Groupon Inc (GRPN) 2013 Q3 法說會逐字稿

Good day, everyone, and welcome to Groupon's third quarter 2013 financial results conference call.

(Operator instructions)

Today's conference call is being recorded. For opening remarks, I would like to turn the call over to the VP of FP&A and Investor Relations, Genny Konz. Please go ahead.

Hello, and welcome to our third quarter 2013 financial results conference call. On the call today are Eric Lefkofsky, CEO, and Jason Child, CFO. Kal Raman, our COO will be available for questions during the Q&A portion of the call. Following discussion and responses to your questions reflect management views as of today November 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. Groupon encourages investors to use this Investor Relations website, as a way of easily finding information about the Company. Groupon promptly makes available on this website, free of charge, the reports that the Company files or furnishes with the SEC, corporate governance information, and select press releases and social media postings.

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 of this call will be against our results for the comparable period of 2012. And now, I will turn the call over to Eric.

Thanks, Genny. In the third quarter, we delivered revenues toward the lower end of our guidance range, operating income at the high end of our range, and EPS above our range despite stronger than anticipated seasonal headwinds and pressure on our e-mail business. Gross billings growth of 10% year-over-year was driven by 20% growth in North America, and 12% growth in EMEA. Revenue growth of 5% year-over-year was driven by 24% growth in North America. Operating income excluding stock-based compensation and acquisition-related costs known as CSOI was $39 million, and adjusted EBITDA was $62 million in the quarter.

Let me start by reviewing the highlights. First for the quarter, billings in North America were $665 million, revenue was $361 million, and segment operating income was $25 million. The business continued to post strong year-over-year billings growth at 20%, despite pressure on our e-mail business as we continued the rollout of Pull. In original Daily Deal e-mail model, consumers needed to buy everything upfront, which meant our sales were front-loaded around newly-launched deals. In the new Pull marketplace model, customers can wait and buy deals closer to when they intend to actually use them. As Pull grows, we believe this timing effect has created some short-term pressure on our North American e-mail business. In addition, results were impacted by Q3 seasonality, and double-digit declines in e-mail open rates related to the new Gmail promotions tab that was rolled out earlier in the quarter.

Despite these pressures, our North American local business continued to see strong momentum. Local billings accelerated from 5% year-over-year growth in Q1 to 9% in Q2, to 13% this quarter. And revenue growth in local improved significantly, from a 5% decline in Q2, to 13% growth this quarter. Despite strong local performance, our goods business in North America went from 112% growth in Q2, to 28% this quarter, which reduced our overall growth from 30% in Q2, to 20% this quarter. Recall that Q3 of 2012 was the first quarter that our goods business was fully ramped up. By that time, we have roughly doubled the number of goods e-mails we were sending per week. As such, we are now comping a fully rolled out goods business, which is why the growth rates have decelerated.

Second, EMEA continued its turnaround this quarter, improving from an 8% year-over-year billings decline in Q1 to 4% growth in Q2, to 12% growth this quarter. Despite continued take-rate investments, we generated $148 million in revenues and $16 million in segment operating income in the quarter. Merchant and customer satisfaction showed continued improvement in many countries, and customer ads were positive after three quarters of decline. Third, we were pleased with our performance in Rest of the World in Q3. Our year-over-year billings decline improved from 21% in Q2, to13% this quarter. Revenues went from a 26% decline in Q2, to a 4% decline this quarter. And we reduced our Rest of World segment operating loss from $14 million in Q2 to $2 million in Q3.

Despite our progress, we have much work left to do. With improving results in Rest of World, we intend to begin making investments again in Asia and Latin America, in an effort to position those markets for growth. Our primary objective given how young those markets are, is not to maximize profits, but instead to drive sustainable growth. That is why today we announced an agreement to acquire Ticket Monster or TMON, one of the leading e-commerce sites in Korea, and one of the most impressive e-commerce companies in Asia. Not only has their growth been tremendous over the past three years, but they also share our vision, having built a truly mobile marketplace that is heavily reliant on organic traffic, with e-mail estimated to account for less than 10% of their sales, and a diverse product set across local, product, and travel. TMON will serve as the cornerstone of our Asian business, bringing scale and e-commerce expertise to that region. We are thrilled to have their incredibly talented team join our family.

Finally we made good progress on our key strategic initiatives, Mobile, Local, Pull, and One Playbook. First mobile, in Q3 we once again had record app downloads, as more than 9 million people downloaded our apps worldwide. We are now at over 60 million app downloads to date. In addition, we crossed the 50% threshold in September in North American transactions, which we believe makes us the first large-scale e-commerce Company in North America that is predominantly mobile. As a result going forward, we will report a global metric rather, than just a North American metric. In September, more than 40% of our transactions worldwide came through mobile.

While mobile purchasers are more engaged and tend to buy more than non-mobile purchasers on average, it takes almost 30% more time to get an app-only user to make their first purchase. So mobile users are presently worth more to us, but take longer to activate. Part of this is related to our Push notifications in mobile being less sophisticated than our e-mails. We also send less of them, and as a result have fewer opportunities in mobile to activate a customer. Given that our mobile growth has been so rapid, we are just starting to optimize mobile activations, and expect to gain greater parity with e-mail over time.

In addition, we continued to make improvements to our mobile app. Historically, when a user traveled to a new city the mobile app only presented deals from their city of origin, rather than from the city in which the user was actually in. And despite 1,000's of deals, the search box had been very hard to find, and not well-integrated into the user experience. With our newest app release, which came out just a few days ago, we have made great strides in addressing both, with a new search experience and the localization of deals.

