Q4 2023 Groupon Inc Earnings Call
Participants
Dusan Senkypl; Interim CEO & Director; Groupon Inc
Jiri Ponrt; Chief Financial Officer; Groupon Inc
Sean McGowan; Analyst; ROTH MKM
Eric Sheridan; Analyst; Goldman Sachs Group Inc
Presentation
Operator
Hello, and welcome to Groupon's Fourth Quarter 2023 financial results conference call. On the call today are Interim Chief Executive Officer, John Campbell, Chief Executive Chief Financial Officer, Yuri Poniard, and Senior Vice President, Corporate Development and Investor Relations, Rainer Kashyap. At this time, all participants are in a listen only mode. A question and answer session will follow the Company's formal remarks to ask a question, press star key followed by the number one on your touchtone phone. Once again, that's star one to ask your question. Today's conference call is being recorded before we begin, and Groupon would like to remind listeners that the following discussion and responses to your questions reflect management's views as of today, March 15, 2024 only and will include forward-looking statements. Actual results may differ materially from those expressed or implied in the Company's forward-looking statements. Groupon undertakes no obligation to update these forward-looking statements as a result of new information or future events. Additional information about risks and other factors that could potentially impact the Company's financial results are included in their earnings press release and in their filings with the SEC, including their annual report on Form 10K. We encourage investors to to use Groupon's Investor Relations website at investor dot groupon.com as a way of easily finding information about the Company. Groupon promptly makes available on this website, the reports that the Company files or furnishes with the SEC corporate governance information and select press releases and social media postings.
On the call today, the company will discuss the following non-GAAP financial measures, adjusted EBITDA and free cash flow in Groupon's press release and our filings with the SEC. Each of which is posted on our Investor Relations web. You will find additional disclosures regarding these non-GAAP measures, including reconciliation of these measures to the most comparable measures under the U.S. Gaap and with that, I am happy to turn the call over to John.
Dusan Senkypl
Hello, and thanks for joining us for our fourth quarter and full year 2020 free Earnings Call. It's a pleasure to be with all of you. Today's prepared remarks are posted on our Investor Relations website, along with an investor presentation, which I will refer to during my remarks.
In addition, I encourage you to review our press release and 10K, which contain more detail on our Q4 and full year 2023 results. I will start today's call on slide 5 and cover the key takeaways from the fourth quarter. First, our numbers. I'm pleased to deliver another quarter of progress on our reported financial results as our fourth quarter numbers came in above the high end of guidance on both revenue and adjusted EBITDA. Our strong performance was driven by our North America segment, where our revenues in our local and travel categories were down a combined 3% year-over-year, a major improvement compared to the same period last year. One of these categories were down further 1%. It's encouraging to see the progress in our North America, local and travel categories, which represents 70% of consolidated revenue. While we are far from declaring victory and clearly have more work to do in our international segment and our goods category. The improved performance of our main market is a strong positive indicator that our transformation plan is working. In addition to our top-line improvements, we also made progress on the bottom line, where adjusted EBITDA margins improved 2,400 bps compared to the last fourth quarter. A combination of better top-line and bottom-line performance resulted in positive. It's been about $51 million of free cash flow as our negative working capital cycle benefited from both Q4 holiday strength and moderating year-over-year declines. From my perspective, robust financial performance is the cornerstone of a thriving organization, fueling innovation, employee satisfaction and long-term shareholder value. I'm pleased to answer here one of our transformation on a strong close. Second, our balance sheet. I am pleased to report that the combination of our improved financial performance and increased liquidity resolves our going concern issue, since speaking with you on our first quarter earnings call, we closed on our plan to raise $100 million in liquidity through a combination of asset sales and a fully backstop rights offering. The rights offering was significantly oversubscribed. And I would like to thank all our investors for their support. Using part of the proceeds from the rights offering. In February, we prepaid and terminated our credit agreement. This is an important milestone to provide clarity to all stakeholders, including our customers, merchants, employees, suppliers and shareholders that Groupon has a solid financial foundation, and we are not going anywhere for an update on our project last quarter, I explained that the pace of our transformation will depend on our progress executing key projects across our businesses. While I will go into more details in subsequent slides, I want to briefly highlight two key projects, our new consumer front end and our gifting initiatives. Since we spoke last, the team has made significant progress on our new consumer from and which is currently running at 3% of North America and touch traffic and expected to ramp up further in the coming weeks.
