Groupon Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2023

There are 5 speakers on the call.

Operator

Hello, and welcome to Groupon's Third Quarter 2023 Financial Results Conference Call. On the call today are Interim CEO, Dushyant Sinekapo CFO, Yuriy Ponert and Senior Vice President, Corporate Development and Investor Relations, Rana Kashyap. 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 conference call is being recorded.

Operator

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, November 9, 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 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 The financial results are included in their earnings press release and in their filings with the SEC, including their quarterly report on Form 10Q. We encourage investors to use Groupon's Investor Relations website at investor.

Operator

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 and A and free cash flow. 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.

Operator

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 Dushyant.

Speaker 1

Hello, and thanks for joining us for our Q3 2023 earnings It's a pleasure to be with all of you. Today's prepared remarks are posted on our Investor Relations website along with an investor presentation, which I will refer to during my remarks. In addition, I encourage you to review our press release and 10 Q, which contain more detail on our Q3 results. I will start today's call on Slide 5 and cover the key takeaways from the Q3. From my perspective, the positive signals I see in the quarter include: 1, another quarter of progress as our 3rd Quarter financial results came in line with our baseline expectations to deliver sequential improvements in the rate of year over year revenue decline, generate positive adjusted EBITDA and slow our free cash outflow.

Speaker 1

2, we announced a plan to raise roughly €100,000,000 between €80,000,000 fully backstopped equity rights offering and €19,000,000 in non core asset sales. Transforming a business like Groupon is not easy. With this financing plan along with the actions we have taken a year to date to create an efficient cost structure, I feel confident that we will be able to provide clarity to all stakeholders from customers, merchants, employees, suppliers and capital market participants that Groupon has the liquidity it needs to support our transformation plan. It's management goal to have no doubt about our ability to operate as a going concern. 3, I'm pleased to see local billings return to growth earlier than expected, which helped to drive a significant and improvement in the rate of decline for Global Billings.

Speaker 1

Local Billings was aided by a strong summer season for our things to do offerings, where we saw several important merchant partners return to Groupon after a several season hiatus. In addition, We run a very popular deal in August offered by a large multinational retailer. Experiences like this confirm my view that Groupon is a supply driven marketplace. If we can get the right assortment on our platform, demand will follow. While the pace of billings materially improved, Our revenues trajectory did not improve in line with the billings improvement.

Speaker 1

This is a planned divergence and covered in our transformation plan, where we aim to strike a better balance and sharing value on our platform between the consumer, merchant partner and Groupon. By strengthening our merchant partner value proposition, we can improve our assortment of desired deals, which leads to a better customer experience that improves traffic and conversion, which helps drive business to merchants and gets the positive marketplace flywheel going. While it's hard to predict how our revenues as a percentage of gross billings will vary from quarter to quarter, I do believe that over time we will arrive at the right balance for Groupon to be competitive in the experienced marketplace. On the negative side, it has become clear that several of our more ambitious projects will take longer to deliver than expected. Progress in transformation is not always linear, and our ability to deliver on critical projects will materially influence the pace of our financial progress and our ability to return our business to growth.

Speaker 1

I will return to this topic later in my remarks. Slide 6. Now I will review where we stand on our transformation plan and the 3 key work streams. Overall, at this stage, the fast transformation is coming to an end, and we are now switching from a cost cutting first mindset to a top line first mindset. We are turning our focus to delivering projects across product, engineering, sales, Marketing and Revenue Management that we expect will strengthen our marketplace and position our business to return to growth.

Speaker 1

To be clear, our goal to create an efficient cost structure is not yet complete and most likely will never be over. But we have made significant progress reducing our SG and A to $320,000,000 annualized as of the Q1, a reduction of over $150,000,000 compared to where we stood a year ago. Our SGA Reduction drove a 2,000 basis points improvement in our adjusted EBITDA margin year over year despite Revenues declining 12% during the same time period. We now have basic visibility on our structural fixed cost footprint and have long term projects in place to further reduce our costs, such as cost optimization, software cost reduction and resizing our facility footprint. The progress we have made on the cost side combined with our plan to raise approximately $100,000,000 in liquidity between a fully backstop equity rights offering and non core asset sales is a major step forward strengthening our financial position.

