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    GRPN   US3994732069

GROUPON, INC.

(GRPN)
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GROUPON : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

05/06/2021 | 04:19pm EST
The following discussion and analysis of our financial condition and results of
operations should be read together with our condensed consolidated financial
statements and related notes included under Part I, Item 1 of this Quarterly
Report on Form 10-Q. This discussion contains forward-looking statements about
our business and operations. Our actual results may differ materially from those
we currently anticipate as a result of many factors, including those we describe
under Part II, Item 1A, Risk Factors, and elsewhere in this Quarterly Report.
See Part I, Financial Information, Forward-Looking Statements, for additional
information.
Overview
Groupon is a global scaled two-sided marketplace that connects consumers to
merchants. Consumers access our marketplace through our mobile applications and
our websites, primarily localized groupon.com sites in many countries. We
operate in two segments, North America and International, and operate in three
categories, Local, Goods and Travel. See Item 1, Note 13, Segment Information,
for additional information.
Currently, we generate product and service revenue from the following business
operations.
Service Revenue from Local, Travel, and Goods Categories: Service revenue
primarily represents the net commissions earned from selling goods or services
on behalf of third-party merchants. Service revenue is reported on a net basis
as the purchase price collected from the customer less the portion of the
purchase price that is payable to the third-party merchant. We also earn
commissions when customers make purchases with retailers using digital coupons
listed on our localized groupon.com sites.
Product Revenue from Goods Category: We generate product revenue from sales of
our first-party Goods merchandise inventory. For product revenue transactions,
we are the primary party responsible for providing the merchandise to the
customer, we have inventory risk and we have discretion in establishing prices.
As such, product revenue is reported on a gross basis as the purchase price
received from the customer. Product revenue, including associated shipping
revenue, is recognized when the merchandise is delivered to the customer. During
2020, we transitioned to a third-party marketplace in North America and we plan
to begin the transition to a third-party marketplace in International in the
second quarter 2021. In a third-party marketplace model, our merchants generally
assume inventory and refund risk, and as such our Goods category will primarily
generate revenue on a net basis following our transition.
Strategy
Our mission is to be the destination for experiences where consumers discover
fun things to do and local businesses thrive. Our strategic priorities are to
expand our Local inventory and modernize our marketplace by improving the
merchant and customer experiences. While both of these are important to building
a successful marketplace, in the immediate term, we believe the most critical of
these is expanding Local inventory.
To validate our strategic priority to expand Local inventory, in mid-2020, we
launched a test in four markets in North America to determine if growing
inventory would result in improved gross billings and unit performance. To grow
Local supply, we are focused on leveraging three types of inventory: Deals with
fewer restrictions, a new lower discount inventory product called Offers, and
Market Rate supply. At the conclusion of our test we determined that we reached
our test goals, and we intend to scale elements of our inventory strategy more
broadly throughout our marketplace in 2021. In North America, we have begun
scaling the removal of Deal repeat purchase restrictions to all merchants and
the launch of Offers to Beauty & Wellness merchants.
To support our strategic priority of improving the merchant and customer
experience, we are reducing friction and making it easier for our customers to
find, buy, and redeem a Groupon. In April 2021, we started to roll out a new
customer experience to North America app and mobile web users, which we believe
will drive engagement, conversion, and customer purchase frequency. On the
merchant side, we are continuing to build out tools that will help us be a
better partner to our merchants, including our self-service tool, advertising
products and booking tool features.
COVID-19, Restructuring and Cost Reduction
Since March 2020, the COVID-19 pandemic has led to a significant decrease in
consumer demand, a decrease in customer redemptions and elevated refund levels
due to changes in consumer behavior and actions taken by governments to control
the spread of COVID-19, including quarantines, travel restrictions, as well as
business restrictions and shutdowns. The COVID-19 pandemic has had an adverse
impact on our financial condition, results of operations and cash flows, which
included impairments of our goodwill and long-lived assets in 2020.
In April 2020, the Board approved a multi-phase restructuring plan related to
our previously announced strategic shift and as part of the cost cutting
measures implemented in response to the impact of COVID-19 on our business. We
expect to incur total pre-tax charges of $75.0 million to $105.0 million in
connection with our restructuring plan through the end of 2021. Once fully
implemented, we expect our restructuring plan to result in $225.0 million in
annualized cost savings. During the three months ended March 31, 2021, we
recorded $7.4 million in pre-tax charges in connection with our restructuring
actions. See Note 9, Restructuring and Related Charges, for additional
information.
In March 2021, we entered into the Amended Credit Agreement to extend covenant
relief through the fourth quarter 2021 and we issued $200.0 million of
convertible notes. See Note 5, Financing Arrangements, for additional
information. We plan to continue to actively manage and optimize our cash
balances and liquidity, working capital and operating expenses, although there
can be no assurances that we will be able to do so.
Recovery from the COVID-19 pandemic could be volatile and prolonged given the
unprecedented and continuously evolving nature of the situation. The future
impact of COVID-19 on our business, results of operations, financial condition
and liquidity is highly uncertain and will ultimately depend on future
developments, including the magnitude and duration of the pandemic, the
protective measures taken to reduce its spread, and the vaccine supply and
demand. We continue to monitor the impact of COVID-19 on our business, including
the developing situation in India, where we operate a shared service center.
How We Measure Our Business
We use several operating and financial metrics to assess the progress of our
business and make decisions on where to allocate capital, time and technology
investments. Certain of the financial metrics are reported in accordance with
U.S. GAAP and certain of those metrics are considered non-GAAP financial
measures. As our business evolves, we may make changes to the key financial and
operating metrics that we use to measure our business. For further information
and reconciliations to the most applicable financial measures under U.S. GAAP,
refer to our discussion under Non-GAAP Financial Measures in the Results of
Operations section.
Operating Metrics
•Gross billings is the total dollar value of customer purchases of goods and
services. Gross billings is presented net of customer refunds, order discounts
and sales and related taxes. The substantial majority of our service revenue
transactions are comprised of sales of vouchers and similar transactions in
which we collect the transaction price from the customer and remit a portion of
the transaction price to the third-party merchant who will provide the related
goods or services. For these transactions, gross billings differs from revenue
reported in our condensed consolidated statements of operations, which is
presented net of the merchant's share of the transaction price. For product
revenue transactions, gross billings are equivalent to product revenue reported
in our condensed consolidated statements of operations. Gross billings is an
indicator of our growth and business performance as it measures the dollar
volume of transactions generated through our marketplaces. Tracking gross
billings on service revenue transactions also allows us to monitor the
percentage of gross billings that we are able to retain after payments to
merchants. However, we are focused on achieving long-term gross profit and
Adjusted EBITDA growth.
•Units are the number of purchases during the reporting period, before refunds
and cancellations, made either through one of our online marketplaces, a
third-party marketplace, or directly with a merchant for which we earn a
commission. We do not include purchases with retailers using digital coupons
accessed through our websites and mobile applications in our units metric. We
consider units to be an important
                                       27

