Groupon Inc (GRPN) 2013 Q2 法說會逐字稿

Good day everyone and welcome to Groupon's second-quarter 2013 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 is being recorded. For opening remarks, I would like to turn the call over to the Senior Director of Investor Relations, Genny Konz. Please go ahead.

Hello and welcome to our second-quarter 2013 financial results conference call. On the call today are Eric Lefkofsky, CEO; Kal Raman, COO; and Jason Child, CFO. Additionally, our new Chairman, Ted Leonsis, is on the call for any questions you might have on the CEO announcement.

The following discussion and responses to your questions reflect Management's views as of today, August 7, 2013 only and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and in our filings with the SEC, including our Form 10-Q.

During this call we will discuss certain non-GAAP financial measures. In our press release and our filings with the SEC, each of which is posted on our Investor Relations website, you will find additional disclosures regarding non-GAAP measures, including reconciliations of these measures with US GAAP. Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2012. Now I'll turn the call over to Eric.

Thanks Genny. We're pleased with our performance in the second quarter of 2013, exceeding the top end of our operating profit range by $19 million. Gross billings growth of 10% year over year was driven by 30% growth in North America. Revenue growth of 7% was driven by 45% growth in North America. And sequentially, operating income excluding stock-based compensation and acquisition-related costs, known as CSOI, improved by about $8 million, reaching $59 million, and adjusted EBITDA increased to $81 million in the quarter.

I want to start by reviewing the highlights. First, our North American business led the way with its best quarter ever, posting revenues of $377 million, and segment operating income of $49 million. What's most impressive about our North American business, which now represents over 50% of our billings, is that our year-over-year billings growth accelerated from 23% in Q1 to 30% in Q2, despite marketing expense actually being down from Q2 of last year. To generate organic billings growth of 30% and still reduce marketing expense is a sign of how truly committed our customers are to Groupon.

Second, we changed our segment reporting this quarter, breaking out EMEA from rest of the world, which provides a better sense of the financial profile of our regions. EMEA billings returned to year-over-year growth this quarter, improving from an 8% decline in Q1, to 4% growth in Q2 as we began to emerge from a difficult period of stagnation. Despite take-rate investments which impacted our revenues, we still generated a 15.4% segment operating margin in the quarter, which compares favorably to 12.9% in North America. So as you can now see, not only do we make money in North America but we also generate operating income in EMEA and have consistently done so since the middle of 2011.

With EMEA growth now on the mend, we shift the weight of our focus to the rest of the world as we work to accelerate growth in Latin America and Asia and therefore narrow our operating loss in those regions. In light of our rapid historic growth, we want to make sure that each country is sitting on a solid foundation with a healthy ecosystem of both customers and merchants. Once we've accomplished that, we'll focus on driving a significant volume of new customers into the funnel. While there's still much to do to reaccelerate growth, we're happy with the strides we made this past quarter, reducing our rest of world segment operating loss from $24 million in Q1 to $14 million in Q2.

Third, we made good progress on all of our key strategic initiatives, mobile, local, Pull, and One Playbook. In fact, we broke another record in mobile, as over 7.5 million people downloaded our apps this quarter alone. I'll talk about each of these in more detail in a moment.

Fourth, our categories performed well in the quarter. Our Goods category increased from 37% year-over-year billings growth in Q1 to 50% in Q2. Our travel category, Getaways, had another solid quarter with acceleration in year-over-year billings growth, driven by over 50% growth in North America. In addition, our Groupon Live platform continues to gain traction as a popular marketplace to find great deals for live events. The beginning of baseball season marked the start of the first full season that we're working exclusively with MLB.com, attracting fans into major league ball parks nationwide.

And we continued our expansion with the launch of Groupon Reserve, our premium channel for upscale offers, starting with restaurants. We let customers book tables at some of the best restaurants in their city at discounts of up to 40%. We've been pleased to see reserve gaining so much early traction in our merchant community.

Finally, we're also announcing today that our Board of Directors has authorized a $300 million share repurchase program. Jason will provide additional details later in the call.

Let me take a step back to put these results in the context of Groupon's broader journey. Our vision is to make Groupon the place you start when you want to buy anything, anywhere, any time. And with the world's largest marketplace of deals, we believe we are better situated than anyone to achieve our vision. Over time, we think people will start with Groupon when they have a need, because everything we offer is highly personalized, provide unbeatable value to our customers. We do the work for our customers, so they can browse among our thousands of deals and have complete peace of mind that when they make a purchase they're getting something of quality at the absolute best value.

We're revolutionizing two emerging trends in commerce, mobile and local. There are over 1 billion smartphones in the world today. Within the next five years, that number is estimated to grow to more than 5 billion. For perspective, there are only about 2 billion internet users on the planet today. So with the expected growth of mobile, the entire internet user population could more than double in size.

As more and more commerce is occurring on the fly, the intersection of local and mobile becomes ground zero for the very evolution of commerce. To us, mobile commerce is everything you can buy anywhere you are with the touch of a finger, because we're all carrying a virtual shopping mall around in our pocket. It's commerce in the connected world where people infuse technology into their everyday buying patterns.

It's all about interacting with your surroundings, using geographic data to make purchasing more relevant, more personalized, more immediate, more efficient. It's defined by where the customers is when they have a need, which makes it inherently local. As such, Groupon is uniquely positioned to lead in the world of mobile commerce, which is why our mobile business has taken off so quickly.

