Good day, everyone, and welcome to Groupon's Third Quarter 2012 Financial Results Conference Call. [Operator Instructions] Today's conference call is being recorded. For opening remarks, I would like to turn the call over to the Senior Director of Investor Relations, Genny Konz. Please go ahead.

Hello, and welcome to our third quarter 2012 financial results conference call. Joining us today are Andrew Mason, our CEO; and Jason Child, our CFO. The following discussion and responses to your questions reflect management's views as of today, November 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 10-Q. 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'll 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'll turn the call over to Andrew.

Thanks, Genny. In Q3, we missed our revenue expectations while meeting our operating profitability expectations. We're also sharing guidance that shows we anticipate strong fourth quarter growth. Jason will take you through the numbers in detail. But before that, I'll frame them by touching on some of the major themes. As discussed in our last call, to understand the numbers, you have to dig below the surface and look at Groupon's 2 regional businesses. First is our North American business, which is now over 4 years old in our oldest market, shows the power and potential of our model. This is the market where we've continually invested in innovations like mobile and deal personalization and obsessed over customer and merchant experience. We've become one of the world's largest mobile commerce companies with about 1/3 of transactions occurring on mobile devices. Our customer and merchant satisfaction scores are world-class, and we've diversified our e-mail daily deal business into a second major category, Groupon Goods. As a result, we saw a healthy year-over-year gross billings growth of 38% this quarter and expected to accelerate in Q4, and this happened while reducing our marketing spend by 63% in Q3 year-over-year. Second is our International, predominantly European, business. We followed a different playbook in Europe, focusing on rapidly capturing market share at the cost of investing in technology and innovation and, too often, the satisfaction of our merchants and customers. With a weak European economy, we didn't have the necessary runway to integrate our international business before reaching a plateau in growth earlier this year. The result is a Q3 annual gross billings decline of 12%. To put the impact of our international business in perspective, if we merely held the last 2 quarters of international performance flat, we would've seen another $135 million…

Thanks, Andrew. With our detailed results available on this afternoon's press release, I'm going to give a quick summary of our performance and then provide our outlook for the fourth quarter. Let me start by running through the results, as well as a couple of key metrics. I want to point out that as we reach our 4-year anniversary, we will report only GAAP measures going forward starting this quarter with the exception of free cash flow. All comparisons refer to year-over-year growth, unless specifically stated otherwise. Revenues grew 32% or 38% excluding the $26 million unfavorable impact of foreign exchange. Despite solid performance in North America, the top line fell short of our expectations in the quarter, driven by continuing weakness in international, which drove a $31 million impact on revenue quarter-over-quarter. North America revenues grew 81% and international grew 3% or 13% excluding FX. Partially offsetting the softness in international was a $18.5 million true-up of breakage, driven by a tax ruling in Germany. We recognized the same impact on operating income. I'll provide some color on this in a moment. Given the impact that the growth of direct revenues have on our overall revenues, we believe that gross billings is a better indicator of overall demand as it removes any revenue classification effects and highlights total transaction volume. Gross billings grew 5% or 11% excluding FX. North America gross billings growth came in at a solid 38% compared to 48% last quarter. International declined 12% or 4% excluding FX. The negative impact on billings from the international decline was $73 million quarter-over-quarter or $66 million excluding FX. For the first time, I'm going to disclose growth in units purchased defined as vouchers and products ordered before cancellations and refunds. In Q3, global units increased 9% year-over-year and…

