Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Groupon Inc (NASDAQ:GRPN)

Q4 2011 Earnings Call

February 08, 2011 11:30 am ET

Executives

Kartik Ramachandran - IR

Andrew Mason - CEO

Jason Child - CFO

Analysts

Scott Devitt - Morgan Stanley

Ralph Schackart - William Blair

Heath Terry - Goldman Sachs

Spencer Wang - Credit Suisse

Jason Maynard - Wells Fargo

Justin Post - Merrill Lynch

Mark May - Barclays Capital

Ross Sandler - RBC Capital Markets

Mark Mahaney - Citi

Shawn Milne - Janney Capital Markets

Operator

Good day, everyone, and welcome to the Groupon Fourth Quarter 2011 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the company's formal remarks. (Operator Instructions). Today's call is being recorded.

For opening remarks, I would like to turn the call over to the Vice President of Investor Relations and Corporate Development Finance, Kartik Ramachandran. Please go ahead, sir.

Kartik Ramachandran

Thank you. Hello, and welcome to our Fourth Quarter 2011 Financial Results Conference Call. Joining us today are Andrew Mason, our CEO; and Jason Child, our CFO. We will be available for questions after our prepared remarks.

The following discussion and responses to your questions reflect management's views as of today, February 8, 2012, only and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and in our filings with the SEC including our Form S-1 that's filed on November 3, 2011.

During this call, we will discuss certain non-GAAP financial measures in our press release, slide and filings with the SEC, each of which is posted on our IR website. You'll find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with GAAP.

Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2011.

Now, I will turn the call over to Andrew.

Andrew Mason

Thank you, Kartik, and thank you everybody for joining us today. 2011 was a phenomenal year for Groupon. At $1.6 billion in revenue, we grew nearly 420% this year. Now, of course, revenue is just the portion of sales that we keep after paying out our merchants. Our total sales or gross billings came in at over $4 billion this year, also up over 400%.

Q4 in particular was a milestone as it was the first quarter in which we've generated operating profit since expanding internationally back in Q2 2010. Quarter-over-quarter, we also saw revenue accelerate by 18% to $506.5 million.

Free cash flow nearly tripled to $155 million with earnings not just working capital contributing for the first time since early last year and accounting for nearly a third of Q4 free cash flow. These results however didn't come at the expense of the investments that we are making in the future.

First, we completed several technology acquisitions in the back half of last year that we expect to accelerate our strategic product roadmap. And during the year, we've increased our total technology headcount by more than four times and to accommodate that headcount we opened a new office in Palo Alto, in Q4 that's focused on our technology operations.

This quarter, we grew not only our core daily deal business, but we also grew Groupon Goods and Groupon Getaways, our travel partnership with Expedia. This further proves that Groupon is the brand that stands for more than just local for millions of customers around the world.

Groupon Goods are product channel featured over 125 different deals in Q4. Each of our top five deals average more than 25,000 units. Our Groupon Getaways, our average hotel deal generates over 1,000 room nights for our hotel partners. We also launched several exciting new tool that deliver additional value for our merchant partners.

Our new Merchant Center provides our merchants with an easier way to manage their campaigns as well as to gather deep analytics on their promotion. Groupon Scheduler is the free sophisticated and easy to use bookings engine for merchants, but they can use regardless of whether or not they've been featured on Groupon before.

Groupon Rewards is the easiest merchant royalty program in the world. It allows the merchants customers to earn rewards from their favorite business while paying with their normal credit cards. For merchants, Groupon Rewards helps drive more repeat business and helps to make Groupon customers our merchant partners' best customers.

Since this is our first earnings call, I thought it would be worth spending a moment highlighting what these results confirm about our business. There are several key drivers that helped us achieve operating profitability this quarter.

Number one is the strong repeat purchase behavior within our customer base. We've consistently seen that once the customer has been activated, their purchasing behavior is durable over time, and in turn significantly reduces the incremental marketing cost to drive repeat purchases.

Second. While we are still investing aggressively in growth, our paid marketing continues to become more efficient. To put it in perspective, a year ago our marketing expense was more than 100% of our revenue. This last quarter, it was down to about 30%.

Third. We continue to become more operationally excellent, which perhaps more than anything determines success and failure in this industry. Let me give you one example of what that means. In Q4, we improved our lead time by about 24%. Now what's lead time?

Lead time is an internal metric that we use to measure the amount of time between when we've informed the merchant that they've been scheduled and their deal is actually featured. You are probably wondering why lead times matters. It turns out that it's an important leading indicator of merchant satisfaction, an AIR rate and lead fund rate, which in turn are leading indicators of customer satisfaction, so lead time in itself use one of many metrics. An example of the keenly small details that go into offering a consistently great merchant customer experience.

