Groupon Inc (GRPN) 2015 Q1 法說會逐字稿

Good day, everyone, and welcome to Groupon's first-quarter 2015 financial results conference call.

(Operator Instructions)

Today's conference 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 first-quarter financial results conference call. On the call today are Eric Lefkofsky, CEO; Rich Williams, President of North America; and Jason Child, CFO. The following discussion and responses to your questions reflect management's views as of today, May 5, 2015 only, and will include forward-looking statements. Actual results may differ materially from those expressed or implied in our forward-looking statements. Additional information about risks and other 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-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.

We previously announced that we've entered into agreement to sell a controlling stake in Ticket Monster, or TMON, our South Korean e-commerce business. As such, historical results have been recast to reflect TMON as a discontinued operation in the tables accompanying this afternoon's press release. And all financial information and operational metrics discussed on this call pertain to continuing operations, unless otherwise noted.

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 2014 and are excluding year-over-year changes in foreign exchange rates throughout the quarter.

Now, I'll turn the call over to Eric.

Thanks, Genny. Q1 was an important quarter for Groupon, as we are now fully in the midst of the second stage of our Company's lifecycle, having evolved from our daily deal email routes into a full-scale local commerce marketplace. There's a lot to cover today, so let me start with a quick financial overview from our progress in the quarter. As noted in our release, every number and metric we provide now excludes TMON, as we have entered into an agreement to sell a majority of that business, and as such, now present TMON as a discontinued operation for financial reporting purposes, effective in the first quarter.

In addition, all year-over-year comparisons are FX-neutral. On this basis, gross billings increased 10% year-over-year to $1.6 billion for the quarter, and revenues increased 10% to $750 million. Gross profit was $347 million, adjusted EBITDA came in at $72 million, and we delivered $0.03 of non-GAAP EPS. Changes in FX rates, the euro in particular, negatively impacted the quarter. Had they remained neutral to last year, we would have delivered $118 million more of billings, $51 million more of revenue, bringing revenue to $802 million, $28 million more of gross profit, and $3 million more of adjusted EBITDA. We still delivered a very strong quarter, as adjusted EBITDA grew about 58% year-over-year, or 65% on an FX-neutral basis with us still investing heavily in marketing and order discounts.

Let me run through the highlights. In North America, gross billings increased 14% to $894 million, driven by our third straight quarter of double-digit increases in all three categories: local, goods, and getaways. North America revenue increased 11% to $480 million, and segment operating income improved by over 115% to $25 million. I'm particularly proud of our results in local in North America. Although national, which includes deals such as Whole Foods that we ran last year, represents a relatively small portion of the business, it has historically aided our traffic and overall local billings growth. Despite slowed growth in national this past quarter, our local billings in North America still grew 12% year-over-year.

And as it relates to margins, our take rate in North America local improved 110 basis points over last quarter to 35.3%, but as I've said before, our focus is on dollars not percentages, so expect us to continue to invest in driving growth through intelligent discounting. Second, EMEA had a relatively strong quarter despite ongoing macroeconomic issues, and continued material declines in the euro. On an FX-neutral basis, billings grew 7% to $459 million, and revenue grew 13% to $216 million. Segment operating income increased to $20 million.

While EMEA is contributing nicely to our overall bottom line, we have yet to unlock the kind of growth that we believe is achievable in the region, especially in local. We showed some progress, as local billings in EMEA improved from an FX-neutral decline of 6% last quarter to a decline of 2% this quarter, but we have a long way to go, and we need sustained double-digit growth in EMEA billings in order to achieve our overall global goals. The team is hard at work to achieve this.

Finally, rest of world billings declined 1%, again on an FX-neutral basis, and without TMON, to $199 million. Revenue declined 8% to $54 million, and our segment operating loss was $4 million, which is an $8 million improvement over last year. Our team has made progress stabilizing rest of world, and returning the business to near breakeven, which was their mandate. Our primary objective for 2015, as it relates to our Asian businesses, is to focus our efforts on those countries that are strategic to our long-term mission.

We've already made progress here with our pending sale of the majority of our interest in TMON to KKR and Anchor, which Jason will discuss in greater detail in a minute. We'll continue to allocate time and resources in countries and businesses where we think we can win, and we'll evaluate alternative structures that help us unlock shareholder value, and those where we question our long-term strategic positioning, as we did in Korea.

Moving on to our strategic and operating initiatives. Our mission is to connect local commerce, in part by establishing Groupon as a daily habit. To do this, we're focused on two areas: 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 from their phones, and save money while they are at it. And the second is to dramatically improve the experience of using Groupon, when you're out and about.

Let's start with the first. We need to enable merchants to populate our marketplace with amazing inventory. This includes both more and better deals, as well as market rate inventory that we can leverage to create a thriving real-time local commerce marketplace. Globally, we now have more than 425,000 active deals on the platform, including nearly 60,000 coupons. Excluding coupons, active deals grew to about 365,000, compared to 330,000 last quarter. Our goal is to more than double the number of active deals on our site over the next year, to ensure we are always in stock in our top categories, and top markets.

