Debra Schwartz - Groupon, Inc. Richard Williams - Groupon, Inc. Michael O. Randolfi - Groupon, Inc..

Ross Sandler - Deutsche Bank Securities, Inc. Tom Forte - Maxim Group LLC Samuel James Kemp - Piper Jaffray & Co. Heath Terry - Goldman Sachs & Co. Ken Sena - Evercore Group LLC Tom White - Macquarie Capital (USA), Inc. Lina Y. Rudashevski - JPMorgan Securities LLC Brian P.

Fitzgerald - Jefferies LLC Mark Mahaney - RBC Capital Markets LLC Aaron Turner - Wedbush Securities, Inc. Emily DiNovo - Cowen and Company Brian Nowak - Morgan Stanley & Co. LLC.

Good day, everyone, and welcome to Groupon's Third Quarter 2016 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. Today's call is being recorded.

For opening remarks, I would like to turn the call over to the Vice President of Investor Relations, Deb Schwartz. 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 the non-GAAP measures, including reconciliations of these measures with U.S. GAAP.

Unless otherwise stated, all comparisons on this call will be against our results for the comparable period of 2015 and are excluding year-over-year changes in foreign exchange rates throughout the quarter. And, now, I'm happy to turn the call over to Rich..

15 countries, primarily in North America and Europe. In these 15 countries we have the teams, competitive positions and investment economics for growth.

While this means we plan to exit some of our smaller and more speculative markets, the fact remains that we're still in the early days in our largest markets and in local commerce in general and believe our resources are better deployed where we already have a solid start and room for significant long-term growth.

For the markets that are not part of the 15 countries for our go-forward footprint, we'll continue pursuing options over the coming months. Mike will add some color on the potential impacts of these changes shortly. Though this process has been disruptive, we're on track and remain focused on stabilizing our international businesses.

We're seeing some initial indications that our efforts are getting traction as the declines in year-over-year growth in EMEA gross billings narrowed in the quarter and segment operating income stabilized. We expect this stabilization work to continue while we pursue options for countries we plan to exit.

Our third priority is to reduce empty calories, particularly in our shopping business. When we talk about empty calories, we're referring to low to negative margin products that drive short-term increases in revenue, but little in the way of healthy, long-term customer behavior or profit.

We continue to execute on this initiative and optimize the quantity and quality of our supply in shopping, which in some instances will result in lower rates of growth in gross billings. After making good progress on shopping margins over the last three quarters, we took a step back in Q3.

As we've discussed in the past, the challenge here is to find the right balance of top-line growth and gross profit growth over the long term. In the third quarter, while unit sales growth remained strong, our tests on a number of pricing levers simply didn't deliver the optimal results.

Instead, we saw a modest gross margin decline without the benefit of significant billings growth. We're not happy with the result, but we've adjusted and believe our shopping business is on solid footing heading into Q4. Our focus remains on driving healthy sustainable growth over the long term.

Fortunately, we have a strong base from which to continue to build. Our fourth priority is to create an amazing end-to-end customer experience, an experience that delights consumers and has them using Groupon again and again.

This means attacking potential pain points in the entire Groupon experience from search and discovery to purchase to redemption. In the third quarter, we attacked one of the largest sources of customer friction in a Groupon experience, expiring Groupons.

Available on our web and mobile platforms in the U.S., our new Trade-In Program should play a major role in alleviating the pain from expirations.

With Trade-In, should a Groupon expire, customers can exchange it for a new local Groupon or in many cases, if a customer just wants a bit more time to use their Groupon, they can choose to extend their expiration date, in most cases by up to two weeks.

Early feedback from customers is encouraging, and we believe the program will strengthen trust in our brand and improve satisfaction and frequency over time. More improvements to the customer experience are on their way, particularly in mobile. We expect to begin rolling out our most significant mobile upgrade of the year in November.

The new app will feature improved filtering, enhanced discovery, search and browse and a continued emphasis on location and targeted notifications. All things we know customers want in an app, they can use every day to help them save time and money locally.

Heading into the fourth quarter, I'm pleased with our progress and confident in our plan and ability to continue executing well against our four strategic initiatives. Before I turn it over to Mike, I want to quickly discuss today's announcement on the acquisition of LivingSocial.

With LivingSocial, we saw both an opportunity to acquire a significant number of new customers at an attractive ROI as well as a solid brand and loyal customer base that could benefit from Groupon's scale and broader inventory across categories. Further, the team understands Local and shares our view of the ultimate opportunity in this space.

We're happy to have them join us on our mission to build the daily habit in local commerce. We're still developing a long-term integration plan that we believe should help us get the absolute most out of our respective platforms, partners and people.

Our immediate term priority, however, is on making sure we have everything in place to help deliver a great holiday experience for our combined customers. With that, let me turn it over to our CFO, Mike Randolfi, to run through the details on the quarter and our outlook..