Going forward, our strategy remains to invest in the future. As promised, we are at the business that we built so far, we believe that the Groupon five years from now, the Groupon that has become a daily habit for consumers and delivers against the larger local commerce opportunity requires investments in technology and innovations made possible by the scale that we've achieved to-date.

While Groupon is the clear market leader in online local commerce, we estimate that we still participate in less than 1% of total local transactions. With $4 billion in gross billing after our third complete year of operations, our rapid growth is really more of a reflection of the enormous size and opportunity for the market segment than anything else, so it's still the early days in this marketplace and in our mission and we are not going to stand still. In fact, we believe we see change in consumer behavior.

Five years from now, we believe the way in which consumers finds sale locally will be radically changed by the proliferation of affordable palm, connected tablets and smartphones. Just as technology has changed the way we communicate, do business and buy retail goods, we're about to see what technology can do for local commerce.

Groupon with its unparalleled foundation of consumer and merchant relationships will drive that change. There are plenty of reasons for us to be optimistic about the investments that we've made thus far. In just over six months since we launched Groupon Now, we've expanded into 31 markets and served deals form nearly 20,000 merchants in North America.

Our investments in creating merchant value are paying off as well. More than half of the merchants interacting with one of the tools available in our new Merchant Center, including our ROI Calculator, Groupon Rewards and Groupon Scheduler, merchant partners using these tools report consistently higher satisfaction ratings and those who do not.

Also, while we are still in the early days of personalized commerce, we are seeing extremely encouraging results with customers that have given us personalized information such as location and gender, showing higher engagement and satisfaction rates than those who do not. We will continue to invest aggressively in these and other related initiatives.

With that I'll hand it over to Jason to go through the numbers in a bit more detail and then we'll go through some Q&A.

Jason Child

Thanks, Andrew. I'll start with the review of our fourth quarter and full year 2011 financial results, and we'll share our current expectations for the first quarter of 2012. We'll then take a few questions.

Fourth quarter operating cash flow increased 226% to $169.1 million. Fourth quarter free cash flow increased 258% to $155.1 million. For the fourth quarter, worldwide gross billings which is the total amount spent by customers on Groupon, grew year-over-year 201% to $1.25 billion.

Fourth quarter worldwide revenue which is defined as the portion of gross billings that we keep after paying our merchant, grew 194% year-over-year to $506.5 million. This requires our entering 2012 with an annualized run rate in excess of $2 billion. The unfavorable impact on revenue from year-over-year changes in foreign exchange rates throughout the quarter was $3.5 million, 69 basis points.

Fourth quarter gross billings and revenue were reflective of strong growth in our daily deals business and in our new travel, entertainment and ecommerce channels. Strength in daily deals was reflective in part by the increase in revenue margins or revenue as a percentage of gross billings on a quarter-over-quarter basis.

As Andrew mentioned, we also saw a lift in seasonal gifting related purchases largely driven to our second annual Grouponicus holiday seasonal promotion. The promotion was served to test 40 North American markets with local deals, travel deals and goods chosen specifically for their giftability.

The success of Grouponicus opens the opportunity for us to rollout additional occasion theme promotions during the course of the year. We have not yet announced similar initiatives for 2012, beyond our Valentine's promotion, but we are evaluating several possibilities and are working closely with our merchant partners to optimize our occasion campaign plan.

For the full year, worldwide gross billings grew 437% to $4.0 billion. 2011 worldwide revenue grew 419% to $1.62 billion. The favorable impact on revenue from year-over-year exchange in foreign exchange rates throughout the year was $43.4 million or 267 basis points. Trailing 12-month operating cash flow increased 234% to $290.5 million. Trailing 12-month free cash flow increased 242% to $246.6 million.

Now, I will discuss our operating expenses excluding stock-based compensation. Cost of revenue for the fourth quarter was $87.3 million or 17% of revenue, up 260 basis points year-over-year. The increase in cost as a percentage of revenue was largely driven by growth in our editorial and technology headcount costs.

Marketing in the fourth quarter was $156.5 million, down 22% in absolute dollars year-over-year and down 8% from third quarter. We continue to realize significant efficiencies in our marketing investments.

Improved execution, word-of-mouth customer marketing benefits and mix shift from subscriber acquisition, spend to market connected directly to revenue generation are all contributors to the improvement.

As of December 31, 2011, subscriber acquisition still comprises the primary portion of our marketing spend. This is particularly true in less mature international markets, where we are still in the early phases of building out our subscriber footprint. As those markets mature and as we optimize our transactional advertising spend in more developed markets, we expect to realize further leverage on the marketing line.