To date, we've had a one-size-fits-all approach when it comes to merchants, and over time, we've come to realize it's too limiting. In order to double our inventory we need to attract merchants that don't want to discount their products and services so heavily, but still want to access our large and growing community. That's why we've developed new multi-tiered approach to working with merchants, that starts with merchant pages. Pages are the entry point of our new inventory assembly line, as they create a transactional relationship between us and the universe of merchants we don't do business with today.

To date, we've released about 900,000 merchant pages, to be indexed on Google. We will release more over time, and we will populate those pages with market-rate bookable inventory, so people can make reservations and book appointments right on Groupon. We will then add specials or coupons for merchants seeking to promote their services on our platform. And finally, we will try and convert those specials or coupons into more attractive deals for our customers. We believe this approach will drive more merchants, more transactable units, and ultimately, more transactions on Groupon.

The second thing we need to do is to ensure that our customers have an amazing experience, every time they use Groupon. We need to improve the experience from search, to buy, to book, to redeem, to pay. Our customers should be able to navigate local merchants, find amazing deals, hit buy, book an appointment or reserve a table, walk in and redeem their Groupon, pay the bill, and handle any customer service issues they have seamlessly right from their phone, using the Groupon app. As I've said before, the process of using Groupon needs to be easier than not using Groupon.

This is equally true when it comes to our goods business. Although the primary experience today involves ordering a product and having it shipped, we are constantly exploring ways to localize our goods business. For example, if one of our customers is on a business trip and it starts to rain and she decides to order a travel umbrella, we want her opening up our app, finding an amazing deal from our curated selection of umbrellas, and then making a decision, whether she wants an umbrella shipped to her hotel, or whether she wants to find a store nearby that has a similar umbrella for sale that she can pick up on the way to her meeting. We believe we can create truly amazing and contextually relevant experiences for our customers at the convergence of local and mobile.

Accordingly, we've begun to evolve the way we think about goods. Over the past few years, as we were building our goods marketplace, we took control over shipping and logistics, migrating most of our goods business to direct, to control the end-to-end customer experience. As the business has grown into a multi-billion dollar global marketplace we are now in a position to turn our focus to expanding supply, through a number of distribution channels.

As we remove our self-imposed constraints of moving inventory largely through our own fulfillment center, we intend to migrate more of our goods business to being fulfilled by a closely managed network of third parties that ship items directly to our customers. This will allow us to add far more items to our marketplace at a higher margin, and with a strong customer experience, much like our International marketplace, where a greater percentage of our business is third party.

Finally, over the past few years, we've invested significant time and money in connecting merchants to our marketplace. Through our merchant-facing operating system, called Groupon OS, we have built a suite of tools that connects merchants to our marketplace in real-time, a marketplace where about 105 million people have downloaded our app. This connectivity serves as the foundation for the platform we're building, and the foundation of our three broader areas of focus, which Rich Williams, our President of North America, will cover in a moment.

The work we've done over the past few years has allowed us to refocus and double down on what we believe matters most, local. We're making important investments in the continued growth of our local business. Our expectation is to largely sustain low to mid double-digit growth in North America local throughout the rest of this year. That said, our primary goal is to grow local billings in North America by 20% or more over the long-term. To that end, we're testing on a city by city basis a number of initiatives, as well as fine-tuning order discounts and marketing investments, all of which could create some variability on our path along the way.

While we've made great strides in shoring up our North America local business, as evidenced by the fact that local growth accelerated from under 2% at year ago to 12% this past quarter, our work isn't done. We are still in the midst of our migration from an episodic push business to a marketplace model. Transitions take time, and are rarely smooth, which provides some context to our results over the past few years. That said, our fundamental thesis remains unchanged, and the opportunity before us unaffected. We aggregate unique local inventory that is both proprietary and difficult to acquire, and make that inventory available to our large community of predominantly mobile customers.

Yet, at less than 5% coverage of potential merchants, our conversion is not where it needs to be, for us to efficiently dial-up our marketing investments to drive growth. At some point in the near future, we expect that to change, and when it does, we expect our growth rates, both billings and revenue, will rise dramatically. In pursuit of that goal, which we believe will be the main driver of shareholder value over the long-term, we are willing to experiment and make bold bets.

Now, let me turn the call over to Rich, before Jason covers the results in greater detail.

Thanks, Eric. Our primary strategic objectives, building out our marketplace, and building a world-class experience for our users, are served by the broader areas of focus for 2015 that we've highlighted previously: push, pull, and platform.

Our progress in these areas is at the root of our continued momentum in North America, which is evident in our strong marketplace fundamentals. Active deals increased by over 50% year-over-year to about 145,000, or over 200,000 with the addition of coupons, which contributed nearly 60,000 deals. We're also seeing more and more of the type of behavior we want to see from our customers, with search now representing 27% of our total transactions in North America, up from 20% a year ago. We are, of course, proud of the performance in North America, particularly in local, where Q1 marked the third quarter in a row of double-digit billings growth. But we're even more proud of the foundational work we've completed so far that's driving those results. It's a foundation we believe in, that we're excited about, and that continues to show signs that we're on the right track.

