Groupon Inc (GRPN) 2014 Q3 法說會逐字稿

Good day, everyone, and welcome to Groupon's third-quarter 2014 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 FP&A and Investor Relations, Genny Konz. Please go ahead.

Hello, and welcome to our third-quarter 2014 financial results conference call. On the call today are Eric Lefkofsky, CEO, and Jason Child, CFO.

Following discussion and responses to your questions reflect management's views as of today, October 30, 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. We encourage investors to use our 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 third quarter reflect the acquisitions of TMON and Ideeli since the respective dates of close in January. We will, at times, discuss performance including and excluding the impact of these acquisitions for comparison purposes. Additional detail regarding the contribution of each to the quarter will be included in our 10-Q.

On the call today, we will also discuss the following non-GAAP financial measures -- adjusted EBITDA, non-GAAP earnings per share and free cash flow, as well as FX neutral results. 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. Unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2013.

Finally, as a reminder, we are hosting our first Investor and Analyst Day in Chicago on November 11th. A live webcast of the event will be made available through our Investor Relations website. Now, I will turn the call over to Eric.

Thanks, Genny. Q3 was a record quarter, and one in which we largely delivered on all of our main operating objectives for the year. After three quarters of stagnant growth, our North American local billings accelerated from 1.8% last quarter to 10% in Q3. Our goods gross margin in North America improved sequentially to about 10%, and in rest of world, we reduced our segment operating loss by more than half sequentially and generated positive adjusted EBITDA for the first quarter in over a year.

We were able to reignite growth across all our segments in Q3, which drove a 39% increase in overall gross billings to $1.86 billion, with revenue increasing 27% to $757 million. Adjusted EBITDA continued to increase, coming in at $67 million. And non-GAAP EPS came in above our range at $0.03.

North American performance was strong. Gross billings grew 16% to $774 million, driven by double-digit growth in all three categories -- local, goods, and getaways -- a trifecta that hasn't occurred in over a year. North American revenues increased 16% to $418 million. Gross profit was $176 million, and segment operating income was $13 million. These are strong results, despite a tough prior-year comp in local growth and given that Q3 is typically a seasonally low point for local, as people travel throughout the summer months.

EMEA billings growth accelerated from under 1% last quarter to over 10% in Q3, reaching $489 million, also driven by growth in all categories. Revenue growth was 56%, compared with 42% last quarter, reflecting a greater mix of direct revenue. In addition, we generated $22 million in segment operating income. After much work, EMEA has now seen three quarters in a row of year-over-year customer growth. And we believe it remains positioned well for the future.

Rest of world grew 155% in billings, driven by the acquisition of TMON. Excluding our Korean business, rest of world grew 9% on an FX neutral basis. Revenue grew 26%. The large difference between billings growth and revenue is related to TMON's deal margins, which remain in the low teens, as are typical for that market. The rest of world segment operating loss improved by almost $12 million quarter-over-quarter to $6 million. The team has done a fantastic job returning the business to growth while at the same time controlling expenses.

We began the year with three primary objectives. First was to reaccelerate local growth in North America and abroad. Second was to improve the gross margins and operating efficiency of our goods business. And third was to continue to achieve stability in our international operations and reduce our losses in rest of world. We're pleased that our results in Q3 largely delivered on all three.

Let me start with the first. Every quarter, we have nearly 12,000 people worldwide focused on initiatives to drive growth. Yet over the last several quarters, these initiatives have been overshadowed by headwinds related to redemptions, e-mail declines, and a shift in consumer behavior as we transform to a mobile marketplace. As these headwinds began to subside in Q3, for the first time in a year, we saw the positive drivers outweigh the negative ones.

After three quarters in a row of slow growth, our North American local billings growth accelerated in Q3 from 1.8% last quarter to 10%, achieving our target of double-digit growth by year end. Redemptions have stabilized, as it appears we have burned through a good deal of our consumers' backlog of unused Groupons. Growth of redemptions is now aligned with our growth in local billings, as opposed to being significantly higher.

In addition, our e-mail business has stabilized after falling for the past several years. And our customer satisfaction and merchant quality are at or near all-time highs, which continues to fuel new customer adds. As the headwinds continue to ease, we expect continued strength in our local business. Wet we're not just focused on driving billings growth in local. We also intend to drive gross profit dollar growth.

While take rates in North American local improved from 35.7% last quarter to 36.3% this quarter, they continue to reflect an increased proportion of sales for higher-quality, lower take rate merchants in the quarter as well as the impact of more site-wide sales and [other] discounts as we continue to drive awareness of our marketplace. Going forward, we believe that take rates in local will remain within the range we've seen over the past year or so, balancing between about 35% and 38%. Jason will provide some additional color on in this a moment.