Selling, general and administrative costs in the fourth quarter totaled $247.4 million, or 49% of revenue, down from 68% in the prior year period. The productivity of our sales force continues to improve as we refine our sales management and selling processes and as we introduce new products and services facilitating deeper customer and merchant engagement. You can expect to see us continue to invest aggressively in people and technology, the benefits of which will be reflected over a long period of time in our financials.

Fourth quarter consolidated segment operating income or CSOI, which excludes stock-based compensation and expenses related to acquisitions was $48 million. This compares to a loss of $143.4 million in the fourth quarter of 2010.

Of the $49.7 million improvement in CSOI versus third quarter, only $13.9 million was related to our ability to reduce marketing cost and realize greater efficiencies. Also, absorbed into the $48 million of CSOI for the quarter, were roughly $40 million in operating losses incurred principally in less matured countries within the international segment. Unlike CSOI, our GAAP operating income or loss does include stock-based compensation expense and acquisition related expenses.

Fourth quarter GAAP operating income improved to $15 million from loss of $336.1 million in the fourth quarter of 2010. The favorable impact on operating income from the year-over-year changes in foreign exchange rates throughout the quarter was $11.6 million.

Fourth quarter net loss attributable to common shareholders was $42.3 million, or $0.08 per share compared to a loss of $378.6 million and $1.8 per share in Q4 2010. Our net loss includes income tax expense of $34.8 million in Q4. This includes tax related to profitability in certain international countries as well as charges related to the establishment of our international headquarters in Switzerland. Primarily, as a result of these charges, our effective tax rate for the quarter was well beyond our current average statutory rate approximately 33%. We expect our effective tax rate to decline over time.

Pro forma EPS loss for the quarter was minus $0.02, adjusting for stock-based compensation and acquisition related expenses. Our effective tax rate for Q4 was negative 1,561%, which certainly makes us a good corporate citizen, but is not indicative of a long-term trend.

Total income-tax was approximately $0.07 per share of which the charges related to the establishment of our international headquarters in Switzerland represented approximately $0.03 per share.

For the full year 2011, cost of revenue was $249.9 million or 15% of revenue, up 170-basis point year-over-year. Full year 2011 marketing was $769.6 million, or 48% of revenue compared with 93% in 2010.

Selling, general and administrative costs totaled $813 million for the year or 50% of revenue versus 63% in the prior year period. We realized improved leverage on our SG&A despite increasing our headcount from 4,457 to 11,471 during the year. The majority of that investment concentrated in our global sales force.

Full year consolidated segment operating loss was $114.3 million. This compares to a loss of $181 million in 2010. Full year GAAP operating loss improved to $203.4 million from a loss of $420.3 million in 2010. The unfavorable impact on operating income from year-over-year changes in foreign exchange rates throughout the year was $9.8 million.

Our 2011 income tax expense was $44.3 million. 2011 full year GAAP net loss was $350.8 million, or $0.97 per share compared to a loss of $456.3 million and $1.33 per share in Q4 2010.

Pro forma net loss attributable to common shareholders for the full year increased to a loss of $261.8 million or a loss of $0.72 a share from our prior year net loss attributable to common stockholders of $217 million or a loss of $0.63 per share.

Now, I will briefly cover our segment results and a few balance sheet items before the look forward to the first quarter 2012.

Note that we do not allocate our stock-based compensation or acquisition related expense items to our segment. In the fourth quarter, North America segment revenue grew 113% year-over-year to $188.5 million. North America segment operating income improved to $35.8 million from a loss of $21.9 million in fourth quarter 2010.

International segment revenue grew 279% year-over-year in the fourth quarter to $3.18 million. Adjusting for the $3.5 million year-over-year impact of foreign exchange, revenue growth was 283%.

International segment operating income improved to $12.2 million from a loss of $121.5 million in fourth quarter 2010. The favorable impact on operating income from year-over-year changes in foreign exchange rates throughout the quarter was $11.6 million.

In 2012, North America segment revenue grew 221% year-over-year to $643.8 million. North America segment operating income improved to $22.3 million from the loss of $10.4 million in 2010.

2011 International segment revenue grew 772% in 2011 versus a partial year of operations in 2010 to $980.9 million. Adjusting for the $43.4 million year-over-year impact of foreign exchange revenue growth was 733%.

International segment operating loss improved to $136.7 million from a loss of $170.6 million in the eight months of international operations in 2010. The favorable impact in operating income from year-over-year changes in foreign exchange rates throughout the year was $9.8 million.

Turning to the balance sheet. As of December 31, 2011, cash and marketable securities increased to $1.1 billion year-over-year from $119 million. Total accounts payable including our accrued merchants payable increased 153% to $557.3 million.

Total accounts payable decreased to 68 from 82 days in the prior year. On a sequential basis, AP days increased from 63 to 68 versus Q3. Despite the move up in AP days this quarter, we expect to continue brining our total accounts payable down to be close and in line with our North America business over time as our international markets mature.