But our work on push, pull, and platform is far from done. For push, we're innovating on both email and push notifications. Email may be a smaller portion of our business, but it's still an important daily engagement channel, with tens of millions of Groupon users. We have worked hard to stabilize email, and now are focused on increasing the dollars that it generates annually. To do that, we're capturing the essence of the early Groupon push experience, that helped make Groupon so viral: A sense of spontaneity, and great offer content.

Today, that means more intelligent customer and item level promotions, mobile-only deals, site-wide events and limited time pricing, to give customers an incentive to make a quick purchase or dive deeper into our catalog. If you have been watching our North America emails, you will have seen these pieces coming to life over the past few quarters. We will also continue to improve the core relevance and personalization aspects of push, which includes geocentrically aware push notifications, so our customers never miss out on deals, when they are nearby merchants with great offers. We're early in testing location aware push notifications, but we are encouraged by early consumer and merchant response.

For pull, our goal is to continue to grow the mix of North American transactions related to search. Our progress here is clear. That said, it's early, and our teams are relentlessly focused on accelerating. For our marketplace to fully take hold, we need to fundamentally shift consumer behavior, and train our users to check Groupon first. To date, we have delivered the key enablers to this behavior shift to all North American markets. Things like search, redemption tools and marketing technology.

Now, we will more fully utilize the benefit of having about 180 live markets, in other words, about 180 scaled test beds in North America, to build and prove the local experience of the future faster. We recently selected a small group of test markets that will see accelerated rollouts of new product and supply initiatives across their highest frequency local use cases, lunch, dinner, beauty maintenance and massage services, and things to do.

Our computational marketing efforts will fast follow our supply initiatives. As we improve conversion, which is directly correlated to the quantity and quality of inventory we have on our sites, we believe we can more efficiently invest in driving traffic to our sites. As we get pieces right in our test cities, we'll scale them nation-wide, and then worldwide. This city by city approach to experimentation and rollout is something we know well, and see it as one of our key competitive advantages. We've begun to fill in the vast whitespace of local, and believe we are uniquely positioned to quickly build on this work, given our scale.

Finally, for platform, our goal is to make connecting to Groupon effortless for merchants, so we can double our offer content in 2015, while making the experience of using a Groupon easier than not using one. Merchant pages are at the center of our platform initiatives, as they provide a footprint on Groupon for all merchants, as well as high-value content for customers. We now have released roughly 900,000 pages to be indexed on Google. Millions of users are finding and engaging with pages every month, and those users are finding increasing numbers of specials, coupons, and deals for merchants, as well as tips and ratings from fellow Groupon customers.

At present, we've collected almost 27 million tips and ratings, and over 1 million people have begun to follow a merchant or hit Request A Deal on pages. To make connecting to the Groupon platform and pages easy for merchants, our merchant-facing operating system, Groupon OS, will further evolve to meet the diverse needs of our local merchant base. Having deployed about 11,000 tablets to merchants over the past year, we've been able to gather invaluable feedback across every major piece of the local merchant experience.

Higher volume merchants will continue to benefit from the powerful tablet form factor, and we expect to deploy thousands more tablets to those merchants over the next year. But it's clear from this feedback that Groupon OS needs to flex beyond tablets to include Beacons and iOS and Android smartphones. In that, we've learned that the cornerstone of Groupon OS is our merchant app, which can now be used on any smart device, at any merchant. This is the flexible real-time connection that local merchants need. With Groupon OS, merchants use the app and the device that best suits them to connect to an increasingly open platform, and with Groupon OS, redeeming a Groupon will become seamless.

All of these pieces are coming together in North America, and we believe they position us to continue to not only grow local in double digits, but to make Groupon a daily habit for customers and merchants. Now, to discuss our results for the quarter in greater detail, I'll turn the call over to Jason.

Thanks, Rich. 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, are FX-neutral, and do not include TMON.

Gross billings increased 10% to $1.6 billion in the quarter. North America grew 14%, EMEA grew 7%, and rest of world declined 1%. Revenue increased 10% to $750 million in the quarter. North America grew 11%, EMEA grew 13%, and rest of world declined 8%. Gross profit was $347 million in the quarter, compared with $366 million last year. Without a $28 million drag from FX, gross profit would have increased to $375 million.

Gross profit was also impacted by an $18 million increase in order discounts compared with Q1 2014, as order discounts are reported as a reduction to billings, rather than as marketing expense. Adjusted EBITDA was $72 million in the quarter, including a $3 million negative impact from FX, compared to $46 million last year. Lower gross profit was more than offset by lower operating expenses, both reflecting the impact of year-over-year changes in foreign exchange rates. We remain on track to hit our target for at least 25% FX-neutral annual growth in adjusted EBITDA in 2015 and beyond.