App downloads accelerated by about 400,000 to more than 7.5 million worldwide in Q2, resulting in nearly 15 million downloads in the first half of this year alone and over 50 million downloads to date. We are preparing to be the first large scale e-commerce Company that is predominantly mobile. In North America, mobile climbed nearly 50% of our transactions in June, and these customers continue to be more engaged than our PC-only cohorts. And our International mobile business is growing even faster than North America's, albeit from a smaller base.

Despite the fact that our apps are great for browsing deals, we still have yet to change consumer behavior such that the majority of our customers interact with Groupon in real-time, on a daily basis. We've made great strides in mobile, but we have a long way to go.

To truly revolutionize mobile commerce we need to get local right. At our core, Groupon's goal has always been the same. To bring the power of the internet to local commerce by offering our customers unbeatable deals that they discover when they're out and about. Everything we do is with local in mind. Our Live business features local concerts and events. Our Getaways business features local hotels. Our Goods business has enhanced interest in Groupon overall. And over time, we'll be localizing our Goods platform, by allowing local vendors to upload inventory they want to sell to our national audience, and by allowing our vendors to offer local in-store pick-up.

The launch of new categories has at time been perceived as a departure from our local roots. But we don't view the world in conventional ways. We start with demand. We start with the customer. And in the eyes of the customer, Groupon stands for the best deals regardless of the category. We try to stay focused on bringing the world around our customers to our customers in a way they can digest when they're on the go.

So we're a local Company and we're a mobile Company, but we've also built an emerging marketplace we call Pull. A single place where our customers can go to search for and discover amazing deals from a wide assortment of merchants. From roughly 1,000 daily deals worldwide at the time of our IPO, we offered over 54,000 deals on average in North America alone at the end of the second quarter, compared to nearly 40,000 as reported just last quarter. Type in nail salons in Atlanta, or pilates in Boston, or seafood in Seattle, and up pops relevant deals around you that can be purchased and used instantly.

With Pull, less and less of our business is coming from the featured deals we e-mail out to our customers every day. In the second quarter, direct e-mail was under 40% of our North American transactions. Albeit early in the product's life cycle, more and more people are browsing and searching and coming to Groupon as a destination of deals they can pull down when they have a specific need.

One signal that Pull is starting to gain traction is our local unit sales growth in North America, which accelerated from 17% year over year in the first quarter of this year, to 22% this past quarter. In addition, we find our most active cohort of users engaging with Pull far more frequently. In other words, the people who know about Pull are using it. They're browsing among our thousands of deals, and buying.

We're just beginning to cross the chasm from being in the demand generation business to also being in the demand fulfillment business, and with that leap, we hope to unlock large new pools of consumer spend. Keeping our marketplace full of deals requires that our merchants fundamentally change the way they do business with Groupon. To be in-stock they needed to largely abandon the notion of a big feature deal once or twice a year, and instead get our merchants to put their deals into our perpetual Deal Bank inventory system. This effort is now so universally accepted by our merchants that it accounted for over 75% of the contracts we signed in June in North America.

And with our new self serve platform, which allows smaller merchants to set the parameters of their offers and launch their deals without the involvement of a Groupon sales rep, we expect the number of merchants to continue to grow over time. For Pull to be successful over the long haul, we can't just serve our customers. We need to build a marketplace that serves the needs of both our customers and our merchants.

To achieve this, we want thousands and eventually millions of merchants relying on Groupon to connect them with their customers as their primary source of growth. They should think of us as a trusted partner who powers their businesses by bringing them new customers, filling their unused capacity, and delivering a series of tools that connect them to the internet. As the number of merchants we feature rises, it's critical that we stay focused on keeping our merchants happy. Our merchants satisfaction scores as measured by independent third party research firm, ForSee, remained best-in-class in North America and Internationally have risen by more than 15% over the past year.

Moreover, in the past few years we built an integrated suite of tools and services called Merchant OS that we believe will profoundly change the way people shop locally. In the past, Groupon was a marketing tool that connected consumers and merchants. Going forward, we plan to move further upstream as we gain traction with our POS and payments products, such that we are an entry point for more and more local transactions. While we've made good progress over the past few quarters, to achieve our vision we need to stay laser focused on our top strategic initiatives, mobile, local, Pull, and One Playbook.

As we continue to build upon our market leading technology infrastructure in North America, we can't lose sight of the fact that despite our recent progress, many of our International markets remain behind, exercising disparate business processes and lacking the core technology stack that sets us apart in North America. We're working hard to align all of our markets but it will take some time.

One Playbook is our initiative to bring our North American systems and processes to the rest of the world. Let me turn it over to Kal Raman, our COO, to give an update on the progress we're making with One Playbook. And then Jason Child, our CFO, will offer more detail on our performance in Q2 and our expectations for the rest of 2013.

Thanks, Eric. We recognize that building a great Company for the long run will be enabled in part by a culture that rapidly syndicates and embraces the best practices to enhance merchant and customer experience across functional and geographic products. Every day, thousands of front line Groupon employees are interacting with our customers and merchants, learning from them, and innovating to deliver more value. Rather than continually reinventing the wheel, we must rapidly leverage our scale and drive innovation globally on a common technology and business platform.

Let me provide a read on our progress. First, Smart Deals, our personalization algorithm, is up and running in 7 of our 10 largest markets. We expect to see lift in our business as we build our Deal Bank inventory, enable greater relevancy, and optimize algorithms for each market. But it will take some time to get the levels of lift we have seen in North America. We'll then turn our product and engineering resources to our front end customer experience.