Our second priority was to improve our goods margins, particularly in North America. Our shipping and fulfillment costs have historically been almost 2x that of other comparable e-commerce companies. To address this, we're making some significant changes, including shifting more of our business to drop ship, moving more fulfillment to our own distribution center in Kentucky, and increasing units per order. We've made continued progress, with gross margins in North America in line with our double-digit target, reaching 10% in the quarter.

Our third priority was to continue to improve our international operations and reduce our losses in rest of world. Our One Playbook initiative, the standardized best practices globally, has really begun to pay off, helping to drive the almost $12 million reduction in our segment operating loss. The operating loss is nearing breakeven when excluding TMON. As I mentioned a moment ago, rest of world generated positive adjusted EBITDA for the first time in over a year.

Our Asian businesses are growing at an accelerated pace, driven by TMON. During the third quarter, TMON billings grew over 60% year-over-year, as that business continues to thrive and gain market share in the fifth largest e-commerce market in the world. As a result of the significant growth opportunities that exist for TMON as well as our Asian businesses more broadly, we've hired financial advisers to help us evaluate a range of financing and strategic alternatives in APAC.

We're exploring opportunities to unlock significant shareholder value, while positioning the businesses to maximize their long-term potential in these large, fast-growing markets. As part of this exploration, Kal Raman will be moving on to explore other opportunities outside of Groupon. Kal has helped us build a tremendous team around the world that is ready and eager to lead us in the next stage of our Company's growth.

We focused on the priorities I've highlighted because we believe they are the purest drivers of gross profit dollar growth. We made great strides in Q3, and with these critical objectives now on track, we believe the business is well-positioned to deliver improved results going forward. As such, while our financial disclosures will remain unchanged, we will shift the focus of our commentary away from quarter-to-quarter movements on these factors, going forward, and instead focus on progress towards our longer-term goal of growing both gross billings and gross profit at least 20% annually, over the next five years.

We've also made progress in the third quarter across our strategic initiatives. Mobile remains well over half our business and growing, as over 100 million people have now downloaded our apps. Our marketplace of about 300,000 deals continued to gain broader awareness, contributing to double-digit growth in North American local. And we believe our international business has really turned the corner.

First, let me spend a bit more time on mobile. Our percent of mobile transactions continued to increase in Q3, including some countries that are approaching a mix that is well above 65% mobile. Spend for customers who buy through mobile remains significantly higher than for those who don't. And this past quarter, we were selected to be a launch partner for Apple's new Apple Pay product, which allows us to integrate with many of the hundreds of millions of credit cards they have on file.

Our mobile business is thriving. So much so, that we've begun to explore how to further capitalize on our mobile advantage. About a month ago, we launched Snap by Groupon, which helps people save money on everyday household items such as groceries. The app is off to a great start, with nearly 1 million downloads in the past 45 days. And more importantly, it's helping our customers save tons of money. Snap is just one example of how we're continuously innovating in mobile commerce.

Second, local. Not only did North American billings growth increase from 1.8% last quarter to 10%, but we also saw improved results in our local business in EMEA, which went from a 6% decline in Q2 to 5% growth in Q3. In addition, we saw similar improvement in rest of world local. This past quarter, we improved the quality of our local deals and the personalized nature by which we present them to our customers. We made great strides in getting top merchants to work with us, achieving the highest concentration we've seen in years -- high-end restaurants and spas and nationally renowned museums and entertainment venues.

Third, marketplace. Groupon is a very different Company than we were six years ago. We have over 250 million subscribers and nearly 53 million customers who have made a purchase in the last year alone. Over 100 million people have downloaded our mobile apps, and we built a marketplace of about 300,000 deals that our customers can buy in real time. Yet despite all of our progress, what we've learned over the past year is that in order to build a thriving local commerce marketplace, we need Groupon to become an integral part of our customers' lives -- a daily habit.

All the products we're building to improve consumer experience are oriented around three primary tenants. One, increased supply to ensure that the best deals are always on Groupon. Two, make it easy for people to discover those deals. And three, provide tools that make the experience of buying and using a Groupon more convenient. Let me start with the first -- increasing supply.

With about 300,000 deals now available on our site, including over 120,000 in North America, we are improving selection every day. Through our self-serve efforts, we're now adding 700 merchants a week, and we believe we're on pace to generate over $20 million incremental billings annually. But we still have a long way to go. The percent of our traffic in North America that's searched, as defined by those utilizing our search box, remained at roughly 10% in the quarter. While we've added a variety of new tools for our customers to explore the site without searching such as sub-category navigation, their impact is not getting captured in this metric. As such, we're working on providing some additional color on how best to measure our progress, going forward, and intend to update people at our Investor Day.

Second, to help people discover our deals, we need to improve the process of searching for them in our marketplace. It's way too hard today. We estimate that we represent 5% of an average merchant's annual volume, and yet almost 30% of all Internet users in north America have a Groupon account. That means millions of people are paying full price today at merchants that are running Groupon deals when they could easily open up our app prior to visiting that merchant and save up to 50% on whatever they're buying. We believe that intelligently targeting and reminding customers to check Groupon represents a significant opportunity not only for us to grow our local business, but also to drive even more traffic to local merchants.