GAAP loss per share was $0.02 and non-GAAP earnings per share was $0.03. Free cash flow for the first quarter was $22 million, bringing free cash flow for the trailing 12 months to $222 million. With TMON now excluded, positive cash flow was primarily driven by changes in our business mix from decelerating growth in goods, towards accelerating growth in local. And as of March 31, we had $976 million in cash and cash equivalents.

Turning to a few notable highlights of our non-financial metrics, keep in mind that like our financials, we have recast all of our non-financial metrics to exclude TMON. Units came in at about 54 million, growing 6% year-over-year, with all categories contributing to the growth. Active customers grew 7% to 48.1 million for the quarter. All categories contributed to the growth in both North America and EMEA, which grew 12% and 6% respectively. As Eric mentioned, while we have room to further accelerate growth, we feel good about the health of our EMEA business, with customers having now increased year-over-year for five quarters in a row.

Moving on to our categories. Local gross billings grew 6% globally on an FX-neutral basis to $830 million, with continued growth in customers, units and active deals. North America posted another quarter of double-digit growth, coming in at 12%, EMEA declined 2%, and rest of world was about flat. With the narrowed focus on local, and with the rollout of our North American playbook, we expect growth to accelerate in EMEA and rest of world as their features and functionality catch up to that of North America. Local gross margins, defined as gross profit divided by gross billings, were 31.1% globally, compared to 34.2% a year ago, with billings growth more than offset by take rate declines resulting largely from increased order discounts, and investments in quality.

Goods gross billings increased 13% globally on an FX-neutral basis to $527 million, with 17% growth in North America, and 16% growth in EMEA, offset in part by an 8% decline in rest of world. Goods gross margins, also on a billings basis, were 10.6% globally, compared to 9.4% a year ago. The improvement was driven by North America, where gross margins increased 320 basis points year-over-year.

Recall that last year's margins reflected some leftover effects of the busy holiday season, but we are making progress in our efforts to reduce our shipping and fulfillment costs. With continued focus, we expect further improvement in gross margins in North America over the next few years, toward the mid teens target shared at our investor day, starting in the second quarter, when we expect them to return to double digits. Finally, travel gross billings increased 17% globally on an FX-neutral basis to $195 million, driven by growth in North America and EMEA.

Before I close, let me provide some additional color on a few items. First, marketing expense was $53 million in the quarter. In addition, we invested $41 million in order discounts, taking our net investment up to $94 million. 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 transactional spend via SEM, display and order discounts on the other end. While we spent only $2 million more in total than last year, the mix was very different, with a greater proportion of our spend on order discounts, which increased $18 million year-over-year.

The most significant impact of this shift can be seen when looking at North America local take rates, which came in at 35.3% in the quarter, 350 basis points lower than last year. While dilutive to margin in the short-term, order discounts are an important means of driving traffic, awareness, and at the end of the day, transactions. Our goal is to ultimately maximize gross profit dollars.

Despite the decline in take rates, gross profit dollars in North America local grew about 1% year-over-year. Going forward, take rates are likely to remain around the 35% level, as we make continued investments in quality and growth, but if we need to trade off margin at times to accelerate growth, we may do so. Keep in mind that starting in the second quarter, our take rates will start to be more comparable on a year-over-year basis.

Second, we have spent the last few months evaluating financing and strategic alternatives for our Asia businesses, including TMON. As the Korean market has evolved, it has become obvious that in order to capitalize on the opportunity to become the leading social commerce company in Korea, TMON would benefit from additional resources and local expertise, given the opportunity and competitive dynamics of that market. To that end, we recently announced that we have entered into an agreement to sell a controlling stake in TMON to a partnership formed by KKR and Anchor Equity Partners for $360 million in cash.

The investments value TMON at $782 million on a fully-diluted basis. Groupon will ultimately retain an approximate 41% fully diluted interest. We expect this sale to close in the second quarter, subject to regulatory and customary closing conditions, at which time we expect to record a pretax gain on the sale of between $195 million and $205 million. Historical results have been recast to reflect TMON as a discontinued operation in the tables accompanying this afternoon's earnings release. After closing, income or losses from Groupon's minority stake in TMON will be reflected as a non-operating item within other income and expense, on our income statement.

Third, we also recently announced that our Board has authorized a new share repurchase program, effective upon the closing of the TMON transaction. The new program allows for repurchase of up to $300 million of our outstanding Class A common stock, and includes the flexibility for accelerated repurchases, as well as purchases in the open market. The new program will expire in August of 2017.

In addition, including the 2.4 million shares repurchased in the quarter, we've repurchased a total of 29.7 million Class A common shares under our existing authorization, for an aggregate purchase price of $217 million. As of the end of the quarter, approximately $83 million remained available under that authorization, which expires in August 2015. The timing and amount of any repurchases will continue to be determined based on market conditions, share price, and other factors. Going forward, we will consolidate both programs for purposes of reporting.