Second, local, for us to succeed and for our mobile business to continue thrive, we need to get local right. First, we need the very best merchants choosing Groupon as the platform they want to use to promote their goods and services. In Q3, we continued to make progress on this front. Our MSAT score has never been higher, our re-feature rate continues to be strong. We continue to get record inbound increase from merchants that want to run a Groupon. And most importantly, 75% of our merchants in North America now opt to be featured on Groupon on an ongoing basis. It is no surprise our merchant community has never been stronger, given that among the 6 million customers we have now surveyed in North America, 60% are trying the merchant for the first time. We are a powerful force of new customer acquisition for local merchants.

Second, we need customers to have a great experience every time they buy a Groupon, While our CSAT is also at all-time highs, we are still plagued by too many customers that never get a chance to redeem their Groupon. We believe that unused Groupons are a drag on people's willingness to buy more, and represent one of the single biggest reasons that our customer spend is not rising faster. With the adoption of Pull, our average redemption time is dropping dramatically, which should promote overall redemption, and lower the barrier for our customers to make subsequent purchases.

Third, we need to make using Groupon as seamless as using a credit card. All of our efforts related to Groupon's operating system, both in payments and point of sale, are designed to create a world where our merchants are constantly connected to the Groupon platform, and redemption is frictionless for our customers. Over the next 12 to18 months, we intend to significantly increase the number of merchants that are connected to the Groupon platform. We hope to one day have millions of merchants plugged into Groupon at all times, thereby creating a local commerce network that our customers and merchants can access.

Next, Pull, let me start by providing an update on where I think we are on our journey to manage the turnaround, and fundamental shift of our business from Push or e-mail to Pull or search. Our vision is to make Groupon the place you start, when you want to buy just about anything, anywhere, anytime. We want people checking Groupon first before they buy something, because with the world's largest marketplace of deals, everything we offer is personalized to provide unbeatable value. Checking Groupon first, before they go out to eat. Checking Groupon first, when they are looking for an activity, or exploring a new part of the city, or trying a new hair salon. Checking Groupon first, before they buy a camera or a new watch or a mattress. Checking Groupon first, before they book a reservation or take a family trip. To get Pull right, we need to accomplish two seemingly simple, but in practice, very, complex things. One, increase supply, and two, increase demand.

Let's start with supply. At the end of Q3, our active deal count in North America exceeded 65,000 on average, a 65-fold increase over the last two years from roughly 1,000 deals at the time of our IPO. Type in teeth whitening in Dallas, or bowling in Chicago, or wine bar in New York, and up pops relevant deals around you, that can be purchased and used instantly. Over the next several quarters, we will continue to focus on growing our deal count to ensure that every search, in every category yields an acceptable result. To date, while supply has grown quickly, demand has taken longer to generate. Despite the continued progress we have made to reduce our reliance on direct e-mail, which remains under 40% of our total transactions in North America, we still have not created enough awareness in the market around Pull. The majority of our customers still have no idea they can come to Groupon and search and browse among our over 65,000 deals in real-time.

With the release of our new site which we unveiled a few days ago, we have taken a giant step forward in addressing this. We have now embedded search into the core user experience, with a prominent search box at the top of the page. The site has also been completely redesigned for the first time in over three years, with an entirely new and a personalized homepage and completely re-engineered category navigation. In addition to rethinking search, we have also added several new features. Our local business now has personalized widgets that build themes for our users, based on their preferences. In goods, we have added variations so our users can see different colors and styles, and a shopping cart, so they can finally purchase more than one item at a time. And in getaways, we have launched search capability that extends beyond our deals, to also include our market picks. So our users can now browse among thousands of hotels, and either find a deal or find the exact hotel they are looking for, and book their reservation on the spot.

Historically, Groupon grew by sending one or two deals a day to our customers via e-mail. Each day millions of people would open their e-mail, and given the time-sensitive nature of each deal, if they didn't act quickly, the deal would be gone. In a Push world, like most flash sale businesses, the sense of urgency is embedded in the very sale itself, and customers often tend to buy on impulse. We show you a deal, and you buy it, and hold it, often for months before you are ready to use it. This manifests in longer redemption cycles. While we still believe our push business offers unbeatable value to our customers through the curation of deals around them, and while we intend to improve this business over time, it has inherent limitations as do all flash sale models.

Pull shifts that paradigm. It is our answer to these limitations. Consumers no longer need to pre-buy Groupons or remember to use them. By checking Groupon first, when they are out and about, they can buy and use our deals in real-time. Not just in real-time, but on their time. In a Pull world, we believe customers come to the site with expectation of using their Groupon now or in the near future. This manifests in shorter redemption cycles. Since the beginning of the year, we have seen the percent of customers who redeem within 24 hours of purchase increase from 6% to over 12%. While these are positive signs indicating the progress we are making in Pull, this shifting mix has created what we anticipate is short-term pressure on our North American Daily Deal e-mail business. This with other factors, including the effects of the Gmail promotions tab and Q3 seasonality, negatively impacted our revenues in the quarter.

As more and more customers interact with us organically through our app, and as we drive continued awareness of Pull, we expect these pressures to be offset by the benefits of tapping into a whole new pool of demand, and creating a truly vibrant e-commerce marketplace. In September, roughly 6% of our total traffic in North America was related to search activity, with customers that search spending over 25% more than those that do not. These are two proxies that offer a glimpse of early progress. If we are successful, this should translate directly into increased customer spend over time.

And finally, I want to cover One Playbook, our initiative to bring our North American systems and processes of the rest of the world. One Playbook made continued strides in Q3, and I want to quickly provide a summary of our progress. Our roll out of SmartDeals continues, and we are working to optimize our personalization algorithms and other critical features, in order to increase relevancy in our largest markets. We are also in the midst of rolling out G2 overseas, which is the process by which we get merchants to put their deals in our marketplace, on an ongoing basis. Both of these are critical to obtaining the lift we have seen in North America. We also have now almost fully deployed the first version of our back-office sales and customer service tools and processes that fuel sales force efficiency. We are now sourcing merchants, scheduling deals, and managing the entire deal factory workflow in similar ways through all of our major markets worldwide.

