Groupon (GRPN) Richard Williams on Q2 2016 Results - Earnings Call Transcript

| About: Groupon, Inc. (GRPN)

Groupon, Inc. (NASDAQ:GRPN)

Q2 2016 Earnings Call

July 27, 2016 5:00 pm ET

Executives

Thomas Grant - VP, Investor Relations

Richard Williams - Chief Executive Officer & Director

Michael O. Randolfi - Chief Financial Officer

Analysts

Tom White - Macquarie Capital (NYSE:USA), Inc.

Lina Y. Rudashevski - JPMorgan Securities LLC

Heath Terry - Goldman Sachs & Co.

Kevin LaBuz - Deutsche Bank Securities, Inc.

Samuel James Kemp - Piper Jaffray & Co. (Broker)

Jonathan P. Lanterman - Morgan Stanley & Co. LLC

Brian P. Fitzgerald - Jefferies LLC

Tom Forte - Maxim Group LLC

Aaron Turner - Wedbush Securities, Inc.

Jim Shaughnessy - RBC Capital Markets LLC

Operator

Good day everyone, and welcome to Groupon's Second Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the company's formal remarks. Today's conference is being recorded.

For opening remarks, I would like to turn the call over to the VP of Investor Relations, Tom Grant. Please go ahead.

Thomas Grant - VP, Investor Relations

Hello, and welcome to our second quarter 2016 financial results conference call. On the call today are Rich Williams and Mike Randolfi. The following discussion and responses to your questions reflect management's views as of today, July 27, 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 Forms 10-Q. We encourage investors to use our Investor Relations website as a way of easily finding information about the company. Groupon promptly makes available on this website, free of charge, the reports that the company files or furnishes with the SEC, corporate governance information, and select press releases and social media postings.

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 the non-GAAP measures, including reconciliations of these measures with U.S. GAAP. Unless otherwise stated, all comparisons in 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.

And now, I will turn the call over to Rich.

Richard Williams - Chief Executive Officer & Director

Thanks, Tom. After three quarters of transition and intense focus on our four strategic priorities, we're improving the core business and seeing sustained progress, evidenced by our strong Q2 results. We are further along our path to becoming the daily habit in local commerce, and our merchants and customers particularly in North America continue to embrace the Groupon marketplace.

Our platform and consistent execution continues to drive the team and Groupon forward. We're building and scaling an important platform that we believe has room to deliver both outsized financial returns and add value to our customers everyday lives.

Remember, that we're not just connecting people with incredible local experiences and businesses around them, we're enabling local transactions at a breadth and scale that is unmatched in our core markets.

We're guiding tens of millions of incremental customers to our merchants, and we're helping support vibrant neighborhoods in the process. To remind everyone, we have four priorities for 2016. They are to profitably invest in customer growth, to streamline and simplify our operations, to reduce empty calories and to build an amazing customer experience.

While there is work to do across the balance of 2016, our results to-date give us confidence that we're on the right track that these are the right priorities, and we have the focus and skills to deliver on them.

Strong execution was once again the primary driver for our Q2 results, particularly for revenue and adjusted EBITDA. As we've discussed in the past, our streamlining actions, pursuit of higher shopping margins and increased investment in marketing create some near-term trade-offs in the P&L but we're on our operational and strategic plans and steadily improving our results.

We expect that to continue throughout 2016, which is reflected in our updated full-year outlook. Our core North American business continues to build momentum for our expanded customer acquisition efforts, with record local billings and growth accelerating to 9% the highest in four quarters.

Gross profit also grew 11%, the third consecutive quarter of double-digit growth, driven largely by improved shopping margins that are performing at near historical highs. Seeing gross profit growth outpace billings and revenue growth in North America is the testament, to the work our teams have been doing to intelligently remove low margin revenues from the business.

Mike will provide more details on our quarterly performance and our full-year guidance shortly, but first, I'll walk through our four strategic priorities in further detail. First, the customer acquisition, bringing millions more customers to our marketplace is integral to achieving our goal of making Groupon the daily habit in local. Our customer acquisition efforts in Q2 introduced 1.1 million new customers to Groupon in North America. This is the most new customers we've added in nine quarters and is a solid acceleration over our first quarter performance.

A critical point here is that our incremental marketing spend continues to perform as expected, with returns well within the 12-month to 18-month ROI thresholds we established last November. Bottom-line, our investments are on plan, and our customers are spending as expected.

Eight months into this renewed customer acquisition focus, we've added more than 2.7 million active customers to our platform. Even with these gains, we believe our active customers make up less than 10% of our addressable market, which leaves tremendous room to grow, while we continue to build out our marketplace, with amazing experiences, businesses and products.

Related, we were excited to launch our first broad offline advertising campaign in the second half of the quarter, including our first national television ad since 2011. Our new campaign, which was built around inspiring customers to own the experience, elevates and differentiates our brand and encourages customers to engage with Groupon in a fun and exciting way.

