A few selections from Groupon’s Q3 earnings call:
In the third quarter, we delivered revenues toward the lower end of our guidance range, operating income at the high end of our range, and EPS above our range, despite stronger than anticipated seasonal headwinds and pressure on our email business. Gross billings growth of 10% year-over-year was driven by 20% growth in North America, and 12% growth in EMEA. Revenue growth of 5% year-over-year was driven by 24% growth in North America. Operating income excluding stock-based compensation and acquisition-related costs (known as CSOI) was $39 million, and Adjusted EBITDA was $62 million in the quarter.
Let me start by reviewing the highlights.
First, for the quarter, billings in North America were $665 million, revenue was $361 million, and segment operating income was $25 million. The business continued to post strong year-over-year billings growth at 20%, despite pressure on our email business as we continued the roll-out of Pull. In our original daily deal email model, consumers needed to buy everything up front, which meant our sales were front-loaded around newly launched deals. In the new Pull marketplace model, customers can wait and buy deals closer to when they intend to actually use them. As Pull grows, we believe this timing affect has created some short-term pressure on our North American email business. In addition, results were impacted by Q3 seasonality and double-digit declines in email open rates related to the new gmail promotions tab that was rolled out earlier in the quarter.
Despite these pressures, our North American local business continued to see strong momentum. Local billings accelerated from 5% year-over-year growth in Q1, to 9% in Q2, to 13% this quarter. And revenue growth in local improved significantly, from a 5% decline in Q2 to 13% growth this quarter.
Despite strong local performance, our Goods business in North America went from 112% growth in Q2 to 28% this quarter, which reduced our overall growth from 30% in Q2 to 20% this quarter. Recall that Q3 of 2012 was the first quarter that our Goods business was fully ramped up. By that time, we had roughly doubled the number of Goods emails we were sending per week. As such, we are now comping a fully rolled-out Goods business, which is why the growth rates have decelerated.
Second, EMEA continued its turn-around this quarter, improving from an 8% year-over-year billings decline in Q1, to 4% growth in Q2, to 12% growth this quarter. Despite continued take rate investments, we generated $148 million in Revenues and $16 million in segment operating income in the quarter. Merchant and customer satisfaction showed continued improvement in many countries, and customer adds were positive after three quarters of declines.
Third, we were pleased with our performance in Rest of World in Q3. Our year-over-year billings decline improved from 21% in Q2 to 13% this quarter, Revenues went from a 26% decline in Q2 to a 4% decline this quarter, and we reduced our Rest of World segment operating loss from $14 million in Q2 to $2 million in Q3. Despite our progress, we have much work left to do.
With improving results in Rest of World, we intend to begin making investments again in Asia and Latin America in an effort to position those markets for growth. Our primary objective, given how young those markets are, is not to maximize profits, but instead to drive sustainable growth.
That is why today we announced an agreement to acquire Ticket Monster, or TMON, one of the leading ecommerce sites in Korea, and one of the most impressive ecommerce companies in Asia. Not only has their growth been tremendous over the past three years, but they also share our vision – having built a truly mobile marketplace that’s heavily reliant on organic traffic, with email estimated to account for less than 10% of their sales, and a diverse product set across local, product, and travel.
TMON will serve as the cornerstone of our Asian business, bringing scale and ecommerce expertise to that region. We’re thrilled to have their incredibly talented team join our family.
Finally, we made good progress on our key strategic initiatives: Mobile, Local, Pull, and One Playbook.
First, mobile. In Q3, we once again had record app downloads, as more than 9 million people downloaded our apps worldwide. We are now at over 60 million app downloads to date. In addition, we crossed the 50% threshold in September in North American transactions, which we believe makes us the first large-scale e-commerce company in North America that is predominantly mobile. As a result, going forward, we will report a global metric, rather than just a North American metric. In September, more than 40% of our transactions worldwide came through mobile.
While mobile purchasers are more engaged and tend to buy more than non-mobile purchasers, on average, it takes almost 30% more time to get an app-only user to make their first purchase. So mobile users are presently worth more to us, but take longer to activate. Part of this is related to our push notifications in mobile being less sophisticated than our emails. We also send less of them, and as a result have fewer opportunities in mobile to activate a customer. Given that our mobile growth has been so rapid, we are just starting to optimize mobile activations and expect to gain greater parity with email over time.
