Good day, everyone, and welcome to the Groupon Fourth Quarter 2011 Financial Results Conference Call. [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.

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, as filed on November 3, 2011. During this call, we will discuss certain non-GAAP financial measures. In our press release and filings with the SEC, each of which is posted on our IR website, you will 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.

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 a 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 1/3 of Q4 free cash flow. These results, however, didn't come at the expense of the investments that we're 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 road map. And during the year, we've increased our total technology headcount by more than 4x. 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, our product channel, featured over 125 different deals in Q4. Each of our top 5 deals averaged more than 25,000 units. On Groupon Getaways, our average hotel deal generates over 1,000 room nights for our hotel partners. We also launched several exciting…

Thanks, Andrew. I'll start with a 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 Groupons, 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 merchants, grew 194% year-over-year to $506.5 million. This implies 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 or 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 e-commerce channels. Strength in daily deals was reflected in part by the increase in revenue margi,n, 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 just 40 North American markets with local deals, travel deals and goods chosen specifically for their gift-abilities. The success of Grouponicus opens the opportunity for us to roll out additional occasion-themed promotions during the course of the year. We have not yet announced similar initiatives for 2012 beyond our Valentine's promotion, but we're 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…

Thank you, Jason and thank you, everyone, for your time today. We're very excited about what we're 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?

Great, why don't we go right to questions. Thanks a lot.

[Operator Instructions] Our first question comes from Scott Devitt with Morgan Stanley.

Andrew, as you've seen the competitive landscape shift to your favor over the past say, 3 to 5 months, with other sites closing and then your market share actually growing relative to those that remain, I'm 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 then I had one follow-up.

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

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 the fact they have lower take rates, I'm just wondering 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?

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, were they'll go up or down quarter-over-quarter depending on the deal mix and these new categories, depending on the maturity of these new categories, things like breakage, et cetera. So we think that we, internally, are focused on net revenue as a gauge of our performance, along with free cash flow and CSOI. And we encourage you to look at the same.

The next question comes from Ralph Schackart with William Blair.

Maybe, I'll start with Jason. Jason, can you give us a little bit more color on the tax and the quarters 1,600%? I think you talked about it declining over time. But just give us a sense if this is one time and how should we think about it going forward?

Sure. So I would kind of -- I guess I would break it into 2 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. That likely -- there will be charges related to that over at least the next couple quarters, as we kind of complete that migration and the establishment of the headquarters. So it will be a bit lumpy. We do -- yes, 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 is that we pointed out that we did have $40 million of losses in a number of our urban stage countries. So if you can 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're kind of just almost combining a bunch of different countries that all pay tax locally. Again, that will be changing as we establish these headquarters over the next, I would say, later this year.

One more if I could, Jason. You talked on the call about $40 million of operating losses in less mature 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 the operating history of Groupon?

Yes, I mean, 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, about a 19% operating or CSOI margin and yet still continue to show strong growth, in fact accelerating from last quarter. So what I would say is that's kind of where we -- that's kind of the model for how we want all of our countries to look. The total -- to your question, the total loss, what that was in the past, we did say that loss was I think was around $50 million to $55 million last quarter. And that was isolated, actually, I think we said last quarter, to 4 countries. And so we're not being quite as specific this time. It's certainly come down a little bit since then. You should expect that we'll continue making progress throughout the, I'd say, 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 2.

The next question comes from Heath Terry with Goldman Sachs.

Andrew, I was wondering if you could give us a sense, that technology headcount increasing by 4x. 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.

So we -- that headcount is the 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 technologically complex. Rewards, for example, taps into the credit card and debit card transaction flow of local merchants in order to allow their customers to 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're still far underindexed in terms of our technology headcount compared to traditional California-based technology companies. So we expect our -- we expect to continue to invest aggressively in adding additional headcount, but nothing -- including an initiative that we have yet to announce.

Great. And then I was wondering if you could give us a sense of the early impact that you're seeing in the personalization of deals on the website? And what the road map looks like for rolling out personalization to the email list into Groupon Now!?

Sure, I'd love to. Like I said, we see -- right now, the personalization that we're doing is around a user's 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're 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 hat thing goes or a 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 a really nice personalization wizard that allows us to collect the fundamental information we need to improve a user's experience. We'll also be -- 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 into additional countries. We now feel that we're ready to do that and are going to be beginning to test personalization in Europe later this quarter.

The next question comes from Spencer Wang with Crédit Suisse.

I guess a question for Andrew on Groupon Now!. As you've 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'd roll that out internationally?

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

Our next question comes from Jason Maynard with Wells Fargo.