Speaker 1

Once these steps are completed, it's management intention to have no doubt about our ability to operate as a going concern. Now moving to our 2nd key work stream, rebuilding our organization. The leadership team we put in place last quarter continues to be aligned and motivated. We continue to build relationships between new and old team members and create a culture of performance and meritocracy across the board. While earlier in the year, we adopted new tools and processes for coordinating remote work, this quarter, we increased the number of our in person engagements and saw a pickup in office attendance.

Speaker 1

In addition, our talent acquisition process was restructured and we are seeing improved throughput and quality from our new hiring engine. There is still more work to simplify our business and make it more agile. While we made good progress in reorganizing our departments and teams, our attention is shifting to basic infrastructure projects such as upgrading our ERP and business intelligence applications. These are major projects that will take time to execute and won't have immediate contributions to our top line results in the near term, but they are important to build a strong foundation for future growth. Last but certainly not least, revitalizing our marketplace.

Speaker 1

Overall, while we have delivered over 100 small initiatives to improve our marketplace and the teams are pushing changes everywhere. It has become clear that several of our ambitious Projects will take longer to deliver than expected. I'm going to spend the remainder of my comments to dig a little deeper on our marketplace performance. Slide 7. The Q4 holiday season has started and our leadership team is laser focused on daily execution to ensure we can deliver on this important season.

Speaker 1

For example, we are actively reviewing our sales processes to remove any obstacles from closing sales. That means postponing activities that may decrease sales productivity and prioritizing a list of merchants who previously worked with Groupon, and for a variety of different reasons, we decided to stop working with them. In addition, reliability on our legacy platform has Been a major issue for Groupon. Over the long term, I believe we can find a few 100 basis points of growth from just improving our platform reliability. For example, one area of focus for us is the checkout process, where we see many opportunities to improve the for customers who have made it all the way through our funnel and added items to their car.

Speaker 1

In the short term, with Q4 here, We have shifted our resources to attack as many bugs and errors on our legacy platform as possible and ensure intended transactions are completed. Finally, search and relevance is a big area of focus for us. We are actively working on increasing our visibility on how we distribute impressions, So we can more quickly adjust the deals our customers are seeing based on various factors, such as seasonality or deal popularity. Slide 8. One project that came off our hackathon this past spring was the development of a new consumer front end.

Speaker 1

New feature development on our legacy platforms takes too long and we quickly realized a new front end is required if we are going to achieve our transformation goal to raise our product experience to modern marketplace standards. We believe that quicker development time and quicker releases can help us provide a much better customer experience over time. The ability to release new features every week and deliver feature parity in North America and international and quick succession will be a major change for Groupon. For example, one feature we want to provide our customers is a more seamless gifting experience and we believe our new consumer front end will make it easier to build this new gifting proposition. Building a new Front end is a significant undertaking for Groupon, with approximately 100 people in the company involved.

Speaker 1

Initial project timeline expectations were 2 years. After challenging all our assumptions, the team took an ambitious goal of 6 months to have it ready in time for our Q4 season this year. Despite incredible progress by the team, I made a difficult decision to delay 100% rollout until Q1 2024 to derisk and protect our peak season. I would like to thank the team for their tireless efforts, and I'm excited to see what we can do with our platform once the new front end is released. In addition to the new front end, our product and engineering team is busy with several projects across our platform, including a new deal creation tool, redesign of our Merchant Center based on the new front end architecture, changes to our marketplace support ecosystem and launching a redemption API to make our voucher redemption process more efficient for merchants.

