Genny Konz – VP of FP&A and Investor Relations Eric Lefkofsky – CEO Jason Child – CFO.

Ross Sandler – Deutsche Bank Brian Peak – RBC Capital Markets Paul Bieber – Bank of America Merrill Lynch Arvind Bhatia – Sterne Agee Trim Chiodo – UBS Ralph Schackart – William Blair Brian Fitzgerald – Jefferies & Co Tom Forte – Brean Capital Heath Terry – Goldman Sachs.

Good day, everyone, and welcome to Groupon’s Third Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the company’s formal remarks. (Operator Instructions) Today’s conference call is being recorded.

For opening remarks, I would like to turn the call over to the VP of FP&A and Investor Relations, Genny Konz. Please go ahead..

adjusted EBITDA, non-GAAP earnings per share and free cash flow, as well as FX-neutral results. In our press release and our filings with the SEC, each of which is posted on our Investor Relations website, you will find additional disclosures regarding non-GAAP measures, including reconciliations of these measures with U.S. GAAP.

Unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2013. Finally as a remainder, we are hosting our first Investor and Analyst Day in Chicago on November 11. Live webcast of the event will be made available through our Investor Relations website. And now, I will turn the call over to Eric..

Thanks Genny. Q3 was a record quarter, and one in which we largely delivered on all of our main operating objectives for the year. After three quarters of stagnant growth, our North American local billings accelerated from 1.8% last quarter to 10% in Q3. Our goods gross margins in North America improved sequentially to about 10%.

And in rest of world, we reduced our segment operating loss by more than half sequentially, and generated positive adjusted EBITDA for the first quarter in over a year. We were able to reignite growth across all our segments in Q3, which drove a 39% increase in our overall gross billings to $1.86 billion, with revenue increasing 27% to $757 million.

Adjusted EBITDA continue to increase coming in at $67 million, and non-GAAP EPS came in above our range of $0.03. North American performance was strong. Gross billings grew 16% to $774 million, driven by double-digit growth in all three categories; local, goods and getaways, a tri-effect that hasn’t occurred in over a year.

North American revenues increased 16% to $480 million. Gross profit was $176 million. And segment operating income was $13 million. These are strong results despite a tough prior year comp in local growth and given the Q3 is typically seasonally low point for local as people travel throughout the summer months.

EMEA billings growth accelerated from under 1% last quarter to over 10% in Q3, reaching $489 million, also driven by growth in all categories. Revenue growth was 56% compared with 42% last quarter, reflecting a greater mix of direct revenue. In addition, we generated $22 million in segment operating income.

After much work, EMEA has now seen three quarters in a row of year-over-year customer growth, and we believe it remains positioned well for the future. Rest of world grew 155% in billings, driven by the acquisition of TMON. Excluding our Korean business, rest of world grew 9% on an FX-neutral basis. Revenue grew 26%.

The large difference between billings growth and revenues related to TMON’s deal margins, which remained in the low-teens as are typical for that market. The rest of world segment operating loss improved by almost $12 million quarter-over-quarter to $6 million.

The team has done a fantastic job returning the business to growth, while at the same time controlling expenses. We began the year with three primary objectives. First was to reaccelerate local growth in North America and abroad. Second was to improve the gross margins and operating efficiency of our goods business.

And third was to continue to achieve stability in our international operations and reduce our losses in rest of world. We’re pleased that our results in Q3 largely delivered on all three. Let me start with the first. Every quarter, we have nearly 12,000 people worldwide focused on initiatives to drive growth.

And over the last several quarters, these initiatives have been overshadowed by headwinds related to redemptions, email declines and a shift in consumer behavior, as we transform to a mobile marketplace. As these headwinds began to subside in Q3, for the first time in the year, we saw the positive drivers outweigh the negative ones.

After three quarters in a row of slow growth, our North American local billings growth accelerated in Q3 from 1.8% last quarter to 10%, achieving our target of double-digit growth by year-end. Redemptions have stabilized, as it appears we have burned through a good deal of our consumers’ backlog of unused Groupons.

Growth of redemptions is now aligned with our growth in local billings, as opposed to being significantly higher. In addition, our email business is stabilized after falling for the past several years and our customer satisfaction and merchant quality are at or near all-time highs, which continues to fuel new customer adds.

As the headwinds continue to ease, we expect continued strength in our local business.

Yet we’re not just focused on driving billings growth in local, we also intend to drive gross profit dollar growth, while take rates in North America local improved from 35.7% last quarter to 36.3% this quarter, they continue to reflect an increased proportion of sales for higher quality, lower take rate merchants in the quarter, as well as the impact of more site-wide sales and discounts, as we continue to drive awareness of our marketplace.

Going forward, we believe that take rates in local will remain within the range we’ve seen over the past year or so, bouncing between about 35% and 38%. Jason will provide some additional color on this in a moment. Our second priority was to improve our goods margins, particularly in North America.

