Groupon Inc (GRPN) 2014 Q1 法說會逐字稿

Good day, everyone, and welcome to Groupon's first-quarter 2014 financial results -- (technical difficulty)

Hello, and welcome to our first-quarter 2014 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.

The following discussion and responses to your questions reflect management's views as of today, May 6, 2014, 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 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.

Our results for the first quarter reflect the acquisitions of TMON and Ideeli since their respective dates of close in January. In order to provide added transparency into our performance, we will at times discuss performance including and excluding the impact of the acquisitions. Additional detail regarding the contribution of each to the quarter will be included in our 10-Q.

We will also discuss certain non-GAAP financial measures. In our press release and our filings with the SEC, each of which is posted on our investor relations website, you will find additional disclosures regarding non-GAAP measures, including reconciliations of these measures with US GAAP.

Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2013.

Now, I will turn the call over to Eric.

Thanks, Genny. We saw continued progress in the first three months of 2014. Our local marketplace of over 200,000 deals is loved by the customers that have discovered it, and it's just starting to gain broader awareness. Our mobile app, that is consistently rated five stars, has catapulted us to being one of the only large-scale eCommerce companies in the world that is predominantly mobile. And our international business is now stable and showing renewed promise after serving as an anchor on our results for several quarters. Strategically, the Company has never been in a better place.

Q1 was another record quarter for Groupon in terms of demand. Gross billings increased 29% to $1.82 billion, and revenue increased 26% to $758 million, both led by strong growth in the goods business and the addition of TMON. Adjusted EBITDA was $40 million, down from $72 million last quarter, mostly as a result of planned investments in marketing and order discounts. And non-GAAP EPS came in above our expectation at negative $0.01.

We also saw strong demand in North America. Our billings growth accelerated from 10% in Q4 to 15% this quarter, coming in at $782 million, led by 47% year-over-year growth in our goods business. North American revenues increased 27% to $431 million, yet gross profit increased only 4% to $180 million, given a higher concentration of goods revenue in the quarter and over $15 million in order discounts that we offered to help drive awareness for our new pull marketplace. Finally, segment operating income was $11 million, down from $26 million in Q4, largely related to losses from our acquisition of Ideeli.

We continued to make progress in EMEA, as billings increased 4% to $514 million, also led by strength in goods, which grew 23% year over year. Revenues increased 26% to $231 million. We generated $19 million in segment operating income, even after our aggressive marketing ramp up in Europe.

When I started as CEO about a year ago, one of our primary goals was to stabilize EMEA. It had been deteriorating throughout most of 2012. We have now had four consecutive quarters of billings growth, and the fundamentals of the Business are encouraging.

Rest of world, which is now highly concentrated in Asia, grew 123% in billings, driven by the acquisition of TMON. Even without TMON, excluding foreign exchange, rest of world grew 9%, which is the first time rest of world has grown in over a year, the result of a tremendous amount of hard work to stabilize the segment and return it to growth. Revenues grew 23%. The big difference between billings and revenue is related to TMON's deal margins, which have historically been in the low-teens, as are typical for large Korean eCommerce companies.

The segment operating loss was $25 million for the quarter, largely related to the impact of the TMON acquisition, including increased marketing investments and one-time costs related to the exit of Groupon's legacy Korean business. Excluding these items, our losses improved on a year-over-year basis by over half, so we're clearly making progress.

For 2014, we have three primary objectives. First is to re-accelerate our local growth in North America and abroad. Second is to improve the gross margins and operating efficiency of our goods business. Third is to continue to achieve stability in our international operations, and reduce our losses in rest of world so that every region in which we operate is generating positive segment operating income by year end, excluding any impact from acquisitions. We believe we are on course to achieve all three objectives by the end of 2014, and have raised our full-year guidance accordingly.

Let me start with the first. Although our North American local billings growth has been essentially flat for the past two quarters, we expect this to change in the back half of this year as our marketplace continues to gain traction. We began to experience headwinds in our local business toward the end of Q3 of last year related to a number of factors, including pressure on our email business; too many Groupons that expire, creating a drag on people's willingness to buy more; and a shift in consumer behavior, whereby less people are buying daily deals in advance as a result of more people buying our deals in real time. Much of this has been by design, as we shift consumer behavior toward thinking of Groupon not just as a daily deal, but as a full marketplace that they can access anywhere, anytime.

While this has created some short-term pressure on the Business, we believe it will strengthen our model longer term. We expect year-over-year local billings growth in North America in Q2 to be relatively flat compared to Q1, and then begin to accelerate, reaching double-digit growth by year end.

