Groupon Inc (GRPN) 2015 Q2 法說會逐字稿

Good day everyone, and welcome to Groupon's second-quarter FY15 results conference call.

(Operator Instructions)

Today's conference is being recorded. For opening remarks, I would like to turn the call over to the Vice President of FP&A and Investor Relations, Genny Konz. Please go ahead.

Hello, and welcome to our second-quarter 2015 financial results conference call. On the call today are Eric Lefkofsky, CEO; Rich Williams, COO; and Brian Kayman, Interim CFO.

The following discussion and responses to your questions reflect management's views as of today, August 7, 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 on 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.

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. In addition, historical results have been recast to reflect TMON as a discontinued operation, and all financial information and operational metrics discussed on this call pertain to continuing operations. And now, I'll turn the call over to Eric.

Thanks, Genny. Q2 marked continued process in Groupon's evolution from our daily deal email roots into a predominantly mobile, local, commerce marketplace. While our turnaround is not yet complete, we're making headway.

Let me start with a quick overview of our financial performance in the quarter. Like last quarter, every number and metric we provide now excludes TMON, and all year-over-year comparisons are FX-neutral. On this basis, gross billings increased 10% year-over-year to $1.5 billion for the quarter, and revenue increased 11% to $738 million. Gross profit was $337 million, adjusted EBITDA came in at $61 million, and we delivered $0.02 of non-GAAP EPS.

Changes in FX rates, the euro in particular, continued to negatively impact us in the quarter. Had they remained neutral to last year, we would have delivered $126 million more of billings, $54 million more of revenue, bringing revenue to $793 million, and $28 million more of gross profit. All in all, we delivered a solid quarter, while continuing to invest in marketing and order discounts to feel our marketplace transition. Let me run through the highlights.

In North America, gross billings increased 12% to $896 million, driven by growth in all categories. North America revenue increased 14% to $481 million, and segment operating income improved by almost 85% to $27 million. North America local billings grew just over 8%, which is respectable growth despite a tough comp. While last year's second quarter saw local billings growth of only 2%, it represented the highest billings the business had posted through that date, with billings of $461 million.

In Q3 of last year, local billings dropped to $447 million. As a result, even though on a percent basis Q3 seems like the harder comp since we're lapping a quarter with double-digit growth, it is actually 2Q that provided the greater challenge. So with growth of 8%, we are on track and see signs that our efforts are continuing to drive engagement in billings. We expect growth to return to double digits in Q3.

As it relates to margins in Q2, our take rate in North America local came in at 34.5% versus 35.7% in Q2 of last year, reflecting continued investment and growth through intelligent discounting and a higher blend of low-margin local and national deals in the quarter, namely Starbucks and Sam's Club. As we've discussed historically, while these national deals degrade our local take rate in the quarter in which they run, they are great for new customer acquisition and the long-term health of our customer base, which is why we run them periodically.

Our goal is to ultimately maximize gross profit dollar growth. Despite the 120 basis point decline in local take rates year over year, gross profit dollar growth accelerated in North America local from $143 million in last year's second quarter to $148 million, which equates to 3% year-over-year growth compared to 1% last quarter. So in North America, gross profit dollars are moving in the right direction, and segment operating income continues to improve.

Our goods business in North America posted another strong quarter, both in terms of growth and improved gross margins. Billings increased 19% year-over-year to $294 million, and margins improved to 10.4% versus 9.3% last year. We are laser-focused on margin improvement, and are on track to achieve our previously-stated target of mid-teens gross margins over the next few years.

Second, in EMEA, billings came in at $434 million, with growth slightly accelerating from 7% last quarter to 9% this quarter. On this basis, revenue grew 9% to $204 million. We made some progress in local in particular, with billings improving from a decline of 2% last quarter to growth of 4%, which represented significant improvement in such a short period. While growth in EMEA picked up, segment operating income came in at $10 million, which was down $10 million versus Q1, driven by a decline in gross profit, due in part to lower margins in goods.

Goods gross margins, which dropped roughly 200 basis points sequentially, were compressed by a sudden mix shift towards lower margin goods in the quarter. While EMEA remains stable, we're working hard to improve margins and return the business to historic levels of profitability.

We reorganized the team, and have used a series of new checks and balances. We still have a long way to go, but I'm confident EMEA is getting the attention it needs. While we continue our focus on growth, we're also looking carefully at our cost structure to ensure we're operating as efficiently as possible.

Finally, rest-of-world billings returned to growth for the first time in three quarters, growing 6% to $199 million. Despite higher billings, revenue declined 4% to $53 million, and our segment operating loss was $7 million versus a $10 million loss last year. We continue to make progress toward our goal of reducing our losses to zero, albeit not as fast as we would like.

Our primary objective as it relates to our international businesses is to ensure that every country in which we operate is making money and is strategic towards our long-term mission. We will continue to allocate time and resources in countries and businesses where we think we can win, and we will evaluate alternative structures that help us unlock shareholder value, and those where we question our long-term strategic positioning, as we did in Korea. We made more progress here recently, with the partial sale of our India business to Sequoia, which Brian will discuss in greater detail in a minute.

