Groupon Inc (GRPN) 2016 Q3 法說會逐字稿

Good day everyone and welcome to Groupon's third quarter 2016 financial results conference call.

(Operator Instructions)

Today's call is being recorded. For opening remarks, I would like to turn the call over to the Vice President of Investor Relations, Deb Schwartz. Please go ahead.

Good afternoon and welcome to Groupon's third quarter 2016 financial results conference call. On the call today are CEO Rich Williams and CFO Mike Randolfi. The following discussion and responses to your questions reflect management's view as of today, October 26, 2016 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 and form 10-Q. We encourage investors to use our investor relations website as a way of easily finding information about the Company.

Groupon promptly makes available on this website 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'll find additional disclosures regarding the non-GAAP measures including reconciliations of these measures with US GAAP. Unless otherwise stated, all comparisons on this call will be against our results for the comparable period of 2015 and are excluding year-over-year changes in foreign exchange rates throughout the quarter. Now I'm happy to turn the call over to Rich.

Thanks, Deb. In the third quarter, we remained focused on the four strategic priorities we have identified as critical to our success in becoming the daily habit for local commerce. These priorities -- grow customers, streamline and simplify the business, reduce empty calories and create an amazing customer experience, once again helped us deliver solid results and continue to frame the road to long-term success.

Overall, with a year of focus on our four initiatives now behind us, we're pleased with our progress. We are on track with our plan and see continued momentum, but we still have plenty of work ahead. Our platform continues to provide significant value for our growing customer base and for the merchants who use it to drive their businesses.

That is most apparent in North America, where our local business grew 10% year-over-year, the highest in six quarters, helping us deliver revenue of $720 million and adjusted EBITDA of $32 million. Mike will provide more details on our third quarter performance and our full-year 2016 guidance shortly. First I will walk through our four strategic priorities in further detail.

First is customer acquisition. A year ago we set out to add millions more customers to our marketplace and have since focused aggressively on growing our quality customer base. We've had success throughout 2016 which continued in the third quarter with another 1.2 million new customers in North America alone, our highest level in more than three years.

Since beginning this effort last November, we have added close to 4 million new customers to our marketplace in North America through the third quarter. That means there are more than 29 million total active customers in North America, and more than 50 million active customers globally. Importantly, these newly acquired customers continue to perform within the 12 to 18 month ROI thresholds we have established for our incremental marketing spend.

Not only are we bringing new quality buyers to our platform, we're doing so at an attractive acquisition cost and through an increasingly diversified marketing program. Our strength in online computational marketing continues to drive efficiency in our customer acquisition efforts. We also continue to increase the sophistication of our promotional programs and use of order discounts with data and targeting.

In the process, we found that they can also be a very effective customer acquisition tool with attractive financial returns. In parallel, we continued investing in and developing our off-line and video-only experience advertising campaign, which has been well received and a great start to our brand building efforts.

While we intentionally avoided expensive and inefficient off-line media spending during the Olympics and early election season, we expect to continue to leverage off-line advertising in Q4. Our second priority is to streamline and simplify our business. Since kicking off this initiative last year, we moved fast on our restructuring plan and reduced our country footprint from 47 to 26 countries.

We also reorganized how we work day to day as a global Company. We're now beginning to realize the savings and efficiencies of a more focused global footprint, a more streamlined organization and global shared services. We're moving faster and with greater consistency and efficiency across the Company.

In parallel with our restructuring efforts, we have been evaluating our remaining country footprint to ensure we're operating in the right locations. In line with our last call, we have arrived at what we believe is the right operational footprint, 15 countries, primarily in North America and Europe. In these 15 countries, we have the teams, competitive positions and investment economics for growth.

While this means we plan to exit some of our smaller and more speculative markets, the fact remains that we're still in the early days in our largest markets and in local commerce in general, and believe our resources are better deployed where we already have a solid start and room for significant long-term growth.

For the markets that are not part of the 15 countries for our go-forward footprint, we will continue pursuing options over the coming months. Mike will add some color on the potential impact of these changes shortly. Though this process has been disruptive, we're on track and remain focused on stabilizing our international businesses.

We're seeing some initial indications that our efforts are getting traction as the declines in year-over-year growth in EMEA gross billings narrowed in the quarter and segment operating income stabilized. We expect this stabilization work to continue while we pursue options for countries we plan to exit. Our third priority is to reduce empty calories, particularly in our shopping business.

When we talk about empty calories we are referring to low to negative margin products that drive short-term increases in revenue but little in the way of healthy, long-term customer behavior or profit. We continue to execute on this initiative, and optimize the quantity and quality of our supply in shopping which in some instances will result in lower rates of growth and gross billings.

