Operator: Good day, everyone. Welcome to the Groupon's Fourth Quarter and Full Year 2012 Financial Results Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the Company's formal remarks. Today's conference call is being recorded.
For opening remarks, I'd like to turn the call over to the Senior Director of Investor Relations, Genny Konz. Please go ahead.
Genny Konz - IR: Hello, and welcome to our fourth quarter and full year 2012 financial results conference call. On the call are Andrew Mason, our CEO; and Jason Child, our CFO; in addition, Kal Raman, our Chief Operating Officer will join us today. The following discussion and responses to your questions reflect management's views as of today February 27, 2013, 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 10-K.
During this call, we will discuss certain non-GAAP financial measures in our press release and our filings with the SEC each of which is posted on our IR website. You will find additional disclosures regarding non-GAAP measures including reconciliations of these measures with GAAP measures. 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 - CEO: Thanks, Genny. Q4 provided the best evidence yet that customers love Groupon. First and foremost, we had our strongest sequential increase in absolute billings dollars in our history growing more than $300 million stronger than our previous record by over $40 million and growth reaccelerated to 25% quarter-over-quarter.
The billings growth was across the board with local travel and goods both in North America and international all seeing strong sequential increases. We also set a new unit sales record in Q4 exceeding $50 million sold for the first time. This is proof once again of the power of our buying platform and network that didn't exist just a little over four years ago and now supports over $5 billion of commerce.
Executing on our belief that scale does matter in this business, our results reflect a deliberate and aggressive focus on growth of our platform and segment market share as well as our willingness to trade-off short-term operating profitability. We expect our operating margins to improve in 2013 as we fine-tune our take rates and automate manual processes that will significantly improve our cost structure going forward. We are also reiterating the long-term operating margin targets that we've shared with you previously.
Excluding stock-based compensation and acquisition0related expenses, our operating profit came in at $14 million in Q4. There were three main drivers of what we expect to be a temporary reduction in operating margins. First, Q4 is a seasonally strong quarter for our goods business. As we've discussed before growth of goods, the direct portion of which carries lower margins has impacted our overall margins as it has grown materially over the last few quarters reaching an impressive $2 billion annual billings run rate in Q4. Second, we reduced local margins in the quarter as part of an aggressive campaign to drive growth by attracting more top merchants to Groupon.
While we believe marketing will always be an effective growth lever for us, our results show that it is not the only way to accelerate top line. By lowering deal margins, we created more value for our merchants, which enabled us to improve our merchant and deal quality. These actions not only drove demand that improve the customer experience, but also helped us make some of our largest ever sequential gains in North America's segment market share in Q4. These strategic factors were anticipated. It was the continued volatility in our international business that drove the weaker than expected profitability in the quarter, including several charges that we do not expect in Q1 and beyond. We still have much work to do to bring our international operations to the same level of those in North America. Despite lower profitability in the quarter, we saw healthy demand. Global units grew 21% year-over-year. Mobile continued to grow rapidly with nearly 40% of North American transactions now on mobile devices, up 44% compared to a year ago, and the search marketplace we recently launched and highlighted in last quarter's call is helping to decrease our dependence on the inbox.
In North America, for example, e-mail and this includes mobile e-mail, now drives less than 50% of our transactions, 12% lower than even last quarter. In addition, about 50% of local transaction volumes comes not from the new deals that we launched in a given day, but from our Deal Bank which is our virtual deal inventory. We continue to recruit new inventory to support the Deal Bank and the search experience and have grown the number of active deals in North America, almost 300% year-over-year to nearly 37,000 at the end of the fourth quarter It's hard to believe that just a short time ago, we were a deal-a-day business.
As you can see, our business continues to evolve at a breakneck pace, just look at the scope of the changes in the last year, from skyrocketing growth in mobile to about half of our local purchase volume in North America coming from Deal Bank to changes in the competitive landscape to the trends in our international segment, to hitting a $2 billion annual billings run rate in the goods business, which is just a year and half old. Most of these changes are good for Groupon as evidenced by our reaccelerating growth and strengthening market leadership position, but they drive short-term volatility in the business.
So, while we are in somewhat uncharted waters with multiple large scale and fast growing businesses, I want to be clear that our vision to be the operating system for local commerce remains at our core. There is no one better positioned than Groupon to meet the needs of consumers and merchants in today's $3 trillion local marketplace. That we are also rapidly becoming a leader and created E-Commerce in parallel is a clear vote of confidence from our 41 million active customers and a hint of the size of the opportunity that lies ahead.
Before Jason joins us I'd like to welcome Kal Raman, our Chief Operating Officer to provide an overview of the actions he is driving to improve efficiency in our cost structure.