The story in Europe is similar, with one nuance. EMEA local growth went from 15% in Q4 to 1% in Q1, largely related to increased order discounts as part of our marketing initiative to attract more customers in Europe, and a reduction in our refund cost in the fourth quarter as compared to 2012. Excluding these items, local billings growth rates between the two quarters were more similar. We expect to continue to make steady progress in EMEA throughout 2014, with local billings returning to stronger growth by year end.

Our second priority is to improve our goods margins. We've experienced tremendous growth in our goods business in the past two years. In North America alone, goods is now pacing to well over $1 billion in billings. While we are thrilled with the growth of this category, we have just recently begun to shift our focus to increasing our gross margin.

The main culprit that drags down our gross margin in North America, from an over-30% pure-product margin, which is defined as sales less the payments we make to direct suppliers, to roughly 5% overall, relates to shipping and fulfilment. Our costs are almost 2 times other comparable eCommerce companies.

In an effort to improve our results, we are making some significant changes, which include shifting more of our business to drop ship, increasing units per order, changing our free shipping special from $19.99 to $24.99, and shifting more fulfillment to our own distribution center in Kentucky. These initiatives should result in significant improvement in our margins in North America in Q2, and we believe that we'll double our gross margins in goods by year end. That said, the improvement in margins will result in a slowdown in our goods billings growth, which we expect to be closer to a more normalized rate of 25% throughout the balance of 2014, impacting North America billings growth in Q2.

Our third priority is to continue to improve our international operations and reduce our losses in rest of world. We made significant progress in the quarter, after stripping out the impacts of the TMON acquisition. Over 60% of our total segment operating loss came from Korea, as we dialed up our marketing spend at TMON to help capture market share, and we incurred one-time costs related to closing Groupon in Korea. Excluding the impact of these items, are loss in the quarter improved by over 50% year over year. This improvement was the direct result of a series of initiatives we put in place last year to accelerate our growth, and reduce our SG&A, by regionalizing a portion of our cost structure.

We have back-office infrastructures in far too many small countries. Throughout the next year or two, we intend to regionalize our operations to reduce SG&A, and improve operating efficiency. We also expect our marketing and One Playbook initiatives to get us back to sustainable growth. As a result, we expect our losses in rest of world to improve in Q2, with positive segment operating income by Q4, excluding TMON.

We are focused on these three operating objectives because we believe they are the purest drivers of gross profit dollar growth over the long term. We define success as both billings and gross profit growing at least 20% annually over the next five years. We may not achieve this every year, but this is our goal.

We also made significant progress on our main strategic initiatives in the quarter. First: mobile. In Q1, we once again had record mobile growth. Our worldwide mobile business, as measured by transactions, increased by over 400 basis points to 54% in March. With mobile exceeding the 50% threshold globally for the first time, we are no longer becoming a predominantly mobile business, we are a predominantly mobile business. As such, this metric becomes less meaningful going forward.

In addition, over 10 million people downloaded our apps worldwide in the quarter, bringing our cumulative app downloads to over 80 million. It still takes longer for a mobile customer to activate. We made some progress in the quarter, which led to us adding roughly 6.9 million customers globally in Q1, including the addition of TMON and Ideeli. Even after excluding acquisitions, Q1 was one of our strongest customer activation quarters in over a year, with 1.3 million customers added in the quarter.

Second: local. One of the clearest trends we see is the convergence of local and mobile. Local is wherever you are. And mobile uses proximity to enhance the buying experience. As we connect these two more and more, we have an opportunity to radically improve our core model, and enhance the experience of using a Groupon.

While redemptions are up, which I'll discuss in a moment, far too many Groupons still expire, creating a drag on people's willingness to buy more. The process of redeeming a Groupon is still too complex. When people use their Groupons, they buy more. When they don't, they buy less. To close the loop and get more people using their Groupons, we need to connect merchants to our customers in real time through our platform.

We've made significant investments in point-of-sale and payment technologies over the past few years. In 2014, we intend to tie these initiatives back to our main business, and provide our merchants with a suite of tools that connect them to our community of over 200 million subscribers and over 51 million active customers. Merchants will be able to manage yield in new ways, loading up deals on days and times when they need customers the most. And because of this connectivity, customers will be able to book appointments and make reservations in real time, removing friction that exists today. They'll be able to do all of this seamlessly, anywhere, anytime, through the phone in their pocket.

Third: marketplace. We built a marketplace and stocked our shelves with deals that our customers want to buy when they're out and about: restaurants, spas, live events, hotels, products, and so on. We now need to enhance customer awareness and get people to check Groupon first, making us an integral part of their daily lives. To achieve that, we've had to completely re-engineer the Company from being singularly focused on daily deals.