Our shipping and fulfillment costs have historically been almost 2x of that of other comparable e-commerce companies. To address this, we’re making some significant changes, including shifting more of our business to drop-ship, moving more fulfillment to our own distribution center in Kentucky and increasing units pulled.

We’ve made continued progress, with gross margins in North America in line with our double-digit target, reaching 10% in the quarter. Our third priority was to continue to improve our international operations and reduce our losses in the rest of the world.

Our One Playbook initiative to standardize best practices globally has really begun to pay off, helping to drive the almost $12 million reduction in our segment operating loss. The operating loss is nearing breakeven when excluding TMON. As I mentioned a moment ago, rest of world generated positive adjusted EBITDA for the first time in over a year.

Our Asian businesses are growing at an accelerated pace, driven by TMON. During the third quarter, TMON billings grew over 60% year-over-year, as that business continues to thrive and gain market share in the fifth largest e-commerce market in the world.

As a result of the significant growth opportunities that exist for TMON, as well as our Asian businesses more broadly, we’ve hired financial advisors to help us evaluate range of financing and strategic alternatives in APAC.

We’re exploring opportunities to unlock significant shareholder value, while positioning the businesses to maximize their long-term potential in these large fast-growing markets. As part of this exploration, Kal Raman will be moving on to explore other opportunities outside of Groupon.

Kal has helped us build a tremendous team around the world that is ready and eager to lead us in the next stage of our company’s growth. We focused on the priorities I’ve highlighted, because we believe they are the purest drivers of gross profit dollar growth. We made great strides in Q3.

And with these critical objectives now on track, we believe the business is well positioned to deliver improved results going forward.

As such, while our financial disclosures will remain unchanged, we will shift the focus of our commentary away from quarter-to-quarter movements on these factors going forward, and instead, focus on progress toward our longer term goal of growing both, gross billings and gross profit, at least 20% annually over the next five years.

We’ve also made progress in the third quarter across our strategic initiatives. Mobile remains well over half of our business in growing, as over 100 million people have now downloaded our apps. Our marketplace of about 300,000 deals, continue to gain broader awareness, contributing to double-digit growth in North American local.

And we believe our international businesses really is turned the corner. First, let me spend a bit more time on mobile. Our percent of mobile transactions continued to increase in Q3, including some countries that are approaching a mix that is well above 65% mobile.

Spend for customers who buy through mobile remains significantly higher than for those who don’t, and this past quarter, we were selected to be a launch partner for Apple’s new Apple Pay product, which allows us to integrate with many of the hundreds of millions of credit cards they have on file.

Our mobile business has thrived so much so that we began to explore how to further capitalize on our mobile advantage. About a month ago, we launched Snap by Groupon, which helps people save money on everyday household items, such as groceries.

The app is off to a great start with nearly million downloads in the past 45 days, and more importantly, it’s helping our customers save tons of money. Snap is just one example of how we’re continuously innovating in mobile commerce. Second, local.

Not only did North American billings growth increased from 1.8% last quarter to 10%, but we also saw improved results in our local business in EMEA, which went from 6% decline in Q2 to 5% growth in Q3. In addition, we saw similar improvement in rest of world local.

This past quarter, we improved the quality of our local deals and the personalized nature by which we present them to our customers. We made great strides in getting top merchants to work with us, achieving the highest concentration we’ve seen in years, high in restaurants and spas and nationally renowned museums and entertainment venues.

Third, marketplace. Groupon is a very different company than we were six years ago. We have over 250 million subscribers and nearly 53 million customers who made a purchase in the last year alone. Over 100 million have downloaded our mobile apps, and we’ve built the marketplace of about 300,000 deals that our customers can buy in real-time.

Despite all of our progress, what we’ve learned over the past year is that in order to build a thriving local commerce marketplace, we need Groupon to become an integral part of our customers’ lives daily.

All the products we’re building to improve consumer experience are oriented around three primary tenants; one, increased supply to ensure that the best deals are always on Groupon; two, make it easy for people to discover those deals; and three, provide tools that make the experience of buying and using Groupon more conveniently.

Let me start with the first, increasing supply. With about 300,000 deals now available on our site, including over 120,000 in North America, we are improving selection every day. Through our self-serve efforts, we’re now adding about 700 merchants a week.

We believe we’re on pace to generate over $20 million incremental billings annually, but we still have a long way to go.

The percent of our traffic in North America net search is defined by those utilizing our search box remained roughly 10% in the quarter, while we’ve added a variety of new tools for our customers to explore the site without searching, such as sub-category navigation. Their impact is not getting capture this metric.

As such, we’re working on providing some additional color on how best to measure our progress going forward and intend to update people at our Investor Day. Second, to help people discover our deals, we need to improve the process of searching for them in our marketplace. It’s way too hard today.

We estimate that we represent about 5% of an average merchant’s annual volume, and yet almost 30% of all internet users in North America have a Groupon account.

That means millions of people are paying full price today at merchants that are running Groupon deals, when they could easily open up our app prior to visiting that merchant and save up to 50% of whatever they are buying.