Second, the deployment of our back office sales and customer service tools continues. We have migrated to a unified sales force platform in 14 countries, which provides the foundation for all of our sales activities. Deployment of Deal Wizard, our capacity management system, is also complete in these countries. [Coffee], our return on investment calculator for our merchants is in all 48 countries and has seen higher adoption Internationally than in the United States.

Our lead management system is now live in 37 countries. And Quantum Lead, our next generation lead management tool, is all set to pilot in the United Kingdom in Q3, and we are targeting deployment in our top five countries by the end of this year. Coffee To Go, a mobile app that incorporates many of our key sales tools for our outside reps is currently being rolled out simultaneously in the United States and the United Kingdom. First where we are launching a new tool across different countries simultaneously.

Third and finally, our work to integrate our many technology platforms continues. Our North American and European platforms which serve the large majority of our businesses globally, are on track to be largely integrated over the next several quarters. With these, we are already seeing productivity within our European and Middle East and African segment improve dramatically year over year. I look forward to reporting our continued progress in EMEA, and as we turn our focus to the rest of the world.

For One Playbook to be successful, every employee, merchant, and customer should have the same positive experience every time they interact with Groupon, whether they are working in Seattle or Singapore, whether they are buying a deal in Boston or Berlin, and whether they are selling their products in Brazil or Bangalore, India. Now to discuss the results, I'll turn the call over to Jason Child.

Thanks, Kal. With the details available in this afternoon's press release I'm going to run through the highlights of the quarter and then provide our outlook. Note that all comparisons unless otherwise stated refer to year-over-year growth.

As Eric mentioned, we've changed our segment reporting, which now provides additional visibility into performance across our International footprint. Going forward, we'll report three segments. North America, EMEA, and Rest of World, comprising Asia-Pacific and Latin America.

In summary, gross billings increased 10% to $1.41 billion, led by growth of the Goods category. North America growth of 30% and EMEA growth of 4% was offset in part by 21% decline in Rest of World. Sequentially, gross billings increased by $6 million.

Revenue increased 7% to $609 million. North America growth of 45% was offset by a 24% decline in EMEA and a 26% decline in Rest of World. EMEA revenues were impacted by a deliberate reduction in take-rates as well as other consumer incentives as we invested in the growth of the business. Sequentially revenue increased by $7 million.

Gross profit decreased by 11% to $385 million, again largely as a result of deliberate take-rate reductions in our International segments, and was about flat sequentially. Overall, category mix was roughly consistent with the first quarter. Within North America, gross profit increased 12%, low relative to 45% revenue growth, due to a greater mix of direct.

Operating income excluding stock-based compensation and acquisition-related costs was $59 million, declining $13 million compared to last year's second quarter, when our International business was larger, but improving $8 million quarter over quarter. Rest of World generated a $14 million loss in the quarter but contributed to the sequential improvement.

Adjusted EBITDA defined as operating income less depreciation and amortization and further excluding stock-based compensation and acquisition-related costs, was $81 million in the quarter, decreasing year over year by $4 million, but increasing sequentially by $9 million. GAAP EPS was negative $0.01, and EPS excluding stock compensation and acquisition-related costs net of tax was $0.02, or $0.03 excluding a $0.01 negative impact from foreign currency.

Operating cash flow for the trailing 12 months ended June 30, 2013 was $160 million. Trailing 12 month free cash flow calculated as trailing 12 month operating cash flow less CapEx and capitalized software was $75 million. For the quarter free cash flow was $29 million. Finally, as of June 30, we had $1.2 billion in cash and cash equivalents.

Turning to our four key nonfinancial metrics. Total units defined as voucher and products sold before cancellations and refunds increased 15% year over year to 46 million units, with all categories contributing. North America units increased 45%, EMEA decreased 3%, and Rest of World decreased 12%. It's worth noting that year-over-year unit growth in all segments accelerated or improved compared with the first quarter, local in particular as Eric mentioned earlier.

Our net active customers increased in the quarter by 900,000 to 42.6 million worldwide. Our North America active customer count was 19.1 million. For EMEA, it was 13.9 million, and for the Rest of World, 9.6 million.

Trailing 12 months billings per average active customer was $138. Sequentially, customer spend was flat, despite a significant $5 increase in North America from $151 to $156. Active deals, including merchants featured in our Pull marketplace, increased to over 54,000 on average in North America, compared to nearly 40,000 as reported at the end of the first quarter.

Now I'm going to speak to the highlights of our categories. Local gross billings, which is made up of local and Live, declined 4% year over year to $806 million, and decreased sequentially by 3%. North America accelerated to 9% growth year over year, and was about flat quarter over quarter. Declines in both EMEA and Rest of World more than offset the growth in North America. As we further roll out the North American playbook, we expect the performance of our International segments to improve.

Local gross profit decreased 9% year over year to $288 million, and increased 2% quarter over quarter. The sequential increase was due partly to a more than 100 basis point increase in take-rates, with improvement across all segments.

Goods gross billings increased 50% year over year to $437 million, and increased 11% quarter over quarter. Goods billings mix in North America continues to be weighted heavily toward direct, and recorded on a gross revenue basis compared to the mix in our International markets where the inverse is true. We continue to expect the mix of direct to increase as we build out our global supply chain infrastructure Internationally. Goods gross profit decreased 16% year over year to $63 million, and increased 7% quarter over quarter.