Turning to give think our relaunch offering had strong results, and we saw December gift orders grow over 50% versus December of last year. While these numbers are off a very small base, I am pleased with the early results as we support our thesis that Groupon can become a leading destination for giftable experiences.
Turning to slide 6, I want to take a minute and take a step back. It has been almost one year or since I accepted the challenge to lead Groupon in my letter to shareholders published with Q1 earnings last year, I spoke frankly about the financial challenges. Our business faced and the need to implement a significant and urgent transformation. Over the past year, our team has worked tirelessly to deliver hundreds of small improvements. We just strengthened our financial position, improve the top-line trajectory and rebuild the organization at the same time. While I am extremely proud of what this team has accomplished, my feeling is we are just getting started on our mission to become the ultimate destination for local experiences and services. Now that we have a strong understanding of internal mechanics, which means people processes, challenges and made our Company more efficient. We are shifting our focus from mainly internal improvements to delivering projects, which will impact our customers, both consumers and merchant partners. We have many opportunities in front of us much more than our current capacity to execute. We are taking a long-term approach to rebuilding Groupon from the bottom up and avoiding shortcuts that sacrifice the endgame for a temporary sugar high to juice top-line or bottom-line results. Many current projects are laying the foundation for us to become more agile and to increase our capacity to execute. We are redoing our technology stacks and changing Groupon to become a technology first company. We are changing how we go to market on the supply side and how we understand and interact with our customers. This is a huge lift and will take time to execute. We also see a massive opportunity to leverage the benefit of AI across our business in sales. We are looking to use AI to generate least leads based on our inventory needs and use IT-driven communication to improve sales efficiency. We are progressing on a out tools to help us create higher-quality deal page co-pays and to improve the efficiency of our customer support.
Success in our building phase is really about changing our customers' experience on both sides of our marketplace to solve more problems reduce friction and trust and increase engagement and overall satisfaction with using Groupon. And while progress in transformation is not always linear, we do expect to show improvements in our financial performance along with the very slight Southern. Our project to reengineer our front end stack continues. As of this week, our new front end is currently at 3% of traffic, which is behind my expectations after running at 1% for most of Q1, we are reaching the point where we can start ramping our new front end without jeopardizing performance. We have fixed many of the issues that had the new front end conversion and now focused on resolving two main brokers, search and the relevance and the LTE trial, we expect to ramp up traffic significantly forward and touch in North America in the coming weeks, portables interested next week, we will be posting a link to dry out the new front end on the company's Linktone page. Once North America that touch is fully ramped, we will turn to North America up, which we expect to launch shortly after after the end of this ramp, we will turn to roll out the new front end in international markets to remind investors why we are doing this. Our legacy platform was cobbled together over many years and many acquisitions as a result, our legacy platform is really several different technology stacks each with their own challenges and inefficiencies that require different people to manage the different specs are some companies who have embarked on similar simplification projects have taken three years to consolidate those specs into one single front-end. We are currently in month 11. We expect this project will enable us to launch new features in weeks versus months. We believe that this kind of speed and agility to delivery new capabilities will give us the opportunity to innovate faster for our customers and give us amazing breadth to do testing and learning. We will also get much more visibility into our customer funnel, enabling us to deliver further product enhancements.
I would like to thank the team for their tireless efforts, and I'm excited to see what we can do with our new platform once it is released.
Slide 8 distinct last quarter, I highlighted again that Groupon historically had not been benefited from have not benefited from the uplift that other marketplaces and retailers typically experienced during big gifting seasons, positioning Groupon to play a bigger role in gifting and specifically last minute, giftable experiences was a key strategic growth as you see this that we wanted to test and validate in the Q4 holiday season. I am happy to report that despite a constrained, we won't experience on our legacy front end platform. The data indicates a significant opportunity in last minute, giftable experiences the highest demand for gifting, starting approximately three weeks before Christmas and speaking of the day before Christmas, overall, for the month of December, we saw gift orders increase of a very small base, 67% versus 2022 and 30% versus 2021. And when looking at the gifting across our countries, we observed a wide variety of gifting, adaptions and gift orders as a percentage of total orders ranging between 5% and 20% going forward.
