Groupon Inc (GRPN) 2013 Q4 法說會逐字稿

Good day, everyone, and welcome to Groupon's fourth quarter and full-year 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 call is being recorded.

For opening remarks I would like to turn the call over to VP of FPMA and Investor Relations, Genny Konz. Please go ahead.

Hello and welcome to our fourth quarter and full-year 2013 financial result 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.

The following discussion and responses to your questions reflect management's views as of today, February 20, 2014 only and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial result is included in today's press release and in our filings with the SEC, including our Form 10-K.

Groupon encourages investors to use its 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'll 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 will turn the call over to Eric.

Thanks, Genny. In the fourth quarter, we delivered record billings and revenue, consolidated segment operating income of $48 million, and non-GAAP EPS of positive $0.04. Gross billings increased 5% to $1.6 billion for the quarter and increased 7% to $5.8 billion for the full year.

Revenue increased 20% to $768 million for the quarter and increased 10% to $2.6 billion for the full year. Adjusted EBITDA was $72 million for the quarter and $287 million for the full year. And finally for the full year, we delivered consolidated segment operating income of $197 million and non-GAAP EPS of $0.11. Jason will cover the numbers in further detail. Let me start by reviewing the highlights.

First, North America posted another strong quarter. Billings in North America grew 10% to $789 million, revenue grew 18% to $444 million, and segment operating income improved from $17 million in Q4 of 2012 to $26 million this quarter. The main takeaway here is how significantly our take rate improved on a year-over-year basis. Late in 2012 as you may recall, we tested a campaign where we dramatically reduced margins to drive billing.

We overshot those efforts, which drove significant short-term billings but reduced our operating income too aggressively. This effect was most acutely felt in Local, where billings were up 2% year-over-year compared with 13% last quarter. So why did Local growth in North America decelerate? After two quarters in a row of accelerating growth, the deceleration we saw in Q4 was directly related to the tough comp. As we stabilized margins in 2013 versus Q4 of 2012, when we were chasing billings growth without restraint.

Growth in North of North America was also compressed by our transformation to Pull, our marketplace of deals, which has cannibalized part of our daily deal e-mails as people are buying more Groupons just before they intend to use them. As I'll discuss in a minute. At the same time our value proposition has never been stronger. We had the highest unit demand we've ever seen and a record number of deals in our platform.

Our Goods business posted strong growth in North America given the seasonally strong period with billings increasing 19% and revenue increasing 21%. The momentum was so strong that our distribution centers were flooded with orders during this holiday season, as we had record sales on Black Friday and Cyber Monday.

In addition to Goods, our travel business continued to post strong growth in North America. Getaways billings increased 38% in the quarter to $66 million and increased 46% for the full year to $264 million. We believe Getaways has the potential to become a multi-billion dollar global business over time. Given the advantages we offer in terms of unbeatable pricing and curated inventory, which will include same night hotel deals for our Mobile audience.

Second, EMEA posted its best quarter ever on a number of fronts. Billings increased 6% for the quarter to a record $566 million, in part due to an acceleration of our Local business. Revenue growth flipped to positive after five quarters in a row of declines, growing 43% to a record $251 million, aided in part by a mix shift in more direct revenue.

In addition, we generated $37 million in segment operating income in the quarter, up from $9 million in the fourth quarter of 2012. The improvement in EMEA is a result of over a year of hard work on One Playbook. Where our investments in people, processes, and systems are now firmly taking hold. Third, we saw mixed results in Rest of World in Q4.

Our year-over-year billings decline slowed from 21% in Q2, to 13% in Q3, to 11% this quarter. A large portion of which was currency related. As a result of take rates returning to historic levels, our Rest of World revenue decline went from 4% in Q3 to 15%. And the segment operating loss went from $2 million in Q3 back to $15 million.

I think it's important to understand what's driving this decline. First, note that excluding FX, billings only declined 2% a sign that our Asian and Latin American businesses have largely stabilized from a transactional perspective.

Second, we reduced our investment in unprofitable cities and sub-categories of deals roughly a year ago, which also hurt our growth rate. Two key initiatives will reverse this decline over time with the good progress we've made in EMEA, we will accelerate our focus on One Playbook and Rest of World. Going one step further as we regionalize a number of our smaller markets in order to reduce our SG&A.

Also by integrating TMON, we gain necessary scale as the acquisition effectively doubles the size of our Rest of World business. As we narrow our focus on International markets where we think we can win, we've decided to limit our future investment in China. China's a market with extreme competition where a committed local partner is essential in order to thrive. Jason will provide additional context in our decision to write off our minority investment in F-tuan in a few minutes.

We also made significant progress in our strategic initiatives in the quarter. First Mobile. In Q4 we once again had record Mobile growth. Our worldwide Mobile business is measured by transactions increased significantly to nearly 50% in December more than a 10% gain in just 90 days.

