Executive Summary / Key Takeaways

• Groupon is executing a strategic transformation to shift from a broad daily deals site to a curated marketplace for local experiences, prioritizing quality supply and customer retention over volume.
• Q1 2025 results exceeded guidance, driven by accelerating billings growth in North America Local (+11% YoY) and International Local (ex-Italy, +5% YoY), signaling a potential inflection point after a period of decline and operational challenges.
• Platform modernization, including a new front-end and ongoing cloud migration, is critical to improving site stability, agility, and enabling new features like enhanced personalization, video, and AI integration, despite causing some short-term performance headwinds.
• While revenue growth currently lags billings due to deliberate take rate compression from marketplace health initiatives (like higher redemption rates), management expects convergence as fundamentals improve and maintains full-year 2025 revenue and Adjusted EBITDA guidance, effectively raising the outlook for the core business post-Giftcloud sale.
• The company has strengthened its financial position through recent financing activities (Rights Offering, 2027 Notes) and returned to positive trailing twelve-month free cash flow, providing flexibility to invest in sales force expansion and marketing to drive future growth, though significant tax and legal contingencies remain key risks.

The Reinvention of Groupon: From Daily Deals to Curated Experiences

Groupon, Inc., which commenced operations in October 2008, rose to prominence as a pioneer in the daily deals space, connecting consumers with discounted offers from local merchants. For years, its business model revolved around high-volume transactions across various categories, including goods and travel, alongside its core local services. However, the company faced significant challenges post-2019, marked by declining revenue and operational inefficiencies that necessitated multiple restructuring efforts.

Today, Groupon is undergoing a fundamental transformation under new leadership, aiming to redefine its place in the competitive e-commerce and local services landscape. The refined mission is clear: to become the trusted destination for quality local experiences at unbeatable value. This strategic pivot involves a deliberate shift away from chasing sheer transaction volume towards building a curated marketplace focused on high-quality supply and fostering long-term relationships with both merchants and customers. This transformation is centered on three key pillars: enhancing marketplace health, modernizing its technology platform, and strengthening financial performance.

The competitive environment is dynamic, dominated by giants like Amazon (AMZN) and Walmart (WMT) in broader e-commerce, eBay (EBAY) in marketplaces, and specialized players like Expedia Group (EXPE) in travel. While Groupon's niche in local experiences offers differentiation, these larger rivals possess significant advantages in scale, logistics, and financial resources. Amazon, for instance, boasts vastly superior revenue growth (~11% vs. Groupon's recent flat-to-negative trends) and profitability margins (Net Margin 7-8% vs. Groupon's TTM -8.13%), enabling greater investment in technology and market reach. Similarly, Expedia's focus on travel allows for deeper inventory and more efficient booking processes in that vertical. Groupon's strategy acknowledges this by focusing on its core strength – connecting consumers with local experiences – and leveraging its platform to create unique value propositions that performance-focused merchants, particularly enterprises, find attractive. The company positions itself as a performance-based platform, which management believes is particularly appealing to merchants seeing weakening traffic trends elsewhere, offering a compelling alternative to traditional click-based advertising models.

Central to Groupon's strategic overhaul is the modernization of its technology platform. For years, the company grappled with a complex, inefficient, and unstable legacy tech stack that hindered innovation and agility. Strategic investments are now directed towards building a new front-end, completing cloud migrations, and developing a new mobile application. This technological transformation is not merely an IT upgrade; it is viewed as foundational to enabling faster feature development, improving site stability, enhancing user experience, and ultimately driving growth.

The new front-end is expected to deliver faster and more stable customer experiences, with the goal of surpassing the legacy platform's performance by the end of Q4 2024. This is anticipated to improve SEO and SEM, driving more traffic and higher conversions. The platform is also being enhanced with features aimed at increasing customer value and retention, such as improved personalization, search relevance, dedicated merchant pages, and AI-driven FAQs. Expanded language capabilities, particularly targeting the Spanish-speaking population in the US, are also part of this effort. The new mobile app is in beta in North America, with a full rollout planned for early 2025, followed by international market migration in the first half of 2025.

Emerging technologies like AI are also being integrated into Groupon's operations. Management sees opportunities to leverage AI in sales (potentially for initial merchant communication), analyzing deal performance to help merchants design effective offers, and improving overall engineering and technology efficiency. Furthermore, the company is ensuring its platform is compatible with AI-driven search engines, noting that customers using AI snippets to find deals show dramatically improved conversion rates upon reaching the Groupon site. Over the next 12-24 months, the goal is to ensure compatibility with all major AI platforms. While specific quantitative targets for all these tech initiatives are not always disclosed, the stated intent is to significantly increase agility and development speed compared to the legacy system. However, this modernization journey has not been without its challenges, with platform stability issues related to cloud migrations impacting performance in Q3 2024 and contributing to a temporary decline in legacy customer retention. Management acknowledges this required sacrificing some short-term performance for the long-term benefits of a modern, agile platform.

Performance Reflecting Strategic Shifts and Operational Focus

Groupon's recent financial performance provides tangible evidence of the impact of its strategic transformation, albeit with some expected volatility along the way. The first quarter of 2025 marked a significant milestone, with results exceeding guidance on both billings and Adjusted EBITDA, and a slight beat on revenue. Global billings grew 1.4% year-over-year, indicating continued progress towards sustained growth after a period of decline.

This growth was powered by strong performance in the company's core focus area: North America Local. Billings in this segment accelerated to an impressive 11% year-over-year growth in Q1 2025, the first time double-digit growth has been achieved since 2017 (excluding the pandemic recovery period). This acceleration is attributed to the successful execution of the hyper-local strategy, focusing on curated, high-quality deals in top cities (where billings grew double digits) and strengthening relationships with both local and enterprise merchants. The "Things to Do" vertical within North America Local has been a consistent bright spot, growing billings double digits for the fifth consecutive quarter.