First question for you, Andrew. Kind of interesting this quarter in terms of the improvement in marketing efficiency. And I'd love to get your commentary here around, how do you see that playing out the next 6 to 12 months, especially considering that you have scale in so many markets relative to your competitors? Maybe start with that, and I've got a follow-up for Jason.

I think part of what we're seeing is just getting -- there's a lot of stuff that we're doing to get smarter in how we do marketing. Just to give you one example where we're 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 cooler product that more and more consumers love. I think that's driving an increased percentage. We see that even as our rates of acquired -- 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 a result of all the investments that we're making in making a better service.

Good, and then for Jason in terms of the Q1 guidance. I'm curious, how should we think about the contribution of some of these there 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 that -- how we should sort of plan or think about that throughout the rest of the year?

Yes, I mean, the categories that we've launched as well as Now! over the last 3 to 6 months are still just very early stage. And so from -- in my perspective, I wanted to give out guidance that is and I think kind of reflects all of the stuff that we do and don't know. What we do know is we saw some seasonal impacts of Grouponicus. We don't know what we'll see, going forward, on other seasonal impacts of things like Valentines Day or other holidays that lend themselves to gifting. They do look like they could be a big benefit for us. So we're learning about seasonality, where we don't know about all of the kind of uncertainty and macroeconomic climate, that kind of stuff. I mean overall, we do think that there's certainly a huge opportunity. As Andrew said before, we have less than 1% of local transactions today. So I think we put out guidance that we think is reasonable based on the performance that we just saw. And we'll just have to kind of -- you have to stay tuned and we'll keep you updated as the quarters progress on some of these new initiatives.

The next question in queue comes from Justin Post with Merrill Lynch.

2 questions. First, can you talk about the merchant satisfaction levels as measured by repeat rates? Are you seeing any -- where are they maybe and are you seeing any trend up or down there? And the second question, is there any empirical evidence or anything you're seeing on the marketing investment, you'll be able to really pull that back? Has that affected, in your opinion, number of Groupons 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?

We talked in Q4 about the -- back in Q4 -- in Q4, we talked about our Q3 percentage of -- percentage of merchants that we had featured, who have been featured on Groupon in previous quarters. It was -- the number was more than half, and we've seen that number increased again in Q4. We're very happy by those numbers and by the experience, that a vast majority of our merchants repeat. Nielsen News recently came out with a survey where they found that 3 out of 4 people that use a 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 did a -- we partnered with Lionsgate to do a Groupon around the film One for the Money. And they did some surveying and found that for every person -- they've surveyed all the people that came to the movie that heard about the Groupon, and only 1 out of 3 of them had actually bought it on Groupon. So for every person that bought the deal, there were 2 people that just came via the word of mouth that the promotion generated. And of those people that did buy the deal, only 93% saw it because of the -- excuse me, the opposite of only. It's a really large number. It's at 93% saw it because of the deal, only 7% would have gone anyway. So most of -- 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're offering to hundreds of thousands of merchants every day.

And then on the marketing investment affecting growth and your outlook for marketing spend in '12?

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 paid customers that we're attracting. What we do is we've been able -- we've done a better job at targeting higher-quality subscribers who are more likely to convert into customers.

Next question in queue is from Mark May with Barclays Capital.

I had 2. I guess I'll ask the other side of that questions on consumer proposition. How do you -- I don't think that you're currently accepting or allowing reviews on the site. So I wonder if you could talk a little bit about how you're 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? And 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 about around the potential margin profile of all of those markets and 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?

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 starting doing this about, I believe 4, 5 months ago. So anytime you redeem a Groupon, you get an email asking how was your experience, and we're seeing really high engagement rates with those e-mails. So we're 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 good constant real-time pulse of how we're doing. On top of that, just as we do with our merchants, we survey our customers frequently. And on top of that more qualitative data, we look at the engagement rates. We look at the cohort behavior of customers who have bought in the past -- who signed up in the past, and look at their repeat purchasing behavior. And just as we kind of highlighted in the road show, the trends continue where all past cohorts continue to purchase at the same -- 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 was 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, $8 million again. And that is indicative of all the other consumer cohorts.

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

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

Okay, let me clarify the statement I've made earlier. The statement I've made earlier was on some of the early, I 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 and operating income perspective, we're actually profitable in the U.S. and all of international today. Now with regards to kind of take rates or revenue margin, I -- you should think of them as being extremely similar. I mean, we're basically using kind of the same playbook or the same kind of deal factory and processes that Andrew talked a little bit about. We're following kind of our share of best practices approaches. And so we're structuring deals very similar. And we find, in general, the open rate, the conversion rate, the merchant kind of acceptance. They're all very, very similar. So you should not think of the revenue margins being different really between...

I think the question was 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 are akin to the U.S. over time?