Moving on to our strategic and operating initiatives, our mission is to connect local commerce by providing better yield management tools to merchants looking to fill their open capacity, while offering consumers a seamless experience, through which they can discover, book, and buy locally. In order for our marketplace to thrive, we need more inventory. Just search for almost any category in almost any city, and you will notice that we just don't have enough inventory to fulfill many of our customers' demands.

The math is pretty simple. If you take North America, we offer about 240,000 deals out of a pool of over 4 million merchants that we've targeted. With less than 10% of merchants running deals in our platform, we still have a long way to go to get density up to the appropriate levels, but we've made some progress.

Globally, we now have almost 510,000 active deals on the platform, including about 75,000 coupons. We're on track to achieve our goal of more than doubling the number of active deals in our site over the next year. This should give us enough inventory in many, but not all markets to improve conversion, allowing us to efficiently invest to drive customers to our site and drive local growth.

As we expand our inventory, our goal is to attract merchants that don't want to discount their products and services so heavily, but still want to access our large community. Merchant pages, and the various market rate transactional products that we now offer, allow merchants to sell their services at much closer to full price. To date, we've released almost 2 million merchant pages to be indexed on Google, up from roughly 900,000 last quarter.

The second broad category we're focused on is ensuring that our customers have an amazing experience every time they use Groupon, 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. The process of using Groupon needs to be easier than not using Groupon.

Finally, over the past few years, we've invested significant time and money in connecting merchants to our marketplace. With our merchant app at the center, we built a suite of tools that connects nearly 1 million merchant to the more than 110 million people that have downloaded our app. Our goal is simple: to make it incredibly easy for merchants to upload inventory to our site, using our tools, so they can seamlessly access our marketplace.

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

Thanks, Eric. Since taking on the COO role in June, a few things have become clear. First, Groupon continues to be a tremendous platform to connect local businesses and customers in dozens of countries around the globe. Our brand is strong, and we believe our value to both merchants and consumers is undeniable.

Second, while we've come a long way in globalizing our operations, we still have significant opportunity to share and deploy our best practices, best products, and best experiences from North America to our international businesses. Third, we need to continue to streamline, focus, and simplify what is a complex global business.

Now, our core focus remains unchanged, making the Groupon marketplace a daily habit with an unparalleled customer experience. Our marketplace offers many different types of deals: local, goods, travel, events, coupons, and we're often asked how to rationalize these seemingly disparate businesses. While we have historically discussed them as three categories, local, goods, and getaways, internally, we've come to think about them in two: services and shopping. Our marketplace is built to serve both, yet each has a distinct operating model.

In local and getaways, we source inventory and sell it on commission, while goods primarily operates in the classic e-commerce model, where we buy inventory and deliver it to customers through our fulfillment network, and through drop shipping.

Moving forward then, when we discuss services, we're talking about the offerings that have historically rolled into local, plus those that have historically rolled into getaways. The shopping category today consists of goods. Viewing the business through this lens is a great simplifier. It's how we operate, and it is generally how customers think about our marketplace. Brian will discuss how we expect this to impact our reporting going forward.

Across both services and shopping, our marketplace fundamentals remain strong. Active deals increased over 125% to about 240,000 in North America, or almost 510,000 globally, both including coupons, which contributed roughly 75,000 deals. We also continue to see more and more marketplace behavior from our customers, with search now representing about 30% of our total transactions in North America, up from 23% a year ago.

Let me talk about some of the specific things that we're doing in each of our categories, again with an aim to focus and simplify. Let's first cover services, which includes local and travel. Services is really just the things you can do wherever you might be, and the ways to get you there.

Our overarching goal here is to make the buying and redeeming Groupon as easy or easier than any other online or off-line experience. We want you to come to our marketplace because taking care of your daily life will be simpler with Groupon, and we're building products that remove friction and annoyance people experience every day, whether it's on or off-line, in the area in which they spend a significant portion of their hard-earned money, locally.

With that in mind, our top priority in our services business is cracking a few key high-frequency local use cases. That means building amazing products and experiences, as well as deep and broad selection in food and drink, in health, beauty and wellness, and in things to do. These are the things that people do frequently when they are out and about.

For example, the average American eats at or from a restaurant over five times per week. Groupon is an online leader in all three of these high-frequency use cases today, yet we believe we're barely scratching the surface of what's possible given our brand, customer scale, and merchant reach.

Our focus on high-frequency use cases was a key driver behind our recently-announced acquisition of OrderUp, a take-out and delivery company we acquired to bolster our food and drink delivery capabilities and technology, and address one of the highest frequency use cases of local commerce. Going forward, you can expect us to more heavily invest in these high-frequency use cases, as we believe they are the best way to make Groupon a daily habit.

As discussed previously, we recently chose a small group of markets where we're testing rollouts of our new product and supply initiatives to accelerate our ability to learn and prove the winning formula for our high-frequency use cases. In those markets, our teams are executing across three core areas.