The campaign is focused on local, a space where we believe we have a significant advantage in coverage and quality as well as significant opportunities to expand how customers think of the Groupon brand and the benefits of our products and services. While it's still too early to gauge the business impact of our new ad campaign, we're pleased with the initial response and we plan to keep investing in television and off-line channels in the second half of the year.

Our second priority is to streamline and simplify our business. We are now more than halfway through our announced restructuring plan. The results to-date have been two-fold. We're operating a smaller, more focused geographic footprint, and we have organized our internal operations to create global leverage in areas like customer service, deal factory, and engineering. These changes are making us both stronger and more agile, and are helping us develop a more efficient cost structure.

The challenge with these efforts is that the improvements we're making in SG&A where we save $12 million year-over-year globally, come with some performance impacts for our international business as we deployed this reframed operational model and put the teams through a significant change management process. That's why our goal for these businesses is centered on stability and our work on that front isn't done. Longer-term, we believe our leaner, more nimble organization should help us more quickly bridge the gap between our international and North American business results.

Third, we're focused on reducing empty calories. This means the decreased focus on load and negative margin categories, particularly in our shopping business in favor of offers that drive healthier long-term relationships with customers and bring them back to our marketplace with greater intent and higher lifetime values.

We are very pleased with our progress in this area. Shopping margins improved for the third straight quarter up to 13.4%, a 240 basis point gain year-over-year, and all segments improved for the third quarter in a row.

In North America shopping billings grew more than 8% but more importantly shopping gross profit improved more than 37%, increasing our confidence that we can profitably grow our shopping business. We will continue our work in this space to balance margins, with gross profit dollars and customer lifetime value generation, the latter metric being far more important.

Finally, I'll touch on our efforts to improve the customer experience, ensuring that customers have a great Groupon experience from the time they open our app to the time they visit one of our great local merchants is foundational to our long-term success. We have teams across the company, including product, engineering, customer service and marketing, working on the most important touch points to our customers.

The key focus for us is revamping our mobile app, one of the world's most ubiquitous e-commerce apps. We look forward to sharing a significantly enhanced mobile experience soon. In the meantime, we remain focused on improving our core customer service experience, particularly in North America where service levels have historically lagged our international markets materially.

Correcting this remains critical and we're seeing early positive results. For the first time we achieved global parity in service levels for Groupon customers, with North American service levels more than doubling over the last two quarters. That means faster service and more satisfied customers. On that front, we continue to see strong satisfaction scores both from our internal metrics and external benchmarks like our Net Promoter Score, which at 73 remains significantly ahead of industry averages for retail, media and technology companies.

Overall, I'm pleased with our progress. Our focus remains intact. Our operation is improving and we're building momentum.

So, let me turn over to Mike Randolfi, our new CFO, to run through the details on the quarter and our outlook.

Michael O. Randolfi - Chief Financial Officer

Thanks, Rich. I'm more pleased than ever with my decision to join Rich and the team. My views on the opportunity for Groupon and the ability of the team to capture that opportunity have only been confirmed since my arrival last quarter.

I'm excited to be here and report on our progress and executing against our strategy. As Rich articulated, we are seeing tangible progress on our strategic initiatives that are translating into meaningful results. We believe our initiatives offer multiple vectors for unlocking the benefits of scale and increasing returns for shareholders over the long term.

The second quarter was encouraging, as we continued to execute well on our key priorities. As, I discuss our results, note that all comparisons unless otherwise stated refer to year-over-year growth and are FX neutral.

For the second quarter revenue was $756 million and adjusted EBITDA was $34 million. Gross billings of $1.49 billion, declined 2%, led by an 8% increase in North America while EMEA and rest of world declined 12% and 21% respectively related to our streamlining and footprint reduction efforts.

There a few items I want to focus on in our top line results. First, North America local gross billings of $542 million, accelerated to growth of 9%. We acquired our third new customer cohort in the quarter since stepping up our customer acquisition marketing spend in the fourth quarter of 2015. When we acquire a new customer, they generate a very long tail of spending well beyond our 12-month to 18-month payback horizon. These cohorts are now beginning to stack and drive a lift in billings.

Second, we've made significant progress in our international segments as we streamline and narrow our country footprint. Following our disposition in Russia, we expect to complete the disposition of Indonesia in the third quarter bringing our footprint to 26 countries from 47 countries in the beginning of 2015. The year-over-year impact to second quarter gross billings of exiting countries, was a reduction of $50 million or 3 percentage points of growth in consolidated gross billings. Related to the restructuring plan announced last year, we expect all decisions regarding our country footprint to be complete by the next earnings call.

Turning to gross profit, our focus on reducing empty calories and improving unit economics in shopping gained further traction during the quarter. Our overall gross profit was $334 million with a gross margin of 22.3%, an increase of 30 basis points compared to a year ago. North America gross margins were 22.5%, which was higher by 60 basis points and gross profit grew to $217 million or an increase of 11%, which was also a third consecutive quarter of double-digit growth.

