Good day, everyone, and welcome to the Groupon's First Quarter 2022 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 Chief Communications Officer, Jennifer Beugelmans..

Hello, and welcome to Groupon's first quarter 2022 financial results conference call. On the call today are CEO, Kedar Deshpande; and Interim CFO, Damien Schmitz. The following discussion and responses to your questions reflect management's views as of today, May 9, 2022, 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 our earnings press release and in our filings with the SEC, including our annual report on Form 10-K.

We encourage investors to use our Investor Relations website at investor.groupon.com as a way of easily finding information about the company. Groupon promptly makes available on this website the reports that the company files or furnishes with the SEC, corporate governance information and select press releases and social media postings.

On the call today, we will also discuss the following non-GAAP financial measures, adjusted EBITDA, free cash flow and 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 to the most comparable measures under U.S. GAAP. And with that, I am happy to turn the call over to Kedar..

a global skilled platform, large customer base and actionable data. I believe that these assets, coupled with a more innovative approach to leveraging our unique inventory position us to grow our business for many years to come. If you add this growth potential to reduce cost structure and a strong balance sheet that includes our investment in summer.

I think you will agree with me that Groupon is well positioned to create shareholder value. We look forward to sharing our progress with you as we work to create the value our stakeholders to sell. With that, I will turn the call over to Damien to cover financial performance..

fixing our cost structure and building a more differentiated inventory offering through curation and a new dedicated premium beauty and wellness marketplace. So let me walk you through our first quarter results, business drivers and trends. Starting with our local category.

As we discussed on our last earnings call, we had anticipated local performance to be significantly impacted by Omicron in the first 2 months of the quarter when COVID case counts were at or near all-time highs.

We also expected to see the category begin to rebound in late February and into March as restrictions in mass mandates were listed and case counts began to decline. This would be a pattern similar to what we had experienced with prior COVID waves.

Instead, however, we saw local performance stall out in the beginning of March, and as Kedar mentioned, elevated refunds. In North America, local billings recovery rates were down 15 points versus the prior quarter and were at 50% to 2019 levels.

And in international, local billings were 48% of 2019 levels, a sequential decline of 4 points versus Q4 2021. We ended the quarter with approximately 22 million active customers worldwide. Within our North America customer base, we had 11 million active local customers in the first quarter, down slightly compared to the prior quarter.

As a reminder, our active customer metrics are trailing 12-month metrics. In the first quarter, we observed a decline in in-period local purchasers. And within our international markets, we grew our active local customers 8% sequentially versus the prior quarter and 31% year-over-year.

And as a result, had 4.9 million active local customers in the first quarter. This growth in local customers partially offset the decline in our lower-value goods customers during the quarter. Moving to our goods category. In the first quarter, billings were at 22% to 2019 levels, which was below the 30% recovery level we expected to achieve.

As a reminder, we completed the international goods transition to a third-party marketplace model in the fourth quarter 2021, which means we recognize goods revenue on a net basis. Turning to operating expenses. SG&A was $126 million, flat versus the prior year and lower than we anticipated.

We remained prudent with our spend during the quarter, and were able to fully offset both wage inflation and incremental expenses associated with our migration to the cloud. Marketing expense was $39 million in the first quarter or 29% of gross profit, which is in line with our investment in the prior quarter and historical averages.

While we intend to take advantage of opportunities to leverage marketing to accelerate our growth over time, we expect to reduce our marketing spend for the rest of 2022. Turning to our cash position. In the first quarter, we saw a cash outflow of $96 million.

We typically experienced net working capital outflows in the first quarter due to seasonality in our normal merchant payment cycles. Net working capital was also impacted by lower sales volume and corresponding cash inflows given the more muted state of our local recovery.

Our liquidity position remains solid and we have a balance sheet that provides us with the financial flexibility to withstand the impacts of coded and invest in opportunities to drive long-term growth. We ended the quarter with a cash balance of $403 million which includes the $100 million drawn on the revolver.