Our work to integrate our many technology platforms also continues. Our North American and European platforms, which continue to make up the vast majority of our business globally are on track to be largely integrated over the next several quarters. With deployment of our new site, which was built on one standard proprietary framework, we are now in a position to speed up the integration of these systems, and our hope is to have most of our largest countries using our front-end design in 2014. We are just starting to see this work pay dividends. When you look at the progress we have made in both EMEA and Rest of World, it is clear we are on the right path. Now to discuss our results, I will turn the call over to Jason.

Thanks, Eric. With the details available in this afternoon's press release, I am 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. In summary, gross billings increased 10% to $1.34 billion. North America growth of 20% and EMEA growth of 12% was offset in part by a 13% decline in Rest of World. Sequentially gross billings decreased by $71 million, which we believe was driven by Q3 seasonal headwinds, as well as other factors including lower e-mail open rates related to the Gmail promotions tab, and the timing effects of Pull.

Revenue increased 5% to $595 million. North America growth of 24% was offset by a 21% decline in EMEA, and a 4% decline in Rest of World. EMEA revenues were impacted by continued take-rate investments as we focused on quality and the growth of the business. Also, recall that EMEA revenues and profitability in last year's third quarter reflected an $18.5 million true-up of breakage, driven by a tax ruling in Germany. Excluding this, revenues would have declined 12%. Sequentially as a result of seasonality, global revenues declined $14 million, with growth in goods and travel more than offset by the local decline.

Gross profit decreased by 7%, compared with both the prior year and prior quarter to $360 million, reflecting a slight mix shift towards the goods business. Within North America, gross profit increased 7%, low relative to 24% revenue growth due to a greater mix of direct revenue. Operating income excluding stock-based compensation and acquisition-related costs was $39 million, declining $11 million year-over-year. As I mentioned a moment ago, year-over-year compares for gross profit and operating income also reflect the $18.5 million breakage true-up in EMEA in last year's third quarter. Sequentially, segment operating income declines in North America and EMEA more than offset improvement in Rest of World, which generated a loss of only $2 million.

Adjusted EBITDA, defined as net income or loss excluding income taxes, interest, and other nonoperating items, depreciation and amortization, stock-based compensation and acquisition-related costs was $62 million in the quarter, decreasing year-over-year by $3 million and sequentially by $18 million. GAAP loss per share was $0.00, and EPS excluding stock compensation and acquisition-related costs net of tax was positive $0.02. Operating cash flow for the trailing 12 months ended September 30, 2013 was $106 million. Trailing 12 month free cash flow, calculated as trailing 12 month operating cash flow less CapEx and capitalized software was $22 million. For the quarter, free cash flow was negative $27 million. Working capital was the biggest factor in the cash flow decline, due to seasonality of the business and related timing of merchant payments.

As of September 30, we had $1.1 billion in cash and cash equivalents. And finally, we repurchased 770,900 shares of Class A common stock in the quarter at an average price of $11.67 per share, for an aggregate purchase price of $9 million. Approximately 291 million of Class A stock remains available for repurchase under our existing share repurchase authorization, which will expire in August 2015. The timing and amount of any repurchases will continue to be determined based on market conditions, share price and other factors. The program is intended to offset dilution from employee stock grants.

Turning to our four key non-financial metrics. Total units, defined as vouchers and products sold before cancellations and refunds, increased 9% year-over-year to 46 million units. North American units increased 19%. EMEA increased 1% and Rest of World was about flat. Our net active customers increased in the quarter 10% to 43.5 million worldwide. Our North American active customer count was 19.9 million. For EMEA, it was 14 million, and for the Rest of World, was 9.6 million. Trailing 12 month billings per average active customer was $137. Sequentially, customer spend was about flat, with North America down $1.00 to $1.55. EMEA, up $2.00 to $137, and Rest of World down $6.00 to $102.

While the TTM metric is a good long-term indicator of wallet share, it combines the effects over four quarters. In the case of Rest of World, the lapping of a strong quarter outweighed the sequential growth we saw in Q3. Looking at the metric on one quarter basis provides a different result, with sequential lift from $23 to $24. Active deals, including merchants featured in our Pull marketplace, were estimated to be more than 65,000 on average in North America, compared to over 54,000 at the end of the second quarter. Keep in mind that active deal counts will fluctuate with the continued evolution of the business.

Now I am going to speak to the highlights of our categories. Local gross billings, which is made up of local and live, increased 6% to $728 million, with continued growth in customers and active deals. All segments accelerated or improved, with North America accelerating to 13% growth. EMEA flipping from declines to a13% growth, and Rest of World declines slowing to 18%. Local gross profit was about flat year-over-year at $264 million, with billings growth offset by investments in take-rate. Sequentially, gross profit decreased 9%. Goods gross billings increased 18% year-over-year to $443 million, reflecting the lapping of a difficult comp when the business first fully ramped. Sequentially, billings increased 1%.

Goods billings mix in North America continues to be weighted heavily toward direct and recorded on a gross revenue basis, compared to the mix of our international markets where the inverse is true. The mix of direct began to increase in the quarter, as we made progress building out our supply chain infrastructure internationally, and we expect it to increase further going forward. Goods billings growth was more than offset by higher costs related to the growth of the direct business, as well as take-rate reductions resulting in a 29% year-over-year decrease in gross profit to $63 million. Goods gross profit was about flat quarter-over-quarter.