Our marketplace now has over 200,000 deals worldwide available at any given time; over 95,000 in North America alone. While we have good coverage in many categories, people can't yet rely on our ability to deliver a great result every time they search. We intend to fix this.

In addition to the efforts of our sales force, which is over 5,000 people strong, last quarter we began introducing technology to help us increase supply, while at the same time remaining focused on attracting the very best merchants to our platform. While supply is growing, demand has taken longer to generate. Searchers accounted for 9% of our overall traffic in North America in March, with customers who search continuing to spend materially more than those that did not. Most of this activity is still concentrated around our best customers, who became early adopters of our marketplace. They are using Groupon more and more as a real-time source of deals, which has led to the continued compression of redemption cycle times and an increase in redemptions overall.

Redemptions in North America local continue to be up double digits over the trailing-12 months compared to the year before. And the average number of unused Groupons per current month purchaser continued to be down nearly 30%. The average number of unused Groupons remained constant in Q1, after declining throughout all of 2013, which signals that people have burned through a significant amount of their unused Groupons. We believe that, over time, this will help with demand.

In addition to our focus on building a local marketplace, we have significant growth opportunities in our core email business. We send over 250 million emails every day to our subscribers. We will continue to innovate on our push business throughout 2014 by introducing technology like our new widget-based email system called Mindstorm that will make what customers see in their emails more relevant and personalized.

Overall, we are pleased with the progress we've made across all our initiatives in the quarter. For the rest of 2014, we remain focused on execution, both in North America and in our international markets via our One Playbook initiative.

With that, I will now turn the call over to Jason to discuss our financial progress in the quarter.

Thanks, Eric. With the details available in this afternoon's press release, I am 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.

Let me run you through the numbers. Gross billings increased 29% to $1.82 billion. North America grew 15%. EMEA grew 4%, or 1% excluding FX. And rest of world increased 123%. The acquisition of TMON contributed just under $300 million to billings. And as Eric mentioned, after stripping out both TMON and FX, we were pleased to see rest of world return to growth, increasing 9% compared to an 11% decline last quarter.

Revenue increased 26% to $758 million. North America grew 27%. EMEA grew 26%. And the rest of world grew 23%, lower than the 123% billings growth as a result of the substantial addition of lower-margin TMON billings to the mix.

Gross profit increased 2% compared with the prior year to $386 million. Within both North America and EMEA, gross profit growth lagged billings growth due to the greater mix of direct revenues, and investments we made in order discounts to drive awareness of our marketplace. Adjusted EBITDA, which, as a reminder, is a non-GAAP measure defined as operating income excluding stock-based compensation, acquisition-related costs, and D&A, was $40 million in the quarter compared to $72 million last year.

The increase in gross profit was more than offset by a $29-million increase in marketing expense year over year; $11 million of which was related to TMON and Ideeli. Compared to last quarter, marketing increased $22 million. I'll provide some greater color on our marketing activities in a moment.

SG&A increased $17 million in the quarter, with $35 million related to acquisitions, including the $3 million negative impact of exiting Groupon's legacy Korean business. Excluding acquisitions, SG&A was actually lower, both year over year and compared to last quarter.

GAAP loss per share was $0.06. Excluding stock compensation, amortization of acquired intangible assets and acquisition-related costs, all net of tax, non-GAAP loss per share was $0.01, which was $0.01 above the high end of our guidance range.

Free cash flow, a non-GAAP financial measure calculated as operating cash flow less CapEx and capitalized software, was negative $37 million for the quarter, resulting in trailing-12 month free cash flow of $124 million. As expected, given the seasonality of our goods business, cash flow was negatively impacted by payments to our suppliers for inventories sold in the Q4 holiday period. As of March 31, we had $1.0 billion in cash and cash equivalents, after paying $143 million in cash in connection with the TMON and Ideeli acquisitions in January.

Finally, including the 3.1 million shares repurchased in the quarter, we've repurchased a total of 7.5 million Class A common shares under our existing authorization, for an aggregate purchase price of $76 million. Approximately $224 million remains available under our existing repurchase authorization, which will expire in August of 2015. The timing and amount of any repurchases will continue to be determined based on market conditions, share price, and other factors.

Turning to a couple notable highlights of our non-financial metrics: Units reached another all-time high of 84 million, and even after excluding acquisitions, were the second highest ever, exceeding 50 million for the second quarter in a row. With the addition of TMON and Ideeli, we reached 51.8 million active customers worldwide for the quarter. Excluding acquisitions, customer growth accelerated for the first time in several years, and EMEA customers grew year over year for the first time in a year.

