Groupon Inc (GRPN) 2014 Q4 法說會逐字稿

Good day, everyone, and welcome to Groupon's fourth quarter and full-year 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 the VP of FP&A and Investor Relations, Genny Konz. Please go ahead.

Hello, and welcome to our fourth quarter and full-year 2014 financial results conference call. On the call today are Eric Lefkofsky, CEO; and Jason Child, CFO. Rich Williams, President of North America, will be available for questions during the Q&A portion of the call.

The following discussion and responses to your questions reflect managements views as of today, February 12, 2015, 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 on our filings with the SEC, including our form 10-K.

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 fourth quarter and full-year reflect the acquisitions of TMON and Ideel since their respective closing dates in January 2014. 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 year will be included in our 10-K. 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. And now, I'll turn the call over to Eric.

Thanks, Genny. Q4 was a record quarter on almost all fronts: units, billings, revenue and adjusted EBITDA. And, one that capped the year of strong progress on our main operating objectives.

Gross billings increased 31% to $2.1 billion for the quarter, and revenues increased 20% to $925 million. Gross profit grew 4% to $393 million in Q4, adjusted EBITDA came in at $87 million, and we delivered $0.06 of non-GAAP EPS. Demand was so strong, in fact, that we broke an all time record, selling more than 100 million units in the quarter.

Our results were particularly strong despite a couple factors that worked against us. First, changes in FX rates, the euro in particular, negatively impacted the quarter. Had they remained neutral to last year, we would've delivered $82 million more of billings, $33 million more of revenue, bringing revenue to $958 million for the quarter. $17 million more of gross profit, and $2 million more of adjusted EBITDA.

Second, our results reflect continued investment in TMON. In an effort to gain market share, we chose to invest more heavily in that market in Q4. As a result, TMON drove the substantial majority of the sequential increase in rest-of-world segment operating loss, contributing $13 million of the overall $16 million Q4 loss. Without TMON, we would have delivered an additional $6 million in adjusted EBITDA in Q4.

Even with these factors, we had a fantastic quarter, as both revenue and EPS were above expectation. Let me run through the highlights.

In North America, gross billings increased at the fastest rate we've seen in over a year, growing 20% to $949 million, driven by double-digit increases in all three categories: local, goods, and getaways. North America revenue increased 24% to $551 million, and segment operating income reached it's highest level in over a year, coming in at $31 million. Consumers are reacting positively to the changes we've made in our most mature market in North America, which we believe bodes well for international business that tends to trail the US in feature and product development.

Second, EMEA had a relatively strong quarter despite a difficult macro economic climate, and a material decline in the euro. Billings were about flat at $561 million, yet excluding the impact of FX, billings grew 8%. Revenue grew 8% to $272 million, 18% excluding FX, and we exited the year with fourth quarter segment operating income of $35 million, a high point for the year. After much work, EMEA is stable, profitable, and contributing nicely to Groupon's financial performance.

Finally, rest of world billings increased 141%, driven by TMON. Excluding our Korean business, rest of world grew 6% on an FX neutral basis. Revenue grew 39%, and our segment operating loss was $16 million, $13 million of which was related to TMON, as I mentioned. Excluding TMON, rest of world was near breakeven in the quarter, improving $12 million over Q4 of last year. We made great progress in stabilizing rest of world in 2014, and we are now focused on positioning our Asian assets in the best possible manner to deliver long-term shareholder value.

Jason will cover TMON's performance in the quarter in more detail, but as I mentioned, we believe investment in Korea is essential to ensure the long-term success of the business, given the opportunity and competitive dynamics of that market. As a result, we have been exploring a range of financing and strategic alternatives for TMON and our Asian businesses more broadly. As part of that process, multiple parties have expressed preliminary interest in TMON, although it's too soon to comment on structure, pricing, or the likelihood of any transaction happening, as the process is still underway.

We also made progress in the quarter across our 2014 strategic initiatives, in which we focused on building a local and mobile marketplace that we could eventually export to every country in which we operate. For us to fulfil our vision, we have to get local right and create a geographically relevant experience for our customers every time they interact with us. And to get local right, we believe we have to basically do two things.

The first is to create a marketplace filled with enough high-quality inventory that our customers can find just about anything they are looking for locally, and save money while they are at it. We need Groupon to become a daily habit that our customers check first before they make a purchase. We began building this marketplace about two years ago. We now have more than 135,000 deals available on Groupon in North America, not counting coupons or specials, which is up from 80,000 a year ago.

While this might seem like a lot, we've come to realize we need more inventory in our market to create a more ideal consumer experience. Our consumers are still burdened with far too many null search results when they look for something on Groupon. To augment our primary efforts and help populate our market, we built merchant pages, a new product that helps us display the nearly 25 million tips and ratings we've collected. Creating the start of a transactional relationship between us and the universe of merchants we don't do business with today.