Speaker 1

More to come here in the New Year. Slide 9. From my perspective, as you review the performance of our business in prior seasons, Groupon has not benefited from the uplift that other marketplaces and retailers typically experience during big gifting seasons. I see that repositioning Groupon to play a bigger role in gifting is a key strategic growth opportunity for our business and the project that I'm allocating resources towards. If we are successful in unlocking gifting, I expect that Groupon will generate much stronger performance in the Q4 holiday season than we are used to seeing.

Speaker 1

In the Q3, we launched initiatives across the company to make Groupon more giftable. Starting with supply, we identified over 25,000 giftable deals and over 4,000 top giftable deals and focused on onboarding new merchants with selected giftable categories. We also worked with existing merchants to improve our deals and add premium giftable options. On the product side, With the decision to delay the full rollout of our new consumer front end, we will be doing our best to adapt our legacy platform to make Groupon more giftable. The legacy platform does have constraints, but we expect to have gifting options on all the important places from home page to check out in time for the Q4 holiday season.

Speaker 1

We have made customized and easy to use gift vouchers and also created themed Groupon gift cards using Groupon Box. With the introduction of gift vouchers, customers will be able to gift a majority of our offering. We are also updating our sorting and ranking algorithms to generate giftable deal feeds, and we'll be launching special holiday themed with pages. These are just a few examples of the initiatives underway to make Groupon more giftable. Giftable experiences is a large untapped market for Groupon and we are excited to build a great gifting offering not just for the traditional Q4 holiday season, at an option that consumers can turn to all year round for very special occasions.

Speaker 1

While it's too early to say that our gifting will materially help our results this Q4 season. Over time, I believe that gifting can become a big business for us and Groupon can become a leading destination for giftable experiences. Turning to Slide 10, I want to cover where we see things from a revenue management perspective. As we updated investors in our last two earning calls, 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 Q3, we continued to shift our spend on the demand side of our marketplace from promotions to marketing.

Speaker 1

On the promotion side, we continue to make progress to cut our inefficient promotional spending and our promotional spend decreased a faster rate than gross billings. We are making progress shifting our promotional tools to a more personalized approach where we provide a discount to specific customers who need it to drive conversion. Reducing our reliance on promotional spend is an ongoing effort, and I do not Progress will be linear. Now turning to marketing. Marketing as a percent of gross profits increased from 20% in the 2nd quarter to 26% in the 3rd quarter as we successfully ramped up our performance marketing and while maintaining our internal benchmarks for return on investment.

Speaker 1

We did observe some constraints in our ability to further increase our performance marketing spend while maintaining an attractive return on investment, so we made a decision not to increase our marketing spend further. Geographically, we have found more success in scaling our performance marketing campaigns in North America versus international, where we are experiencing lower conversion rates and lower return on investments. International is an area of focus for the marketing team going forward. Our ability to further ramp up our marketing spend is not static and will be influenced by a variety of factors, including continued improvements in how our marketing campaigns are run and improvements in our product and supply. While we are making progress to drive traffic growth through our paid marketing channels, traffic from our direct and managed channels is still declining with traffic managed channels decreasing at a faster rate than our direct to site traffic.

Speaker 1

Improving our managed channels performance a focus for our marketing teams going forward. Overall, a key focus for our revenue management is pushing top performing deals across our channels. At this stage of our transformation, my view is our deals can be a great marketing tool to drive traffic to our site and improve conversions. We have made changes in our processes so that our marketing teams are cooperating more closely with our supply teams and revenue management. In addition, our revenue management team is actively managing our search and relevance process to more efficiently distribute our impressions.

Speaker 1

Slide 11, turning to supply. As we have discussed in previous quarters, we see an opportunity to improve the productivity of our sales force. And in the Q3, we continued to see an increase in year over year sales representative productivity. We rolled out a new pipeline management and reporting process, which is helping us monitor progress, set expectations, prioritize, actively manage and hold reps accountable. We are working on projects to add automation tools to help increase our sales efficiency, such as a new lead management tool.