Thanks, Jason. In closing, let me quickly reiterate the major points. The continued success of our oldest region, North America, demonstrates the power and potential of our model. Customers continue buying, merchant satisfaction is high and our data clearly shows that we have increased our already substantial market leadership position. Internationally, fast growth and geographic expansion has led to execution issues which resulted in negative sequential growth in Q3. To solve them, we will continue to apply the same playbook that is making the North American business successful. We know how to do it, and we're well underway. Our strong Q4 guidance reflects this optimism. In fact, in the first few weeks of this quarter, we're on pace for the strongest sequential global gross billings growth we've seen in over a year. This is important because, as Jason mentioned, we believe gross billings to be the best indicator of our overall platform demand. This puts us on track for gross billings growth to exceed revenue growth in Q4. We diversified our e-mail business by introducing new categories, like Goods, that our customers love and we're evolving our local business by increasing selection and building the world's first local e-commerce marketplace. I believe that we are better positioned than anyone to unlock the full potential of the $3 trillion local commerce market by plugging it into the web. It's a massive greenfield in front of us, and we're building the necessary relationships, helping merchants run and grow their businesses and customers discover and save. And we're a company with the resources, team, vision and resolve to pull it off. With that, we'll open it for questions. Operator?

[Operator Instructions] Our first question comes from the line of Ralph Schackart from William Blair. Ralph Schackart - William Blair & Company L.L.C., Research Division: Looking at the third-party revenues, sort of, declining year-over-year, Jason, you talked about units growing on a worldwide basis year-over-year and maybe the mix of the price points coming down. But strategically, how are you thinking about, as a management team, the trade-off between third-party and direct as you sort of look out the horizon?

Yes. So I guess, first, what I would say is the -- we optimize overall -- we're putting the best offer in front of a consumer what they choose to buy, whether it's a good item or whether it's a getaway or local or whatever it is, it's clearly up to them. And then, when it is a good for that particular business, we certainly have made a lot of strides, specifically in North America to have a larger percentage of those goods, where we control the customer experience. So we set price. We own the logistics kind of relationship and coordination, which means we can ensure a better or at least the optimal kind of delivery cycle time. We own the reverse [ph] logistics, et cetera. And so, you've seen an increase in the direct revenue, but that's also just because you've see an increase in the good portion of the business, where I think we're doing a good job of improving the customer experience. In terms of the -- in terms of kind of what the mix between third-party and direct looks like in the long term, we haven't -- we don't have any kind of specific view nor do we plan on trying to drive customers to buy one versus the other. Given the overall size of the opportunity in local, which is much larger than the size in Goods, we would expect that probably it would be larger. But because of the direct versus third-party revenue recognition differentials, you're kind of seeing the revenue look different. That's why we provided the gross billings by segments so you can now actually see in particular kind of within the segments what the overall growth is across the platform, across the both third-party and direct businesses to see kind of just the inherent strength.

And our next question comes from the line of Ross Sandler from Deutsche Bank.

Just 2 questions. First, on cash flow, so on -- just kind of a follow-on from the last question. But what's the cash flow dynamic going into next year going to look like as Goods becomes a bigger percent of billings and as third-party potentially declines? I mean, according to our math, which I'm kind of doing on-the-fly, third-party was down 7% year-on-year in the third quarter. So could cash flow be down year-on-year next year? And then, one more question on the customer cohorts. Can you just talk about the transactions you're seeing in terms of new customer purchases versus repeat? Are you guys having to reacquire customers after the initial purchase, or are you still seeing the recurring purchase pattern among the customer cohorts?