Kal Raman - COO: Thanks, Andrew. Before I dig in I just want to say a quick hello to those of you whom I haven't met. As Andrew mentioned, today I want to talk about Groupon's evolving cost structure. I will also provide a brief update on the turnaround of our international segment. When I arrived 9 months ago, one of my top priorities was to turn innovation inward to automate and optimize many of our internal processes.
Based on my experience at Walmart, Drugstore.com, Amazon.com and GlobalScholar I immediately signed Groupon an amazing business that it relate on hiring people very quickly. As a matter of fact an incredible 10,000 people distributed across more than 500 markets in 48 countries in its first three years, in art of scale and grow its market leadership position.
Also I saw that Groupon was overflowing with opportunities to operate faster and more efficiently by automating the manual processes and improving the experience for our merchants and consumers. Bottom line I saw the opportunity to do more with less and sustainably improve our cost structure.
I of course also saw a bit challenge. Let me provide few anecdotes that got me really excited about this opportunity. We had hundreds of people spending their days copying and pasting data from external systems into our customer relationship management system and city managers doing that market planning on whiteboards and in excel spreadsheets. There was a common ratio when comparing our segments that's 2 to 1. The number of individuals that touch a deal in international is more than twice that of North America. The average sales rep in North America drives more than two times the sales than the representatives in international. There is an enormous opportunity to organize Groupon's operations to be both more efficient and get us closer to our merchants. I am very pleased with the progress we are making.
In the last nine months, we have released a suite of internal productivity tools that span our sales cycle from identifying to qualifying to closing the best merchants. We have already begun to realize the benefits with significant improvement in productivity North America over the course of 2012. We expect the early success we have had with our automation efforts to continue and we also believe improved efficiency will be reflected in significant SG&A leverage for the next few years.
Turning to our International business; we still have our work cut out. My focus is on technology and improving efficiency, which supports Groupon's top priority for 2013, we call it, 'one playbook' rolling out the consumer and merchant experience that have driven growth in North America over the last two years. We have made some progress in our International segment. Merchant and customer satisfaction scores have improved in almost every country over the last six months. The rollout of our internal tools suite is well underway. Our personalization technologies, Smart Deals is live in the U.K. and will be rolled out in most top European markets by Q2 of this year. While European productivity reached an all-time high in Q4, it still significantly lags in the United States.
The tools and processes we recently put in place will both make us more nimble and efficient in our day to day work and it'll also allow us to substantially reduce cost and the headcount leverage we have over time.
We believe that we'll be able to sustainably reduce our cost structure in the first half of 2013. Of course, we'll keep you posted on the progress on this front.
Our work on the international turnaround is very much a work in progress and you should expect that it will take us some time, but I feel very good about the early progress we have made.
Now, I'll turn it over to Jason Child, to take you through the numbers.
Jason Child - CFO: Thanks, Kal. With our detailed results available in this afternoon's press release, I'm going to run through the highlights of our performance and then provide our outlook for the first quarter of 2013. Please note that all comparisons refer to year-over-year growth unless specifically stated otherwise. Despite some operational challenges, 2012 was a solid year for Groupon overall.
Billings or platform growth of 35% or 40%, excluding foreign exchange, was about in line with our expectations at the time of the IPO, a little over a year ago and we reached operating profitability for the first time for a full year with both the North America and international segments posting annual operating profits.
Now, let me turn to some highlights for Q4. Gross billings grew 25%, excluding FX. Again, this was the strongest sequential increase in absolute dollars that we've ever seen, as well as the strongest sequential percent growth we've seen in six quarters. Excluding FX, North America led the growth up 52%, while international is up 9%. Revenues grew 31% excluding FX due to the growth of direct revenue which is accounted for on a gross basis. Strong performance in North America was offset by declines in international.
We reported an operating loss of $12.9 million in Q4 including 26.6 million of stock-based compensation and acquisition related expenses and 16 million of depreciation and amortization compared with an operating loss of 15 million in the fourth quarter of 2011. North America segment operating margin was 4.5%. International segment operating margin came in at negative 1.3%. The segments include an $8.5 million impact of an update to our intercompany headquarters allocation which resulted in a one-time increase to North American OpEx and a corresponding decrease to international OpEx. We've recorded a net loss for the quarter of 81.1 million or $0.12 per share reflecting 26.6 million of stock-based compensation and acquisition related expenses and the share count of 655.7 million. This compared with the loss of 65.4 million or loss of $0.12 in the fourth quarter of 2011. Excluding a $0.07 charge in the fourth quarter of 2012 related to a non-operating item, the loss per share improved $0.07 year-over-year to $0.05. I'll discuss this further in a moment. Free cash flow in Q4 was 25.7 million bringing free cash flow for the trailing 12 months to 171 million. Cash flow in the quarter was impacted by seasonal investments in goods inventory as well as reductions in payable days especially in Europe.