That said, the vast majority of search occurs outside Groupon. We need to make sure that we're in front of customers, wherever they're searching. Our customers should be able to search on Google and other search engines and find amazing Groupon offers. Today, SEO represents about 7% of our business in North America. We believe it should grow substantially in the future. To expand our SEO efforts, we're dramatically increasing the amount of content we put in front of our users so they can rely on Groupon not just to save money, but also to help them navigate and discover local experiences.

One tool to help us expand our content is merchant Pages. To date, we've built more than 7 million pages in North America and have released over 500,000 of them to be indexed, which will grow significantly with the roll out of each new city. In just the past few months, we've seen strong consumer interaction with Pages. We've collected and displayed more than 20 million ratings and tips for our consumers to read, letting customers know how many people recommend a particular merchant. In addition, over 400,000 people have begun following our merchants or have hit Request a Deal.

And third, make the experience of buying and using a Groupon more convenient. We've also launched and deployed Gnome, our merchant-facing operating system, to over 6,000 merchants in North America. While we're still in beta with this product and continue to work on ways to drive adoption, we're encouraged by some of the early signs related to improving the redemption process and increasing connectivity with our merchants.

Gnome puts us right inside our merchants and allows us to capture critical data regarding consumer spending and open capacity. Many merchants don't have access to this data today. They don't have the ability to figure out why they're having a slow day or which items aren't selling well or why their sales people aren't converting customers. And even if they can cobble together some level of insight, they rarely are able to doing anything with it. We believe Gnome will allow them to analyze item-level sales detail and take action by tapping into our community to help drive additional demand.

When you combine Gnome with the millions of people that have downloaded our apps, you can see the foundation of a true local commerce network unfold. A network where users and merchants are continuously connected, allowing consumers to explore the world around them and save money while they're at it. And allowing merchants to offer realtime discounts and incentives to get the right customers coming in their doors at the right times.

Overall, I'm thrilled with the progress we made across all of our initiatives in the quarter. We remain focused on execution, both in North America and in our international markets via our One Playbook initiative, and are excited to see it starting to generate real benefits. With that, I'll now turn the call over to Jason to discuss our financial progress.

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. Here are the highlights.

Gross billings increased 39% to $1.86 billion. North America grew 16%, EMEA increased 10%, and rest of world increased 155%. Excluding TMON and FX and further taking the exit of Groupon's legacy Korea business into consideration, we were pleased to see rest of world growth, for the third quarter in a row, increasing 9%. Revenue increased 27% to $757 million. North America grew 16%, EMEA grew 56%, and rest of world grew 26%, lower than the 155% billings growth, as a result of the substantial addition of lower margin TMON billings to the mix.

Gross profit was $380 million in the quarter, compared to $360 million last year. Gross profit growth lagged billings growth due to a greater mix of direct revenues as well as the addition of lower-margin TMON billings. North America, in particular, was also impacted by continued investments in quality as well as order discounts to drive awareness of our pull marketplace. The sequential decline in gross profit is consistent with the seasonal patterns that we've seen in the past.

Adjusted EBITDA was $67 million in the quarter, up slightly compared to $62 million last year, as higher gross profit was partially offset by increases in SG&A and marketing related to TMON and Ideeli. Note that, including order discounts to drive awareness of pull, which are reported as a reduction to billings rather than as a marketing expense, we saw a $23 million increase in marketing compared to last year. GAAP loss per share was $0.03. Excluding stock compensation, amortization of acquired intangible assets, and acquisition-related costs -- all net of tax -- non-GAAP earnings per share was $0.03.

Free cash flow for the trailing 12 months was $93 million, including $25 million for the quarter, which resulted from our positive cash flow from operations. We continue to expect free cash flow to pick up materially in the fourth quarter, as did it in 2013. As of September 30th, we had $855 million in cash and cash equivalents, including a $21 million negative impact of FX in the quarter. You may recall that we recently entered into a three-year $250 million revolving credit facility. As of September 30th, we had not drawn on the line.

And as it relates to our share repurchase program, including the 1.3 million shares repurchased in the quarter, we have repurchased a total of 26.1 million Class A common shares under our existing authorization, for an aggregate purchase price of $190 million. Approximately $110 million remains available under our existing repurchase authorization, which will expire in August 2015. The timing and amount of any repurchases will continue to be determined based on market conditions, share price, and other factors.

Turning to a few notable highlights of our non-financial metrics. Units reached another all-time high of 88 million, and even after excluding acquisitions, were the second-highest ever. Active customers grew 24% to 52.7 million for the quarter. All categories contributed to growth in both North America and EMEA. And notably, EMEA customers increased year-over-year for the third quarter in a row.