We believe that intelligently targeting and reminding customers to check Groupon, represents a significant opportunity, not only for us to grow our local business, but also to drive even more traffic to local merchants. That said, the vast majority of search occurs outside Groupon.

We need to make sure that we’re in front of customers wherever they are searching. Our customers should be able to search on Google and other search engines and find amazing Groupon offers. Today, SEO represents about 7% of our business in North America. We believe it should grow substantially in the future.

To expand our SEO efforts, we’re dramatically increasing the amount of content we put in front of users, so they can rely on Groupon, not just to save money, but also to help them navigate and discover local experiences. One tool to help us expand our confidence is merchant pages.

To-date, we’ve built more than seven million pages in North America and have released over 500,000 of them to be indexed, which will grow significantly with the roll-out of each new city. In just the past few months, we’ve seen strong consumer interaction with pages.

We’ve collected and displayed more than 20 million ratings and tips for our consumers to read, letting customers know how many people recommend a particular merchant. In addition, over 400,000 people have begun following our merchants or have hit request-a-deal.

And third, to make the experience of buying and using at Groupon more convenient, we’ve also launched and deployed Gnome, our merchant facing operating system over 6,000 merchants in North America. While we’re still in beta with this product, we continue to work on ways to drive adoption.

We’re encouraged by some of the early signs relating to improving the redemption process and increasing connectivity with our merchants. Gnome puts us right inside our merchants and allows us to capture critical data regarding consumer spending and open capacities. Many merchants don’t have access to this data today.

They don’t have the ability to figure out why they’re having a slow day, which items aren’t selling well and why their sales people aren’t converting customers. And even if they can cobble together some level of insight, they rarely are able to do anything with it.

We believe Gnome will allow them to analyze item level sales detail and take action, by tapping into our community to help drive additional demand.

When you combine Gnome with the millions of people that have downloaded our apps, you can see the foundation of a true local commerce network unfold, a network where users and merchants are continuously are connected, allowing consumers to explore the world around them and save money while they’re added and allowing merchants to offer real-time discounts and incentives to get the right customers coming in their doors at the right times.

Overall, I’m thrilled with the progress we made across all of our initiatives in the quarter. We remain focused on execution, both, in North America and in our international markets via our One Playbook initiative, and are excited to see us starting to generate real benefits.

With that, I’ll now turn the call over to Jason to discuss our financial progress..

Thanks Eric. With the details available in this afternoon’s press release, I’m going to run through the highlights of our performance and then provide our outlook. Note that all comparisons, unless otherwise stated, refer to year-over-year growth. Here are the highlights. Gross billings increased 39% to $1.86 billion.

North America grew 16%, EMEA increased 10% and rest of world increased to 155%. Excluding TMON and FX, and further taking the exit of Groupon’s legacy Korea business into consideration, we were pleased to see rest of world’s growth for the third quarter in a row increasing 9%. Revenue increased 27% to $757 million.

North America grew 16%, EMEA grew 56%, and rest of world grew 26%, lower than the 155% billings growth as a result of the substantial addition of lower margin TMON billings to the mix. Gross profit was $380 million in the quarter, compared to $360 million last year.

Gross profit growth lagged billings growth, due to a greater mix of direct revenues, as well as the addition of lower margin TMON billings. North America in particular, was also impacted by continued investments in quality, as well as the order discounts to drive awareness of our pull marketplace.

The sequential decline in gross profit is consistent with the seasonal patterns that we’ve seen in the past. Adjusted EBITDA was $67 million in the quarter, up slightly compared to $62 million last year, as higher gross profit was partially offset by increases in SG&A and marketing related to TMON and Ideeli.

Note that including order discounts to driver awareness of pull, which are reported as a reduction to billings rather than as a marketing expenses, we saw a $23 million increase in marketing compared to last year. GAAP loss per share was $0.03.

Excluding stock compensation, amortization of acquired intangible assets and acquisition-related costs, all net of tax, non-GAAP earnings per share was $0.03. Free cash flow for the trailing 12 months was $93 million, including $25 million for the quarter, which resulted from our positive cash flow from operations.

We continue to expect free cash flow to pick-up materially in the fourth quarter as it did in 2013. As of September 30, we had $855 million in cash and cash equivalents, including a $21 million negative impact of FX in the quarter. You may recall that we recently entered into a three-year $250 million revolving credit facility.

As of September 30, we had not drawn on the line. And as it relates to our share repurchase program, including the 1.3 million shares repurchased in the quarter, we’ve repurchased a total of 26.1 million Class A common shares under our existing authorization for an aggregate purchase price of $190 million.

Approximately $110 million remains available under our existing repurchase authorization, which will expire on August 2015. The timing and amount of any repurchases will continue to be determined based on market conditions, share price and other factors. Turning to a few notable highlights of our non-financial metrics. U.S.

reached another all-time high of $88 million, and even after excluding acquisitions were the second highest ever. Active customers grew 24% to 52.7 million for the quarter. All categories contributed to growth in both in North America and EMEA. And notably, EMEA customers increased year-over-year for the third quarter in a row.