Because of the relatively high mix of direct revenue it's helpful to look at Goods gross profit as a percentage of Goods gross billings. On this basis, as I mentioned last quarter, product margins in North America after deducting only the cost of inventory are very healthy. We continue to spend too much on shipping and infrastructure, which has driven our overall Goods gross margins into the mid-teens. We expect that margins will improve over time as we scale these costs. But it's important to note that we could see variability quarter to quarter until then.

In the second quarter, Goods gross margins were 14% globally. 14% North America, 16% in EMEA, and 12% Rest of World. A one time credit that we received related to third-party freight costs had a 300 basis point favorable impact on North America margins in the second quarter. While still up quarter over quarter, the underlying margin remains lower than our International markets, reflecting a higher mix of direct which includes significant shipping, fulfillment, and other expenses. EMEA gross margins reflect a greater mix of lower margin products as well as take-rate investments to drive growth. And travel and other had another solid quarter, with gross billings increasing 8% year over year to $171 million.

Before I close, let me provide some additional color on a few specific items. First, let me spend a moment on marketing. Marketing expense for the second quarter was down 37% year over year, to $55 million, or about 9% of revenues. As we discussed last quarter, we spend marketing dollars in a variety of ways, including customer incentives and take-rates, some of which are recorded either as contra revenue or cost of revenue. Compared to the first quarter, we spent an incremental $6 million in marketing expense and $4 million in discounts, in addition to more than $10 million related to Goods and travel take-rate investments Internationally and free shipping.

Secondly, I want to build on what Eric said regarding the Rest of World. As you can see, we are focused on shoring up our International market segments one at a time. Over the past year, we have focused largely on EMEA. Given our progress there, and the foundational work that needed to be done in Latin America and Asia, including closing our offices in unprofitable cities and shutting down unsustainable subcategories, we are now in position to invest once again in the growth of those markets. Performance varies widely amongst the countries, including our Rest of World segment. Some are growing and profitable, some are growing but generating a loss, and others are losing money and falling short of our growth expectations.

It's important to highlight that only a small subset of these countries fall in this last bucket. As we evaluate our growth investments, it's these countries that we're looking at most closely.

Third, as Eric outlined, our Board has authorized a share repurchase program. Under the program, we're authorized to repurchase up to $300 million of outstanding Class A common stock over the next 24 months. The timing and amount of any repurchases will be determined based on market conditions, share price, and other factors. The program is intended to offset the annual dilution from employee stock grants.

Finally, turning to our outlook. We expect seasonality to impact the local business in the third quarter, as people tend to travel more frequently in the summer months. In addition, we continue to invest in marketing initiatives to drive long-term growth. As such, for the third quarter of 2013, we expect revenue of between $585 million and $635 million, operating income excluding stock-based compensation and acquisition-related expenses of between $20 million and $40 million, and EPS excluding stock-based compensation and acquisition-related expenses net of tax of between negative $0.01 and positive $0.01. We estimate that stock compensation will be approximately $30 million for Q3, or approximately $20 million net of tax.

For the full year, we reaffirm our guidance that full-year 2013 GAAP operating income will exceed $100 million. As always, our results are inherently unpredictable and may be materially affected by many factors, including a high level of uncertainty surrounding the global economy and consumer spending, as well as exchange rate fluctuations. With that I'll turn the call back to Eric.

Thanks, Jason. The opportunity before us is substantial. Merchants need customers and customers crave simple tools to discover and buy locally. I believe that Groupon is in a position to redefine local commerce, if we're successful in shifting consumer behavior and increasing our customers' reliance on Groupon as their primary mobile commerce provider.

Armed with our current market advantages which include over 200 million subscribers, nearly 43 million customers who consume nearly 50 million Groupons every quarter, over 500,000 merchant partners, over 50 million app downloads, nearly 11,000 employees operating in 48 countries, and over 54,000 deals on average in North America alone, we believe we are better positioned than any other Company to redefine the local and mobile commerce landscape.

I want to emphasize that we'll we're pleased with our performance in Q2, we're still building the very foundation of the business as we migrate from a daily deal model to a full e-commerce marketplace. The process of building is a marathon rather than a sprint and will require a lot of continued hard work and solid execution.

When Ted and I took this job nearly six months ago, we expected to begin a CEO search. However, as Groupon has both grown and evolved, the Board felt strongly that continuity was important to capitalize on the opportunity in front of us. We simply have too much to do in building out our business model to take on a transition at this point. As a result, the Board has asked me to stay on as CEO, which I've agreed to do for the next few critical years. Ted will assume the role of Chairman and will continue to provide his experience and leadership to the Management team and the Board in much the same way as he has over the past six months.

I want to personally thank Ted for his service. He has been and continues to be a true partner of mine in this effort, and I look forward to serving with him and serving the stakeholders of Groupon for years to come. With that, let's take some questions.

(Operator Instructions)

Our first question comes from Ralph Schackart of William Blair. Your line is open.

Looking at the Q2 unit growth acceleration in the quarter, 45% in North America this quarter up from 37% last quarter, can you sort of given us a little bit more color what's driving that. I know you talked about Pull. But it was also accelerating on an International basis as well.