Moving on to our categories. We saw the strongest growth in local globally that we've seen in at least six quarters, with local gross billings increasing 17% to $855 million with continued growth in customers, units, and active deals. All segments contributed to the growth. North America increased 10%, EMEA returned to growth increasing 5%, and rest of world grew 60%, driven by TMON.

Local gross profit decreased 2% to $261 million, with billings growth and lower cost of revenue more than offset by takeaway declines. While rest of world declined 13%, North America was about flat, and EMEA grew 3%. Goods gross billings increased 63% to $723 million, with all segments contributing to the growth. Goods gross margin is defined as gross profit divided by gross billings, or 10.9% 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 190 basis points year-over-year to 11.7%. With about half of our goods billings now direct, the dollars in aggregate continue to move in the right direction. And as Eric mentioned, with continued focus on the reduction of shipping and fulfillment costs, we expect to see continued improvements in gross margins over time. Finally, travel gross billings increased 62% to $282 million, with EMEA returning to growth, increasing 22% in the quarter.

Before I close, let me provide some additional color on a few specific items. Our results for the quarter included $19 million of non-operating FX losses, related to inter-Company loans with our subsidiaries, primarily resulting from the significant decline of the Euro against the US Dollar. In addition, we recorded a tax benefit of $6 million in the quarter, which included an $8 million reduction in our tax reserves.

Looking ahead, as Eric mentioned, we believe that local take rates in North America will remain within the range we've seen over the past year or so -- between about 35% and 38%. It's important to keep in mind that reflected in this is not only our margin on deals with local merchants, but also larger national merchants, which often carry lower margins.

We believe take rates will fluctuate within the 35% to 38% range as the mix of deals varies by quarter and as we make investments in quality. As it relates specifically to Q4, you should expect that we'll come in closer to the low end -- around 35% -- given the normal seasonal effect of the holidays. Likewise, for goods, as we've seen in the past, we anticipate that the holidays will drive a slightly lower margin in the fourth quarter, along with the significant sequential lift that we typically see in volume.

Finally, significant movement in FX rates, the Euro in particular, has led to a roughly $7 million negative impact on our adjusted EBITDA estimate since we last gave full-year guidance. For the fourth quarter, based on current FX rates, we expect revenue between $875 million and $925 million, adjusted EBITDA between $80 million and $100 million, and non-GAAP EPS of between $0.02 and $0.04, excluding stock compensation, amortization of acquired intangibles, and acquisition-related costs net of tax.

As always, our results are inherently unpredictable and may be materially affected by many factors, including a high level of uncertainty surrounding the global economy and consumer spending, as well as exchange rate fluctuation. With that I'll turn the call back to Eric.

Thanks, Jason. As more and more commerce is occurring on the fly, the intersection of local and mobile becomes ground zero for the very evolution of commerce. With local being one of the last great white spaces of the Internet and the largest sector of our global economy, disruption is inevitable. We are pioneering that disruption.

Imagine millions of merchants connected to hundreds of millions of customers through a geocentric commerce network. Imagine that as these customers move around, their commerce world moves with them. The options of what they can buy and should buy are being sorted in real time, based on their location, their current preferences, what they just bought, the time of day, inventory that's just become available, and so on. This is the platform we're building at Groupon. And we look forward to providing more insight at our upcoming Investor Day.

With that, let's take some questions.

Thank you.

(Operator Instructions)

And our first question comes from the line of Ross Sandler of Deutsche Bank. Your line is open. Please go ahead.

Thanks, guys. I had two questions. Nice job on getting the growth going, here. So, on that front, it seems like billings growth rates are accelerating pretty much across the board. In some markets, you're seeing take rates come down. And, Jason, you just mentioned some quality initiatives and how local's going to be kind of range-bound.

But if we look out like 2015, 2016, do you firmly believe that, with accelerating growth rates on billings, you can also see gross profit grow in tandem with that? And then, the second question is on Groupon Pages. Eric, I think you mentioned 7% of your conversions come from SEO-driven activity. Can you just give us an update?

It's only been out for a short period of time, but what is Groupon Pages doing to increase that 7%? I guess, what percent of small businesses that have one of these new pages have claimed their page or have run active Groupons with you guys in the past? Thanks.

Thanks, Ross. I'll start. First of all, I think we're excited that we were able to accelerate our growth in local from 1.8% last quarter to 10% this quarter. And obviously, doing that in the face of some significant headwind that we've seen over the past three quarters, where that local growth rate has been around 1% to 2%. And we talked a lot about what drove in that the past -- predominantly headwind related to e-mail and headwinds related to redemptions. But that has started to, obviously, stabilize. And we're coming out of that period and encouraged that a lot of that negativity is behind us.

