A few selections from Groupon’s Q4 earnings call:

 In Blog

In the fourth quarter, we delivered record billings and revenue, Consolidated Segment Operating Income of 48 million, and non-GAAP EPS of positive 4 cents. Gross billings increased 5% to 1.6 billion for the quarter, and increased 7% to 5.8 billion for the full year. Revenue increased 20% to 768 million for the quarter, and increased 10% to 2.6 billion for the full year. Adjusted EBITDA was 72 million for the quarter, and 287 million for the full year. And finally, for the full year, we delivered Consolidated Segment Operating Income of 197 million, and non-GAAP EPS of 11 cents.

First, North America posted another strong quarter. Billings in North America grew 10% to 789 million, revenue grew 18% to 444 million, and segment operating income improved from 17 million in Q4 of 2012, to 26 million this quarter.

The main takeaway here is how significantly our take rate improved on a year-over-year basis. Late in 2012, as you may recall, we tested a campaign where we dramatically reduced margins to drive billings. We overshot those efforts, which drove significant short-term billings, but reduced our operating income too aggressively.

This effect was most acutely felt in local, where billings were up 2% year-over-year compared with 13% last quarter. So why did Local growth in North America decelerate? After two quarters in a row of accelerating growth, the deceleration we saw in Q4 was directly related to the tough comp, as we stabilized margins in 2013 versus Q4 2012, when we were chasing billings growth without restraint. Growth in North America was also compressed by our transformation to Pull, our marketplace of deals, which has cannibalized part of our daily deal emails, as people are buying more Groupons just before they intend to use them, as I’ll discuss in a minute.

At the same time, our value proposition has never been stronger, with the highest unit demand we’ve ever seen, and a record number of deals on our platform.

Our Goods business posted strong growth in North America given the seasonally strong period, with billings increasing 19%, and revenue increasing 21%. The momentum was so strong that our distribution centers were flooded with orders during the holiday season, as we had record sales on Black Friday and Cyber Monday.

In addition to Goods, our travel business continued to post strong growth in North America. Getaways billings increased 38% in the quarter to 66 million, and increased 46% for the full year to 264 million. We believe Getaways has the potential to become a multi-billion dollar global business over time given the advantages we offer in terms of unbeatable pricing and curated inventory, which will include same-night hotel deals for our mobile audience.

Second, EMEA posted its best quarter ever on a number of fronts. Billings increased 6% for the quarter, to a record 566 million, in part due to an acceleration of our local business. Revenue growth flipped to positive after five quarters in a row of declines, growing 43% to a record 251 million, aided in part by a mix shift to more direct revenue. In addition, we generated 37 million in segment operating income in the quarter, up from 9 million in the fourth quarter of 2012. The improvement in EMEA is the result of over a year of hard work on One Playbook, where our investments in people, processes and systems are now firmly taking hold.

Third, we saw mixed results in Rest of World in Q4. Our year-over-year billings decline slowed from 21% in Q2, to 13% in Q3, to 11% this quarter, a large portion of which was currency related. As a result of take rates returning to historic levels, our Rest of World revenue decline went from 4% in Q3 to 15%, and the segment operating loss went from 2 million in Q3, back to 15 million. I think it’s important to understand what’s driving this decline. First, note that excluding F/X, billings only declined 2%, a sign that our Asian and Latin American businesses have largely stabilized from a transactional perspective. Second, we reduced our investment in unprofitable cities and sub-categories of deals roughly a year ago which also hurt our growth rate. Two key initiatives will reverse this decline over time. With the good progress we’ve made in EMEA, we will accelerate our focus on One Playbook in Rest of World, going one step further as we regionalize a number of our smaller markets in order to reduce our SG&A. Also, by integrating TMON, we gain necessary scale, as the acquisition effectively doubles the size of our Rest of World business.

As we narrow our focus on international markets where we think we can win, we’ve decided to limit our future investment in China. China is a market with extreme competition, where a committed local partner is essential in order to thrive.

We also made significant progress on our strategic initiatives in the quarter.

First, mobile. In Q4, we once again had record mobile growth. Our worldwide mobile business as measured by transactions, increased significantly to nearly 50% in December, more than a 10% gain in just 90 days. In addition, about 9 million people downloaded our apps worldwide in the quarter, bringing cumulative app downloads to nearly 70 million. Of the 9 million app downloads, over 80% were organic, as we have one of the highest rated apps in the market. We are seeing an acceleration of mobile adoption, even at our already high levels.