Moving on to our categories. We saw the strongest growth in local globally that we’ve seen in at least six quarters with local gross billings increasing 17% to $855 million, with continued growth in customers, units, and active deals. All segments contributed to the growth.

North America increased 10%, EMEA returned to growth increasing 5% and rest of world was 60%, driven by TMON. Local gross profit decreased 2% to $261 million, with billings growth and lower cost of revenue, more than offset by take rate declines. While the rest of world declined 13%, North America was about flat and EMEA grew 3%.

Goods gross billings increased 63% to $723 million with all segments contributing to the growth. Goods gross margins defined as gross profit divided by gross billings, were 10.9% globally, reflecting a greater mix of direct and lower margin TMON revenues, most of which are recognized on a third-party or net basis.

Direct margins increased 190 basis points year-over-year to 11.7%. With about half of our goods billings now direct, the dollars in aggregate continued to move in the right direction, and as Eric mentioned, with continued focus on the reduction of shipping and fulfillment costs, we expect to see continued improvement in gross margins over time.

Finally, travel gross billings increased 69% to $282 million, with EMEA returning to growth, increasing 22% in the quarter. Before I close, let me provide some additional color on a few specific items.

Our results for the quarter included $19 million of non-operating FX losses related to inter-company loans with our subsidiaries, primarily resulting from the significant decline of the euro against the US dollar. In addition, we recorded a tax benefit of $6 million in the quarter, which included an $8 million reduction in our tax reserves.

Looking ahead, as Eric mentioned, we believe that local take rates in North America will remain within the range we’ve seen over the past year or so between about 35% and 38%. It’s important to keep in mind that reflected in this is not only our margin on deals with local merchants, but also larger national merchants, which often carry lower margins.

We believe take rates will fluctuate within the 35% to 38% range, as the mix of deals varies by quarter and as we make investments in quality. As it relates specifically to Q4, you should expect that we’ll come in closer to the low end around 35%, given the normal seasonal effect of the holidays.

Likewise for goods, as we’ve seen in the past, we anticipate that the holidays will drive a slightly lower margin in the fourth quarter, along with the significant sequential lift that we typically see in volume.

Finally, significant movement in FX rates, the euro in particular, has led a roughly $7 million negative impact on our adjusted EBITDA estimates since we last gave full-year guidance.

For the fourth quarter, based on current FX rates, we expect revenue between $875 million and $925 million, adjusted EBITDA between $80 million and $100 million and non-GAAP EPS of between $0.02 and $0.04 excluding stock compensation, amortization of acquired intangibles and acquisition-related costs, net of tax.

As always our results are inherently unpredictable and maybe materially affected by many factors including a high level of uncertainties surrounding the global economy and consumer spending, as well as exchange rate fluctuation. With that, I’ll turn the call back to Eric..

Thanks Jason. As more and more commerce is occurring on the fly, the intersection of local and mobile becomes ground zero for the very evolution of commerce, with local being one of the last great white spaces of the internet and the largest sector of our global economy, disruption is inevitable. We are pioneering that disruption.

Imagine millions of merchants connected to hundreds of millions of customers through a geo-centric commerce network.

Imagine that as these customers move around, their commerce world moves with them, the options of what they can buy and should buy are being sorted in real-time, based on their location, their current preferences, what they just bought, time and day, inventory that’s just become available and so on. This is the platform we’re building at Groupon.

And we look forward to providing more insight at our upcoming Investor Day. With that, let’s take some questions..

Thank you. (Operator Instructions) And our first question comes from the line of Ross Sandler of Deutsche Bank. Your line is open. Please go ahead..

Thanks guys. I had two questions. Nice job on getting the growth going here. So on that front, it seems like billings growth rates are accelerating pretty much across the board. In some markets, you’re seeing take rates come down. And Jason, you just mentioned some quality initiatives and how local is going to be kind of range bound.

But we look at like 2015, 2016, do you firmly believe that with accelerating growth rates on billings, you can also see gross profit grow in tandem with that? And then the second question is on Groupon Pages. So Eric I think you mentioned 7% of your convergence come from SEO-driven activity.

Can you just give us an update? It’s only been out for a short period of time, but what is Groupon Pages doing to increase that 7%? And I guess what percent of small businesses that have one of these new pages of claim their page for active Groupons with you guys in the past? Thanks..

Yes. Thanks Ross. So I’ll start. First of all, I think we’re excited that we were able to accelerate our growth in local from 1.8% last quarter to 10% this quarter.

And obviously doing that in the phase of some significant headwind that we’ve seen over the past three quarters, where that local growth rate has been around 1% to 2% and we’ve talked a lot about what drove that in the past, predominantly headwind related to email and headwinds related to redemptions.

But that has started to obviously stabilize and we’re coming out of that period and encourage that a lot of negativity is behind us. To me the first thing you have to do is get the local business growing again. You got to get billings growing. And if billings are growing and growing in a healthy way, it should translate into gross profit dollar growth.