On the marketing side, we will continue our efforts to educate customers about the benefits of experiential gifting at Groupon and we see numerous gifting opportunities throughout the year with a focus on the US market.
On the product side, we have a long list of improvements we are making to gifting on our legacy platform and are also taking our learnings to iterate on our new gifting proposition for our new front end.
On the supply side, we are expanding our work with merchants to highlight giftable products. These are just a few examples of the initiatives underway to make Groupon more giftable. We believe giftables experiences are a large untapped market for Groupon, and we are excited to build a great gifting offerings, not just for the traditional Q4 holiday season, but an option that consumers' concern to all around forbearance special occasions over time, I believe that gifting can become a big business for us and Groupon can become a leading destination for last-minute giftable experiences. Gifting also showcases the ability of our team to move quickly and execute on a market opportunity going forward. There are significant opportunities across our business. So this is a nice case study of what the team can deliver.
Slide 9, marketplace management overall I'm pleased with our dealer execution during the holiday season as we connected an improved assortment of deals with performance, marketing, push and active management of how we distribute our impressions. Our customers responded, and we saw uplift in our business and improving trends throughout the quarter. From the demand side of the marketplace, we saw improving trends in the number of in the number of unique visitors visiting our website, driven by growth in paid channels and improved rate of decline of direct traffic within paid channels. We delivered on our desired ROI targets while continuing to grow in SEM and display. And while it is very early, we saw success in our revamped affiliate channels, including early traction in the influencer market search and the relevance continues to be an important priority for us as we improve our algorithm and actively manage the distribution of impressions.
Finally, we continue on our initiative to reduce our reliance on promotional spend. As we have discussed before, improving the mix between paid marketing and promotional spend is a key step towards improving the health of our marketplace.
On the supply side of the marketplace. We continue to see strength in our things to do vertical and our enterprise accounts where we see companies return to our platform after a long hiatus and existing companies increase the amount of business they want to do with Groupon both are encouraging signals. Last year as part of our transformation, we reimagined the original city Planner model for a modern needs and local nuances. Our efforts on this initiative is beginning to pay off as we are seeing strength in local micromarkets. But this approach was rolled out. We are planning to double down on our focus to manage our marketplace at a local level. Earlier this week, I was in Chicago with our sales leadership, where we announced a plan to shift our go to market in the US into eight local regions with dedicated sales reps and regional managers responsible for driving assortment strategy and deal quality.
Finally, as I mentioned last quarter, we have rolled out a new merchant partner success organization focused on actively managing our top 80% of business. This full lifecycle sales team is responsible for the revenue and retention of our highest value accounts based on the success we have seen with merchant partners in this program, we have expanded our one-on-one account management and continue to build tools, processes and culture around shifting our support to more productive partner success over time, we expect this theme will help our existing merchant partners drive more business to the group.
On Slide 10, let me close with a few thoughts on why I continue to be excited about the prospects for Groupon to create value for shareholders.
Groupon is a 15 year old company, but we see ourselves at day zero. The market for local experiences and services is massive, rivaling our large service markets such as ridesharing delivery and hotels in those other markets that are scaled marketplaces and OTAs with combined market capitalization in the hundreds of billions of dollars. It's still a relatively early days in the experience market going online, and we expect an increasing percentage of this market to be transacted online in the future, fueling a secure growth opportunity.