In addition about 9 million people downloaded our apps worldwide in the quarter bringing cumulative app downloads to nearly 70 million. Of the 9 million app downloads, over 80% were organic, as we had one of the highest rated apps in the market. We are seeing an acceleration of Mobile adoption even at our already high levels.

As we discussed last quarter, 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 worth more but take longer to activate, which means we have a growing pool of potential untapped demand among people who have downloaded our app.

In addition, as we've begun to shift a significant portion of our marketing spend toward driving Mobile app downloads instead of acquiring e-mail subscribers, our Local business has been effected. As we increase Mobile activations in the next few quarters, we expect this trend to reverse itself.

Second, Local. Central to our operating plan is that in order to win in Mobile you have to win in Local, as Mobile and Local are inherently connected. Everything we do is with Local in mind. While we have a significant advantage in Local commerce given our scale, we have yet to truly deliver an experience that our customers can't live without.

To crack the code, we need to stay laser focused on the following. First, we need the very best merchants choosing Groupon as the platform they want to use to promote their goods and services. In 2013, as we expanded our Pull marketplace, we were primarily focused on the number of merchants using Groupon, which helped us get over 140,000 deals in our platform.

In a race to get coverage, we spent our time focused on total deal quantity in order to build scale, which we believe is a critical first step in creating a proprietary long-term advantage in this market. In 2014, we're increasing our focus on quality, with a campaign aimed at getting the best merchants on our platform. The good news is that our merchant community remains as strong as ever. Re-feature rates are stable, inbound inquiries are near all-time high, and merchant satisfaction scores remain best in class.

Our goal is that every great merchant is on Groupon. Second we need customers to have an amazing experience every time they use Groupon. We still have too many customers that have a suboptimal experience because they forget to use their Groupon. We believe that unused Groupons are a drag on people's willingness to buy more Local deals from us.

In order to solve this problem, we need to first get more of our customers using Pull, our marketplace of deals. Through which we've seen more people buy and redeem in realtime. And second, improve the actual redemption experience itself. We need to make the experience of using a Groupon easier than not using one.

We believe the key to a seamless experience lies in having every merchant plugged into Groupon at all times, accessing our hundred of millions of subscribers largely through Mobile, and creating a Local commerce platform that truly connects the off-line world to the online. We're currently testing a new merchant technology that does exactly this right now. And while it's early days, we believe it can be transformative. The best way to imagine our Local commerce platform is to think of a highway that connects our customers and our merchants.

The types of deals that our merchants offer in our platform will become somewhat irrelevant. As in a highway can hold a truck, a car, motorcycle; likewise we offer deals for restaurants, spas, home services, products, hotels, events, activities, and so on. We hope that in the future merchants will be connected to our platform as the primary tool that runs their business, brings new customers in the front door, and allows them to maximize their yield to ensure they have the right customers coming in at the right time.

Next, Pull. Our vision is to make Groupon the place you start when you want to do or buy just about anything, anywhere, anytime. We want people checking Groupon first before they buy something because we have the world's largest marketplace of deals. To build a thriving marketplace, we need to increase supply and demand and do both in an orchestrated manner.

Let's start with Supply. At the end of Q4 our active deal count in North America was about 80,000 on average and our worldwide deal count exceeded 140,000. While we have good coverage in many categories and many markets, we still have far too many holes.

We deliver too many null results and people can't yet rely on our ability to deliver a great result every time they search. Groupon can't be relevant some of the time, it has to be relevant especially in Local all the time. To improve Pull without sacrificing quality, we're continuously enhancing our products.

The first example of this is a tool we call Deal Builder, which allows merchants to create their own deals and add them to our marketplace in a completely self-serve manner. Through Deal Builder we're adding hundreds of merchants a week without human intervention and we expect this to scale to thousands at some point in the near future.

The second example is a product we call Freebies, our coupon offering. In addition to providing another way for national merchants to work with Groupon, Freebies gives shoppers an easy way to save money in online stores for their favorite brand. We've been very pleased with the early adoption. With more than 25,000 coupons available in the US today, for more than 5000 brands, Freebies is giving customers another reason to check Groupon first, further positioning us as a destination for Local commerce.

Yet while supply continues to grow, demand has taken longer to generate. Despite the continued progress we've made to reduce our reliance on direct e-mail, we have not yet created enough awareness in the market around Pull. The majority of our customers in North America still have no idea they can come to Groupon and search among our 80,000 deals in realtime.

For Pull to gain awareness, we need to fundamentally shift our consumers' behavior. We need them to think about Groupon every time they have a need, every time they pull their phone out looking to buy something. We believe that product enhancements like Deal Builder and Freebies along with our other marketing efforts, are necessary steps in our journey to fundamentally shift consumer behavior and train people to check Groupon first.

While we're still in the early stages of attracting new customers, we've started to see some changes in how our existing customers especially our best customers are interacting with us and our e-mails. Historically people would open our e-mails and given their time sensitive nature, 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. Customers often tend to buy on impulse and hold onto their deals often for months before they're ready to use them.