Moving on to our categories: Note that we've reclassified other into local. Other includes freebies, payments, and point of sale, among other small pieces, which are increasingly viewed as components of local, as they're services predominantly provided to local and national merchants.

In the quarter, other billings were $4 million in North America. We have recast the prior year as well to ensure apples-to-apples comparability. Local gross billings increased 7% to $887 million, with continued growth in customers, units, and active deals. EMEA grew 1%; and the rest of world grew 39%, driven by TMON. As Eric mentioned, North America remained about flat at 1.4%, reflecting continued short-term headwinds that we believe are related to the marketplace transformation.

Local gross profit increased 1% to $287 million, with billings growth and lower cost of revenue offset, in part, by take-rate declines, driven mostly by the increased mix of lower-margin TMON revenues. Goods gross billings increased 81% to $709 million, led by TMON and North America. Even after excluding acquisitions, all segments contributed to the growth.

Goods gross margins were 8.8% globally, reflecting a greater mix of direct and lower-margin TMON revenues, most of which are recognized on a third-party or net basis. Direct margins increased 40 basis points year over year to 6.5%. With nearly half of our goods billings now direct, the dollars in aggregate are moving in the right direction. As Eric mentioned, with continued focus on reduction of shipping and fulfilment costs, we expect to see significant improvement in gross margins by the end of this year. Finally, travel gross billings increased 20% to $221 million, with North America up 26% in the quarter.

Before I close, let me provide some additional color on a couple specific items. As expected, marketing expense increased to $79 million in the quarter, a substantial $22-million increase from the $57 million last quarter. In addition, we increased order discounts by $15 million, taking our net incremental investment up over $35 million compared with last quarter.

The investment breaks down as follows. First, we increased order discounts in North America by $7 million. A significant portion of these discounts were site-wide sales and banner ads that offered people discounts to search for deals in our marketplace. While they are dilutive to margin in the short term, they are driving necessary awareness for pull.

Second, we increased marketing by about $10 million in EMEA, a significant portion of which went to traditional channels, as we focused on adding subscribers and customers that will generate returns in subsequent quarters. And third, we invested $10 million in the marketing of TMON. We made a decision to increase our investment in marketing in the first half of this year to get TMON to parity with other competitors in the market, as they had underinvested prior to their sale. While a large percentage of this spend is transactional, the dollars don't translate into material gross profit gains given TMON's lower margins. Together, we believe these investments will produce long-term benefits, beginning to translate into gross profit lift by year end.

Finally, turning to our outlook: We expect continued investments to accelerate our long-term growth worldwide. As such, for the second quarter of 2014, we expect revenue between $725 million and $775 million; adjusted EBITDA between $45 million and $65 million; and non-GAAP EPS, excluding stock compensation, amortization of acquired intangibles, and acquisition-related costs net of tax, of between zero and $0.02.

In addition, we are raising our annual guidance, and now expect full-year adjusted EBITDA to be above $300 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 in consumer spending, as well as exchange rate fluctuation.

With that, I'll turn the call back to Eric.

Thanks, Jason. We believe Groupon has an opportunity to become the starting point of local commerce. People use Groupon to book their hotels, order their meals, buy concert tickets, discover amazing things to do with their families, and more. All these offerings are delivered to them seamlessly through their smart phones, allowing them to access the world around them, the very definition of local, on the fly.

We are in the midst of a mobile commerce revolution that not only affects local merchants but every supplier across all of our categories. And local is at the epicenter of that revolution.

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 email. Today, we are a radically different company, having built the foundation for Groupon to become a local commerce platform, connecting millions of customers and merchants in real time. Our deep knowledge of local, coupled with a vast mobile presence, has us uniquely positioned to be the place people start when they want to do or buy just about anything, anywhere, anytime.

With that, let's take some questions.

(Operator Instructions)

Paul Beaver, Bank of America Merrill Lynch.

I was hoping, first off, what gives you confidence that North America Local can accelerate in the second half? Secondly, on the geographic basis, how should we think about the segment margins just as the year unfolds?

I'll take the Local piece and Jason can take the next piece. Our Local business, as we said a few quarters ago, started to experience some headwind, but our plans are on track. I mean, if you look at the business, we are in the midst of this migration from being a predominantly email oriented daily deal business to really building a mobile marketplace. That migration has positives and negatives. One of the negative is that we've removed the sense of urgency that used to be in that daily deal email business, so redemptions overall are up. Our unused Groupons are down, and that's created some headwinds.