After making good progress on shopping margins over the last three quarters, we took a step back in Q3. As we have discussed in the past, the challenge here is to find the right balance of topline growth in gross profit growth over the long term. In the third quarter, while unit sales growth remained strong, our tests on a number of pricing levers simply didn't deliver the optimal results.

Instead, we saw modest gross margin decline without the benefit of significant billings growth. We're not happy with the result, but we have adjusted and believe our shopping business is on solid footing heading into Q4. Our focus remains on driving healthy sustainable growth over the long term.

Fortunately, we have a strong base from which to continue to build. Our fourth priority is to create an amazing end-to-end customer experience, an experience that delights consumers and has them using Groupon again and again. This means attacking potential pain points in the entire Groupon experience, from search and discovery, to purchase, to redemption.

In the third quarter we attacked one of the largest sources of customer friction in a Groupon experience -- expiring Groupons. Available on our web and mobile platforms in the US, our new trade-in program should play a major role in alleviating the pain from expirations. With trade-in, should a Groupon expire, customers can exchange it for a new local Groupon.

Or in many cases, if a customer just wants a bit more time to use their Groupon, they can choose to extend their expiration date -- in most cases by up to two weeks. Early feedback from customers is encouraging and we believe the program will strengthen trust in our brand and improve satisfaction and frequency over time.

More improvements to the customer experience are on their way, particularly in mobile. We expect to begin rolling out our most significant mobile upgrade of the year in November. The new app will feature improved filtering, enhanced discovery, search and browse and a continued emphasis on location and targeted notifications.

All things we know customers want in an app, they can use every day to help them save time and money locally. Heading into the fourth quarter, I am pleased with our progress in confident in our plan and ability to continue executing well against our four strategic initiatives. Before I turn over to Mike, I want to quickly discuss today's announcement on the acquisition of Living Social.

With Living Social, we saw both an opportunity to acquire a significant number of new customers and an attractive ROI as well as a solid brand and loyal customer base that can benefit from Groupon's scale and broader inventory across categories. Further, the team understands local and shares our view of the ultimate opportunity in the space.

We're happy to have them join us on our mission to build the daily habit in local commerce. We're still developing a long-term integration plan that we believe should help us get the absolute most out of our respective platforms, partners and people. Our immediate term priority, however, is on making sure we have everything in place to help deliver a great holiday experience for our combined customers. With that, let me turn it over to our CFO Mike Randolfi to run to the details on the quarter and our outlook.

Thanks, Rich. We're pleased with our progress in the third quarter as we continue to move forward on our strategic initiatives with a long-term focus on growth and gross profit, adjusted EBITDA and ultimately free cash flow. As I discuss our results for the third quarter, note that all comparisons, unless otherwise stated refer to year-over-year growth and are FX-neutral.

In Q3 we accelerated our active customer adds, delivered stronger North America local billings, continued to see stabilizing trends in EMEA, reduced SG&A, and made the decision on our go-forward country footprint which will include 15 countries. For the third quarter, revenue was $720 million and adjusted EBITDA was $32 million.

Gross billings of $1.43 million declined by 2%, led by a 6% increase in North America and decreases in EMEA and rest of the world of 8% and 23% respectively, related primarily to our reduced country footprint. On a same country FX-neutral basis, total gross billings grew by 1%. North America local gross billings of $531 million grew 10% and North America local revenue of $176 million grew 8%.

During the quarter, we added 1.2 million active customers, our fourth cohort since stepping up our marketing spend, bringing total customer additions in North America to 3.9 million. Regarding our international business, EMEA will represent the large majority of our go-forward footprint, which I will discuss further.

EMEA gross billings and revenue growth on a same country, FX-neutral basis were down 2% and up 6% year-over-year respectively, highlighting the stabilizing trends that we're beginning to see. Gross profit was $314 million, driven by an increase in North America which was offset by declines in international segments with a significant portion of the decline driven by country exits.

For North America specifically, gross profit increased $10 million, driven by a 10% increase in local billings with gross profit margins comparable to last year, which was partially offset by lower margins experienced in shopping. North America shopping gross margin was 10.6% and declined by 160 basis points driven by pricing. With the adjustments we made at the end of the third quarter, we expect shopping margins to be up on a year-over-year basis in the fourth quarter.

Our marketing expense for the quarter was $88 million, an additional $26 million year-over-year related to our investment in customer acquisition. The incremental spending was in both online and off-line channels. In North America, online marketing spend skewed to display, page search and app download. Also, we're seeing greater success using select order discounts as a tool for customer acquisition and are increasing its mix relative to marketing.

And our customer cohorts are continuing to perform in line with our 12 to 18 month payback period. As we continue to realize the benefits of streamlining and simplifying our business, SG&A was lower by $72 million in the third quarter, which included lapping a $30 million reserve for a securities litigation matter reserved for in the third quarter of 2015 that was subsequently settled.