With Pull, many of our customers come to the site with the intention of using their Groupon now or in the immediate future. This has created shorter redemption cycles. In 2013, we saw total redemptions in North America Local increase 20%. Since the beginning of the year we've seen same day redemptions double, which is a significant shift in our business.

In addition, we saw a nearly 30% reduction in the average number of unused Groupons per current month purchaser. So not only are we starting to see customers redeem faster, we're seeing fewer people forget to use their Groupons. The effect of our best customers being trained to search for deals and use them in realtime is ultimately a good thing as the lifetime value of these customers is dramatically higher. If the customer has an expired Groupon, they're worth less to us.

Yet similar to the effect of Mobile, we believe this shift creates short-term pressure on our growth rates in Local by reducing the amount of front loaded sales that occur as we remove the sense of urgency, which was embedded in our impulse buy business. We're literally training our Local customers that it's okay to hold off and buy a deal just before they actually intend to use it.

We believe that this trend is likely to be with us for a few more quarters until the positive effects from Pull out weigh the short-term pressure this transition creates for our Local business. The key to counterbalancing this is growing the total number of people who use our marketplace. In December, roughly 8% of our total traffic in North America searched for a deal on our site, a 25% increase in the last quarter alone, albeit from a relatively small base.

Over that same period, customers at search spent over 50% more than those that did not. Searchers are great, we just need more of them. That said, we still believe our e-mail business we call Push has room to grow. We send over 250 million e-mails every day to our subscribers; but today, our customers are less engaged with e-mail in general.

In our case this is largely due to their migration to Mobile. But it's also due to the fact that despite all of our advancements, we still send far too many irrelevant e-mails. That will change in 2014.

Through the release of a new widget based e-mail system call Mind Storm, we're introducing new forms of merchandising into our e-mail so we can create assortments by category or theme instead of by deal. Thereby broadening the relevancy of our e-mail. The power of this technology is amazing, and we believe that over time it could enable us to generate as much revenue through one e-mail as we used to generate through two or three.

Finally, I want to cover One Playbook, our initiative to bring our North American systems and processes for International business. To date we've almost fully deployed the first version of our back office sales and customer service tools and processes that fuel sales force efficiency.

We're now sourcing merchants, scheduling deals, and managing the entire deal factory workflow in similar ways globally. We've also deployed our in-house e-mail platform for our largest countries and are making progress on rolling out SmartDeals and Deal Money, the primary tools that drive personalization.

We plan to exit 2014 on one platform across Europe and North America, our two largest regions. The work we did in 2013 was instrumental to improving the health of our International business. We began 2013 with significant challenges in many of our largest International markets and ended the year with a more stable and growing Europe and a much healthier Rest of World.

Now I'll turn the call over to Jason.

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

Eric covered the full year. Let me go deep on the quarter. Gross billings increased 5% to $1.6 billion. North America growth of 10% and EMEA growth of 6%, or 3% excluding FX, were offset in part by an 11% decline in Rest of World, or a 2% decline excluding FX. Sequentially gross billings increased $250 million related to growth in both Goods and Local due to the holiday season.

Revenue increased 20% to $768 million. North America growth of 18% and EMEA growth of 43% were offset by a 15% decline in Rest of World. Revenues in all regions were impacted by continued take rate investment, albeit not to the levels that we saw in last year's fourth quarter as we focused on attracting high quality merchants.

Sequentially global revenues increased $173 million, again, reflecting seasonal strength. Keep in mind also that as the direct portion of our goods business continues to ramp internationally, as it did in Q4 in EMEA, this will have an impact on our revenues.

Gross profit increased by 6% compared with prior year and 5% compared with prior quarter to $378 million. Within EMEA, gross profit increased 7% relative to 43% revenue growth, again, due to a greater mix of direct revenue. Adjusted EBITDA was $72 million in the quarter increasing year-over-year by $42 million and sequentially by $10 million.

Consolidated segment operating income, which as a reminder is operating income excluding stock-based compensation and acquisition-related costs, was $48 million increasing $34 million year-over-year. Sequentially the increase in segment operating income in North America and EMEA more than offset a decline in Rest of World, which generated a loss of $15 million.

As Eric mentioned, it's important to keep in mind that our performance in Rest of World will be lumpy as we lap periods before we significantly reduced our deal offerings in unprofitable cities and sub categories.

GAAP loss per share was $0.12 including the pretax impairment charge of $85.5 million or $77.8 million after tax related to our minority investment in China, partially offset by a $9.6 million reduction in income tax expense, related to a partial release of our valuation allowance in the United States. I'll come back to these in a moment.

Excluding stock compensation and acquisition-related costs as well as the impairment charge all net of tax, EPS was positive $0.04. Operating cash flow for the quarter was $178 million bringing operating cash flow for the trailing 12 months ended December 31, 2013, to $218 million. Free cash flow, calculated as operating cash flow less CapEx and capitalized software, was $158 million for the quarter resulting in a trailing 12 month free cash flow of $155 million.