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indicator of the total volume of business conducted through our marketplaces. We
report units on a gross basis prior to the consideration of customer refunds and
therefore units are not always a good proxy for gross billings.
•Active customers are unique user accounts that have made a purchase during the
trailing twelve months ("TTM") either through one of our online marketplaces or
directly with a merchant for which we earned a commission. We consider this
metric to be an important indicator of our business performance as it helps us
to understand how the number of customers actively purchasing our offerings is
trending. Some customers could establish and make purchases from more than one
account, so it is possible that our active customer metric may count certain
customers more than once in a given period. For entities that we have acquired
in a business combination, this metric includes active customers of the acquired
entity, including customers who made purchases prior to the acquisition. We do
not include consumers who solely make purchases with retailers using digital
coupons accessed through our websites and mobile applications in our active
customer metric, nor do we include consumers who solely make purchases of our
inventory through third-party marketplaces with which we partner.
Our gross billings, units, and TTM active customers for the three months ended
March 31, 2021 and 2020 were as follows (in thousands):
                               Three Months Ended March 31,
                                   2021                   2020
Gross billings          $       553,972                $ 806,399
Units                            17,803                   29,766
TTM Active Customers                         25,754         41,837



Financial Metrics
•Revenue is currently earned through product and service revenue transactions.
We earn service revenue from transactions in which we generate commissions by
selling goods or services on behalf of third-party merchants. Service revenue
from those transactions is reported on a net basis as the purchase price
collected from the customer for the offering less an agreed upon portion of the
purchase price paid to the third-party merchant. Service revenue also includes
commissions we earn when customers make purchases with retailers using digital
coupons accessed through our digital properties. We generate product revenue
from our sales of first-party Goods inventory. Our product revenue from these
first-party transactions, which are direct sales of merchandise inventory, is
the purchase price received from the customer. During 2020, we transitioned to a
third-party marketplace in North America and we plan to begin to transition to a
third-party marketplace in International in the second quarter 2021. Following
the International transition, we expect our Goods category to primarily generate
revenue on a net basis within service revenue.
•Gross profit reflects the net margin we earn after deducting our cost of
revenue from our revenue. Due to the lack of comparability between product
revenue, which is reported on a gross basis, and service revenue, which
primarily consists of transactions reported on a net basis, we believe that
gross profit is an important measure for evaluating our performance.
•Adjusted EBITDA is a non-GAAP financial measure that we define as net income
(loss) from continuing operations excluding income taxes, interest and other
non-operating items, depreciation and amortization, stock-based compensation,
acquisition-related expense (benefit), net and other special charges and
credits, including items that are unusual in nature or infrequently occurring.
For further information and a reconciliation to net income (loss) from
continuing operations, refer to our discussion under Non-GAAP Financial Measures
in the Results of Operations section.
•Free cash flow is a non-GAAP financial measure that comprises net cash provided
by (used in) operating activities from continuing operations less purchases of
property and equipment and capitalized software. For further information and a
reconciliation to Net cash provided by (used in) operating activities from
continuing operations, refer to our discussion in the Liquidity and Capital
Resources section.
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The following table presents the above financial metrics for the three months ended March 31, 2021 and 2020 (in thousands):

                                        Three Months Ended March 31,
                                            2021                   2020
               Revenue           $       263,817                $ 374,150
               Gross profit              166,983                  201,247
               Adjusted EBITDA            30,372                  (22,464)
               Free cash flow            (58,445)                (247,004)