And then turning to the average spend customer metrics, nice acceleration in North America. You're starting to see flattening out in the rest of the world and EMEA regions. As you roll out One Playbook, should we assume that these trends are sort of flattening out and should grow again on an average customer basis going forward? Thanks.

Thanks. I'll start with what's driving the North America unit growth. So it was predominantly driven by an acceleration of local in the quarter from 17% in Q1 to 22% in Q2. That made up the biggest lift. And it's also I think the good news for us is that our unit growth has been outpacing even our billings growth, which is a sign of strong consumer demand. And it's done it even in North America, which accelerated from 23% growth in terms of billings in Q1 to 30% in Q2. So the fact that our units are growing even stronger is a great sign.

And in terms of the spend on a TTM basis per customer, again, I think the North American story is quite strong with the acceleration in Q2, and we would expect as we roll out One Playbook, as we roll out Pull, as we roll out all those initiatives, and as mobile takes on a greater foothold internationally, that we would see similar signs.

Let me add to it. This is Kal. In North America, the customer demand which is mentioned represented by units is accelerating, which is very encouraging, so is the merchant satisfaction. As we mentioned in the script, more than 50% our merchants come back to us. As a matter of fact, in June, 75% of our merchants put their inventory perpetually available in Groupon. So we are getting the growth because we are taking care of our merchants and customers.

With respect to your second question on the average spend metrics flattening out Internationally, I won't repeat the same thing. It all starts with the merchant and customer satisfaction. As we told you in the script, as well as in the press release. Our MSAT and CSAT scores Internationally have grown more than 10% year over year, and that is a result of all the hard work we are putting in in controlling the controllables, which is through One Playbook. As you could see, the business has accelerated in Europe from a negative 8% year over year last quarter to positive 4%.

We see progress, but as we continue to focus on merchant experience and customer experience through One Playbook, we believe returns will be positive for the Company.

Great, thank you.

Thank you. Our next question comes from Ross Sandler of Deutsche Bank. Your question, please.

Great. Thanks, guys. I just had one question on the marketplace and then two questions on the International. So I think you said the marketplace business in North America is up to 54,000 merchants in perpetual deals. What is the velocity of transactions for that side of the business, i.e., the Pull side of the business look like? Are you seeing greater spend per customer or greater conversion rates when those deals are up in the marketplace model?

And then on International, Jason, your comments on ROW, so how long is that likely to take to kind of rationalize? Is that going to involve divesting some countries or is it just roll out the EMEA playbook on a lag basis for those countries?

And then the last question for Kal, seems like EMEA is at least halfway if not three-quarters of the way to being up and running with North America best practices. So when are we likely to see billings growth look more like North America in EMEA? Is that end of this year or is that a 2014 event? Thanks.

It's Eric. I'll start with the marketplace question. So we made great strides. If you think about our migration from being predominantly an e-mail business to being much more of a marketplace, it's only been going on for a few quarters and we've made fantastic strides, especially in supply where even last quarter we had 40,000 deals in North America and we're now up to 54,000.

We've also made great strides in reducing our reliance on e-mail. Only a few short years ago when e-mail was virtually all the business and today, it's less than 40% of the business. We have made great strides.

We also see the good news for us is we see our most active cohort of customers engaging with the marketplace most often. They're browsing. They're searching. They're going to the All Deals page and typing in key words and been pulling down and buying deals. So it's very encouraging.

In terms of how much of our business is Pull versus the other segments, you can look at it -- when you look at the e-mail part of our business you can get the clearest sense as to how much is driven by us sending out a Featured deal, and again that's under 40%.

So your question on Rest of World. I'd say first, the Rest of World is primarily Asia-Pacific and Latin America or countries within those regions. And if you think about the age of those businesses, the youngest one is about 1.5 years, and even the oldest has just hit three years I think last month. So they're very, very young operations.

There's a variety of performance within Rest of World. There's many countries that are actually growing very solid and some that are actually growing negative. So at this point I think it's a little early to focus too much on what the current results are.

I think the long-term approach is as we roll out, as you reference, as we roll out the One Playbook that we're in the midst of doing in EMEA now and take that to these Rest of World countries, we expect to see similar results that you're now starting to see in EMEA, and then longer term will look more like North America.

Let me add a point to the Rest of World before I answer your question on EMEA. Rest of World also the operating loss like we reduced it by $10 million Q over Q and that is by focusing on the first steps of One Playbook, of shutting down unprofitable cities, and stopping us from doing business in unsustainable categories and stuff like that. So we already have started the rationalizing of One Playbook like we have done in EMEA two quarters back.

Like Jason said, as we roll out One Playbook, we believe we can turn them around the way we are turning them around the EMEA markets, but we will be fiscally very prudent and responsible throughout this tough question on should we be in a country or not on a regular basis, which we do on a monthly, quarterly basis within the Company.

With respect to EMEA, I always believe in order to build a sustainable business you need to create an ecosystem of happy merchants and happy customers. As you could see the merchant satisfaction and customer satisfaction, their [rates have stayed to the] highest we have in the Company, and the growth is a direct reflection of the satisfaction of the merchants and customers.

With all of the One Playbook and all the efforts we have put in place in EMEA in the last six to nine months, our merchant satisfaction, customer satisfaction has gone up 10% year over year, but it's still lagging behind the United States. As we continually focus on the merchant and customer experience by implementing these strategies and being relentless about it day in and day out, the growth will follow.