Finally as of December 31 we had 1.2 billion in cash and no long term borrowings. Our cash balance increased versus last quarter as it has every quarter since being a public company. We continue to be pleased with our flexibility and strong balance sheet.
Turning to some key operational metrics. Global units defined as vouchers and products ordered before cancellations and refunds exceeded $50 million for the first time in fourth quarter growing 21% year-over-year and 19% versus last quarter which is the strongest sequential growth we've seen in six quarters.
Now, I'll turn to our primary top line drivers, our customers and how much they spend. Our active customer count grew 22% to $41 million with gross customer additions partially offset by higher customer inactivations. For the first time, this quarter we're breaking out active customer count by segment.
For North America, our active customer count also grew 22% year-over-year to $17.2 million in fourth quarter. For international, it grew 21% to $23.8 million. The detail for historical quarters can be found in our press release.
Trailing 12-month billings per average active customer declined 23% year-over-year and 3% quarter-over-quarter to $144 on a global basis. Sequential improvement in North America was more than offset by decline in international. While the TTI metric is a good long-term indicator of wallet share, it combines the FX of our four quarters does not capture the strong sequential growth we saw in the last quarter. We're looking at the metric on one quarter basis provides a different result. With sequential lift from $31 and $38 driven by billings reacceleration in both segments.
Now I want to provide some additional color on a few items. First, let me speak to the operating profit decline versus last quarter. In addition, to continued challenges in international and growth of the lower margin direct business, our margins were impacted by our conscious decision to invest in the growth of our local merchant days and test supply elasticity by fluxing deal margins. This contributed to strong sequential billings growth as well as solid double-digit growth in both active deals and units in North America and overall improvement in deal quality metrics. As Andrew mentioned, we'll fine-tune our take rates further in 2013. We've refined our approach as we exited the quarter and expect local margins to increase in Q1. Also, as a reminder, our third quarter was benefitted by an $18.5 million one-time true up in breakage due to a German tax ruling.
Second, global revenue growth was driven entirely by an $80 million quarter-over-quarter increase in direct revenues or those related to the business for which we take title to inventory and sell product directly to the consumer. Third party revenues are those accounted for a net basis that are related to sales for which we act as an agent for the merchant declined about 2% globally quarter-over-quarter, but let's focus on North American revenue growth for a minute. While we continue to be very pleased with the growth of direct revenues, which are primarily related to the goods business, it's important to understand what we're seeing in third party revenues, as more than 80% are related to our local business. Third party revenues increased 5% quarter-over-quarter in North America in Q4, while local revenue growth was impacted by margin reductions. It grew nicely on a platform basis, and in fact, local unit growth accelerated from 6% quarter-over-quarter in Q3 to 20% quarter-over-quarter in Q4. Even more impressive year-over-year local unit growth accelerated from 3% in Q3 to 25% in Q4, both quarter-over-quarter and year-over-year growth were offset in part by declines in purchase price. Third, recall that we broke out direct versus third party cost of revenue for the first time last quarter, in order to give visibility into the margin structure of the direct business.
In addition to cost of inventory and shipping that are specifically attributable to direct revenue transactions, we've allocated other variable costs such as editorial, technology and web hosting, based on relative gross billings. Direct continues to comprise the majority of cost of revenue. On a consolidated basis, the margin after all variable cost was 3% for direct and 85% for third party. As you compare them note that direct gross margin include revenue and costs for shipping as well as the cost of fulfillment, while third party margins are relatively high as they do not include the significant cost of our sales force recorded within SG&A.
I also want to comment quickly on the sequential decline in direct margins. Specifically North America dropped from 13% last quarter to 6% this quarter, driven mostly by higher holiday discounts. International direct margins were negative 40% in the quarter compared to negative 1% last quarter. Keep in mind that international direct revenue is only 16 million and was influenced by a small number of negative margin strategic deals. We expect international direct gross margins to look more like those of North America over time. We also believe we are on track to achieve our long-term target for operating margin, excluding stock-based compensation and acquisition-related expenses of high-single-digits for the direct business and 25% to 30% for the third-party business.
The high-single-digit target for direct assumes little overhead costs given the low relative support requirements of the business. Given all the moving pieces here we've included an illustrative P&L that builds to these targets in the slides posted on our website. Keep in mind though, as we run the business these targets are not timed out, particularly as we invest for the long-term and we manage to absolute dollar rather than the margins.