We build millions of pages, and have begun to index them in search. Today, we have released over 800,000 of our merchant pages to be indexed on Google, up from over 500,000 a quarter ago. When it comes to the rollout of pages, we are taking a city by city approach, targeting our top markets first.

Ultimately, we believe the success of pages will be measured by how much revenue they generate, but today, you can look at two metrics to measure their progress. First nearly 800,000 people have begun following our merchants or have hit Request A Deal on pages. Second, they have generated millions of unique visitors for Groupon. While we are pleased with the progress to date, as our customers are engaging with them and they are generating meaningful traffic, it's still early.

While we are focused on the quantity of deals in our market, it's not enough to just get more merchants on our platform. We also need the best merchants. We've always been willing to do whatever it takes to get the very best merchants to run deals with us. If that meant lowering discounts or take rates, we've done so.

In Q4, our local take rate in North America was down roughly 250 basis points compared to last year, and yet the gross profit dollars we generate from local were higher. With profits measured in dollars rather than percentage points, we would happily trade a bigger business at lower take rates for a smaller business at higher take rates, as long as the trade-off produced more dollars at the end of the day. That said, we expect take rates to remain relatively stable in our North American local business throughout 2015.

The second thing we need to do to get local right, is to ensure that our customers have an amazing experience every time they buy a Groupon. The current experience is far from perfect. Too many customers let their Groupons expire, the process of booking appointments or reserving tables is still manual, and when you're at a merchant, paying your bill can be clumsy at times.

We need to make the experience of using a Groupon easier than not using one. Over the past few years, we've invested significant time and money in connecting merchants to our marketplace through our in-store tablet, which used to be called Gnome, we provide a point of sale system to our merchants that don't have one, a payment platform, dashboards, and analytics, and a redemption device, so our customers can redeem their Groupons by name or through Bluetooth signature without ever pulling their phone out of their pocket.

We've now shipped about 10,000 tablets, and intend to continue rolling them out nationwide in 2015, focusing on those merchants that have the highest frequency of Groupon customers coming through their doors. In an effort to bring some of the capabilities of our operating system to a broader set of merchants, we're launching an additional product that utilizes beacons, which are available for merchants who claimed their page.

With pages and beacons, merchants will be able to upload content, get real-time access to customer feedback, track consumer behavior, and use proximity signals to connect to nearby customers from our community of almost 110 million people that have downloaded our app so they can run targeted promotions to attract new customers. Beacons are our lightweight solution for merchants that don't do enough business with us yet to warrant us shipping a tablet.

As with the merchant tablet, there is no significant financial implication of us deploying beacons. Both are typically paid for by the merchant, or have a very short term return. Tablets and beacons are powerful tools for merchants and consumers. But, they're only part of the solution to improve the experience of using Groupon.

We are also rolling out our new booking engine to more deals, and expanding the ability for merchants to offer discounts that are both day of week and time of day sensitive. Our goal is to tens of thousands of merchants using these tools by year-end.

And finally, we are building a suite of new products that we believe will enhance our customers ability to pay their entire bill at a merchant using their Groupon account, so they don't need to pull out their credit card or try to reconcile the amount they owe.

As you can see, we have a lot going on. But each of these initiatives is aimed at making the process of buying and using a Groupon easier.

In 2014, we learned that there is a correlation between the strength of our marketplace and growth in billings. In 2015, you'll see us double down on what is starting to show real progress. More inventory, higher quality merchants, greater adoption of our tools, and a relentless focus on the consumer experience from the time we send them an e-mail or they come to our site searching for something, all the way through redemption.

Each of these fits in the broader areas of focus for 2015 that we highlighted at our Investor Day; push, pull, and platform.

For push, we aim to avoid future headwinds and maintain stability in our North American e-mail business, increasing the dollars that our e-mail business generates annually. For pull, our goal is to continue to grow the mix of North American transactions related to search, which increased to 26% in the fourth quarter, up from 19% a year go. And for platform, which is our definition of a connected marketplace, our goal is to continue to grow our active deal count at the same rate we did last year, in which deals on our site more than doubled to about 370,000 globally by year-end.

Going forward, active deals will include the addition of coupons and other deal types, that offer more flexible structures for merchants. If we stay focused on the initiatives I've just outlined, and stay focused on always doing what is best for our customers, we are confident that our business will continue to grow. Now, to discuss our results in the quarter in greater detail, I'll turn the call over to Jason.