And the beauty of our EMEA market, our operating leverage in EMEA as you could see in the press release is already at 15.4%, compared to the 12.6%. So it is a very healthy business. Now we need to continue to improve our merchant customer satisfaction and the growth will follow and look like the United States.

Thanks, guys. Nice job this quarter.

Thanks.

Thank you.

Thank you. Our next question comes from Heath Terry of Goldman Sachs. Your line is open.

If there are specific technologies or strategies that are driving growth in the US business that has yet to be employed Internationally that you can kind of point us to? And then also to the extent that you've had a few weeks of it that you've got any sense of what kind of impact you're seeing on either open rates or conversions post the changes that Google has made to Gmail as it relates to what they're calling promotional email.

I'll take the first one. I'll let Eric answer the second one. Technology's always the means to the end. So there is no one silver bullet of technology. But all our technologies are built in such a way either to delight our merchant or our customers.

So the Deal Bank, which is our proprietary virtual inventory system, which we have rolled out in EMEA right now as we continue to increase the number of deals like we have done in the United States, that technology will have humongous benefits to our customers, our merchants, and to our business. And similarly it is very true with all the backend tools we have rolled out, everything, Coffee, to Deal Wizard, and all the sales [for ventures]. They are not only improve the productivity, which you can see in our SG&A reduction, they'll also improve the quality of the merchants we bring to the EMEA platform.

And we are early stage. Like I told you in the last two calls, this turnaround is not a one or two quarter turnaround. It's a marathon, and I'm glad we are making progress, because we've got 8% year-over-year growth in billings, operating leverage is 15.4%, MSAT is up 10% year over year. These are all great indications that we are in the right direction, but no sense of imagination, the job is done. But we are very pleased with the progress we have made.

And I think just to reiterate, then we'll talk about Gmail, if you think about the core technologies that are leading to the North American business performing so well, again, rising from 23% year-over-year growth to 30% this quarter, it's predominantly the fact that we're so highly penetrated in mobile, and we have this vibrant Pull marketplace. And there's a lot of technology that supports that. Certainly as Kal mentioned a second ago, Deal Bank being a key component. We made great strides with a technology we call Smart Deals, by which where we're taking these deals out of Deal Bank and using technology to figure out how to expose them.

But this is all being migrated through One Playbook, along with all the back office tools we have to various parts of the world. And the good news, to answer your second question, is because we've done so much work in North America, we reduced our reliance on e-mail dramatically, again, it's less than 40% of our business. And so we just have become less dependent on that channel, and so at the present moment we're not seeing any materially effects related to the Gmail roll-out. But again, I think they're still rolling it out and we'll see as time goes on.

Great. Thank you.

Thank you. Our next question comes from Eric Sheridan of UBS. Your line is open.

Two quick questions. One, the mobile transaction volumes in North America, wanted to understand the differences you're seeing in this stage of the business, a velocity of purchases, or a balance of purchases on a global basis versus a non-global basis in North America.

And then second, on the buyback, want to understand sort of how the Company is going to think about the buyback going forward, and then since Ted's on the call, maybe how Ted, Eric, and the Board are thinking about the additional $900 million of cash on the balance sheet as a long-term asset of the Company. Thanks.

So let me -- let's talk about mobile business first and then Jason can jump in. When you look at our mobile business, as we've discussed historically, we're fortunate that our mobile users tend to be the most engaged. So the mobile app right now is a universal app, which means that both an iPhone and Android, it's very similar throughout the entire world. Unlike our North American technology stack, which is -- we have multiple different, and again Kal covered this historically, we have multiple different technologies that we're trying to unify under One Playbook.

But mobile is already unified and our mobile users tend to be the most engaged. They're searching and browsing the most often and they're buying the most often. You've seen just in this last quarter that our North American purchasers where we happen to be the most penetrated in mobile are buying more often. Our TTM has gone up from I think $151 to $156, and our average purchases per year have risen as well. So people are buying more and a big part of that is being driven by mobile.

The good news again for us on the International front is that even though we're not as penetrated Internationally in mobile, it's accelerating at a faster pace. And so eventually we expect to be at parity down the road. So let me give it to Jason to talk a little about the buyback. And then either Ted or I will talk about the rest of the cash.

First on the buyback, I would say at this point we just announced an authorization that will be executed sometime over the next 24 months. I'd say recall that we do have about $1.2 billion in total cash on the balance sheet and then depending on which liability we want to net against it you can net that down to I think you said $900 million. Whatever. There's a variety of ways to look at it. It's a strong cash position nonetheless.

We have generated $75 million of free cash flow in the trailing 12 months as well. So in terms of the timing and amount of any repurchases, this is to be determined based on the market conditions, share price, and other factors over the 24 month period. And lastly, I would just say that the Board has actually been looking at this for some time, but felt like the Company now is on solid foundation and so now was kind of the right time.

And just to kind of give maybe a minute of color on the rest of the cash that we'll have on our balance sheet. And again, Jason mentioned it's not as if the buyback will occur over time, so we have $1.2 billion of cash and we generate cash.

But I think the way we view it is probably not dissimilar from other large Internet companies. Which is when technologies are changing as fast as they are in today's environment, and we're living through this amazing migration and moment in time when smartphone adoption is becoming so pervasive and more and more business is moving from PC to mobile. And it's just I think critical for companies like ours to have the resources on hand, to be able to innovate and move quickly and take advantage of dislocations in the market. You tend to see technology companies that have a lot of cash and we're fortunate that we have a great balance sheet as well.