Our headcount is now roughly 8,400 down sequentially in the third quarter by 200 as we continued to streamline the business and scale up shared service centers in international regions, and down by 2,100 year-over-year. Our overall goal is to continue to balance identifying areas of efficiency while making investments in the business and dropping some of the efficiency to the bottom line.

Regarding our go-forward footprint, it will now be composed of 15 countries which are listed in our earnings call presentation available on our IR website. We took an objective approach to determine our go-forward footprint, based on several criteria including market attractiveness, our ability to win in the market and the cost of winning relative to expected returns on capital.

After careful consideration have determined that these 15 countries are the ones that we plan to invest in going forward. To provide some visibility on sizing, the 11 countries not included in the go-forward footprint on a trailing 12 month basis generated $140 million of revenue and an adjusted EBITDA loss of approximately $10 million.

As we pursue options, we may continue to explain some small losses in APAC and LATAM -- which are incorporated in our guidance. We will update you on the next earnings call regarding how we expect the timing of those actions to impact 2017. Turning to free cash flow -- we had $54 million of negative free cash flow, which reflects our typical seasonality for the third quarter.

We expect to generate significant free cash flow in the fourth quarter. For the full year, we continue to expect free cash flow to be about breakeven. We ended the quarter with $690 million in cash, excluding our $250 million undrawn revolver, which we believe gives us ample flexibility to invest in our strategic initiatives and generate long-term sustainable growth.

Additionally, the acquisition of Living Social is expected to close by early November. We expect it will contribute approximately $15 million of revenue and $2 million to $3 million of adjusted EBITDA losses per quarter while we bring the Living Social customers into the Groupon ecosystem.

We're increasing our 2016 revenue guidance to $3.075 billion to $3.150 billion, which reflects the acquisition of Living Social and our decisions around country footprint. Based on our results year to date, we're also slightly increasing the midpoint and narrowing our adjusted EBITDA guidance range to $150 million to $165 million for 2016.

As always, our overall guidance reflects current FX rates and our results may be materially affected by various factors, including a high level of uncertainty surrounding the global economy and consumer spending as well as exchange rate fluctuation. Additionally, I want to remind you that our class A and B shares will automatically convert into common stock on October 31, 2016.

Following the conversion, each share of common stock will be entitled to one vote per share, and otherwise have the same rights as prior to the conversion. Finally, I would like to welcome Deb Schwartz to Groupon as our new Vice President of Investor Relations, who joins us from Goldman Sachs and thank Tom for all his support for our transition period over the last year as he departs for new adventures outside of Groupon. With that I'll turn the call back over to Rich.

Thanks, Mike. It's now been one year since I took the CEO role at Groupon. I am proud of how the team has risen to the executional challenge and the determination and drive with which they work to help our customers and merchants. This is a leaner, more focused Company and our focus is delivering results.

Bottom-line, our strategy is working. We are growing customers. We're growing the business. Were doing what we said we'd do and delivering what we said we would deliver. Most importantly, we believe we're setting Groupon up for long-term success.

One year in, I believe more than ever in the local opportunity. I believe Groupon is better positioned than ever to realize that opportunity. We have a scaled and accountable advertising platform for local merchants, a proven platform that helps small businesses grow and thrive when so many others are working to put them out of business.

We have a Top 25 US mobile app with nearly 140 million downloads. We have a better and steadily improving product that is making it easier for tens of millions of customers to transact locally. We have a brand that millions and millions of loyal customers love.

Our challenge remains largely one of execution and time. It is an exciting proposition and we are excited to tackle it. Let's take some questions.

(Operator Instructions)

Ross Sandler, Deutsche Bank

If I can ask three quick ones, that would be great? Rich, the new plan and thesis here as you guys ramp up the marketing, and you bring in new cohorts of buyers that they will start to stack upon each other, so you are about nine months into the first cohort from 4Q 2015? How is that cohort behaving?

And can you talk about -- like we saw unit growth in North America decelerate a little bit -- was that a comp issue, or any color there? Than the second question is, from Living Social -- thanks, Mike, for the impact on financials -- but can you give us a sense of the overlap or lack thereof today in their customer base and-or merchant base versus Groupon?

Last question is, around the shopping areas of the unit economics there are kind moving around a little bit? Can you elaborate further on what is going on with gross margin? And why it went down in third-quarter and why it is going to go back up in 4Q? Thank you.

Thanks for that, Ross. I'll start, I will cover your first couple and then I'll hand it over to Mike to talk about shopping unit economics and Q4. On the cohorts, we feel really good about what we're seeing in the cohorts. We continue to see cohorts track well within the range that we expected as we set out on our plan and as we set our ROI thresholds.

So those first cohorts that we acquired in Q4 are in a really great space and tracking along as we see. Just as the cohorts that we just acquired in Q3, they are tracking right in the zone we expect them to track as well. We feel really good about how they are stacking.