So on the first question, in particular, the way I would about cash flow is, in particular, the -- while the margin percentages are different because of revenue recognition, if you actually were to say both businesses were booked on a growth basis, the long-term operating margin, that we talked about and have previously talked about, for the third-party business is about 25% to 30%. And if you take it way, it's somewhere between a revenue margin of 30% to 40%. If you were to convert that to a gross basis, so using gross billings or having 100% revenue margin, that will basically take the operating margin to a 10% to 12% range. And I mentioned on -- in the scripted portion that a long-term margin percentage that we expect for the Goods business is to be in the high-single digit percentage, so actually not far away from the 10% to 12% that you would see in the local business or the third-party business if you were recording it with the same basis. So as you think about free cash flow, kind of, yield as a percentage of gross billings, it should be actually quite similar, okay? And so, the working capital characteristics are actually pretty similar. The AP days are similar. AR days are very similar. Inventory, we are -- we're not warehousing and storing inventory, we're generally buying it at very short lead times before selling it. So you should think of very similar working capital. So as a result, the cash flow yields should be similar for both businesses. In terms of the way things could look next year, the reason you see in the decreasing cash flow quarter-over-quarter, the most significant aspect is, first, the slowdown of international. If we actually had international just have flat growth, we would have $40 million more of free cash flow. But then also -- and based on the guidance we gave, we think we're going to -- yes, we are going to see some strength there that should slow down that cash -- slowdown on the cash flow impact. But then also, the other piece is taxes. Taxes have -- because we have not implemented our international tax headquarters yet, that's something we expect to be doing in the next quarter or 2. That is something that will start to lower our cash tax payments over the next year or 2. And so, I -- and so, the cash flow could be lumpy, but I wouldn't expect as a yield, as a percentage of gross billings, I wouldn't expect big differences -- even if there is a movement to -- more movement to the direct business.

So I'll take your question. This is Andrew. On new versus repeat customer engagement and overall behavior of the cohorts. So we had a decline in our trailing 12-month gross billings per average active customer this quarter. That was driven by, in part, just the trends in Europe. In North America, it was driven by an increased number of units sales at a lower price point. So we're still seeing the same kind of customer engagement with actually an increase in unit sales but the decline in purchase price drove some softness in North America. That also flows through to the cohort behavior. What I can tell you is we have about 40 million active customers, and that is a very small percentage of the Internet population, still far more local commerce purchases are not being -- not involving the Groupon than are involving the Groupon. So the opportunity to grow by reaching new customers is still tremendous. We're focused on doing that through new channels to reach customers, from mobile to search engines, to direct site traffic, through the recently launched site search engine that we've created that I've mentioned earlier. And those will help us reach new customers along with new forms of more sophisticated transactional advertising that we've been investing in, that have helped us continue to reduce our marketing spend, now down over 50% year-over-year in North America, while at the same time North America is seeing a 38% gross billings growth. And that's largely because of more sophisticated forms of marketing that we've been doing.

And our next question comes from the line of Rohit Kulkarni from Citi.

Two questions, please. On guidance [indiscernible] on the guidance, it seems that you're not particularly referring to improving [indiscernible] margins [indiscernible] quarters [indiscernible] why didn't you [indiscernible] of that? Could you walk through that, is there [indiscernible] you want to your money into? And second is about active customers. Clearly, it does look they are starting to cycle out a little bit, but there was a slight pick-up in net adds in Q3. [ph] And if I just -- [indiscernible] subscribers [indiscernible] region. So if you can talk to how high the [indiscernible] could go -- is there something new or different that you are doing to manage that?

You're hard to kind of understand, so let me -- I think what your first question was on the operating income margins, kind of, implied guidance coming down quarter-over-quarter. Is that what you asked?

Yes.

Okay. So if you look -- so going back and looking at Q3. So our overall -- if you take the $50 million-or-so of operating income on a stock based compensation and acquisition-related, you have about $50 million, and then if you deduct the $18.5 million-or-so that's related to the onetime impact of the breakage catch-up, then that would put you at about $32 million. And so, $32 million as a percentage of the $568 million in revenue puts us at about a 5.6% operating margin. So from my perspective, you need to pull out that onetime impact. And then our guidance for Q4, which is basically a 30 to 50 operating income, less stock-based compensation, and it would basically be a midpoint of 40, which works out to about a 6.2% margin. So there is actually increasing margin quarter-over-quarter. Now I would say these are still lower than the absolute rates that you saw back in the previous quarter in Q2. And the primary reason for that is really the international business, which is -- which has had the struggle that we've already talked a bunch about. And so, I think as we start to improve the fundamentals of that business, that should hopefully allow us to drop more of the growth to the bottom line. But our view right now is we -- given the size of the opportunity in front of us, as Andrew mentioned, we really want to drive for, kind of, repairing growth and restoring growth first, and then we believe the margins will kind of follow after that.