First is supply. We believe that great supply of inventory makes every other piece of the marketplace work better. We've made great strides in our ability to target the right supply, and we're committed to greatly increasing the inventory our customers buy most frequently. We have seen increasing operating leverage in our primary sales teams over the past year, and while we expect that to continue, it's not the only way we intend to expand supply in the marketplace.

For example, we're working with a number of third-party partners to add low discount and market rate local offers to the site over time. We expect that this will result in thousands of new deals in our marketplace, many of them in markets where we currently lack sufficient deal density. We expect those offers to increasingly be found on merchant pages on Groupon.

Millions of users continue to find and engage with pages, which now total almost 2 million. Those users are finding increasing numbers of specials, coupons and deals from merchants, as well as tips and ratings from fellow Groupon customers. At present, we've collected 32 million tips and ratings, and more than 1.3 million people have begun to follow a merchant or hit request a deal on pages.

The second is product. As Eric often says, the process of using a Groupon has to be as easy or easier than not using a Groupon, and it should be dead simple for merchants to add inventory to our platform, manage their offers, and run their businesses. For consumers, we continue to develop solutions in our app that we believe will make redemption, payment, and even tipping seamless.

We're also continuing to evolve our merchant-facing tools in the Groupon merchant app to make connecting to the Groupon ecosystem flexible and easy. These tools provide a unique set of functionality that help merchants get the most out of their deals, and deliver a great experience for their customers.

The third area is marketing, as our focus on inventory and the customer and merchant experience bear fruit, we will turn our attention to connecting this new supply with already strong consumer demand. We know through some of our early tests that increased quantity and quality of supply can improve conversions such that we can more efficiently invest in driving traffic to our site.

The primary vehicle for this is SEM, which when deployed effectively at scale with the right levels of supply support should ultimately deliver strong growth in local. As we see proof points that this model is working in our test cities, we plan to scale the program nationwide and then worldwide. As we see efficiency of our SEM investments increase, we would also expect to shift marketing dollars away from order discounts over time.

Bringing local commerce to the connected world and to the masses remains an extraordinary opportunity, one where we believe Groupon stands virtually alone. When our three focus areas and services, supply, product and marketing come together at scale, we believe Groupon will be lot well along the path to becoming a daily habit.

Our local marketplace is already one of the largest of its kind among offline to online companies, and we anticipate that our investments in inventory and the customer and merchant experience will help it become the starting point for consumers looking to experience their local communities, and for merchants who want to grow their businesses.

Finally, I'll move to shopping, which again we've traditionally referred to as goods. This continues to be an exciting and high-growth category for us, one that we find particularly appealing as we deliver against our target of mid-teens gross margins over the next few years.

To further develop our shopping category, we're focused on two areas. First is continued margin improvement in our direct or first party business. The team has made significant headway over the past few quarters in this area, and remain focused on further optimizing our logistics and supply chain processes, vendor relationships, and operations, to speed delivery for customers while reducing costs. In addition, we continue to refine our pricing and merchandising playbook to improve cross sell and multiple unit orders, as well as scale smaller but more profitable subcategories.

Second but equally important is connected supply. With connected supply, we expect to supplement our direct primarily flash-oriented inventory with third-party and market rate items, in order to significantly accelerate the breadth and depth of our marketplace. We now have over 50,000 products available in North America alone, and expect that number to only increase. We don't need every iPhone case or pet bed ever made in every color, but we have the demand to support a broader selection and richer assortment than is available on Groupon today, and we believe there is appetite for additional services and experiences around it.

Once we've made good progress with connected supply, the natural next step is to localize. In the long-term, we think no one is better positioned to solve that last mile of local commerce. Coupled with improving margins in both the direct and third-party businesses, we believe that getting connected supply right will make our shopping platform a true customer magnet, a differentiated offering in scaled e-commerce, and a long-term business driver.

With that, we have a long way to go in both services and shopping, but we're making steady improvements on our top priorities. I look forward to keeping you updated on our progress. Now, to discuss our results for the quarter in greater detail, I will turn the call over to Brian.

Thanks, Rich. I'm going to run through the highlights of our performance and provide our outlook. The details are also available in this morning's press release. Please 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 $1.53 billion in the quarter. North America grew 12%, EMEA grew 9%, and rest of world grew 6%. Revenue increased 11% to $738 million in the quarter. North America grew 14%, EMEA grew 9%, and rest of world declined 4%. Gross profit was $337 million, or about flat to last year's second quarter, had it not been for a $28 million FX headwind. Our gross profit was negatively impacted by a significant increase in order discounts, as order discounts are reported as a reduction to billings, rather than as a marketing expense.

Adjusted EBITDA was $61 million in the quarter, compared to $60 million last year, as lower gross profit was mostly offset by lower operating expenses, both due to the impact of FX. GAAP earnings per share was $0.16 including $0.21 related to the gain on the TMON sale. Non-GAAP earnings per share was $0.02. Free cash flow for the second quarter improved by $45 million to negative $12 million, bringing free cash flow for the trailing 12 months to $267 million. As of June 30, we had $1.1 billion in cash and cash equivalents.

