Genny Konz - Groupon, Inc. Eric Lefkofsky - Groupon, Inc. Rich Williams - Groupon, Inc Brian Kayman - Groupon, Inc..

Douglas T. Anmuth - JPMorgan Securities LLC Paul Judd Bieber - Bank of America Merrill Lynch Ross Sandler - Deutsche Bank Securities, Inc. Tom White - Macquarie Capital (USA), Inc..

Hello and welcome to our third quarter 2015 financial results conference call. On the call today are Eric Lefkofsky, Rich Williams, and Brian Kayman. The following discussion and responses to your questions reflect management's views as of today, November 3, 2015 only and will include forward-looking statements.

Actual results may differ materially from those expressed or implied in our forward-looking statements. Additional information about risks and other factors that could potentially impact our financial results is included in today's press release and in our filings with the SEC, including our Form 10-Q.

We encourage investors to use our Investor Relations website as a way of easily finding information about the company. Groupon promptly makes available on this website, free of charge, 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, we will also discuss the following non-GAAP financial measures – 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 2014 and are excluding year-over-year changes in foreign exchange rates throughout the quarter.

In addition, historical results have been recast to reflect TMON as a discontinued operation and all financial information and operational metrics discussed on this call pertain to continuing operations. And now, I'll turn the call over to Eric..

Thanks, Genny. As you may have seen in our early release, this is my final call as CEO, as I hand the range over to Rich Williams.

When I became CEO two-and-a-half years ago, I hoped that the day would come when the foundation of the business would be solid enough for me to return to my role as Chairman, and that the board and I would find the right person to take over. That day is here. Let me start with Rich.

Having served as our Chief Marketing Officer, President of North America and most recently our Global Chief Operating Officer, Rich has proven to be a tremendous operator; but more importantly, he's also a dynamic leader with great strategic insight. I've worked alongside Rich for years, and there is no one, I would rather have replaced me today.

In 2013, our business was facing huge obstacles from years of rapid and fragmented international expansion and a reliance on an eroding e-mail business. To surmount these obstacles and ultimately thrive, we needed to completely transform the business and build a local commerce marketplace. Over the past few years, we've accomplished a great deal.

Our marketplace is now at scale, as search accounts for nearly one-third of our North American business, and we have nearly 570,000 deals live on our site, up from just 1,000 when we went public. We've also invested heavily in mobile and as a result, well over 55% of our business comes from the over 115 million people that have downloaded our apps.

Our mobile and marketplace efforts have allowed us to grow by more than 32% from the $2.3 billion in revenue we had when I took over two-and-half years ago, while simultaneously increasing adjusted EBITDA and free cash flow.

On a trailing 12 month basis, we generated $3.1 billion in revenue, $1.4 billion in gross profit, $283 million in adjusted EBITDA and $228 million in free cash flow.

The foundation of our business is stronger than it's been in years due to the tremendous effort and hard work of the over 10,000 people that make Groupon so much more than just a company. We've worked hard to transform the business and are now ready to take our next big step.

As such, now is the right time for me to step away from my operating role and let Rich lead us during this next age. Before I turn the call over to him, let me provide a few more details on the quarter. Q3 was another important quarter for Groupon.

I'll make a few comments on our financial performance, which Brian will cover in greater detail in a minute, and I will also set the context for some larger strategic initiatives we've collectively decided to pursue. Keep in mind that all year-over-year comparisons are FX neutral.

On that basis, gross billings were $1.47 billion for the quarter, increasing 6% year-over-year and revenue was $714 million, up 7%. Gross profit was $329 million, adjusted EBITDA was $56 million and we delivered $0.05 in non-GAAP EPS. Changes in FX rates, the euro in particular, continued to negatively impact us.

Had they remained neutral to last year, we would have delivered $117 million more of billings, $48 million more of revenue, bringing revenue to $762 million, and $26 million more of gross profit. We continue to make progress in North America, with billings growth of 12% year-over-year to $869 million.

All of the fundamentals in North America were also up and to the right, with units up 11%, active customers up 8%, customer spend up 2%, and active deals at now over 290,000. EMEA and Rest of World fell a bit behind with billings roughly flat for the quarter at $415 million and $184 million, respectively.