Okay. In terms of active customers, we're continuing to see healthy year-over-year growth reaccelerating this quarter sequentially versus last quarter, I think 37% year-over-year. On top of that, as we've exited what now has become clear, slower summer months for Groupon, we're seeing a rate of new activation increased, actually doubling from -- in North America from the beginning of the first month of Q3 to the last month of Q3, and we're, so far, seeing those trends hold into Q4. Now as I said a few minutes ago, still, Groupon is only participating in a fraction of a percent of local commerce. And now, we do not believe that the only way to reach customers is through sending them an e-mail in the morning and trying to predict exactly what they want to go out and do that day, it's to create a marketplace where they can tell us what they want to do. We've launched that now in Chicago and New York. That becomes a platform through which we can intercept engine traffic and reach customers in entirely new ways, different types of customers as well. And we think that's going to be a growth driver for us next year.

Our next question comes from the line of Brian Pitz from Jefferies. Brian J. Pitz - Jefferies & Company, Inc., Research Division: Two quick questions. What impact, if any, have you seen from recent weather events on the East Coast? And second, with respect to the strength in Groupon Goods domestically, any additional color on traction abroad and maybe just some additional color on international markets, is it southern Europe? Which is the biggest drag? Maybe just some more color there.

So on the first question regarding weather or Sandy or I don't know if we're talking about the second, I certainly don't know much about the most recent snowstorm but -- I mean, overall, as we've looked at the impact of Sandy, it has not been significant. It actually is, I'd say, less than a 1% impact on billings for the quarters or expectation -- that was built into our guidance expectations that we just provided.

So Goods -- internationally, Goods actually began for us internationally. The team got off to an early start there, and then we brought it over to the U.S. We think the same problems that we've suffered from internationally in the local business have applied to the Goods business. There's also been more innovation around the customer experience in the U.S. with us building many of the staples that one would expect of any e-commerce experience in the U.S. that we still haven't rolled out overseas. As we do that, we expect to see a stronger international Goods business. Our head of Groupon Goods is now our global head of Groupon Goods. That's the change that we made, I believe, earlier this quarter. And with the global scope, that would enable him to easily start thinking about it like a global business and drive more growth in Goods internationally. In terms of where the problems are, like I said, it's predominantly Europe -- within Europe. It's in our largest European markets, which includes Germany, U.K., Italy, France and Spain. Some of the markets that got focused on improving customer and merchant experience earlier, like the U.K., we are starting to see record days again for the first time in a while, and we are also seeing great improvements in the customer and merchant satisfaction scores. So the leading indicators are strong and contribute to our optimism that's reflected in the Q4 guidance.

And our next question comes from line of Scott Devitt from Morgan Stanley.

This is Zach calling in for Scott. I have a couple of questions, a couple of short ones. You've very strong merchant relationships, saying you've announced 100,000 unique merchants in each of the past 3 quarters. So can you, one, talk about how many of those were unique? And then also, can you spend some more time talking about your nascent local merchant services businesses, like what percentage of merchants in the U.S. have adopted? Is this accelerating since your Breadcrumb and Payments announcements? And do you have any indications of satisfaction?

Great. Thanks for the question. The numbers that we've disclosed most recently on unique merchant relationships is over 0.25 million. I think that data is a few quarters old. What I can tell you though is, in addition to the number of merchant relationships that we have, that's really referring to the number of merchants with which we've run daily deals, we have millions of relations -- direct -- known by their first name relationships with merchants that we're talking to on a regular basis. And that is the -- those are the relationships through which we are enabled to do more than just help merchants grow their business, but also help them run their business, which gets back to the merchant services that we've provided. Payments and point-of-sale are nascent businesses for us. They're both launched in the last couple of months. These are services that we think of not as near-term growth drivers. It's about indirect growth through creating a better and more sticky merchant experience, improving the quality of their experience running deals on Groupon and long-term drivers of growth for us, but no early numbers to report quite yet.