Thanks, Rich. We are pleased with our progress in the third quarter, as we continue to move forward on our strategic initiatives with a long-term focus on growth in gross profit, adjusted EBITDA and ultimately free cash flow.

As I discuss our results for the third quarter, note that all comparisons, unless otherwise stated, refer to year-over-year growth and are FX neutral.

In Q3, we accelerated our active customer adds, delivered stronger North America local billings, continued to see stabilizing trends in EMEA, reduced SG&A and made the decision on our go-forward country footprint which will include 15 countries. For the third quarter, revenue was $720 million and adjusted EBITDA was $32 million.

Gross billings of $1.43 billion declined by 2% led by a 6% increase in North America and decreases in EMEA and rest of the world of 8% and 23% respectively, related primarily to our reduced country footprint. On a same-country FX-neutral basis, total gross billings grew by 1%.

North America local gross billings of $531 million grew 10% and North America local revenue of $176 million grew 8%. During the quarter, we added 1.2 million active customers, our fourth cohort since stepping up our marketing spend, bringing total customer additions in North America to 3.9 million.

Regarding our international business, EMEA will represent the large majority of our go-forward footprint, which I will discuss further. EMEA gross billings and revenue growth on a same country, FX neutral basis, were down 2% and up 6% year-over-year respectively, highlighting the stabilizing trends that we're beginning to see.

Gross profit was $314 million, driven by an increase in North America, which was offset by declines in international segments with a significant portion of the decline driven by country exits.

For North America specifically, gross profit increased $10 million, driven by a 10% increase in local billings with gross profit margins comparable to last year, which was partially offset by lower margins experienced in shopping. North America shopping gross margin was 10.6% and declined by 160 basis points driven by pricing.

With the adjustments we made at the end of the third quarter, we expect shopping margins to be up on a year-over-year basis in the fourth quarter. Our marketing expense for the quarter was $88 million, an additional $26 million year-over-year related to our investment in customer acquisition.

The incremental spending was in both online and off-line channels. In North America, online marketing spend skewed to display, paid search and app download.

Also we are seeing greater success using select order discounts as a tool for customer acquisition and are increasing its mix relative to marketing and our customer cohorts are continuing to perform in line with our 12- to 18-month payback period.

As we continue to realize the benefits of streamlining and simplifying our business, SG&A was lower by $72 million in the third quarter, which included lapping a $38 million reserve for a securities litigation matter reserved for in the third quarter of 2015 that was subsequently settled.

Our head count is now roughly 8,400, down sequentially in the third quarter by 200 as we continue to streamline the business and scale up shared service centers in international regions and down by 2,100 year-over-year.

Our overall goal is to continue to balance identifying areas of efficiency while making investments in the business and dropping some of the efficiency to the bottom line. Regarding our go-forward footprint, it will now be composed of 15 countries which are listed in our earnings call presentation available on our IR website.

We took an objective approach to determine our go-forward footprint based on several criteria including market attractiveness, our ability to win in the market and the cost of winning relative to expected returns on capital. And after careful consideration, have determined that these 15 countries are the ones we plan to invest in going forward.

To provide some visibility on sizing, the 11 countries not included in the go-forward footprint on a trailing 12-month basis generated $140 million of revenue and an adjusted EBITDA loss of approximately $10 million. As we pursue options, we may continue to experience some small losses in APAC and LatAm which are incorporated in our guidance.

We will update you on the next earnings call regarding how we expect the timing of those actions to impact 2017. Turning to free cash flow, we had $54 million of negative free cash flow which reflects our typical seasonality for the third quarter. And we expect to generate significant free cash flow in the fourth quarter.

For the full year, we continue to expect free cash flow to be about breakeven. We ended the quarter with $690 million in cash, excluding our $250 million undrawn revolver which we believe gives us ample flexibility to invest in our strategic initiatives and generate long-term sustainable growth.

Additionally, the acquisition of LivingSocial is expected to close by early November, and we expect they will contribute approximately $15 million of revenue and $2 million to $3 million of adjusted EBITDA losses per quarter while we bring the LivingSocial customers into the Groupon ecosystem.

We are increasing our 2016 revenue guidance to $3.075 billion to $3.150 billion which reflects the acquisition of LivingSocial and our decisions around country footprint. Based on our results year-to-date, we are also slightly increasing the mid-point and narrowing our adjusted EBITDA guidance range to $150 million to $165 million for 2016.

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

Additionally, I want to remind you that our Class A and B shares will automatically convert into common stock on October 31, 2016. Following the conversion, each share of common stock will be entitled to one vote per share and otherwise have the same rights as prior to the conversion.