Speaker 1

We will be working methodically to optimize every stage of our selling process And we see a significant growth opportunity from improving the efficiency of our sales investments. One area in supply from the top 5 markets in North America to the top 23 markets worldwide. This rollout is still planned, but not moving as fast as expected. Next, I would like to touch on our existing merchant base. Like many established marketplaces, the vast majority of Our business in any given quarter comes from existing merchants.

Speaker 1

In 2022, all existing accounts were moved to pooled services that we're only reacting to merchant inbounds and many merchants were not actively managed. In the Q3, We rolled out a new customer success organization focused on actively managing our top 80% of billings. This full lifecycle sales team is responsible for the revenue and retention of our highest value accounts. Over time, We expect this team will help our existing merchant partners drive more business with Groupon. Finally, Last quarter, I mentioned we were evaluating higher investments into our sales network, including potentially increasing the number of sales representatives.

Speaker 1

In the Q3, we started ramping up new hires and also testing alternative more performance based remuneration and faster training processes. Slide 12. Before I turn it over to Yuzhi to provide some insights on our financial performance and provide an update on our outlook and our activity position, let me give a few concluding comments. As I updated you last quarter, our financial results indicate the serious challenges our business faces and underscores the need to implement a significant and urgent transformation. While we made some good progress in the Q3, I am not happy with the delivery of our projects and progress is taking longer than I expected.

Speaker 1

Delivery of projects is our main priority as return to growth depends on it. At the same time, as indicated by my commitment to the back I'm confident that we will succeed in our transformation and we will lay the foundation for our long term success. And lastly, I want to update shareholders that Eric Levkovskiy has made a decision to resign from the Board of Directors so that he can focus on his other commitments. Over 15 years ago, Eric co founded Groupon and helped build the company into what has been recognized as one of the fastest growing Internet companies of all time. Throughout the company's journey, Erik has served in different roles at Groupon, including Chairman and CEO and helped to lead the company through several challenging periods, including to but not limited to its on the COVID-nineteen pandemic.

Speaker 1

On a personal note, I would like to thank Eric for the partnership approach he took than Balfour first invested in Groupon and his support of my interim CEO, Candidacy. As Groupon's 2nd largest shareholder, Eric has assured us he is not going far, and I look forward to our continued engagement in the quarters and years ahead. With that, I will turn it over to Yousry.

Speaker 2

Hello. Thank you, Dushyant, and thank you all 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 3rd quarter financial results, progress on our cost savings action, update on our liquidity position and our updated outlook. Before I begin, I would like to make an announcement that Karl Netzli will be moving from her position as Interim Chief Accounting Officer to becoming our permanent Chief Accounting Officer.

Speaker 2

I've been pleased with Kao's management of the accounting team and her contributions to the success. Please join me in congratulating Kyle and wish her the very best in her new role. Slide 13, please. So let's jump into our SARB quarter summary financial results. In the Q3, we delivered global billings of 419,000,000, a decrease of approximately 3% and a significant improvement from the 2nd quarter, The billings declined approximately 14%.

Speaker 2

I will cover more details in all of the drivers of our Q3 billings later in my remarks. Revenue was 126,000,000 and declined at 12% year over year, a slight improvement in year over year trends versus our 2nd quarter results and in line with our outlook to show a sequential improvement. Revenue declined at a faster pace than billings. While there are several factors impacting the divergence between our revenue and the gross billing growth rate. The primary driver is a reduction in our deal margin.

Speaker 2

As a result, revenue as a percentage of gross billings was 30%, a reduction of over 300 basis points year over year. Given that the many variables that impact revenue as a percentage of gross billings from quarter to quarter, including mix, seasonality and several other factors. We will not provide forward looking commentary on how we expect revenue as a percentage of Gurgaon's billings to evolve in the quarters ahead. That said, As previously outlined in our shareholder letter published in our Q1 earnings, reviving our merchant partner Value proposition is an important pillar of our transformation, and we believe we need to strike a better balance in sharing value on our platform between the customer, merchant partners and Groupon. Moving on, Our gross profit as a percentage of revenues remained stable around 88%.