And satisfaction?

We didn't really -- merchants have been extremely pleased in the results that we've seen so far. If you take Payments for example, we have an unprecedented pricing structure at 1.8% plus $0.15 per transaction for Visa/MasterCard transactions. And for our merchants, we actually have a low price guarantee where we will match lower prices that they can find elsewhere. And it's hard to find merchant who aren't going to be satisfied with something like that.

And our next question comes from the line of Heath Terry from Goldman Sachs.

Andrew, I was wondering if you could give us a sense here now that you've begun to roll out the U.S. improvements that have been driving growth acceleration here into the international market, how far into that process are you? How much more time do you need before the personalization and tools that you have in the U.S. are fully deployed globally?

Thanks for the question, Heath. I wish I could give a you specific timetable, but I think it would be premature. Our optimism is reflected in our Q4 guidance. We've rolled out some of the personalization technology in the U.K. and Brazil, and we're starting to see a lift. It's taking a little bit longer than we would have hoped. But bringing these different technology platforms together is a non-trivial task. So I think we're just continuing to plug away. It's really our top priority in the business right now. And I'll, hopefully, have some more to report for you next quarter.

Then maybe to understand Jason's comment on the call, it's just that personalization in the U.K. and Brazil that helps drive the re-acceleration in growth that's [indiscernible] re-acceleration in growth in September and October?

No, the technology has been just one component of taking the North American playbook and applying it internationally. It's also deal mix. There's been a real focus on doing what it takes in order to get high-quality merchants in categories that resonate with our customers on the platform, and I think that's probably been the largest driver of international growth that we've seen so far.

And our next question comes from the line of Tom White from Macquarie.

A question on the international merchant terms. You guys talked about sort of addressing those on a deal-by-deal basis. I guess, how do you think about doing it that way versus more of sort of just a blanket change, particularly as it relates to -- you guys are talking about sort of your brand maybe suffering there a little bit in terms of sort of the consumer versus merchant value proposition? And then, on marketing spend, I know you guys have talked over the past couple of quarters about not sort of being able to spend to what you had originally hoped for kind of based on what you saw as disappointing ROI, has anything changed there? Or you're just sort of more comfortable with the uplift you're seeing in North America from the stuff like SmartDeals and the personalization?

First of all, thanks for the question. So on the merchant terms, the reason why the terms are I guess flexible is because different deals have either different margins -- the category that it's in may have an inherent margin structure. The quality of the merchant also can also have an influence. There's so many different pieces that we feel that it makes the most sense to let the salesperson and the merchant kind of work out what's the best overall structure. And if we make that a little too rigid, it -- we're just -- I think there's a big risk that you're not going to end up with the quality, the overall quality of deal and quality of merchants that we strive for. So I mean, at this point, you should think that from an -- overall from a terms perspective, certainly, when it comes to kind of payments and working capital or AP terms, we didn't -- we saw things were very consistent quarter-over-quarter for and the same year-on-year. In terms of the terms regarding the margin structure, those also have been similar. But to the -- to Andrew's points on the call, we certainly are experimenting to try to find merchants that have never actually worked with us or maybe even never even used any sort of a daily deal competitor or otherwise. And therefore, it takes an investment in that takeaway to try to -- or revenue margins to try to get them to try it for the first time to see the positive ROI and then to be able to create a longer-term relationship. So I think the net answer is flexibility. We still think it is the right answer. In terms of the second question on marketing, yes, we're -- as [indiscernible] marketing…

And our next question comes from the line of Craig Huber from Huber Research Partners.

I'm curious, over the next 3 to 6 months, what's your plans for the size of your sales force in North America and international? And also same question for your total employees, and I have a follow-up.