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

Gross billings increased 31% to $2.1 billion for the quarter, and 32% to $7.6 billion for the full-year. Excluding an $82 million negative impact from changes in currency, billings would have been $2.2 billion in Q4, growing 36%. On this basis, North America grew 20%, EMEA increased 8%, and rest of world increased 154%. Further excluding TMON and taking the exit of Groupon's legacy Korea business into consideration, rest of world grew for the fourth quarter in a row, increasing 6%.

Revenue increased 20% to $925 million for the quarter, and 24% to $3.2 billion for the full-year. Excluding a $33 million impact from FX, revenue would have been $958 million in Q4, growing 25%.

On an FX neutral basis, North America grew 24%, EMEA grew 18%, and rest of world grew 50%, lower than the 154% billings growth as a result of the substantial addition of lower margin TMON billings to the mix.

Gross profit was $393 million in the quarter, compared to $378 million last year. Without a $17 million drag from FX, gross profit would have been $410 million, up 9% year-over-year, which is the highest gross profit dollars we've seen in over two years. Gross profit growth lagged billings growth, due to a greater mix of direct revenues, as well as the addition of lower margin TMON billings.

Gross profit was also impacted by a $17 million sequential increase in order discounts in North America and the rest of world in particular, which you will recall I reported as a reduction to billings, rather than as marketing expense. While dilutive to margin in the short term, order discounts have served as an effective means of driving traffic and the necessary awareness of our marketplace.

Adjusted EBITDA was $87 million in the quarter, compared to $72 million last year. FX had a $2 million negative impact on adjusted EBITDA in the quarter. Higher gross profit was partially offset by increased investment in TMON and Ideel.

In total, we invested $108 million globally in marketing and order discounts in the quarter, a $39 million increase compared to last year. GAAP earnings-per-share was $0.01, and non-GAAP earnings-per-share was $0.06. Free cash flow for the trailing 12 months was $201 million, including $266 million for the quarter, which resulted from the strongest cash flow from operations we've generated in our history. As of December 31, we had $1.1 billion in cash and cash equivalents.

As it relates to our share repurchase program, including the 1.2 million shares repurchased in the quarter, we've repurchased a total of 27.2 million class A common shares under our existing authorization for an aggregate purchase price of $199 million. Approximately $102 million remains available under our existing repurchase authorization, which will expire on 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 few notable highlights of our non-financial metrics. Units reached another all-time high, exceeding 100 million for the first time ever. Active customers grew 23% to 53.9 million for the quarter. All categories contributed to the growth in both North America and EMEA, which grew 16% and 8% respectively. As Eric mentioned, we are feeling good about the health of the EMEA business, with EMEA customers increasing year-over-year for the fourth quarter in a row.

Moving on to our categories. Local gross billings increased 8% globally to $903 million with continued growth in customers, units, and active deals. North American growth was the strongest we have seen in at least two years, growing 14%. Rest of world grew 38%, driven by TMON, and EMEA posted a 13% decline, almost half of which was related to FX.

As I have mentioned historically, our goods margins are higher in EMEA, which allows us to be more agnostic as to the mix shift between categories and take advantage of the seasonally strong holiday season for goods. Local gross profit decreased 4% globally to $267 million, with billings growth and lower cost of revenue offset by takeaway declines. 5% growth in North America was more than offset by declines in EMEA and rest of world.

Goods gross billings increased 60% globally to $951 million, with all segments contributing to the growth. Goods gross margins, defined as gross profit divided by gross billings, were 9.6% globally, reflecting a greater mix of direct, as well is the lower margin TMON revenues, most of which are recognized on a third-party or net basis.

Despite the sequential decline that is typical of the Q4 holiday season, direct margins increased 300 basis points year-over-year to 10.9%. As more than half of our goods billings are now direct, the dollars in aggregate continue to move in the right direction. In North America, we continue to focus on the reduction of shipping and fulfillment costs, which we expect to drive continued improvement in gross margins. We're on track to achieve the mid-teens target shared at our Investor Day over the next few years.

Finally, travel gross billings increased 40% globally to $230 million, with all segments posting growth for the second quarter in a row.

Before I close let me provide some additional color on some specific items. First, as expected, given the normal seasonal effects of the holidays, North America local take rates dipped in Q4, coming in at 34.2%. Margins in the quarter we impacted by higher promotional activity via order discounts. We are pleased with the returns we've seen on CRM programs, and as we get smarter and smarter about them, we will likely continue to view them as attractive investments.

Going forward, we continue to expect that take rates will be in the 35% to 38% range. However, as the mix of deals varies by quarter, and as we make continued investments in quality and growth, they are likely to hover around the low-end of that range. As Eric mentioned, and as we have shared before, our goal at the end of the day is to maximize gross profit dollars. If that means we need to trade-off margin at times to accelerate growth, we may do so.