As AP days compress over time and as we realize continued improvements in operating leverage, composition of free cash flow should shift increasingly to earnings and migrate away from the flow provided by our merchant payables. As such, CSOI will more closely approximate free cash flow over time.

We fully expect that cash generated through business operations in the foreseeable future combined with the cash we now have on the balance sheet will provide ample resources to fuel any growth initiatives we currently haven't planned or may anticipate in the near-term.

Our Q4 2011 capital expenditures were $14 million. Full year capital expenditures came in at $43.8 million. In Q4 2010 and full year 2010, respectively, CapEx totaled $8.6 million and $14.7 million. The increase in capital expenditures reflects additional investments in technology as we continue our long-term orientation and aggressive approach towards investing in the future.

Outlook. I am going to conclude my portion of today's call with our outlook. Incorporated in this outlook are the trends that we've seen today in Q1. Our results are inherently unpredictable and maybe materially affected by many factors, including a high level of uncertainty surrounding exchange rate fluctuation as well as the global economy and consumer spending. It's not possible to accurately predict demand and therefore actual results could differ materially from our guidance.

Our outlook further assumes that we don't conclude any additional business acquisitions or investments record any further revisions to stock-based compensation estimates and that foreign exchange rates remain approximately where they have been recently.

For Q1 2012, we expect revenue between $510 million and $550 million, or between 73% to 86% year-over-year growth and between 1% and 11% quarter-over-quarter growth. We expect first quarter GAAP operating income to be between $15 million and $35 million of income as compared to an operating loss of $117.2 million in the first quarter of 2011. This outlook include approximately $35 million for stock-based compensation expense. We do not anticipate any acquisition related expenses for the quarter.

We anticipate consolidated segment operating income, which excludes stock-based compensation and acquisition related expenses to be between $50 million and $70 million as compared to our first quarter 2011 consolidated segment operating loss of $98.3 million.

Before we turn it over to questions, I'll hand it back over to Andrew for closing comments.

Andrew Mason

Thank you, Jason, and thank you everyone for your time today. We are very excited about what we are building and look forward to sharing our progress with you in the years to come, so why don't we now take a few questions with the time we have left. Kartik?

Kartik Ramachandran

Great. Why don't we go right to questions? Thanks a lot.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Scott Devitt with Morgan Stanley. Your line is open.

Scott Devitt - Morgan Stanley

Hi. Thanks. Andrew, as you've seen the competitive landscape shift to your favor over the past, say, three to five months with other sites closing and your market share actually growing relative to those that remain. I was just wondering how that's impacting your decisions around the pace of investments in your own business, particularly as it relates to marketing spend if at all and I had one follow-up.

Andrew Mason

Well, historically, we haven't made decisions based on the behavior or share of our competitors, so while we are encouraged by developments in the marketplace, we continue to operate against our own strategic roadmap rather than be influenced by the behaviors of competitors.

Scott Devitt - Morgan Stanley

Okay, and then secondly maybe for Jason. Given the relative size of Now, Goods and Getaways all being small relative to the deals business and in fact they have lower take rates. I just wondered if you could talk a little bit more about the higher take rate that you reported in the quarter, is it better international take on the deals business? Is it just too early to see the impact of the newer businesses or something else? Thanks.

Andrew Mason

I'll take that one as well, Scott. We encourage people to focus on net revenue. As we've said historically, we think it's the stronger indicator of our business. There's a lot of noise that goes into take rates, where they will go up or down quarter-over-quarter depending on the deal mix in these new categories, depending on the maturity of these new categories, things like breakage et cetera. We internally are focused on net revenue as age of our performance along with free cash flow and CSOI and we encourage you look at those things.

Scott Devitt - Morgan Stanley

Thanks.

Operator

Thank you. The next question comes from Ralph Schackart with William Blair. Your line is open.

Ralph Schackart - William Blair

Good afternoon, everyone. I will start with Jason. Jason, can you give us a little bit more color on the tax in the quarters that came 100%. I think you talked about the planning over time. Could you give us a sense of the one-time and how should we think about it going forward?

Jason Child

Sure. I guess I will break it into two pieces. The total tax expense was about $0.07. Of the $0.07 about $0.03 relates to the establishment of our international headquarters in Switzerland. There will be charges related to that over at least the next couple of quarters as we kind of complete that migration and establishment of the headquarters, so it will be a bit lumpy.

We are in a position where we are in a positive tax position in a number of our foreign entities. Over time, we do expect that as all of our countries are profitable, you will see an effective tax rate that's going to be closer to that kind of low 30s ETR that I mentioned in the release.