Now, I'll take you through our outlook for the second quarter and full year 2022. In the second quarter, as a percentage of 2019, April local billings have been trending in line or slightly better than what we reported for the first quarter.

Based on this, we expect to deliver $155 million to $165 million of revenue and $0 million to $10 million of adjusted EBITDA. For the full year 2022, we expect to deliver $670 million to $700 million of revenue and $60 million to $80 million of adjusted EBITDA.

Our updated guidance reflects a more muted recovery outlook than our prior guidance given what we've observed year-to-date. At the low end of our guidance range, we are assuming local recovery rates in the back half of the year, and we improved modestly versus current recovery levels.

At the high end of our range, we are assuming local recovery rates in the back half of the year and more in line with the second half of 2021. Keep in mind that our financial guidance for the year does not include any benefit from our new growth initiatives. Turning to expenses. We expect marketing as a percent of GP to be in the low 20% range.

And we intend to continue to manage SG&A closely despite the increased costs related to wage inflation and migrating to the cloud, we expect to hold SG&A expenses flat to slightly down versus 2021. For your models, we expect our expenses associated with migrating to the cloud to be approximately $35 million in 2022.

Finally, I wanted to provide you with a few insights on cash flow. Given the cash outflow in the first quarter and our expectations for the second quarter, we no longer expect to generate cash for calendar year 2022.

That said, as the recovery picks up momentum and our operating initiatives begin to drive impact, we expect to return to cash generation in the fourth quarter.

Before I turn it back over to Kedar, I want to take a step back and provide some thoughts on our long-term target financial model, which we believe can deliver significant value to our shareholders and other key stakeholders. We believe we have a number of undervalued assets that we can leverage to drive value creation.

Let me remind you of a few key points. First, let's look at the big picture. We have built a global 2-sided marketplace with tremendous scale that generated more than $1.6 billion in local billings in 2021. We have brand recognition that extends to consumers around the world, and we have nearly 16 million active local customers.

And second, we also have a strong track record of prudent cost control and have taken more than $225 million of expenses out of our P&L compared with where we were in 2019.

And as Kedar has outlined today, we believe we can streamline our tech infrastructure and automate many processes to unlock further cost reductions and drive efficiencies across the business.

With these financial drivers, we believe we can sustainably deliver full year adjusted EBITDA margin in the 15% to 20% range and generate a minimum of $100 million in annual free cash flow starting next year.

Looking at all of these assets, combined with their balance sheet that includes our investment in SumUp our new strategy, we don't believe our current market cap reflects the value we believe we are unlocking. Net-net, we believe we are well positioned to create value for all of our stakeholders.

And with that, I'll turn it back over to Kedar for a few final prepared comments..

Thanks, Damien. To be clear, we have a lot of work to do but I'm confident that we have the right resources to make rapid progress.

Our entire organization will be focused on the most important work, improving and reducing our expense structure to deliver a strong adjusted EBITDA margin and free cash flow as we are investing in future growth, and growing our marketplace offering more differentiated inventory through curated inventory collection and a new vertical marketplace for premium and beauty and wellness experience.

We believe success in these 2 areas will allow us to achieve our financial goals and position Groupon to grow in a variety of economic cycles. With that, I will turn it over to operator for your questions..

[Operator Instructions] Your first question comes from Trevor Young of Barclays..

Great. Kedar, this feels like a bit of a reset, some user experience work to be done, some improvements in getting the right breadth and depth of inventory and new beauty and wellness marketplace experience this year. All of which would seem to indicate some additional spend is required from here to get those components right.

That feels a bit opposed to the goal of needing to take further cost out after the company has already taken out upwards of $225 million in run rate savings.

So just help us understand how you're thinking about balancing the cost reduction versus needing to spend on some of the tooling that you're indicating?.

Good evening, Trevor. And thanks for asking the question. I think, overall, what we have is when we look at all our costs at the moment, some of these particular costs are well-put-it internally built equations.