Speaker 2

Marketing expense for the Q3 was $29,000,000 or 26 percent of gross profit. As we updated you last quarter, Our rebuilt performance marketing campaigns were ready to receive increased investment in the 3rd quarter, and we increased our marketing spend 30% quarter over quarter. As we deliver additional improvements in the efficiency of our performance marketing channels. We will continue to review our marketing spend to ensure we strike the right balance between maintaining adequate returns on each door spend and driving better top line results. Contribution profit for the 3rd quarter was $82,000,000 or 65 percent of revenues.

Speaker 2

And adjusted EBITDA was $18,000,000 as we recorded a 2nd straight quarter positive adjusted EBITDA generation as the company benefited from realized savings from our cost actions on SG and A. Turning to cash flow. The 3rd quarter saw a free cash outflow of 18,000,000 Well, this is an improvement versus last quarter and last year. It was still negative as our return to free cash flow generation elect our return to positive adjusted EBITDA. I will have more to say on the divergence adjusted EBITDA and free cash flow later in my remarks.

Speaker 2

We ended the quarter with 86,000,000 in cash and cash equivalents, including $47,000,000 drawn on the revolver. Please note that our cash position assumes $15,000,000 of restricted cash, which is posted as a collateral against our outstanding letters of credit and I reported on our balance sheet in prepaid expenses and other current assets. Slide 14. We had approximately 17,000,000 active customers worldwide at the quarter end, down 500,000 from the prior quarter. Turning to our local category.

Speaker 2

Consolidated local billings by $354,000,000 up 2% compared with the prior year. This is the first time we have reported local billings growth since the start of pandemic and a nice positive signal for our business. Within North America, we deliver local billings of 260,000,000 up 5% year over year. Within international, we deliver local billings of 94,000,000 down 3% year over year. As Dushyant mentioned in his prepared remarks, Our local category benefited in the Q3 from the strong performance of a large enterprise deal the Peran on Groupon during the month of August and also benefited from better performance on our Singhs2Do vertical, which saw several important merchant partners return to our platform for the summer season.

Speaker 2

Offsetting these strengths was our Health, Beauty and Wellness and Food and Drink verticals, which we continue to experience headwinds. Moving to our goods and travel categories. In the 3rd quarter, Consolidated good billings was $36,000,000 down 34% year over year and consolidated favorable billings was $29,000,000 down 16% year over year. Slide 15. Turning to operating expenses.

Speaker 2

3rd quarter SG and A was 80,000,000 down 33% year over year and down 17% quarter over quarter as we continue to see the benefits of our recent cost saving actions are reflected in our financials. SG and A includes $3,800,000 in stock based compensation and $6,400,000 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 seek opportunities to improve Groupon's ability to execute more efficiently and in turn further reduce cost in 2024. For the Q4, as Dushyant mentioned in his prepared remarks, Several of our projects to further reduce cost will take time to get delivered.

Speaker 2

And as a result, We do not expect to see a material change in SG and A from the current levels in the Q4. Slide 16. Turning to free cash flow. Despite producing positive $18,000,000 of adjusted EBITDA in the 3rd quarter. Our business experienced another quarter of cash outflows.

Speaker 2

In order to better help investors understand the divergence between adjusted EBITDA and free cash flow, We prepared a bridge that Tricon South's adjusted EBITDA to free cash flow. Specifically, I would like to point your attention to 5 drivers of the divergence. Number 1, CapEx is primarily driven by capitalized labor. Number 2, Change in merchants and supplier payables is primarily driven by overall change in billings and secondarily impacted by our merchant payable cycle. Please note that our quarter ending balance of merchant payables can be impacted by seasonality.