In the third quarter, goods gross margins based on gross profit as a percent of goods gross billings were 14% globally, 11% in North America, 17% in EMEA, and 15% Rest of World. North America margins remain lower than our international markets, reflecting a greater mix of direct which includes shipping and infrastructure costs that are still too high. I will come back to this in a moment. Also recall that North America margins in the second quarter were favorably impacted by a 300 basis point one-time credit related to third-party freight costs. Taking this into account, gross margins in North America were about flat quarter over quarter. Like last quarter, EMEA gross margins reflect 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, I want to build on my comments regarding our opportunity to improve goods margins. As I mentioned, shipping and infrastructure continues to be our largest cost related to goods, second only to the cost of the actual inventory. Today our costs remain up to 2x higher, than what many other e-commerce companies spend in this area. By creating better and more efficient processes, we have an opportunity to not only improve our cost structure, but to also enhance our overall customer experience.

Later this month, we plan to open our first warehouse in Kentucky. Unlike other e-commerce companies that have large warehouses designed to hold a wide selection of inventory for relatively long periods of time, our facility in Kentucky will largely be a [cross-docs] center to mostly hold products while they are in transit to the customer. Our capital investment related to the Kentucky warehouse is approximately $5 million. This strategy will enable us to improve our gross and operating margins, while at the same time significantly reducing our delivery times.

Second, I want to build on Eric's comments regarding today's announcement that we have agreed to acquire TMON from Living Social. Our agreement is for a total purchase price of $260 million, including at least $100 million in cash and up to $160 million in Groupon Class A common stock, with the final cash and stock allocation to be determined upon close. TMON is a well-established e-commerce operation in one of the largest e-commerce markets of the world. We look forward to applying their best practices to our Rest of World operations, as we drive improved growth in that segment. TMON has consistently seen year-over-year billings growth in excess of 50%, and has annual billings of more than $800 million today. We are in the process of integration planning right now, and we will provide an update on the financial impacts of the transaction including any potential synergies upon close. We currently anticipate the transaction to close in the first half of 2014, subject to regulatory approval and other customary closing conditions.

Finally turning to our outlook. In the fourth quarter, we expect continued e-mail headwinds and investment in marketing initiatives to drive adoption of the Pull marketplace. In addition, we expect normal seasonal strength, as customer's prepare for the holiday season. As such, for the fourth quarter of 2013, we expect revenue of between $690 million and $740 million, operating income excluding stock-based compensation and acquisition-related expenses of between $40 million and $60 million, and EPS excluding stock-based compensation and acquisition-related expenses net of tax of between $0.00 and $0.02.

We estimate that stock compensation will be approximately $30 million for Q4, or approximately $20 million net of tax. Our guidance includes costs that we'll incur in Q4 related to the diligence for the Ticket Monster acquisition. There are no other known financial impacts of the transaction at this time. As a result, we are now expecting GAAP operating income for the full year of between $72 million and $92 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 fluctuation. With that, I will turn the call back to Eric.

Thanks, Jason. Despite the challenges that come with transition, we made significant progress in the last 90 days. We have launched an entirely new website and new mobile app. We set new quarterly records with 9 million app downloads, and crossed the 50% threshold for mobile transactions in North America. We accelerated growth in EMEA, and reduced our losses in Rest of World. We returned our local business to double-digit year-over-year billings growth once again in North America. We delivered long-awaited features in goods and getaways, and we expanded our active [Gill] count in North America to over 65,000. Perhaps most importantly, we began to see the first signs that consumers are rethinking their image of Groupon, from a flash sales company to a full mobile commerce market place.

Consumers are carrying around a virtual shopping mall in their pocket, and we want them starting with Groupon, checking Groupon first, because we offer unbeatable deals that they should explore before they make a purchase. It is a big ambition, to become a starting point for mobile commerce. An ambition we believe we can achieve by virtue of our local roots. We allow our customers to interact with their surroundings in ways others don't or can't, making purchasing more relevant, more personalized, more immediate, more efficient. As a result, we have a significant opportunity ahead of us. We owe it to our employees, our stockholders, our customers, and our merchants to stay singularly focused on executing against our strategy. And with that, let's take some questions.

(Operator Instructions)

Our first question comes from the line of Justin Post from Bank of America Merrill Lynch.

Thank you for taking my question. A couple questions, the mobile downloads -- by the way, this is Paul for Justin, apologies. The mobile downloads were very strong in the quarter, but unit growth decelerated significantly.

What do you see in terms of engagement or purchase activity from your Groupon users? I was hoping you could parse out, perhaps a little bit more in detail the issues with Google versus the seasonality? And then just a clarification on the Google Gmail issues that you mentioned, were those declines year-over-year or quarter-over-quarter? Thank you.

So there is a lot there. Let me start with -- it is Eric by the way, let me start with the mobile piece. So we did have a record downloads in the quarter, we had 7 million downloads in Q1. We had 7.5 million in Q2, which accelerated to 9 million in Q3.

And what we've seen with mobile -- the big story of mobile this quarter is not just that we had record downloads, but also that for the first time we crossed the 50% threshold in North America, which probably makes us one of the largest e-commerce companies in North America that is predominantly mobile. And as a result, we began quoting a global statistic, and I have said that 40% of our global revenues are from mobile.

But what we have seen with mobile is that, despite the fact that mobile customers spend more, and they spend it -- they spend significantly more. They take longer to activate, roughly 30% longer to activate. And the reason for this is in part because if you think about our e-mail business, our current push business is very sophisticated.

We send a couple of e-mails a day, we are one of the largest e-mailers in the world. It is highly visual, we have gotten very good at it, built a bunch of technology around e-mail. And the adoption of mobile has been so extreme and so recent that we have yet to become as sophisticated in mobile as we are in e-mail.