I think the thing to remember there is that the stacking occurs and it becomes powerful over the long term. We have added roughly 3.9 million customers since we started, but even that is roughly 15% of our total customer base as we sit now. So it is still a relatively small share and we have seven years or so of long-tailed cohorts that have stacked up behind them.

Our goal is to make this an ongoing effort that we are stacking cohorts for the long-term, so that we can continue to accrue the benefits that have been demonstrated over time. All of our cohorts have demonstrated they have a long tail, they continue to spend on our platform, and if we keep acquiring on this track we're pretty excited about ultimately what that means for us over the long term.

On Q3, unit base deceleration -- there's a couple of things there -- one, you called it out there. We do have a challenging comp in Q3, specifically in shopping. We're comping a time when our shopping growth was around 18%.

Year-over-year this time last year, seeing definitely our challenge as we mentioned in the script there. Just in general with shopping this quarter, as we were moving around some of the pieces on pricing, which Mike will cover in a little bit. Just quickly on the overlap on Living Social, I will not going to too much detail there but the easiest way to think about it on the customer side will add in the neighborhood of 1 million unique customers as part of the transaction to Groupon.

Then on the merchant side, there is some opportunity for us to add some merchant volume there as well but it is relatively small and in general not material

On the unit economics on shopping, a couple of thoughts there. First, I would just say, as we think about shopping just in general, our overall goal over the long-term is really running that business with the focus of maximizing gross profit, not just in this quarter but over the long haul.

And the second point that I would highlight is, when I think about our margin trends with regard to shopping, if you look over the last several quarters, what you saw was pretty nice year-over-year increases in our margins on shopping. And then in the fourth quarter, we are expecting that trend to -- expecting that same trend where we have higher shopping margins in the fourth quarter year-over-year.

I would say the third quarter is somewhat of an aberration. And overall, what I would say is during this quarter we spent some time, we tested various pricing strategies. And quite honestly, there was some learnings out of it, but we were not satisfied with the results.

The learnings from it -- we were able to take those and embed those as we moved into the fourth quarter and for us they're very helpful as we move into the busy shopping season. The other underlying point that I would say is, with regards to the shopping business overall, while the margins were lower the underlying demand was strong.

And so we saw really healthy unit growth in that business. Overall I feel good as we're moving into the busy shopping season for the fourth quarter.

Tom Forte, Maxim Group

Great, thank you for taking the question. As we approach the holiday sales period, how should we think about your maintaining your initiatives when it comes to goods and focusing on higher-margin items?

How should we think about the balance between sales and margin? And then, if I hear you correctly, do you feel like you have the international footprint the way you want it now on a go-forward basis? And that is good for now, thanks.

As we think about margins overall, one of the things we're going to think about is -- obviously we're focused on generating gross profit, like I said, over the long haul, and goods is a big portion of that. What I would say is in the fourth quarter, you ultimately have to provide customers with what they naturally want. So in the fourth quarter there is a natural skew towards shopping.

You see that seasonally every year in our business. Ultimately, we're going to be working in the fourth quarter to optimize for gross profit and optimize for continuing to grow our North American local business. That is going to be the same as we have been focusing on the last several quarters.

What was the second question?

The international footprint?

It sounds like you make the adjustments to the international portfolio to get it where you want to be? How confident are you that you won't have to make any additional adjustments going forward?

What I would say on that, we went through a really thoughtful process on country footprint. We spent a lot of time thinking about the attributes of the attractiveness of a given market. We spent a lot of time thinking about what is our ability to win in a market.

And then in order to win, how much would we have to invest, what would be the return on the investment, what would be the time horizon. We ultimately came up with a list in our go-forward footprint that is a list of countries that we feel comfortable and feel confident are the countries want to move forward with. And ultimately invest in and believe we have the ability to ultimately win in those markets.

That is the way that we're thinking about it. Those are the countries we are going to move forward with.

Sam Kemp, Piper Jaffray

Quick, on marketing? You started out the year thinking you were going to increase marketing by about $150 million to $200 million year-over-year? Just looking at your guidance, it implies you are probably not going to hit that range?

Can you talk about what has been the governor on that marketing deployment? And secondly, you watch TV at the end Q2 -- can you talk about learnings from TV advertising campaigns you have been running?

I will take the first part, Sam. With regards to overall marketing range for the year you are right we will be a bit below the $150 million mark for marketing year-over-year. I would say there's a couple of things that factored in from our perspective in marketing.

One is, we're going to look to acquire customers in the most efficient and effective way. And we've had some -- between the Olympics and presidential campaigns, there were times that we were being off-line did not make as much sense so we scaled some of that back. Now on the other hand, we have found that utilizing order discounts as an acquisition tool has actually been a really good acquisition tool for us.