As we discussed last quarter, 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 worth more, but take longer to activate, which means we have a growing pool of potential untapped demand among people who have downloaded our app. In addition, as we have begun to shift a significant portion of our marketing spend toward driving mobile app downloads, instead of acquiring email subscribers, our local business has been affected. As we increase mobile activations in the next few quarters, we expect this trend to reverse itself.

Second, Local. Central to our operating plan, is that in order to win in mobile, you have to win in local, as mobile and local are inherently connected. Everything we do is with local in mind. While we have a significant advantage in local commerce given our scale, we have yet to truly deliver an experience that our customers can’t live without. To crack the code, we need to stay laser focused on the following:

First, we need the very best merchants choosing Groupon as the platform they want to use to promote their goods and services. In 2013, as we expanded our Pull marketplace, we were primarily focused on the number of merchants using Groupon, which helped us get over 140,000 deals on our platform. In a race to get coverage, we spent our time focused on total deal quantity in order to build scale, which we believe is a critical first step in creating a proprietary long term advantage in this market.

In 2014, we are increasing our focus on quality, with a campaign aimed at getting the best merchants on our platform. The good news is that our merchant community remains as strong as ever. Re-feature rates are stable, inbound inquiries are near all-time highs, and merchant satisfaction scores remain best in class. Our goal is that every great merchant is on Groupon.

Second, we need customers to have an amazing experience every time they use Groupon.

We still have too many customers that have a suboptimal experience because they forget to use their Groupon. We believe that unused Groupons are a drag on people’s willingness to buy more local deals from us. In order to solve this problem we need to:

First, get more of our customers using Pull, our marketplace of deals, through which we’ve seen more people buy and redeem in real-time.

And second, improve the actual redemption experience itself. We need to make the experience of using a Groupon easier than not using one. We believe the key to a seamless experience lies in having every merchant “plugged-in” to Groupon at all times—accessing our hundreds of millions of subscribers, largely through mobile, and creating a local commerce platform that truly connects the offline world to the online. We’re currently testing a new merchant technology that does exactly this right now, and while it’s early days, we believe it can be transformative.

The best way to imagine our local commerce platform is to think of a highway that connects our customers and our merchants. The types of deals that our merchants offer on our platform will become somewhat irrelevant; as in a highway can hold a truck, a car or a motorcycle. Likewise, we offer deals for restaurants, spas, home services, products, hotels, events, activities, and so on. We hope that in the future merchants will be connected to our platform as the primary tool that runs their business, brings new customers in the front door, and allows them to maximize their yield, to ensure they have the right customers coming in at the right time.

Next, PULL. Our vision is to make Groupon the place you start when you want to do or buy just about anything, anywhere, anytime. We want people “checking Groupon first” before they buy something, because we have the world’s largest marketplace of deals.

To build a thriving marketplace, we need to increase supply and demand, and do both in an orchestrated manner.

Let’s start with supply. At the end of Q4, our active deal count in North America was about 80,000 on average, and our worldwide deal count exceeded 140,000.

While we have good coverage in many categories in many markets, we still have far too many holes; we deliver too many null results and people can’t yet rely on our ability to deliver a great result every time they search. Groupon can’t be relevant some of the time. It has to be relevant, especially in local, all the time. To improve Pull, without sacrificing quality, we’re continuously enhancing our products.

The first example of this is a tool we call Deal Builder, which allows merchants to create their own deals and add them to our marketplace in a completely self-serve manner. Through Deal Builder, we’re adding hundreds of merchants a week without human intervention, and we expect this to scale to thousands at some point in the near future.

The second example is a product we call Freebies, our coupon offering. In addition to providing another way for national merchants to work with Groupon, Freebies gives shoppers an easy way to save money in online stores for their favorite brands. We’ve been very pleased with the early adoption. With more than 25,000 coupons available in the US today, from more than 5,000 brands, Freebies is giving customers another reason to check Groupon first, further positioning us as a destination for local commerce.

Yet while supply continues to grow, demand has taken longer to generate.

Despite the continued progress we’ve made to reduce our reliance on direct email, we have not created enough awareness in the market around Pull. The majority of our customers in North America still have no idea they can come to Groupon and search among our 80,000 deals in real time. For Pull to gain awareness, we need to fundamentally shift our consumer’s behavior. We need them to think about Groupon every time they have a need; every time they pull out their phone looking to buy something.