Second, marketing expense was $66 million in the quarter. In addition, we invested $42 million in order discounts, taking our net investment up to $108 million, a $39 million increase compared to a year ago, and $23 million higher than last quarter. Our marketing activities continue to balance short- and long-term objectives, with programs geared towards customer and subscriber acquisition on one end of the spectrum, and SEM, display, and order discounts on the other end.

In Q4, we shifted a greater proportion of our spend toward order discounts. While dilutive to margin in the short-term, as seen in North America in Q4, they are an important means of driving traffic, awareness, and at the end of the day, transactions. We continue to believe that, together, this blend of investments will translate into gross profit lift over time.

Third, throughout 2014, we invested more heavily in the Korean market than we originally anticipated, trading off short-term profitability for growth in order to capitalize on the market opportunity. Despite TMON driving our losses in rest of world, contributing $39 million of the $65 million overall segment operating loss for the full-year, their billings grew 52% in 2014, or 47% an FX neutral basis.

In Q4 in particular, we further stepped-up investment to drive market share, with order discounts increasing almost $10 million sequentially, again driving the substantial majority of rest of world losses in the quarter, contributing $13 million of the overall $16 million loss. Slightly reduced billings growth in Q4 of 34%, or 38% on an FX neutral basis, reflected the competitive dynamics of the market, highlighting importance of these investments. We feel good about our position going forward, with growth having accelerated in January to 41%, or 44% on an FX neutral basis.

Fourth I want to comment quickly on the shelf registration that we plan to file this afternoon. The purpose of the shelf is to give us more flexibility when using our stock as consideration of future M&A transactions. There are no acquisitions on the immediate horizon where we currently intend to use the shelf, but this allows us flexibility to act quickly should we need it.

Fifth, our results for the quarter included a tax benefit of $4 million, which included a $17 million reduction in our tax reserves. In addition, we recorded $11 of non-operating FX losses related to intercompany loans with our subsidiaries, primarily resulting from the significant decline of the euro against the US dollar. In the last two quarters alone, we have seen a $30 million impact from these not-operating FX losses.

As a result, starting in Q1, we intend to exclude these losses or gains from our non-GAAP EPS definition and guidance, as they are related to mark to market changes in loans with our subsidiaries, and are not expected to significantly impact cash flows in the near-term.

Looking ahead to Q1. For the first quarter of 2015, based on current FX rates, and the fact that we're lapping our TMON and Ideel acquisitions, we expect revenue between $790 million and $840 million, growing between 4% and 11%. This guidance reflects approximately 500 basis points of unfavorable impact from changes in foreign exchange rates. Based on current FX rates, and an expected $15 million of investment in TMON to ensure the business is well-positioned, we expect adjusted EBITDA in the first quarter of the between $45 million and $65 million, and non-GAAP EPS of between zero and $0.02.

And for the full-year, we are reiterating the target that we shared at our November Investor Day, of at least 25% year-on-year growth in adjusted EBITDA, or slightly higher on an FX neutral basis. As such, we currently expect adjusted EBITDA for the full year of greater than $315 million. As always, our results are inherently unpredictable and may be materially affected by many factors, including a high level of uncertainty surrounding the global economy and consumer spending, as well as exchange rate fluctuation. With that, I'll turn the call back over to Eric.

Thanks, Jason. Our progress in the past year was essential to the repositioning of the Company. We began the year with three big goals. To get local in North America growing in double digits again, to improve our goods margins, and to stem our losses in rest of world ex-TMON. Thanks to the tremendous effort of our team, North America local billings reached the highest growth we've seen in the couple of years, coming in at 14% for the quarter.

Our goods direct margins in North America remained above 9% in Q4 despite normal seasonal pressure, which is up almost 50% from Q4 of last year. And in rest of world, we reduced our full-year losses in our legacy business by more than half.

Our goal is to one day have millions of merchants plugged into Groupon and connected to our hundreds of millions of subscribers. Thereby creating the first real-time local commerce marketplace.

It's a big ambition. One we believe we can achieve, given that we allow our customers to interact with their surroundings in ways others don't or can't. Making purchasing more relevant, more personalized, more immediate, and more efficient.

Plain and simple, we believe we are well-positioned to take advantage of the off-line to online conversion that is occurring in local commerce. As we now turn our attention to 2015, we look forward to keeping you posted on our progress in the year to come, and delivering on the opportunity in front of us. With that let's take some questions.

Thank you.

(Operator Instructions)

Ross Sandler from Deutsche Bank.

Thanks. Just a couple questions.

First, a big part of the Bear Case is that you're North America goods margin is never going to go up, and from what I see here, it looks like it went up 200 basis points year-over-year; first time it has been up ever. So is that basically a reflection of the efficiency gains from the distribution centers, or is that product mix or something else? A little color there would be helpful.