Unlocking growth in our international businesses is going to take a renewed sense of focus and prioritization, which Rich will discuss in a minute. So Q3 was a strong quarter and provided further evidence that we've stabilized and repositioned the business.

Yet it also provided evidence that despite our efforts in supply where we've been mainly focused, we can't unlock additional growth without taking bold steps in marketing. Our product is world's better than it was a few years ago. And we've grown supply by over 100% in the past few years.

And yet, we're still only growing 12% in North America, why? Because as we've been overly focused on marketing efficiency, the fundamentals of our product and short-term adjusted EBITDA, we've been under-investing in marketing. There are only two ways to grow; get your existing customers to spend more or add more new customers.

Given the consistent way our customers behave over time, which Rich will discuss in a minute, we have the opportunity to create a virtuous cycle by investing in new customers, who will generate significant lifetime value for us.

When you take a step back and think about it, it's hard to grow your business by 20% when your customers are only growing by 8%. It's also hard to justify not investing in more customers, when they pay for themselves so quickly and they continue to pay dividends for years, in light of how stable their buying patterns are.

And it's hard to keep investing less than 5% of your sales and marketing, when most of your competitors invest twice that amount or more. So we've decided to significantly increase our marketing investment in an effort to secure millions of new customers and help drive additional growth.

It's an absolutely essential move if we want to take advantage of the enormous opportunity in front of us. And with that, I'll hand the call over to Rich, as the architect of this plan, to take you thorough more of the details..

to build the daily habit for local commerce, the marketplace where people discover and save on amazing things to eat, see, do and buy in their neighborhood. Yet once again, we're forced to make tough decisions, trading short-term pain for long-term gain, in order to build a company that we're proud of, not just in 2016, but equally in 2036.

With that, I'll turn it over to Brian..

Thanks Rich. I'm going to start by summarizing our Q3 results. The details are also available in this afternoon's press release. Please note that all comparisons, unless otherwise stated, refer to year-over-year growth and are FX-neutral. Gross billings, our measure of marketplace activity, increased 6% to $1.47 billion in the quarter.

Our increase in gross billings was largely driven by a 12% increase in North America, which I will further discuss in our segment summary. Revenue increased 7% to $714 million in the quarter.

While we saw many of the same trends as other e-commerce companies, our $714 million of Q3 revenue, reflects a focus on North America shopping gross profit and the focus of our international operations on our restructuring efforts. Gross profit was $329 million or about flat to last year's third quarter had it not been for a $26 million FX headwind.

Our North America gross profit increased 9% in Q3. Adjusted EBITDA was $56 million for the quarter. GAAP loss per share was $0.04, reflecting a charge for our announced restructuring and increased accrual related to our securities litigation and a gain on the deconsolidation of our India operations. Non-GAAP earnings per share was $0.05.

Free cash flow for the third quarter was negative $35 million, bringing free cash flow for the trailing 12 months to $228 million. We repurchased approximately 44 million shares during Q3, bringing our share count down to 623 million at quarter-end. Approximately $270 million remains available for repurchase under our existing authorization.

The timing and amount of future repurchases is based on many factors and is subject to routine evaluation. Turning to our notable non-financial performance metrics, active customers grew 4% year-over-year to 48.6 million for the quarter. North America active customers were 25.3 million, growing 8%.

Customer spend was $132 and grew 3% on an FX-neutral basis. North America marketplace annual spend per customer was $148 and grew 2%. Moving on to our of the segments. North America gross billings grew 12% to $869 million, driven by growth in all categories. Services gross billings grew 10% and shopping gross billings grew 18%.

Our North America segment reflected a year-over-year increase in marketing spend of $4 million as well as additional SG&A spend, as we integrate order up and focus on high-frequency use cases. EMEA gross billings of $414 million declined 1%.

Gross margin of 25% was down year-over-year from 26.9%, but up sequentially from 24% as we focused on profitability. Rest of World gross billings of $184 million was about flat. Gross margin of 18.6% was down year-over-year from 21%, but up sequentially from 18.3%. Moving on to our categories.