We send one push notification today, instead of multiple, and we just don't have the same kind of relevancy sophistication that we have on the email side. As we build that out over the next several quarters, we hope to gain parity over time. And so that is the reason why even though people are downloading our app like crazy, it is not translating into the new unit growth. The unit growth is actually kind of parallels, it is much closer our billings growth.

Your second question I think was predominantly, what led to -- we were within our guidance but toward lower end of revenue, and how does Gmail and that impact stack up against seasonality and pull? And basically, you have three factors that led to the revenue that we delivered this quarter. And the first is that there is natural seasonality, so and this year we actually had less seasonality than we had in 2012. We actually had less of an adverse effect.

The seasonality as we mentioned historically, is predominantly driven by the fact that e-mail albeit less than 40% of our revenue, is still a significant part of our revenue. And that Daily Deal e-mail business is really subscriber-oriented. So you subscribe to a city and then you get deals for that city. And in the summer months people are traveling. So if I am a subscriber to Chicago, and I am traveling to Boston or Los Angeles or whatever I am consistently getting deals for the city that I subscribe to. And so we have seen at Groupon over the last several years, some natural seasonality pressure in Q3. This particular -- but what we obviously knew that was coming in Q2.

So the additional headwind related to this quarter was predominantly on the e-mail side. And it was driven by two things, first Gmail did make a change or Google made a change to their Gmail product at the beginning of the quarter, where they basically took all the large e-mailers like us and moved our e-mails into this new promotions tab. And while that has not been a huge material effect, it did have an effect on our open rates, and it is part of the story.

The second part is related to the fact that we are just starting to see the first signs that people are actually embracing pull. And one of the good pieces with embracing pull, is that our redemption cycles are compressing. So in the old model, we would send you a deal, you would buy it, and you would often redeem a month or two or three months later. Now because we have these 65,000 deals in our marketplace and people are now browsing and searching, they are actually buying deals and using them in real-time. And so, we have seen our same-day redemption over the last 90 days or so actually double from about 6% to 12%.

Which means that people are basically browsing and buying in real-time, which is good long-term, I believe it is good long-term. But it does create some short-term pressure because it -- you were front-loading revenues in the older model. And so we saw some of that in Q3, and it is obviously baked into our expectations for Q4. Did I miss any part of the question?

No, I think you got everything. Just were the double-digit declines year-over-year or quarter-over quarter?

They were slight double -- I don't want to -- there is the implication that it was like a 90% decline, it wasn't. It was low double-digit declines, and it was quarter-over-quarter.

Okay, thanks a lot.

Thank you. And our next question comes from the line of Ross Sandler from Deutsche Bank.

I just had three quick ones. I will just ask them real quick and then go back into the queue. Eric, the ungating of the website in the new version this seems like a pretty watershed moment for the Pull strategy. So how does this impact Groupon's ability to increase selection and potentially grow billings into 4Q in 2014 from here? How do you train users to go to the website and keep returning to it instead of looking for e-mails?

And then, Jason, the CSOI to billings margin or segment margins for North America was down a little bit more than the prior trajectory, either on a year-on-year or a quarter-on-quarter basis, and the take rates were relatively stable. So can you just give us a little color on what is driving that deleverage at the e-mail issue? And then why is the fourth quarter CSOI lower than your previous thinking?

And then the last question is, the TMON deal, cash and stocks, so is Living Social now a major shareholder in Groupon? Or are those shares going to be set aside for -- instead of compensation for TMON management? Thanks.

Okay, so I will start, we will do a bit of a round-robin. So the first is -- Ross, you are kind of stealing a bit of a potential press release that we might send out in a few weeks. So you are obviously in a test bucket, which is why you are seeing an ungated site, but that is okay. Nonetheless, we can discuss it.

So we have been testing ungating the site to a small user population. At the moment at which we decide to fully ungate the site, should we make that decision, then we will announce it. We tend not to announce stuff until it fully rolls out. But ungating the site and building the marketplace we have been building -- if you think about the kind of core necessary ingredients to having a vibrant mobile commerce marketplace, I think there is really two huge things.

You have to get -- first, you have to get mobile right. You have to get people embracing your mobile product, which means they are not only downloading your app, they are also transacting through mobile. And then you have to get enough inventory, enough supply in the current system that you have something for them to search. And you have to get the whole search product right.

So we have been spending a lot of our time on that. And we now feel like with the launch of the new site that is only about a week old, we finally feel like we have a product both in web and mobile, and the inventory is at a sufficient level that we are ready to kind of jump in with both feet.

And part of that could be that we ungate the site and no longer force people to become subscribers, which means anyone can just come to our site, browse a deal, and buy it. And so, yes, it is -- it would be a watershed moment, and we are testing it now. And at some point, we will roll it out.

And then the last part of your question I think was, how are we driving awareness? We are doing all kinds of things to drive awareness for our new marketplace. Certainly, we are using one of the core assets we have, which is e-mail. We have begun -- just begun promoting our marketplace in e-mail. People can see a variety of deals. If you look at the homepage of our website now, we have built these kind of personalized widgets that have these different categories in them, so people can search for health and beauty or food and drink, not just one deal but many deals. We have begun to do that.

And we also obviously are starting to test some really interesting campaigns, like the Starbucks campaign, that we have been running for the last two days, which was a really interesting campaign. Because it was the first time that we didn't send an e-mail or promote a deal. We simply promoted a brand that you had to come find, by coming to our site and searching. And so the only way you could get the Starbucks deal, which has sold over 1 million units, is you had to basically come to search, type in Starbucks, and pull down the deal. And we will continue to do things like that to drive awareness.