And, finally, I'd like to welcome Deb Schwartz to Groupon as our new Vice President of Investor Relations, who joins us from Goldman Sachs, and thank Tom for all his support through our transition period over the last year, as he departs for new adventures outside of Groupon. With that, I'll turn the call back over to Rich..

Thanks, Mike. It's now been one year since I took the CEO role at Groupon. I am proud of how the team has risen to the executional challenge and the determination and drive with which they worked to help our customers and merchants. This is a leaner, more focused company, and our focus is delivering results. Bottom line, our strategy is working.

We're growing customers. We're growing the business. We're doing what we said we'd do and delivering what we said we'd deliver. Most importantly, we believe we're setting Groupon up for long-term success. One year in, I believe more than ever in the local opportunity, and I believe Groupon is better positioned than ever to realize that opportunity.

We have a scaled and accountable advertising platform for local merchants, a proven platform that helps small businesses grow and thrive when so many others are working to put them out of business. We have a top 25 U.S. mobile app with nearly 140 million downloads.

We have a better and steadily improving product that's making it easier for tens of millions of customers to transact locally. And we have a brand that millions and millions of loyal customers love. Our challenge remains largely one of execution and time. It's an exciting proposition, and we're excited to tackle it. Let's take some questions..

Thank you. Our first question comes from the line of Ross Sandler of Deutsche Bank.

Your question, please?.

Hey, guys. If I can ask three quick ones, that would be great.

So, Rich, I guess the new plan and thesis here is that as you guys ramp up the marketing and you bring in new cohorts of buyers that they'll start to stack upon each other, so you're about nine months into the first cohort from 4Q 2015, how is that cohort behaving? And can you talk about like we saw unit growth in North America decelerate a little bit.

Was that just a comp issue or any color there? And then the second question is, for LivingSocial – thanks for, Mike, the impact on financials, but can you just give us a sense of like the overlap or lack thereof today in their customer base and/or merchant base versus Groupon? And then the last question is around the shopping areas.

So the unit economics that are kind of moving around a little bit. Can you just elaborate further on what's going on with gross margin and why it went down in the third-quarter and why it's going to go back up in 4Q? Thank you..

Great. Thanks for that, Ross. I'll start, I will cover your first couple and then I will hand it over to Mike to talk about shopping unit economics and Q4. So on the cohorts, we feel really good about what we're seeing in the cohorts. We continue to see cohorts track well within the range that we expected.

As we set out on our plan and as we set our ROI thresholds, so those first cohorts that we acquired in Q4 are in a really great space and tracking along as we'd see just as the cohorts we just acquired in Q3, they are tracking right in the zone we expect to them track as well. So we feel really good about how they are stacking.

I think the thing to remember there is that this stacking occurs and it becomes powerful over the long term.

I mean, we have added roughly 3.9 million customers since we started but even that is roughly 15% of our total customer base as we sit now, so it's still a relatively small share and we have seven years or so of long-tailed cohorts that have stacked up behind them.

So our goal is to make this an ongoing effort that we are stacking cohorts for the long-term so that we can continue to accrue the benefits that have been demonstrated over time.

I mean all of our cohorts have demonstrated they have a long-tail, they continue to spend on our platform and if we keep acquiring on this track, we're pretty excited about ultimately what that means for us over the long term.

On Q3 unit-based acceleration I think there's a couple of things there, one, you call it out there, we do have a challenging comp in Q3 specifically in shopping. We're comping a time where shopping growth was right around 18%. Year-over-year this time last year and seemed definitely our challenge as we mentioned in the script there.

Just in general with shopping this quarter as we were moving around some of the pieces on pricing which Mike will cover in a little bit.

And just quickly on the overlap on LivingSocial, I won't go into too much detail there but easiest way to think about it on the customer side will add in the neighborhood of 1 million unique customers as part of the transaction to Groupon and then on the merchant side, there's some opportunity for us to add some merchant volume there as well, but it's relatively small and in general not material..

On the unit economics on shopping, so a couple of thoughts there. First, I would just say as we think about shopping just in general, our overall goal over the long-term is really running that business with the focus of maximizing gross profit not just in this quarter but over the long haul.

And the second point that I would just highlight is, is when I think about our margin trends with regards to shopping, if you look over the last several quarters what you saw was pretty nice year-over-year increases in our margins on shopping.

And then, in the fourth quarter, we're expecting that same trend where we have higher shopping margins in the fourth quarter year-over-year. So I would say the third quarter is somewhat of an aberration.

And overall, what I'd say is, during this quarter we spent some time, we tested various pricing strategies and quite honestly there were some learnings out of it, but we weren't satisfied with the result. But the learnings from it, we were able to take those and embed those as we moved into the fourth quarter.

And for us, they're very helpful as we move into the busy shopping season. The other underlying point that I would say is, with regards to the shopping business overall, while the margins were lower, the underlying demand was strong. And so we saw really healthy unit growth in that business.