Looking ahead specifically to Q2, for the second quarter of 2015, based on current FX rates and excluding TMON, we expect revenue between $700 million and $750 million. This guidance anticipates approximately 800 basis points of unfavorable impact on the year-over-year growth rate from change in FX rates. We expect adjusted EBITDA in the second quarter of between $55 million and $75 million, and non-GAAP EPS from continuing operations of between $0.01 and $0.03.

For the full year, in light of the pending TMON sale, as well as the volatility we've seen in FX rates, I'd like to give some context on our previously stated full-year revenue targets. After removing TMON, which would take our 2014 baseline to $3.04 billion, and taking into consideration roughly 700 basis points of the anticipated impact from FX, we expect revenues of between $3.15 billion and $3.3 billion this year.

Regarding profitability, we continue to expect adjusted EBITDA of greater than $315 million. Both our revenue and adjusted EBITDA guidance are right in line with the targets we provided last quarter. As always, our results are inherently unpredictable, and may be materially affected by many factors, including the high level of uncertainty surrounding the global economy and consumer spending, as well as exchange rate fluctuations.

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

Thanks, Jason. In 2014, we learned that there is a correlation between the strength of our marketplace and growth in billings. Yet despite Groupon's evolution over the past six years, our marketplace today has penetrated less than 5% of the merchants that should be on our site.

The natural question given this connection is why is it taking us so long to get more merchants on Groupon? The answer is because it's hard. If cracking the code on local commerce were easy, it would have been done long before Groupon. The fact that it's so difficult, and the number of advantages we have by virtue of our size and scale, is precisely what gives me confidence that one day we will have millions of merchants plugged into Groupon, connected to our large mobile audience, thereby creating a real-time local commerce marketplace.

We believe we are well-positioned to take advantage of the offline to online conversion that is occurring in local. We believe as we aggregate more inventory, conversion will rise, and we'll be able to invest more heavily in driving traffic and transactions, unlocking new pools of growth, especially in our core local business. We look forward to keeping you posted on our progress, and with that, let's take some questions.

(Operator Instructions)

Paul Bieber, Bank of America/Merrill Lynch.

Good afternoon, thanks for taking my questions. Now that TMON is no longer part of the rest of the world business, can you give us some color on what's left in rest of world? What countries are -- comprise the bookings there? And maybe you could just give your assessments of execution and performance in those countries?

And then secondly, I was hoping you'd give some further color on the progress on the goods gross margins. What are some of the tactical things you hope to accomplish before the end of the year, to drive gross margins higher?

Thanks. I'll probably take the first question on RoW, and then either Rich or Jason will take the second question on goods margins. But before we get to TMON, I want to just set some context to the quarter.

I've been in this job for about two years, and the single biggest inflection point over that time has been this transition to building a local commerce marketplace and no longer being reliant on daily deals and emails, not just in North America, but all throughout the world. And if you look at all of our efforts today, they are completely focused on that transition, growing the number of deals we have on our platform from 1,000 when we went public to 400,000 today.

Growing traffic, we now have 160 million monthly visitors, growing engagement, getting people to search. Search now represents 27% of our business, up from 20% a year ago.

Getting more people to engage with us via mobile. We now have 105 million people that have downloaded our app, and mobile's the majority of our business. And try to connect to our customers when they are on the go which is obviously essential for anybody in local commerce.

And while we've made a ton of progress, we have room to go. But we are seeing signs, the kind of signs we want to see, that lead us to believe we're on the right path. When demand and supply are in sync, our business thrives here in North America, and in rest of world and Europe.

And what I would say is finally, maybe most importantly for a Company in the midst of transition, we've been delivering very solid results, which is a testament to the team. We said last quarter that our goal, our midterm goal was to grow revenues on FX-neutral basis by 15%, and EBITDA by 25%, and we remain completely on track to deliver those results.

As it relates to TMON, which obviously created some noise in the quarter, what's left is basically a series of countries in Asia and in Latin America, the largest of those being, as you can look at it by deal count on our site, countries such as Australia, Japan, Brazil, Chile, Argentina, Mexico, and a series of countries in Southeast Asia. And those countries are all in very different states.

What led us to look at exiting our majority interest in Korea is, we're looking now, it's funny to say that for a six-year-old Company, we're trying to get some maturity. But we're looking around the world and trying to be more focused, and asking ourselves a very simple question. Can we win, and can we win in the long term?

And if we can, we intend to double down, and if we can't, then we intend to look at partnering with somebody that can help us. And so we exited Korea, and now we look at our rest of world assets, and we're asking that same question. The good news is in most of those countries, we believe we can win, and I'm sure there will come a few where we say we'd like to find a partner.

And in terms of how they are performing, again, some of them are more mature, businesses that are of scale, that we have been at for a while. And some of them are still emerging smaller countries, where we still have a very young immature platform that needs to continue to grow and evolve, and that's what you get when you have 15, 20 countries in a region. In terms of goods margins?