The positive is that searchers, people who use our marketplace, spend more. That used to represent about 6% of our business a few quarters ago. It's 9% of our business now, and the trends we're seeing are positive. We are starting to see those redemptions leveling, which is critical, because those unused Groupon that people have, basically, dampen future demand. When we see them leveling, we believe we've hit the bottom. As soon as the benefit from people who search and they spend more and their lifetime value is greater, as soon as those benefits outweigh the negatives, we expect to see lift.

We're seeing those trends today. We would expect in the back half of the year, the Local business begins to re-accelerate and as a result we believe we'll deliver double-digit growth in Local toward the end of the year.

Let's see. On the second question about the segment operating margins. There's something unique to each segment. In Q1, North America had the ideeli acquisition, which added some SG&A and some marketing expense that had a downward impact in the quarter. EMEA had some step up, in particular, had a step up in marketing expenses relative to the previous quarter. Then, in the Rest of World segment, the TMON and Korea shut-down costs had disproportionate impact.

You should expect to see all the segments improve in segment operating margin next quarter along with the overall improvement in EBITDA. Then, in the back half of the year also fairly consistently with what you saw as a ratio what you saw last quarter.

Okay. Thanks a lot.

(Operator Instructions)

Ross Sandler, Deutsche Bank.

Just two questions. Ones a follow up from the last one. Eric, so you were pretty clear with anyone who met with you over the past couple months that you expected North America Local billings to re-accelerate once you comped the take rate issues from 4Q. That didn't happen, despite what appears to be the greater frequency of emails sent out in 1Q. Can you tell us what happened versus your prior bullish comments? How you believe that you could get to 20% growth by the back half? Then for Jason, you guys have been ramping up the marketing now for three quarters in a row. It looks like organic growth is decelerating in most regions. Goods is looking decent. Can you help us reconcile where the marketing is going? Why is it not driving billings growth acceleration? Thanks.

On the first part, we are in the midst of a big migration. This fundamental shift from being a predominantly push daily deal business to building a marketplace that people come to has positives and negatives. It has tailwinds and headwinds. The awareness the people using the marketplace searching, spending more with that higher lifetime value, that awareness has taken us a bit longer to generate than we would have thought. We've also been watching these redemptions go up and this unused bank of Groupon come down. These things counterbalance each other. It's not a perfect science.

We believe our Local growth rate is going to re-accelerate. From our standpoint, every quarter that goes by, we have more data and we can get more clarity on when it's going to re-accelerate. The good news from our standpoint is that those redemptions have now leveled off, and so we feel like we've seen the bottom in terms of us chewing away at some of that headwind. There is no question that the awareness has not been as fast as we would have liked. It's been slow and steady progress, from 6% to 8% to 9% and up. The marketplace has huge benefits.

We are absolutely on the right track. I wish it was quicker. It would be nice if those benefits showed up sooner, but we are absolutely on the right track. The headwinds showed up in Q3 of last year, and from all the data we see as we begin to lap it and get to into the back half of the year, will deliver double-digit growth. We didn't call for -- at 20% growth, we call for double-digit growth by year end in Local.

Ross, on your second question, so we actually saw overall organic growth accelerate from about 4% year on year globally a year ago to about 9% in you exclude the acquisitions, so over doubling. That's actually up also from about 5% last quarter, so our organic growth is there. Second, in terms of the marketing spend, the ramp up really occurred in Q1. The absolute dollars spent, really across the last few quarters, was actually very consistent in the mid $50 million range, Then stepped up, of course, to the $79 million that we had in Q1 of this last quarter. The reason why you haven't seen a lot of step up in growth is because we spend marketing in a variety of ways. As Eric was mentioning, we are trying to drive awareness for the Pull marketplace. In North America you see us driving marketing that's more about awareness building. In EMEA, we're still trying to grow the customer base. You saw solid customer growth in EMEA, the strongest growth we've had in over a year in the quarter, so we felt that was successful. In the Rest of World region, we're really moving to more of a transactional model.

All of those spends you should expect to return sometime in Q2 and beyond. That's the way those activities work, and that's the way they're being measured. That looks like how they're performing for us. I would say, stay tuned.

Ralph Schackart, William Blair.

Even after stripping out the effect of acquisitions, just curious what drove the stronger than anticipated customer demand in the quarter? Was that marketing driven? Second question. Is there any major differences in either the purchasing habits of these customers or the redemption rates as the Pull message gets communicated broader to your customers? Thanks.