Operating Expenses
•Marketing expense consists primarily of online marketing costs, such as search
engine marketing, advertising on social networking sites and affiliate programs,
and offline marketing costs, such as television and radio advertising.
Additionally, compensation expense for marketing employees is classified within
marketing expense. We record these costs within Marketing on the condensed
consolidated statements of operations when incurred. From time to time, we have
offerings from well-known national merchants for customer acquisition and
activation purposes, for which the amount we owe the merchant for each voucher
sold exceeds the transaction price paid by the customer. Our gross billings from
those transactions generate no service revenue and our net cost (i.e., the
excess of the amount owed to the merchant over the amount paid by the customer)
is classified as marketing expense. We evaluate marketing expense as a
percentage of gross profit because it gives us an indication of how well our
marketing spend is driving gross profit performance.
•Selling, general and administrative ("SG&A") expenses include selling expenses
such as sales commissions and other compensation expenses for sales
representatives, as well as costs associated with supporting the sales function
such as technology, telecommunications and travel. General and administrative
expenses include compensation expense for employees involved in customer
service, operations, technology and product development, as well as general
corporate functions, such as finance, legal and human resources. Additional
costs included in general and administrative include depreciation and
amortization, rent, professional fees, litigation costs, travel and
entertainment, recruiting, office supplies, maintenance, certain technology
costs and other general corporate costs. We evaluate SG&A expense as a
percentage of gross profit because it gives us an indication of our operating
efficiency.
•Restructuring and related charges represent severance and benefit costs for
workforce reductions, impairments and other facilities-related costs and
professional advisory fees. See Note 9, Restructuring and Related Charges, for
additional information about our restructuring plan.
Factors Affecting Our Performance
Impact of COVID-19. During the COVID-19 pandemic, actions taken by governments
to control the spread of COVID-19, and changes in consumer behavior have had a
negative impact on our business, which relies on customers' purchases of local
experiences, including events and activities, beauty and wellness, travel and
dining. Recovery from the COVID-19 pandemic could be volatile and prolonged
given the unprecedented and continuously evolving nature of the situation. We
continue to monitor the impact of COVID-19 on our business, particularly in our
International segment where restrictions have been more prolonged and stricter
than in North America, surges in virus cases continue to occur and the
vaccination rollout has been slower. We also continue to monitor the developing
situation in India, where we operate a shared service center.
Attracting and retaining local merchants. As we focus on our local experiences
marketplace, we depend on our ability to attract and retain merchants who are
willing to offer their experiences on our platform. Merchants can generally
withdraw their offerings from our marketplace at any time, and their willingness
to continue offering services through our marketplace depends on the
effectiveness of our marketing and promotional services. Since the widespread
economic impacts of COVID-19 began in March 2020, we are prioritizing
opportunities to help drive demand for our merchants and highlighting offers
that customers can enjoy right now. As we continue to navigate through the
volatility of the COVID-19 recovery period, we intend to take a market-by-market
approach to attracting and retaining local merchants.
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Driving purchase frequency and re-engaging and retaining customers. In light of
significant declines in consumer demand for local and travel services due to
COVID-19, we must highlight offers that customers can enjoy right now in order
to drive purchase frequency and retain customers. This includes surfacing the
relevant Local inventory in each market depending on the government restrictions
currently in place and continuing to leverage our Goods category in the
near-term. We also must continue to focus on expanding inventory through our
three inventory products - Deals with fewer restrictions, Offers, and Market
Rate. On the customer experience side, we must continue to improve our websites
and mobile applications; launch innovative products that remove friction from
the customer journey and drive awareness to our supply; and grow our
high-quality, bookable inventory.
                                       30