On the question about the CSOI to billings, the degradation versus what you saw in the previous quarter. So first, the first portion or the largest portion is really mostly due to mix shift. So on a global basis, local which is obviously much higher margin was about 57% of the total billings basis and about 31% in goods and about 12% or so in travel. That flipped in Q3 to actually local down from 57% down to about 54%. And so that certainly is a large driver of -- for Q3, and part of our expectation for Q4 as well.

But we also had -- or the second piece was marketing initiatives, which is, we have talked a lot about the different marketing programs we have. And you have what -- you have, of course, the largest portion that is actually in the marketing P&L line of roughly $50 million. Then you have this stuff, that we call market initiatives that are not actually in the marketing expense line. And so that includes order discounts to entice new customer activation and free shipping. And those two things in particular, we actually increased spend on those initiatives by about $11 million quarter-on-quarter.

We expect we will continue to make those investments. Free shipping to drive the goods business, and of course, order discounts, and other take-rate investments to try to drive the pull business.

And just to clean up -- to hit the third part of your question, which was the TMON consideration. So the TMON consideration was $260 million. And the way it worked is, it is at least $100 million of cash, and up to $160 million of stock. And we will make that decision as we get closer to closing, and so it may be less than $160 million of stock they ultimately get.

We, it represents, obviously, as you know a very small percentage of our float. And I do not have any idea if they intend to hold our stock, or sell it, or distribute it to their investors. They have raised quite a bit of money over the past four years, and they may decide to distribute that stock to their investors. We just have no idea.

Thank you. And our next question comes from the line of Scott Devitt from Morgan Stanley.

Hi, I had a few. As you have expanded Deal Bank in North America, it has opened up Google distribution. It would be useful if you could talk about how search is progressing off platform, both SEO and SEM as contributors to pull?

Secondly, Eric, you noted 2014 as the year that One Playbook brings the full platform to EMEA. And I was just wondering if you could discuss where you are on deal count in pull, as a percentage of activity internationally now? And when in 2014 you expect to see noticeable changes in that area like you experienced in North America as you transition the platform in markets outside the US?

And then finally, on the Ticket Monster deal, could you talk a little bit more in terms of how that fits with the strategy of One Playbook, and cleaning up international, the rationale for paying all cash, and whether or not it was a competitive process? Thanks.

Yes, so let me start with SEO and SEM. So -- and this is somewhat surprising, but we talk about certain things, it is hard to realize that Groupon is only five years old. So sometimes we say, some of the stuff and people they honestly do not believe it. Like for example, when we actually announced that we just recently deployed a shopping cart. And people feel a little bit like, I can't believe you would announce that. But it is true, up until now we didn't have a shopping cart. And so, if you wanted to buy two Groupon goods, you would have to basically buy one, and then go check in again and buy another.

Well, on the SEO SEM side, which is for those that don't know it, it is search engine optimization or marketing, our site up until this recent redesign was largely un-crawlable by Google. And so, with this new design that came out, we also fixed the backend. We had a bunch of technical debt that had been built up over the early years of Groupon by virtue of how fast we grew. And so we are seeing some really interesting signs of Google now being able to crawl our site and search our site.

And so we intend to invest heavily in SEO and SEM. We would like over time that they basically guide -- that they basically are as big a part of our revenue as they are for other large e-commerce companies, which we are highly under-correlated to that today. It is still single-digits for us, it is although growing, and we intend to invest heavily in it. And on the One Playbook, I will turn it over to Kal.

Yes, like as we are notified in the script here, we are making significant progress in rolling out our technology for Subplay, which is predominantly the tools for the sales force and operational teams. We are pretty well done with most of the big countries in Europe. And we are right now in the process of fine-tuning the demand, which is our small deals algorithms

And we are making phenomenal progress, and the progress could be seen in numbers, as we noted in EMEA has turned around in billings from a negative 8% in Q1 to positive 4% to positive 12% And it is not only helping with our business, the growth in numbers as our customer satisfaction and merchant satisfaction has continued to raise, while the business remains very profitable.

So in terms of deal count, we do have tens of thousands of deals in EMEA. And that deal count is growing very rapidly as we talked. And sometime in 2014, this whole strategy of One Playbook, which enables us to advance from a Daily Deal business to a full marketplace would be eminently feasible in EMEA, and we are making fantastic progress in that.

And in terms of the TMON consideration, so they actually -- it was a competitive process. There were multiple bidders, and we were fortunate to be able to win and they actually wanted some of our stock. It was a negotiated point. So, again, I do not know if their intention is to distribute some of that stock to their investors who might want it. I do not have any idea.

But we, it certainly is a small enough percent for us, that if it allowed us to win this asset that we very much wanted, because it really is -- it was important for strategically, we were okay with giving them a small amount of stock.

And then the next question on TMON, is it going to distract from the progress we are making just so far. And the rest of the world is all about healthy. As you could see, we have been pretty heads-down focused on stemming the losses by making sure that we are cutting out unprofitable cities, unsustainable categories so on and so forth. So you could see the results we have accomplished in Q3, where we have in a big way reduced the operating losses there.

And the One Playbook rollout is happening just as we talked. Like I told you in the prior calls, it is a work of multiple quarters, we are in the right direction, and it will be bumpy. But we are very pleased with the progress we have made in the rollout of One Playbook. And we believe TMON is not going to distract us. As a matter fact, TMON is going to provide us a lot more scale and opportunity to make the rest of the world a growing thriving business for us.

Scott, just one more thing I want to throw on too is -- the other thing to know about TMON is -- of course, the deal is not closed, and so I can't speak to the full financial impact until it is closed. However, based on the financials that we have been presented with, we did disclose that they have over $800 million in annualized billings, but they have also indicated that they are about breakeven on an adjusted EBITDA basis. And so that is certainly an indication that from an operational perspective, there is certainly many things to potentially learn from what they doing.

Thanks.