Fourth, we've recorded a 56 million pre-tax non-operating gain in Q2 related to the exchange of our minority interest in our China operations for our minority position of Life Media Limited or FTuan, a leading competitor. The investment remains on our books today as a cost method investment and is monitored continuously for impairment. The latest financial projections received from FTuan indicate significant declines in forecasted revenues compared to the original expectations on which our investment was based due to the intense competitive environment. As a result, we recorded a $50.6 million pre-tax impairment charge in the fourth quarter which represents the reduction at fair market value from $128.1 million at the time of our original investment. The loss was recorded within the interest and other income net line item and our P&L. Given the gain that we recorded in Q2, there is no material pre-tax impact for the full year.
Finally, as it pertains to the material weakness designation that arose in connection with last year's audit, we're pleased to share that we have concluded that our internal controls over financial reporting are effective as of December 31. The effectiveness of our internal controls was tested by our auditors as part of this year's year-end audit as required for all public companies.
Turning now to our outlook. As you have heard today, we're focused on accelerating growth, reducing our cost structure to drive improved profitability and replicating our North American play book in international. Our guidance takes into consideration all the moving pieces as well as the rapid evolution and volatility of a business that is just over four years old and operating in 48 countries.
It should now be clear that we're optimizing for growth which may involve trade-ups in the future between top line and operating income. As always, our results are inherently unpredictable and maybe materially affected by many factors including a high level of uncertainty surrounding the global economy and consumer spending as well as exchange rate fluctuation. Keeping in mind that the fourth quarter was a seasonally strong quarter for goods, for Q1, 2013 we expect revenue of between $560 million and $610 million as the mix of local increases.
For the first quarter, we expect between an operating loss of $10 million and operating income of $10 million. Our outlook includes $30 million of stock-based compensation expense. We do currently anticipate any material acquisition related expenses in the first quarter.
Now, for the full year. We are still in early stages of automation, as we made continued progress we expect to make substantial efficiencies in our cost structure throughout 2013, particularly in the international business. As such we currently expect that global operating income in 2013 will exceed that of 2012.
With that, I'm going to turn it back to Andrew now for some closing comments.
Andrew Mason - CEO: We started Groupon in 2008 with a very simple value proposition. Every day we send you something great to do, see, eat or buy and make it available at 50% to 90% off. Since then, we've made dramatic improvements to that value propositions. Smart deals makes our e-mails far more relevant. We've expanded into new categories, now it's the infrastructure to procure not only local but also product and travel deals, adding freshness and variety to the Groupon experience and ensuring that Groupon never becomes boring for our customers.
We built a mobile experience that many people prefer to our web experience has reflected in the massive shifts in usage patterns and we've begun the process of moving beyond the inbox with a searchable market place and inventory system that now accounts for about 50% of our local transaction volume in North America. These innovations helped us bring in a solid close to a great 2012 for Groupon. 35% growth in billings, 45% growth in revenue, 20% growth in units, 22% growth in active customers, our first full year of operating profitability and a fourth quarter of that while operating margins have temporarily contracted shows powerful signs of customer demand for what we've built. Despite their unpredictability at times, when you take a step back, we're quite proud of these numbers.
2013 will bring sharp focus to the customer and merchant experiences, which we believe is the healthiest and most durable way to grow our platform in the Company. As we sit today, we remain better positioned than any Company in the world, to plug local commerce into the web. There are 60 million local merchants worldwide, 18 million of those merchants are in our core categories. Of these, we have contacted 2 million in our lifetime and we have featured more than 500,000. So, while we're the largest player in local commerce, we're just getting started. There is significant conditional headroom for growth.
With that, I'll turn it over to the operator for some questions..
Operator: Ross Sandler, Deutsche Bank.
Ross Sandler - Deutsche Bank: Jason, you said just a second ago that CSOI will be up in 2012. Can you also just help us with from a planning perspective, what kind of billings growth and gross profit growth would need to be achieved to hit that goal? And then the second question is CapEx was up to about 40 million in the fourth quarter that was above prior run rate with their additional capitalized software in there and what do you think the cash flow run rate will look like going forward?
Jason Child - CFO: In terms of giving long-term guidance beyond operating income it is just not something that I am going to be able to give – to provide at this point. What I can say is we do expect that there will be – the profit will come from – the combination of both growth as well as improvements in operating leverage through, I'd say, tightening our cost structure as we are continuing to roll out automation specifically in our international markets. In terms of the question about CapEx, you are right. The largest increase was because of capitalized software and much of that has to do with the efforts that you've seen or I think we talked just a moment ago about some of the efforts with the (pool) business where we've done a lot of work from a technology perspective and those costs we are capitalizing and now you are starting to see the amortization increase with those efforts. And then I think there was also some additional costs that come from increasing storage capacity and data centers. And then I'd say the last thing is, finalizing kind of the implementation of our international headquarters in Switzerland, which went live at the end of Q4 was another piece of kind of the build out. In terms of cash flow guidance going forward, I haven’t – we're not providing specific guidance, I would say you should continue to think about cash flow trending similarly with CSOI or operating income less stock-based compensation and with any increase in CapEx offset largely by working capital.
