Hello and welcome to Groupon's Second Quarter 2023 Financial Results Conference Call. On the call today are our Interim CEO, Dusan Senkypl; and CFO, Jiří Ponrt. [Operator Instructions] Today’s conference call is being recorded.
Before we begin, Groupon would like to remind listeners that the following discussion and responses to your questions reflect management's views as of today, August 09, 2023 only and will include forward-looking statements. Actual results may differ materially from those expressed or implied in the company’s forward-looking statements.
Groupon undertakes no obligation to update these forward-looking statements as a result of new information or future events.
Additional information about risks and other factors that could potentially impact the company’s financial results are included in their earnings press release and their filings with the SEC including their quarterly report on Form 10-Q.
We encourage investors to use Groupon’s 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, the company will also discuss the following non-GAAP financial measures, adjusted EBITDA, non-GAAP SG&A, free cash flow and FX-neutral results.
In Groupon’s press release and their filings with the SEC, each of which is posted on their Investor Relations website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable measures under U.S. GAAP.
Unless otherwise noted, all comparisons are provided on an FX neutral basis. And with that, I'm happy to turn the call over to Dusan..
Hello, and thanks for joining us for our second quarter 2023 earnings call. It's a pleasure to be with all of you. In today's prepared remarks, I will be referring to an investor presentation which is posted on our Investor Relations website. In addition, I encourage you to review our press release and 10-Q, which contain more detail on our Q2 results.
I will start today's call on slide 5 with a top-level overview on Groupon. Our mission is to become the ultimate destination for local experiences and services. Every day, we see reasons to believe in our mission and our ability to drive value for all stakeholders.
Groupon receives millions of daily unique views from consumers who are exploring to discover an extraordinary experience or a delightful local service.
And on the supply side of our marketplace, Groupon has thousands of merchants ranging from popular national chains and globally renowned experiential destinations to local small businesses who place their trust in Groupon as an important toolkit to achieve their growth objectives.
As we execute and deliver against the opportunity to serve both consumers and merchants, we believe that our business model has the potential to unlock significant shareholder value, as indicated by our 87% gross profit as a percentage of revenues and 63% contribution margin for the trailing 12 months.
Moving to slide 6, after completing the first quarter as interim CEO, I have better visibility into how much work is waiting ahead. And at the same time, I can see that we are on the right path towards successful transformation of the company.
While our product experience and financial results may indicate incremental changes from the outside, internally, there are large changes underway.
From my perspective, the positive signals I see from this quarter include attracting a world-class leadership team, gaining a better management of the levers to drive revenue, improvements on our performance marketing stacks, and our ability to lower our SG&A costs, while at the same time improving our ability to execute.
And while our financial results are not acceptable, I am pleased to see our second quarter 2023 revenue declines of minus 16% year-over-year, modestly improved versus our Q1 results of minus 21% year-over-year, and that we return to positive adjusted EBITDA generation of $15 million.
On negative signals, while not new to Groupon, our employee attrition rate continues to run well above industry benchmarks. Some of this attrition is to be expected given the transformation. We expect to handle the rest by internal promotions and new hires.
In addition, we saw another quarter of free cash outflow as our free cash flow lacked our return to positive adjusted EBITDA generation. Jiří will provide more details on the drivers of this divergence in his section. Slide 7, please.
Overall, I am pleased to report the transformation plan we presented last quarter is in place and tracking to my expectations. The eight pillars of our plan can be grouped into three key work streams, rebuilding our organization, revitalizing our marketplace, and strengthening our financial foundation.
We are urgently pushing ahead with our transformation on all fronts and raising the bar across our organization. As we make progress on our transformation plan, I expect to show year-over-year improvements every quarter going forward in 2023. Now let me say a few words in greater detail on several of our pillars. Moving to slide 8 please.
Over the last nine months the company has taken swift action to install a new senior management team by leveraging Pale Fire Strong brand in the Czech Republic, hiring former Groupon employees and strategically making fresh hires. I am personally happy with the leadership team we have assembled.
Despite coming together in a relatively short period of time it has been great to see the team go together and embrace our transformation. With every month the team is improving the speed and efficiency of execution while continuing to challenge the status quo and constantly seek improvement.