We think about order discounts, really with the same framework we think of marketing. So we put it to the same ROI framework. We think about it in terms of payback the same way. What you see is in the last couple of quarters we have been increasing order discounts on a year-over-year basis and we have been using that as an acquisition tool and that is also part and parcel to why our overall marketing level was able to flex down a bit.

As far as off-line, what we have learned there, I will start out with saying, we have only been on TV in total for less than a couple of months in terms of actual airtime. We started out in late June, and we ran a bit in the early part of Q3 and then we pulled out of the market during the Olympics, and where the elections media started to make it a bit challenging to find efficient pockets.

We are still learning a lot in this space, but one thing we do know for sure is there is an opportunity to get the brand in front of a lot of customers we haven't reached in a long time and to reach completely new markets in that space. We know that the feedback on the brand has been really high. I know the feedback on the campaign has been really solid.

Customers are definitely finding the message, one they can really connect with. The second big piece is we're finding we can measure it well and there is real opportunity to make it an efficient customer acquisition channel for us. We're applying the same kind of analytical rigor and depth in the off-line world that we apply in the online world.

Obviously tracking is a bit different but we are treating it in the same way, holding it to the same bar. And finding that it can deliver against that bar. We are really happy with the potential in off-line for Groupon, especially as we continue to build the marketplace and march toward our vision of being a daily habit and you can expect to see us in Q4 active in the off-line and video world.

Just maybe a quick follow-up on that? Given that commentary, when we think about marketing ramp into 2017, should we be thinking that the $150 million to $200 million might have been more attainable, not given the presidential elections season?

I will take the last part first. We could have spent lots of money. We're not constrained in our ability to spend. What we didn't want to do is spend in an inefficient way. The media was incredibly expensive around the Olympics in particular.

Again we didn't have, we were not ready a year ago which is where we would have had to be ready in order to start planning for that media to make it efficient. There is not a constraint on our ability to find pockets of areas to spend. But we really care about is making sure we are investing where we believe we have the right kind of return on investment characteristics that we require.

I think that is generally how we will approach the problem moving into 2017. We're not going to provide guidance on anything specific to 2017, but from a method or philosophy perspective, that is how we think about the marketing space. We're going to invest to the point of our ROI thresholds, which at this point is getting a gross profit payback within 12 to 18 months.

We think it's a very reasonable space, and if we find an ability to scale up our spend and still maintain that kind of payback we're going to scale it up. If we find that we have to pull it back to stay within those ROI thresholds we will pull it back. I think it is a good healthy place for us to be, and we like the results that it has delivered so far. You can see them what is happening in North America, local growth in particular, and we think it is a good place to continue to operate.

Heath Terry, Goldman Sachs

Just back on the shopping business for a second? Away from this quarter, away from Q4, can you remind us how you view the strategic value of shopping to Groupon as a whole? That is obviously an incredibly competitive space with a lot of companies trying to vie for the incremental wallet dollars. What value does being in shopping add to the core local business?

One -- there's a couple of things there Heath, thanks for the question. Number one, and we've said this before and its absolutely right -- our customers do not ask us whether we should be in that business and most of that is because we provide a compelling value prop for them and a compelling product offering for them. And its one that for us now on a more strategic level that does drive engagement with our platform.

It fits our heavily browse-oriented environment and a lot of what our brand is known for with surprising and delighting customers. So it has a real place in the ecosystem, and it genuinely is an ecosystem. We have significant cross shopping behavior. One of our largest sources of local customers over time is ultimately people who start out buying shopping and then ultimately migrate over to that channel.

People very much see it as a part of the Groupon experience, and I think there is real value in that. There's real value in it for local long-term as an entry point into activating on the local product. The other thing that I have said historically, and I still believe there is an opportunity in, and we tested it, you can see it on the platform live today -- if you've taken a look at the goods product.

I think there's a big opportunity in ultimately finding a way to really empower local retail on our platform. We think about shopping in general as a channel, local retail is underserved by most online players. And I think there's opportunity for us to extend our local footprint and shopping position combined on that front.

There is both strategic opportunity, practical value and practical customer value in being in the business today. Last, by the way, it is still a couple hundred million dollars in gross profit annually with improving gross profit margins over the last four quarters. So its also not a bad business.

Ken Sena, Evercore

As you think about the active user growth and you pare down to fewer countries, should we think about that coming from marketing right now? Or are you seeing it from North America or certain service areas that you can highlight? And I have a follow-up.

We have been focused to date, and thanks, Ken. We've been focused today on North America, the vast majority of our incremental marketing dollars have been channeled to North America. However, you did see marketing overall globally increased a bit. So we're spending, we're starting to invest a bit in some of our European locations in particular we think there is good opportunity to grow.