So on goods margins, we improved about 320 basis points year-on-year, specifically in North America. We're making headway with continued improvement in the infrastructure areas, we're putting inventory in the right locations, getting multiple units in a box, and the initiatives we talked a bunch about at the Analyst Day and last quarter.

But we also have an ongoing focus on increasing inventory, primarily through third parties, which we believe we're still on track to deliver, and this will get us towards our mid teens target over the next few years, similar to our goods business, that is already at that level today in Europe. In Q2, we do expect to see goods margins return to double digits, just like we said last quarter and at Analyst Day.

Okay, thank you.

Ross Sandler, Deutsche Bank.

Great, thanks. So just a question for Jason on the cadence of EBITDA throughout this year. So you just put up $72 million, the midpoint for Q2 $65 million, and then the full year above $315 million.

So the implied second half assumes you won't see the same uptick in profit or EBITDA flow-through that you saw last year, despite having some drag from TMON in the fourth quarter. So is there some planned investments that are going to hit in the second half, or is that just conservatism?

And then on the order discount, thanks for breaking that out. Can you just talk about that technique, in terms of driving better retention or better lifetime value, versus other marketing options? And I think we cycled through some of that in the second quarter. It looks like you actually had some in the first quarter a year ago, but when should we start to see the gross profit and billings growth rates start to level out? Thanks.

Thanks, Ross. So first, just high level when it comes to the outlook and guidance.

Overall, we're right on track with the targets that we've laid out previously. We feel very good about our outlook.

However, there is a lot of moving pieces this year, but there are two pieces that can't be ignored. I would say first, there is the removal of TMON, and then there's a downward pressure on 2015 from FX. So when you look at our reported growth, as a result of these two factors, you need to add about 13 percentage points or 1,300 basis points to make it comparable to prior year with TMON.

So going a little deeper, first on top line, I want to make sure you're using the right growth baseline for comparison. On an FX-neutral basis, and more recently including TMON revenues grew 11% in 2013 and 19% in 2014. Growth in 2014 was heavily impacted by the shift towards direct revenue and goods, which is recorded, of course, on a gross basis.

So as such, I would say the better proxy for demand is really, and that which neutralizes revenue recognition, is gross billings. Over the same timeframe, we grew FX-neutral gross billings from about 8% in 2013 to about 10% in 2014. As such, the 11% to 16% FX-neutral growth guidance represents an acceleration in both our original target, and versus prior year.

Our previous guidance of about 15% or greater FX-neutral growth, when adjusted to remove the contribution from TMON, translates to the low end of our range of about 11% FX-neutral growth, or $3.15 billion. So by maintaining the high-end at about 16% FX-neutral growth or $3.3 billion, we've actually raised our expectations versus our last guide.

A lot of stuff here. If you didn't get all that, I would just say, just remember when you look at the reported growth, you need to add about 13 percentage points to the number to make it comparable with prior year, when including TMON.

So specific to your question on adjusted EBITDA, so our previous guidance was greater than $315 million. When you exclude the impact of TMON, we would be at about $330 million or higher for the year.

However, with the recent movement in FX rates, the majority of that upside, or about $14 million, is FX. So basically it takes us back to the $315 million. So overall, we're right on track with our target of 25% or greater FX-neutral growth in adjusted EBITDA.

And then lastly, regarding the cadence, our expectation was really if you take Q1 and you take the $72 million -- $70 million, $72 million, and you multiply that by 4 and then add the increase in Q4, it would take you around $315 million or $317 million, so pretty close to where we are at. What we want to do is make sure we're giving ourselves room to make the necessary investments to drive growth, since which we are calling for some acceleration as we get into the back half of the year.

On order discounts, Ross, as you mentioned there's a couple of ways we invest marketing dollars, order discounts is just one of them. Spend in the quarter continued to shift towards order discounts, for a couple reasons. First is because they are working, we like the ROI we're seeing on them, their ability to drive transactions.

But there's also another piece of them that I think is often overlooked, and that is their ability to train marketplace behavior. Every time we send an offer to a customer, we're seeing more of that search behavior, browse behavior, where customers are diving deeper into our catalog. We like what that stands for long-term, so we're happy with the overall investment in them now, and we continue to refine them, and we'll keep doing that going forward.

A big piece of that is of course focusing on the who, the what, and of course the timing of them, so that we're continuing to hit against, of course, the transaction pieces, the overall growth of the marketplace, as well as the behavioral pieces, and training that long-term behavior of using Groupon as a daily habit.

Heath Terry, Goldman Sachs.

Great, thanks. Just a couple questions. On the EMEA side of the business, can you give us a sense of what you are seeing in take rates within EMEA? More your perception of where they are from a maturity standpoint, what your general expectation is for like for like, or mix shift, or take rate changes in the future?

And then on pages for the businesses where you -- the 900,000 business where you have established pages. Can you give us a sense of what traffic is looking like to those pages, or what sort of initial benefit that you are seeing from having those showing up in the search index?