As it relates to our share repurchase program, we repurchased 19.3 million shares in the quarter at a total cost of $122.7 million. We have now completed our original $300 million authorization, and have begun repurchasing shares under our recently-announced $500 million program. Approximately $461 million remains available for repurchase under that authorization. While the timing and amount of any repurchases is determined based on many factors, and is subject to routine evaluation, we expect to continue to make opportunistic purchases based on current market conditions.

Turning to a few notable highlights of our non-financial metrics. Units came in at $53 million, growing 7% year-over-year, with all categories contributing to growth. Active customers grew 6% to $48.6 million for the quarter. All categories contributed to the growth in both North America and EMEA, which grew 10% and 7%, respectively. With continued progress building out our marketplace and all the related initiatives that Rich mentioned, we expect customer growth to accelerate over time.

Moving on to our categories, local gross billings growth accelerated to 7% globally on an FX-neutral basis to $798 million, with continued growth in customers, units, and active deals. North America grew 8%, EMEA returned to growth increasing 4%, and rest of world grew 5%. With continued progress building out our marketplace, and as we lap lower billings dollars in last year's third quarter, we expect growth in North America to return to the double digits in Q3. We continue to expect growth to accelerate in EMEA and rest of world over time, as their features and functionality catch up to that of North America.

Local gross margins, defined as gross profit divided by gross billings, were 30.4% globally, compared to 33.1% a year ago, with the decline resulting largely from increased order discounts and select investments. With continued use of order discounts, and as high-frequency use cases begin to scale we could see take rates in North America hover around or slightly below current levels. Our goal is to ultimately maximize gross profit dollars. If we need to trade off margin at times to accelerate growth, we may do so.

Goods gross billings accelerated to 14% globally on an FX-neutral basis to $537 million, with 19% growth in North America, 12% growth in EMEA, and 4% growth in rest of world. Goods gross margins, also on a gross billings basis, were 11% globally, compared to 13.1% a year ago. The decline was driven primarily by declines in EMEA, resulting in part from a shift towards lower margin goods.

The decline was offset by improvement in North America, where margins improved 110 basis points year over year, and 200 basis points quarter over quarter to 10.4%. We remain focused on achieving our mid-teens target over the next few years. Finally, travel gross billings increased 14% globally on an FX-neutral basis to $194 million, driven by double-digit growth in all three segments.

Before I close, let me provide some additional color on a few items. First, as Rich discussed, in order to better reflect our operations, and how we believe customers view our marketplace, starting in the third quarter, we will be discussing local and travel as one overall services category. We have included a view on this combined category in the tables included in our earnings release.

In Q2, services globally had billings of $992 million, growing 8% year over year, with a take rate of 32%, with 9% growth in North America, at a take rate of 32.3%. While our messaging going forward will focus on two primary categories, services and shopping, we will continue to include standalone disclosures on local and travel in the earnings release for at least the next quarter.

Second, with respect to our international footprint, we announced in May that we had completed the sale of a controlling stake in Ticket Monster. Our results in the quarter reflect a $202 million pre-tax gain on the sale, which is presented within discontinued operations. We continue to evaluate our footprint for strategic fit. Our India business recently completed an equity financing transaction with Sequoia. As a result, we no longer control that entity.

India, like Korea, is a fast-moving and competitive market, that we believe will need significant investment to fully unlock value. As such, we believe bringing on a partner like Sequoia will best position the business for long-term success. We expect that our Q3 results will include a gain on the transaction.

Going forward, changes in the fair market value of our minority stakes in TMON and India will be reflected as nonoperating items within other income and expense on our income statement. Both the gain, as well as changes in the fair market value of the investments will be excluded from our non-GAAP metrics, and therefore have not been incorporated into our outlook.

Finally with our movement to uniform worldwide systems and processes, and with the decline in EMEA's profitability this quarter, we have increased attention on our cost structure to ensure we are operating as efficiently as possible. We expect to make significant progress in our cost initiatives during the second half of this year.

Looking ahead, we expect to make investments in high frequency use cases, particularly in North America in Q3. Our recent investments in take-out and delivery, of which our OrderUp acquisition is a part, are an example. We believe these investments are important to increase inventory and traffic, which are essential to making Groupon a daily habit, and driving additional growth in our core business. Our guidance for the third quarter and for the full-year 2015 reflect current FX rates, as well as these investments.

For the third quarter of 2015, we expect revenue be between $700 million and $750 million. This guidance anticipates nearly 600 basis points of unfavorable impact on the year-over-year growth rate from changes in FX rates. We expect adjusted EBITDA in the third quarter of between $45 million and $65 million, and non-GAAP EPS from continuing operations of between $0.00 and $0.02.

For the full year, we continue to expect revenues of between $3.15 and $3.3 billion, which anticipates a nearly 600 basis point unfavorable impact on year-over-year growth from FX. And we now expect adjusted EBITDA to be closer to $290 million for the full year.