Thanks for the question, Craig. So for the first 3 years of our existence, most of our innovations and technology was focused outward at -- towards the customer and the merchant. In the last 9 months, 6 months or so, we've started looking inward on ways that we can build internal tools to automate manual processes. In order to support the hyper growth that we've gone through, we've largely scaled by using people, and it wasn't always the most productive or efficient or -- way that led to the smallest number -- or the fastest results or the smallest number of errors, but it was what we needed to do in order to grow. Now we've started releasing tools. I think I've talked in the past about the prior need of several dozen people to do nothing more than copy and paste deal information from our internal sales platform to the groupon.com platform, and we're automating things like that. That is allowing us to continue to scale without adding the same amount of headcount for revenue as we have in the past. So we expect to get continued operating leverage in the future because of these internal innovations that we've been making, and that's what I can say about that for the time being.

But what about the sales force piece of that, when you think about internationally and North America over the next 6 months?

Yes. I think that applies to the sales force. I mean, we've seen, just in the last several months, that our -- productivity of our sales force improved in increasing the number of deals that a single salesperson can close because of the new tools that we've released. The tools, like Quantum Lead [ph], for example, is a internal tool that we use to help use our actual SmartDeals and personalization technology to predict the value of different -- of different leads in our merchant database. And those sort of things are allowing us to increase productivity and will allow us to continue to scale without adding the same headcount that we have in the past.

And my other quick question is on Groupon Now! You've talked a lot about it during your IPO process. I'm just curious how that's going for you, and how significant is that for your revenues, please?

Well, Groupon Now! represents our strategy to break out of the inbox and to become a destination that Groupon -- that customers think of whenever they're hungry or bored. We've just released what's really the next evolution of Groupon Now!, which you can see in Chicago, in New York. It's a marketplace with our daily deals, our deal bank deals and our Now! deals all integrated that anyone can search or browse. And there are literally thousands of deals available on demand. So we are as committed as ever to the vision behind Groupon Now!, and you can see we're essentially doubling down on it by making it the -- making that kind of experience the primary experience that you'll see when you go to groupon.com.

Our final question comes from the line of Douglas Anmuth from JPMorgan. Kaizad Gotla - JP Morgan Chase & Co, Research Division: This is Kaizad in for Doug. A couple of questions. The first, I was wondering if you could just give us a sense of the mix of e-mail inventory or allocating between Goods and local deals today? And then the second question, can you just elaborate a little bit on sort of the pull efforts you're undertaking in New York and Chicago? Does that just mean that you're allocating more SEO/SEM resources to those 2 geographies?

Thanks for the question. So what I can tell you about the mix between goods and local, obviously, there's a fixed amount of e-mail real estate available to us. And over the last few quarters, we've dedicated an increasing percentage of that real estate to goods and away from local. We've done that because our e-mail business is all about keeping it fresh and not being boring. When we started Groupon 4 years ago, we were featuring mostly restaurants. Then we started featuring activities like hot air balloon rides, et cetera, which diluted the percentage of restaurants that we featured. Then we started featuring spas and salons, which diluted the percentage of restaurants and hot air balloon rides that we would feature. Then we started featuring travel, then we started featuring goods once we've built the infrastructure to be able to ship goods to customers. So all of this is in the best interest of optimizing that core value proposition of curated offers at unbeatable prices on really, really great things. And that's how we think of our e-mail business. Your second question was pull efforts. I mean, I think, when you visit the Chicago or New York website, you can see it's a different type of feel as the Groupon that you might have visited a month ago. We have search -- the ability to search by specific location or keyword, the ability to browse by different categories. And it's pretty interesting how much inventory in how many different locations we actually have available, and this is really just the beginning. We've got a couple of thousand deals on there, and we've got plans to continue to increase that selection over time. I think selection and increasing selection is going to be one of our core strategies to grow the local business, which also, by the way, enables the ability for us to intercept more searched terms.

Thank you. And this concludes our question-and-answer session. I'd like to turn the conference over to Groupon for any concluding remarks.

I think we are completed, operator.