Our marketing expense increased to $92 million or an additional $35 million year-over-year related to our strategic initiative, to acquire new customers. The incremental spend was allocated primarily in North America online marketing channels, but also included offline marketing for the launch of our TV campaign. Our cost per acquired customer was well within our target threshold of $50.

As a reminder on how we measure ROI on marketing spend, we measure gross profit generated by an active customer, relative to the time required to pay back the cost of acquiring the customer. Our payback period for customer acquisition marketing remains 12 months to 18 months, which is what we are observing in our new cohorts. This simply highlights that in each period, as we step-up marketing, we have a significant investment for which the benefit will occur in future quarters.

On our streamlining initiative, we are capturing the benefits of a more focused country footprint and the efficiency associated with a shared service model. SG&A in the second quarter was $277 million lower by $12 million and our head count of 8,605 declined by 2,081 heads year-over-year. We incurred restructuring charges of $16 million during the second quarter, associated with this initiative. As we look at our operating model going forward, we expect to drive productivity and SG&A cost structure, as we focus on building a more effective and efficient organization.

Now, I'll touch on a few points related to cash and free cash flow. Our free cash flow was negative $70 million for the second quarter and negative $167 million year-to-date. Over the first six months of this year, our cash flow was impacted by items related to our initiatives, including a reduction in adjusted EBITDA of $68 million related to the step up in marketing investment, as well as restructuring charges and the settlement of merchant payables related to country exits of about $30 million, and a $40 million funding of a litigation settlement.

Most of these items are transitory, as we took actions that have some negative cash impact in the short run, but we believe will generate benefits in the long run. As we look to the back half of 2016, we expect to generate significant free cash flow, skewed towards the fourth quarter, which we expect will put us at near breakeven for the full year.

In general, as we look beyond 2016, we believe free cash flow will return to historical patterns, whereby operating cash flow trends more closely with adjusted EBITDA.

We ended the quarter with $780 million in cash, excluding our $250 million undrawn revolver, which we believe provides us with ample stability and flexibility to continue to invest in our business as we execute our strategic initiatives to generate long-term sustainable growth and shareholder value.

Our active deals were more than 800,000 globally and more than 475,000 in North America. While expanding the quality and quantity of supply will always be part of our focus, we no longer plan to report this metric in future periods and believe that our efforts on supply coupled with our initiatives will be better reflected in gross billings, units sold and gross profit over the long-term.

Our updated 2016 guidance for revenue is now $3 billion to $3.1 billion. This guidance reflects additional insight on the performance of customer cohorts and stabilizing trends in shopping which collectively provide greater visibility to the revenue trajectory for this year. Regarding Brexit, the adverse impact on our revenue forecast is estimated to be approximately $25 million, which is reflected in this guidance with no material impact on adjusted EBITDA.

Looking at seasonality in the back half of the year, we expect similar to historical trends, Q3 absolute revenue to be lower than Q2, while building toward a strong Q4. In addition, with the realization of cost benefits associated with our streamlining initiatives, we're increasing our expectation for adjusted EBITDA to $140 million to $165 million for 2016. As always, our overall guidance reflects current FX rates and our results maybe materially affected by various factors including a high level of uncertainty surrounding the global economy and consumer spending, as well as exchange rate fluctuation.

In summary, we're seeing our gross profit initiatives working, our cost structure moving to a level that enables greater operating leverage and early indicators that the stacking of our new customer cohorts is driving growth. We believe that we're laying the groundwork for our business model that will provide financial benefits to our shareholders for years to come. We look forward to updating you on our progress next quarter.

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

Richard Williams - Chief Executive Officer & Director

Thanks Mike. The first half of 2016 and Q2 in particular has shown us that focusing a great team on a few key priorities can drive results. And while a lot of progress has been made, significant work remains. Fortunately, it's work that's already underway and yielding positive results.

As always I need to recognize and thank the Groupon team, they're moving fast, bringing creative customer focused solutions to the table and ultimately embracing the tremendous opportunity we see in local commerce.

Now let's take some questions.

Question-and-Answer Session

Operator

Our first question comes from the line of Tom White from Macquarie. Your question, please.

Tom White - Macquarie Capital (USA), Inc.

Great. Thanks for taking my question, and solid quarter guys. I was wondering maybe if you could just give an update on some of the product improvements and innovation you guys have been talking about, kind of that forth of the key initiatives. I feel like the issue of less friction at the time of redemption and kind of better search like time based search. We've been hearing about that for a few quarters but I haven't seen any I guess big changes there. Is it just a question sort of prioritizing that versus all the other things that you guys are doing in the business or is there something kind of sort of structurally kind of delaying that?