Great. Thanks, guys.

Thank you. Our next question comes from Gene Munster of Piper Jaffray. Your question, please.

Congratulations. A question just on take-rate and some of the ranges to kind of think about how that could oscillate going forward. And maybe in particular, it sounds like we've seen some stability in the US. As you bring the playbook outside of the US, could you start to use take-rate as more of a lever to entice merchants and like you did a couple quarters ago? Thank you.

We believe our take-rates in the long term will be in the guidance we have given. So we expect businesses to operate in the same -- it would be between 30% to 40% like we have given that to you in the past quarters. We are really confident that we can maintain it.

In the meantime, the take-rate I just spoke to of seeing in EMEA and Rest of World, it's all towards our ability -- we want to attract high-quality merchants who will give great customer experience and delight our customers. And we want to get as many of them on our platform. And through One Playbook, we could standardize the process like we have done it in the US, and we'll also get efficiencies out of it in the long run.

The only thing I would add is that in terms of making investments in take-rates, that certainly is part of kind of what we call marketing incentives, where we think about extending discounts to try to get customers to activate or to offer lower take-rate, to try to get new merchants on the platform.

As we are now into Q3 and looking at Q4 which is our seasonally strongest quarter of the year you should expect us to make some take-rate investments, which is certainly part of the consideration for the guidance range we gave on our operating income.

Okay. That's helpful. And just to get back to that 30% to 40%, we've seen a lot of stability in the take-rate in the last two quarters. Is there -- based on what you just mentioned, and just to think about that 30% to 40% range. When you say that, I really think it's 33% to 38%; is it really 30% to 40%, and could we see some -- should we just be kind of prepared that there could be some strategic swings that could be a little bit more measurable, or do you feel like there's some more stability in how that plays out?

I'd say there's clearly more stability in the business. You've seen it over the last couple quarters. We're not here to tell you that there's kind of massive instability on the horizon. What we are I think trying to be very conscious of saying is that this business is not even five years old, and we're investing for the long term and as Kal has mentioned numerous times, we're investing to build the healthiest ecosystem we can in terms of customers and merchants. And you really want to get to attract the highest quality merchants and customers on the platform, at times you may have to invest in the take-rates and we have done that and we'll continue to do it.

Great, thank you.

Our next question comes from Jordan Rohan of Stifel Nicolaus. Your question, please.

I'm curious about the category and market closures for the ROW. Can you give us an idea of how extensive those have been, how much of that $10 million in lower loss or reduced loss that accounts for ROW? And specifically why weren't the markets that appeared not to be working, working, what was lacking from those? Was it density of population or any other characteristics you could share?

I think we have to be very cognizant of very important fact here. Groupon is not even five years old and our International business is 3.5 years old, and several of the countries are as old as 1.5 years. So we are about creating a category, not running a business in a category which already exists. And as we continue to do it, we have been doing it in disparate ways worldwide, and this is the first time since last year we are focused on One Playbook. So as we continue to roll out the One Playbook, you will see lots of similarities in the [kpas] with which we run the business and output as those deals get.

So it is too early to say that some country is not the right market for Groupon or not, but having said that, the Board and the Management team seriously go through the exercise on a monthly, quarterly basis to make sure that we are in the right categories which are sustainable where we can give great customer experience and merchant experience. And we also make sure that we are in the right cities, which are sustainable based on the demographics of the customers we want, Internet penetration, mobile penetration and so on and so forth.

And we are focused on it. In the US we have done a good job. We have been focusing on EMEA, which is our largest International segment for the last nine months. Now as I told in my script, we are turning our focus to Rest of World, and you will continue to see progress, and you can be rest assured that we will be fiscally extremely responsible in what [odation] we would make.

Kal, how many markets are you still in and how many did you exit this quarter? Thank you.

We are in more than 1,000 cities and we haven't disclosed exactly how many cities we have opened and how many cities we have closed. You could say we are in more than 1,000 cities and we are in 48 countries and we are diligently looking through that list believe it or not on a monthly, quarterly basis. And it's actually lots of fun for me because some of the countries and cities I have never seen myself on the world map.

We are very proud that we've got a Groupon brand which is appreciated and needed by people all over the world. Because whether the people live in China or India or United States, people want curated deals at unbeatable value, and that value proposition is very common across the world and we are trying to serve that.

Alright, thank you very much.

Thank you. Our next question comes from Arvind Bhatia of Sterne Agee. Your line is open.

Like to add my congratulations on the quarter. Couple questions. One is related to your TAM opportunity. I noticed that in your slide presentation you've taken up the addressable number of merchants from I think used to be 18 million to 30 million. Just curious kind of what went into that thinking there?

And then second question is you talked about this in different ways but productivity of sales force, Internationally how that's about 50% of the US. As you go towards the sell/serve platform, just wondering how that's going to impact your headcount and productivity and stuff like that. Thank you.

So starting with the total addressable market, people define our addressable market in different ways. Right. But it's certainly measured in the trillions. In local commerce is most small segment of the worldwide GDP.

The way to I think about Groupon and the opportunity in front of us is, is you only can go buy a TV or something similar, maybe once a year, twice a year, whatever it is. But people are eating out just alone in North America I think five times a week, and that doesn't include all the other local services that you buy, from health and beauty, to activities, to fitness, and on and on. So we sit in this just massive market opportunity and that we're in the midst of trying to revolutionize.