But also on a same-country basis, there is good solid growth potential and actual growth in those areas in terms of customers. On a go-forward basis we're ultimately going to keep investing to grow the customer portfolio overall that will continue to focus most heavily on North America.

Just a follow-up on the headcount, as we look at it by geo? It looks like the headcount in EMEA is holding flat? Maybe you could help us think through, as you go through this restructuring, are there certain levels that we could look to as far as reductions or how should we be thinking about modeling that going forward? Thanks.

Assume you're talking to changes in our country footprint. What I would say on that is we're still working through various conversations, whether they be sale or partnership type opportunities with regards to the countries that are not part of our go-forward footprint.

As a result it just makes it a little difficult at this stage to provide more visibility around specific metrics such as headcount. We will be able to provide a more fulsome update on how the changes in the country footprint affect 2017 and the future on the next earnings call.

Tom White, Macquarie

Rich, you just mentioned marketing spend outside the US? I'm just curious, it sounds like the cohorts in North America, new customers are performing in line with your expectations. How should we think about your appetite, or the timing of maybe you guys looking to pursue a similar type of investment in your non-US markets? And then a quick one on percentage of North America transactions from local?

Looks like it has flattened out here over the past couple of quarters? Just kind of curious how we should think about that, relative to the focus you have on trying to drive more of a marketplace or demand fulfillment type of use case on the part of consumers?

As far as marketing spend outside the US, the reality is we just don't think about it all that differently. It is the same basic investment mechanics. It's the same kind of ROI thresholds that we have. We have started to move a little bit of marketing dollars, more marketing dollars toward the international segment, particularly in our larger countries in Europe.

As we're really trying to test to see if they have the right kind of fundamentals in terms of marketplace behavior, marketplace supply, et cetera that can support more investments. We're still learning in that space, so I think until we really see something major crack there, you will see it continue to do exactly that. We are going to test and learn.

We will trial some of the things that have worked in the North American business and is helping to drive some of the growth here and in other markets. And if we see that they have potential to give us a good solid ROI, then we will start moving more dollars there. At this point we do not have any specific plans to share or shading on marketing spend this year on that front.

With respect to North America transactions from local, I think mostly what you are seeing is -- you are seeing solid growth and acceleration in North America local overall and on a billings basis. And transactions as a percentage, it is moving around a bit and it is mostly due to mix and seasonal pieces. I wouldn't put a lot in that at this point, especially related to the long term.

As you mentioned, the big unlock in this business continues to be the real frequency lever in moving more toward our path of where we are now, call it in the 4 to 5 units a year to being a monthly habit for people, a weekly habit for people, and ultimately a daily habit. We have a long way to go to go from 4 to 5 units a year up to 12, then to 52 and then 365. We have a ton ahead of us which is why we are investing as much as we are in the customer experience and the things like the trade-in program.

Why we're investing so much in the mobile product and the mobile experience, the faster app, the sharper app, with better search and browse. Why we're making those forward investments in a great experience and the product to help us enable that longer-term and that is going to be something that truly is longer-term. You just don't change frequency and scale overnight. It will be a longer burn process and one that is going to require continued investment in innovation on the product side.

Douglas Anmuth, JPMorgan

This is Lina Rudashevski on for Doug. We wanted to know -- you mentioned that you were testing different pricing strategies, and there was some learnings for that with regards to the margins? Can you elaborate on what didn't work and what you learned from that? And then I have a follow-up.

What I would say on that, we're always testing various things on price and it is everything from how you display price to how you promote to how you merchandise and the combination of all of those. It's a little too nuanced and quite honestly proprietary to indicate what the learnings were from it.

Other than, I would say we looked at it and as we saw the learnings through the quarter, what we were able to see is there is some really good insights that gave us really the ability to adjust what we were doing, particularly as we ended the quarter going into the fourth quarter. It gave us a good degree of confidence in the trends we are expected to see in the fourth quarter, whereby margins we would expect to be up on a year-over-year basis in the shopping business.

You mentioned the trade-in and the expirations, can you elaborate a little bit on how does the trade-in work? Are all the merchants on board with that? And who is footing the bill -- is it the merchants, or are you?

Thanks for that. It is a great program, and one that -- basically the way it works is if a customer has a Groupon expire, we send that customer a notification offering a trade-in. That offer is good for usually in the range of a couple of weeks. It the customer decides to trade in the voucher, they just click the button trade-in this voucher.

They then have a period of time, 24 hours to trade-in that voucher on any other voucher on Groupon, which we are seeing that they generally do. There is really not a footing of the bill, so to speak. You are trading, it is more like an exchange. If someone is basically taking something they paid for and exchanging it for another. The vast majority of merchants are on the program as we have rolled it out.

It is really simple in that way. Extension is even easier. It is literally, if you are on your Groupon app and you have a Groupon expire you go to the voucher page. You will see Extend Your Time window on there. You basically click that button and you have usually about two extra weeks to use your Groupon.