To me, the first thing you have to do is get local business growing again. You've got to get billings growing. And if billings are growing, and growing in a healthy way, it should translate into gross profit dollar growth. As I've said before, I care a lot more about gross profit dollar growth than I do about percentages. I'd much rather have a local business that's two or three times as big, at let's say 35% margin, as opposed to one that's roughly the same size as we have today at 38% margin.

It's not about percentages. The local business is so healthy -- it's really about reigniting growth. And what we would expect to see, now we're through that period of negativity, we would expect to see that, over time, we make the kind of progress we want to make, both in terms of billings growth and in terms of gross profit dollar growth as we work our way toward that ultimate goal of getting to 20% growth of both.

And I will let Jason comment in a second. But before I do, I want to just knock out your question on search. We talk about search, and it's somewhat confusing -- and we'll try to provide some additional color at the investor day -- because search really has two parts. When you look at our marketplace and attraction, you have people who come to Groupon and, basically, search for something inside the search box. And then you have search that occurs where it normally occurs, on places like Google and Bing.

And, what we talked about in the script is that our SEO efforts are now at 7%. But when you factor in the SEM side of that, when you really look at search that's occurring in Google or Bing, it's really closer to 14%. So, we've made really great strides. As you may recall, we started giving out numbers a year ago, or a little bit longer, that said we were low-single digits. And those efforts have now really started to pay off. And that side of our search business is up to 14%.

You have to look at search holistically -- both search that's occurring inside our search box and search that's occurring where people normally search, which is, again, places like Google and Bing. And a big part of how we get search moving in the right direction is, we get all kinds of fantastic content out there. And that's a big part of what Pages are.

We've collected, over time now, over 20 million tips and reviews and ratings without really putting a ton of effort behind that because our customers and our merchants are clamoring for this, and they love it. And putting that content out there is helping merchants get new customers, and it's helping customers find amazing merchants.

We're going to invest a lot of time and energy in making those pages as good as we can. And we think it's going to drive a ton of traffic. And, obviously, we start from an incredible base. We have over 150 million unique visitors [to-date]. So, our community is already, in terms of local commerce, is really large, both in terms of traffic and in terms of engagement, right -- nearly 53 million customers, 100 million people have downloaded our app. And so, this really engaged community. But too often, they come to Groupon looking for something and can't find it, and Pages is an opportunity to fix that.

So, Ross, on your question regarding kind of expectations and the flow-through and take rate on revenue and gross profit -- I'd say the first thing is that the take rate in Q3 of last year in local -- that was highest we saw all of last year. So that, of course, from a comp perspective, made it a little bit tough from a revenue growth standpoint in local. And you should -- you'll see that change a bit next quarter, when -- last year, we had a 320-basis-point reduction in local take rates from Q3 to Q4. We do not expect to see anywhere near that kind of reduction from Q3 to Q4 this year -- somewhere probably more like 100 basis points or so.

And then, going forward into 2015, Eric did provide, in his prepared remarks, the long-range target of 20% plus all categories, all regions, going forward over the next five years. I would expect us to make progress against that goal next year. In terms of exactly what the growth rates will be across billings, revenue, and gross profit, we're going get into that a little bit more at our analyst day in a couple of weeks. And so we look forward to sharing it with you then.

Great. Thanks, guys.

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

Hi, guys. It's Brian, on for Mark. I was wondering if we could talk about local billings growth outside of North America, especially as you've been deploying some of your North America technology abroad -- specifically in Europe, I believe -- as part of the One Playbook. And then, also, could you just remind us when we largely lapped the push-to-pull headwinds?

Yes, so first, in terms of local growth rates outside North America is one of the great stories of this quarter -- is obviously, the performance in Europe. Not only did Europe in the aggregate accelerate from just under 1% growth last quarter to 10% growth across all categories, but, in local, we went from negative 6% decline last quarter to 5% growth this quarter.

So while Europe is not yet at the 10% level that North America is at, it certainly moved meaningfully in the right direction last quarter. And that has to do with the fundamentals of that business being really significantly improved over the past year. In terms of customer satisfaction and merchant satisfaction and deals that are really resonating, that team has done that.

And we now will turn our attention and focus to rest of world and try to make sure that all those -- all the stuff we've done with One Playbook is making its way into rest of world, which predominantly is made up of Asia and Latin America. So, and in terms of -- your second question was related to headwind?

The transition from push to pull, especially as some of the unused deals, also, have started to bottom out in North America. When do you think we'll lap some of those headwinds?

Yes. The headwinds began to show up in Q3 of last year -- towards the end of Q3. And, really, it was related to the marketplace starting to take hold. People could all of a sudden, in mass, search on Groupon and find amazing deals without having to buy them up front in the e-mails we were historically pushing to them. As a result, the number of unused Groupons began to drop, and redemptions went up. And we really started to see the impacts.

Our e-mail business was really suffering because of that. A lot of that was being made up for parts of our business that were growing quite rapidly, like our mobile business. But it was just off -- slightly more than offsetting the negative headwinds. That's why we were delivering 1% or 2% growth.