Working capital was the biggest driver of growth in the quarter given the impacts of Q4 seasonality on cash flow. We expect that cash flow in the first quarter will be negatively impacted by payments to suppliers for inventory sold in the Q4 holiday period. As of December 31, we had $1.2 billion in cash and cash equivalents.

And finally including the 3.7 million shares repurchased in the quarter, we repurchased 4.4 million Class A common shares in 2013 for an aggregate purchase price of $47 million. Approximately $253 million remains available under our existing repurchase authorization, which will expire in August of 2015. The timing and amount of any repurchase, will continue to be determined based on market conditions, share price, and other factors. The program is intended to offset the dilution from employee stock grants.

Turning to the notable highlights of our non-financial metric. Units reached an all-time high of 56 million for the quarter. We saw our strongest customer ads in a year resulting in 44.9 million active customers worldwide for the quarter. It's worth noting that EMEA customer ads grew for the second quarter in a row after three sequential quarters of decline.

Trailing 12 month billing per average active customer was $134. Sequentially, customer spend was down $3 with North America down $5 to $1.50, EMEA up $2 to $1.39, and Rest of World down $7 to $95. While the TTM metric is a good long-term indicator of wallet share, it combines the effects over four quarters, with the lapping of strong quarter in the prior-year sometimes outweighing the growth in the current quarter.

Looking at the metrics on a one quarter basis provides a more current view with a sequential lift in North America from $34 to $39, and in EMEA from $32 to $40, and Rest of World about flat sequentially at $24. Further detail on our non-financial metrics is included in the press release issued earlier this afternoon.

Now I'm going to speak to the highlights of our categories. Local gross billings increased 4% to $830 million with continued growth in customers and active deals. EMEA accelerated to 15% growth and Rest of World decline slowed to 10%.

As Eric mentioned the deceleration in North America to 2% reflects the lapping of a difficult comp from Q4 of 2012 when we reduced margins to test their impact on billings growth. Local gross profit increased 15% year-over-year to $279 million with billings growth, normalized take rate, and reduction in cost of revenue all contributing to the growth. Sequentially, gross profit increased 6%.

Goods gross billings increased 10% year-over-year to $595 million. Keep in mind that we're now lapping quarters when the business was fully ramped. Growth was led by North America, which grew 19% year-over-year and saw typical seasonal strength growing 47% sequentially.

Seasonality was also reflected in the sequential decline in Goods gross margins, which were impacted by holiday promotions, as well as take rate investments in all regions to drive growth. On the year-over-year basis, direct margins globally increased 500 basis points. With more than half of our Goods billings now direct, reflecting the significant growth in the direct business and EMEA in the quarter, the dollars in aggregate are moving in the right direction.

We're asked all the time, When are our Good margins going to improve? It's important to note that our product margins in North America after deducting only the cost of inventory, were again over 30% in the quarter. Our shipping and infrastructure costs still remain too high.

We have several efforts underway to address this. First, despite recently launching a shopping cart, we're still shipping approximately one unit per order, compared with the e-commerce average of over two. As people become aware of our shopping cart, this should increase.

Second we've only just recently opened our first distribution center. Given the geographic breadth of our customer base, we need appropriately located distribution centers to bring our freight costs down. We're still in the early innings of creating more efficient processes to reduce costs. This will be a focal area throughout 2014.

Finally travel and other gross billings declined 7% year-over-year to $168 million with strong growth of 38% in North America, more than offset by declines in EMEA and Rest of World where we are still rolling out North American features. Before I close, let me provide some additional color on a few specific items. In the fourth quarter, we wrote off 100% of F-tuan our minority investment in China, which resulted in a pretax impairment charge of approximately $85.5 million or $0.13 per share after tax.

F-tuan has historically needed significant funding and operational support from our co-investors, including Tencent. In December 2013, we were notified that Tencent had made a decision to cease providing necessary support to F-tuan, and other existing shareholders would not be providing additional funding.

In conjunction with a recent Board of Directors meeting, we have also decided not to provide future funding to F-tuan given our desire to narrow our focus and only invest in markets in which we believe we can build long-term sustainable business. As with many early-stage Internet companies, without funding the business likely cannot sustain itself. As such we are impairing the value of our minority investment and have written it down to zero. The charges reflected within the other expense net line item on our P&L.

Net income in this year's fourth quarter also reflects a reduction in income tax expense of $9.6 million. As a result of our performance in recent periods within North America, as well as our expected future performance, we were able to release a portion of the valuation allowance against our federal and state deferred tax asset in the United States. Finally I want to give you a heads-up on a few changes we'll be making in our reporting going forward in a continuing effort to provide information about how we look at our business that's as meaningful as possible to investors.

First, we are moving to adjusted EBITDA rather than operating income excluding stock-based compensation and acquisition-related costs, as our primary non-GAAP measure for evaluating consolidated results. Similar to our peers, we use adjusted EBITDA to assess our operating performance, to make future plans, and determine appropriate allocation of capital.