That is exactly in line with our merchant value prop and merchants are happy with that product. The number one thing they want to have from Groupon is customers across, moving through their doors and sitting in their businesses. Both of these give folks an opportunity to do more of that.

Brian Fitzgerald, Jefferies

Couple of questions, can you give us maybe more color on your private-label businesses? Which brands are doing well there, which ones are getting the most traction? And then maybe a little overview of the strategy around private label?

We have launched a number of private label product lines, you probably saw our fitness apparel product line here recently that we announced. We're happy with, so far the performance of those lines and we did a pretty broad selection of lines. We don't give specifics of which lines and the performance of them, but in general we are happy with how they are performing.

Strategy there is to be able to of course find opportunity to increase our margins and provide great value to our customers. It is something that we now have the scale to be able to do, and not just in North America but as part of our global business and we will continue to pursue those opportunities. It would have to be a great product.

When we think about that space is not just about margins, margins are a clear opportunity there, but we found over time that we have to sell great products. Its one of those, if we're going to move into any product line we have to be really confident that we're putting -- if we're going to put one of our brand names together, its going to be something that customers are going to be really excited to receive when they unpack their boxes.

To the extent that we can continue to do that, a think it is great for customers, great for Groupon margins overall and we will continue to pursue it.

So I guess that would fall into -- if I think about your four strategies, that is reduce empty calories and that's amazing and then -- would be the two those resonate with?

Yes, that's exactly right. Part of it is streamline and simplify and part of it is reducing empty calories. For us it simplifies the supply chain in a really material way. We control the supply chain on those products end to end, and we understand what it means to make sure they arrive at a customer's door on time because we understand the manufacturing thresholds and overseas delivery times, et cetera.

It is clearly streamline and simplify and absolutely reducing empty calories, and making sure that again, we are investing our margin dollars were we will have the highest return. So it fits squarely down the center for our overall strategic set up.

Mark Mahaney, RBC Capital Markets

Can you again provide color on that 1.2 million add you had, sequential adds you had in North America? I know that was one of the bigger numbers you had in a while? The particular channels you think may have worked, that are new for you?

Is it just more effort or were there a couple of new wins in there that allowed you to get those? And if you could comment on the local take rate, the local revenue over local billings? The number I think it was down to 33% or something like that?

One of the lower levels we have seen? And I know you don't necessarily work towards that number but there may be a tell from that? Or how should we interpret that?

You'll see that these two are actually related. I'll take the first piece and Mike will take the second on take rate. On the adds, you are right this is the highest level of net adds we have put 1.2 million in the quarter in three years.

Is a significant performance there and a significant acceleration versus where we were over the first couple quarters. The biggest things there ultimately, I think is just the team is a time to optimize their campaigns. They have had time to tune the kinds of campaigns and programs that are working best for us.

Our marketing mix overall -- the only major change in it has been really the addition of off-line over the last call it four, 4.5 months. Mix is stable. We're still seeing really great performance on our core digital campaigns with Google, and search and Facebook and display. And increasing other areas in mobile and video. And we're seeing off-line gain of traction, at least early in the quarter before we hit the Olympic stretch and the election stretch.

We are happy with how the team has performed here, and how the efficiencies have been able to capture. And also in their ability to innovate around new tactics and programs which they have been testing specifically with order discounts as an activation measure. And we have seen that has performed increasingly well and the team has been able to make a good program out of it. With that it will turn it over to Mike, and he will talk about how that relates to local take rates.

Mark, as you think about our local take rates, I would unpack it a little bit and what I would say is if you look at the take rate with merchants, the direct take rate with merchants -- it has been incredibly stable over the last couple of years with very little change. What you have seen in terms of the reduction year-over-year in take rate is primarily by our increased order discounts per quarter discounts, as we just talked about.

And I mentioned earlier we put them through the same ROI filter that we do our marketing. So we look at that as a potential tool to acquire customers in the ultimately measure what is the gross profit we expect to generate from utilizing that order as a tool so that shows up, the initial order discount when you incur it shows up against our take rate.

So you see the impact for the lower take rate decline, but unpacking that core take rate with our merchants has been incredibly stable over the last couple of years.

Aaron Turner, Wedbush Securities

Wanted to drill down into the new cohorts as well? Wondering if you can comment on the demographics of these new cohorts? Do they skew younger, by chance? Or is it more broad-based?

And then is there any particular category of local deal that you see them gravitating towards that you may be able to lean in on from a supply standpoint? Second question around the new geographic footprint -- with the countries that remain, are all of them already profitable or is there some work to do there to get them up to profitability?

I will take the first question on customers and category skews and then I will turn it over to Mike on footprint. You basically said it, the customers we're acquiring are very much broad-based. Over the last couple of quarters, those 3.9 million-odd people or so are very similar to the composition of the 25 million or 26 million that they joined.