Operator: Justin Post, Merrill Lynch.
Justin Post - Merrill Lynch: Couple of questions. First, can you talk a little bit about the goods margins, obviously 3% in the quarter? I saw your long-term outlook slide is much higher. How do you get there and what kind of sourcing do you need to do to kind of get those higher? And then for the guidance for the first quarter, I guess, it's suggesting that the third-party business is up sequentially. What's going to really help profitability in the first quarter?
Jason Child - CFO: So, first on the direct margins, let me kind of break that apart. We had a 6% direct margin in North America and that is down from last quarter, although it's roughly 13%. The reason that you saw a reduction was primarily due to the goods business where from a seasonal perspective we had a higher of lower margin product very much related to kind of the seasonal push on the types of products we wanted to sell and the customers clearly had shown an indication to buy. But then also we implemented a free shipping program as well and so those were the key aspects. I think you should still expect that our long-term operation margin is still expected to be in the high single digits. When you do, one thing I want to make sure it's clear is when you look at the 6% in North America, make sure that when you're comparing that to any other eCommerce companies. This does include shipping, it includes all fulfillment cost, inventory cost, even processing, email distribution cost. It includes basically everything but an allocation of the direct headcount cost to run a team as well as some marketing allocation. So, there's not a lot below that line to get to operating income. Now, the other piece was international, which was actually negative. Now, the international direct forces are very small. It's only about 15 million and it was negative because o basically some strategic deals that we sold below cost for seasonal, having a couple of seasonally strong offerings in some of the newer markets for a good, very early stage business. Moving on to your next question. Actually can you remind me what was the guidance question? It was mix?
Justin Post - Merrill Lynch: You're expecting the third party business to maybe improve sequentially to help overall operating margins is that right and what kind of growth are you hoping for in the third party business in Q1 versus Q4?
Andrew Mason - CEO: That's exactly right. We are expecting that you will see, I would say, solid growth in the third party business, and we would expect it to accelerate from what we saw in Q4. That's a less seasonal business for us. That will be offset by a bigger reduction in the goods business, which, now that it's $2 billion run rate, seasonality is now becoming a factor given we're at that scale. As far as result, when you see the reduction in the lower margin goods business offset by the acceleration or higher margin third-party business, that's why we expect to see improved operating leverage in Q1 versus Q4.
Operator: Heath Terry, Goldman Sachs.
Heath Terry - Goldman Sachs: I guess one question, first for Kal; Kal as you look at Groupon's sort of geographic footprint relative to the cost initiatives that you've got in the year ahead. How do you think about the footprint that Groupon carries versus the prior eCommerce businesses that you've been around? Then Jason having gone through the process of resolving the material weaknesses, I guess could you give us a sense to the extent that there was sort of one kind costs in 2012, involved in resolving those weaknesses, to what degree we shouldn't expect to see those in 2013? Then now that you've got those resolved, what you feel like you're going to be able to do either from a disclosure or management standpoint that you weren't able to do before?
Kal Raman - COO: That is an excellent question. Groupon; we are doing something which is unprecedented in the world. We are not building a company, we are building a category and simultaneously we are building it all over the world. It really forces a huge issue on executive bandwidth, if we don't have the processes and controls alike everywhere. One of the biggest initiative we have for this year is about getting the processes and efficiencies which I call as, 'one playbook', is what we are fully focused on, and rolling them out worldwide and as we get there I think the executive bandwidth, we would need to exploit the cent percent opportunity would be a lot lesser than what it has been in the last two years, but simultaneously, we are continuing to evaluate not just countries, we are continuing to evaluate every single market, every single city we are in and to make sure that we are able to take care of the merchants and customers, more importantly our shareholders, while operating in each one of them. So this is an evolving question. This is a question we continue to ask ourselves every week, every month, every quarter and we believe – we are in the right place right now, and as we roll out our one playbook in 2013, we'll continue to evaluate it again and again to make sure that we've been the best value for our merchant customers and shareholders.
Jason Child - CFO: Heath on your second question about the material weakness. I guess there's two things going on this year. One we were working the material weakness, but we're also implementing Sarbanes–Oxley or SOX as it's our first full year as a public company. So, I would say, we feel great about the progress we've made. In terms of how that's going to affect things going forward, I would say one, from a cost perspective a lot of the cost that saw had more to do with implementing Sarbanes–Oxley across 48 countries as opposed to the material weakness which is really specifically around a financial statement closed process. So it was really around a very small portion of the overall Sarbanes–Oxley efforts. So I think the impacts, you could see some reduced SG&A cost as a result of that effort that was mostly a 2012 effort and then that also allows for us, it allows the auto-process to be a little less intense as they now – the order is coming alive and the integrity, the financial statement close process and have to do less auditing as a result. In terms of disclosure, it shouldn't impact the disclosure at all actually going forward.