What's interesting about Q3 of last year is that it actually -- in Q3 of 2013, it was actually our biggest period of local growth. I think we grew about 13% in Q3 of last year. I think it was like, 4%, 5%, 6% in Q1. Then like, 8% or 9%. Then up to 13%. Then it dropped pretty dramatically to like, 1.8% in Q4.

So, to deliver 10% growth in Q3 of this year, we're actually lapping a period of pretty significant growth. This isn't an easy comp for us. If the comp gets easier, it gets easier in Q4 after the headwind began to show up. So, hopefully, that answers your question.

Great. Thank you very much.

Thank you. Our next question comes from the line of Paul Beaver of Bank of America Merrill Lynch. Your line is open. Please go ahead.

Hey, guys. Thanks for taking my questions. I was hoping that you could give some commentary just on the quarter-over-quarter growth in active customers. It looks like US and Europe was pretty healthy, but rest of world declined. Can you give us some color on the decline there, given the strong bookings numbers?

And then, secondly, on exploring the sale of Ticket Monster, it's been a relatively short time since you acquired that. Can you give us some color on the full process there?

This is Jason. I'll take the first question. On the customers, it relates to after we bought TMON in Q1. In Q2, we shut down the Groupon Korea operation since TMON became the new operation for us in Korea. So we then removed those customers towards the end of Q2 last year. So, as a result -- I'm sorry, actually this year. So, as a result, it shows that the customer count decreased when, if you take Korea out of it, it actually increased in fairly healthy trends, just like the other regions.

And as it relates to -- so one of our main objectives, obviously, was to reduce our losses in rest of world. But another is to stay focused and to make sure that we win in our biggest and most important business, which is local. Right now, we're in 47 countries, and we can't invest in every country at the level that we would like to at all times. It's just not possible. And some markets, like Korea, are evolving really rapidly.

TMON is growing faster than we thought it would. It's certainly growing faster than it was when we acquired it. The growth has been unbelievable, and that business is thriving. And it has the potential to be the leader in e-commerce in Korea. We're very focused -- on the long term, we're focused on making that happen. And one of the things that we're going to do is explore strategic alternatives because we believe that TMON -- and there could be other markets that are similar -- could really benefit from having a strategic or financial partner that helps them unlock their ultimate value.

We're not looking to sell all of TMON. We love the business. And, obviously, you can never tell where these things go, but we'd like to be a shareholder for a long time. But we need to set that business up for success. And, again, we just can't be as aggressive as we'd like to be in 47 markets at one time. And the opportunity in TMON and some other emerging markets in APAC is really getting interesting, and we want to take advantage of it.

Okay, thank you.

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

Thank you. I'd like to add my congratulations on achieving your targets in the quarter, earlier than expected. I wanted to go back to a question that I think Ross was asking about your 2015 and 2016 plans. As you think about local billings in North America and elsewhere, and [trending to] go from 10% to 20% long term, can you provide some thoughts on, in the interim -- 2015 and 2016 -- how much progress you expect in those years? Similarly, for gross profits as well.

And then, my second question is on Groupon Pages. As you invest against that business, do you also have plans to maybe incorporate some sort of advertising model into that? Do you think that would be a possibility for you down the road? Thank you.

Arvind, this is Jason. I'll take the first one. Thanks for the question. The short version is, we do expect to make progress in 2015 and 2016. And kind of how we expect to do that, I'm just not going to be able to get into it now. But I hope will you'll be able to join the investor day in a couple of weeks, and we'll get into it then.

And in terms of Pages -- so if you think about this product and where it is, we have built over 7 million pages. But we've only released roughly 500,000 or more, both to our internal search index at Groupon and then to the external search indexes like Google. And that's a matter of time, right? Because these pages have to have rich content. You can't just dump 7 million pages on the market; you have to make sure the pages have rich content. So we've just begun taking action to help facilitate the collection of tips and pictures and reviews and ratings and all that good stuff that makes the pages exciting.

As these pages get built, we're fortunate that Groupon is, first and foremost, in the transaction business. And so, we want to put up some kind of deal or special or offer on these pages. We have a lot of inventory already that we can pull from and put on those pages, and we're now working with our merchant partners for whom we build pages to say, hey, is there any specials or offers or deals that you want to put up to help attract customers? Again, when you have a community of traffic as large as ours, with over 150 million monthly uniques and all these people that have credit cards on file and are actively purchasing, we think we can become an amazing channel for merchants to get customers in the door.

And just one anecdotal point is, we launched a feature a few months ago, called Request a Deal. We've just been blown away. Over 400,000 people have clicked that button, letting merchants know that, should they ever decide to run a deal, they would love to buy it. This is only 45 or 60 days old, or whenever we launched it. So it's very new. So the engagement's just been fantastic. Right now, we're, first and foremost, focused on getting that engagement up. We monetize things for a living. And so we'll have no problem monetizing these pages.