(Operator Instructions)

Our next question comes from the line of Eric Sheridan from UBS.

Yes, hi. So one question. Looking at the number for the app downloads, you are at 60 million app downloads now, but only 43 million customers. I think you have talked a little bit about it on the call, Eric, but just understanding longer-term over the next year or two, how you can close that gap and whether it might mean marketing spend of an offline nature to drive the Groupon brand? Or acknowledgment that there is pull, because I think as you also said on the call that you still suffer a little bit from a lack of awareness that you've moved to being a pull company in the marketplace? Thanks.

Yes, I mean, I tell you what is interesting is that we have over 200 million subscribers worldwide and 60 million app downloads. So the first thing to think about is that our app downloads -- we hope they will continue to grow because we are not yet at parity, there is still an enormous number of people that have subscribed to get our e-mail that don't get our -- have not downloaded our app.

And what we clearly have to do, and we have talked about it is we have to infuse technology in this process, so that we are eventually sending push notifications and using incentives intelligently to get people to make that first purchase on mobile. We also have to increase awareness, so that people realize that when they are out and about, they should be starting with Groupon. They should be opening up that app and saying, if we are looking to get some lunch somewhere, let me start with Groupon and see what is nearby. If my TV broke and I am walking down an aisle, let me see if Groupon has a TV that they are selling on goods at an amazing price. So part of it is awareness, part of it is technology, and we are making significant investments in both.

Thank you. And our next question comes from the line of Arvind Bhatia from Sterne Agee.

Thank you. A couple of questions. First one is, I was wondering what your guidance for the fourth quarter implies for local billings and goods billings, relative to the growth that you saw, the acceleration you saw recently. And then the 6% of total traffic in North America coming from search, how does that -- how is it broken out between mobile and desktop?

I will go ahead and take the first question, this is Jason. So on the Q4 guidance, we don't, of course, we don't give guidance on the segments or on the channels. But you could assume that much like you saw last year in Q4, goods is a much more seasonal category, more so than local. So you should probably assume that, much like how you saw the mix shift a bit more and skew a bit more towards goods in Q4 last year, you should -- I assume probably see something similar like that.

And then in terms of your second question which is, how does the 6% breakdown? So first of all, I want to just clarify for a moment that this metric we are providing, we consider to be kind of like core nucleus of how you should think about pull. What this metric is, it's people who come into the search box in Groupon either on our site or on our mobile app, and type in something with -- obviously with intent to buy.

So we provide that metric, which is 6% of our transactions are driven through that search box. Then we tell you basically how much more these people are currently spending, albeit it is a rough range, it is not an exact number. We say they spend more than 25% more. So over time, what this should translate into is increased customer spend, right?

That if search becomes a bigger part of our business, if they continue to spend more, which we believe they will, then that total customer spend is going to grow. This does not include volume we drive from SEO or SEM, because if somebody goes into Google search box and types in Chicago spa and lands on a deal page and makes a purchase, we don't include that in this number. And in terms of the breakdown between mobile and web, we don't disclose that. But we have told you that more than half of our business is mobile, and you should assume that the traffic coming to us into the search box is broken down roughly in that same proportion.

Great. Thank you.

Thank you. And our next question comes from the line of Heath Terry from Goldman Sachs.

Great. Thank you very much. Eric, curious, was there any commonality to the deals that you are seeing that are really driving this reacceleration in the local business? Whether it is the type of merchant, the type of offer, the channel that they are coming through that is worth noting?

And to the SEM question that you touched on, once you feel like the site is fully optimized and with the new design and more persistent deals, how meaningful do you expect transactional marketing to become? And what kind of ROI would you be looking for on that?

So let's start with a -- I will start with the merchant piece and what is driving some of that local acceleration. I think in general, the quality of merchants that we have been adding to the platform has been pretty high, but still has a long way to go. And we are up to over 65,000 merchants, but we still are very unsophisticated in our approach to the market. We still are very much rooted in -- most things are half off and our margin structure is very similar, and you can kind of see that.

And over time, granted we are only five years old, but over time we have to get more sophisticated in terms of what should our discount rate be, how do we use margin as a lever to consistently drive the very best merchants coming on to the platform. And so you see us quarter after quarter, we sometimes play with these dials a little bit, and we are effectively trying to find ways to get better merchants on the platform.

I think for pull to really thrive long-term, we need to have way more merchants on the platform. So you are going to see us over the next several years, I think get very focused o,n how do we make the Groupon platform a solution for every merchant?

Some merchants are just too full, they have too many customers to offer stuff at 50% off. Maybe we can get them to offer products at 20% off or 30% off. And we want them on the platform too. We want -- if we are going to be the starting point for mobile commerce, we need people to be able to type in just about anything and get a relevant search result, so we are very focused on that.

Let me add a point to that, like we have a -- we are perfecting a scientific technology called Quantum Lead, which basically tells us where our customers are, where our mobile users are, where our e-mail subscribers are. And that pretty much dictates exactly what the next need from our customer would look like. And that technology is kind of a self-learning, self-collecting (inaudible) control system, which gets better with the human input and the browser type behavior.

And we are fine-tuning that. It has been nine months old in the renters space, and we have just rolled it out in EMEA. As we continue to fine-tune the self-learning, self-collecting app control system, we expect our ability to target high quality merchants would be even better. And we are also simultaneously building technologies where we can get merchants to call in to Groupon or do self-service to introduce their services to Groupon customers. And we have just rolled it out in the central states and we are making progress, and we will see the benefits of this in the US this year, and we'll get more benefit out of it in international next year.

And your second question, in terms of the ROI of our transactional marketing spend. The thing about our transactional marketing spend as we have said in the past few quarters, it is very young. We just started jumping into this a few quarters ago as we began trying to understand how to get good at transactional marketing. And it is a very tricky thing when you are tackling local, because at the end of the day it is much easier to drive transactional marketing when you are picking from a limited SKU set where you have got a lot of searches occurring. And they are not diffracted into that long tail.