We're investing in what we believe will position us for long-term success, including making Groupon a daily habit. Until we see further proof points from our investments, we expect both revenue and adjusted EBITDA to grow at least 15% on an FX-neutral basis transitioning into 2016, as we continue to build toward the longer-term targets shared at last year's investor day.

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

Thanks, Brian. As you can see, we are laser-focused on completing the marketplace transformation that began a few years ago, adding more merchants to our platform, and allowing our customers to buy, book, reserve, redeem, and pay for local goods and services seamlessly through our app. As we aggregate more inventory and improve user experience, we believe conversion will rise, and we'll be able to efficiently invest to drive traffic and transactions, unlocking new pools of growth.

As such, we now turn our attention to making our product truly indispensable to consumers looking to explore the world around them, and save money while they're at it. We aspire to be the best kind of daily habit, one of surprise and delight. A place you start when you are looking to do or buy just about anything locally.

As we seek to connect local commerce and reward everyday curiosity, we are mindful of how far we've come, and how far we have yet to go, given the size of the opportunity before us, and the fact that we're still only six years old, despite the scale at which we operate.

With that, let's take some questions.

(Operator Instructions)

Ross Sandler, Deutsche Bank.

Thanks for the new slide presentation. I had a couple questions. First is on the characterization of higher-frequency categories. At a high level, what percent of billings or units are in these high-frequency categories today, and where do you expect that to go? And then, if we look at transaction frequency, what does that look like in higher density markets where you do have a mix of -- a greater mix of higher frequency categories like Chicago versus the overall Company average?

Second question is just around, you had mentioned the EMEA take rates are coming down in both goods and local. Can you just give us a little more color about what's going on there, and are the current take rates that we are seeing the sustainable level? And then lastly looks like your reducing the guidance for EBITDA for the full year by about $25 million. How much of that just from integrating Order versus doubling down on the organic business, as you just mentioned, a few of those investment initiatives? Thanks.

Rich will take part of that in terms of the high-frequency use case in EMEA take rates and Brian will cover the guidance, but I just wanted to give a few seconds of context on the quarter and the business. A few years ago, we realized in order to grow at scale, we had to build a marketplace, and that our email business was just too limiting.

So we built a product, went from 1,000 deals to over 500,000, migrated to mobile, 110 million app downloads. And although our existing customers are really starting to use the marketplace, as evidenced by the fact that over 30% of business now comes from people searching on our site, we still have to complete the last key piece of this marketplace transition. We have to fundamentally shift consumer behavior.

But if you think about it, for our business to double in size, one of two things has to happen, in essence. Either our existing customers have to buy twice as much, or we have to add twice as many new customers.

To get our existing customers buying more, they have to think of us as a daily utility. We have to offer more deals, the right kind of deals in the right locations, and particularly in these high traffic use cases that you heard us talk about. Lunch and dinner, including take-out and delivery, massages, pedicures, events and activities, and we also have to marry our marketing efforts in SEMI and SE to the inventory we have, and really focus on conversion so we can effectively and efficiently invest in adding more customers. We have to get our existing customers buying more and add more customers, and that's where all of our energy and investments right now are focused.

Marketplaces take time to build, and I think people don't realize ours is only a couple of years old. So clearly, we've got a great foundation. We have huge customer and merchant scale, but we have to get these high-frequency use cases and marketing efforts right, to see the kind of acceleration that we want to see in our core business. And if you look at the investments we're making, and certainly the $25 million we intend to invest in the back half of the year, is really all focused around that. Let pass it over to Rich to cover the percent of billings that come from that, in this case.

Ross, it is Rich. On high-frequency categories, I'd say just a couple of things to think about there. One is, of course, we don't break down local into the sub category mix details, and the big piece of that is there is over 150 sub categories that we operate in, and literally over 1,500 different service levels within there. But an easy way to think about it is that over half of local would be in these, what we would think of as the high-frequency category. But it's less about where we are today there, and really where we should be.

So if you look at it in a really basic light, and we're talking a little bit about frequency as well, even if over half or in these three categories, people are eating out at or from a restaurant five times a week, they are eating three times a day. With an average customer frequency around five a year, we are well underpenetrated versus the potential in the marketplace overall.

So I think it's really more about the potential of where we can go with high-frequency categories over time, than where we are today, and what percentage of our unit mix it makes up. If we're successful in those places, I would expect the mix to change significantly, and the frequency, we believe, would go up a ton as well.

With respect to the actual markets, and how to think about customer frequency in higher density markets or the bigger markets that we operate in, it's a little bit of the same thing, but you just expect -- and a way to think about it is that in our biggest markets is where we have the richest inventory, it's where we have the most density of offers in these high-frequency use cases. But even in those markets, you have a big mix of customers. You're going to have your top customers that are doing 15, 20, 30 units a year, and then you will have people that have just bought from us once in those cases. But in general, in the markets with richer inventory, and those bigger high density markets, we're going to have a little bit higher customer frequency overall.