We believe that product enhancements, like Deal Builder and Freebies, along with our other marketing efforts, are necessary steps on our journey to fundamentally shift consumer behavior and train people to check Groupon first.

While we are still in the early stages of attracting new customers, we have started to see some changes in how our existing customers, especially our best customers, are interacting with us, and our emails.

Historically, people would open our emails, and given their time sensitive nature, if they didn’t act quickly, the deal would be gone. In a push world, like most flash sales businesses, the sense of urgency is embedded in the very sale itself; customers often tend to buy on impulse and hold onto their deals, often for months, before they’re ready to use them.

With Pull, many of our customers come to the site with the intention of using their Groupon now or in the immediate future. This has created shorter redemption cycles. In 2013, we saw total redemptions in North America local increase 20%. Since the beginning of the year, we’ve seen same day redemptions double, which is a significant shift in our business. In addition, we saw a nearly 30% reduction in the average number of unused Groupons per current month purchaser. So not only are we starting to see customers redeem faster, we’re seeing fewer people forget to use their Groupons.

The effect of our best customers being trained to search for deals and use them in real time is ultimately a good thing as the lifetime value of these customers is dramatically higher. If a customer has an expired Groupon, they are worth less to us. Yet similar to the effect of mobile, we believe this shift creates some short-term pressure on our growth rates in local by reducing the amount of front-loaded sales that occur as we remove the sense of urgency which was embedded in our impulse buy business. We’re literally training our local customers that it’s ok to hold off and buy a deal just before they actually intend to use it.

We believe that this trend is likely to be with us for a few more quarters until the positive effects from Pull outweigh the short-term pressure this transition creates for our local business.

The key to counter-balancing this is growing the total number of people who use our marketplace. In December, roughly 8% of our total traffic in North America searched for a deal on our site, a 25 percent increase in the last quarter alone, albeit from a relatively small base. Over that same period, customers that searched spent over 50% more than those that did not. Searchers are great, we just need more of them.

That said, we still believe our email business, we call Push, has room to grow. We send over 250 million emails every day to our subscribers, but today, our customers are less engaged with email in general. In our case, this is largely due to their migration to mobile, but it’s also due to the fact that despite all of our advancements, we still send far too many irrelevant emails.

That will change in 2014.

Through the release of a new widget-based email system, we call Mindstorm, we’re introducing new forms of merchandising into our emails so we can create assortments by category or theme, instead of by deal, thereby broadening the relevancy of our emails. The power of this technology is amazing, and we believe that over time it could enable us to generate as much revenue through one email as we used to generate through two or three.

Finally, I want to cover One Playbook, our initiative to bring our North American systems and processes to our international business.

To date, we have 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 globally. We have also deployed our in-house email platform to our largest countries and are making progress on rolling out Smart Deals and Deal Bank, the primary tools that drive personalization. We plan to exit 2014 on one platform across Europe and North America, our two largest regions.
The work we did in 2013 was instrumental to improving the health of our international business. We began 2013 with significant challenges in many of our largest international markets, and ended the year with a more stable and growing Europe, and a much healthier Rest of World.

2013 was a foundational year for Groupon. In summary –

We transformed our mobile business and added over 33 million app downloads this past year alone, increasing our mobile business to nearly 50% of our total transactions. We made good progress stabilizing our international business and returned EMEA to growth. We drove growth in North America while shifting to a more sustainable marketplace model as we expanded to over 140,000 deals worldwide. We added 4 million new customers, exceeded 650,000 merchants featured to date, and delivered record billings and revenues. We launched a new site and made important technology improvements across mobile, web, and email.

Five years ago, Groupon was a one dimensional tool for merchants to use as a means of attracting new customers. We had one tool in our toolbox – the daily deal email. Today, we are a radically different company, having built the foundation for Groupon to become a true local commerce platform. 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.

In 2014, we will double down on our progress over the past year, across 4 key areas by: Investing in growing our mobile customer base, accelerating activation and making Groupon a mobile first company, Delivering a better local commerce experience by getting the very best merchants onto our platform and improving the redemption experience for our customers, Continuing to build out our marketplace and get more of our customers using Pull, and Building on One Playbook so that every merchant and customer has the same experience working with Groupon globally.

If we’re successful on those fronts, we will have laid the foundation for Groupon to become an integral part of mobile commerce, and the place our customers start when they want to do or buy just about anything, anywhere, anytime.

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