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Results of Operations
North America
Operating Metrics
North America segment gross billings, units, and TTM active customers for the
three months ended March 31, 2021 and 2020 were as follows (in thousands):
                                            Three Months Ended March 31,
                                                2021                   2020         % Change
    Gross billings
    Service gross billings:
    Local                            $       281,296                $ 392,609        (28.4) %
    Goods                                     69,142                   18,119        281.6
    Travel                                    31,460                   33,660         (6.5)
    Total service gross billings             381,898                  

444,388 (14.1)

    Product gross billings - Goods               626                   82,275        (99.2)
    Total gross billings             $       382,524                $ 526,663        (27.4)

    Units
    Local                                      8,266                   14,132        (41.5) %
    Goods                                      3,081                    3,742        (17.7)
    Travel                                       193                      312        (38.1)
    Total units                               11,540                   18,186        (36.5)

    TTM Active customers                                  15,204         25,340      (40.0) %


Comparison of the Three Months Ended March 31, 2021 and 2020:
North America gross billings and units declined by $144.1 million and 6.6
million for the three months ended March 31, 2021. TTM active customers declined
by 10.1 million for the three months ended March 31, 2021. These declines were
primarily due to the significant decrease in consumer demand due to changes in
consumer behavior and actions taken by governments to control the spread of
COVID-19, including quarantines and travel restrictions, as well as business
restrictions and shutdowns. These declines were partially offset by a shift in
mix to higher-priced offerings.
North America units and gross billings declined in January and February 2021
compared with the prior year, and increased in March 2021 due to the timing of
the onset of the pandemic in March 2020.

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Financial Metrics
North America segment revenue, cost of revenue and gross profit for the three
months ended March 31, 2021 and 2020 were as follows (dollars in thousands):
                                             Three Months Ended March 31,
                                             2021                       2020         % Change
  Revenue
  Service revenue
  Local                               $      125,374                $ 142,660         (12.1) %
  Goods                                       15,285                    3,745         308.1
  Travel                                       5,959                    6,449          (7.6)
  Total service revenue                      146,618                  152,854          (4.1)
  Product revenue - Goods                        626                   82,275         (99.2)
  Total revenue                       $      147,244                $ 235,129         (37.4)

  Cost of revenue
  Service cost of revenue
  Local                               $       12,948                $  18,801         (31.1) %
  Goods                                        2,229                      737         202.4
  Travel                                       1,241                    2,487         (50.1)
  Total service cost of revenue               16,418                   

22,025 (25.5)

  Product cost of revenue - Goods                458                   69,333         (99.3)
  Total cost of revenue               $       16,876                $  91,358         (81.5)

  Gross profit
  Service gross profit
  Local                               $      112,426                $ 123,859          (9.2) %
  Goods                                       13,056                    3,008         334.0
  Travel                                       4,718                    3,962          19.1
  Total service gross profit                 130,200                  130,829          (0.5)
  Product gross profit - Goods                   168                   12,942         (98.7)
  Total gross profit                  $      130,368                $ 143,771          (9.3)

  Service margin (1)                            38.4   %                 34.4  %

  % of Consolidated revenue                     55.8   %                 62.8  %
  % of Consolidated cost of revenue             17.4                     

52.8

  % of Consolidated gross profit                78.1                     

71.4



(1)   Represents the percentage of service gross billings that we retained after
deducting the merchant's share from revenue.
Comparison of the Three Months Ended March 31, 2021 and 2020:
North America revenue and gross profit decreased by $87.9 million and $13.4
million for the three months ended March 31, 2021. Those decreases were
primarily driven by a decline in gross billings and transaction volume due to
the impacts of COVID-19. Revenue also declined due to the transition of Goods to
a third party marketplace model. In a third-party marketplace model, we generate
service revenue which is presented on a net basis.
Cost of revenue decreased by $74.5 million for the three months ended March 31,
2021 primarily due to the impacts of the transition of Goods to a third-party
marketplace model.
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Marketing and Contribution Profit
We define contribution profit as gross profit less marketing expense. North
America contribution profit for the three months ended March 31, 2021 and 2020
was as follows (dollars in thousands):
                                      Three Months Ended March 31,
                                      2021                       2020         % Change
         Marketing             $       22,768                $  39,409         (42.2) %
         % of Gross profit:              17.5   %                 27.4  %