As a result starting in Q1, we will not report consolidated operating income excluding stock-based compensation and acquisition related costs, in future periods. As such our guidance for the first quarter will be on adjusted EBITDA. Our disclosures at the segment level will not change.

Second, due to increased M&A activity, we will be changing one component of our definition of non-GAAP EPS. Or EPS excluding stock compensation and acquisition-related costs, net of tax starting in Q1. As our M&A activity has picked up, the amortization of acquisition related intangibles has grown. In order to enable more meaningful comparisons of our core business, we will be stripping it out of non-GAAP EPS going forward.

Finally, turning to our outlook. We expect some one-time costs in the near-term as we integrate our recent acquisitions. Specifically as they consolidate TMON with our Korean business and make investments required to get ideally to profitability. Together in the first quarter they are expected to contribute roughly $50 million to our revenue and have approximately $20 million negative impact on adjusted EBITDA.

In addition we anticipate approximately $25 million of additional investment in marketing and other growth initiatives to drive adoption of our marketplace. As such, for the first quarter of 2014, we expect revenue between $710 million and $760 million, adjusted EBITDA between $20 million and $40 million, and EPS excluding stock compensation, amortization of acquired intangibles, and acquisition-related costs net of tax between negative $0.04 and negative $0.02.

We have included some additional detail on our outlook in our earnings slides on our website. As a result of growth investments we intend to make in 2014, we expect full-year adjusted EBITDA to be slightly above 2013 levels. 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. 2013 was a foundational year for Groupon. In summary, we transformed our Mobile business and added over 33 million app downloads this past year alone, increasing our Mobile business to nearly 50% of our total transactions.

We made good progress in stabilizing our International business and returned EMEA to growth. We drove growth in North America while shifting to a more sustainable marketplace model, as we expanded to over 140,000 deals worldwide. We added 4 million new customers, exceeded 650,000 merchants featured to date, and delivered record billings and revenue. We launched a new site and made important technology improvements across mobile, web, and e-mail.

Five years ago Groupon was a one-dimensional tool for merchants to use as a means of attracting new customers. We had one tool in our toolbox, the Daily Deal e-mail. Today we are a radically different Company. Having built the foundation for Groupon to become a true local commerce platform, 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. In 2014, we will double down on our progress over the past year across four key areas by investing and growing our Mobile customer base, accelerating activation and making Groupon a mobile first Company, delivering a better Local commerce experience by getting the very best merchants onto our platform and improving the redemption experience for our customers, continuing to build out our marketplace and get more of our customers using Pull, and building on One Playbook, so that every merchant and customer has the same experience working with Groupon globally.

If we're successful on those fronts, we'll have laid the foundation for Groupon to become an integral part of mobile commerce; and the place our customers start when they want to do or buy just about anything, anywhere, anytime. And with that let's take some questions.

Thank you. (Operator Instructions) Ralph Schackart, William Blair.

-- $25 million in increased marketing expense. Curious will this only be focused in Q1 or will this be sort of incremental marketing spend that you'll reassess in Q2, as well as through 2014?

And then as a follow-up is there any associated revenue upside in your Q1 guidance as a result of increased spend? Thank you.

Yes. So thanks for the question. When you look at our guidance for Q1, what you basically see at the midpoint of revenue is about a 22% year-over-year growth, which was fairly dramatic.

We're making that investment and growing by essentially investing money both in marketing in the core business, as well as in acquisitions. We have about $20 million that's being invested from the acquisitions we made and about $25 million from marketing in the core business. When you look at the total marketing we spend relative to other companies, it's still pretty light. So we look at it as a pretty strong result.

And we can only make that investment by virtue of the work we've done in 2013 to build the foundation we built. In terms of how long that investment's going to last. You'll see us as we said, our 2014 guidance calls for EBITDA equal to or above slightly above what we delivered in 2013. So I would expect you'll see EBITDA ramp pretty dramatically in the back half of the year.

Ross Sandler, Deutsche Bank.

Thanks. I just had three questions. First, is just a high-level question. What's going on with overall demand?

We all see the tough comp from the take rate reductions from last year, but if you just look at North American Local, and you use a two-year growth rate, it's still pretty much declining precipitously. So how do you turn that back up? What's the plan?

Second question is somewhat related to the first one, but do you think that there's like a permanent inverse correlation between take rate and your ability to generate demand? Can you grow at a faster growth rates only by cutting take rate?

And then last question, mind storm. What was the timing for the rollout of the new e-mail platform? Thank you.

Yes, so I'll just kind of quickly give you some color. Our Local growth rate North America was about 2%. When you look at the revenue growth rate it was actually 12%. And if you look at Local globally we had about 15% growth in EMEA, which is fairly dramatic.

The Local growth rates had decelerated from Q3 in large part due to the fact that we have a tough comp. I mean we invested pretty heavily in Q4 of 2012 to drive short-term billings and we invested without constraint. So we tried to take a more balanced approach this quarter.