Really quickly, what drove -- and, again, this is -- we're on track for executing against our plan. I feel like in Q1 we moved in the right direction. A lot of the growth we generated that lifted our North American growth rate from 10% in Q4 to 15% in Q1 came from Goods, which had a very strong quarter at about 47% year-over-year growth. The rest of it was driven by activations, which were up. We added around 1.3 million new customers in the quarter, not related to the acquisitions. It was one of the strongest new customer acquisition quarters we've had. It's up almost double from a year ago. Certainly, more people are activating on Groupon than ever before. A big part of that, as we said last quarter, we are just starting to really invest in mobile and getting people to activate on mobile and some of that early work has started to pay dividends.

Finally, people who use Pull continue to spend more. Again, I wish things were quicker, but the good news for us is people who use Pull spend more. Their lifetime value is higher. We just need more people using it. It only represents 9% of our transactions, which means the other 90% aren't using it. It's the same thing in mobile. People who buy on mobile are worth more to us, so we just need more people activating on mobile. The ingredients are there.

Great. Thank you.

Heath Terry, Goldman Sachs.

Eric, I was wondering if you could give us a sense of what stage you see the efforts at rationalizing and optimizing your international operations are? Whether its innings or quarters or 90% that you would suggest that we think about it in terms of getting them to the footprint and expense base that you think is optimal? Then, with the efforts that you've made in terms of sales force efficiency in the Local business, what kind of improvements are you seeing either from more recurring revenues from Local businesses that are running persistent deals versus the technology investments that you've made at improving sales force optimization?

Hey, Heath. Thanks for the question. This is Kal. I'll take the first one and Eric will take the second one. As we look at our international segment, we know we need to split it into two, one is EMEA and the other one is Rest of the World. EMEA we feel very good, the basics, because we have four consecutive quarters of growth in billings, growth in met customers, growth in units sold, across all channels. We are in the right direction. As contribute to the rationalized, the [Asia EMEA] there is to increase in Pull leverage. We're making very good sales progress on that, and we feel very good about the path we are in. That, I would say, definitely at a far mor advanced stage then the rest of the world.

With respect to Rest of the World, we have made significant progress in the last quarter. For the first time ever, even excluding Ticket Monster and foreign exchange, we grew our billings 9% year over year and we reduced our losses by greater than 50%. The business is healthy, but we are in an earlier earnings. Like we always told in the earlier calls and that APAC. That's because APAC and Latin America where will continue to focus on regionalization, more on G&A reduction, but do it in such a way that we continue to improve the merchant and customer satisfaction. We are in earlier innings on that, but we have complete belief that by the end of the year the Rest of the World picture, the Rest of the World region would be segment operating come breakeven while it will continue to grow.

In terms of sales force efficiency, we've added a significant number of deals for our marketplace over the past year. In North America alone, we are 95,000 deals, over 200,000 deals worldwide. We've done this without adding a significant number of headcount to our sales force. It's 5,000 people deep, so it's a very large sales force. Supply is up four or five x over the last year and the sales forces has remained fairly constant. We've been able to do that by building, I think, the most sophisticated suite of back office, local commerce sales tools that have ever existed. By getting most of our merchants -- now, it's well over 75% of our merchants that opt to be on Groupon in a perpetual manner. Their deals are up all the time. That being said, for the marketplace to thrive, we are going to have to continue to add supply and add demand. It is a big shift, and so we're mindful as to how we do that. We've been releasing a series of tools like for example, Deal Builder, which improve automation and help us get more merchants on the platform.

Great. Thank you.

Mark Mahaney, RBC Capital Markets.

This is Brian on for Mark. Wondering, when could you expect to see an inflection point in terms of US shipping efficiencies? Also, what is your strategy for international shipping looks like relative to the US? In terms of shift to direct over time and also drop-ship capabilities?

This is Kal, I'll take your question and Jason may want to add a few points there. We are very much in the process of rationalizing our warehouse and fulfilment costs. Like Jason, Eric mentioned has curbed. We are adjusting our drop-ship mix to direct fulfilment. We are also trying to get more keels into one box by utilizing the distribution center we have built. We are increased the shipping threshold from $19.99 to $34.99, while we are rationalizing the outbound freight costs by renegotiating deals with the carriers. We are doing it both in the rental space as well as in the rest of the world. Like Jason and Eric mentioned, we expect to see significant progress starting Q2, and we expect that to really be in the double digits by the end of year.

The only thing I would add, in terms of outside the US, is that while Kal said lot of this same approaches are being taken, if you look at the margins for the direct business outside the US, there are already much higher at about 13%, in EMEA particular. You have to keep in mind that they're having their own facility is not as urgent because you have much shorter geographies to ship to. Therefore, the use of three PLs and drop shippers actually is very efficient. As you can actually see, that's already manifested in the financial today. That's something where you shouldn't expect to see any build out in fulfillment centers probably any time this year.