And then just quickly in the local business. I was just curious about how you think about kind of take rates for kind of local marketplaces over the long-term. How do you guys think about that as sort of the lever to maybe bring a lot more supply and a lot of merchants to the platform over time? Thanks.

Richard Williams - Chief Executive Officer & Director

Sure. Thanks Tom. I'll start, it's Rich and then if Mike has some more to add he can jump on. On the product side, look I think the biggest change that you're seeing over time is that, I'm spending less time talking about the things before they're actually live for customers at scale, it's not that we're not making forward progress on the core product. It's just that we're not ready to release anything major on that front yet. But you call out a couple of things, that we are working on and we have been working on and then are actively being test or actively in-test, we have some things that you'll see really pretty soon here on the friction reduction side for customers, we've been very, very focused on expirations of Groupons in particular, so there is some interesting work being done on that front.

Search and browse and discoverability continues to be a core focus for us. The thing that is most visible in the product on that front and just making easier to find the inventory that we have is, we've made some pretty significant improvements on the location front, and specifically in maps, where it's much easier to discover the broader inventory that we've been adding to the platform. So we're obviously exposing more pins and more deals actively that have been just hidden in the past. And there is some new structure and format around how we expose the deals happening on the map side, at least, this is specific to of course the mobile app.

So there is really good work there that's being done. I think you'll see more of it discussed publicly and with more specifics coming in the back half of the year. Again, it's not that it's not a priority, it's just early. What has been a priority and we have discussed it. I think it may not be a sexy part of the customer experience, but it's ignored far too often, and we didn't make enough improvement fast enough I think on that side. It's customer service, and that's a piece in the last six months, where we've just made a significant amount of investment, a significant amount of improvement on that front as well.

We're answering the phones faster, we're providing more and different kinds of service to customers, our chat functionality has improved materially, the customer self-service side of the Groupon experience has improved really significantly, and you kind of are seeing that, and that impacts millions of customers. And so, we decided to prioritize, accelerating those specific pieces, first, because it is a really meaningful part of the experience that had a lot of low hanging fruit for us to improve. So, that's in play now, and if you have experienced it hopefully was a much, much better experience for you over the last six months; it has been for customers.

Just a couple of thoughts on local take rates, for marketplaces in local, in general over time, I think, look, the core of take rates in this space like any other space is the value you create in the marketplace, both in our side for the consumer and of course for the merchant. I think we've been able to maintain stable local take rates, because our value equation is working really well, and the value prop works well for merchants.

And as you know over 80% of our deals are breakeven or better on the deal itself, and that's allowed us to maintain that kind of take rate. That's the component that I think is most important. And we're very early in the local marketplace development. We're probably the most mature of the local marketplaces that are out there. So, we have to figure that out over time on what the overall margin profile might look like, but we're going to dictate that largely by the same rules that have helped us maintain our current take rate structure, which is provide great value to merchants and provide a clear value prop for them, and clear ROI for them.

And whether that means a lower overall take rate, but higher overall volume on the platform, we don't yet know. And I think as long as we keep that core focus on delivering great value on a strong value prop and more importantly driving gross profit dollars over time on the platform, I think we are going to net out in a great place no matter what happens on the rate side.

Tom White - Macquarie Capital (USA), Inc.

Got it. Thanks a lot.

Richard Williams - Chief Executive Officer & Director

Thanks.

Operator

Thank you. Our next question comes from the line of Douglas Anmuth from JPMorgan. Your question please.

Lina Y. Rudashevski - JPMorgan Securities LLC

Hi, this is Lina on for Doug. Congratulations on a great quarter, and we were just wondering if you could discuss your TAM opportunity as you see it today, how big you think it is, how it might be different now, versus before and just basically how you define it internally? Thanks.

Richard Williams - Chief Executive Officer & Director

Sure. Thanks. Thanks Lina. So, the TAM in this space has always been an interesting point. We've measured it in a bunch of different ways, and we still would say that the TAM in local is – and this is just in local is still measured in the trillions of dollars not in the billions of dollars. So, we obviously we look at the local spend and the local services spend and the categories that we serve and the geographies in which we operate, and those are huge percentages of the GDP of the countries in which we operate. So, it's just a massive TAM profile for the business.

Internally though we don't get caught up all that much in that. I think the real core for us is how we think about delivering a great customer experience, which is having great quality of inventory and density of inventory at a neighborhood level in the categories that our customers shop in the most. And that's obviously different than the trillions of dollars, but again neighborhood by neighborhood is where that counts, and that's how we operationalize the business.

So, I think the running room is really significant. We are even on a merchant level, say our addressable merchants in a place like North America is well north of 5 million, we're at 475,000 or so active deals. We're so low in the overall penetration of the marketplace in any dimension. So, I think we have just a ton of running room in local, but of course significant amount of work ahead to make sure that we have the operation that can support further scale and that we're doing the things we need to do to set the business up for future success.

Lina Y. Rudashevski - JPMorgan Securities LLC

Thanks. That's very helpful.