We also dedicated quite a bit of real estate to Goods, and on top of that there's a macro trend which we discussed in the call which is the more -- we've invested pretty heavily in building a marketplace and that marketplace reduces the inherent sense of urgency that used to exist in our e-mail business, people can now wait and buy a deal just in time. So that has a short-term impact on those local growth rates.

But in general, the Local business has been pretty healthy. I mean certainly when you look at it from a revenue perspective, it's been pretty healthy and we view these take rate as more indicative of healthy long-term take rates. So yes, we can flex take rates, and if we do bring them down you to drive some short-term billings growth. You have to find that balance.

In terms of mind storm, this is a new initiative that we're unveiling because we believe there's huge opportunity in our Push business, our e-mail business. And our e-mails have to be more relevant. One of the ways you do that is you have essentially this widgetized e-mail system where you can start to market categories of deals instead of just one deal.

And we think this is also critical for us, because ultimately one of the challenges in any e-mail business is your limited by the distribution pipe. You can only spend so send so many e-mails and people can only see so many deals. And you have to get through that.

And one way to get through, the biggest way to get through it is you build a marketplace, which we've built going from 1,000 deals at the time of our IPO to 140,000 deals now. The other way you get through that is you build advancements into the actual e-mail delivery system and mind storm is one of those advancements.

Paul Bieber, Bank of America.

Hi guys, thanks for taking my questions. How should we think about the gross margins in the Goods segment in North America and EMEA in 2014, especially as you gain leverage from the fulfillment center and the International mix goes direct? And secondly, just how should we think about the International Goods mix both in Q1 and for the year as it goes more direct?

Okay. So this is Jason. So in terms of how to think about margins overall in the Goods business, so we did see a decrease quarter-on-quarter. A lot of that is due to kind of seasonal effects that we did expect.

We do also -- we did have to with our first fulfillment center online for only not even half the quarter, we did finally start making some investments in inventory which has some costs. And also a little bit of an increase in refunds, which is also typical related to Q4 demand.

But you should, as I said in the prepared remarks, you should focus on the fact that really one in a business that's barely over two years old we've created almost a $2 billion business. And two years in we feel great about the demand side. The supply side however is at two years old, and really we've only been focused on the infrastructure side really for a couple months.

And so 2014 you should expect us to focus a lot on, I think I mentioned, increased orders per unit and then ultimately orders per shipment. But then you should also expect us to just do a better job of managing our network, which will allow us to significantly reduce shipping costs.

As I said in the prepared remarks we have take rates that are well under the 30% range. And so it's the shipping costs that are really the anomaly if you want to look at us versus some of the more mature e-commerce companies. So you should expect to see gross margins that effectively improve over time.

And then just a quick follow-up on Ticket Monster and ideeli, how should we think about the billings contributions for those for the full year?

Yes. So you should -- you can see from the recent regulatory filings that the run rate on a combination of those two is somewhere in the $1 billion annual run rate, and roughly $200 million in revenue on an annual run rate, as of Q1.

And I'll just -- to jump in for a second when you look at the guidance that we gave which was $710 million to $760 million, we tried to call out that roughly $50 million of that comes from these acquisitions, which cost us about $20 million of EBITDA. The rest is us using marketing to ramp up our organic revenues, which again are pretty healthy at the 22% midpoint range.

(Operator Instructions) Mark Mahaney, RBC Capital.

One question, but I'll make it a little bit broad. You talked about one of the reasons that drag factors on the Local billings being the use of space to promote Goods. And then I guess just broadly how do you think about that? And how much the trade-offs are or how far are you willing to make that trade-off and not sacrifice too much growth in Local? I guess overall how do you balance that? That space -- that limited space that you have between those two categories? Thanks a lot.

So our goal is to become the starting point of Mobile commerce; right? And some of the advancements we've had this quarter you have -- we're at 70 million app downloads to date. Now 50% of our worldwide business is Mobile. It's been some significant growth.

And in order to get to that, you have to kind of take a very broad view of Local commerce and we view all this stuff as connected. So we don't view Goods as being distinct from our Local commerce strategy.

I use this umbrella analogy where you're walking outside, and you realize you need an umbrella and you go to Groupon. You check it first, you go to Groupon you type in umbrella, we show you five umbrellas. And at that moment you can make a decision because we're giving you fantastic deals. Do you want to have that umbrella delivered to your door or pick it up a block away?

And that's the power of Mobile commerce that's ultimately what we're trying to deliver. So we don't think about shelf space as necessarily a trade-off. We think about all these categories Goods, Getaways, Live, as part and parcel of the overall Local commerce experience.

Brian Pitz, Jefferies.

Great. You briefly mentioned early success at Groupon Freebies. Are these mostly from Local merchants, or really the national retailers? Is there any more color you could give us on this strategy? And just with respect to the weather impact in Q4 and Q1 to date, can you just give us any more color on the industry and macro dynamics at play there?