So, overall I feel good as we're moving into the busy shopping season for the fourth quarter..

Thank you. Our next question comes from the line of Tom Forte of Maxim Group. Your line is open..

Great. Thank you for taking my question.

So as we approach the holiday sales period, how should we think about you're maintaining your initiatives when it comes to goods and focusing on higher-margin items, and how should we think about the balance between sales and margin? And then, if I hear you correctly, do you feel like you have the international footprint the way you want it now on a go-forward basis? And that's good for now.

Thanks..

Yeah. As we think about margins overall, one of the things we're going to think about is obviously, we're focused on generating gross profit, like I said, over the long haul and Goods is a big portion of that.

Now, what I would say is in the fourth quarter, you ultimately have to provide customers what they naturally want, and so in the fourth quarter there is a natural skew towards shopping. And you see that seasonally every year in our business.

So, ultimately, we're going to be working in the fourth quarter to optimize for gross profit and optimize for continuing to grow our North America local business. That's going to be the same as we've been focusing on the last several quarters.

And what was the second question?.

The international footprint..

Yeah. So it sounds like you made the adjustments to international portfolio to get it where you want it to be.

How confident are you that you won't have to make any additional adjustments going forward?.

Yeah. What I would say on that is, we went through a really, really thoughtful process on country footprint. And we spent a lot of time thinking about the attractiveness of a given market. We spent a lot of time thinking about what's our ability to win in a market.

And then in order to win, how much would we have to invest, what would be the return on that investment, what would be the time horizon.

And so we ultimately came up with a list in our go-forward footprint that is a list of countries that we feel comfortable and feel confident are the countries that we want to move forward with and ultimately invest in and believe we have the ability to ultimately win in those markets. So that's the way we're thinking about it.

And those are the countries we're going to move forward with..

Thank you..

Thank you. Our next question comes from Sam Kemp of Piper Jaffray. Your line is open..

Great. Thanks for taking the questions. Quick on marketing, you had started off the year thinking that you were going to increase marketing by about $150 million to $200 million year-over-year. If I'm just looking at your guidance, it implies you're probably not going to hit that range.

Can you just talk about what's been the governor on that marketing deployment? And then, secondly, you launched TV at the end of Q2. Can you just talk about learnings from the TV advertising campaigns that you've been running? Thanks..

I'll take the first part, Sam. With regards to overall marketing range for the year, you are right, we'll be a bit below the $150 million mark for our marketing year-over-year. And I would say there's a couple things that factored in from our perspective in marketing.

One is we're going to look to acquire customers in the most efficient and effective way, and we've had between the Olympics and Presidential campaigns there were times where being offline didn't make as much sense, so we scaled some of that back.

Now, on the other hand, we have found that utilizing order discounts as an acquisition tool has actually been a really good acquisition tool for us. We think about order discounts really with the same framework we think of marketing. So we put it through the same ROI framework. We think about it in terms of payback the same way.

And so what you see is, is in the last couple of quarters we've been increasing order discounts on a year-over-year basis. And we've been using that as an acquisition tool, and that's also part and parcel to why our overall marketing level was able to flex down a bit..

Yeah. And as far as offline, what we've learned there, I'll start out with saying, look, we've only been on TV in total for less than a couple of months in terms of actual airtime.

We started out in late June and we ran a bit in the early part of Q3 and then we pulled out of the market during the Olympics and where the elections media started to make it a bit challenging to find efficient pockets.

But we're still learning a lot in this space, but one thing we do know for sure is that there is an opportunity to get the brand in front of a lot of customers we haven't reached in a long time and to reach completely new markets in that space.

We know that the feedback on the brand has been really high and the feedback on the campaign has been really solid. Customers are definitely finding the message one that they can really connect with.

And the second big piece is, we're finding we can measure it well and that there is real opportunity to make it an efficient customer acquisition channel for us. We're applying the same kind of analytical rigor and depth in the off-line world that we apply in the online world.

Obviously tracking is a bit different but we're treating it in the same way, we're holding it to the same bar, and we're finding that it can deliver against that bar.

So we're really happy with the potential in offline for Groupon especially as we continue to build the marketplace and march toward our vision of being a daily habit and you can expect to see us in Q4 active in the off-line and video world..

Great. And then just maybe a quick follow-up on that given that kind of commentary. When we think about marketing ramp into 2017, should we be thinking that the $150 million to $200 million might have been more attainable not given the Presidential elections season? Thanks..

I'll take the last part first. We could have spent lots of money. We're not constrained in our ability to spend. What we didn't want to do was spend in an inefficient way. The media was incredibly expensive around Olympics in particular.

And again, we weren't ready a year ago, which is where we would have had to be ready in order to start planning for that media to make it efficient. So there is not a constraint on our ability to find pockets of areas to spend.