Our business model is a two-sided horizontal marketplace that operates at a local level. It has attractive gross margins and a fixed cost base that can be leveraged with growth and proper execution as shown in other categories. When done the right, the Internet marketplace can be extremely attractive business model benefiting from network effects, economies of scale and low capital requirements. And given our local dimension, it will not be easy to replicate our supply-side assets. Groupon has global scale operating in 13 countries with over $1.6 billion in billings, $75 million visitor sessions per month and over [$16 million] active customers. We have an under-leveraged asset in our brand. It has been used over [$1 billion] times. Once we improve the customer value proposition, we believe we can leverage our brand recognition to engage and reengage consumers to combine with Groupon. We are drawing inspiration from a successful transformation playbook that starts with a supply cost approach and strategically shifts towards emphasizing quality value proposition and developing it functional economic model for merchant partners we are rebuilding the consumer experience with trust and convenience at the center. There are multiple opportunities to improve our market price for position for both consumers and merchant partners. Today, we have more opportunities than our ability to execute. We are assembling an A-plus management team with skin in the game and a mindset of Ambition drive passion intensity, no egos partnership first continuous growth mindset and love for our we are building a humble, meritocratic, high-performance culture that values execution excellence. First principle reasoning totally hands on sustenance to tackle the hard problems and extreme ownership. We see ourselves as a sports team and we are playing to and we believe we are providing an environment where talented people with dry can get 10 years of experience in two years. For those interested to understand the mentality and culture we are building, I recommend reading my personal assessment, which you can find in the appendix of our earnings slides. If you or anybody you know, aligns with the mindset and approach and you are ready to dedicate yourself to the mission, please reach out regardless of the positions to see open. We are building Groupon to perform in a variety of economic conditions in both growing and shrinking economies. People love getting good deals and experiences that they love and we want to be a place for them. Our merchant partners have historically used Groupon's platform, a sales management tool, a use case which can increase when demand slows. And finally, we have taken steps to strengthen our balance sheet and address our going concern issue, which usually will go into more details for Lowe's for these and other reasons. It's my belief that Groupon has the ability to drive superior value creation through a successful transformation.
Before I turn the call over to Uzi, I want to take the opportunity to thank the Groupon team transformations are not easy. We have asked and continue to ask our teams to drive significant changes across our business. Our team has responded with energy and passion to deliver on our mission. I'm proud of the dedication and the resilience of our team has shown and excited to work together as we focus on innovating faster for our users and merchant partners. With that, I will turn it over to you the same vision.
Jiri Ponrt
Thank you as well to everyone who is joining us today. It's a pleasure to be speaking with you. I believe my time today to provide further insight into our fourth quarter financial results, progress on our cost savings actions, update on our liquidity position and our updated outlook.
Turning to Slide 12. So let's jump into our Q4 summary financial results. In the fourth quarter, we delivered global billings of $436 million, a decrease of approximately 7% year over year revenue was $138 million and declined at 7% year over year, a significant improvement in year over year trends versus our third quarter result and above the high end of our guidance.
Moving on, our gross profit as a percentage of revenues remained stable at 89%. Persons marketing expense for the fourth quarter was $34 million or 28% of gross profit. As we have discussed in our last two earnings calls, our EBIT performance, marketing campaigns appreciates increased investments, and this trend continue in the fourth quarter where we increased our marketing spend 19% quarter over quarter as we deliver additional improvements in the efficiency of our performance marketing channels. We will continue to review our marketing spend to ensure these bags are at balance between maintaining sufficient returns on each dollar spend and driving better top-line results.
Contributing profit for the first quarter was $88 million for 64% of revenues. Adjusted EBITDA was $27 million as we recorded the third straight quarter positive adjusted EBITDA.
Turning to cash flow. Fourth-quarter operating cash flow was positive $55 million and free cash flow was positive $51 million, strong improvement both sequentially and year over year, as our cash flow benefited from both Q4 holidays, things and moderating year-over-year billing declines. We ended the quarter with $142 million in cash and cash equivalents, including $42.8 million drawn on the revolver. Please note that our cash position excludes $26 million of restricted cash, which is posted as collateral against our outstanding letters of credit and a bucket in our balance sheet in prepaid expenses and other current assets slide, starting with approximately $16.5 million customers worldwide as of quarter end, down [0.5 million] from the prior quarter.
Turning to our local category. Consolidated local billings were [$363 million], DOWN 1% compared with the prior year. In Latin America, the deliver local billings of $257 million, flat compared with the prior year. International, we delivered local billings of $106 million, down 3% year over year. Similar to the third quarter, our Q4 performance in local benefited from the strong performance in [six] to do vertical and our enterprise customers.
Moving to our paper category into Q4, consolidated fiber billings was $28 million, down 12% year over year.
With North America, we can see our transformation strategy taking hold. It's federal delivery and billing growth of 4% year over year and international and travel still has more work to do within billings, down 38% year over year.
Moving to a good start, category consolidating moves and billings was $45 million down 36% year over year in the fourth quarter. Our current new business is struggling and we do not see any near term change in the negative trends at 6% of Q4 revenues and declining capital group is becoming smaller and smaller part of our business.