When I look at it from my external perspective, when I look at it, hey, some of these particular costs, are these necessary to run the platform? Are these costs actually add-on to our current customer experience? Those are not required.

So that's where we are taking a look at both our technological platform to say, is this platform actually serving our need and is this going to be this large that we need to continue to fit? The answer to that is no. And so we are going through each of those pretty equations.

And reinvesting some of that particular taken out costs back into building these particular new marketplaces is where we are going to be focused on..

And Damien, one for you, if I may.

What gives you the confidence around those 2023 goals, the $100 million in free cash flow in the 15% to 20% EBITDA margin? And just relatedly, can you walk us through some of the moving pieces in terms of like take rate, gross margin and key OpEx lines to bridge to that 15% to 20% margin bogey?.

Yes. Sure thing, Trevor, and thanks for the question. Providing this framework in long-term target financial model is really aim to kind of answer your first question to Kedar there around how we're thinking about generating profit -- bottom line profitability for the company.

And this framework is really around how we intend to operate going forward, net of all of those investments in marketing, sales, tech and G&A. As we get closer to 2023, we'll definitely provide you with more details on the specific P&L line items.

But what I can share at this time is that we're confident we can achieve this type of financial profile with just a nominal change in our revenue. And some of that is because of those cost opportunities that we do see and why we wanted to disclose our investment in the cloud that we don't see recurring in 2023..

Great. Thanks for that, Damien. And just one last housekeeping one. Was there any change in the carrying value of the SumUp stake in the quarter? I think that's usually detailed in the 10-Q, but I don't think that's out just yet..

Yes. No change there, Trevor..

Your next question comes from the line of Mike Ng of Goldman Sachs..

I was just wondering if you could talk a little bit about your confidence level in the second half recovery, just given how April is pacing.

And are you assuming a continued recovery into 2023? And I was just wondering if you could offer any thoughts around customer count and whether or not you expect any stabilization this year or next?.

Mike, I will address the first one regarding the -- our confidence how April is progressing. So April basically stabilized better than what we had seen in the March. And in general, for the back half of the year, I think we have what we are putting out is a number that is scenario-based number.

Based on what we have seen that, okay, last year, there were some scenarios where we actually went up because the COVID recovery was more, I would say, spikes in and out where there were ways coming in and out.

This year, we don't expect that sort of spiky recovery or it's more a smooth line recoveries is what we will expect for the rest of the year, and that's where our scenario equation is based on.

Now as far as the customer interaction, customer accounts are concerned, we believe that if we can continue to deliver on the value, particularly we are targeting our Q3 to go back and say, "Hey, we will have this differentiated collections launch in Q3.

We should see a much better response from customers, starting with Q3." But that will get much bigger traction in Q4 as well as in 2023..

[Operator Instructions] Your next question comes from the line of [Ida Ronan] of [indiscernible]..

Can I just start on the trends in the recovery? I just want to understand a little bit better. So you noted March rebounding like you expected. You mentioned the high demand and low availability. It sounds like you were surprised by that. That was something you guys saw last year as well.

So -- and then as well, if that is the case right now, why expect that, that gets any better as we work our way through the year and presumably demand continues to get stronger.

Does availability get better? Is it labor factors? Can you just walk us through the expectations around those puts and takes a little bit more?.

Thanks for the question. I think 1 of the things we got to look into is what were the inputs, right? So inputs last quarter, we had Delta or last year, we had delta. And then before that, whenever code hit 2 months later, we started to see the customer demand, both as well as merchant demand to say, "Oh, we want to bring back.

We want to come back to Groupon platform, come back really fast. Now this will time what is happening is that merchants have the ability to raise the prices to meet their goals in that particular case.

And don't need to discount as much because their capacity to serve these particular customers is lower, but they can meet their goal, financial goals by serving lower number of customers. That was very different from it happened in earlier coverage recoveries.

The second part is also customers are looking for these -- some of these particular merchants, which are differentiated experiences or which have differentiated quality, these particular merchants, they are not looking for those specific set of merchants on Groupon platform because -- their expectation is I'm ready to pay.