Speaker 2

For example, along with January, February April, September is one of our seasonally lowest months as we transition from a busy summer things to do season into our Q4 holiday season. 3, Change in trade accounts payable is primarily driven by 1, how much non payroll SG and A and marketing via spending and 2, Any changes in our accounts payable cycle. Year to date, our accounts payable cycle has reduced significantly and we do not have further compression. We do not expect further compression, sorry. Point number 4, change in accrued SG and A and other current liability is primarily driven by our SG and A and other expenses as we reduce our overall spend.

Speaker 2

We will be accruing less. Number 5, Cash outflow from change in net operating leases is driven by remaining lease payment obligations on our impaired leases. In Q1 'twenty three, the outflow included a one time payment associated with the early lease termination of our Chicago facility. As we resize our real estate footprint to our current needs, either through the expiration of our current leases on negotiating early lease exits. We expect the working capital outflow from this item will trend towards 0.

Speaker 2

Going forward, our ability to convert positive adjusted EBITDA generation to positive free cash flow will depend on the timing of our working capital cycle and other cash expenses. Slide 17. As Dushyant covered in his prepared remarks, strengthening of our financial position is one of the main pillars of our Transformation Plan. I'm happy to see the continued progress the company has made to create and efficient cost structure and improve the trajectory of the top line performance in the business. Our financial results indicate the serious challenges our business faces and improved business performance is an important factor to our financial position.

Speaker 2

As we updated investors in the last two quarters, Management has been developing several different options to enhance our liquidity, including potential monetization of certain non core assets and seeking additional financing from both public and private markets through issuance of equity or debt securities. After reviewing a variety of Debt and Equity Financing Options. The Board has approved an €80,000,000 fully backstop right offering. The right offering is expected to be made through distribution of non transferable subscription rights to purchase shares of Groupon common stocks at the subscription price of $11.30 per share. The right offering is fully backstopped by Palfar Capital, who is currently Groupon's largest shareholder and it's isolated to Dushyant Sinikapal, our Interim CEO and a member of the Board and Anyan Bharta, also a member of the Board.

Speaker 2

HealthArch Capital signed a binding agreement to subscribe to their RADA subscription, write and fully purchase any and all unsubscribed shares in the rights offering. Rights are expected to be distributed to common stockholders offer record as of November 20. The rights offering currently is expected to commence promptly after November 20 and expire on January 17, 2024. Additional details relating to the rights offering will be available in the form of 8 ks that the company will file within 4 business days relating to the rights offering and the backstop agreement as well as in the prospectus supplement that the company expects to file promptly after the record date. Our monetization of certain non core assets, we have entered into 2 separate agreements to sell partial stakes of our investment in Zama.

Speaker 2

1st, as previously disclosed in October, We signed an agreement to sell a partial stake for approximately $9,000,000 which subsequently We received the cash and the transaction closed. And today, we signed 2nd agreement to sell approximately USD10 1,000,000 on the same economic terms has the first agreement and expect the transaction to be completed later in Q4. We expect to generate net proceeds from these sales of approximately 19,000,000 Approximately R100 $1,000,000 raise from fully backed uprights offering along with proceeds from Cygn Non Core Asset Sales is expected to provide the company with the liquidity it needs to support our transformation plan and the management's intention is to have no doubt about our ability to operate as growing concern. In addition to the announced transactions, Management continues to evaluate the monetization of certain non core assets, including the remaining stake in SumUp, GiftCald and its portfolio of intellectual property. But there can be no assurances as to better or ban a sale of these non core assets will be consummated.

Speaker 2

Management currently believes It could generate net proceeds of approximately $100,000,000 from potential future non core asset sales. To be clear, these $100,000,000 would be in addition to the $100,000,000 Plan we announced today consisting of the right offering and 2 tranches of sum upsell. Slide 18. Now turning to guidance. Management has made a decision to end state Formal guidance.

Speaker 2

While there can be no assurances that the company will continue to practice of giving formal guidance in the future quarters. We want to furnish our shareholders with additional information as they consider a potential subscription to the rights offering. As of November 9, 2023, management is issuing guidance for the Q4 of 2023 as follows: Revenue between $127,500,000 to $137,500,000 Paul, declined year over year between minus 14% and minus 7%. Adjusted EBITDA between $18,000,000 $25,000,000 positive free cash flow. Management would also like to share a preliminary outlook for 2024.