Since I’ve said before, I care a lot more about gross profit dollar growth than I do about percentages. I’d much rather have a local business that’s 2x or 3x as big as I think 35% margin as opposed to one that’s roughly the same size we have today at 38% margins. It’s not about percentages. The local business is so healthy.

It’s really about reigniting growth.

And we would expect to see now that we’re kind of through that period of negativity, we would expect to see that over time we make the kind of progress we want to make, both, in terms of billings growth and in terms of gross profit dollar growth as we work our way toward that ultimate goal of getting to 20% growth of both.

And I’ll let Jason comment to the second, but before I do, I want to just knock out your question on search. We talk about search and it’s somewhat confusing and we’ll try to provide some additional color at the Investor Day, because search really has two parts when you look at our marketplace and the traction.

You have people who come to Groupon and basically search for something inside the search box. And then you have search that occurs, where it normally occurs on places like Google and Bing. And what we talked about in the script is that our SEO efforts are now at 7%.

And when you factor in the SEM side of that, so when you really look at search is occurring in Google or Bing, it’s really closer to 14%. And so we’ve made really great strides. As you may recall, we started giving out numbers year ago or little bit longer.

Let’s say we were low-single-digits and those efforts have now really started to pay off, and that side of our search business is up to 14%. And you have to look at search holistically, both, search is occurring inside our search box and search is occurring where people normally search, again like places like Google and Bing.

And a big part of how we get search moving in the right direction is we get all kinds of fantastic content out there. And that’s a big part of what Pages are.

We’ve collected over time now over 20 million tips and reviews and ratings without really putting a ton of effort behind that, because our customers and our merchants are clamoring for this and they love it. And putting that content out there is helping merchants get new customers and it’s helping customers find amazing merchants.

And we’re going to invest a lot of time and energy in making those pages as good as we can, and we think it’s going to drive a ton of traffic, and obviously we start from an incredible base. We have over 150 million unique visitors today.

So our community is already – in terms of local commerce is really large, both in terms of traffic and in terms of engagement, right now with $53 million customers, 100 million people have downloaded our app.

And so we have this really engaged community, but too often they come to Groupon looking for something and can’t find it and Page is an opportunity to fix that..

So Ross, on your question regarding kind of expectations in the flow-through in take rates on revenue and gross profit. I’d say, the first thing is as the take rate in Q3 of last year in local, that was the highest we saw all of last year. So that of course from a comp perspective made a little bit tough from a revenue growth standpoint in local.

And you still see that change a bit next quarter when – last year, we had 320 basis points reduction in local take rates from Q3 to Q4. We do not expect to see anywhere near that kind of reduction from Q3 to Q4 this year. So we’re probably more like 100 basis points or so.

And then going forward into ‘15, Eric did provide in his prepared remarks the long range target of 20% plus for all the categories, all regions going forward over the next five years. I would expect us to make progress against that goal next year in terms of exactly let the growth rates will be across billings, revenue gross profit.

We’re going to get into that a little bit more at our Analyst Day in a couple of weeks, and so we look forward to sharing with you that..

Great. Thanks guys..

Thank you. Our next question comes from Mark Mahaney of RBC Capital. Your line is open. Please go ahead..

Hi guys, Brian on for Mark. I was wondering if we could talk about local billings growth outside of North America, especially you’ve been deploying some of your North America technology abroad, specifically in Europe I believe, as part of the One Playbook.

And then also, could you just remind us when you largely lapse the push to pull headwinds?.

Yes. So first in terms of local growth rates outside North America, one of the great stories of this quarter is obviously the performance in Europe.

Not only did Europe in the aggregate accelerate just under 1% growth last quarter to 10% growth across all categories, but in local, we went from negative 6% decline last quarter to 5% growth this quarter. So while Europe is not yet at the 10% level that North America is at, it certainly moved meaningfully in the right direction last quarter.

And that has to do with the fundamentals that business being really significantly improved over the past year in terms of customer satisfaction and merchant satisfaction and deals that are really resonating, that team has done that.

And we now will turn our attention and focus to rest of world and try to make sure that all the stuff we’ve done with One Playbook is making its way into rest of the world, which predominantly is made up of Asia and Latin America.

And in terms of – your second question was related to headwind?.

The transition from push to pull, especially at some of the unused deals also started to bottom-up North America, when do you think will lapse some of those headwinds?.

Yes. So the headwinds began to show up in Q3 of last year, towards the end of Q3. And really it was related to the marketplace starting to take hold, people could all of a sudden in mass searched on Groupon and find amazing deals without having to buy them upfront.

In the emails, we were historically pushing to them as a result, the number one used Groupons began to drop and redemptions went up. And we really started to see the impacts that our email business was really suffering because of that.

A lot of that was being made up for parts of our business that were growing both rapidly, like our mobile business, but it was just up slightly more than offsetting the negative headwinds, that’s why we were delivering kind of 1% or 2% growth.