Thanks so much.

So most of the current brands, I think there's roughly 25,000 deals on Freebies. Most of them are national coupons as you can see. But again I'd use that same, that same Groupon Goods analogy with the umbrella where right now you might not think that Goods has a Local element, but over time you'll see it. Same thing on the Freebies side.

As we will over time introduce all kinds of geo specific targeted deals inside our Freebies offerings. So you'll have national coupons, but also be able to see where you can redeem that coupon and where is the nearest store. And even store- specific coupons.

So we feel pretty good about our Freebies strategy in light of the fact that we have so much organic traffic. And we believe over time we can build a huge business in the space. As for weather, I'm sure it had some impact, but we haven't called it out.

Heath Terry, Goldman Sachs.

Great, thanks. I was wondering if you could give us a sense of as you've rolled out additional services to merchants and gone beyond just sort of that one offering that you mentioned, whether it's trying -- to beginning to integrate payments and reward scheduling, what impact have you seen those have in terms of merchant retention and engagement?

And then I guess sort of a related question, as you've done sort of the same thing in terms of providing more technology to your sales force, what impact have you seen it have on productivity particularly to the extent that it's driving Local merchants onto the platform?

I'll take the first and Kal can take the second. The -- our operating system the products we brought to market both on the POS side and the payment side are significant and necessary components of what we believe ultimately is the Local commerce platform, which allows us to connect merchants and consumers in real time and actually build a network.

And when you think about our current Local experience it's still missing something. It's still isn't as easy to redeem a Groupon as it should be. It should be as frictionless as walking into a store; you don't even pull your phone out. We know you're there and you can redeem your Groupon. And in order to do that we have to connect merchants to the network, and so we've been building a series of tools for the last several years that do that.

We believe -- we certainly know that the lifetime value of a customer who remembers to use their Groupon and has a good experience is dramatically higher. And we're building those [up]. And for merchants it's the same thing. They want that connectivity that allows them to ultimately get in to true yield management and not just have Groupon customers coming in, but coming in at the exact right time.

So we're very focused on building that and we expect to make great strides this year.

On the same tools and technology it's all about getting high quality merchants at the right time, at the right margin and discount. It should be profitable for them and it would be monitizing for our customers. As we have noted we've got more than 85,000 deals in the US and we've got a couple hundred thousand deals across the world.

And as year-over-year the number of merchants we have done business with has grown 33%. Now we are dealing with more than 650,000 merchants worldwide. And the retention of those merchants is also continually improving. And those are the true reflection of the tools in terms of the way we target the merchant and the way we structure the deal, which should be profitable and sustainably profitable for them.

Douglas Anmuth, JPMorgan.

Great, thanks for taking the question. Just wanted to ask about Rest of World profitability, it had been improving the last few quarters a little bit lower, worse in 4Q. Just wondering if you can talk about any specific markets that you're seeing more investments in and how we should think about that segment for 2014? Thanks.

Thanks for the question. As I told you in the prior call conference calls, rolling out One Playbook and stabilizing the business in EMEA and Rest of World is a multi-culture effort. As you could see EMEA has not only turned around, it has grown in a very profitable way because of the attention to detail we've put on the basics. And we are doing the same thing in Rest of the World as we talk.

Even though the billings growth looked too negative, if you do it without foreign exchange the billings deceleration has come down and it's only 2% negative year-over-year. And the business has become a lot healthier. As a matter of fact, our customer satisfaction, merchant satisfaction is going up. Our net customer adds for active customers in Rest of World is going up.

And as we told you, it is a multi-culture effort and we are slightly lagging behind EMEA. But EMEA is the proof for what will happen with Rest of the World. In terms of investments and exiting markets like Eric mentioned the call we exited business in China and we also announced that we are consolidating Korea.

In the meantime we are also regionalizing the market in a way to grow the business and we'll continue to make the investment. Because 2013 is a year of fixing the fundamentals, 2014 is a year for growth and we'll continue to do that all throughout the world.

Chris Sinnott, Telsey Advisors.

Great, thanks. This is Tom Forte, Telsey. So can you talk about the long-term margin opportunity from adding the cross docking facility for Groupon Goods? And how would you determine -- you had talked about potentially having multiple geographies to better service the consumer. How would you determine when you would add a second facility?

Thank you.

This is Jason. I'll take that question.

On when you had a second facility, it's really just going to be based on -- well first we've launched on that we've now had for a few months. We're implementing some of the basic WMS as well as trying to connect that with the rest of our network, which is really 3PLs and drop shippers today. And so once we feel like we have that understood, then it's likely going to be that it makes sense to put a fulfillment center in either Western or even Eastern seaboard, or over time, probably, both. Because right now we're paying a lot of inbound shipping and outbound shipping by not putting things in closer to where customers are ordering and having things shipped to.

