Groupon (GRPN) Q2 2012 Earnings Call August 13, 2012 5:00 pm ET Executives Kartik Ramachandran Andrew D. Mason - Co-Founder, Chief Executive Officer and Director Jason E. Child - Chief Financial Officer Analysts Ralph Schackart - William Blair & Company L.L.C., Research Division Mark S. Mahaney - Citigroup Inc, Research Division Mark May - Barclays Capital, Research Division Clayton F. Moran - The Benchmark Company, LLC, Research Division Ross Sandler - Deutsche Bank AG Jason Maynard - Wells Fargo Securities, LLC, Research Division Spencer Wang - Crédit Suisse AG, Research Division Shawn C. Milne - Janney Montgomery Scott LLC, Research Division A. Justin Post - BofA Merrill Lynch, Research Division Presentation Operator
Now, I will turn the call over to Andrew.Andrew D. Mason Thank you, Kartik. Q2 was a solid quarter for Groupon. Total revenues grew to $568 million, that represents 53% growth excluding a $32 million unfavorable impact from foreign exchange. Operating income was $46 million compared with a loss of $101 million in the second quarter of last year. Before I get into the details, I'll call out a few more highlights. Gross billings were up 47% year-over-year, excluding FX, to $1.29 billion. North American revenue growth was 66% year-over-year, driven in part by demand in our burgeoning goods business. Weakness in our European markets, which comprised the majority of our international business today, created a significant drag on performance with over $70 million of impact on gross billings quarter-over-quarter. While macroeconomic factors did not help our performance in Europe, we believe there are a number of opportunities within our control that can improve our performance, which I'll discuss momentarily. We reported second quarter GAAP EPS of $0.04 and non-GAAP EPS of $0.08, both of which include some nonrecurring items that Jason will cover. Excluding nonrecurring items, non-GAAP EPS was $0.04. Finally, for the eighth time in a row, we ended this quarter with more cash than when we started, generating $49 million of free cash flow in Q2. This further strengthens our balance sheet, which had $1.2 billion of cash and no long-term debt as of June 30. Now I'd like to go into detail on 4 different topics: factors affecting our performance in Europe; our North American segment results; marketing efficiency; and technology. Let's start with Europe. We are exiting a period of historic growth rates in our international segment. Since we expanded outside of North America in 2010, our business grew by nearly 10x in its first full year from just over $250 million in gross billings to nearly $2.5 billion at the end of 2011.
The majority of our international business remains concentrated in our most developed overseas markets, which are in Western Europe. We grew our presence in Europe rapidly through either acquisition or rapid country expansion, allowing us to quickly capture market share in an industry in which scale economies and leverage are critically valuable and thus, secure a true first-mover advantage.While the benefits of this approach are clear given our leadership position in most international markets, it also means we have some key disparities with other markets to address, including tuning our deal mix, balancing customer and merchant value and leveraging both technology and learnings from our more developed markets. First, the mix of deals we feature can have a substantial impact on performance especially in times of macroeconomic volatility. We have a larger mix of high price point offers in our European markets than in North America. While deals such as laser hair removal and luxury hotel stays in Monaco give Groupon an element of serendipitous discovery that is key to our brand, we have also found that these more discretionary offers are more susceptible to negative demand elasticity over the past few quarters as macroeconomic conditions have deteriorated. These effects have been felt to various degrees across all of our markets, resulting in a general stabilizing in our per customer spend measurements worldwide. In Q2, our trailing 12-month gross billings per average active customer was down 5% year-over-year, coming in at about $165 per customer on a global basis. While the macroeconomic pressures in Europe over the past few months are reasonably well understood, we believe that we are not totally dependent on a macroeconomic turnaround to improve the performance of our European business. One specific action we are taking, and this leads to opportunity number two, is to better balance our customer and merchant value proposition in Europe. Using the same ForeSee methodology that recently ranked our U.S. merchants among the happiest of all online B2B companies participating in their survey, we found that our merchant satisfaction score in Europe was about 25 points lower than here at home. Read the rest of this transcript for free on seekingalpha.com