The best teams win and I believe we are putting together the best team I have ever worked with. Slide 9. Our transformation is really about changing the ability of the company to deliver and execute. We are going into the details and step by step changing the organization structure, people, culture, processes and systems.
As we realign our teams and simplify our process we are enabling the company to become more external focused to better understand the needs of our customers on both sides of the marketplace and start building solutions to help solve our problems. Examples of changes we are bringing to the company include, for example, Squads.
An initiative started in our global service organization and expanded in our department where cross-functional small teams are created for a limited duration to address one specific issue of inefficiency or new opportunity. We currently have 17 Squads running.
Adaption of AI across the organization has enabled us to improve the copywriting of our deals and deals creation process. We are also leveraging AI on projects in product and engineering to help improve our deal recommendation, quality assurance among our areas.
Improvements in enterprise sales organization and process changes combined with value proposition changes are helping to return our enterprise accounts to year-over-year growth. Slide 10 please. In the second quarter we made positive progress on the demand side of our marketplace.
In the last several years our business heavily invested in promotional spend to drive conversion resulting in spend on promotions in 2022 at almost two times the amount we spent on paid marketing. This promotional spend is on top of the initial deal discount many merchants offer and hurts our merchant value proposition.
Reducing our reliance on promotional spend and improving the mix between paid marketing and promotional spend is a key step towards improving the health of our marketplace. In the second quarter we began the process of gradually reducing our reliance on promotions. I do not expect progress here will be linear.
A key enabling project will be shifting to a personalized approach. We took an important step on our personalization projects with the launch of our new purple prices product.
Turning to paid marketing, we made great progress in rebuilding our performance marketing stacks including search engine marketing and display channels and also improved the connection between our marketing campaigns and our top deals.
With the benefit of a stronger foundation we started increasing our paid marketing spend in the quarter and saw our gross profits from performance marketing return to year-over-year growth in June. We believe our performance marketing channels are ready to receive additional investment and are looking to ramp up further in Q3.
By efficiently scaling our performance marketing channels we believe we can drive increased traffic to our site and offset any potential headwinds from lower conversions as we gradually reduce our promotional spend.
Paid marketing is only one of our demand side channels and we are still experiencing declines in our direct to site and managed channels such as email and push notifications. In the short term as we increase our paid marketing we expect to see only a small spill over effect into direct and managed channels.
As we execute on our overall plan to revive our marketplace through product and supply changes our long-term goal is customers who are acquired by paid channels will become repeat purchasers and return through direct and managed channels. Slide 11 please.
In our technology organization we are moving from fixing things to building things and launched an ambitious hackathon projects in Q2 under our new head of product. After fairly limited new product development at Groupon, we launched several new product features that are helping improve the experience of our consumers, merchants, and our employees.
On the consumer side, we are building a new consumer web and mobile application which will simplify our infrastructure and enable us to deliver faster development changes. We are also developing a new gifting proposition which we expect will be launched in time for the holiday season.
As we build, our projects are no longer done in silos but connected across the across the company. Our gifting project will have work streams in supply to ensure sales is attracting more premium supply, which is better for gifts, and also changes to our SEO and paid marketing campaigns.
On the merchant side, our product changes are focused on improving the convenience for merchants. One example of a new development this quarter is our redemption API, which enables merchants to seamlessly redeem a voucher, eliminating a prior requirement to log into the merchant center and manually load voucher redemptions.
As we continue to improve our merchant product experience, our long-term goal is to be seen by merchants as a marketing technology platform rather than a discount portal. And like many businesses today, we are constantly asking ourselves how Groupon can incorporate generative AI into all our product development roadmaps.
In the second quarter, we launched a better version of a new AI-driven deal creation tool which would allow merchants to create a new deal with deal structure and deal content all in one click. AI has the potential to be a game changer for our business and is being involved in most of our new product features.
In addition to our product changes, our engineering team continues to make great strides to simplify our platform, reducing the number of microservices by further 6% since the beginning of the year.
While it's still early days on our journey to build a world-class product experience, I'm proud of the work our product and engineering team is doing to cut down on costs while at the same time taking on ambitious projects to improve the product experience.