Operator: Shawn Milne, Janney.
Shawn Milne - Janney: My question, just wanted to see if I could get a little bit more color on the North American take rate just in the third-party business. You mentioned that you attested some things and you're trying different take rates during the quarter. I think in the prior calls, you'd said those have been pretty steady. I just wanted to understand the thought process around that and how we should think about that going forward?
Andrew Mason - CEO: So, what you see in the fourth quarter in North America in the local business is investments in our strategy to increase the selection on our platform. Again, we've increased our active deal counts in North America by over 300% in the last year, because we think it delivers a more relevant experience for consumers and is in pursuit of our searchable marketplace strategy where customers can come and find deals on demand and not just have them emailed to them. So, part of that strategy is ensuring that we bring in new high-quality merchants and that all of our merchants are comfortable having inventory available in a persistent manner on our marketplace and the results are why we're seeing such strong numbers in the local business, in terms of unit growth and overall demand billings growth in the fourth quarter and through our guidance expecting that to accelerate even further into Q1. In the fourth quarter because of some of these changes we have added more merchants to our platform than I believe any quarter in history. And on top of that we in the fourth quarter, the merchants that we signed 84% of them are in our deal bank inventory and still running deals today in our marketplace.
Kal Raman - COO: And, Sean, one last point we have given a long-term guidance of local take rates to be at the high end of 30% to 40%. And we believe as a result of this exercises we are very comfortable with the long-term guidance we have given on the local take rate in the 30% to 40% range.
Operator: Arvind Bhatia, Sterne Agee.
Arvind Bhatia - Sterne Agee: I wanted to see what your thoughts are on as we move more towards search marketing; one, what the impact is on the cost and also how does that impact customer's sense of urgency in buying the local deal knowing that deal might always be there in your deal vault, if you will. Do you sense that a customer then therefore delays the purchase decision as a result?
Andrew Mason - CEO: I'll start with the latter and I'll let Jason take your question about cost. When we started this business in the first months of 2008 that sense of urgency of a deal being available for 24 hours might have played a role in the people's purchase decision. But all the research that we have done that has informed this strategy has thought us that through the proliferation of competitors and the available of multiple deals through many different sources as the space took off, that became less of an influencing factor in people's purchasing decision. Like, the reason that people buy Groupon is not some gain mechanics, it's because of the real value that these offers provide. So, in the same way that we just believe that the potential of a local marketplace business where you can fulfill demand instead shocking people into buying something they have no intention to buy when they woke in the morning, with which we've built a great business on top of and only making it available for 24 hours is just a much larger business opportunity. The numbers which I just articulated as part of the prior question reflect that. Can you restate the question on the cost?
Arvind Bhatia - Sterne Agee: You're going to try to pull people towards your website show up more on search engine marketing type situations. What is the cost of that to your marketing?
Andrew Mason - CEO: Yeah, I would think of that cost is being backed into our marketing targets and that is what you're talking about is more of transactional marketing as opposed to what we've been doing a lot in the past which is subscription or marketing to try to drive someone to sign up on the list as opposed to being driven to the site to purchase, but in terms of the overall dollar spend on marketing, we allocate those dollars based on whatever the next highest ROI is or the incremental ROI and the current infrastructure that we have around driving more SEM, I would say is still relatively small and it's mainly been constrained by the size of the overall inventory of deals. In other words, the more deal inventory you have, the more turns that you could buy and then therefore the more likely potential SEM revenue you can purchase. So, as we increased the total inventory from roughly a little less than 10,000 deals a year ago, now to up to, I think it's around 37,000, we're going to hopefully start to be able to continue to increase that capability. In terms of the overall spend rates, we've told people historically that we expect to spend roughly 20% of revenue on a third party basis on marketing and more like 8% on a direct basis. So, 8% and 20% by the way are on a billings basis. They're both about 8%. So, it's the difference of the take rate assumption. So, we expect to still stay within those guidelines. Obviously we spend a lot less than this most recent quarter, and so, as we see the ability to drive more marketing spend to drive growth, we will plan on doing that.
Arvind Bhatia - Sterne Agee: One sort of clarification, the comment you guys made about operating income growth in '13 versus '12. Based on your first quarter guidance, it implies that you're looking for significant acceleration in the quarters after the first quarter. Is that mainly as a result of better take rates or is there more to it?