What we really care about is making sure we're investing where we believe we have the right kind of return on investment characteristics that we require. So I think that's generally how we'll approach the problem moving into 2017.

We're not going to provide guidance on anything specific to 2017, but from a method or philosophy perspective that's how we think about the marketing space. We're going to invest to the point of our ROI thresholds, which at this point is getting a gross profit payback within 12 to 18 months. We think it's a very reasonable space.

And if we find an ability to scale up our spend and still maintain that kind of payback, we're going to scale it up. If we find that we have to pull it back to stay within those ROI thresholds, we'll pull it back. So I think that's a good healthy place for us to be and we've liked the results that it's delivered so far.

You can see it in what's happening in North America, local growth in particular, and we think it's a good place to continue to operate..

Got it. Thanks, guys..

Yeah..

Thanks. Your next question comes from Heath Terry of Goldman Sachs. Your question, please..

Great. Thanks. Just back on the shopping business for a second. Away from this quarter, away from Q4, can you remind us how you view the strategic value of shopping to Groupon as a whole? That's obviously an incredibly competitive space with a lot of companies trying to vie for the incremental wallet dollars.

What value does being in shopping add to the core local business?.

There's a couple of things there, Heath, and thanks for the question. Number one, and we've said this before and it's absolutely right, our customers don't ask us whether we should be in that business. And most of that is because we provide a compelling value prop for them and a compelling product offering for them.

And it's one that for us now on a more strategic level that does drive engagement with our platform. It fits our heavily browse oriented environment and a lot of what our brand is known for, with surprising and delighting customers. So it has a real place in the ecosystem. And it genuinely is an ecosystem. We have significant cross-shopping behavior.

One of our largest sources of local customers over time is ultimately people who start out buying shopping and then ultimately migrate over to that channel. So people very much see it as part of the Groupon experience, and I think there's real value in that.

There's real value in it for local long-term as an entry point into activating on the local product. The other thing that I've said historically, and I still believe there's an opportunity in and we've tested it. You can see it on the platform live today, if you've taken a look at the Goods product.

I think there's a big opportunity in ultimately finding a way to really empower local retail on our platform. So when we think about shopping in general as a channel, local retail is underserved by most online players and I think there's opportunity for us to extend our local footprint and shopping position combined on that front.

So there's both, strategic opportunity, practical value, and practical customer value in being in the business today. And last, by the way, it's still a $200 million of gross profit annually with improving gross profit margins over the last four quarters. So it's also not a bad business..

Thank you. Our next question comes from the line of Ken Sena of Evercore. Your question, please. Mr. Sena, your line is open. Please proceed. Just make sure your line isn't muted..

Sorry about that. I was on mute. But as you think about the active user growth and you pare down to fewer countries, should we think about that coming from marketing right now or are you seeing it from North America for certain service areas that you can highlight? And I have a follow-up. Thanks..

We've been focused to date – and thanks, Ken. We've been focused to date on North America. The vast majority of our incremental marketing dollars have been channeled to North America. However, you did see marketing overall globally increase a bit.

So our spending, we're starting to invest a bit in some of our European locations, in particular, where we think there is good opportunity to grow. But also on a same country basis, there is good solid growth potential and actual growth in those areas in terms of customers.

So, I think, on a go-forward basis, we're ultimately going to keep investing to grow the customer portfolio overall that will continue to focus most heavily on North America..

Okay. Great. And then just a follow-up on the head count, as we look at it by geo, it looks like the head count in EMEA is holding flat.

Maybe if you could help us think through as you go through this restructuring, are there certain levels that we could look to as far as reductions or how should we be thinking about modeling that going forward? Thanks..

Yeah. I assume you're talking about with regards to the changes in our country footprint. What I would say on that is we're still working through various conversations, whether they either be sale or partnership-type opportunities with regards to the countries that aren't part of our go-forward footprint.

And so as a result, it just makes it a little difficult at this stage to provide more visibility around specific metrics such as head count. We'll be able to provide a more fulsome update on how the changes in the country footprint affect 2017 and the future on the next earnings call..

Got it. Thank you very much..

Thank you. Our next question comes from Tom White, Macquarie. Your line is open..

Good. Thanks for taking my question. Rich, you just mentioned, I guess, marketing spend outside the U.S. I'm just curious it sounds like the cohorts in North America of new customers are performing in line with your expectations.

How should we think about your appetite or the timing of maybe you guys looking to pursue a similar type of investment in your non-U.S. markets? And then just a quick one on percentage of North American transactions from local, it looks like it's flattened out here over the past couple of quarters.

Just curious how we should think about that relative to this focus you guys have on trying to drive more of a marketplace or demand fulfillment type of use case on the part of consumers? Thanks..