I think the main thing also that we pointed out that we did have $40 million of ARPUs and number of our ARPU countries, so if you kind of back that out and then you use a higher CSOI number, the tax doesn't look quite as crazy and so again you are kind of just almost combining a bunch of different countries that all pay tax locally. Again, that will be changing as we establish its headquarters I would say later this year.

Ralph Schackart - William Blair

Okay. One more if I could, Jason. You talked on the call about $40 million of operating losses in less matured countries. Can you give us a sense how that's trended over the last couple of quarters and have you seen that in other markets that you've launched throughout operating Groupon?

Jason Child

Yes. I think the first thing I'd point you to is, our oldest and most mature market of course is the U.S. and there we actually made about $35 million in Q4 at about 19% operating or CSOI margin, and yet still continue to show strong growth in fact accelerated in the last quarter, so what I would say is that's kind of the model for how we want all of our countries to look.

To your question of total loss, what that was in the past? We did say that last was, I think, around $50 million to $55 million last quarter and that was isolated actually I think we said last quarter four countries and so we are not being quite as specific this time. Certainly, it comes down a little bit since then. You should expect that will continue making progress throughout the balance of the next year or so and really get to a point where I think all the regions and all the countries should be profitable sometime in the next year or two.

Ralph Schackart - William Blair

Great. Thank you very much.

Operator

Thank you. The next question comes from Heath Terry with Goldman Sachs. Your line is open.

Heath Terry - Goldman Sachs

Great. Thanks. Andrew, just wondering if you could give us a sense that technology headcount increasing by four times, what would you say your highest priorities are for that additional tech headcount and to what degree do you expect that pace of hiring to continue and then I have a follow-up.

Andrew Mason

Thanks for the question. That headcount is to support existing initiatives that you can see today like Groupon Goods and Groupon Getaways as well as Groupon Now, Groupon Rewards. Many of these newer products that we've launched are more technology complex.

Rewards for example absent of the credit card and debt transaction flow with local merchant in order to allow their customers accumulate rewards using their normal credit cards that they have on file with Groupon, so it's pretty remarkable magical stuff that we think is going to create a more comprehensive marketing suite for our merchant partners and more value for consumers, but it obviously takes deeper investment.

We are still far in depth in terms of our technology headcount compared to traditional California-based technology company, so we expect to continue to invest aggressively in adding additional headcount, including initiatives that we are yet to announce.

Heath Terry - Goldman Sachs

Great. Then, I was wondering if you could give us a sense of the early impact that you are seeing in the personalization of deals on the website and what the roadmap looks like for rolling out personalization to the e-mail list into Groupon Now?

Andrew Mason

Sure. I'd love to. Like I said, right now the personalization that we are doing is around the users' location. You can now enter multiple locations, your home address, your work address, any additional addresses, your gender, past buying behavior and some other things. It's smart enough to know the difference between consumer behavior and consumer traveling behavior in New York and St. Louis, so we are making incremental improvements every quarter.

A few things that we'll be rolling out this quarter or in Q2 will be depending on how the testing goes, or you know the thumbs up/thumbs down mechanism to allow people to say please stop sending me pole dancing lesson deals and that's been a much requested feature. As well as there are really nice personalization wizard that allows us to collect the fundamental information we need to improve the user's experience.

Right now, the personalization has only been in the U.S. Our general approach with innovation has been to cultivate it in one market, get everything right before rolling it out and do additional countries. We now feel that we are ready to do that and are going to be beginning to test personalization in Europe later this quarter.

Heath Terry - Goldman Sachs

Great. Thanks, Andrew and you can definitely keep sending pole dancing emails. I am okay with that.

Andrew Mason

All right.

Operator

Okay. Thank you. The next question comes from Spencer Wang with Credit Suisse. Your line is open.

Spencer Wang - Credit Suisse

Thanks. Good afternoon. I guess the question for Andrew on Groupon Now. As you rolled out Now across the 31 markets in North America, I was wondering if you could share any sort of metrics or data points with respect to how it's impacted purchase frequency among your customer base or maybe customer activation or subscriber churn and any thoughts on when you roll that out internationally. Thanks.

Andrew Mason

Thank you. So, I can tell you that our customers who purchased a Now deal are better customers that spend more in general on Groupon once they've made their first Now purchase. We are really happy with what we are seeing. With Groupon Now, everything is on track and we plan to rollout to additional markets in the U.S. as well as markets in the U.K, either later in Q1 or Q2.

Spencer Wang - Credit Suisse

Great. Thanks a lot.

Operator

Thank you. Our next question comes from Jason Maynard with Wells Fargo. Your line is open.

Jason Maynard - Wells Fargo

All right. Good afternoon, guys. Congrats. First question for you, Andrew, kind of interesting this quarter in terms of the improved marketing efficiency and I would love to get your commentary here around how do you see that playing out the next 6-12 months, especially considering that you have scale in so many markets relative to your competitors? Maybe start with that and I got a follow-up for Jason.