Andrew Mason - CEO: I would say there's a couple of things. There's the combination of increasing growth in the local business, specifically which is the highest margin business, we have. You're going to see that business accelerate into Q1 and then the lower margin goods business, specifically the direct portion will decelerate as I mentioned earlier because of the seasonality, the seasonal effect coming up off Q4 going into Q1. So, that's going to help in Q1 but going forward we expect that because of things we've talked about with mobile and with pull you are going to continue to see the local business continue to grow. So, there will be overall growth that helps. There is some aspect of stabilizing take rates in the local business where in Q4 we adjusted down a bit more than we did at the end of the quarter. And so as we've been flexing and kind of trying to learn the elasticity on the revenue margin or tax rate we are confident that as we exited the quarter with the higher take rate that will allow us to have high take rates overall in the local business and within third party in Q1 versus what you saw in Q4. The last piece, let me just add one more piece, Arvind, and that is – the last piece is Kal talked a little bit about how as we increase automation you are also going to see us reduce our cost structure. I also mentioned I think a few minutes earlier to Heath Terry's question we're also going to have less I'd call it kind of public company classes where now path to sox compliance in the material (indiscernible) remediation. So, there will be some improvement in cost structure as a percentage of revenue as well.
Operator: Jordan Rohan, Stifel Nicolaus.
Jordan Rohan - Stifel Nicolaus: A question for Tal. I am wondering how you make sense of being in 500 different markets and 48 different countries and clearly profitability would have to be higher if the bottom 10% or 20% of these markets were exited. How do you think about when those markets turn profitable and whether you guys have gone a little bit too far to manage sometime on a long-term profitability basis. Secondly, marketing is down a ton I think it is 60% year-on-year, but you guys still came in a little bit shy of profit expectations or significantly shy. How does this trend reverse? What's going to make that happen?
Kal Raman - COO: I think that's a fantastic question, so 500 markets, 48 countries. We did grow way too fast and I would (wait too) many people, because we did wanted to gain market segment shares and we do have significant market segment share in most of the countries. We are on a constant exercise on a regular basis to make sure that now at a country level, at an every single market level do we have the right variable cost which would justify the right leverage or the top 11 leverage. We are going through that exercise as a part of the one playbook for our international markets and we will continue to flex it in a way that we are there to take care of the merchants and customers and our shareholders in the right way and it will be an evolving process. Like I said, the international, it's a turnaround. We're very happy with the progress, but by most – in terms of imagination it is done in one quarter or it will be done in one quarter. But the progress we have made in the last quarter, John, the acceleration in billings which is highest in the last five quarters. The productivity has been the highest. We have accomplished that while taking care of our merchants and customers because our merchant satisfaction, customer satisfaction scores have been the highest ever too, do you see lots of confidence that we can not only grow, we can grow in a fiscally responsible way and given it around investment to shareholders. On the marketing question, I'm going to ask Andrew to jump in and answer with me on that.
Andrew Mason - CEO: Sure. So, what you saw in the fourth quarter was the result of our recognition, that there's a few different ways that we can drive growth in this business. we can invest in marketing, that's one way, another lever that we have is passing savings back to our merchants and customers through reducing – through passing savings along the merchants, bringing higher quality merchant selling to the platform, that attract more customers. That is a reflection of our strategy to become a marketplace with a wide selection of deals, and we've seen the results pay off in having a record quarter in terms of unit and billings growth, with some of the strongest sequential growth that we've ever seen. So, we're expecting to use these two levers to continue to grow billings and revenues into 2013.
Operator: Brian Pitz, Jefferies.
Brian Pitz - Jefferies: You discussed direct revenue growth earlier. Any additional color on key drivers of direct revenue growth in each region internationally and also I may have missed it, but any update on average customer acquisition cost and LTV.
Andrew Mason - CEO: So we said that we hit about $2 billion run rate in the goods business overall. So, roughly $500 million for Q4. The direct revenue was roughly $225 million globally. So, within that, about $15 million of it was – a little less than $15 million was in the international business. The remainder was in North America. Did that answer your question?
Brian Pitz - Jefferies: The question was more the color on drivers of that international growth.
Jason Child - CFO: The international revenue is very small. It's only 15%. The reason why it's very small is, because we have not implemented all the same processes and the network around the third-party logistic partnerships, like we have in the U.S. or we have a group of preferred partners, which allows us to take ownership of inventory and handle the full customer experience. As we expand those relationships internationally, you should expect to see that number grow from the $15 million which was up just slightly from what it was the previous quarter, but that's going to be later in 2013.
Brian Pitz - Jefferies: Just any updates on customer acquisition cost in lifetime value?