Services gross billings increased 4% globally to $955 million. North America grew 10%, EMEA declined 3%, and Rest of the World declined 1%. North America local grew 8%.

Services gross margins, defined as gross profit divided by gross billings, were 27.5% globally compared to 29.6% a year ago, with the decline resulting largely from increased order discounts. North America local gross margin was 28.8% and take rate was 34%. We increased our active deals to nearly 570,000, including 80,000 coupons.

Shopping gross billings increased 10% globally to $513 million with 18% growth in North America, 3% growth in EMEA and 2% growth in Rest of World. Shopping gross margins, also on a gross billings basis, were 13% globally compared to 12.6% a year ago and 11% last quarter.

The increase was driven by improvement in North America, where margins improved 230 basis points year-over-year to 12.2%. Let me also touch on two additional items. As we discussed last quarter, we have increased our focus on our cost structure.

On September 22, we announced a restructuring program and our GAAP earnings includes a $24.1 million pre-tax charge. I want to also point out that our tax benefit for the quarter reflects an $18 million reduction in our accruals for tax contingencies. This resulted in a $0.03 EPS benefit.

Turning to our forward view, Rich discussed three strategic focus areas – marketing, international, and shopping – and I want to provide some color on the impact on our longer term outlook. As we think about 2016, we expect our revenues to be between $2.75 billion and $3.05 billion.

This guidance considers our focus on international profitability, our focus in shopping, on increasing margins and the impact of our marketing investments in the back half of the year. We expect adjusted EBITDA to be in the range of $75 million to $125 million. This includes planned marketing investments of $150 million to $200 million.

Given the timing of our marketing investments, we expect adjusted EBITDA to improve steadily throughout 2016.

As for the fourth quarter of 2015, we expect revenue between $815 million and $865 million, as we continue to deemphasize our lower margin shopping categories and our international operations remain flat, in part, as we continue to exit business and countries as part of our previously announced restructuring plan.

With respect to adjusted EBITDA, we expect to increase our marketing investments by approximately $20 million during the quarter and we expect an additional drag of approximately $20 million from our international businesses, as we continue to right-size our operations abroad.

As such, we expect adjusted EBITDA in the fourth quarter of between $40 million and $60 million. We expect non-GAAP earnings per share from continuing operations of between negative $0.01 and $0.01.

As always, our guidance reflects current FX rates and our results are inherently unpredictable and may be materially affected by many factors, including a high level of uncertainty surrounding the global economy and consumer spending as well as exchange rate fluctuation.

And finally, I'd like to congratulate Genny Konz on her new role as Vice President – Revenue Management in our North America Services Business. Tom Grant, who most recently served as our International CFO, will step in and lead our Investor Relations. With that, I'll turn the call back over to Rich..

Thanks, Brian. We've shared some big decisions today, but we believe they're the right ones and that they help better position us for growth long-term. We're choosing to get out of what's not working, what's not sustainable, or what's not aligned to achieving our long-term vision and to driving long term stockholder value.

That means we'll be more streamlined and more focused, even if it means operating in fewer countries and moving away from empty calories that boost short-term revenue or billings. We're willing to get smaller in order to get bigger.

In turn, we're choosing to double down on what's clearly working and on those things that are aligned to helping us capture the long-term opportunity. Seven years into our journey, we're still far better positioned than anyone else in our space to turn our vision into reality.

That means we'll continue to invest in improving our products, in improving the quantity and quality of supply and in developing winning solutions and high frequency use cases. It also means that we'll invest in adding more new customers to unlock more growth.

These aren't the kinds of investments that pay off instantly, they're the kind of investments that build sustainable growth and competitive advantage. That's what we're here to do. I look forward to leading Groupon through such a challenging and exciting time. With that, let's take some questions..

Our first question comes from the line of Douglas Anmuth of JPMorgan. Your line is open. Please go ahead..

Great. Thanks for taking the questions. Two things. First, just on the 2016 outlook, probably a little bit easier to understand the EBITDA impact from marketing.