With respect to EMEA take rates, I think there's just a few things there. One is just to keep in mind, which have been a key activity for us and a key focus for is just keeping the business stable. And the business is stable. You see growth accelerating from 7% to 9%, with growth across all categories, so that's moving in the track, and I think the fundamentals remain healthy.

What took a step back, as you call out is margins and really profitability in the quarter, and a big piece of that is just the mix shift towards lower-margin goods, which we believe is a relatively short-term issue. And we have worked hard with the team, and the team is focusing on getting that back into a place where it's moving toward historic levels of profitability, applying a lot of the same approaches and processes that we've used elsewhere in the world to manage margins, and keep moving that in a healthy direction. We're still working on that, and we'll continue to do so.

And with respect to local, I think an easy way to think about our situation in EMEA, is we're just in an early stage of marketplace development, much like we were at the beginning of our marketplace build here in North America, where the teams are focused really on building out supply. Quantity and quality of supply is core for them, which includes being willing to trade some amount of take rate to get high quality merchants on the platform.

And then the second piece of it as well, as we're starting to build out that inventory in the marketplace, we're starting to roll out more order discounts in EMEA as well, to help do what we've done in North America over time, which is help train that marketplace behavior. The same kinds of things that have contributed to increasing search transactions on the North America side, those are the kinds of things that were going to be keyed on, and that will put a little bit of pressure on local take rates moving forward.

Want to cover guidance, Brian?

Sure, Ross. Let me give a little bit of background on our entire guidance. From a revenue side, we've reiterated $3.15 billion to $3.3 billion, and we have seen the fundamentals be consistent and strong. With respect to the adjusted EBITDA, we want to take growth to the next level, it's as simple as that.

In the high-frequency use cases that we've talked about are going to take investments in things like marketing, discounts, additional SG&A, and they're going to include our recent entry into the entirety of the take-out and delivery space, of which the Order acquisition is a part. Net-net, we're going to move guidance from $315 million to closer to $290 million.

I want to give a little context too on Q3, and as Rich discussed, we're focused on goods margins, and our revenue guidance contemplates a higher quality revenue, and a $700 million to $750 million target. The adjusted EBITDA basically for Q3 is the same story, with about half the investment coming into our $45 million to $65 million target.

Paul Bieber, Bank of America Merrill Lynch.

Good morning. Thanks for taking my questions. Two quick questions. What gives you confidence that the North America local billings can return to double digit growth in the third quarter? I think historically, you've given the order discount number in dollars. What was that in 2Q?

I'll start out on the North America piece and our confidence there, and then we'll move on to order discounts in Q2. First and foremost, I'd say we feel good, we're making good progress in North America local. Billings are 10% up year to date. That includes of course a little bit of a dip down to 8% to Q2 on what was a very tough comp in sheer dollar terms.

But we're still confident for a couple of key reasons. First, I'd say the marketplace fundamentals, they remained strong. In North America, we more than doubled our deal count versus a year ago, to roughly 240,000 to date. That's still out of a total of 4 million targeted merchants. So we still have a long way to go there, and we're making steady progress on that front.

Also continuing to see steady progress in active customer growth, with our active customers growing about 10% year-over-year. And we're continuing to see traction on search as a percentage of our transactions, now at 30%, up from 23% a year ago. So that confidence is built on this basic recipe. This is the basic recipe that has helped us drive now in double-digit local growth for roughly the last year.

The second piece of that, that adds to the confidence of course, is that we're off to a solid start in Q3, as we mentioned, and everything that we've seen stuff so far leads us to believe that we'd expect to see the growth trend continue.

And on the absolute numbers, our order discounts for the quarter were $39 million compared to roughly $21 million in Q2 of last year, for an increase of about $18 million.

Okay. Thank you.

Ralph Schackart, William Blair & Company.

Good morning, Eric, it's always been part of your long-term strategy to make it easier to use a Groupon, reduce the friction, and then increase the time from when you buy it to use it. Just curious if you could get some metrics around this; what you are seeing in the recent quarter? Do you feel that supply is a key issue, to -- that you -- to this longer-term strategy? But any color around that would be great. Thanks.

So certainly, I think it's part of this market place evolution. If you think about it, it's hard to imagine, but we didn't even have a search box a couple of years ago, so we now talk about search being 30% of our business. We didn't even have a search box. A few years before that, email was virtually 100% of our business. So we've had to get this product, the product piece here has not been immaterial. We've had to basically build an entire marketplace, in terms of the app and the sight and touch, and then we've had to populate it with deals.

We were this episodic email push business, and we've had to basically fill our shelves with inventory and try to figure out how to do that, and it's taken a significant amount of time. But with over 500,000 deals, we're starting to get to the right density that makes the product in many cities pretty good. But it's still, when you think about in North America, we have less than 10% of available merchants, like there's around 4 million target merchants on the site.

So far too often, you still come to the site, and you don't see the kind of density of deals that you'd want to see to have it be really useful. And that's why we talk about this high-traffic use cases and getting the right inventory on the site as being so critical. That's part of it.