         Contribution profit   $      107,600                $ 104,362          3.1%


Comparison of the Three Months Ended March 31, 2021 and 2020:
North America marketing expense and marketing expense as a percentage of gross
profit declined for the three months ended March 31, 2021 due to accelerated
traffic declines, significantly shortened payback thresholds and lower
investment in our offline marketing and brand spend in light of COVID-19.
The increase in our North America contribution profit for the three months ended
March 31, 2021 was primarily attributable to a $16.6 million decrease in
marketing, partially offset by a decrease in gross profit.
International
Operating Metrics
International segment gross billings, units, and TTM active customers for the
three months ended March 31, 2021 and 2020 were as follows (in thousands):
                                            Three Months Ended March 31,
                                                2021                   2020         % Change
    Gross billings
    Service gross billings:
    Local                            $        69,674                $ 157,401        (55.7) %
    Goods                                      7,748                   10,657        (27.3)
    Travel                                     3,459                   26,831        (87.1)
    Total service gross billings              80,881                  

194,889 (58.5)

    Product gross billings - Goods            90,567                   84,847          6.7
    Total gross billings             $       171,448                $ 279,736        (38.7)

    Units
    Local                                      2,091                    6,844        (69.4) %
    Goods                                      4,121                    4,487         (8.2)
    Travel                                        51                      249        (79.5)
    Total units                                6,263                   11,580        (45.9)

    TTM Active customers                                  10,550         16,497      (36.0) %


Comparison of the Three Months Ended March 31, 2021 and 2020:
International gross billings and units decreased by $108.3 million and 5.3
million for the three months ended March 31, 2021. TTM active customers declined
by 5.9 million for the three months ended March 31, 2021. These declines were
primarily due to the significant decrease in consumer demand due to changes in
consumer behavior and actions taken by governments to control the spread of
COVID-19, including quarantines and travel restrictions, as well as business
restrictions and shutdowns. The decline in gross billings was partially offset
by a $15.1 million favorable impact from year-over-year changes in foreign
currency exchange rates.
                                       33

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Financial Metrics
International segment revenue, cost of revenue and gross profit for the three
months ended March 31, 2021 and 2020 were as follows (dollars in thousands):
                                             Three Months Ended March 31,
                                             2021                       2020         % Change
  Revenue
  Service revenue:
  Local                               $       23,189                $  48,668         (52.4) %
  Goods                                        1,970                    2,233         (11.8)
  Travel                                         847                    3,273         (74.1)
  Total service revenue                       26,006                   54,174         (52.0)
  Product revenue - Goods                     90,567                   84,847           6.7
  Total revenue                       $      116,573                $ 139,021         (16.1)

  Cost of revenue
  Service cost of revenue:
  Local                               $        1,762                $   4,144         (57.5) %
  Goods                                          111                      217         (48.8)
  Travel                                         134                      529         (74.7)
  Total service revenue                        2,007                    4,890         (59.0)
  Product cost of revenue - Goods             77,951                   76,655           1.7
  Total cost of revenue               $       79,958                $  81,545          (1.9)

  Gross profit
  Service gross profit:
  Local                               $       21,427                $  44,524         (51.9) %
  Goods                                        1,859                    2,016          (7.8)
  Travel                                         713                    2,744         (74.0)
  Total service gross profit                  23,999                   49,284         (51.3)
  Product gross profit - Goods                12,616                    8,192          54.0
  Total gross profit                  $       36,615                $  57,476         (36.3)

  Service margin (1)                            32.2   %                 27.8  %

  % of Consolidated revenue                     44.2   %                 37.2  %
  % of Consolidated cost of revenue             82.6                     

47.2

  % of Consolidated gross profit                21.9                     

28.6



(1)   Represents the percentage of service gross billings that we retained after
deducting the merchant's share from revenue.
Comparison of the Three Months Ended March 31, 2021 and 2020
International revenue and gross profit decreased by $22.4 million and $20.9
million for the three months ended March 31, 2021. Those decreases were
primarily driven by a decline in gross billings due to the impacts of COVID-19
as discussed above. The decreases in revenue and gross profit were partially
offset by favorable impacts of $10.0 million and $3.2 million from
year-over-year changes in foreign currency exchange rates.
Cost of revenue decreased by $1.6 million for the three months ended March 31,
2021 primarily due to the decrease in transaction volume and gross billings,
partially offset by a $6.8 million unfavorable impact from year-over-year
changes in foreign currency exchange rates.
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Marketing and Contribution Profit
International marketing and contribution profit for the three months ended March
31, 2021 and 2020 was as follows (dollars in thousands):
                                      Three Months Ended March 31,
                                     2021                        2020         % Change
         Marketing             $      10,898                  $ 20,721         (47.4) %
         % of Gross profit:             29.8   %                  36.1  %