But can you help us just bridge down on the revenues as well, and I guess how much in particular is from the international markets that you're shutting down and what else is in there? And then secondly, on the marketing investments, can you give us more color on the kind of media that you'll be doing and obviously it's a lot more money, but what is different in terms of how you're going to invest those dollars? Thanks..

Thanks, Doug. I'll – we'll do a little bit of tag team on that. I'll take the marketing piece and Brian will take the guidance piece. But before I do that, let me just say a couple of quick things. I mean first and foremost, look, I'm happy to be here today. I'm glad to be here and I'm looking forward to leading Groupon through this next stage.

I mean, it's an exciting time for Groupon and it's obviously an exciting time for me personally. With that, I want to thank Eric and Ted and the board for the opportunity and as well, thank the team across Groupon for what's been just overwhelming support in my time here. As I've said, we covered a ton of ground in the prepared remarks.

You've picked up obviously on two big pieces there that we should cover. And you're going to, I think, see a couple of things as we respond here, I mean, one, look I think now I'm an hour and 34 minutes into the job, and I recognize that the magnitude of the changes are significant and that's not missed on me by any stretch.

You're going to see that, look, we're moving fast. We're being bold and we're being decisive, and kind of the key there is that, look, I've been here for that four-and-half years. I've had the support of the team; I've been able to have the time to see what we need to do to learn across the business in basically every core function here.

And as a result, I just don't – I don't need the proverbial 100 days or that extra time to have a point – a strong point on view of what we need to do and what we need to change.

Within that, we're ultimately doing what I believe is right – having been here for the past four-and-half years – and that means doubling down on what's working, walking away from what's not, and ultimately, it just means we're here – we're here to win and we're playing to win.

So you're going to see some of that even if it means some short-term pain. Because playing to win isn't always going to be easy and you're going to see some of that reflection in 2016 on the outlook as well as in our Q4 outlook as well. I will turn it over Brian now for him to cover and then I'll loop back around at the end on marketing..

Thanks, Rich. Doug, I'm going to cover your question on the revenue side here first, and then I'll walk through the rest of the guidance so there's a pretty clear picture. So, on the revenue side, we have a range of $2.7 billion to $3.05 billion in 2016. Rich talked about the changes we're making in shopping and that is one of the big drivers.

We're placing a greater focus on third-party inventory and higher margin growth and less on categories like consumer electronics. It's a big change and it could result in about a $250 million reduction of revenue for the overall shopping category.

Second, we've assumed continued underperformance in our international business due in part to the disruption, as we focus and rationalize our international operations.

With the restructuring program we announced in September, we've begun to take a lot of actions to right-size our international operations, which have been relatively flat for the past two quarters. And while it's best for the long-term health for the business, it's begun to create some disruption that we expect to continue in the near-term.

These two factors make up the majority of the reduction versus our prior expectation. We've also broadened the range to provide some flexibility as we continue to explore the strategic alternatives in our international markets that might not be a good fit for us..

Awesome. Thanks, Brian. So on the marketing side, a couple of – couple of things there – one is, I do think it's worthwhile taking a bit of a step back. I mean, obviously we're signing up for what's a pretty big commitment to marketing, a bigger one than we've made in a very long time.

We haven't invested at this kind of level really since, what I'd say is kind of in the 2011 time zone, into the 2012 range. We've been much, much lower than this. But we should be clear that it's not a hair-trigger call. I mean, this is data that I've been watching for a long time.

I mean, I was the CMO for a long time here, but it's – but it's simple – like we're choosing to double down on what's working and one of things that's working best is the historical return on our marketing investment, specifically our new customer investments. A lot of that data is in the slides.

I think if you take a real clean look at the slides and one to pay attention to is, just look at the billings growth trends and how they correlate to new customer growth.

As you see, there's a lot of times when we were growing new customers at 20%, the business is growing at 20%, but it's hard, as Eric mentioned in the prepared remarks, it's hard to expect to grow much faster than that, much faster than single digits when your customers are growing the basic single digits.

The math, like how we get here is ultimately, take a look at what I'd say in slide 15, it's the most basic math, but it's probably the most compelling where you can see our investment relative to return over time; and then you can see from the cohorts, they're just consistent.