In addition, we continue to make improvements to our mobile app. Historically, when a user traveled to a new city, the mobile app only presented deals from their city of origin, rather than from the city in which the user was actually in. And, despite our thousands of deals, the search box had been very hard to find and not well integrated into the user experience. With our newest app release, which came out just a few days ago, we have made great strides in addressing both; with a new search experience and localization of deals.
Second, Local. For us to succeed, and for our mobile business to continue to thrive, we need to get local right.
First, we need the very best merchants choosing Groupon as the platform they want to use to promote their goods and services. In Q3, we continued to make progress on this front. Our MSAT score has never been higher, our re-feature rate continues to be strong, we continue to get record inbound inquiries from merchants that want to run a Groupon, and most importantly, 75% of our merchants in North America now opt to be featured on Groupon on an ongoing basis.
It’s no surprise our merchant community has never been stronger, given that among the six million customers we’ve now surveyed in North America, 60% are trying the merchant for the first time. We are a powerful force of new customer acquisition for local merchants.
Second, we need customers to have a great experience every time they buy a Groupon. While our CSAT is also at all-time highs, we are still plagued by too many customers that never get a chance to redeem their Groupon. We believe that unused Groupons are a drag on people’s willingness to buy more, and represent one of the single biggest reasons that our customer spend is not rising faster. With the adoption of PULL, our average redemption time is dropping dramatically, which should promote overall redemption, and lower the barrier for our customers to make subsequent purchases.
Third, we need to make using Groupons as seamless as using a credit card. All of our efforts related to Groupon’s Operating System, both in payments and point-of-sale, are designed to create a world where our merchants are constantly connected to the Groupon platform and redemption is frictionless for our customers. Over the next 12-18 months, we intend to significantly increase the number of merchants that are connected to the Groupon platform.
We hope to one day have millions of merchants “plugged-in” to Groupon at all times, thereby creating a local commerce network that our customers and merchants can access.
Next, PULL. Let me start by providing an update on where I think we are on our journey to manage the turn-around and fundamental shift of our business from Push, or email, to Pull, or search.
Our vision is to make Groupon the place you start when you want to buy just about anything, anywhere, anytime. We want people “checking Groupon first” before they buy something, because with the world’s largest marketplace of deals, everything we offer is personalized to provide unbeatable value.
“Checking Groupon first” before they go out to eat; “checking Groupon first” when they’re looking for an activity, or exploring a new part of their city, or trying a new hair salon; “checking Groupon first” before they buy a camera, or a new watch, or a mattress. “Checking Groupon first” before they book a reservation, or take a family trip.
To get PULL right, we need to accomplish two seemingly simple, but in practice, very complex things: one, increase supply, and two, increase demand.
Let’s start with supply. At the end of Q3, our active deal count in North America exceeded 65,000 on average, nearly a 65 fold increase over the last two years, from roughly 1,000 deals at the time of our IPO.
Type in “teeth whitening” in Dallas or “bowling” in Chicago or “wine bar” in New York, and up pops relevant deals around you that can be purchased and used instantly. Over the next several quarters, we’ll continue to focus on growing our deal count to ensure that every search in every category yields an acceptable result.
To date, while supply has grown quickly, demand has taken longer to generate. Despite the continued progress we’ve made to reduce our reliance on direct email, which remains under 40% of our total transactions in North America, we still have not created enough awareness in the market around Pull. The majority of our customers still have no idea they can come to Groupon and search and browse among over 65,000 deals in real time.
With the release of our new site, which we unveiled a few days ago, we have taken a giant step forward in addressing this. We’ve now embedded search into the core user experience, with a prominent search box at the top of the page. The site has also been completely redesigned for the first time in over 3 years, with an entirely new and personalized home page and a completely re-engineered category navigation. In addition to rethinking search, we’ve also added several new features. Our local business now has personalized Widgets that build themes for our users based on their preferences. In Goods, we’ve added variations so our users can see different colors and styles, and a shopping cart so they can finally purchase more than one item a time. And in Getaways, we’ve launched search capability that extends beyond our deals to also include our market picks, so our users can now browse among thousands of hotels and either find a deal, or find the exact hotel they’re looking for, and book their reservation on the spot.