Speaker 2

Year over year, revenue change at minus 5% to 0%. Adjusted EBITDA between $80,000,000 $100,000,000 positive free cash flow for the entire year. Finally, I would like to provide some additional commentary to assist with your module. While we return to year over year growth in local billings earlier than expected, We continue to expect progress will not always be linear and we would not be surprised If local Blaine's growth turn back negative in the 4th quarter. We continue to expect our revenue growth trends might diverge from our local billings brands depending on the composition of our local billings, the timing of our time formation strategy and the trajectory of our other categories.

Speaker 2

For our Q4 guidance, As Dushyant covered, we made a decision to delay the full rollout of our new consumer front end to the next year and we are working to adapt our new gifting proposition into our legacy platform. The low end of our guidance contemplates a scenario that our business does not materially benefit from gifting the Q4 holiday season. The high end of our guidance contemplates a scenario when gifting on our legacy platform is moderately successful during the Q4 holiday season. For 2024, we currently expect revenues in the first half of twenty twenty four to decline year over year and revenues in the second half of twenty twenty four to grow year over year. The trajectory of year will depend on a variety of factors, including, firstly, VABY and DAP on a year over year basis exiting Q4 and secondly, the timing of launching certain projects, including our new consumer front end.

Speaker 2

And while we expect to generate positive free cash flow over the full year 2024, We would expect our Q1 free cash flow will be negative given the seasonality of the accurate merchant payables as we exit our Q4 May season. Given our current equity market valuation, plus our operating plan, focus on unlocking both top line growth and expense savings, positive 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, we would like to open the call

Operator

Your first question comes from the line of Trevor Young with Barclays. Your line is open.

Speaker 3

Great. Thanks. Clearly, a lot of detail here, so I have several questions, so just bear with me. First one, just on North America local billings returning to growth. Can you talk about the cadence of growth there throughout the quarter?

Speaker 3

Did it peak in August around that popular deal and then fade into September? And then any color on how billings are trending so far in 4Q? Yuri, I think you mentioned that you wouldn't be surprised if total local billings turned negative in 4Q. So just curious if that's actually what you're seeing so far or you're just taking a more cautious stands on the quarter.

Speaker 2

Thank you, Trevor. Frankly, we don't comment on monthly trends. Local Blinks in Q3 was helped by strong things to do on season and a popular deal of multinational retailer. If I take a step back, our current marketplace assortment has a mix of always on deals and time limited deals. There are also different seasons where certain types of experiences From better in certain seasons, for example, things to do in summer months, versus Q4 of gifting season.

Speaker 2

For our time limited deals, the merchants might choose to run Time limited deal once a year in a month period, not necessarily the same calendar month, not even the same time, it is in the month. So next year could be different time. So therefore, we are not Providing details on the monthly data. So it's very difficult for us to extrapolate how our business is performing by taking 1 month and comparing it versus prior months of prior year and so on. So we will really focus on How overall quarter performed and longer term trends, which we believe investors should also focus.

Speaker 2

Hope I answered your question. Yes,

Speaker 3

that's fair. I can appreciate that. Dushyant, in your prepared remarks, you mentioned some constraints on dialing up marketing spend in the quarter. Can you actually elaborate on what those constraints were? Was it ad unit pricing on certain social platforms or something totally unrelated?

Speaker 3

And then as we look at the 4Q holiday season, That's typically when impressions get even greater demand from other advertisers. So should we expect that spend to actually decline Q on As you focus on those ROI thresholds.