So if you take a clean view of that data, meaning remove the self-imposed limitations and constraints, which is generally how I approach these challenges, you're going to see a business that's spending somewhere around $50 bucks to acquire a customer and those customers are delivering predictably 3x, 4x, 5x returns over time.

And taken that clean look, one of your first questions would probably be why on earth are you not spending more on marketing, which is ultimately where we end up. And if you're looking past 2016, and you're thinking three years to five years out, you're going to spend more on marketing, even if it means taking a short term hit in EBITDA.

It just ends up being the clear, right call for the business.

So what we're going to do that's different within the marketing space? I mean, some of that is in the channel, kind of media color to your question directly Doug is, there's going to be piece of it that's just doubling down on our core marketing programs in the online space, things like SEM and display, and the work we're doing in the Facebook and mobile app downloads, et cetera.

But as we mentioned earlier – as we move our ROI payback thresholds from the 6 month range to the 12 to 18 month range, I'd expect a lot more media opportunities to put themselves in front of us and that could include traditional offline media, things like TV, et cetera, which the team is actively considering and we'll be able to provide an update on at a later date.

So, I think that's the big things and ultimately what different, it's really that – we have now more time, we have more proven history with our cohorts – and now we have the opportunity to start putting the pedal down on something that believe is the right call for the long-term of the business.

And we're going to do it across more channels than we've probably ever done it. So, hope that answers your question, Doug..

Doug, I do want to – I want to add just a little bit of color on a couple of other things that I think you might find helpful. So, on the adjusted EBITDA side, you mentioned it's clear from the marketing side, roughly $150 million to $200 million in incremental marketing.

We also expect to extend our payback periods in order to get there from 6 months to 12 to 18 months. And so, we're expecting that it's going take some time for that spend to reach the optimal efficiency levels.

And so our investments will start to pay off first in the back half of 2016 and so, we're assuming very little payback in 2016 with our return on investment starting in 2017.

I also want to add that on the adjusted EBITDA side, as we talked about the softness in the international markets for a number of other reasons that I covered on the revenue side, we could have an additional drag of roughly $50 million next year.

Also thought that it made sense to just to cover a little bit about Q4, because many of the same factors are applying in Q4. I mentioned that our – that we've got a number of focus areas on shopping and looking at the international side and we're seeing these exact same trends.

Our revenue range of $815 million to $865 million reflects our efforts to deemphasize low margin shopping and we began to actually see this in Q3, and we're going to increase our efforts, particularly in North America and the Rest of the World. We could – we expect that this could have a $50 million to $100 million impact on Q4 revenue.

Also in light of the underperformance we're seeing in international, again due in part to some of the disruption in our efforts to focus and nationalize our international operations, we're guiding to flat revenues in our international business in Q4. So the combined impact of the shopping and the international side gets us to our new revenue range.

And it's similar on adjusted EBITDA, our margins in our shopping business in particular, in EMEA are trending below historic levels. We've made some progress in this past quarter as reflected by the 240 basis point increase to 14.9%, but they're not recovering fast enough.

So the combination of some of the pressures that we've noted in our international business and our margins create about a $20 million drag on adjusted EBIT this quarter. And I'll close by saying that our guidance assumes an additional – an incremental $20 million in marketing investments in the fourth quarter..

Great. Thanks for color and congrats on the new role, Rich..

Thanks, Doug..

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, thanks for taking my question and questions and congratulations, Rich, on the new role. How should we think about the Group's gross margins in Q4? I think usually your quite promotional.

Excluding consumer electronics, do you plan on being promotional in the goods category similar to previous years and then how should we think about the local take rates as we head into Q4?.

So I'll – thanks Paul for that, I appreciate it – I'll cover the first part in shopping and then I'll turn it over to Brian to talk about local take rates.

But so, I think the real key point on shopping as we move into Q4, is that, what we talked about doing here, which is deemphasizing low/negative margin goods, is different than excluding consumer electronics from our business.