The other part is actually making the product better, from purchasing, to booking and making reservations, to paying through the app. There is a ton of work that the team is doing to really make it much easier to use a Groupon. Certainly, we've made huge progress.

I remember a few years ago, the average time to use a Groupon was a month and a half to two months, and today, it is under three weeks and falling. But I want to get to the point where people are buying a Groupon and using it within a couple of days, or buying a Groupon, and making an appointment or booking a reservation that same minute.

So for us to become a business that's 10 or 20 times the size of what we are today, we can't just offer 50% off deals episodically, we have to have a marketplace that has high-discount inventory and low-discount inventory, and high-margin inventory and low-margin inventory, and we have to have people, merchants that are basically on Groupon all the time.

And when they need a few customers they're going to have much closer to market rate inventory that they are putting in our app, and the app should make it easier to use a Groupon than not use a Groupon. When there's a lot of customers, they are going to basically lower that discount to make it really attractive for people to say, hey, I'll buy this and look to use it in a few weeks. We're making good progress, but we've still have a long way to go.

Okay. Thank you.

Brian Fitzgerald, Jefferies.

Thanks guys. A couple of questions, one on Breadcrumb. Can you give us an update there? What trends are you seeing there in terms of usage, new sign-ups, and in general, what's been the level of interest from restaurants and other merchants? And then maybe similarly, an update on the coupons business. What traction are you seeing there, and have you seen any impact from any recent algoid changes? Thanks.

Let me start with Breadcrumb. We got into the point of sale business a few years ago, and we've invested a significant amount of time and energy in trying to figure out how our current offering integrates in with point of sale. And the learnings have been fantastic for us, it's part of this whole OS initiative to really figure out what tools are going to help merchants run their business better, and most importantly, upload inventory onto our platform.

The whole point of all these OS initiatives is getting merchants, having it be super simple for them to basically say, I have two open tables today or two open time slots, let me upload it. And Breadcrumb has done quite well in its space, which is really higher-end restaurants. It has thousands of merchants on the platform. It's growing nicely, it's doing well.

What we've come to realize though, is that the main focus, and you heard Rich talk about this, the main focus of our initiatives on the OS side are really our app. We messed around with hardware for a while, trying to figure out, well, could we put tablets in merchants. Can be put point-of-sale systems in merchants?

And we looked around and said, oh my God, our app is in hundreds of thousands of merchants around the world today, and they're using it all the time. So set of having a hardware-centric solution, why don't we have a software-centric solution?

So we've done -- our thinking there has evolved a bit, and right now, our focus as it relates to Breadcrumb is to make sure that team continues to grow, and again, we evaluate Breadcrumb like we evaluate all of our markets and countries and try to figure out, can we win, and how do we win? And how we position that business for success? But in general, that is doing just fine, and I will let Rich cover coupons.

Hello, Brian, so on coupons, we are pleased with our progress there. It's just been steady consistent progress. If you look at just the offering that we have, we ended Q1 with about 60,000 coupons, and that's now grown to about 70,000 coupons and offers on the coupons platform as we exit Q2. And still almost entirely North America and those 75,000 coupons coming from almost 9,000 stores. So good traction there on the supply side, which just keeps improving the customer experience.

It's just another way for us to get people to think about Groupon first when they're out and about, whether that's shopping for products or for local services. So good traction still, so far, but the thing to keep in mind is it's still in early product, and it still early for us overall, and today it's just not material to financials.

With respect to what we're seeing on the algoid side, so far with us, we haven't really seen any material changes or any material impact to our business in the SEO front positive or negative. It's really, our focus continues to be on building great quality pages for customers, and taking that customer experience first approach to developing our content, and in our products, and ultimately feel that will benefit us on the SEO side, no matter what happens. And the more you focus on just unique content and great experiences, you tend to benefit just fine there.

Great. Thanks, Eric. Thanks, Rich.

Mark Mahoney, RBC Capital.

Thanks. Maybe I'll throw in three quick questions. Any broad comments on how you get active customer growth to reaccelerate? Second, the comment that the mix shift towards lower margin goods was just a temporary phenomenon, or why is it temporary? Is that something that you think you'll see in terms of consumer behavior will switch back, or is that something you'll just try to drive? And then finally, I think there was a quick comment about revenue and EBITDA growth at a 15% rate. Was that through 2016, or are you just commenting on what the obvious growth rate was for 2015? Thank you.

There is a lot there. I will cover -- I'll start with active customers, and then maybe Rich can jump on as well and also talk about EMEA. We've seen good customer growth. In total North America, it's 10%, and I think for us, as I mentioned before, it's not -- if you look at our business today, we are about 10% growth in North America local through the first two quarters right now.

To get to 20% or 30%, it doesn't have to come from the active customer side. We have nearly 50 million active customers around the world. It has to predominantly come from either adding more customers, which is one part of it, or having our existing customers spend more. That's really what we're focused on. If I take the active customer piece, the biggest chunk of that is going to come from that marketing machine that we've been talking about, where you get the right amount of inventory in the right cities, and you get conversion up, and then you can more effectively spend money.