And on top of that as we've extended into the travel business with Groupon Getaways and the product business, Groupon Goods, and the live event business, Groupon Live, we just keep adding to our addressable market. And I would add that as mobile permeates more and more of commerce, and we are literally at ground zero of the intersection between mobile and local, the opportunity gets even bigger.

At Groupon the good news is there's so much headroom in front of us that we tend to be more focused on the next executional step in front of us than how big the market is because we're just lucky that we live in this large market.

The question on productivity, between EMEA and the US, like the good thing is that the tools we have put in place, not only have we increased the -- improved the productivity in EMEA in the last quarter, we are also continuously increasing the productivity within the US through the self service and other areas. So it would be a marathon. We will never be satisfied with. We want to continuously increase productivity and the quality of the merchants we bring into the ecosystem.

The beauty is in the last quarter, year over year we have reduced hundreds of sales support jobs while we have added hundreds of front line sales jobs, and we increased the top line and the productivity. And as you could see in our SG&A, which has come down, it is directly because of that change.

Great, thanks guys.

Thank you. Our next question comes from Scott Devitt of Morgan Stanley. Your question, please.

Was wondering how you think the Living Social password breach may have helped particularly the North American business, whether you saw a change in metrics coincident to that in late April, and if so has it sustained through the second quarter into 3Q?

And then secondly, as we're thinking about how One Playbook manifests itself to consumers in EMEA particularly, would it just simply be the expansion of Deal Bank? Is that the biggest output of One Playbook? And are there other outputs you'd highlight for us to monitor? Thanks.

First, on the password breach, I don't know exactly -- I don't know the details about how that exactly affected Living Social. I do know our growth rates throughout the quarter were steady in North America, which I assume is what you're referring to, we did see an acceleration of unit growth from 37% to 45%. That growth happened I would say fairly evenly throughout the quarter. So I don't -- and we continually track kind of our market share versus a variety of competitors. And that's been kind of relatively slow and steady progress. I don't think there's anything in particular that was at least evident to us.

On One Playbook, definitely Deal Bank and Active Deals is one indication, but One Playbook is about merchant and customer experience. So the merchants will get better tools, like our merchant center where we make it frictionless for them to work with us, adoption of merchant center should go up. And customers should see more high-quality deals, which are much more relevant to them than they would have seen otherwise. Those are the two big areas we need to worry about.

The beauty about this business is doing the small things right in a consistent way to delight the merchants and customers. So One Playbook will do lots of small things right to improve customer experience and merchant experience.

I'll just maybe add that if you -- one of the things, we discussed this when we gave our guidance for the quarter, we're still in the midst of this migration from our earliest daily deal e-mail roots, and one of those that we're still dealing with is that today very often in North America when you subscribe and across the world when you subscribe to Groupon, you subscribe to the city. So in summer months especially given that our customer base is skewing more affluent, skewing more female, as people are traveling because they've got families or they're just traveling in the summer months, they're getting pushed deals in a city in which they're not in. And the mobile app is still not saying oh, okay, you're a Chicago subscriber but you're in Boston, let me show you deals around you in Boston.

This represents a big opportunity for us. So what I would say is you want to get to the point that our consumers, especially in a predominantly mobile world, that no matter where they are, Groupon is curating for them unbeatable deals such that they're coming to our mobile apps, or coming to our site via mobile, and they're seeing things that are relevant to them. We know what they like. We know where they are. And we're finding a way to kind of curate and manage the retail world around them in way that they can understand and engage with and hopefully you'll see that.

Thank you.

Thank you. Our next question comes from Mark Mahaney of RBC. Your line is open.

Great. Thanks a lot. I just want to ask a question about how -- if there's any change or evolution in thinking regarding shipping logistics in support of the direct goods business. Eric, as you've kind of done an overview of the Company is that something that you think about the pace and the amount of investment you want to put into that, what are you thinking about now? Just the overall pace and level of investment in the shipping and logistics. Thank you.

I'll start and then maybe Kal can talk a little bit about the details, some more thoughts in terms of distributor centers. The Goods business is a fantastic business and as Jason has mentioned historically, we have very high take-rates in Goods, but we also are unfortunately because the business is so young, this is only 18 month, 2-year-old business, we have very high costs. Our costs for fulfillment, distribution, warehousing, logistics, is still very high, disproportionately high relative to other large scale ecommerce companies.

And so we're very focused, and our consumer experience is still not up to par. We're still getting product in our consumers' hands and seven plus days very often instead of two to three to four, which has become much more standard. We're very focused on taking this amazing business, Goods, and operating in a way that's world class. Some of these investments that we're making, which fortunately for us aren't that big are all part of that process.

So like Eric said, the way to think about that is our warehouse fulfillment cost is like almost 2 times of what a scale e-commerce company would have. Definitely by focusing on (inaudible) and fulfillment, we will reduce costs. But more importantly, we'll improve customer experience by shipping the products to the customers in a much shorter timeframe. The beauty is the warehouse you've built would be complete cost out facilities, which will handle hundreds of SKUs, not storage facilities, which will have millions of SKUs. We will do it predominately like Eric said to improve the customer experience because that's the right thing to do. And it's a smart investment, which will benefit Groupon in the long term.

Thank you, Kal. Thank you, Eric.

Thank you, sir. Ladies and gentlemen, that does conclude our program for the evening. We'd like to thank you for your participation. You may disconnect your lines at this time. Have a great day.