And then second question is just any update on what is happening with TMON? If we look at the $15 million or so a quarter investment from TMON, is the right way to think about full-year 2015, if we deconsolidated TMON, closer to $365 million or $375 million for the core business?

Thanks.

Before we talk about TMON, I will take it in reverse and cover TMON a bit, and then Jason can cover North American goods margins. I thought maybe it would be good to give some context on 2014, which for us was, obviously, a transformational year. We set out to build the first real-time local commerce marketplace, connecting nearly a million merchants who have done business with us to our community, which has grown pretty dramatically.

We now have 260 million subs, 110 million people have downloaded our app, 54 million customers, 160 million visitors; so we've made great progress in building this market place. We still have a long way to go. We also made good progress operationally in 2014, reducing our reliance on e-mail, which used to account for the vast majority of our Business and is down to about 20%; increasing our search business 19% a year go; it is 26% in Q4. And when you add in SEO, it now represents about a third of our Business, which is a sign that are marketplace is really starting to take hold.

Getting our local business growing again, it was 1% to 2% growth a year go, finished at 14% growth this quarter. Improving our goods margin as you just mentioned, they were about half what they were at the end of the year, and stabilizing rest of world. But we still have a quite a bit of room.

As it relates to TMON, let me start by covering the process for second. We believe that Korea is an essential market for us, and we believe in the opportunity. It happens to be a very competitive market. As a result, we have been exploring a bunch of financing and strategic alternatives for TMON and our Asian business more broadly.

As part of that process, we now have multiple parties that have expressed an interest in TMON, and although it's too soon to comment on structure or price or the likelihood of a deal happening, things are underway and we feel very good about the process. That said, there has been some pressure at the end of Q4, that market got particularly competitive, and so we leaned on order discounts a bit more the end of Q4. That cost us about $6 million of EBITDA in Q4, so without that the $87 million we delivered would have been about $93 million. That continued into January, which is why we've called out that there could be up to $15 million of EBITDA investment in Q1.

But we've been able to drive growth. That business was growing about 44% in January, so we feel good that if we make the investments we are still driving growth on a business that is very large. But to give you some additional color as it relates to guidance, and also talk about the goods margins, I will toss it over to Jason.

Hey Ross.

So, on the goods margin improvement. Yes, we had a very good quarter in terms of really just execution. A year ago, you saw margins go down 400 or 500 basis points from Q3 to Q4. Mostly due to fulfillment challenges.

This quarter, you saw us go down from about 9.9% in North America down to about 9.3%; so down 60 basis points. That is really just seasonality, relating more to pure product margin, so, holiday, promotional stuff normally happening more around Black Friday and Cyber Monday. And so, as you said, year-on-year up a couple hundred basis points.

So, we are right on track with what we talked about back at analyst day. We are still at the relatively early stages of increasing the biggest driver to improving margins, which is really getting more units in a box. So, units per order then ultimately units per shipment. And so that is still in the early stages, but we are very much on track for the three-year goal that we set out back at Analyst Day, which is to get to the mid-teen gross margin range.

And then actually in terms of guidance, as Eric alluded to, a little more context overall. Our guidance, overall, is right in line with what we provided last November. For the full-year, we are reiterating our expectations for more than 25% growth in EBITDA, which translates to at least $315 million. The quarterly trajectory for both revenue and EBITDA will follow similar trends as last year.

In other words, growing throughout the year and being more backend of the year-weighted. For the quarter, the midpoint of our EBITDA guidance is growing 38%, which is well above the 25% target for the year. Excluding the incremental $50 million of investments in TMON that Eric just alluded to, it actually would be growing about 75%.

The midpoint of our range implies really strong core earnings growth despite the fact that we are still investing heavily in marketing and order discounts, and of course we have FX pressure. The midpoint of our revenue guidance is about $815 million, which is solid growth, given that the FX impact was roughly $25 million negative since we last reported.

So, this implies a 13% growth on an FX neutral basis. The target we laid out at Investor Day was at least 15% growth on an FX neutral basis for the full-year, so we believe we are very much on track. Also keep in mind that we are lapping the TMON and Ideel acquisitions from January of a year ago.

Just to maybe add some additional color, on the TMON side, even though now Jason and I have spent -- it's been quite a long answer to a short question, we've got $50 million invested in Q1, and we expect those losses to taper off. As I mentioned a minute ago, the discounting in that environment was pretty heavy late in Q4 into early Q1, but we have already begun to dialback some of those discounts on our end, and so we don't expect these kind of investments, these kind of material investments beyond Q1, so the EBITDA impact on a consolidated or not consolidated basis will be much less, because we are factoring in those investments tapering off beyond Q1.

Paul Bieber, from Bank of America.

Thanks. Thanks for taking my question.