There's a couple of exceptions where you have a country like China, but China is not in the international segments. They're actually -- that's a joint venture globe line. And there's a few exceptions that on average, you should assume that international is very similar. For example, you back that $40 million out of the international CSOI. You get to numbers that are not that dissimilar from the U.S. 19% operating margin today. So I think it's just -- the point I gave out before was let's call it, a good point I would say is somewhere in the next 12 to 18 months, we'll see. We're still a very high growth company that makes these estimates. You need to have a little wider range. But somewhere in that timeframe, that you should probably see the U.S. and international, or North America and international be converging on the CSOI margins.

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

Just -- I've got 3 quick questions. First, Andrew, when you guys add new merchant products like the Merchant Center dashboard, can you talk about what kind of increased, I guess, repeat frequency you see on the merchant side for these new products? And just second question for Jason, follow-up on the marketing comment earlier. So as you roll out these targeted marketing programs that are going directly to deals versus some of the marketing you had done earlier on acquiring e-mails, how did the P&L -- how did the economics change in terms of your marketing expense as a percent of revenue as that becomes a bigger percent of the total versus where you are today, like 31%? And then last question was just a housekeeping. The share count was below what we were looking for. Can you talk about what's going on with the diluted share count?

So to answer your first question, the repeat frequency of a Groupon -- of a Groupon merchant. This isn't, say, an actual stat, but just the average -- the average restaurant 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 the last 3 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 rolled out 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 merchants from a one-and-done deal event into something that's longer term, and we're very confident that these tools will take us along that path. Jason?

Sure. So first on the, just -- I'll knock out the share count one quickly. So in Q4 because of the IPO, you saw the weighted average share count. You really only saw a little less than 2 out of the 3 months that had kind of the full share count included. So you'll see that get -- that be normalized and go up over the 600 million number that you probably expected in Q1. So 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 a 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 more than an annualized run rate of somewhere between $600 million and $700 million, and that's an amount that we're comfortable with and we think gives us a lot of opportunity to spend in a variety of ways. So today, it's been primarily -- or out through today, it's been primarily subscriber acquisition spend as we start to continue to focus on the highest ROI. Today, we mark -- we measure the ROI primarily on cost per new customer. You'll see us start to experiment and do more revenue-driving transactions, which you'd 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're going to hit some of our more mature markets. So you should overall think that marketing will continue to go down as a percentage. Whether it get down to the -- what is it, 5% to 10% that you see for Amazons or Netflix or those types of guys, that's probably going to -- it's not going to be -- it's going to take a little while. But again, I would not expect it to be increasing as a percentage of revenue.

The next question is from Mark Mahaney with Citi.

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?

What we can tell you is just that we feel great about how well the assets that we've acquired over the last 3 years is building a local commerce business have translated into these new spaces. That means the operational infrastructure we've built, a lot of the competencies and the operational excellence of the staff and the sales force here, as well as the consumer base who 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, for these customers. It's just -- I mean, one thing that shocked us was the relatively high percentage at the first week that we launched Groupon Getaways, of purchases that came from mobile devices where people are just looking on their little 4-inch screens at a picture of a hotel and spending $300 or $400 just because of the trust that they have with the Groupon brand that we've established and invested in through the local business over the last 3 years. So we think-- we're very excited. We still don't feel like we know enough about where the businesses are headed to give you clearer guidance on how they will contribute to the overall financial picture. But as we've said, at various points on this call, we're continuing to invest and we're bullish about those businesses.

I'm showing we have time for one further question. Shawn Milne, with Janney Capital Markets.

I wondered if I could go back to that last question. I know you 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, and can you expect, at least in the getaway product to expand beyond your current relationship and really broaden out that product going forward?

Yes, like I guess I'd say first in terms of broadening the product, 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 to 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 hotel rooms but over time, it could be even more. But I think in terms of Q1, I wouldn't -- I would just assume that we're very happy with the progress. We're not seeing -- I mean, we did, in the first quarter, you can assume that when you're launching a category, you're probably having to make maybe some investments in some of the commission rates to be able to get deals. And over time, that investment, it lessens. And so I think in terms of -- but in terms of Q1, how much of Q1 goods or getaways is going to be as a percentage? We're not going to disclose that at this time. It's just too competitive of categories for us, so we just want to not kind of specify them at this time.

Okay, and just lastly. I know I've missed it, did you give out any expectations for what you thought CapEx would look like for the year?

No, we did not. We did step up CapEx in Q3, which was largely related to -- we've built up our tech team to a sizable enough level for-- you did see the impact of capitalized software come into play. And we did actually also open a data center. And 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.

And I'd like to turn the program back to our presenters for any concluding remarks.

Thanks, guys. This has been a lot of fun. Look forward to many more of these.

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