The significant transformation underway has not been easy and I am grateful how the product engineering team is handling the changes. There is new excitement in our technology organization and I'm excited to be sharing with you more updates in the quarters ahead. Slide 12 please.
On the supply side, we are taking a back-to-fundamentals approach to running sales. Our three priorities are one, top supply acquisition and retention, two, sales performance and efficiency and three, evaluating higher investments into our sales network. Getting the right quality inventory on our marketplace is critical.
Our top supply is less than 20% of our deals that drives the majority of our business. This past quarter we studied the top 100 accounts to understand what works and what doesn't and what we can do to improve our merchant value proposition.
We have been hard at work to define the correct deal structure, categories, merchant value proposition and deal ranking amongst other features that together make up a quality deal.
While still very early, we are seeing that our focus on targeting quality deals at the geofocus level is paying off with our top five markets in North America outperforming our other markets in North America by double digits. In the third quarter, we expect to expand our focus from the top five markets in North America to the top 23 markets.
We continue to take steps to improve our sales force performance and efficiency, including a new lead allocation tool, continue changes to our sales incentive programs to better align it with the company's goals and further globalization and standardization of our sales operations.
The steps we are taking to improve the pipeline of deals and our sales force profitability converting the pipeline is setting up a strong foundation. As we exit the second quarter, we have started to evaluate higher investments into our sales network, including potentially increasing the number of sales representatives.
While it's still early days, I'm excited to be sharing with you more updates in the quarters ahead. Slide 13, please. Before I turn it over to Jiří to provide some insights on our financial performance and provide an update on our outlook, let me give a few concluding comments.
As I updated you last quarter, our financial results indicated serious challenges our business faces and underscores the need to implement a significant and urgent transformation. We have a lot of work to do and results will take time.
At the same time, I am more confident than ever that we will succeed in our transformation and we will lay the foundation for our long-term success.
And although we haven't finalized and are still considering approaches to financing and asset monetization, I feel confident that all or some combination of these initiatives will enable us to enhance our financial flexibility and liquidity position. With that, I will turn it over to Jiří to provide some insights on our financial performance..
Thanks, Dusan, and thank you as well to everyone who is joining us today. It's a pleasure to be here today speaking with you.
I will use my time today to provide further insight into our second quarter financial results, progress on our cost savings actions, progress on our plans to increase our financial flexibility, and factors to consider for the remainder of the year. Before I begin, I would like to make a few observations after one quarter as CFO.
The team is full of professionals, which I appreciate a lot. Despite this, we are still looking to fill certain roles. There are opportunities in the simplification of the processes as well as in automation. Turning to slide 14. So let's jump into our second quarter key financial results.
In the second quarter, we delivered $129 million of revenue, $91 million of contribution profit, and $15 million of adjusted EBITDA. Second quarter cash flow outflow was $45 million and we ended the quarter with $118 million in cash, including $47 million drawn on the revolver.
Our top line results in the second quarter are a slight improvement in year-over-year terms versus our first quarter results and our adjusted EBITDA generation benefited from realized savings from our cost actions on SG&A. Marketing expense for the second quarter was $22 million or 20% of gross profit.
As we continue to deliver improvements in the efficiency of our performance marketing channel, we started to increase our marketing spend towards the end of the second quarter.
As long as we are able to maintain adequate returns, we expect to continue to increase our investment into our paid marketing going forward as a key driver of our transformation plan. We experienced another quarter of significant cash outflow as our return to free cash flow generation lacked our return to positive adjusted EBITDA.
I will have more to say on the divergence of adjusted EBITDA and free cash flow later in my remarks. Slide 15. Slide 15. We delivered $393 million of gross billings and had over 17 million active customers worldwide as of quarter end. Turning to our local category, consolidated local billings were $320 million down 12% compared with the prior year.
Within North America, we delivered local billings of $232 million, down 13% year-over-year and had 8.7 million active local customers as of June 30, 2023, down 3% sequentially and 17% year-over-year.
Within international, we delivered local billings of $88 million, down 9% year-over-year and had 4.9 million active local customers, down 2% both sequentially and year-over-year. Moving to our goods and travel categories.
In the second quarter, consolidated goods billings were $42 million, down 31 year-over-year and consolidated travel billings were $32 million, down 15% year-over-year. Slide 16.