A quick follow-up to Ross's question. When we think about the sales process -- I know you're not commenting specifically, but how much of rest of world is in Asia, and will that be included in the sale of Ticket Monster?

If you look at the rest of world segment in Q4, it was about $2.2 billion, and about a little over $400 million in revenue. And TMON represents about 60% of the billings and a little over a quarter, actually a little more like a third, a little over a third of the total revenue.

And the transaction that's kind of in process, or the process in general is, at this point, really focusing on TMON. And that is the only thing that we have really contemplated at this point.

Okay and a quick follow-up on the gross margins. Are the product gross margins stable?

Yes. As I alluded to a moment ago, there is always a little bit of holiday promotional -- it is really kind of proactive pricing action that we will take, specifically around the big kickoff to the holiday timeframe and Black Friday-Cyber Monday, and which is where a large bulk of the sales -- the biggest days of the year occur.

And so, we were right in line with the expectations that we expected, and the business again is right on target with what we shared with you back at the Analyst Day in November.

Just to add on one comment, which is even though, as Jason mentioned, the focus of our strategic and financing alternatives are aimed at Korea at the present moment, we're looking at Asian more broadly, and as we said last quarter, we are focused on unlocking shareholder value in either emerging or evolving markets, where we feel like if we brought in a partner we would enhance the long-term prospects of that business, because we're in 45-plus countries, and it is very hard for us to at one time make equal investments in all of them. We do think about Asia a bit more broadly.

Okay, thank you.

Arvind Bhatia from Sterne, Agee & Leach.

Yes, thank you.

I just wanted to go back to a topic that you had discussed on your Analyst Day, E-mail versus non-e-mail trends. Wonder if you could maybe quantify those for the quarter? And, just wondering if I could get more clarity on free cash flow expectations for this year that correspond to your EBITDA guidance?

Thank you.

Before I talk about e-mail, I also want to pass it over to Rich, because I think it's particularly acute as it relates to our North American local growth. But what I will say just broadly is we've seen it in the e-mail business, as a percentage of our total business, go down precipitously over the past several years, and for a period of time it created some headwind, which is one of the reasons that those local growth rates decelerated so dramatically.

We have been working on returning that and stabilizing that business, so that at least the dollars we generate from our e-mail business are no longer going down, and one of our goals as we called out a few minutes ago is to get those dollars going up. But, it's part of a broad campaign more generally to get local growing, and I'll toss it over to Rich to maybe provide some commentary.

I think its key to look at the North America business overall and our progress, maybe, from a high-level, and then we will work a little bit down, but in general, we feel really good about that progress. We set a goal early in the year to start hitting double-digit growth by year-end. We hit 10% in Q3, we accelerated to 14% in Q4, and more importantly, that momentum continued into January.

As Eric is alluding to, we feel good about how we built that momentum. As we talked about in November, e-mail redemption headwinds we feel are largely behind us, and the local marketplace is starting to really gain traction, and that traction is coming out of four key areas. First is really just active deals; if you look at the marketplace now you're at active deals at 135,000 and growing, which is more and better merchants on the platform.

Second, we are actually seeing improved operating leverage in sales. We closed the year down in headcount while we increased that active deal count by almost 70% over the course of the year.

And that's a big piece feeding into the third part, which is continued traction in search. We gained 700 basis points versus last year in search, and it's now 26% of our transactions when you add things like SEO to the mix, it goes up well north of a third.

And last, we are continuing to focus and make progress in mobile. When you have a 4.5 star app that now has 110 million downloads. We like that recipe. We like that combination of less focus on and less reliance on e-mail, with a rich and healthy marketplace, and that's the kind of thing that we believe -- that leaves us believing that focus on efficiency, mobile marketplace can continue to deliver continued growth in local.

Regarding the free cash flow expectations. So, you saw that we had the strongest quarter in our history at $266 million; generated TTM over $200 million. The way you should think about it going forward is Q1 like last year? Will it be negative because of the payments related to the seasonal growth of the business in Q4?

So you should expect to see some negatives. Certainly nowhere close to the amount that we generated, of course, in Q4. And, I think the best number to focus on is TTM, which will neutralize some of the seasonal effects. As you think about full-year, you should think that cash flow will generally trend with the EBITDA increase, and so we have a 25% growth in EBITDA that we guided to, and you should think of free cash flow going very much in a similar trend.

Great. Thank you.

Tom Forte from Brean Capital.

Great, thank you. So, two quick questions. One, you may have quantified it, but if you didn't quantify it, can you talk about your planned investment spend, the combination of marketing and discounting for both the first quarter and full-year 2015? And then when we think about your coupons business, should we still think about it as a way for you to offset any margin pressure from investing in higher quality merchants?

Thank you.