Historically, Groupon grew by sending one or two deals a day to our customers via email. Each day, millions of people would open their email, and given the time sensitive nature of each deal, if they didn’t act quickly, the deal would be gone. In a push world, like most flash sale businesses, the sense of urgency is embedded in the very sale itself, and customers often tend to buy on impulse. We show you a deal and you buy it and hold it, often for months, before you’re ready to use it. This manifests in longer redemption cycles.
While we still believe our push business offers unbeatable value to our customers through the curation of deals around them, and while we intend to improve this business over time, it has inherent limitations, as do all flash sale models.
Pull shifts that paradigm. It’s our answer to these limitations. Consumers no longer need to pre-buy Groupons or remember to use them. By checking Groupon first when they’re out and about, they can buy and use our deals in real time. Not just in real time, but on their time.
In a Pull world, we believe customers come to the site with the expectation of using their Groupon now or in the near future. This manifests in shorter redemption cycles. Since the beginning of the year, we’ve seen the percent of customers who redeem within 24 hours of purchase increase from 6% to over 12%.
While these are positive signs indicating the progress we’re making in Pull, this shifting mix has created what we anticipate is short-term pressure on our North American daily deal email business. This, with other factors, including the effects of the gmail promotions tab and Q3 seasonality, negatively impacted our revenues in the quarter.
As more and more customers interact with us organically through our app, and as we drive continued awareness of Pull, we expect these pressures to be offset by the benefits of tapping into a whole new pool of demand and creating a truly vibrant ecommerce marketplace.
In September, roughly 6% of our total traffic in North America was related to search activity, with customers that search spending over 25 percent more than those that do not. These are two proxies that offer a glimpse of early progress. If we’re successful, this should translate directly into increased customer spend over time.
And finally, I want cover One Playbook, our initiative to bring our North American systems and processes to the rest of the world.
One Playbook made continued strides in Q3, and I want to quickly provide a summary of our progress:
• Our rollout of Smart Deals continues, and we’re working to optimize our personalization algorithms and other critical features in order to increase relevancy in our largest markets. We’re also in the midst of rolling out G2 overseas, which is the process by which we get merchants to put their deals in our marketplace on an ongoing basis. Both of these are critical to obtaining the lift we have seen in North America. We also have now almost fully deployed the first version of our back-office sales and customer service tools and processes that fuel sales force efficiency. We are now sourcing merchants, scheduling deals, and managing the entire deal factory workflow in similar ways through all of our major markets world wide.
• Our work to integrate our many technology platforms also continues. Our North American and European platforms, which continue to make up the vast majority of our business globally, are on track to be largely integrated over the next several quarters. With deployment of our new site, which was built on one standard proprietary framework, we are now in a position to speed up the integration of these systems, and our hope is to have most of our largest countries using our front end design in 2014.
We are just starting to see this work pay dividends. When you look at the progress we’ve made in both EMEA and Rest of World, it’s clear that we’re on the right path.
Despite the challenges that come with transition, we made significant progress in the past 90 days:
We launched an entirely new web site and new mobile app. We set new quarterly records with 9 million app downloads, and crossed the 50% threshold for mobile transactions in North America. We accelerated growth in EMEA and reduced our losses in Rest of World. We returned our local business to double-digit year-over-year billings growth once again in North America. We delivered long awaited features in Goods and Getaways. And, we expanded our active deal count in North America to over 65,000.
Perhaps most importantly, we began to see the first signs that consumers are re-thinking their image of Groupon, from a flash sales company to a full mobile commerce marketplace.
Consumers are carrying around a virtual shopping mall in their pocket, and we want them starting with Groupon; “checking Groupon first” because we offer unbeatable deals that they should explore before they make a purchase.
It’s a big ambition: to become the starting point for mobile commerce. An ambition we believe we can achieve, by virtue of our local roots. We allow our customers to interact with their surroundings in ways others don’t, or can’t, making purchasing more relevant, more personalized, more immediate, more efficient.
As a result, we have a significant opportunity ahead of us. We owe it to our employees, our stockholders, our customers, and our merchants to stay singularly focused on executing against our strategy.