Jason Child - CFO: Well, in terms of the acquisition cost, I mean, if you use the marketing numbers on the phase of the financials and the customers, the customer growth, you could extrapolate that it was down around I'd say over 50% year-on-year. We actually put in the earnings release that it was actually down 61% year-on-year.
Operator: Rohit Kulkarni, Citi.
Rohit Kulkarni - Citi: On mobile, 80% of your business in North America coming from there. Any additional color you can talk about on customers acquired through mobile, how valuable they are, whether they spend more versus other, as they're going to look forward to other channels? Second, any addition, nobody can give on Groupon now and get away?
Andrew Mason - CEO: Sure. I will take the questions on Now and Mobile and pass it over to Kal for Getaways. So, mobile users as we said in the past are better customers for Groupon than non-mobile customers with the data this is very clear. They have a higher life time value, retention is higher of these customer. So the transition to mobile is a very good thing for Groupon. We've also seen it as a core component of our strategy to move from push email marketing to pull marketplace marketing and the massive shift in consumer behavior towards mobile is ton if the clear signs that we see that our strategy is working and resonating with customers. Groupon Now; what you are seeing with our market search marketplace strategy is the evolution of Groupon Now, and we see numerable signs that it is resonating with customers. Now, over 50% of transaction in our local North American business are not from deals that we launched in a given day but from deals in our deal bank virtual inventory system. So, the investments that we've been making and selection are paying off. We've also seen a large increase in the percentage of transactions that are customers seeking out Groupon, going direct to Groupon and not being driven through a push email. Kal, do you want to talk about Gathways?
Kal Raman - COO: Getaways is a fantastic segment for Groupon and the business is fairly new, it has been around for little over a year. Our customers have been playing extremely well to look for curated deals with unbeatable value and we shocked them into buying things, they never thought when they wake up in the morning. Travel is actually a best way to shock people into taking vacation or buying the deals they want to buy and that business, we expect that to be a meaningful percentage of our business in the long run, but it is going to aid our third-party business in a very positive way and we are very happy with the progress we are making. It is too early to declare victory or too early to report numbers on that as we talk.
Operator: Tom White, Macquarie.
Thomas White - Macquarie: On the local deal margins, it seems like in the fourth quarter, you guys made some concessions there to bring people or more merchants, high-quality merchants out on the platform. Where are we in that process internationally? Do you guys feel like you've sort of balanced the members versus merchant experience there or do we still have a few innings to go sort of balancing that out? Then just secondly on goods, I was wondering if you guys are starting to see any signs of maybe trouble procuring just kind of inventory from manufacturers and retailers as the macro seems to stabilize or how should we think about that if the macro continues to stabilize or trend up over the course of this year?
Andrew Mason - CEO: Let me first clarify on local margins in North America and I'll let Kal talk about how we're doing internationally. So, in North America, I mean one interesting thing to keep in mind that's different about Groupon from most eCommerce businesses is for a typical eCommerce business, 90% of your transactions are related to deals that you struck with the supplier in prior quarters, out of period. The first thing about Groupon is we're always out there closing new deals, and the majority of our sales are coming from deals that we are closing in a relatively short time frame. So, as a result, as we make strategic shifts, we can – and one of the luxuries of our business is we can move margins around very quickly and experiment with different ways to drive growth. So, that's why you see some of the movements and we actually expect those local margins, just through what we saw in the back half of the fourth quarter and what we're seeing in Q1. Those local margins in North America will go back up. So, with that in – in other words, even there, we are constantly loading and evolving and perfecting our approach. You want to talk about international?
Kal Raman - COO: Yeah. Thanks Andrew. Like Andrew said, we can test and flex up the elasticity faster than many other eCommerce players. We were flexing and testing it with the only aim of attracting high quality merchants onto our platform. We did that in the United States, we did that in our international markets. As we emerge through the test in Q4, you could say we have kind of arrived at an optimum point, which we believe remains very much in the range we gave to you long time back in the top half of 30% to 40% and that's when you'll end up in both United States and international. On the second question, any trouble in accessing inventory from vendors and goods. Actually, we have absolutely no trouble. As a matter of fact, the vendor community likes us for multiple reasons, one is that we could be their testing bed for launching new products, we could be their fastest way to push inventory at the end of life-cycle product and we could also be the fastest way to increase their inventory terms. So, we could play with the vendors at the beginning of a product life-cycle, while the product is in work, as well as at the end of the product life-cycle. Our issue is not getting access to the vendors, our issue is making sure that we curate the deals in such a way that that we can continue to delight our customers with our value proposition of freshness, and high value for them.
Operator: This concludes our conference call for today. Ladies and gentlemen thank you for participating. You may all disconnect and have a wonderful day.