The International segment also showed signs of recovery, with Local billings (excluding Italy, which the company exited in July 2024 due to a tax matter) growing approximately 5% year-over-year in Q1 2025. This improvement reflects the application of the marketplace playbook – rebuilding sales capacity, focusing on key categories and cities, and driving traffic with high-volume deals – which was first piloted successfully in Spain, a market now showing strong double-digit growth.

While billings growth is encouraging, revenue growth is currently lagging, decreasing 4.8% year-over-year in Q1 2025. This is primarily due to a deliberate compression of take rates in North America Local. Management explains this as a natural consequence of focusing on marketplace health initiatives, such as encouraging higher redemption rates, which are seen as positive for long-term sustainability but create a short-term headwind to revenue. The expectation is that as these healthy marketplace fundamentals are delivered, billings and revenue growth rates will converge over time.

Profitability metrics reflect the ongoing investment and efficiency efforts. The gross profit margin remained strong at 90.42% TTM. Operating expenses, particularly Selling, General, and Administrative (SGA), saw a decrease year-over-year in Q1 2025, driven by lower cloud costs and amortization of internally developed software, partially offset by an increase in stock-based compensation. Marketing expense increased year-over-year in Q1 2025, reflecting increased investment in performance marketing campaigns, which management believes will be a tailwind given improving channel efficiency. The company's Adjusted EBITDA remained positive for the sixth consecutive quarter in Q1 2025, demonstrating its ability to generate operating profit while investing in the transformation.

Liquidity and cash flow generation have also seen significant improvement. The company returned to positive trailing twelve-month free cash flow in 2024 ($40.56 million TTM), a key milestone after a long period of negative cash outflow. This was driven by better working capital management, including faster accounts receivable collections and strategic management of merchant payables. As of March 31, 2025, cash and cash equivalents stood at $226.8 million. Recent financing activities, including the $80 million Rights Offering closed in January 2024 and the issuance of $197.3 million in 2027 Convertible Senior Notes in November 2024 (partially exchanged for existing 2026 Notes), have further strengthened the balance sheet and provided financial flexibility. The remaining 2026 Notes principal is $53.7 million, maturing in March 2026. This improved financial position allows the company to invest in key growth initiatives, such as ramping up its sales force, which is seen as currently inadequate to fully capitalize on the market opportunity.

Outlook and Strategic Trajectory

Looking ahead, management is increasingly optimistic about Groupon's trajectory, signaling a shift from stabilization to playing offense. For the second quarter of 2025, the company expects another quarter of accelerating year-over-year growth in both billings and revenue.

The full-year 2025 guidance reflects this increased confidence. The billings growth rate guidance was raised from 2-4% to 3-5%. Importantly, the revenue and Adjusted EBITDA guidance were maintained despite the sale of the Giftcloud subsidiary in April 2025, which is expected to remove approximately $6 million in revenue and $4 million in Adjusted EBITDA for the remainder of the year. Management emphasized that maintaining the overall target effectively represents a raise for the core business.

This outlook is underpinned by several key assumptions and strategic priorities. Continued execution of the hyper-local strategy and focus on quality supply in North America and key international markets are expected to drive further billings growth. The completion of remaining platform modernization projects, particularly the full rollout of the new front-end and mobile app, is anticipated to improve site performance, conversion rates, and enable new features that enhance customer engagement and retention. While the Q3 2024 platform issues highlighted the risks in this process, management is committed to resolving them and leveraging the new technology for long-term agility.

Investment in marketing is expected to continue at a rate of roughly 30-35% of gross profit, contingent on achieving satisfactory ROI targets. The company believes performance marketing will be a tailwind and is also exploring new channels like social media influencers. A key internal priority is improving customer retention and purchase frequency, with initiatives like the "WowDeal" pilot showing promising early results in encouraging repeat transactions, particularly in high-frequency categories like food and drink. The ramp-up of the sales force is also a critical investment aimed at supporting growth in 2025 and beyond.

Despite the positive momentum and strategic clarity, significant risks remain. The company is involved in complex and potentially costly tax disputes in Italy and Portugal, with substantial assessments at stake ($123.5 million and $32.2 million in Italy, up to $4.6 million in Portugal). While management believes it is more likely than not to prevail in the Italian matters and has made provisions/guarantees for the Portuguese assessments, adverse outcomes could have a material impact. The material weakness in internal control over financial reporting related to complex manual calculations is also ongoing, requiring continued remediation efforts. Furthermore, macroeconomic uncertainty, intense competition from larger, more diversified players, and the inherent risks of international operations (currency fluctuations, regulatory changes) continue to pose challenges.

Conclusion

Groupon is in the midst of a significant and complex transformation, moving decisively to reposition itself as a focused marketplace for local experiences. The strong performance in Q1 2025, particularly the accelerating billings growth in North America Local and International Local (ex-Italy), provides compelling evidence that the strategic pivot towards quality supply, hyper-local focus, and platform modernization is beginning to yield tangible results. While challenges remain, including the need to fully resolve technical issues, improve customer retention, and navigate substantial legal and tax contingencies, the company's strengthened financial position and positive free cash flow trajectory provide a more stable foundation for investment in future growth. The maintained full-year guidance, effectively raised for the core business, signals management's increasing confidence. For investors, the story is one of a potential turnaround, where successful execution of the strategic roadmap and leveraging the modernized platform could unlock sustained growth and improved profitability, making the current phase a critical juncture to watch for further progress.