I mean, deemphasizing it and backing it off, is really what we're talking about and making it a smaller part of our overall mix, but a much more strategic part. I think one of the things that I've learned in my time in e-commerce working – when I was working at Amazon or otherwise – is you can run a couple of different kinds of goods businesses.

You can run a razor-thin CE business – a consumer electronic business – that chases empty calories largely and where you're constantly looking for the next big hit in order to make your results.

Or you can build one that's much more strategic and use these low margin items to drive traffic, using it really as a marketing mechanism, where you're driving that traffic into a funnel that does a way better job of having high attach, high margin items to bring the overall margin of the baskets up. And that's what we ultimately started to do in Q3.

I think you're going to see more of that moving into Q4, where of course, the CE and low margin items are going to be a smaller part of our overall mix, but where they're visible and accessible and where we're putting promotion horsepower behind them, they're going to be more focused on overall basket quality.

And I think you could see that in the net results in Q3, that so far, our progress on that direction is pretty sharp. Bit with that, I'll turn it over to Brian to talk about local take rates.

Sure. We were 34% in Q3 and down from 34.5% in Q2, which was largely an increase in order discount spending. So, as you look at it, our take rates are roughly around the same spot and we'd expect that to continue into Q4..

And any update on the CFO search?.

Look, at this point, now I'm an hour and forty-five minutes into the job, up from an hour and forty-one a couple of minutes ago. Look, I think that the biggest thing to take away on this front is that the team here is amazing. I've inherited a lot of talent.

Brian, frankly, is a testament to the depth of the team here, that he was able to step into the CFO role on an interim basis and do a great job.

But like I'll do with any team I've ever inherited, I'm going to give us time to get into a good rhythm and get it to lock in on a cadence that is high trust and high confidence and that gives me an opportunity to assess where we have gaps or where we need to add additional talent to the team.

So, I'm going to need some time before I make those assessments across a CFO role or even thinking about a COO role or anything else, given that I'm kind of moving out of one and into another.

So, we'll have to keep you updated on that across the board, but again, expect us to keep building our team and expect us to keep building the team from within..

Okay. Thank you..

Thank you. Our next question comes from the line of Ross Sandler of Deutsche Bank. Your line is open. Please go ahead..

Thanks, guys. That was a whole lot to take in, so I guess, I'll just – I have two questions, one just on the – expanding on the marketing, and then another one on just key metrics.

So, Rich, you've been a marketing guru for most of your career and have figured this stuff out at Amazon and now Groupon, so we like the idea of investing behind your strengths. But having said that, awareness I don't think has been a real problem for Groupon, historically.

It's been more about balancing merchant density and merchant satisfaction with the customer side, and it looks like you have that in North America – that flywheel going – but not in these other markets.

So, I guess the first question is, what countries is this marketing going to flow into? And is it as simple as moving back the payback period or do you need to fix other aspects of the business first? And then, of these 36 countries that we're still in, how many of those – is every one of them that you're not spending the marketing against going to get shut down or sold eventually? That would be the first section of questions, I guess.

And the second question for Brian is, with this pivot, it seems like the model is shifting something closer to Amazon, where you're trying to run the operating income at close to zero and focus on generating free cash flow.

So, what is the key metric? Should we look at EBITDA generation or should we look at some other metric to assess whether this pivot is successful? Historically, investors have looked at North America local billings growth as kind of a key precursor for the business.

What is the primary metric that you guys are now focusing on internally? Sorry about the 10 minute question..

No. I mean, hey, you called me a marketing guru, Ross, you can ask 10 minute questions all you want. So I'll cover the first parts obviously, and then Brian will cover the second.

So there's a lot in there on the expanded marketing side and look, I think one of the things we've seen as we've expanded supply and we've improved the product, both of which are in the best position they've ever been in North America, we can grow the business, but it's not as exciting as we want that growth to be.

And ultimately, as we've started to focus some marketing investments on a hyper-local level and some of these market tests we've talked about in the past, I mean, you really see that when you get supply, demand and product all working together at once, you can drive accelerated growth. So that's obviously our focus.