Okay, great. Thank you, guys.

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

Hi. Tim Chiodo, in for Eric. The question is mainly on the EMEA direct business. So, specifically, last year around Q4, you started, I believe, partnering with some third-party fulfillment partners. And you really saw an uptick in that business and its continued strength for the last few quarters. Just wanted to see if there were any plans to bring on additional partners, or to build out the fulfillment capacity in the region further for 2015.

This is Jason. I'll take that question. So, we did see a really nice improvement in direct margin last year, as you said. We actually grew from about 10% to 14% direct margin in EMEA last -- Q3 to Q4. This year, we actually just completed Q3 at about 18%. It is -- there are some 3PLs, or third-party logistics, kind of outsourcers that we use. We use a larger percentage of drop shippers.

You have to remember that, in Europe, it's very different than North America, where you have much smaller geographic areas that we're covering. So, as a result, we can actually provide a great customer experience, in terms of a relatively short order-to-delivery timeframe. And per-unit economics are not as sensitive there as they are in the US, where getting two versus one units in a box really makes a big cost differential in the US. Not as much so in EMEA.

So you should expect to see that business continue to run in -- the direct margin was 18%. Overall, it was about 17%. You should expect it to stay in that territory. And because there is a lot of capacity for drop ship and 3PLs, we don't have any near-term expectations that we need to do any sort of fulfillment center build out. But that certainly could be an opportunity. And I'd say farther down the line, but again, not something that we're focusing on.

Okay. Thanks very much.

Thank you. Our next question comes from the line of Ralph Schackart of William Blair. Your line is open. Please go ahead.

Good afternoon. On the goods side of the business, again, as you made a lot of significant amount of logistical changes since last year, how are you thinking about the upcoming holiday seasonal demand in 2014 -- your ability and capacity to handle that demand versus where the goods infrastructure was last year? Thanks.

Yes. So I'll start, and Jason may want to also comment. But, look, we've done a significant amount over the past year to prepare for this holiday season. And we think we're in very good shape. We opened up our Kentucky distribution center in Q4 of last year, and so it was just starting to ramp up. Obviously, it's been open now for a year, and we feel great about the throughput of that facility. We've done a ton of work on the system side to make sure that our logistical infrastructure and systems are ready.

As you can see from the site itself, we've done a lot of work, in terms of the user experience that people are seeing when they come to goods and search. We've got a new UI. There's a new UI in mobile that's being rolled out. We've added a significant amount of inventory. There's now thousands of deals on the site. So we think we're well positioned, from a demand perspective and from a systems perspective, going into this holiday season.

Yes. Ralph, the only thing I would add is, last year, we did have a couple hundred basis points of margin reduction that happened in the quarter because of the combination of refunds and upgraded shipments. Because we just didn't have a great handle on the combination -- the intersection of what our demand versus what our supply capacity actually was.

So that is something that we have a much better, I think, team as well as process and set of tools to monitor. And so, as a result, I would expect the -- I think last year between Q3 to Q4, we saw over a couple hundred basis point degradation -- actually, 370-basis-point degradation -- in gross margin. We expect to see -- there could be a little bit of reduction that has more to do probably with pricing and margins. But, in terms of the actual net gross margin reduction, it should be very small, certainly relative to last year.

Great, thank you.

Thank you. Our next question comes from the line of Brian Fitzgerald of Jefferies. Your line is open. Police go ahead.

Thanks, guys. You've had Groupon Freebies for a while -- longer than Snap, with the cash-back offerings. Can you differentiate around the levels of interest in both of these? Is there any difference in the type of merchants participating in each one? And, maybe as a follow-up, how is the in-store usage of Freebies tracking, to date? Thanks.

Yes. So I would say, in terms of Freebies and Snap, even though Freebies is older than Snap, both are still fairly new business lines for us. Snap, we launched -- obviously, it's very new. It's only a few months old. And we've just been overwhelmed at the adoption of that app. We're -- about 1 million people have downloaded the app in the last 45 or 60 days. And it's just been kind of a runaway hit. And I think one of the reasons is, it serves a different kind of merchant profile than Freebies.

Freebies is really in the business of dealing with all the big retailers and brands and gets that kind of the mainstay of commerce, right? It's big national retailers, people that have an on-line presence, people that have in-store presence, and it's all the coupons that they tend to offer, similar to a Retail Me Not or Coupons.com or people like that. Whereas Snap is really a much more of an everyday household, kind of a CPG product. It's all about helping people save money on the everyday things that they buy in a grocery store. You know, it's loaves of bread and milk and eggs and macaroni and cheese and all that good stuff.

And so those big consumer brands have just adopted it and have really fallen in love with it as a tool to reach a new consumer and get people to try new items, right? It's a very big deal -- if you can get people to try a new brand of soda or a new brand of a household item, you can build long-term loyal adoption. And Snap is a tool to do that.