Richard Williams - Chief Executive Officer & Director

Thanks Lina.

Operator

Thank you. Our next question comes from the line of Heath Terry from Goldman Sachs. Your question, please.

Heath Terry - Goldman Sachs & Co.

Great, thanks. There was obviously a sharp change in customer acquisition trajectory here. Curious what channels you are seeing success in and how much leverage you feel like there is in those channels? And then to the extent that we're seeing this strong growth in local, can you give us a sense of what categories you're seeing the most traction in and what the ROI math that those advertisers are seeing, that's driving them to return to Groupon at the rate that they seem to be?

Richard Williams - Chief Executive Officer & Director

Sure. Thanks for that Heath. On the channel side, we're seeing strong performance really across the program, I'd say this is the spot where the team is just absolutely cranking and it's multidimensional, it's not just marketing side. I think the team is doing great work on that front, but you also have to have great inventory to convert that traffic into buyers. So, we're doing a lot of work and good work to add quality inventory and then supply to the marketplace.

But specifically in marketing we're seeing continued strong performance in our online channels we're a big customers obviously of Google and Facebook and we've done a lot of work on our own proprietary systems there to continue to optimize and find new spaces of opportunity and to get shaper in targeting. We've now moved in into the offline space while still very, very early in that space, we're excited by the early market response and by the kind of traffic that we're seeing coming into site and just the engagement overall on the site that really good positive signals on that front. So, just overall on the marketing front and with the customer acceleration we're seeing strong performance.

One thing to call out on that is, I think more than anything we've been surprised by how fast the team has been able to find efficiency in the marketing spend. If we're ahead of schedule on that front, it's really been about finding more efficient pockets in what we're doing overall than necessarily tapping into some significant new wealth. But, I do think we have a lot of room within that and a lot of confidence in the team within that to let them run.

As far as the second part of your question, the categories we're seeing the most traction in, it's the same basic categories that we're really focused on and that are the biggest categories in local. I mean obviously Health and Beauty is a big piece of our local business, the things to do business with us which is really everything from our ticketed events and Live Nation concerts to skydiving and parachuting. So, that piece of the business is doing really well and we're seeing continued traction in Food and Drink. So, it's really those core big local categories where we're seeing solid traction. And that we expect to continue to see that contraction.

Part of that is as you mentioned it's the ROI math for merchants, I talked about it a little bit earlier with Tom's question. We have an ROI calculator here that our merchants have access to in the merchant center. They can of course give us lots of inputs everything if you're a restaurant from your food cost, and how you think about your operational expenses to the actual expenses of the promotion. And then, we of course given the tools to layer in things like overspend that goes above and beyond the Groupon promotion. So, we're giving them the basic tools, and even in some cases, some pretty advanced tools to calculate their return on investment, which is ultimately customized around their operation. So, it's a tool we've invested a lot of time and energy in that our customers and merchants get in particular a lot of value out of and it's customized for them. So, that's a high-level view of ROI.

Heath Terry - Goldman Sachs & Co.

Great. That's really helpful. Thank you.

Richard Williams - Chief Executive Officer & Director

You're welcome.

Operator

Thank you. Our next question comes from the line of Ross Sandler from Deutsche Bank. Your question please.

Kevin LaBuz - Deutsche Bank Securities, Inc.

Hi. Thank you very much. It's Kevin LaBuz on behalf of Ross. Looking at your Rest of World business, given the streamline footprint, why is the CSOI there deteriorating? And I've got a follow-up. Thanks.

Michael O. Randolfi - Chief Financial Officer

Sure. So, thanks for that question and I'll talk about international just in general. Our goal on our international business is stability. And if you look at our international revenue on a FX neutral basis, same country basis, we're actually up slightly in the second quarter year-over-year. And looking at segment operating income, it's a similar story. If we look at our international business, if you adjust for the restructuring cost, it would be up slightly or would have positive segment operating income for the second quarter. But overall, our goal internationally is stability.

Our primary focus has been on North America. In terms of our level of investment, we're roughly one to two years behind on EMEA, a little further than that behind on Rest of the World. But as we continue to execute in North America over time, we're going to translate that to the international portion of our business. The second thing I would just highlight is, is we're continuing to evaluate our footprint, we've made a lot of progress, we've eliminated or we've closed 20 countries in the last year and we will continue to evaluate that and have more to share on the upcoming call.

Kevin LaBuz - Deutsche Bank Securities, Inc.

Great. Thanks for that. And then just thinking about the progress that you've made acquiring new customers in North America and how, is that buying behavior starting to be layered on? Do you think it's unreasonable to expect that you could exit the year growing North America services billings double-digits?