So I think really that's why I mentioned earlier that it's really about learning and focusing on getting the execution done of fulfillment center one. And then basically figuring out how to build the infrastructure around that to make sure that we're putting inventory in the right place so we can minimize inbound and outbound shipping. As well as making sure that we're picking the right balance of when do we want to use a drop ship or when do we want to use our own network or use our own facility?

So that's the math that goes into it. The good news is it's not an inventional challenge. This is something that's been done with many other companies. It just takes some time. If you were to compare us to where any other e-commerce Company is at two years, I feel like we're in a very good place. So it's something that you should expect to see a lot of progress on this year.

Arvind Bhatia, Sterne Agee.

Yes, thank you very much. One broad question. The spend throughout the fourth quarter I was wondering if you might be able to provide some color on how things progress from October to December? And then perhaps also so far this quarter particularly as it relates to Local? I know there were some underlying statistics that were healthier than what the numbers imply. So just would be curious how you see Local progressing.

Are you referring to when you say Local trends from October to December are you referring to North America or International, or billings or what?

I think North America billings primarily is what I was going to focus on.

Okay. So as I said before, obviously quarter-over-quarter we saw some significant growth in Locals sequentially; right? The business got larger in Q4 in Local than it was in Q3, and demand is still healthy. The issue is when you compare the year-over-year growth rate you saw some deceleration, in large part because, as I mentioned earlier, Q4 2012 was a particularly tough comp.

Back in that quarter we reduced take rates pretty dramatically to try to drive short-term billing. We over reduced those margins, and it hurt profitability pretty dramatically, but it did drive some short-term billings in Q4 of 2012. This year we didn't want to repeat that. We wanted to grow in a much more controlled way so when you compare year-over-year you see some deceleration as opposed to previous quarters.

But again you see pretty strong revenue growth at 12%. You even stronger growth in EMEA at 15% year-over-year. So the Local business remains intact and doing pretty well especially in light of the fact that Q4 is a quarter when we do tend to drive a lot of traffic to Goods and you're also dealing with this short-term headwind related to our transition to a marketplace.

And over time as more and more people Pull and we provided this statistic in the strip, people who come and search or use our marketplace spend about 50% more, so they're worth quite a bit to us. And they now represent about 8% of our business which is up 25% in just the last quarter. So we're seeing great signs and Pullers are worth a ton to us, we just need more of them. And as that grows, you'll see it start to make up and eventually offset any headwind in our Local business as we migrate from this Push e-mail Daily Deal business to this largely Mobile marketplace.

Darren Aftahi, Northland Securities.

Great, thanks for taking my question. Just on your comments about the increased marketing spend, can you talk about how you plan to re-educate your Push users to Pull? And then increase $25 million and perhaps more so in FY14? What channels specifically are you going to be using that money on? Thanks.

Yes. So I mean the good news again is that we're fortunate that we do have an e-mail channel that we can use to try and drive some awareness, but it's not going to drive as much awareness as we need. And so ultimately we have to make some investments in marketing.

When you look at our marketing investments, relative to our billings as I mentioned earlier, it's roughly I think 3%, which is far below where many of our peers are. And so we have to dial that up a bit. And when we make those investments we're basically investing in awareness. General advertising, display advertising. We're also trying to make significant investments in SEO and SEM.

Historically we said that our SEM basically our total search effort between SEO and SEM represented in the high single digits for us. It's now in the low double digits. So we've made some significant improvement. And all of these improvements are driving less reliance on e-mail.

And the good news is when we invest in marketing, we do so in an ROI positive way; right? We're constantly looking at what's lifetime value of the people we're acquiring, and what's the month of payback and we're trying to invest intelligently.

It just so happens that you're making investments today that might yield a benefit a quarter or two or three from now. And so a lot of those investments are hitting us, especially those related to the acquisitions in Q1, and it's going to take us a few quarters to feel the EBITDA benefit of that. Which is why overall in the aggregate we expect to deliver some pretty strong EBITDA this year. But we're making some big investments in Q1.

Tom White, Macquarie.

Great, thanks for taking my question. I apologize if I missed this in the prepared remarks, but I was hoping maybe you guys could just talk a bit about sort of the intermediate term or near to intermediate term trajectory for Local take rates in EMEA and the Rest of World? In the past you guys have talked about maybe needing to make some concessions there, but how content are you generally with the quality and quantity of the merchants participating in those markets?

Thanks.

Thank you. This is Kal. As you saw, the Local growth in EMEA this year was negative 19% in Q1, negative 11% in Q2, and it flipped to positive 13% in Q3, and it is a record 15% positive in Q4. And this has been done by literally focusing on the basics, which include attracting great merchants and flexing the take rates.

But more importantly focusing on what we have been telling you all along is One Playbook of getting the standard practices, which would improve customer experience and merchant experience.

With respect to long-term take rates the guidance that Jason, Eric and I have given all along; there is no change in that. We believe the long-term take rates would be in the 30% to 40%. And we believe we will be able to attract and retain high quality merchants in that range while accelerating the growth.

Thank you, sir. This concludes the Q&A. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.