Andrew Mason

I think part of what we are seeing is there's a lot of stuff that we are doing to get smarter in how we do marketing. Just to give you one example, we are investing more in transactional marketing than we once did marketing that's designed to drive purchases and not just new subscribers, so I think that is driving the cost of customer acquisition down.

At the same time, Groupon is, with the introduction of Goods, with the introduction of Travel, with the introduction of Groupon Now with better personalization, it's just every day becoming a core product that more and more consumers love and I think that's driving an increased percentage.

We see that even as our rate of our absolute number of acquired paid customers stays constant or increases quarter-over-quarter, the percentage of organically acquired customers continues to improve, and I think it's just the result of all the investments that we are making and making a better service.

Jason Maynard - Wells Fargo

Good, and then for Jason. In terms of the Q1 guidance, I am curious how should we think about the contribution of some of these newer products and ramping in certain international markets in terms of contributing to that number and any color you can maybe offer in terms of how we should sort of plan or think about that throughout the rest of the year?

Jason Child

Yes. The categories that we've launched as of now over the last three to six months are still just very real estates and so in my perspective I wanted to give out guidance that is I think kind of reflects all of the stuff that we do and do now.

What we do know is we saw some seasonal impact of Grouponicus. We don't know what we'll see going forward on other seasonal impacts of like Valentine's Day or other holidays that lend themselves to gifting that seems do look like there could be a big event for us, so we are learning about seasonality.

We don't know about all of the kind of uncertainty in macroeconomics climate, that kind of stuff. I mean overall, we do think that there is certainly a huge opportunity as Andrew said before. We have less than 1% of local transaction today, so I think we've put out guidance that we think is renewable based on the performance that we just saw and we'll just have to kind of stay tuned and we'll keep you updated as the quarter progress on some of these new initiatives.

Jason Maynard - Wells Fargo

Great. Thank you very much.

Operator

Thank you. The next question in queue comes from Justin Post with Merrill Lynch. Your line is open.

Justin Post - Merrill Lynch

Thank you. Two questions. First, could you talk about the merchant satisfaction levels as measured by repeat rates? Where are they maybe and are you seeing any trend up or down there?

The second question. Is there empirical evidence or anything you are seeing on the marketing investment you did that were really pulled out back. Has that affected in your opinion number of Groupon sold or any facets of your business and do you still think you can see a lot of leverage on that line as we look into 2012? Thank you.

Jason Child

Thank you for the question. In Q4, we talked about our Q3 percentage of merchants that we have featured who had been featured on Groupon in previous quarters and the number was more than half and we've seen that number increase again in Q4, so we're very happy by those numbers and by the experience that a vast majority of our merchants repeat.

Nielsen recently came out with a survey where they found three out of four people that use the Groupon bring a friend with them. 9 out of 10 people spend more than the value of the Groupon. Another example that I thought was really exciting is we partnered with Lionsgate to do a Groupon around the film, One for the Money, and they did some surveying. They surveyed all the people that came to the movie that heard about the Groupon and only one out of three of them had actually thought about Groupon.

For every person that bought the deal, there were two people that just came via the word-of-mouth as the promotion generated. Of those people that did buy the deal, it's a really large number. That 93% saw it because of the deal. Only 7% would have gone anyway, so the vast majority of the purchases generated by the Groupon were customers that they wouldn't have received anyway. It was all incremental, so that's the kind of data that gets us really excited about the merchant value proposition that we are offering to hundreds of thousands of merchants every day.

Justin Post - Merrill Lynch

Then on marketing investment affecting growth and your outlook for marketing spend in '12.

Jason Child

No. We haven't seen any negative impact. Largely when we cut down our marketing spend, it hasn't come at the cost of cutting down at the expense of reducing the number of pay customers that we are attracting. What we do is, we've done a better job at targeting higher quality subscribers who are more likely to convert into customers.

Justin Post - Merrill Lynch

Great. Thank you.

Operator

Thank you. Next question in queue is from Mark May with Barclays Capital. Your line is open.

Mark May - Barclays Capital

Thanks for taking my questions. I had two. I guess I'll ask the other side of that. Question is on the consumer proposition. I don't think that you are currently accepting or allowing reviews on the site, so I wonder if you could talk a little bit about how you are measuring customer satisfaction. What that's telling you maybe if you could share a little bit about repeat usage on the consumer side of the business.

Then second question has to do with the international operations and the losses that you referenced earlier. Can you help us think through a little bit around the potential margin profile of all these markets in aggregate as you report them? What might be the differences between the U.S. business and how we should be thinking about the margin profile longer term? Thanks.