Great. Thanks, Tom. As far as marketing spend outside the U.S., the reality is we just don't think about it all that differently. It's the same basic investment mechanic and it's the same kinds of ROI thresholds that we have.

We started to move a little bit of marketing dollars, more marketing dollars towards the international segment, particularly in our larger countries in Europe as we're really trying to test to see if they have the right kind of fundamentals in terms of marketplace behavior, marketplace supply, etcetera, that can support more investments.

We're still learning in that space. So I think until we really see something major cracks there, you're going to see us continue to do exactly that. We're going to test and learn.

We're going to trial some of the things that have worked in the North American business and that's helping to drive some of the growth here and other markets, and if we see that they have potential to give us a good solid ROI, then we'll start moving more dollars there.

But at this point I don't have any specific plans to share or shading on marketing spend this year on that front.

With respect to North American transactions from local, I think mostly what you're just seeing is, you're seeing solid growth and acceleration in North American local overall and on a billings basis and transactions as a percent, it's moving around a bit and it's mostly due to mix and seasonal pieces.

So I wouldn't put a lot in that at this point, especially related to the long term.

As you mentioned the big unlock in this business continues to be the real frequency lever and moving more toward our path of where we are now call it in the four to five units a year to being a monthly habit for people, a weekly habit for people, and ultimately a daily habit.

We've got a long way to go to go from four to five units a year up to 12 to 52 and then to 365.

So we have a ton ahead of us, which is why we're investing as much as we are in the customer experience and the things like the trade-in program; why we're investing so much in the mobile product and the mobile experience, the faster app, a sharper app with better search and browse; why we're making those forward investments in a great experience and the product to help us enable that longer-term and that's going to be something that truly is longer-term.

You just don't change frequency and scale overnight. It's going to be a longer burn process and one that's going to require continued investment and innovation on the product side..

Thank you..

Thank you. Our next question comes from Douglas Anmuth of JPMorgan. Your line is open..

Hi. This is Lina Rudashevski on for Doug. We wanted to know, you mentioned that you were testing different pricing strategies and there were some learnings for that with regards to the – with the margins. Can you just elaborate on what didn't work and what you learned from that and then I have a follow-up..

Yeah. What I would say on that is we're always testing various things on price, and it's everything from how you display price, to how you promote, to how you merchandise and the combination of all of those. It's a little too nuanced and quite honestly proprietary to indicate what the learnings were from it, other than I would say we looked at it.

And as we saw the learnings trough the quarter we were able to see is there were some really good insights that gave us really the ability to adjust what we were doing particularly as we ended the quarter going into the fourth quarter.

So it gave us a good degree of confidence in the trends we're expecting to see in the fourth quarter, whereby margins we'd expect to be up on a year-over-year basis in the shopping business..

Okay. Great. And then you mentioned the trade-in and the expirations.

Can you just elaborate a little bit on how does the trade-in work? Are all the merchants on board with that and who is footing the bill? Is it the merchants or you?.

Yeah. Thanks for that. It's a great program and one that – basically the way that it works is if a customer has a Groupon expire, we send that customer a notification offering a trade-in that offers goods for usually in a range of a couple of weeks. If the customer decides to trade in the voucher, they just click the button, trade in this voucher.

They then have a period of time, they have 24 hours to trade in that voucher on any other voucher on Groupon, which we're seeing that they generally do. So there's really not a footing of the bill, so to speak. It's more like an exchange. So someone is basically taking something they paid for and exchanging it for another.

So the vast, vast majority of merchants are on the program as we've rolled it out. And it's really simple in that way. Now, extension is even easier. It's literally, if you're on your Groupon app and you have a Groupon expire, you go to the voucher page. You'll see extend your time window on there.

You basically click that button and you have usually about two extra weeks to use your Groupon. That's exactly in line with our merchant value prop and merchants are happy with that product. The number one thing they want to have from Groupon is customers moving through their doors and sitting in their businesses.

Both of these give folks an opportunity to do more of that..

Thank you..

You're welcome..

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

Thank you, guys. A couple questions. Can you give us maybe more color on your private label businesses, which brands are doing well there, which ones are getting the most traction, and then maybe a little overview of the strategy around private label? Thanks..

Sure. Thanks, Brian. We've launched a number of private label product lines. You probably saw our fitness apparel product line here recently that we announced. We're happy with so far the performance of those lines and it's a pretty broad selection of lines.

We don't give specifics of which lines and the performance of them, but in general we're happy with how they're performing. The strategy there is to be able to, of course, find opportunities to increase our margins and provide great value to our customers.

It's something that we now have the scale to be able to do and not just in North America but as part of our global business, and we'll continue to pursue those opportunities. But it'd have to be a great product. When we think about that space, it's not just about margins.