I'm just going to go and pay that instead of trying to get more discount. Both of these 2 combinations made it difficult for us to see the kind of recovery we are expecting in March. Go forward, the way I see is that we are trying to build this particular curated collections, as I've talked about that one.

And then along with that one, you can also see that our availability we are very focused on that 1 to get back on our platform to say, hey, what are the ways we can get this particular at back on the platform, looking through things such as what sort of inventory density we need to have on the platform? What sort of merchants we need to bring back on the platform instead of just looking for, hey, we need to be focused on this amount of merchants, we can say, it's okay to have 1 or 2 more churns, but we just need to make sure that they have availability.

So that's part of our input as opposed to just say x number of merchants need to be back on the platform. We are making sure that the quality -- end-to-end quality, not just merchant quality, end-to-end customer quality is also considered while we bring back the supply. And that's what gives me confidence that it's going to be better in Q3, Q4..

Okay. So maybe then let's talk about the new marketplace and the kind of bundled curated offerings. Can you just talk through the process, like how are you bundling on, what does that involve? What does it require? And then on the new app, maybe just more details.

Is it a different brand? Is it still Groupon? And how are you going to get the kind of 0 to 60 in terms of inventory on that? It sounds like it's going to be a completely different experience. Maybe if you could just share some more color around that..

Yes, definitely.

I think the first one, essentially, what we are trying to do here is the experience starts by saying, what are the things you can bundle together or what are the things that are collected are experienced together? And so it is the process we are starting is in-house by creating these particular collections manually looking at the pattern what works and then scaling those up in different geographies.

That's one. So the capability we are building right now is to combine these particular experiences together such that they actually make sense for our customers. And we will have the traction as we go along. As I said, Q3 is the time. The second, the differentiated marketplace, it's going to be completely brand, different brand.

And the reason it is different brand is because the expectation from a different brand starts differently. The current whenever you start something with the Groupon brand, the first set of expectations customers have is it will be discounted. That's not what this new brand will stand for. The new brand will start -- it will be starting with trust.

That means you will have the price transparency, you will have the convenience transparency and -- most important of all, you will have a much richer content in this particular experience.

These 3 things make this particular brand completely different and the set of merchants, a set of actually merchant partners that we can onboard on this new brand will be completely different because they are frankly trying to disassociate themselves in some cases from discounts.

And then taking this new brand and actually powering with the customers that we know are not always looking for discounts gives us a very good advantage to start and get this particular brand powered up with the right set of customers. This is something we only can do given that the scale we have with 15 million of local customers.

And I think this premium brand actually completes the whole gamut of collections in terms of discounted premium inventory versus right now, we are stuck with, hey, we have to have the discounted inventory, and you cannot have anything. So we are focused on local. This gives us the ability to serve all local instead of only discounted logo..

And if I could squeeze in one more quickly, Damien, you mentioned believing that the shares are undervalued, cash flow this year sounds like -- I mean, maybe not negative, but certainly not positive as you're calling out. You're expecting a return to a good amount of cash flow next year.

Just how do you think about capital allocation and buybacks, given maybe those 3 things together?.

Yes. Thanks for the question. We we're laser-focused on realizing the opportunity in front of us and once stabilizing and fixing our core platform as well as unlocking some of these growth vectors that keep our mentioned, playing out some of that scenario all the way into 2023. We're looking forward to returning to cash generation.

later this year in the fourth quarter, as I indicated in my prepared remarks, but then also putting out that type of free cash flow generation on a sustainable basis going forward. That's really the key for us to think about capital allocation is we need to be delivering that free cash flow on a sustainable basis.

I'd also say part of the reason for calling out in a reminder on our SumUp investment, this can be an important shift for us to monetize and address capital allocation going forward for us, too..

[Operator Instructions] There are no further questions. And with that, this concludes today's conference call. Thank you for participating. You may now disconnect..