Nothing specific to call out there in terms of overall skew in geodemographics. Now, on the category side, there is really, there really are three core major categories in local. They represent the lion's share of what we do in a local business. And that is our food and drink category, which we absolutely are doubling down on in terms of both supply and even the product solutions and offers we are adding there.

There is of course our health and beauty business, spas and salons -- which again we are investing a lot of time and energy in, both on the product side with things like bookings and appointment systems as well as, I'm just making sure we have amazing inventory. And then there's what we call Things To Do in our activities business, where we have really good product there already that is doing nothing but improving as well as having amazing inventory.

Both due to our own efforts and due to what has been a great long-term relationship with Live Nation Entertainment and Live Nation Concerts, Ticketmaster. So those are really the crux of the categories that we're working in local, and those are natural skews as a result for the activation on our customer base.

With regards to the countries that are remaining within the international footprint, a couple things I would point you to. One is, if you look at our EMEA segment operating income for the quarter, what you can see is for the region, we had a profit for the region on a segment operating income basis. But if I look at individual countries, what I would generally say is the countries are generally breakeven to contributing to our EBITDA.

Some of them are in different phases, depending on level of investment, level of supply. But what I think is more important, is really -- what do we think about these countries going forward? And every country that we've kept in our go-forward footprint we have kept because we believe the return dynamics ultimately favorable.

We believe that ultimately with the right supply, with the right support behind brand and with the right support behind product, these could all be contributors in future years to Groupon. So that was all very much of our thought process.

Kevin Koppelman, Cowen and Company

This is Emily DeNovo on for Kevin. We were wondering if you could share some foresight going into Q4 on holiday trends that you are seeing? Particularly your marketing strategies surrounding the key shopping days of Black Friday and Cyber Monday?

We feel really good about where we are with Q4 strategically and operationally. We are heading into the quarter I think better prepared than we have ever been, and I think with a stronger marketing strategy and marketing mix than we have ever had. We feel great about that and our plans are solid. We planned very much to be active in the retail advertising environment in Q4.

We think we have a great message and we are also -- we feel really strongly about our unique position in Q4, relative to a lot of the folks that are going to be out there and active in the quarter. We are about the only destination for customers where we can provide a great Black Friday and Cyber Monday experience, where we are going to be focused on providing amazing brands at amazing prices and deals on a broad selection of categories like we always do.

I think we have some great new brands that are coming onto the portfolio and into our experience this year. We also have -- after it becomes very difficult for all e-commerce players in particular to deliver packages, we have an amazing destination for gifting local experiences that you can't really find anywhere else. We feel really great about how we are positioned going in to Q4 and in general.

Brian Nowak, Morgan Stanley

Just to go back to the North America active customer growth -- can you talk about, break about the dynamics little bit between gross additions and churn going down a reactivation? Just help us better understand what is driving the strong results? And then on the marketing spend versus the couponing and discounting?

If the marketing spend is going to be under (inaudible) a year, is the right way to think about it though, that are actually spending more on discounting and couponing for the year so that you are going to end up in aggregate around $150 million? Or is that not the right way to think about it?

I will take the second question first and I would say, in general, yes you are thinking about it the right way. We have internally traded those off and viewed them both as good levers and ways to acquire customers so I think that is the right way to generally think about it. With regards to our customer adds, when we look at our customers we are obviously looking to acquire new customers that have never been part of Groupon.

And we also do look at acquiring and re-acquiring customers who may have engaged with us in the past but have not within the past year. Both of those factor into our acquisition efforts. We do not break up the detail about but they're very much in our thought process as we are looking to bring customers to the Groupon ecosystem and continue to keep them over time.

One follow-up -- is there any way you can help us better understand what drove the decision to shift more toward discounting and couponing and away from advertising? Is there anything you see among consumer behavior where there's a more discounting need than there is a branded need?

I think we've looked at it was simply how customers respond, and customers respond to the order discount at inception. What we saw when we offered that order discount, once we acquired the customer, the customer cohort associated with those customers performs amazingly similar to customers we acquire through other channels. They tend to behave very similarly.

Customers like a great deal and we are there to help offer them a great deal and bring them onto Groupon.

Another way to think about it is we're tactic and channel-agnostic. We care ultimately about the customer behavior over long-term and do we get a good return on our investment -- and that is ultimately what drives us. We do look at it that way, where its marketing plus order discounts for us have been very stable over the last couple of quarters, even though you have seen some variation in that distribution. We think that is absolutely fine. We think it's all about -- are we getting a great ROI.

Ladies and gentlemen that does conclude the Q&A session and Groupon's third quarter 2016 earnings conference call. Thank you so much for your participation. You may disconnect your lines at this time. Have a wonderful day.