Slide 14. Turning to our operating expenses. Fourth quarter SG&A was $72 million down 55% year over year and down 9% quarter-over-quarter as we continue to see the benefits of our Asian cost-saving actions reflected in our financials. Sg&a includes $0.7 million in stock-based compensation and $6 million in depreciation and amortization, creating an efficient efficient cost structure is a key pillar of our transformation plan. And as you can see, we've made significant progress, reducing our fixed cost base going forward. While we continue to see opportunities to further reduce costs, we expect to see smaller declines than we saw in 2023. Many of our projects underway to further reduce costs will take multiple quarters to deliver, such as our cloud cost optimization project for our ERP simplification project. In addition, we are still evaluating investments into our sales organization.
Slide 15. Turning to free cash flow. In the first quarter, we generated positive $77 million of adjusted EBITDA and positive $51 million of free cash flow in order to better help investors to understand the conversion from adjusted EBITDA to free cash flow, big paper and bridge that reconciles adjusted EBITDA to free cash flow, I would like to point your attention to five drivers. One CapEx is primarily driven by capitalized labor to change in merchant and supplier payables is driven by the annual change in billings, along with a quarter over quarter change in billings. For example, our December ending merchant payable bonds benefited both from improving year over year trends and the timing of Q4 holidays sorry, change in paid accounts payable is primarily driven by a how much non-payroll G&A and marketing expenses, Andy and it changes in our accounts payable cycle, accounts payable cycle aside significantly, and we do not expect further compression for change in our accrued SG&A and other current liabilities. It's primarily driven by the trajectory of SG&A and R&D expenses in the fourth quarter, we had an increase in activity in accruals for marketing and several other current liabilities. Five cash outflow from change in net of price increases driven by remaining lease payment obligations in our impaired leases in Q1 2023, say the outflows included a one-time payments associated with the early lease termination of our Chicago offices has various size. Our real estate footprint in our current needs, either through the expiration of our current leases for negotiating early lease exits, expect that the working capital outflow from this item, the brands that are zero going forward, our ability to convert positive adjusted EBITDA generation to positive free cash flow will depend on these drivers to timing of our working capital cycle and application.
I'm sorry, Slide 16 beginning in the fourth quarter 2023 to be disclosed, conditions and events can consider in the aggregate are a substantial doubt about our ability to continue as a going concern since then we've taken the following actions to improve our liquidity. Our operating cash flow performance has improved for full year 2023 compared to full year 2022. And for Q4 and we see compared to Q4 '22. In the first quarter '23, VA received $18.9 million in proceeds from the sale of portion of our state income in January, it went before the close of fully backstop rights offering that was significantly oversubscribed and raised $18 million in February seventh before the prepaid $43.1 million and terminated our credit facility in advance of its maturity in May 2024. Accordingly, management has concluded that the substantial doubt about our ability to continue as a going concern has been alleviated. In addition to the completed transactions, management continues to evaluate the monetization of certain noncore assets, including the Company's remaining stake in somewhat difficult and its portfolio of intellectual property filings that can be no assurances as to whether or when the sales of these non-core assets will be consummated.
Management currently believes Zi's future non-core asset sales. We generate proceeds of approximately $100 million.
Slide 17. Now turning to guidance. As of March 15, 2024 management issuing guidance for the first quarter of 2024 as follows revenues between [$113 million and $118 million] for decline year over year between minus 7% and minus 3%. Adjusted EBITDA between $7 million and $12 million negative free cash flow management look a lot, which I would also like to reiterate, it's 2024 outlook. Year over year revenue change at minus 5% and 0% adjusted EBITDA between $80 million and $100 million positive free cash flow for the full year.
Finally, I would like to provide some additional commentary to assist you with your models where we expect to generate negative free cash flow for the first quarter, given the timing of our accrued merchant payables as we exit Q4 holidays, we expect to report a significant improvement in the level of outflows compared to the same period last year. There are many drivers that influence saving as a percentage of gross billings including merchant margins, segment mix, category mix, local vertical mix, breakage points, utilization and several other factors in the number of the drivers with some exiting of certain handlings and other lesser Belden's. It's hard to predict with precision where we will land each and every quarter. That said, for 2024, we do not see consolidated consolidated revenue as a percentage of gross billings varying significantly compared to the Range reported over the last five, Walter, as we commented in last quarter's earnings call, one area of focus for us has been the checkout process that we see many opportunities to improve the experience for customers who have made it all the way through our funnel and added items to our prior to out to their car fees include promoting some payment options ahead of other, depending on local customer preferences. We continue to expect revenues in the first half of 2024 to decline year over year and revenues in the second half of 2024 to grow year over year. The tragic story of the year will depend on a variety of factors, including the delivery of certain projects such as such as our new CONSUMER front-end. Given our operating plan focus in driving profitable top-line growth, positive value of our non-core assets, we believe we can create an increased value for all of our stakeholders as we continue to execute our transformation strategy.