Michael O. Randolfi - Chief Financial Officer

Thanks for that question. What I would say with regards to North America local billings growth is, first we're very pleased with the progress we've made, and we're pleased with the growth we saw in the second quarter, up 9% year-over-year. What I would just say though is that's not a metric we provide guidance on. And the other thing is as I just think about the phasing of that, what I would keep in mind is our total absolute revenue guidance for Q3 relative to Q2, where we would expect based on historical trends, Q3 revenue to be a little lower than Q2, so something to keep in mind. But that's not a metric we provide guidance on.

Kevin LaBuz - Deutsche Bank Securities, Inc.

All right. Thanks very much.

Operator

Thank you. Our next question is from the line of Sam Kemp from Piper Jaffray. Your question, please.

Samuel James Kemp - Piper Jaffray & Co. (Broker)

Hey, thanks for taking the question. And congrats on the quarter. Can you characterize any changes you've been seeing in the cohorts you've been acquiring over the past couple of quarters? And I know it's early for your TV campaign at this point, but are you seeing any impact to your historical cohorts? And then Mike, can you give us an update on the marketing spend by region please? Thanks.

Richard Williams - Chief Executive Officer & Director

So, I'll start Sam. Thanks for the question. There is no major changes to call out in the cohorts. We obviously track them very, very closely. It's a huge piece of our strategy to invest in customer growth, but we've also held ourselves to a high bar of ROI there. So, lots in those cohorts like hawks and so far, it's really steady as she goes, they're right in plan, they're right on target with our ROI thresholds in 12 months to 18 months payback, and our customer acquisition costs are right in range as well.

So, they continue to track, but again, we're watching them closely, because we're making an investment over time. With a threshold to 12-month to 18-month range, we need to watch them over longer stretches of time. Our oldest cohorts since starting this are eight months old.

So, while they're trending in a great spot, we have time between now and their full paybacks to watch. So, nothing major on that front. The only thing that I'll call out on our historical cohorts is really, if you look at spend per customer, I think we're really happy that spend per customer as it stable as it is. We're adding obviously a large volume of new customers. And as a trailing 12-month metric, there's an inherent drag on something like spend per customer, because we're adding millions of people who have only had literally handful of months to spend on the platform and to see that number is stable as it is, I think that's very, very encouraging for us.

The relationship with that to television, I'd say has nothing to do with it. I mean, it's just TV, while we're excited about the early response in returns, we really launched that moving into June. So, it only had a couple of weeks of runtime in June, so I wouldn't have expected that to have any material impact in Q2, or either that frequency overall of the customer cohorts or our spend per customer.

That's something that obviously we're hopeful that it does reengage existing or previous Groupon buyers and that puts us more top-of-mind with more, but I think we're going to need a couple of quarters of time and performance and messaging with those customers in order to see that kind of thing play out.

Michael O. Randolfi - Chief Financial Officer

Yes. And for the quarter we incurred $92 million of marketing expense; that was $35 million higher than last year. The majority, $32 million of that was applied to our North American businesses. As Richard indicated, we've had a little bit of shift in this past quarter from marketing dedicated towards online channels versus offline. And as we look to the back part of the year, we'd expect to continue to build into our offline marketing campaign that we're quite excited about.

Samuel James Kemp - Piper Jaffray & Co. (Broker)

Okay, thanks.

Operator

Thank you. Our next question comes from the line of Brian Nowak from Morgan Stanley. Your question please.

Jonathan P. Lanterman - Morgan Stanley & Co. LLC

Hi, this is Jon Lanterman on for Brian. I just had a question on order discounts. Looks like they're still continuing to grow. Is this about the right level where it is today, and where you're concentrating these discounts at? Is it still North American local? Thanks.

Michael O. Randolfi - Chief Financial Officer

Thanks for the question. So, yes, order discounts were up roughly $12 million year-over-year and it was concentrated disproportionately on local. And the way we think about order – I'm sorry – on North America, the way we think about order discounts is we think about it as another tool similar to marketing. And we think about it in the context of payback threshold, particularly as we're working to acquire customers and then also maintain the frequency of our existing customer base. So if you look at the portion of order discounts attributable to North America was roughly 4%. We would expect order discounts to remain roughly in that range going forward.

Jonathan P. Lanterman - Morgan Stanley & Co. LLC

And just a quick follow-up on that. Since you kind of think of these in tandem with marketing, if you look at your marketing spend up $35 million year-over-year, which is slightly less than that $150 million to $200 million guided to before. Do you kind of lump these two together or is that $150 million to $200 million directly attributable to marketing spend? Thanks.

Michael O. Randolfi - Chief Financial Officer

The $150 million to $200 million is directly attributable to marketing.

Jonathan P. Lanterman - Morgan Stanley & Co. LLC

Got it. Thank you.

Operator

Thank you. Our next question comes from the line of Brian Fitzgerald from Jefferies. Your question, please.

Brian P. Fitzgerald - Jefferies LLC

Thanks, guys. Can you give us maybe a little bit more color on your recent delivery partnership with Qdoba? How many of their 600 national locations are covered at the start? Maybe do you plan to cover all the remaining locations? And then what metrics should we look at or do you look at to determine how successful that initiative is?