Okay. Thank you.

Gene Munster, Piper Jaffray.

If we could revisit the take rate, you mentioned some of the one-time impacts from TMON, but how should we think? Is it still in the 30% to 40% range? Any sort of thoughts on how you expect that to play out? How it's been used as a tool to kind of motivate some merchants to participate more in the marketplace? Thanks.

This is Jason. I'll just answer the -- mathematically the take rates, as I think you alluded to it, he take rate, if you exclude TMON, is very consistent with where it last quarter and where it has been in the past. It's the TMON business, which has a low double-digit take rate, which is very unique. Outside of that, we're still in the same 30% to 40% range for Q1.

What I think (multiple speakers) I'm sorry.

Have you been needing to -- I guess it's been relatively consistent, but do you see going forward to try to continue to build the marketplace to use take rate as a tool or a lever to do that? Or should we think of it as becoming more consistent?

The take rates in Local have been relatively consistent over a long horizon of times. There is nothing we see in the short horizon that would materially affect our local take rates. What we do see leaning on incentives and discounts more and more to drive awareness of our marketplace and to drive awareness in mobile. For example, in North America in Q1 we spent a significant amount of money on incentives to drive awareness of our marketplace. We would actually -- you can see it up on the site today. If you go to the site today, you'll see something like 10% off great hotel deals that you can go shop for. You go to Getaways and you go into the search box and you type New York hotel or Chicago hotel and you'd see various deals. This is driving awareness for our marketplace.

It's been a very effective form of advertising for us. We intend to continue to do it until we get the awareness to the marketplace where we want it to be such that it's counterbalancing some of the headwinds we talked about earlier.

Okay. My final question, just in terms of the total deals, you mentioned 200,000 deals globally on the network. What is that optimal number, do you think, over the next few years?

I get asked this question a lot. I wish I had a perfect answer. Local is the long tail. We are solving problems that has never been solved. It's one of the reasons that -- when you think about all the variables we have to forecast and manage, if you look within all the microscopic elements of our results, you're always going to see some variability, but we've done a pretty good job of managing the results in the aggregate. It's complicated and you have to piece it together. What was the first part of your question -- the second part of your question?

What was that number? Is it a half a million deals, do you think or -- it's 200,000 now

In terms of the total number, which bounces around a bit. I used to think it was probably in the neighborhood of maybe a quarter million or a half million might be the optimal number. Because it's the long tail and because it's a complicated problem, you are trying to solve all these different pairing combinations like flower shop in Topeka, Kansas or whatever the pairing combination might be in Local. It's impossible to know for sure. I would say this, that we still deliver far too many null search results and we don't yet have an experience where people can pull out their mobile app, go to a search box, type something in, and get an amazing deal right around them. I think we're going to continue to invest until we get to that point, maybe it's half a million deals. I would be guessing to tell you the exact number.

What I do know is that we've been able to add a significant number of deals without materially increasing the size of our sales force, because of the tools, because of the automation. We have new stuff hitting market that's going to just enhance that. We feel comfortable that whatever that number is, we're going to be able to get there without making a outsized investment.

Final quick question. You said that the deal growth or number of deals on marketplace was 42% growth through the March quarter. Can you remind me what that was in the December quarter?

I believe it was over 65,000 in North America.

Okay, great. Thank you.

Tom White, Macquarie Research.

My question is on consumer awareness of the Pull marketplace in North America. I apologize if I missed this. I believe you guys tested some brand TV advertising in the US recently that touts the search ability on the site. Did that launch early enough in order to affect that 9% of searchers number? Or if not, are there any early findings or performance metrics that you guys could talk about relative to that? Maybe just comment on how you're approaching TV advertising for consumers and Pull the US? Thanks.

The short answer is it launched very late in the quarter or at the beginning of April. I can't remember the exact dates. It launched in a few cities. We are testing it before we roll it out. The results are -- it's far too early to have conclusive results of the campaign. If you saw it, you're clearly getting the message we're trying to convey, which is we want to be that starting point of local commerce. We want people opening up that app and searching when they're out and about to find amazing deals right around them. We've got to just increase that awareness.

All the things we're doing, whether it's discounts and incentives on the website or in mobile, whether it's TV ads that we are running, whether it's national deals that can only be found in search. All these things are meant to drive awareness for the ultimate experience we know people want to have, which is when I have a need, I go to Groupon and I find a deal nearby, and I buy it, and I use it right away. When people do that, when redemptions are -- same-day redemptions or short-term redemptions are way up, that's the perfect experience to have. That's when you get people increasing their spend and using Groupon as -- will make it a part of their daily life.

Thank you.