What’s interesting about Q3 of last year is that, actually in Q3 of 2013, it was actually our biggest period of local growth. I think we grew about 13% in Q3 of last year. I think it was like 4%, 5% or 6% in Q1. Then like 8% or 9% and up to 13%. And then it dropped pretty dramatically to like 1.8% in Q4.

So to deliver 10% growth in Q3 of this year, we’re actually lapping a period of pretty significant growth. This isn’t an easy comp for us. If the comp gets easier, it gets easier in Q4 after the headwind began to show up. So hopefully that answers your question..

Great. Thank you very much..

Thank you. Our next question comes from the line of Paul Bieber of Bank of America Merrill Lynch. Your line is open. Please go ahead..

Hi guys, thanks for taking my questions. I was hoping that you could give us some commentary just on the quarter-over-quarter growth in active customers. It looks U.S. and Europe was pretty healthy, but the rest of world declined.

Can you give us some color on the decline there, given the strong bookings numbers? And then secondly on exploring the sale of Ticket Monster. It’s been a relatively short time since you acquired that.

Can you give us some color on the whole processor?.

This is Jason. I’ll take the first question. So on the customers, it relates to absolutely bought TMON in Q1. In Q2, we’ve shutdown the Groupon Korea operations, since TMON became the new operation for us in Korea. And so we then removed those customers towards the end of Q2 last year. And so as a result – I’m sorry, actually this year.

And so as a result, it shows that the customer account decreased, when if you take Korea out of it, it actually increased in fairly health trends just like the other regions..

And as it relates to Ticket Monster. So one of our main objectives obviously was to reduce our losses in rest of world, but another is to stay focused and to make sure that we win in our biggest and most important business, which is local.

Right now, we’re in 47 countries and we can’t invest in every country at the level that we would like to at all time. It’s just not possible. And some markets like Korea are evolving really rapidly. TMON is growing faster than we thought. It would have certainly growing faster than it was when we acquired it.

The growth has really been unbelievable and that business is thriving. And it has the potential to be the leader in e-commerce in Korea and we’re very focused on the long-term. We’re focused on making that happen.

And one of the things that we’re going to do is explore strategic alternatives that could – because we believe that TMON there is – and there could be other markets that are similar could really benefit from having a strategic or financial partner that helps them unlock their ultimate value. We’re not looking to sell all of TMON.

We love the business and you – obviously you can never tell where these things go, but we’d like to be shareholder for a long time, but we need to set that business up for success. And again, we just can’t be as aggressive as we’d like to be in 47 markets at one time.

And the opportunity in TMON and some other emerging markets in APAC is really getting interesting and we want to take advantage of..

Okay, thank you..

Thank you. Our next question comes from the line of Arvind Bhatia of Sterne Agee. Your line is open. Please go ahead..

Thank you. And I’d like to add my congratulations on achieving your targets in the quarter earlier than expected. I wanted to go back to a question that I think Ross was asking about, your 2015 and 2016 plans. As you think about local billings in North America and elsewhere, turning ago from 10% to 20% long-term.

Can you provide some thoughts on in the interim ‘15 and ‘16, how much progress you expect in those years, similarly for gross profits as well? And then my second question is on Groupon Pages.

As you invest against that business, do you also have plans to maybe incorporate some sort of advertising models into that? Do you think that, that would be a possibility for you down the road? Thank you..

Arvind, this is Jason. I’ll take the first one. Thanks for the question. So I mean the short version is, we do expect to make progress in ‘15 and ‘16 and kind of how we expect to do that. I’m just not going to be able to get into it now, but I hope you’ll be able to join the Investor Day in a couple of weeks and we’ll get into it then..

And in terms of pages. So if you think about this product and where it is, we have built over seven million pages, but we’ve only released roughly 500,000 or more, both to our internal search index at Groupon and then to the external search indexes like Google. And that’s a matter of time, right, because these pages have to have rich content.

You can’t just dump seven million pages in the market. You have to make sure the pages have rich content. And so we’ve just begun taking action to help facilitate the collection of tips and pictures and reviews and ratings and all that good stuff that makes the pages excited.

As these pages get built, we’re fortunate that Groupon is first and foremost in the transaction business. And so we want to put up some kind of deal or special offer on these pages.

We have a lot of inventory already that we can pull from and put on those pages and we’re not working with our merchant partners for them build pages to say, hey, is there any specials or offers or deals that you want to put up to help attract customers.

Again, when you have a community of traffic as large as ours over 150 million monthly unique, and all these people that have credit cards on file and are actively repurchasing, we think we can become an amazing channel for merchants to get customers in the dorm.

Just one anecdotal point is we launched the feature a few months ago called request-a-deal. And we’ve just been blown away. Over 400,000 people have clicked that button letting merchants know that should they ever decide to run a deal, they would love to buy it. And this is only 45 or 60 days old or whenever we launched it. So it’s very new.

So the engagement has just been fantastic. And right now we’re first and foremost focused on getting that engagement up. We monetize things for living, and so we’ll have no problem monetize these pages..