Turning to operating expenses, second quarter SG&A was $96 million, down 22% year-over-year and down 5% quarter-over-quarter as we continue to see the benefits of our recent cost-saving actions reflected in our finances. SG&A includes $7.5 million in stock-based compensation and $6.6 million in depreciation and amortization.
Creating an efficient cost structure is a key pillar of our transformation plan and we have launched multiple projects across the company to reduce our fixed cost structure. We continue to see opportunities to improve Groupon's ability to execute more efficiently and, in turn, further reduce costs.
Slide 17, Turning to free cash flow, despite producing positive $15 million of adjusted EBITDA in the second quarter and positive $10 million of adjusted EBITDA in the first half of 2023, our business experienced significant cash outflows.
In order to better help investors understand the bridge between adjusted EBITDA and free cash flow, we've prepared a bridge that identifies the five large drivers, and I will provide the following commentary for each. CapEx is primarily driven by capitalized labor.
Change in merchant payables is driven by billings, growth, or declines, and secondarily impacted by our merchant payable cycle. Change in trade accounts payable is driven by changes in our accounts payable cycle as we improve our purchase order approval process to streamline the payment process for our vendors.
Change in accrued SG&A and other expenses is driven by our SG&A and other expense deleveraging. Change in operating lease obligations will be driven by our expirations of our facility leases and we resize our real estate footprint with our current needs.
And in the first half included one-time payment associated with the lease termination of our Chicago facility. Slide 18, we are currently evaluating several different options to enhance our liquidity position.
These options include, but are not limited to, pursuing additional actions under our multi-phase cost-saving plan, seeking additional financing from both the public and private markets through the issuance of equity or debt securities and potential monetization of certain non-core assets, including our stake in SumUp, ownership of Giftcloud, and our portfolio of intellectual property.
Groupon continues to hold a 2.29% equity stake in the privately held global payment provider SumUp. As a reminder, we reflect the value of this stake as well as the other minority investments in our balance sheet. The current value for this investment is approximately $120 million.
While there is no public market for SumUp securities at this time, if an opportunity arises to monetize this asset, we would consider this path going forward. As Dushan covered in his remarks, our business performed better than expected in Q2, which gives us increased confidence in our future output.
In addition, we have made some progress on our plans to seek financing and pursue asset sales, and we have received several proposals that are currently under consideration.
While management intends to improve our liquidity and meet our obligations through the plans described above, those plans are not final and are subject to market and other conditions not within our control. As a result, as we evaluate various financial scenarios in accordance with the U.S.
General Acceptance Accounting Principles and consider our obligations over the next 12 months, including our credit facility maturing in May 2024, we have concluded that these plans do not alleviate substantial doubt about our ability to continue as a growing concern. Slide 19.
As Dushan and I are now one quarter into the role, we have better knowledge about the company and are more comfortable with confirming our prior outlook. We are pleased with the progress we made this quarter, and we expect to see year-over-year improvements every quarter going forward in 2023.
At the same time, it is still very early, and transformation progress will not always be linear. While we are not providing formal guidance at this time, I would like to share with you our updated outlook. For our third and fourth quarter revenue expectations, we expect to see slight improvements in the rate of year-over-year declines each quarter.
As our transformation strategy takes hold, we expect to see an increase in year-over-year local billings by early 2024, so our total revenue growth trends may diverge from our local billing trends depending on the trajectory of our other categories and the timing of our transformation strategy.
As previously mentioned, we believe our performance marketing channels are ready to receive incremental investments and expect to increase our marketing spend as percentage of gross profit. On our cost profile, we expect our full year non-GAAP 2023 SG&A will be approximately $320 million.
Beyond 2023, while it's too early to give a formal outlook for 2024, we do expect our annual non-GAAP SG&A for 2024 will be below our prior outlook of $290 million. As Dushan mentioned in his remarks, we are also evaluating higher investments into our sales network, which may offset some of our expected savings in 2024.
We expect to be able to provide more details at our next earnings call. Turning to profitability, we expect to generate positive adjusted EBITDA to the remainder of the year. On free cash flow, our ability to convert positive adjusted EBITDA to positive free cash flow will depend on the timing of our working capital cycle and other cash expenses.