I'll take the EMEA piece, and then Rich can take the pages piece. Take rates have been similar, if you look at the trend in Europe versus North America, you've seen a similar trend, which is a little bit of pressure, but relatively in line with historic rates, down 200, 300, 400 basis points over the last four or five quarters.

And there is a slight difference between Europe and North America. Today, they are 300 basis points higher in Europe, but that's predominantly a slightly different model where we pay merchants when a voucher is actually used, and so there's a little bit of breakage. That breakage used to be a much bigger part of our business. It's come way down.

Part of building this really healthy marketplace has been to improve the core dynamics of that marketplace. And two of those are getting people to use their Groupons more often, and getting them to use them faster. And we've seen that trend in both Europe, and we've seen it in North America, where the average time to use a Groupon has come way down.

As it relates to mix, the mix in Europe, the good news about our margin profile of goods and getaways in Europe is that they are much healthier margins. And so we tend to be more agnostic as to where the growth comes from. Our main emphasis in Europe is just getting that growth to be higher.

Right now, that European business is growing about 7% FX-neutral, and generating really healthy segment operating income. Well, we want to see that growth rate double. We'd like to see that get to 15% over the next -- over the medium term, and so we're very focused on that.

Awesome. And with respect to pages, first and foremost, pages still very early in its development cycle, but we are very much excited about its progress. As we mentioned before in the prepared remarks, pages are at the center of our platform initiatives on the merchant side. And they are a big piece of the marketplace customer experience of the future, on the consumer side.

With merchants, they are very much that start of the transactional relationship with merchants, whether or not they are working with Groupon in a deal format today. As you mentioned, we're making steady progress on releasing them on the indexing front. We're now at about 900,000 pages to be indexed in search engines.

That indexing has ultimately resulted in millions of users finding and engaging with them monthly. And when those users hit those pages, they are finding increasingly valuable content, including things like 27 million or so tips and ratings from other Groupon customers.

So primarily, what we're seeing from them today is that engagement piece with merchants, and an ability to start a new conversation with merchants, and move them through our inventory pipeline, and they are an engagement piece with consumers. You now have over 1 million people hitting the request a deal button or following a local merchant. So all great traction, and it's a steady rollout.

So we expect them to continue to play a key role, and to play an even bigger role in the future, especially when it comes to increasing our offer content. So I'd say watch for continued updates on that rollout as we move ahead.

Great, thank you very much.

Gene Munster, Piper Jaffray & Co.

Good afternoon. I apologize, if I missed this, but can you update us on the deal count for each of the last few quarters, excluding TMON?

Gene, this is Jason. The deal counts excluding TMON, let me just give them to you going back to first quarter of 2014.

So on a global basis, 180,000, then in Q2 we went to 220,000, Q3 of 2014, 260,000. Q4 of 2014, 330,000, and then Q1 of 2015 was 425,000, which includes 58,000 of coupon. So if you exclude that, call it roughly 370,000 ish.

So just to be clear, if the goal is doubling deals, you'd be basically talking about 850,000 deals within a year, or is that on the same page?

Our goal is to increase the inventory, and increase that deal content, and you can't just look at it and say, once we double it or hit this number, we win, and we can stop. Any time you are building a marketplace, you are going to be trying to increase inventory, market by market, city by city, category by category, until you get the results you want, which is people coming and converting at a higher rate. And so you should expect us to make progress every quarter at adding inventory.

Great, thank you.

Dean Prissman, Morgan Stanley.

Good afternoon, and thanks for taking my questions. So it seems like your sales headcounts in North America declined year-on-year. Can you share some of the underlying dynamics?

And then, can you comment on the percentage of North America local gross billings that had order discounts associated with transactions? Thank you.

There's a couple things in there, and we will work through both of them, I think, because they are intersecting where we are with the North America local marketplace. Maybe I'll just step back for a second and talk about some context there, it sets the foundation for how we are thinking about building supply, and thinking about scaling inventory via sales and otherwise, as well as how it plays into order discounts.

The important thing to keep in mind there is, we're not the first to build a marketplace online. We're really just the first to do it in local, at scale. Within that, the marketplace model is a relatively well understood formula, and it's a classic marketplace challenge. It's, as Eric mentioned, about collecting supply and demand at scale.

Local had some unique aspects for sure, but we have many of what I'd say are the hardest to build pieces already in place, that customer and mobile scale, products that work for customers and merchants, and geographic reach. Only instead of attacking things like electronic and books or hotels alone, we have to do it really for combinations of geography and services, like Chicago Thai food or Seattle yoga.

In keeping with that marketplace formula, the first critical piece for us is to build supply. We knew early on that we needed to dramatically scale the quantity and quality of merchants on our platform.

Now we're at 200,000 or so active deals on the platform. I'd say that puts us well on our way, and we will continue to build out that inventory.

And again, as Eric mentioned, in parallel, we have to start solving that second piece, is connecting supply to broader demand, where we have to bring our inventory to where people have local intent. And today, that's mostly in search.