I will start with coupons, then turn it over to Jason to talk about marketing and order discounts and how they are going to trend throughout the year, or at least the first half. We're pleased with the progress of our coupon initiative, both our previous business or the main coupon as well as the snap business that we discussed last quarter. Both are continuing to grow at really strong clips, and we are excited about the progress.

And yes, that business, in particular, does produce a higher margin in that we basically are collecting a commission, and that commission is effectively at a very high-margin. Over time, as that business gets bigger, it will offset some of the pressure that we naturally put on margins through order discounts. Especially as we get more sophisticated about order discounts, it's become a very efficient form of marketing for us, and so we've been able to lean on it to drive some short-term lift, and one of the offsets to that is either higher take rates and/or growing businesses like coupons that produce higher margin.

And as a result of that, we've called out that we expect margins to be relatively stable. Although depending on the mix, they may be around the low-end of that range, but certainly relatively stable for the foreseeable future. The question in terms of marketing and order discounts and how big that is going to be, do you want to --.

Yes. So, in terms of marketing and order discounts, you should think of that on a combined basis. You've seen us spend somewhere around $100 million on a combined basis. We are going to flex the ratio between what we are seeing from an ROI basis.

In Q4, you saw an increase in the order discount side versus marketing, which was up a little bit. Going forward, we are going to continue to flex based on the returns that we are seeing within that quarter, but on a combined basis you should expect to see it growth similar with the rate of revenue, which again was at a 15% FX neutral basis, plus or minus, depending again, on what efficiencies we see.

Thank you very much.

Ken Sena from Evercore ISI.

Hi. Just on the transition to pages and the efforts around SEO and SEM, we are hearing from some partners that they're having to sort of reengineer their platforms here in order to wire more structured data into Google. Is there an opportunity for Groupon to do that in terms of maybe offering some discounts within that?

Because we look at how my business listings are being presented, it's in a much more controlled fashion. So, just wondering your thoughts there as far as how the discounts could be conveyed in that new experience.

Thank you.

Yes.

Let me start, in that pages are a big initiative for us in building out our marketplace. As I said earlier, one of our main goals is to build up that marketplace, and one of the things you need is more inventory. Better inventory, more inventory, that's a key element to get in this marketplace where we want to get it to. And what pages basically allow us to do, is do business with and interact with the millions of merchants that aren't currently running a deal with us in North America.

I mentioned we only have 135,000 merchants running a deal, and yet there are millions of merchants that could be running a deal, and so pages help us extend that reach, by creating an informational site for these merchants, and hopefully allowing them to access new customers by tapping into our community, which is quite large.

The progress in the past quarter has been good. We've now released about 800,000 pages to be indexed on Google. That's up from 500,000 a quarter ago. We have about 800,000 people that have now hit request a deal or follow a merchant. That's doubled in the past quarter from 400,000.

We've collected nearly an additional 5 million tips and reviews and ratings; we were at 20 million, we are now at nearly 25 million, and we've got millions of visitors coming to these pages. They're absolutely performing as we would have hoped, and I will let Rich jump in on the data side and what the opportunities are.

Thanks, Eric.

I think its important to think about one piece here with us when you move into SEO and SEM. One is reengineering is less of a concern for us. We started out as a Company, a deal and an e-mail.

SEO wasn't part of the core strategy, wasn't part of our website architected originally away. Really a lot of our SEO efforts, SEM efforts are keying around first and foremost building a great content experience for customers, and a great customer acquisition expense for merchants, and a great transactional experience for merchants.

It's less about reengineering than it is about engineering for those great customer experiences and then engineering for the direction that the marketplace is headed on that front. As we continue to see more and more moves into fee-based integrations, whether it is in search and otherwise, we're in a bit of a different spot there where we can quickly move into those spaces and take advantage of those opportunities where they make sense for us. And I would expect for us to be doing more and more of that as time goes on.

Great, thank you.

(Operator Instructions)

Sameet Sinha from B. Riley.

Yes, thank you very much. A couple of questions, here. You spoke about beacons, and you can see the opportunity there, but on dealing with small businesses, how you're thinking about the education process of how that could work, and with that be manual? Would that require you to have people in the store with the process? Secondly, Jason, if you could update us on the consolidation of Europe into one headquarters to simplify the cost structure?

I will start with Beacons. We've had a very consistent OS strategy, which -- or operations system strategy, which is all about putting hardware into merchants and connecting them to our platform. Again, connecting them so they can upload inventory into our marketplace, so we can fulfill on this promise of building this real-time local commerce marketplace, and ultimately help merchants get the right customers coming in at the right time, which is most what they want.

To pull that off, we began -- we had a project called genome, which we are in the midst of renaming, referred to as tablets in the script, and this is all about putting a tablet inside merchants where they can have a redemption system, a lightweight point of sale system, they get full payment capability. Obviously they get access to all that review data, and the rollout of that is going well. We had about 6000 in market in Q3, we're at about 10,000 and Q4. So, we are happy with the progress.