For our third quarter, we expect our cash flow will still be negative. However, we expect the outflow will be less than in the second quarter. For our fourth quarter, we expect to generate positive cash flow.
Given our current equity market valuation, plus our operating plan focused on unlocking both top-line growth and expense savings, plus the value of our non-core assets, we believe we can create value for all of our stakeholders as we continue to execute our transformation strategy. Thank you for your time today.
With that, I would like to open the call for your questions.
Operator?.
Thank you. [Operator Instructions] Our first question comes from Trevor Young from Barclays. Please go ahead. Your line is open..
Great. Thanks. First one is just on the cost guide for the back half. Help us walk through the puts and takes on EBITDA.
$15 million EBITDA this quarter, the SG&A guide of still $320 million for the full year versus $200 million here in 1H implies a big reduction in 2H SG&A, which combined with maybe some incremental gross profit in the next couple quarters would imply 2H EBITDA would potentially be materially higher than 1H.
And any way to size how much reinvestment you're contemplating for marketing? Just trying to help line up EBITDA in the back half. That's my first question..
Jiří, if you can take it, please. Thank you, Trevor, for asking the question..
Hello, Trevor. Thank you for that question. Actually, yes, we are going down with first quarter of this year, we have negative adjusted EBITDA and we continue and we turn it in the second quarter to positive, which overall brings us first half year to positive EBITDA.
And second half, we expect it will be still on positive and EBITDA to deliver overall on positive EBITDA, adjusted EBITDA for this year..
Okay. And then second question on the Giftcloud business, helpful breakout on some of those non-core assets that you're evaluating.
Just for Giftcloud specifically, how large is that today in terms of revenue or EBITDA contribution, or what is the carry value of that asset on balance sheet as it seems as though the investment line on the balance sheet is entirely sum up? Just trying to size that business..
Yes, I'm really sorry, but we are not providing any disclosure on Giftcloud as such. It's part of the bigger company, it's part of the IDL, and we are not shooting out separate numbers..
Okay, no problem. Thank you..
Thank you..
[Operator Instructions] Our next question comes from Eric Sheridan from Goldman Sachs. Please go ahead. Your line is open..
Thanks so much for taking the questions.
Two if I could, just first in terms of key learnings as you've taken over operating the business, what do you see as the biggest opportunities in front of you that you're most excited to execute against and what are some of the sort of structural challenges that you feel will likely take longer to play out in terms of realigning the business for the longer term? That would be number one.
And then you talked about merchants and supply on slides 11 and 12. We'd love to get the sense of where you think you need to get scale of supply over time to sort of, to use your words, fix the supply side of the marketplace and how you think the merchant offering might need to change to sort of drive supply growth. Thanks so much..
Okay. Thanks. Thanks for questions. A lot of them on the, so I hope I remember all parts of that. First of all, we had internal discussion about low hanging fruits and one of my fellow colleagues mentioned that the low hanging fruits in our case is like low hanging berries.
So I really don't see one or two or three big items which we can just change and the company will be like flying. We are touching pretty much every part of the organization, pretty much every process inside the organization.
As you saw in the presentation, we have fairly big senior management team built and like every single member of the team is really rebuilding the organization part where they are managing. So that's on that part.
In terms of the value proposition and how we see it going forward, what we need to change, like one of the projects which we started this quarter is experimenting with new rate cards, making it much easier to onboard on Groupon, make our, let's say, fee structure more comparable with our marketplace, which are available on the internet.
So that's a major part which we will be continuing down the road.
And in terms of like promotion and structure and how the deals will be different in the future, we believe that going forward as we will be decreasing the promotional spend, increasing quality of deals, we will be simply able to sell more deals, services on our website with slightly higher discount compared to list price, which will make whole business case much more viable for merchants.
And having the quality deals, it will mean that also the value proposition for customers will be same or much, actually not same in my opinion, it will be much better than what we have right now..
Thank you..
We have no further questions in queue. I'd like to turn the call back over to Dushan for any closing remarks..
Okay, thank you. So thank you everyone for joining. We look forward to continuing to update you in our future conversations. And as always, if you have any questions, feel free to go to our investor relations team. Have a good evening..
This concludes today's conference call. Thank you for your participation. You may now disconnect..