Thank you for your time today. And with that, I would like to open the call up for your questions. Operator?
Question and Answer Session
Operator
Thank you. As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. Your first question comes from the line of Sean McGowan, ROTH MKM. Please go ahead.
Sean McGowan
Morning and thank you very much on a couple of questions, if you don't mind. One is to give us some thoughts on your capital allocation priorities on balance sheet's in great improvements. You've eliminated a going concern. You've got some cash, you looks like cash flow prospects. And can you give us an idea of what the what the priorities are for capital allocation?
Dusan Senkypl
Yes. I think currently, we are here to make it sustainable and frankly had one positive quarter and we still have to work on making a long-term sustainable growth. It's cash flow of this company.
Sean McGowan
Okay. And on user engagement, can you give us some thoughts there on what what are you seeing currently in terms of the number of occasions that a user engages and what's your goal for growing that?
Dusan Senkypl
Yes. Thanks, John, for the question. We have we are focusing right now on the next generation of that site, which will bring us many, many new opportunities. The one very positive signal, which which we have overall is the gifting which opens another set of opportunities several several times a year, but we have like many, many additional use cases, which we will start unlocking once we have the new websites launched and we will have that clearly increased cadence of new features coming coming into the portfolio. So this will be an area of our focus for later part of this year.
Jiri Ponrt
Okay, great. I would I would imagine as you get that engagement up and it really has a significant impact on your cash flow and EBITDA. So how big do you think gifting can get as a percentage of total revenue.
Dusan Senkypl
I can't really comment comments and the numbers, but the clearly the current use cases on the on the platform are fairly limited. And as I said, there will be new features come in, but we are also focusing on a lot on the curation of deals and bringing the right deals. So when the customers come to the website, there will be always something new and something extremely engaging for them. So I think it should be another driver by far to bring customers more often to the platform Great.
Sean McGowan
Thank you very much, and we'll come back.
Operator
And your next question comes from the line of Eric Sheridan, Goldman Sachs. Please go ahead.
Eric Sheridan
Thanks so much for taking the questions. Maybe two, just on the supply side of the marketplace, how should we be thinking about elements of both gross additions on the supply side, building as we go through 2024 and where you're most focused on reducing friction from the onboarding side for supply?
And then in terms of our supply retention conversion, delivering ROI, how should we be thinking about elements of once that supply is where you want it to be how that then would possibly translate into more marketing spend to drive growth. Thank you.
Dusan Senkypl
And so in terms of things like. Thanks for the question on and I'll start from backwards. In terms of marketing spend, I believe that directionally we are on the level of our we would like to say, we still believe that we can grow the marketing in volume, but not in a percentage of gross revenues or of our gross billing.
Just on month one side, Dan, in terms of what we have on our website, we saw in the last quarter. That's a plenty of suppliers. We were working in the past some big merchants, national merchants who are working with Groupon are coming back and we are doing more and more business. So we are very confident that as our sales process, which is very consultative nowadays, is improving we will be also also able to grow the business with our existing merchants or which will have a very positive impact on overall group on the results.
And then in terms of like supply proposition which we have on the vet side, we have a lot of focus on the top half of the inventory. In the past past, management was focusing more on the automated the process on an onboarding process for merchants through online acquisition. What we see is that we if we really support our merchants in the way how we are structuring the deals, it brings much, much better results. So this is our focus. So I expect that together with the regionalization that we will have real experts on the individual geographies we will be able to optimize the marketplace coverage with the deals and with supply proposition. So when we generate optimal results, not only for Groupon, but the the same will apply for our merchant partners and for customers.
Eric Sheridan
Thank you.
Operator
We have no further questions in our queue at this time. And with that, that does conclude today's conference call. Thank you for your participation, and you may now disconnect.