Richard Williams - Chief Executive Officer & Director

Thanks for that, Brian. Look, that's something that is a very new partnership. We've just announced that not too long ago. What I can tell you about that partnership right now is that we're currently active in nine markets with Qdoba. And we have the opportunity to expand as far as our market footprint and their market footprint overlaps. We still have room in our footprint to do that. But we want to make sure that we get the partnership off to a great start; that we're delivering the kind of food experience and delivery experience that we built that business on and that our customers expect and also that Qdoba's customers expect.

So we want to make sure that we get that in a great spot before we start to roll it out. Overall, the OrderUp business is one that's it's integrated into Groupon at this point. It is a single team and a single technology platform that's powering our delivery across the board, and we're really happy with how the team and technology is performing. So they're being part of the overall local business, it's not a specific business that we'll call out and share specific performance measures on. But all I can tell you is we're very happy with the traction in the team and how we're competing in the marketplace because it's a very good customer experience and product.

Brian P. Fitzgerald - Jefferies LLC

Maybe one follow-up on that same point then. Do you find it's a differentiated strategy or leverage point that helps you enter new or more crowded markets?

Richard Williams - Chief Executive Officer & Director

You mean food delivery in general or are you talking about a partnership with folks like Qdoba?

Brian P. Fitzgerald - Jefferies LLC

Just the partnership with Qdoba.

Richard Williams - Chief Executive Officer & Director

Yes. Look, we think about that market I guess, apply on both sides. We're in the food delivery business because food is core to the local experience, and now delivery is an expected piece of that experience. And when we enter that market, we want to make sure that we have a great offering for customers, and I think that great offering for us has meant a couple things.

One, it's meant predictable delivery and you have trackable delivery in our application. You've had it for some time, and it works really well. It also means a good mix of inventory, and that means folks that typically don't offer delivery, and that can be people like Qdoba and even very, very high-end restaurants, but also I think it does mean having really trusted brands and national brands like Qdoba that folks can get a great delivery experience with. So it does allow us to compete more effectively with our customers on that front, and I'd expect that we'll continue to do more of it.

Brian P. Fitzgerald - Jefferies LLC

Great. Thank you, Rich.

Richard Williams - Chief Executive Officer & Director

Thanks.

Operator

Thank you. Our next question comes from the line of Tom Forte from Maxim Group. Your question, please.

Tom Forte - Maxim Group LLC

Great. Thank you. Two questions. So, first off, I think you indicated that, by the time of the next earnings call, you're going to have a good sense of what your international footprint is going to look like. So on a percentage basis, how do you rate your North America, EMEA and Rest of World business as far as how far long are you in getting the businesses to where you want to be on a percent basis? And then, second, on mobile, you talked about making some changes there and some upgrades there. You already have a large number of downloads for the app. At a high level, what sorts of things you're going to try to do to improve your mobile offerings? Thank you.

Michael O. Randolfi - Chief Financial Officer

Thanks for that question. And just to touch, I'll touch first on the international footprint, and Rich will address the mobile question. With regards to our international footprint, first and foremost what I would say is our focus is and will continue to be on our top markets, which we're investing in, particularly in North America, and we'll continue to think about our focus on that going forward, so that we continue to invest and drive business in those large markets.

Second, what I would indicate is that, to-date, we've exited 20 countries. So we're a good bit along the way with regards to our country closures and moving on our footprint. The other point is, what I would just highlight is, if I were to look at the smallest country in our portfolio, our 27 countries, it's 0.1% of billings, so it's relatively small. So we'll provide a more fuller update with regards to our decisions on the upcoming quarter. But just to give you a little bit of context there, the other thing I would highlight is, our current guidance already incorporates or contemplates a range of potential footprint outcomes as you're looking forward.

Richard Williams - Chief Executive Officer & Director

And I'll just add a little bit of color before diving on to the mobile side, Tom. And thanks for the question. On the percentage completion I guess, we just don't think about it really that way. And we've talked about just a relative maturation of the marketplaces in terms of really a place like Europe is one year to two years behind North America. And that means a couple of things specifically. If you just look in the basics of the inventory, the deal density and supply that we have is anywhere from one year to two years behind depending on the market. And just to give you an example of that, in a place like Central London, the deal count is in the hundreds. In a place like downtown Chicago, the deal count's in the thousands. And that just takes time to bridge that gap. That's a core piece of the customer experience.

And there is also technology differences, and a lot of those are driven by the gaps in supply. A lot of our technology feeds off of having some density in supply. And our experiences feed off of having that selection in inventory. So we've had some time between the regions to bridge that. Rest of world is probably another year behind Europe and its development. So we have a range of, say, between one year and three years behind where North America is. The reason I put it that way and we don't think about it is percentage completed, we're still developing the business in North America.