         Contribution profit   $      25,717                  $ 36,755         (30.0) %


Comparison of the Three Months Ended March 31, 2021 and 2020:
International marketing expense and marketing expense as a percentage of gross
profit declined for the three months ended March 31, 2021 due to accelerated
traffic declines, significantly shortened payback thresholds and lower
investment in our offline marketing and brand spend in light of COVID-19.
The decrease in International contribution profit for the three months ended
March 31, 2021 was primarily attributable to a $20.9 million decrease in gross
profit, partially offset by a $9.8 million decrease in marketing expense.

Operating Expenses
Operating expenses for the three months ended March 31, 2021 and 2020 were as
follows (dollars in thousands):
                                              Three Months Ended March 31,
                                              2021                       2020         % Change
Marketing                              $       33,666                $  60,130         (44.0) %
Selling, general and administrative           127,143                  207,135         (38.6)
Goodwill impairment                                 -                  109,486        (100.0)
Long-lived asset impairment                         -                   22,351        (100.0)
Restructuring and related charges               7,422                        6       NM
Total Operating expenses               $      168,231                $ 399,108         (57.8)

% of Gross profit:
Marketing                                        20.2   %                 29.9  %
Selling, general and administrative              76.1   %                102.9  %


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Comparison of the Three Months Ended March 31, 2021 and 2020:
Marketing expense and marketing expense as a percentage of gross profit declined
for the three months ended March 31, 2021 due to accelerated traffic declines,
significantly shortened payback thresholds and lower investment in our offline
marketing and brand spend in light of COVID-19, partially offset by a $0.9
million unfavorable impact from year-over-year change in foreign currency
exchange rates.
SG&A decreased for the three months ended March 31, 2021 primarily due to lower
payroll-related expenses due to restructuring actions and lower consulting and
facilities-related expenses, partially offset by a $4.4 million unfavorable
impact from year-over-year changes in foreign currency exchange rates. SG&A as a
percentage of gross profit decreased for the three months ended March 31, 2021
due to the decline in fixed costs as a result of our restructuring actions.
During the first quarter 2020, we performed an interim quantitative assessment
of goodwill and long-lived assets as a result of significant deterioration in
our financial performance due to the impact of COVID-19. As a result, we
recognized goodwill impairment of $109.5 million, that represented the excess of
the EMEA reporting unit's carrying value over its fair value, and long-lived
asset impairment of $22.4 million for the three months ended March 31, 2020. See
Note 2, Goodwill and Long-Lived Assets, for additional information.
Restructuring and related charges for the three months ended March 31, 2021
primarily represent severance and benefit costs for workforce reductions See
Note 9, Restructuring and Related Charges, for additional information.
Other Income (Expense), Net
Other income (expense), net includes interest income, interest expense, gains
and losses on fair value option investments, impairments of investments and
foreign currency gains and losses, primarily resulting from intercompany
balances with our subsidiaries that are denominated in foreign currencies.
Other income (expense), net for the three months ended March 31, 2021 and 2020
was as follows (dollars in thousands):
                                                                   Three Months Ended March 31,
                                                                     2021                  2020
Interest income                                                $        1,155          $    2,556
Interest expense                                                       (5,116)             (6,958)
Foreign currency gains (losses), net                                   22,084              (6,496)
Impairment and other changes in fair value of investments                   -              (8,089)
Other income (expense), net                                    $       

18,123 $ (18,987)



Comparison of the Three Months Ended March 31, 2021 and 2020:
The change in Other income (expense), net for the three months ended March 31,
2021 as compared with the prior year period is primarily related to a change in
foreign currency gains and losses of $28.6 million due to a $32.2 million
cumulative foreign currency translation adjustment gain that was reclassified
into earnings as a result of the substantial liquidation of our subsidiary in
Japan as part of our restructuring actions, as well as a $8.1 million impairment
and other changes in fair value of investments.
Provision (Benefit) for Income Taxes
Provision (benefit) for income taxes for the three months ended March 31, 2021
and 2020 was as follows (dollars in thousands):
                                               Three Months Ended March 31,
                                              2021                        

2020 % Change

 Provision (benefit) for income taxes   $      2,427                   $ (5,988)       (140.5) %
 Effective tax rate                             14.4   %                    2.8  %