Margins are a clear opportunity there, but we found over time that we have to sell great products and it's one of those.

If we're going to move into any product line, we have to be really confident that we're putting – if we're going to be put one of our brand names together, it's going to be something that customers are going to be really excited to receive when they unpack their boxes.

And so to the extent we can continue to do that, I think, it's great for customers, it's great for Groupon and margins overall, and we'll continue to pursue it..

And so, I guess, that would fall into, if I think about your four strategies, that's reduce empty calories and that's amazing and then would be the two those resonate with..

Yeah. It's exactly right. I mean, look, part of it is streamline and simplify, and part of it is reducing empty calories. I mean, for us, it simplifies the supply chain in a really material way. I mean, we control the supply chain on those products end-to-end.

And we understand what it means to make sure that they arrive at a customer's door on time because we understand the manufacturing thresholds and overseas delivery times, et cetera.

So it's clearly streamline and simplify and absolutely reducing empty calories and making sure that, again, we're investing our margin dollars where we're going to have the highest return. So it fits squarely down the center for our overall strategic set-up..

Got it. Thanks, guys..

Thanks, Brian..

Thank you. Our next question comes from Mark Mahaney of RBC Capital Markets. Your question, please..

Thanks.

Could you, again, provide some color on that 1.2 million add you had, sequential adds you had in North America, I know this is one of the bigger numbers you've had in a while, the particular channels you think that may have worked that are new for you, is it just more effort or were there a couple of new wins in there that allowed you to get those.

And then if you could just comment on the local take rate, the local revenue over local billings number, I think it was down to 33% or something like that, one of the lower levels we've seen and I know you don't necessarily work towards that number, but there may be a tell from that or how should we interpret it? Thank you..

Thanks, Mark. You'll see that these two are actually related. So I'll take the first piece and then Michael will take the second on take rate. On the adds, you're right, I mean this is the highest level of net adds we have with 1.2 million in the quarter in three years.

So it's a significant performance there and a significant acceleration versus where we were over the first couple quarters. And the biggest things there ultimately I think is just the team has had time to optimize our campaigns. They have had time to tune the kinds of campaigns and programs that are working best for us.

Our marketing mix overall, the only major change in it has been really the addition of off-line over the last, call it, 4, 4.5 months. So mix is stable.

We're still seeing really great performance on our core digital campaigns with Google and search and Facebook and display and now increasingly in other areas, mobile and video and we're seeing offline gain a little bit it of traction at least early in the quarter before we hit the Olympic stretch and the election stretch.

So we're happy with how the team has performed here and how the efficiencies they've been able to capture and also in their ability to innovate around new tactics and programs, which they've been testing specifically with order discounts as an activation measure and we've seen that that's performed increasingly well and the team has been able to make a good program out of it.

And with that, I'll turn it over to Mike and he'll talk about how that relates to local take rates..

Yeah, so, Mark, as you think about our local take rates I would unpack it a little bit and what I would say is, is if you look at the take rate with merchants, the direct take rate with merchants, it's been incredibly stable over the last couple of years with very, very little change.

What you've seen in terms of the reduction year-over-year in take rate is primarily by our increased use of order discounts. Now, order discounts as Rich has talked about and I mentioned earlier, we put them through the same ROI filter that we do our marketing.

So we look at that as a potential tool to acquire customers and then we ultimately measure what's the gross profit we expect to generate from utilizing that order discount as a tool.

So that shows up, the initial order discount when you incur it shows up against our take rate, and so you see the impact of this lower take rate decline, but unpacking that, the core take rate with our merchants has been incredibly stable over the last couple of years..

Thank you, Mike. Thank you, Rich..

Thanks, Mark..

Thank you..

Thank you. Our next question comes from Aaron Turner of Wedbush Securities. Your line is open..

Great. Thanks for taking my question. I wanted to drill down into the new cohorts as well. Just wondering if you could comment on the demographics of these new cohorts.

Do they skew younger by chance, or is it more broad-based? And then, is there any particular category of local deal that you see them gravitating towards that you may be able to lean in on from a supply standpoint? And then, second question around the new geographic footprint, with the countries that remain, are all of them already profitable or is there some work to do there that to get them up to profitability? Thank you..

Thanks Aaron. I'll take the first question on customers and category skews and then I'll turn it over to Mike on footprint. You basically said it. The customers we're acquiring is very much broad based.

Over the last couple of quarters those 3.9 million odd people are so are very similar to the composition of the 25 million or 26 million that they joined. So nothing specific to call out there in terms of overall skew in geo-demographics. Now, on the category side, there really are three core major categories in local.

They represent the lion's share of what we do in a local business and that's our food and drink category which we absolutely are doubling down on in terms of both supply and even the product solutions and offers we're adding there.