We don't sit here and presume to have it solved and to have local cracked. It's a very big space with a ton of opportunity. We just happen to be leading the charge in local here and feel like there's a lot of room to improve. But our goal over time with the work that we've been doing in international has been to bridging that gap faster and easier, which is why we've been so focused on streamlining the business, making sure the operation is as lean and as agile that needs to be in order to make fast progress.

But just to give you a little bit color on that, on the mobile side, the big things that we're focused on in general in the customer experience, but very much on the mobile side. Discoverability is a big piece for us, making it very, very easy to find the inventory that we're adding to the platform. Historically it's not been. So that discoverability, the speed to get to the deal that you're looking for is a big piece. So I think you're going to see some big changes coming on the just the interaction model in the app, and how easy it is to find inventory, how fast it is if you're hungry to find food. And if you want delivery very quickly to get the delivery, or if you want to dine in, you know very quickly how to get to the dining experience on a Groupon app.

So that's not as easy as it needs to be today. You'll see some improvements there. As I mentioned before, reducing friction is also really important, so the whole redemption process via mobile is inherently better, but there's more we're doing on that side to make it even better. And so you're going to see some big pieces on just ease of friction in the whole experience coming on the mobile app as we work through the year. And, again, we are very focused on location and maps, and how that also interacts with the notification side of the app, again, to make it easy to help you find what you're looking for and being time sensitive, context sensitive is a big area of focus for us, and you'll see those kinds of pieces hitting the mobile app here shortly.

Tom Forte - Maxim Group LLC

Great. Thank you very much.

Richard Williams - Chief Executive Officer & Director

Thanks, Tom.

Operator

Thank you. Our next question comes from the line of Aaron Turner from Wedbush Securities. Your question please.

Aaron Turner - Wedbush Securities, Inc.

Great. Thanks for taking my question and congrats on the quarter. Two questions, if I may. The first, and this may be a little early, but given the strength that you've seen in the marketing program in the first half of this year, do you expect a similar level of marketing spend in 2017 or maybe do we drop back to pre-2016 levels? Any thoughts there would be helpful. And then regarding the new cohorts that are coming in, are those coming in predominantly in the local channel or the goods channel, or is it more mixed? Thank you.

Michael O. Randolfi - Chief Financial Officer

Thanks for that question. With regards to marketing and how I think about marketing, for this year we've indicated previously and still believe we'll be in the range of a $150 million to $200 million. We see our marketing expenditures building throughout the year, particularly with the ramp up of our offline campaign that we're very excited about.

With regards to 2017, what I would say is on this call is we're providing revenue guidance and adjusted EBITDA guidance, but with regard to any metric or guidance beyond that on any measure, we wouldn't be providing any guidance at this time.

Richard Williams - Chief Executive Officer & Director

Yes. And hey, Aaron, it's Rich. Just on the new cohorts, we're acquiring customers across the business. Our core focus is to acquire Groupon customers and that means shopping customers, that means local customers, travel customers, OrderUp customers. Our focus is on bringing new customers onto the platform across our properties and to drive lifetime value for those customers, maximize lifetime value for those customers.

So we're doing a lot of work, of course, across local, but we want customers coming into Groupon, because ultimately we want to have those customers cross shopping. The real unlocking this business, as we said before, comes with frequency and over time, and the only way you get that is by having customers in your ecosystem buying from lots of different categories. So we're more and more focused on getting people in the door, so we have that opportunity in the future.

Aaron Turner - Wedbush Securities, Inc.

Okay. Got it. Thank you.

Michael O. Randolfi - Chief Financial Officer

Thanks, Aaron.

Operator

Thank you. Our next question comes from the line of Mark Mahaney from RBC Capital Markets.

Jim Shaughnessy - RBC Capital Markets LLC

Hey, good afternoon, guys. This is Jim Shaughnessy filling in for Mark today. Just a quick one for me. Couple quarters ago you said something along the lines of until you boost your new customer adds and have data behind those new cohorts, that you expect North America local growth to stay mid-single digits. We have the new customer adds. We have the data. You guys put up a high-single digit number. Is it reasonable to assume that we should expect this as a new run rate for North America local gross billings? Thanks.

Michael O. Randolfi - Chief Financial Officer

With regard to North America gross billings, we're really excited about the progress we've made. And what I would say is in terms of what we'd look at going forward. You have some sense based on our revenue guide in terms of what we think overall P&L shape would look like. But what I would say is, as we're looking at the individual cohorts, what we've essentially seen is a lift that we believe has occurred a little earlier than we would've expected, but we still believe the overall value of the cohorts are going to be relatively similar. They're trending very much in line with the ROI thresholds that we had laid out at 12 months to 18 months. And so they're progressing nicely along that. But that's the way we're thinking about it.

Jim Shaughnessy - RBC Capital Markets LLC

Thank you.

Operator

Thank you. And this does conclude the question-and-answer session as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.

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