Andrew Mason

Thanks for the question. I'll take the first one around how we measure customer satisfaction. I'll let Jason take the second. So, actually we do collect feedback from consumers. We just started doing this about, I believe four, five months ago, so anytime you redeem the Groupon, you'll get an e-mail asking how is your experience and we are seeing really high engagement rates with those e-mails, so we are basically collecting reviews of these experiences that the customers are having.

That allows us to flag anything that's exceptionally good or exceptionally poor and give us a pretty constant real-time pulse of how we are doing on top of that just as we do with our merchants, we survey our customers frequently. On top of that more qualitative data we look at the engagement rates, we look at the cohort behavior of customers who signed up in the past and look at their repeat purchasing behavior.

Just as we kind of highlighted in the road show, the trends continue where all past cohorts continue to purchase at the same rate in Q4, that they did in prior quarters, so just to use the one example that we used in the road show which the Q2 2010 cohorts. That first quarter those customers spent about $6 million, then $8 million $7 million, $8 million, $7 million, $7 million in Q3 and now in Q4 again, and that is indicative of all the other consumer cohorts.

Mark May - Barclays Capital

That's really helpful. Thanks.

Jason Child

I think, Mark, the other question was on the difference between the U.S. and international revenue margins, is that right?

Mark May - Barclays Capital

Yes. How as we lookout further, I think you talked about a 12-18-month timeframe for breakeven or profitability. Looking even further out, how might that segment looks from a margin profile? Vis-à-vis the U.S. segment?

Jason Child

Okay. Also, let me clarify the statement I made. The statement I made earlier was on some of the early, I'd call them less mature countries that are losing money. When will they be making money? I think that was more the timeline you should expect everyone to make money. From a consolidated statement operating income perspective, we're actually profitable in the U.S. and all of international today.

Now, with regard to kind of take rates or revenue margin, you should of them as being extremely similar. I mean, we're basically using the same playbook or the kind of deal factory and process and that Andrew talked a little bit about, we are following kind of our sheer best practices approach and so we are structuring deals very similar and we find in general kind of the open rate, the conversion rate, the merchant kind of acceptance, they are all very, very similar, so you should not think of the revenue margins being different.

Mark May - Barclays Capital

I think the question is the operating margin for international today is lower than in the U.S. and is there anything structurally different about those markets that would prevent them from having operating margins that came to the U.S. over time.

Jason Child

There is a couple of exceptions where you look at a country China, but China is not in the international segment. That's a joint venture global line, and there is few exceptions that on average you should assume that international is very similar.

For example if you back that $40 million out of the international, you get the numbers that are not that similar from the U.S. 19% operating margin today, so slightly gets us to the point I gave before out before was, call it, at this point I would say in the somewhere in the next 12 to 18 months, we'll see we're still a very growth company and that makes these estimates need to have a little wider range, but somewhere in that timeframe that you should probably see the U.S. and North America and international be converging on the CSOI margins.

Mark May - Barclays Capital

Thanks a lot.

Jason Child

Thanks, Mark.

Operator

Thank you. Our next question is from Ross Sandler with RBC Capital Markets.

Ross Sandler - RBC Capital Markets

Thanks. I got three quick questions. First, Andrew regarding our new merchant products like the Merchant Center dashboard. Can you talk about what kind of increase I guess repeat frequency you see on the merchant side for your new products?

The second question for Jason, follow-up on the marketing comment earlier. When you roll out these targeted marketing program that are going directly to deals versus some of the market you have been earlier on acquire e-mails, how do the economic change in terms of your marketing expense as a percent of revenue of that becomes a bigger percent of the total versus where you are today like 41%. Then last portion is just housekeeping. The share count was below what we were looking for. Can you talk about what's going on into diluted share count? Thanks.

Andrew Mason

To answer your first question, the repeat frequency of Groupon merchants. This isn't an actual stat, but just the average restaurants is thinking about running maybe a couple of times a year at most, so these are all merchant features that we've rolled out in last three months or so, so it's far too early to tell what the long-term impact is going to be.

On top of that, many of them like rewards we've only rollout in Philadelphia, so these things are still in the early stages. However, the leading indicators of repeat feature rates such as merchant satisfaction are all telling us that we should expect increased engagements with these merchants. All these things are about building, transforming our relationship with won-and-done deal event into something that's longer term and we are very confident that these tools will take us along that path. Jason?

Jason Child

Sure. First on, I'll knock on the share count one quickly, so in Q4 because of the IPO, you saw the weighted average share count, you realize a little less than two out of the three months that had kind of the full share count included, so you will see that be normalized and go up over the $600 million number that you probably expected in Q1, okay. That's first.