So the level of interest has been super high. They serve slightly different consumers, as I mentioned. In terms of in-store usage, basically right now, the Freebies business -- we make money the same way as the other companies I mentioned, where we distribute these coupon codes, and people redeem them online or in store. And then we earn an affiliate fee. That business is just growing like a weed. It's been fantastic month-over-month growth.

But because we're in the aggregate, the fact that we did nearly $1.9 billion last quarter alone -- even though that business is growing really quick, it's still small, relative to the overall business. And so we don't call it out.

The only thing I'd add is, in terms of the selection and inventory, we have about 35,000 coupons and about 7,000 stores available through Freebies right now, and continuing to expand.

Great. Thanks, guys.

Thank you. Our next question comes from the line of Tom Forte of Brean Capital. Your line is open.

Great. Thanks for taking my question. Thanks for the traction in North American local. So how should we think about the use of branded deals -- Starbucks, things like that -- versus digital advertising, where I know you're very good at tracking your return on investment, as far as which is more effective at driving both sales and the different impacts they have on the margins as well? Thanks.

So, I mean, I can give you some anecdotal commentary, but I wouldn't profess to be able to give you a perfect answer. I will tell you that when we run national deals, like Starbucks or Whole Foods, or any of the variety of people -- we just ran iTunes recently -- you can see it from the rate of sale. When we do a Starbucks deal, we can sell hundreds of thousands of units an hour. I mean, these things can really generate some significant volume.

And we have been a very good source of driving both new customer acquisition for these big brands as well as some of the stuff they really want, which, for example, might be people to download their app or to engage with them in a new way. And so I think, if you look at Groupon in the aggregate, we are one of the most successful forms of advertising that exists because it's all performance-based advertising.

You put a deal up of some kind, and the only way the merchant is giving anything away is if a customer actually walks in the door. So it's completely ROI based. You can measure its effectiveness instantaneously, as opposed to when someone might run a more general-branded campaign on television or on other forms of advertising where it's harder to measure. And, obviously, it's been effective because the -- Groupon's not even six years old, and our run rate's nearly $8 billion. So it's been widely adopted.

Thank you.

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

Great. Thanks. I was wondering if you could give us a little bit more color on the kind of adoption that you've seen for some of the newer merchant services offerings -- whether it's Pages or Gnome, especially to the extent that you're starting to see some replacement of normal payment systems through that. And then, what kind of -- as well as reservations and some of the other offerings that you've got.

And then, to the extent that there's a sense of these things for the merchants that are using those offerings, what kind of difference you're seeing in either revenue per merchant or uptake of the deals that those merchants are offering among consumers.

So, there's a lot that in question. Let's start with Gnome for a second, right? Gnome is still a very new product for us. We just rolled it out. I think we began talking about it last quarter. We're in about 75 markets, but just rolling out in those markets. We've deployed over 6,000 tablets, which is quite a bit when you think about the absolute number. But, obviously, given the fact that Groupon does business with over -- or has done business with over 800,000 merchants, we've a long way to go. But the 6,000 in our market, they're predominantly fulfilling multiple merchant needs.

It's a redemption device which helps our consumers redeem. It can be a point-of-sale system for those merchants that don't have one -- and roughly 60% of our merchants don't have a point-of-sale system. It has payment capabilities. And obviously, it's a tool to collect reviews. As we talked about a minute ago, we've collected, and now starting to make public, the nearly 20 million ratings and reviews that we have.

Basically, what we've seen in this original deployment of Gnome is that merchants are using it. Customers are using it. The payment attach rate -- the number of merchants that are signing up for payments -- has been higher than we would have thought. I can't tell you the exact number because we're not disclosing it, but it has surprised us in how many people are signing up for payments. So we think there's a really interesting long-term opportunity there.

But the main goal of this tool is to, basically, allow merchants to try to figure out what's happening at an item level. Why is today slow? Why aren't customers coming in? Which sales people are doing bad? Which items are selling or not selling?

And as merchants can start to get insights around that item-level volume, they can access our community of 250 million subscribers and 150 million visitors and 100 million app downloads and all that stuff. They can access that to basically move that inventory. And that starts to get at the real problem we want to get at, which is realtime yield management in local commerce. So, it's early. The stats are encouraging, but not big enough to really paint the full picture.

In terms of revenue per merchant, right now we're deploying these Gnome tablets to the merchants that we're already working with. So, we haven't seen any real significant change to our economic model, in part because the way the tablet program is designed, we neither really make a lot of money or lose money from it. It's really economically agnostic for us to deploy a tablet or not. And, obviously, the deals are selling on our site the way they sell, and that's not influenced by whether or not somebody has a tablet or not.

Great. Thank you.

Thank you. And, ladies and gentlemen, that concludes our Q&A session and our conference for the day. Thank you for your attendance. You may all disconnect. Have a great rest of your night.