We have refocused that rollout a bit, aiming it at our biggest merchants that have the greatest use, because asking merchants to put this tablet on their countertop is a big deal, and we want to make sure there's enough -- there's a steady flow of customers coming in to warrant it.

As a result of that, we launched a second project aimed really at the long tail of merchants. It's a lighter weight solution called Beacon. It only costs a few dollars, so it's a much easier product, piece of hardware to deploy, and it's really aimed at making the redemption process easy, and also giving us proximity signals, so that these merchants can again tap into our marketplace to drive new customers to come in. It's just launching now, it is too soon. But the good news on the educational front as you mentioned, is that that is what Groupon does.

We sold over 100 million Groupons in Q1, so we are sending an enormous number of new customers into these merchants all the time. We, in many instances, we are their largest source of new customer acquisition. So they want to take the tools that we can make available to them, be it a Beacon or a tablet or an app that helps them in any which way shape or form, because we are just driving new customer acquisition. It's much easier to engage.

Regarding taxes. So, we have a handful of countries that are in the structure today. We will be moving the remainder of all of the international -- the bulk of the international countries, not just Europe, and into the structure over the next year or so.

So, tax on an effective rate basis will still look a little strange, probably throughout this year and a little bit into next year. So as a result, you should really focus on the absolute tax dollars, which should be relatively similar as a percentage of EBITDA that you saw in 2014 by quarter

Great, thank you.

Daniel Ernst from Hudson Square.

Thanks for taking my call. Two questions if I might.

In your push to be a daily habit as you say, and to have merchants have offers up virtually all the time, I can understand how the consumer would be interested in that process, but can you talk to us about the reception and the longevity of merchants on platforms like that? In other words, don't they fear that that becomes their all the time price, the price that is up on Groupon, and so how that works and how long you can expect to keep a merchant in that category? Do you have higher churn with that?

And then second, just a financial question. You had obviously an FX drag in the quarter on the topline, but on the cash flow line, wouldn't there have been also a benefit on the merchants payable and accounts payable line?

Let me start with the daily habit merchant question. So first, the best way to think about this is, if you look at for example -- one that many investors are familiar with, if you look at booking.com as a good corollary.

They went out in Europe and other international markets, and they aggregated a bunch of inventory, typically smaller boutique hotels that couldn't really -- wouldn't have the scale to access the Internet, and they created a nice searchable infrastructure that customers could come to. And it allowed those boutique hotels to basically put inventory on the platform at a discount when they wanted to and take it off the platform when they wanted to.

So, I think the way to think about our marketplace in North America is very similar. We're allowing merchants en mass the ability to put inventory up and take it down, and really dial-up or dial-down the level of discount to drive new customer acquisition. And, net/net, because we helped them manage yield better, they can afford to discount their services and still generate more dollars at the end of the day.

Merchants think about dollars and percentages the same way we do when we look at our local business. We want more dollars, we are not as focused on more percentages. It's very similar.

If you look at the resilience of our marketplace and how merchants are behaving over a long period of time. First of all, last we quoted the statistics, it was something like 80% of merchants are opting to be perpetually on Groupon. So the vast majority of merchants that we sign up want to be on Groupon all the time.

It's one of the reasons that our number of merchants has gone from 1000 at the IPO to 135,000 in North America and 370,000 globally, and it's because these merchants typically want new customers, and they just can't find it. They are more than happy to give a discount if it means giving them the opportunity to engage with a new customer that hopefully they can win and create a loyal relationship.

It tends to be great for merchants, which is one of the reasons that our merchant satisfaction is so high and our retention is so high and our repeat behavior is so high. And, all those things are moving well.

On the question about the merchant payable capital cycle, I didn't catch all that. Can you please ask that again?

Yes, sure. I was wondering what the FX benefit actually would have been on the payables line. For cash flows.

Got it. It was a 500 basis point impact globally on gross. So you can think of it as being, I think in Europe, when you look at the numbers, there you can see its more like about a 10% impact on payables. About -- that would translate to somewhere in the -- maybe in the teens of millions of dollars benefit. I think -- I mean, at the end of the day it's a working capital benefit, which is great.

The way you should think about cash flow going forward is the working capital aspects being slowly replaced more by the EBITDA aspect, especially because the growth of the business especially in Europe, where you see -- you're seeing 8% FX neutral growth, which is nice growth, but the working capital aspect of cash flow is not huge.

Thank you, that's helpful.

I'm not showing any further questions at this time. This concludes the Q&A session and today's conference.

Thank you all for your participation in today's conference. You may all disconnect and, everyone, have a great day.