Second, on marketing, I guess what I would say is you should first assume that 31% marketing as a percentage of revenue is not being anywhere close to steady state, so as Andrew said it's come down from well over 100%. It was 116%, 117% in Q4 of last year and been coming down steadily ever since and that's basically because the actual spend has been coming down a little bit, but overall we went from an annualized run rate of somewhere between $600 million and $700 million and that's an amount that we are comfortable with and we think gives us a lot of opportunity to spend in a variety of ways, so today's it's been primarily or through today it's been primarily subscriber acquisition spend.

As we start to continue to focus on highest ROI, today we measure that ROI, primarily on cost per new customer, you'll see us start to experiment and do more revenue driving transactions, which you would see in more typical e-commerce companies. We don't necessarily think we need to be spending more money. We just think that we will be able to shift some of that spend, because every quarter there is a smaller pool of subscribers to go after, because of the relatively large penetration that we are going to hit in some of our more mature markets, so you should overall think that marketing will continue to go down as a percentage whether it will get down to the, what is it? 5% to 10% that you see for Amazon, or Netflix, or those types of guys. That's probably is not going to be. It's going take a little while, but again I would not expect into revenue.

Ross Sandler - RBC Capital Markets

Thanks, guys.

Jason Child

Thanks.

Operator

Thank you. The next question is from Mark Mahaney with Citi. Your line is open.

Mark Mahaney - Citi

Thanks. I know it's still relatively early days, but in terms of some of the newer areas like Goods and Getaways and Groupon Now, could you quantify what kind of impact you've seen or maybe talk about the kind of acceptance at least qualitative acceptance you've seen from both, merchants and from consumers for those newer products? Thanks.

Andrew Mason

Thanks, Mark. What we can tell you is just that we feel great about how well the assets that we've acquired over the last three years of building a local commerce business have translated into these new spaces. That means the operational infrastructure we've built, what are the competences in the operational excellence, the staff and the sales force here, as well as the consumer base. We've learned really think of Groupon as a place where they can go to find consistently high quality, unbeatable deals on all kinds of things and that's what the Groupon brand stands for these customer.

One thing that shocked us was the relatively high percentage, the first week that we launched Groupon Getaway is purchases that came from mobile devices, where people are just looking on their little four-inch screens at a picture of a hotel and spending $300 or $400 just because of the trust that they have in the Groupon brand that we've established and invested through the local business over the last three years, so we think we are very excited.

We still don't feel, but we know enough about where the businesses are headed to give you clear guidance on how they will contribute to the overall financial picture, but as we said at various points on this call, we're continuing to invest and we're bullish about those businesses.

Mark Mahaney - Citi

Thank you, Andrew.

Operator

Thank you, and sir we have time for one further question. Shawn Milne with Janney Capital Markets. Your line is open.

Shawn Milne - Janney Capital Markets

Great, and thanks for taking my question. If you go back the last question and I don't want to quantify the impact, but Jason maybe can you frame up a little bit more how you think about Getaways and Goods into the first quarter guidance? Can you expect at least the Getaway product to expand beyond your current relationship and really broaden out that product going forward? Thanks.

Jason Child

Well, I guess, I'd say first in terms of broadening the product. I mean, it is in partnership with Expedia, but we actually source a large percentage of the deals with our own travel sales force, and so you should already assume that it is I guess broadening into that at least from a sales perspective.

You should expect to see us probably add more features and just further develop the product in terms of, today it does really well with hotels rooms, but over time it could be even more but I think in terms of Q1, I would just assume that we're very happy with the progress. We are not seeing, I mean, we did in the first quarter.

You can assume that when you are launching that category, you are probably having to make maybe some investments in some of your commission rates to be able to get deals, and over time that investment is lessened, but in terms of Q1, how much of Q1 Goods or Getaways is going to be as a percent, where we are not getting closer. It's just too competitive of categories for us, and so we just want to not kind of talk about them at this time.

Shawn Milne - Janney Capital Markets

Okay. Then just lastly, I may have missed it. Did you give out any expectations for what you thought CapEx would look like for the year?

Jason Child

No. We did not. We did step up CapEx in Q3, which was largely related to, we built up our tech team to a sizable enough level for as you did see the impact of capitalized software come into play and we did actually also open a data center, so I would say that the levels you saw in Q4 are kind of reasonable in terms of what we expect to see in the near-term and then we'll let you know when we see something. You won't see, I would say, sizable shifts from the Q4 level.

Shawn Milne - Janney Capital Markets

Okay. Great. Thank you very much.

Operator

Thank you and I would like to turn the program back to our presenters for any concluding remarks.

Kartik Ramachandran

Thanks, guys. Just as we have lot of funds, we look forward to many more of these.

Operator

Thank you. Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program and you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Groupon Inc's CEO Discusses Q4 Results - Earnings Call Transcript
This Transcript
All Transcripts