There is of course our health and beauty business, which is really spas and salons, which again we're investing a lot of time and energy in both on the product side with things like bookings and appointment systems, as well as on just making sure we have amazing inventory.

And then there's, what we call things to do in our activities business, where we have, I think, really good product there already that's doing nothing but improving as well as having amazing inventory both due to our own efforts and due to what's been a great long-term relationship with Live Nation Entertainment and Live Nation concerts, Ticketmaster.

So I think those are really the crux of the categories that we're working in in local and those are kind of natural SKUs as a result for the activation on our customer base..

With regards to the countries that are remaining within the international footprint, a couple of things I'd point you to. One is, if you look at our EMEA segment operating income for the quarter, what you could see is for the region we had a profit for the region on a segment operating income basis.

But if I look at individual countries, what I would generally say is the countries are generally breakeven to contributing to our EBITDA. Some of them are in different phases depending on level of investment, level of supply.

But what I think is more important is really what do we think about these countries going forward and every country that we've kept in our go forward footprint, we've kept because we believe the return dynamics are ultimately favorable.

We believe that ultimately with the right supply, with the right support behind brand and with the right support behind product, these could all be contributors in future years to Groupon. So that was all very much of our thought process..

Got it. Thank you..

Thank you. Our next question comes from Kevin Kopelman of Cowen and Company. Your line is open..

Hi. This is Emily DiNovo on the line for Kevin. We were wondering if you could share some foresight going into Q4 on holiday trends that you are seeing and particularly your marketing strategies surrounding the key shopping days of Black Friday and Cyber Monday? Thanks..

Sure. Thanks, Emily. We feel really good about where we are with Q4 just strategically and operationally. We are heading into the quarter, I think, better prepared than we've ever been and I think with a stronger marketing strategy and marketing mix than we've ever had. So we feel great about that. Our plans are solid.

We plan very much to be active in the retail advertising environment in Q4. We think we have a great message, and we are also – we feel really strongly about our unique position in Q4 relative to a lot of the folks that are going to be out there and active in the quarter.

I mean, we are about the only destination for customers where we can provide a great Black Friday and Cyber Monday experience, where we're going to be focused on providing amazing brands and amazing prices and deals on a broad selection of categories like we always do.

And I think we have some great new brands that are coming on to the portfolio and into our experience this year. We also have after it becomes very difficult for all e-commerce players in particular to deliver packages, we have an amazing destination for gifting local experiences that you can't really find anywhere else.

We feel really great about how we are positioned going into Q4 and in general..

Thank you..

Thank you. Our next question comes from Brian Nowak of Morgan Stanley. Your line is open..

Thanks for taking my question.

Just to go back to the North America active customer growth, could you just talk about, break apart the dynamics a little bit between gross additions and churn going down on reactivation just to help us better understand what's driving the strong results? And then on the marketing spend versus the couponing and discontinuing, if the marketing spend is going to be under last year, is it the right way to think about it though that you are actually spending more on discounting and couponing for the year, so that you are going to end up in aggregate around $150 million or is that not the right way to think about it?.

Well, I will take the second question first and I'd say, in general, yes, you are thinking about it the right way. I mean we have internally traded those often and viewed them both as good levers and ways to acquire customers. So I think that's the right way to generally think about it.

With regards to our customer ads, I will tell you, when we're looking at our customers, we are obviously looking to acquire new customers that have never been part of Groupon and we also do look at acquiring and reacquiring customers who may have engaged with us in the past, but hasn't within the last year, so both of those factor into our acquisition efforts.

We don't break out the detail of that, but they're very much in our thought process as we are looking to bring customers on to the Groupon ecosystem and continue to keep them over time..

And just one follow-up, is there anything you can help us better understand what drove the decision to shift more toward discounting and couponing and away from advertising, is there anything you see among consumer behavior where there is a more discounting need than there is a branded need?.

You know I think it really – the way we looked at it was just simply how customers respond and customers respond to the order discount at inception.

And what we saw though is, when we offered that order discount once we acquired the customer, the customer cohort associated with those customers performs amazingly similar to customers we acquire through other channels. So they tend to behave very, very similarly.

Customers like a great deal and we are there to help offer them a great deal and bring them onto Groupon..

Yes. Another way to think about it is we're tactic and channel agnostic..

Yeah..

We care ultimately about the customer behavior over the long-term and do we get a good return on our investment..

Absolutely..

And that's ultimately what drives us. And we do – if you look at it that way, where marketing plus order discounts for us have been very, very stable over the last couple of quarters, even though you've seen some variation in that distribution. And we think that's absolutely fine, if it's all about are we getting a great ROI..

Great. Thanks..

And ladies and gentlemen, that does conclude the Q&A session and Groupon's third quarter 2016 earnings conference call. Thank you so much for your participation. You may disconnect your lines at this time. Have a wonderful day..