Over the last couple of years, we've been more focused on supply and product and now it's time in places like North America to start layering on the demand piece, especially as we understand it far better than we ever have and we have more data to prove that it's a smart investment.

Now, how that flows into international? As I said earlier, look, there are some countries that are in a really good position. When we talk about the UK, France, Germany, Italy, Australia, their market positions and their marketplaces are further along than many other countries in international.

In those locations, or those kinds of locations where we have a strong position and a strong marketplace and good momentum, we'll start to invest more in marketing.

That said, the majority of our marketing investment will likely be pushed against North America – this $150 million to $200 million that we're talking about, that's going to be largely deployed in North America with some strategic or smart investments in some of the countries that are further along in marketplace development.

So what does that mean about the other countries? Look, it's too early to say with specificity where we're thinking about exiting. And exiting could mean a couple of things as we've demonstrated in the past. It could mean strategic partnerships; it could mean selling off a part of the business; or it could mean an outright closure.

I just can't give you details on that now as we're really just kicking off on the incremental round of our strategic review there. But again, it's going to be a core focus of, is it – what markets do we believe that where the opportunity just isn't in line with the return on investment of time, technology, product, supply, et cetera.

And those are the areas where we're going to focus our energy to find a strategic alternative. So with that, I'll turn it over to Brian to cover the other part of your question..

Sure. Gross billings growth is still obviously an important metric as we go into the future. I would say that EBITDA – adjusted EBITDA and free cash flow – are the main barometers of where we're going.

But I think you need to take a look out at 2017, 2018, 2019 as – sort of the real measure is – once we get through the initial investments here in our marketing and look at the paybacks then..

Thank you. Our next question comes from the line of Tom White of Macquarie. Your line is open. Please go ahead..

Great. Thanks for taking my questions. Just first, North America local gross billings growth in the quarter, I think you guys said in the last earnings call and kind of early to mid-August that it was going to accelerate to double-digits. It actually slowed a tick or was basically stable.

Anything that happened kind of in the back half of the quarter that you could touch on it as to why that maybe didn't accelerate? And then, just again on the marketing side, you spent some time talking about your comfort from the cohort data and some sort of tests that you guys had been running.

Can you just clarify, I'm trying to understand, is there any uplift from these investments reflected in the 2016 revenue outlook or was that commentary around sort of pushing back the payback period, is that sort of more reflective of kind of what you guys expect the real returns to come from this additional $150 million to $200 million? Thanks..

Sure. Thanks for that. So, I'll cover the local piece first. And as you said, that local grew at around 8% again, so quarter-over-quarter relatively stable; year-to-date continues to hover around that 10% range. Earlier we did expect – we did expect it to accelerate a little bit there – but ultimately, it stayed stable over the last couple of quarters.

I think there's nothing significant to point out on that front; the business continues to be solid. The only thing on the short-term side that I'd say there'll be some pressure potentially coming from a lower mix of order discounts, as we increase some of the other points of marketing expense.

But other than that, nothing major to call out and the team continues to focus on all the right things, driving high-quality supply, better density of supply, and continuing to build out high frequency use cases in food and drink and health and beauty and specifically, our activities business of things to do.

So everything is steady as she goes there and moving in a great direction. Ultimately, I think that business just like the business overall, will benefit from increased marketing expense.

So, talking about that with guidance, I'll turn over – I'll turn it over to Brian to cover the expectations around 2016 – but I would generally recommend, again, just taking a look at slide 15 and how this money flows over time and consider those points that I made earlier around 12 to 18 month payback horizon, as well as the ramp to that kind of efficiency that we'd expect to see.

So while we're going to start to ramp up spend now, I'd expect it to take about six months before we're really humming at the kinds of efficiencies that we want to see, and then you have 12 to 18 months from there.

But for that, Brian?.

I think Rich really just summarized the – how we've incorporated that into our guidance. We're really looking at paybacks of – that really don't start till 12 to 18 months after the fact. So, and that's all included in our guidance..

Thank you..

Thank you. And ladies and gentlemen, that does conclude our question-and-answer period for today as well as our teleconference. Thank you for your participation in today's call. You may all disconnect. Have a great rest of your day..