And if you think about it, that's the piece that up until now has really been missing. We have been gaining supply consistently, yet we haven't been able to seamlessly connect it to demand at scale. And as you look at other scaled marketplaces, whether it's a Priceline or Amazon, Booking.com, this is where they hit their stride when they made that seamless connection.

We're in the thick of that now, and the good news is that we've seen those marketplace mechanics and that formula, it's the same in local, in so many ways. We have several pockets today where we see that marketplace model working well, where it's humming. And I'd say, as an example, search for something like Boston massage or things to do in Atlanta on Google, and you can see an example of that progress. You are going to see improvements in discoverability, you are going to see improvements in the depth and quality of our inventory.

Now how we go and attack those pockets is really the key, but they have shown us that when the marketplace is humming, we can use that marketing engine to bring more people into the top of the funnel, and then we use that strong supply to convert more of the traffic into buyers, and we know now that we can do that profitably. So scaling those pockets is really the challenge. It's the challenge of any early marketplace, and there just simply aren't enough of those pockets yet.

Now my job has been to give the team laser-focused on building out that supply piece of the business in the right places, such that we can start turning on that marketing engine in more and more locations. That's a big piece of our energy, has been, how do you do that more and more efficiently? I think you're seeing that in the sales headcount numbers, as they go down.

You're seeing us get sharper and sharper in running the tools, how we think about prioritization of merchants, et cetera. And that's giving us the ability to bring more merchants on the platform at lower cost, while actually still growing on the billings side.

Thank you.

Brian Pitz, Jefferies.

Thanks for taking my question, this is Stan Velikov for Brian.

Can you give us some color on your coupons offering? What types of merchants are participating in coupons, how is the in storage usage of coupons tracking to date? And lastly do you see any cross sale opportunities with merchants that don't generally offer deals on Groupon?

I'll take the first piece. Our coupons business is about a year old, give or take, and we've been very pleased with the progress we have made to date. As Jason mentioned a minute ago, we have nearly 60,000 coupons on the platform. That business continues to grow, and grow quite dramatically.

But it's still a relatively young business, it's still relatively small. And one of the primary advantages we believe we have long-term is that we have a significant amount of traffic on our platform. Over 160 million monthly unique visitors that want to take advantage of this kind of inventory, because they come to Groupon looking for a deal, looking to save money, looking to explore and find new things to do, and these coupons are an invaluable part.

So our first order of business was to get the scale, again, get more inventory on the platform, expose it in the right ways within our app and on our site, and then take advantage of that local element, which I will let Rich cover, because I think that gets to the second part of your question.

On the second part, there are a couple things to keep in mind on this one, as well. Your question around what types of merchants are on that platform, there's roughly 9,500 merchants representing those 60,000 offers on the platform, which has been consistently moving up. Those merchants range from the largest global brands to more localized retailers.

There is, of course, an opportunity to cross sell into that space, and many of those existing brands on our platform for coupons have been Groupon merchants in the past. And we'd expect to see more of those merchants coming on to Groupon in our other products, whether that's deal products, in store or otherwise, as we continue to roll out the marketplace in the future. And the other thing that I would say there is, we also have other forms of in-store couponing, in the form of our Snap app that we have rolled out now four or five months ago, which really attacks that in-store piece of the marketplace, specifically with consumer packaged good retailers head on.

That's still early in the process. We're excited about the traction we've seen there, and it's continued to gain momentum quarter-over-quarter now with over 1.4 million app downloads, so we know there's opportunity in that space, we know consumers are excited about the products as well in both coupons and Snap. And we'll keep working on them and update you on our progress.

Great, thanks for the color.

Ken Sena, Evercore.

Just had a question on the unit growth versus the active user growth. I'm looking at North America, it looks like the 8% unit growth versus the 13% user growth suggests some lag. So maybe you can just discuss if there is maybe a change in marketing channel, or some mix that could be driving that lag? Thank you.

I'll start on that, this is Rich. There is a couple things there. One is, I would say, you have some of the components of mix involved in there, just what people are buying.

But from a marketing point of view, you did see more marketing spending overall shift to order discounts in that front. But there are some pieces in category mix that inevitably impact units, and units per customer over time.

The thing, though, that we are focused on, we're looking longer-term, and as I mentioned more in the prepared remarks is that we're focused on increasing that units per customer, and the units piece, units growth increasingly over time. And that's mostly by focusing our energies on those high-frequency use cases, things like lunch and dinner in the food and drink space, on beauty maintenance like manicures, pedicures, blow-outs and hair care, et cetera.

That continues to be in our minds, in the back of our minds, and in the front of many of our actions in local, as we continue to develop the marketplace. So it is top of mind, and we're making, I think, progress on it. But you will see some of that shift with the units and customer growth quarter-over-quarter, depending on mix, and wherever we are in rolling out those pieces, at any given point.

Great. Thank you.

Thank you. That concludes today's Q&A session and today's conference.

Thank you for participating in today's conference. You may all disconnect. Everyone, have a great day.