Local is by its very nature, a long tail. People tend not to search pizza, they tend to search pizza by either a zip or by a very specific neighborhood. And so it is a little harder to do well and to kind of find an economic model on the SEM side. The good news is that we have got a fantastic team in Seattle that is been cranking away at it, and we make progress every quarter. And we believe that at some point in time, it will become a meaningful part of our business. It continues to grow, and we look forward to the day when it represents the kind of percent of our business that it does for other larger e-commerce companies.

Great. Thank you very much.

Thank you. And our next question is from the line of Gene Munster from Piper Jaffray.

Hi, good afternoon. If we could just -- I know this question has been asked a couple ways, but just take a step back and say, what we are trying to do is really build the search, the marketplace for deals can -- two questions, one is on the marketing side, how are you going to build that? Is there going to be any sort of campaign out there to build awareness?

And separately, as you think about why the deal density is not going up faster, can you give us some indications of what the sticking points are with merchants, that might ease in the future to try to get some of the deal density to accelerate? Thanks.

No problem. So the first part is, how are we going to market this new marketplace? We -- it has been asked a few times. And so, I think way to think about it is, we have an inherent advantage that many other companies don't have. And that is when we want to market a new product, we get to send basically two e-mails a day to our inherent customer base, which is over 200 million subscribers worldwide and promote something. Now when we promote it, it does take some shelf space from the other things we could have promoted that day, and so we have to be careful. But you will see us over time using e-mail as a lever to promote pull.

Number two, we intend to market it in other conventional ways, we intend to basically drive awareness. The Starbucks campaign was one way to drive awareness and we will use others. We do not have any huge TV campaigns planned, but you should see us over time get more and more aggressive at driving the awareness of pull.

But it is a brand-new product for us in terms of the website and redesign. It is a pretty new product in terms of its infrastructure, and so we are just kind of evaluating how hard to market it quarter by quarter. And in terms of deal density, we -- for us, the issue -- I get asked this question all the time, which is, what's the right number of deals and why don't you have more deals? And at the present moment in our largest markets, we have significant inventory in all of our main categories. You go type in pizza in Chicago, or yoga class in New York, and you will see a wide array of deals.

The challenge is, it is not just about getting more deals for the sake of getting more deals. It is often about getting the best deals so that people get results that are really -- there is really great inventory in all of these neighborhoods and subdivisions and zips. And it is also about looking at search queries and figuring out where are you not in stock? And for Groupon, this is an entirely new methodology. We -- our roots are Daily Deal, they are e-mail.

We are just building the infrastructure to behave like a real e-commerce company, where you can look at your traffic and look at your searches, and say, I need to have inventory in this category. I need to have Thai food in Atlanta, when maybe in the e-mail business we don't need that, but we are getting a lot of search queries. And so we are building all those systems right now. We are fortunate that we have an unbelievable team that has expertise in these areas, and we are building out these systems, and so will see inventory grow over time but grow intelligently.

Yes, let me add a quick statistic. As you saw in the press release and the script, our active deals are now at 65,000 or more. And the beauty is 75% of our merchants want to be active in Groupon year in and year out. And our active deal count in international, like I answered in the prior question is in tens of thousands and it is growing rapidly.

Now we are building technology which is going to tell us in a very laser-focused way on where to get a deal based on a customer search, customer need, and a subscriber hit map. And this is a first-time, nobody has built a local market base, and Groupon is building a category, not a business. And we are inventing our way into giving a great customer experience, while doing it in a way that they are profitable and good for our merchants.

Thank you.

Thank you. And we have time for one more question. Our final question comes from the line of Mark Mahaney from RBC Capital Markets

Thanks, quick question. Eric, you talked earlier about material increase in the number merchants on the Groupon platform. We have done our own survey, where it seems like merchant satisfaction is pretty high, there should be pretty broad awareness. So why do you think there aren't enough merchants on the platform, or how do you do that? Why do you need to do it and why do you need to materially increase given that satisfaction levels and how do you do it?

So we are fortunate that our merchant satisfaction is extremely high and our customer satisfaction, our CSAT scores are even higher. The issue is, you have to get the supply/demand balance right. And at the present moment, we have gone from 1,000 merchants on the platform at the time we went public to now are over 65,000 in North America alone today. And you do run the risk -- if we just flood supply too quickly, you run the risk that merchants are getting too few orders.

And we are just way ahead of our skis, in terms of supply. So you have to have demand that is moving forward and gaining momentum at roughly the same pace or at an appropriate pace. And we are getting -- we still get record inbound increase from people that want to run on Groupon. If we just let them all on the platform, that 65,000 number would skyrocket.

We get 20,000, 30,000 a month of people who reach out to us in North America alone and say, I would like to run a deal. So it is not just about opening it up and letting everybody on the platform. Again, it is the right merchants, and it is balancing it with customer awareness so that the ecosystem is basically working. And it becomes this kind of network effect, where it just builds upon itself.

Let me just add a point here. We are not only trying to build a marketplace with lots of merchants, we are trying to build a demand rate to marketplace. We are basically selling the demand we get from our customers, both from our mobile application and through the pull transition. And that is reason why the 65,000 - and the 65,000 like Eric said, we could make it a much bigger number, if we just add them arbitrarily, but we are trying to do it in a very laser-focused, scientific way to provide a great customer experience, and to make sure that our merchants are happy and the MSAT scores remains as high as it is today.

Thank you.

Thank you. We have run out of time for questions. This does conclude our conference for today. We thank you for your participation and you may now disconnect. Everyone, have a good evening.