                                       36
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Comparison of the Three Months Ended March 31, 2021 and 2020:
The effective tax rate for the three months ended March 31, 2021 was lower than
the U.S. statutory federal income tax rate due to the benefit of non-taxable
items and the U.S. research and development tax credit. The three months ended
March 31, 2021 and 2020 were also impacted by the pretax losses incurred in
jurisdictions that have valuation allowances against their net deferred tax
assets. The three months ended March 31, 2020 was impacted by the reversals of
reserves for uncertain tax positions due to the closure of tax audits and by the
carryback of federal net operating losses due to the income tax relief provided
by the CARES Act. We expect that our consolidated effective tax rate in future
periods will continue to differ significantly from the U.S. federal income tax
rate as a result of our tax obligations in jurisdictions with profits and
valuation allowances in jurisdictions with losses. See Note 10, Income Taxes,
for additional information relating to tax audits and assessments and regulatory
and legal developments that may impact our business and results of operations in
the future.
                                       37

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Non-GAAP Financial Measures
In addition to financial results reported in accordance with U.S. GAAP, we have
provided the following non-GAAP financial measures: Adjusted EBITDA, free cash
flow and foreign currency exchange rate neutral operating results. Those
non-GAAP financial measures, which are presented on a continuing operations
basis, are intended to aid investors in better understanding our current
financial performance and prospects for the future as seen through the eyes of
management. We believe that those non-GAAP financial measures facilitate
comparisons with our historical results and with the results of peer companies
who present similar measures (although other companies may define non-GAAP
measures differently than we define them, even when similar terms are used to
identify such measures). However, those non-GAAP financial measures are not
intended to be a substitute for those reported in accordance with U.S. GAAP.
Adjusted EBITDA. Adjusted EBITDA is a non-GAAP performance measure that we
define as net income (loss) from continuing operations excluding income taxes,
interest and other non-operating items, depreciation and amortization,
stock-based compensation, acquisition-related expense (benefit), net and other
special charges and credits, including items that are unusual in nature or
infrequently occurring. Our definition of Adjusted EBITDA may differ from
similar measures used by other companies, even when similar terms are used to
identify such measures. Adjusted EBITDA is a key measure used by our management
and Board of Directors to evaluate operating performance, generate future
operating plans and make strategic decisions for the allocation of capital.
Accordingly, we believe that Adjusted EBITDA provides useful information to
investors and others in understanding and evaluating our operating results in
the same manner as our management and Board of Directors. However, Adjusted
EBITDA is not intended to be a substitute for income (loss) from continuing
operations.
We exclude stock-based compensation expense and depreciation and amortization
because they are primarily non-cash in nature and we believe that non-GAAP
financial measures excluding those items provide meaningful supplemental
information about our operating performance and liquidity. Acquisition-related
expense (benefit), net is comprised of the change in the fair value of
contingent consideration arrangements and external transaction costs related to
business combinations, primarily consisting of legal and advisory fees. The
composition of our contingent consideration arrangements and the impact of those
arrangements on our operating results vary over time based on a number of
factors, including the terms of our business combinations and the timing of
those transactions. For the three months ended March 31, 2021, special charges
and credits included charges related to our restructuring plan. For the three
months ended March 31, 2020, special charges and credits included goodwill and
long-lived asset impairments and strategic advisor costs. We exclude special
charges and credits from Adjusted EBITDA because we believe that excluding those
items provides meaningful supplemental information about our core operating
performance and facilitates comparisons with our historical results.
                                       38

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The following is a reconciliation of Adjusted EBITDA to the most comparable U.S.
GAAP financial measure, Income (loss) from continuing operations, for the three
months ended March 31, 2021 and 2020 (in thousands):
                                                     Three Months Ended 

March 31,

                                                         2021               

2020

  Income (loss) from continuing operations     $      14,448                

$ (210,860)

Adjustments:

  Stock-based compensation                             7,179                

14,015

  Depreciation and amortization                       17,019                

25,909

  Acquisition-related expense (benefit), net               -                

4

  Restructuring and related charges                    7,422                

6

  Goodwill impairment                                      -                

109,486

  Long-lived asset impairment                              -                

22,351

  Strategic advisor costs                                  -                

3,626

  Other (income) expense, net (1)                    (18,123)               

18,987

  Provision (benefit) for income taxes                 2,427                    (5,988)
  Total adjustments                                   15,924                   188,396
  Adjusted EBITDA                              $      30,372                $  (22,464)