I often say to people, our business is very similar in lots of ways to Booking.com. They went out, they aggregated all kinds of proprietary, which is difficult to aggregate inventory, and then spent years focused on conversion, so they could really efficiently spend money to drive customers to the top of the funnel. And that exactly what we're just starting to do now. We just have been at this for a couple of years, but Rich, you may want to add on to that.

I think that's really the key, is us continuing to just tap into both the existing demand on our platform. So we have over 80 million unique visitors in North America alone, and well north of 150 million unique visitors worldwide. So we have a significant demand that's already on our platforms, so we're going to continue working on converting more of those folks into buyers. And of course, converting more of the existing customers we have to more frequent buyers.

And obviously, supply is a big piece of that. It's getting the right deals in the right places, and in front of customers at the right time when they are looking for it, and then there's just going to be a big piece of tapping into that broader demand. And that's just going to take smarter approaches on sourcing inventory, as well as continued advancement in our computational marketing efforts, which we're pushing forward on all fronts on those pieces.

Just shifting to your question on EMEA goods, and whether it's a short-term or a long-term challenge, I think as we've said, we believe it's a relatively short-term issue. And while, of course, customer behavior plays a part in that, because customers choose what they buy, there's also a big piece of that with us, that we choose what we present to customers.

And especially in Europe, where the marketplace isn't as developed as it is in North America, push is still a bigger part of that business. That's the piece that we're focusing on most, is really managing the mix of the products that we put out, managing vendor relationships with more stringent controls, and we've made some changes on that front, and put some different guidelines in place for the teams to help get margins into a healthier place.

And we believe that collection of changes that we put in place and some of those checks and balances that we put in place over the last little stretch here will over time put us into -- back into more historic levels there, which we're confident about.

The increase in the guidance around 15%, we're obviously testing a lot of things, and as we look at those tests, we're going to continue to evaluate, but we're looking at the 15% as going through 2016. We're still focused on our longer-term targets laid out at investor day, and we'll keep you posted as we move through this.

Okay. Thank you very much.

Heath Terry, Goldman Sachs.

Great. Thanks. I was just wondering if you could give us a little bit more of an update on pages? Where you are in terms of the count, the number of pages that you have been able to develop thus far? What kind of penetration and adoption that you are seeing from the merchants, and the group, and what impact that having, to Mark's question, on the effort to build active users?

And then just one financial question, the decision to merge travel and local into a metric, obviously those are two businesses with a lot of different dynamics in them. Seeing those merged is going to -- is I think, making it a lot or a little more difficult to analyze the health of particularly the local business. Do have any intention of continuing to break out in any way metrics, specifically on local?

So let me start with pages, and then Rich can start to cover the services piece. We now have over 2 million pages indexed on Google. They are doing well, we continue to gather reviews and tips, and they are doing all of the things you want them to do, which is basically drive traffic.

Over the long term, we expect these pages to be a significant contributor to revenue, but it's still a new product for us, relatively speaking. So right now, the big effort has been to populate them with enough content that they can be indexed and indexed high in Google or in other search engines, and that they begin to rise.

One of the best parts of Groupon is we're so mobile and we have so much rich content, by evidence of the fact that virtually 30 million people have left a tip, a review, or a rating, that these pages tend to rise over time, both in natural SE ranking, and they get ranked very high in mobile. We expect these to be, over time, a really meaningful contributor, and our customers obviously love them.

The fact that 1.3 million people have already hit request a deal or begun following a merchant is evidence of the fact that over time, we're going to be a very large collector of review content, and a place that people go to try to learn about merchants and figure out where they ought to -- what they should try and where they should eat, and what they ought to do locally.

The only thing I would add to that is as we continue to build out supply, and that's that combination of high-discount inventory, high-margin inventory, lower-discount inventory, lower-margin inventory, et cetera, that's going to play more and more over time into that active customer growth piece.

Today there's a lot of rich content on these 2 million pages and a lot of great interaction on these pages, but we don't have 2 million active deals, we're at 240,000, so we have some work to go and work to do in that front, to help make the pages more transact able for customers, and then it will start to play more into that long-term active customer piece.

So shifting onto the services, accretion of the services category, there's obviously some different dynamics in the space. But when you really think about the operational side of those businesses, they are actually very, very similar.

How we source inventory and the basic business model and the inventory is extremely similar, and ultimately, we believe is generally how people view our marketplace, where it's really about the things that you want to do when you're out and about, and how you get there, and where you stay. That's much more in the domain of the services space than really separating it between local and travel.

I think as Brian mentioned, we'll continue to break them out throughout the next quarter, so you can have some broader insight into local. And then from there, Brian, if you have anything else to add.

No, I think through the end of the year, we'll continue to break out that information.

Okay. Great. Thanks.

Ladies and gentlemen that does conclude the Q&A session for today. Thank you for participation in today's conference. This concludes the program. You may all disconnect.