Okay, great. Thank you guys..

Thank you. Our next question comes from the line of Eric Sheridan of UBS. Your line is open. Please go ahead..

Hi, Tim Chiodo in for Eric. Question is mainly on the EMEA direct business. So specifically last year around Q4, you started I believe partnering with third-party fulfillment partners, and you really saw an uptick in that business and its continued strength for the last few quarters.

Just wanted to see if there were any plans to bring on additional partners or to build out the fulfillment capacity in the region further for 2015?.

This is Jason. I’ll take that question. So we did see a really nice improvement in direct margin last year. As you said, we actually grew from about 10% to 14% direct margin in EMEA last Q3 to Q4. This year, we actually just completed Q3 at about 18%. It is – there are some 3PLs or third-party logistics kind of outsources that we use.

We use a larger percentage of drop-shippers. You have to remember that in Europe, it’s very different than North America. We have much smaller geographic areas that we’re covering. And so as a result, we can actually provide a great customer experience in terms of a relatively short quarter to delivery timeframe.

And per unit economics are not as sensitive there as they are in the U.S. We’re getting two versus one units in a box really makes a big cost differential in the U.S., not as much so in EMEA. So you should expect to see that business continue to run the direct margin was 18%. Overall it’s about 17%. You should expect it to stay in that territory.

And because there is a lot of capacity for drop-ship and 3PL, we don’t have any near-term expectations that we need to do any sort of kind of fulfillment center build out, but that certainly could be an opportunity I’d say farther down the line, but again that’s not something that we’re focusing on right now [ph]..

Okay. Thanks very much..

Thank you. Our next question comes from the line of Ralph Schackart of William Blair. Your line is open, please go ahead..

Good afternoon. On the good side of the business again. As you made a lot of significant amount of logistical changes since last year, how are you thinking about the upcoming holiday seasonal demand in 2014? Your ability and capacity to handle that demand versus where the goods infrastructure was last year? Thanks..

Yes. So I’ll start and Jason may want to also comment, but look, we’ve done a significant amount over the past year to prepare for this holiday season, and we think we’re in a very good shape. We opened up our Kentucky distribution center in Q4 of last year. And so it’s just starting to ramp-up.

Obviously it’s been opened now for a year and we feel great about the throughput of that facility. We’ve done a ton of work on the systems side to make sure that our logistical infrastructure and systems are ready.

As you can see from the site itself, we’ve done a lot of work in terms of the user experience that people are seeing when they come to goods and search. We’ve got a new UI. There is a new UI in mobile that’s being rolled out. We’ve added a significant amount of inventory that’s now thousands of deals on the site.

So we think we’re well positioned from a demand perspective and from a systems perspective going into this holiday season..

Yes, Ralph, the only thing I would add is, last year we did have a couple of hundred basis points of margin reduction that happened in the quarter because of the combination of refunds and upgraded shipments, because we just didn’t have a great handle on the intersection of what our demand versus what our supply capacity actually was.

And so that is something that we have a much better, I think team, as well as process and set of tools to monitor. And so the result I would expect, I think last year between Q3 to Q4, we saw over a couple of hundred basis point degradation, I’d say 300-plus – 370 basis point degradation in gross margin.

We expect to see – there could be some – a little bit of reduction that has more to do probably with pricing and margins, but in terms of the actual net gross margin reduction, it should be very small, certainly relative to last year..

Great. Thank you..

Thank you. Our next question comes from the line of Brian Fitzgerald of Jefferies. Your line is open. Please go ahead..

Thanks guys. You’ve had Groupon Freebies for a while longer than Snap with the cash back offers. Can you differentiate around the levels of interest in both of these? Is there any difference in the type of merchants participating in each one? And maybe as a follow-up. How is the in-store uses of Freebies tracking to-date? Thanks..

Yes. So I would say in terms of Freebies and Snap, even though Freebies is older than Snap, both are still fairly new business lines for us. Snap, we launched – obviously it’s very new. It’s only a few months old and we’ve just been overwhelmed at the adoption of that app.

There were about a million people downloaded the app in the last 45 or 60 days and it’s just been kind of a runaway hit. And I think one of the reasons is that it serves a different kind of merchant profile than Freebies.

Freebies is really in the business of dealing with all the big retailers and brands and gets at kind of the main stay of commerce, right. Its big national retailers, people that have an online presence, people have in-store presence.

And it’s all the coupons that they tend to offer, similar to a RetainMeNot or Coupons.com and people like that, whereas Snap is really much more whenever they household – kind of a CPG product.

It’s all about helping people save money on, the everyday things that they buy in a grocery store, loafs of bread and milk and eggs and macaroni cheese and all that good stuff. And so those big consumer brands have just adopted and have really fallen in love with it. It is a tool to reach a new consumer and get people to try new items, right.

It’s a very big deal. You can get people to try a new brand of soda or a new brand of a household item. You can build long-term loyal adoption. And Snap is a tool to do that. So the level of interest has been super high. They serve slightly different consumers as I mentioned. In terms of the in-store usage.