Speaker 1

Actually, I don't think that we hit a long Interim limit, let's say, for our advertising. We are, in my opinion, hitting the limit, which we can do right now with the platform and Technology, which we have available. The Business Intelligence Infrastructure project, for example, should unlock us other opportunities to be smarter and performance advertising, same with the new platform, which should provide us more insights on conversion This is extremely important, especially in international. And in Q4, I believe that our Not performance, revenue management team is looking carefully into seasonality trends when Certain types of products are starting their own season. So although I expect that percentage wise, we will be on the same level, The overall spend, it depends how successful we will be, and it's very possible that it will be higher in the dollars amount, For the percentage wise, I don't think that it will be higher.

Speaker 3

Okay. That makes sense. Just the last one For me, had this inbound from a few new investors to the name. Just what steps are you taking to drive retention between a merchant and consumer, The illustrative scenario being a customer buys a Groupon from for some activity and now has a direct relationship to that merchant. Why would the customer come back through Groupon for that service and vice versa?

Speaker 3

Why wouldn't the merchant just go direct back to that consumer kind of cutting Groupon out of the process altogether? Just any thoughts on how you address that structural challenge would be appreciated.

Speaker 1

We have several potential ways how to going forward and we will be testing most likely all of them. However, what I would like to mention is not in V1 of our new merchant platform, which we will be or we are building now, but we will be launching it early next year. I would like to have an option We have different pricing and conditions, including our take rate for first time customers and repeated customers. So that The cost for merchant for the second and follow-up purchases is different versus what they are paying right now for the first time customers. This is one very simple very obvious solution, which we will for sure offer to our merchants.

Speaker 3

Got it. We look forward to seeing the new interface next year.

Speaker 1

Thank you, everyone.

Operator

Your next question comes from the line of Eric Sheridan with Goldman Sachs. Your line is open.

Speaker 4

Thanks so much for taking the questions. Maybe 2 if I could. We talked last quarter about getting the right mix of merchants and having a density of not Just number of deals, but the right top deals by zip code and geography. How far along in the merchant acquisition And alignment process are you in terms of getting the right array of merchant deals on a market by market basis? And how should we think about some of the work that still needs to be done there Looking out into next year.

Speaker 4

And then, maybe I don't know if it's a 1 part or a 2 part on the rights offering. So Post the rights offering, what is your working assumption of the cash position of the company post the rights offering? How dilutive will that be? And how should we think about that in terms of sort of runway of cash going into 2024? Thank you.

Speaker 1

If you do want to take the second question first and I will then take the first question.

Speaker 2

Yes. Thank you for the question. So as we said, we are going to raise $120,000,000 from these two branches of sum up and $80,000,000 for rights offerings. We also expect Q4 will be positive in our Free cash flow and but Q1 due to the Due to the natural merchant cycle, it will be negative because it's Quarter after gifting season. And the following quarters, we To have positive cash flow.

Speaker 2

So I don't want to put numbers here, but this is about the trends which we see there, in which we see In probably to add a little bit the information which is known is that it's also Our facility, which we have currently open, we mentioned this $47,000,000 drawn. It's still May 2024.

Speaker 1

Okay. And I can take the merchant acquisition question. So this is the area where I would like to see faster delivery than what we have. As I mentioned during my call, we are seeing year over year growth trend in terms of productivity of our sales people. And I was talking on our last call that we will be adding the city managers, city CEOs who will be able Help us to manage the traffic, but we had to change the priorities internally and we were rebuilding other parts of Sales organization and processes and tools, so that we have better control in how we are selling, what we are selling And the focus on the deal assortment, the quality of deals is something which we are working now and will be focusing on in Q1.

Speaker 1

So no changes in the plan. As a side effect of this, we have several like automation projects, which should help us to increase the Productivity of the sales force significantly, but this one part, although we have confirmed that it works and In our top areas, we see year over year growth. The implementation of that is slightly delayed.

Speaker 4

Okay. Thank you.

Speaker 1

You're welcome.

Operator

There are no further questions at this time. This will conclude today's conference call. We thank you for joining. You may now disconnect your lines.

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Earnings Conference Call
Groupon Q3 2023
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