Arvind Bhatia, Sterne Agee.

What you just alluded to on the shorter-term or same-day redemptions, I'm sorry if I missed this, but could you update us on how that's trending? I think last quarter you had said it was sort of doubling in the early part of the year. Then on mobile activations, Eric, wondering if the trajectory there -- I think you had said those guys take about 30% longer. Anything materially changing there as you've been pushing more of that? Then, just generally on the acquisitions, have there been any surprises at all so far, positive or negative, that you would like to share with us? Thank you.

Let me take the first and the third, but maybe the second you can repeat because I missed part of it. Redemptions continue to outpace our billings growth. Unused Groupons are still down, materially down over 30%. We're still seeing a similar trend that we saw. That being said, over the last several weeks, last month plus, we started to see redemptions really leveling out. The number of unused Groupon's per user have begun to level. That's what you want to see. That's when you know you've chewed through or used up that bank of unused Groupons or that backlog of unused Groupons.

In terms of acquisitions, we haven't seen anything that's really surprised us. ideeli -- it's doing exactly as what we had expected. It's still very new. We acquired it only a few months ago. Same with TMON. I would say if there's anything to call out, it's simply that the opportunity in Korea is truly amazing. That market is growing quite a bit, and the billings growth has been fairly exceptional for TMON. We've been investing in that growth. We dialed up our marketing spend in the first quarter in TMON. In fact, most of the spend in Asia was in transactional marketing for TMON. We expect the spend to be fairly significant again in Q2. Then it will start to taper in the back half of the year. As Kal mentioned it will begin to generate positive EBITDA.

Then your second question was --

My second question was on mobile activations. I think that was one of the areas where you were making some marketing investments to get people who downloaded the app to become active sooner. I think you've shared with us that mobile customers take about 30% longer to activate. Just wondering if that's changing at all in any way resulting from your push?

It's, certainly, it's one of the areas we are doing a very good job in. If you look at our activations, they're up from roughly 700,000 a year ago in Q1 to 1.3 million, excluding TMON and ideeli this quarter. A lot of that is mobile and a lot of that is us investing in some form of discounts, save $5 if you download the app and buy something right now or save 10% off a restaurant if you buy a deal right now. There's certainly a lot of incentives that are being used to try to dial up those activations in mobile. When you dial it up as we have and you get the kind of customer growth that we got, your spend per customer will look a bit flat as ours does because you've added a ton of new customers who continue to spend and their lifetime value will go up over the next several quarters.

It's part of that. We said we were going to invest marketing to drive billings growth, and we did just that. We dialed up our marketing. We brought EBITDA down a bit, but we still feel comfortable that we're going to deliver roughly $300 million in EBITDA for the year, at least $300 million EBITDA for the year, which is, obviously, a raise from last quarter. We still invested pretty heavily this quarter, up $30 million in marketing, and still delivered over $40 million in EBITDA. We are exactly where we thought we would be in that regard.

Great. Thank you.

Tom Forte, Telsey Advisory Group.

What I wanted to know is when you think about answering new opportunities such as the Groupon basics, how do you make the decision on what opportunities to enter? For that initiative, to what extent can you leverage the current infrastructure and to what extent do you have to make changes down the line, adding fulfilment centers or things of that nature to grow that business? Thank you.

Kal and I will take it. The first part is, we are highly focused on Local. It's obviously what drives our business. It's where our main strategic forces is. That being said, we built these incredible categories. Our Goods business in North America alone is now on pace to do over $1 billion. World wide, it's $2.5 billion plus or whatever the run rate is. We are very mindful of making sure that our Goods business and our Getaways business and our Live business are all thriving. From time to time, we do add categories. Basics for us is one of those categories, and we think it fits right in. In large part because it just fits the value prop that we offer, which is highly curated, unbeatable deals that our customers love and want to buy and can consume when they are out and about.

That's a great point, Eric. Also, Basics is going to help us a lot with customer retention, because these are products you want to buy very regularly. If Groupon offers them at unbeatable value in a very curative way, we believe it is going to help us with our customer loyalty, but also our ability to get around and place a number of order units we'll have in a shipment go up. In that way, it fits very much into the core value proposition of Groupon Goods business.

Then just to add on it, as Kal mentioned earlier, it all gets distributed out of -- where there's renewed focus on distribution for our own fulfilment center and Basic, these are items that are shipped in bulk, which keeps the freight logistics costs very low and they get shipped out of our distribution center -- utilizing our infrastructure.

Thanks.

Thank you. This does conclude a question-and-answer session of today's program as well as today's program. We appreciate your participation in today's conference. Thank you. You may now disconnect. Good day.