Basically right now, the Freebies business – we make money the same way as the other companies I mentioned, where we kind of distribute these coupon codes and people redeem them online or in-store, and then we earn an affiliate fee. And that business is just growing like weed.

It’s just been kind of fantastic month-over-month growth, but because we’re – in the aggregate the fact that we did nearly $1.9 billion last quarter alone, even though that business is growing really quick, it’s still small relative to the overall business. And so we don’t call it out..

The only thing I would add is in terms of just kind of the selection and inventory, we have about 35,000 coupons in about 7,000 stores available through Freebies right now and continue to expand..

Great. Thanks guys..

Thank you. Our next question comes from the line of Tom Forte of Brean Capital. Your line is open. Please go ahead..

Great. Thanks for taking my question and thanks for the traction of the North American local.

So how should we think about the use of branded deals, Starbucks and things like that, versus digital advertising, where I know you’re very good in tracking your return on investment as far as reaching more effective at driving, both sales and the different impacts they have on the margin as well? Thanks..

So I can give you some anecdotal commentary, but I wouldn’t profess that to be able to give you a perfect answer. I will tell you that when we run national deals like Starbucks or Whole Foods or any of the variety of people, we just ran iTunes recently. When we – and you can see it from the rate of sale.

When we do a Starbucks deal, we can sell hundreds of thousands of units in hour. These things can really generate some significant volume.

And we have been a very good source of driving both new customer acquisition for these big brands, as well as some of the stuff they really want, which for example, might be people that download their app or to engage with them in new way.

And so I think if you look at Groupon in the aggregate, we are one of the most successful forms of advertising that exists, because it’s all performance-based advertising. You put a deal up of some kind, and the only way the merchant is giving anything away is that the customer actually walks in the door. And so it’s completely ROI based.

You can measure its effectiveness instantaneously, as opposed to when somebody might run a more general branded campaign on television or in other forms or advertising where it’s harder to measure. And obviously it’s been effective, because the Groupon is not even six years old and reaching to $8 billion. So it’s been widely adopted..

Thank you..

Thank you. Our next question comes from the line of Heath Terry of Goldman Sachs. Your line is open. Please go ahead..

Great. Thanks.

I was wondering if you could give us a little bit more color on the kind of adoption that you’ve seen for some of the newer merchant services offerings, whether it’s pages or Gnome, especially to the extent that you’re starting to see some replacement of normal payment systems through that? And then what kind of – as well as sort of reservations and some of the other offerings that you’ve got.

And then to the extent that there is a sense of these things for the merchants that are using those offerings, what kind of difference you’re seeing in, either revenue per merchant or uptake of the deals that those merchants are offering among consumers?.

Yes. So there is a lot in that question. So let’s start with Gnome for a second, right. So Gnome is still a very new product for us. We just rolled it out. I think we began talking about it in last quarter. We were in about 75 markets, but just rolling out in those markets.

We’ve deployed over 6,000 tablets, which is quite a bit when you think about the absolute number, but obviously given the fact that Groupon does business with over 800 or has done business over 800,000 merchants, we have a long way to go. But the 6,000 market, they are predominantly fulfilling multiple merchant needs.

It’s a redemption device, which helps our consumers redeem. It can be a point-of-sale system for those merchants that don’t have one, and roughly 60% of our merchants don’t have a point-of-sale system. It has payment capabilities, and obviously it’s a tool to collect reviews.

Hence we talked about a minute ago, we’ve collected and now starting to make public to nearly 20 million ratings and reviews that we have. And basically, what we’ve seen in this original deployment of Gnome is that merchants are using it, customers are using it.

The payment attach rate, the number of merchants that are signing up for payments has been higher than we would have thought. I can’t tell you the exact number, because we’re not disclosing it, but it has surprised us in how many people are signing up for payments. So we think there is a really interesting long-term opportunity there.

But the main goal of this tool is to basically allow merchants to try to figure out what’s happening at an item level, and why is the day slow, why aren’t customers coming in, which sales people are doing bad, which items are selling or not selling.

And as merchants can start to get insights around that item level volume, they can access our community of 250 million subscribers and 150 million visitors and 100 million app downloads and all that stuff. They can access that to basically move that inventory.

And that starts to get at the real problem we want to get at, which is kind of real-time yield management in local commerce. So it’s early. The stats are encouraging, but not big enough to really kind of paint the full picture.

And in terms of revenue per merchant, right now we’re deploying these Gnome tablets to the merchants that we’re already working with. So we haven’t seen any real significant change for economic model in part, because the way the tablet program is designed, we neither really make a lot of money or lose money from it.

It’s really economically agnostic for us to deploy a tablet or not. And obviously the deals are selling on our site the way they sell, and that’s not really influenced by whether or not somebody has a tablet or not..

Great. Thank you..

Thank you. And ladies and gentlemen, that concludes our Q&A session and our conference for today. Thank you for your attendance. You may all disconnect. Have a great rest of your night..