(1)Other (income) expense, net for the three months ended March 31, 2021
includes a $32.2 million cumulative foreign currency translation adjustment gain
that was reclassified into earnings as a result of the substantial liquidation
of our subsidiary in Japan as part of our restructuring actions. Refer to Note
9, Restructuring and Related Charges, for additional information.
Free cash flow. Free cash flow is a non-GAAP liquidity measure that comprises
net cash provided by operating activities from continuing operations less
purchases of property and equipment and capitalized software. We use free cash
flow to conduct and evaluate our business because, although it is similar to
cash flow from continuing operations, we believe that it typically represents a
more useful measure of cash flows because purchases of fixed assets, software
developed for internal use and website development costs are necessary
components of our ongoing operations. Free cash flow is not intended to
represent the total increase or decrease in our cash balance for the applicable
period.
Free cash flow has limitations due to the fact that it does not represent the
residual cash flow available for discretionary expenditures. For example, free
cash flow does not include cash payments for business acquisitions. In addition,
free cash flow reflects the impact of the timing difference between when we are
paid by customers and when we pay merchants and suppliers. Therefore, we believe
it is important to view free cash flow as a complement to our condensed
consolidated statements of cash flows. For a reconciliation of free cash flow to
the most comparable U.S. GAAP financial measure, see Liquidity and Capital
Resources below.
Foreign currency exchange rate neutral operating results. Foreign currency
exchange rate neutral operating results show current period operating results as
if foreign currency exchange rates had remained the same as those in effect in
the prior year period. Those measures are intended to facilitate comparisons to
our historical performance.
                                       39

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The following table represents the effect on our condensed consolidated statements of operations from changes in exchange rates versus the U.S. dollar for the three months ended March 31, 2021 (in thousands):

                                                            Three Months Ended March 31, 2021
                                           At Avg. Q1 2020             Exchange Rate
                                              Rates (1)                 Effect (2)               As Reported
Gross billings                           $         538,882          $         15,090          $       553,972
Revenue                                            253,798                    10,019                  263,817
Cost of revenue                                     89,994                     6,840                   96,834
Gross profit                                       163,804                     3,179                  166,983
Marketing                                           32,790                       876                   33,666
Selling, general and administrative                122,773                     4,370                  127,143
Restructuring and related charges                    6,897                       525                    7,422
Income (loss) from operations                        1,344                    (2,592)                  (1,248)


(1)   Represents the financial statement balances that would have resulted had
exchange rates in the reporting period been the same as those in effect in the
prior year period.
(2)   Represents the increase or decrease in the reported amount resulting from
changes in exchange rates from those in effect in the prior year period.
Liquidity and Capital Resources
Our principal sources of liquidity are cash flows from operations and cash
balances, which primarily consist of bank deposits and government money market
funds. As of March 31, 2021, cash balances, including outstanding borrowings
under the Amended Credit Agreement, were $676.8 million. We also have $169.8
million in restricted cash as of March 31, 2021 (which is a portion of the net
proceeds from the 2026 Notes offering) that will be used to repurchase the
Atairos Notes in May 2021.
Our net cash flows from operating, investing and financing activities from
continuing operations for the three months ended March 31, 2021 and 2020 were as
follows (in thousands):
                                              Three Months Ended March 31,
                                                  2021                   2020
          Cash provided by (used in):
          Operating activities          $      (46,405)              $

(236,408)

          Investing activities                 (12,744)                  

19,564

          Financing activities                  62,618                 

141,312

Our free cash flow for the three months ended March 31, 2021 and 2020 and a reconciliation to the most comparable U.S. GAAP financial measure, Net cash provided by (used in) operating activities from continuing operations, for those periods are as follows (in thousands):

                                                                Three 

Months Ended March 31,

                                                                2021                    2020

Net cash provided by (used in) operating activities from continuing operations

                                     $      (46,405)         $    (236,408)
Purchases of property and equipment and capitalized
software                                                         (12,040)               (10,596)
Free cash flow                                            $      (58,445)         $    (247,004)


Our revenue-generating transactions are primarily structured such that we
collect cash up-front from customers and pay third-party merchants at a later
date, either based upon the customer's redemption of the related voucher or
fixed payment terms, which are generally biweekly throughout the term of the
merchant's offering. Historically, we have primarily paid merchants on fixed
payment terms in North America and upon voucher redemption internationally. In
the third quarter 2020, we largely completed a transition to redemption payment
terms in North America.
                                       40

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Our cash balances fluctuate significantly throughout the year based on many
variables, including gross billings growth rates, the timing of payments to
merchants and suppliers, seasonality and the mix of transactions between Goods
and Local.
For the three months ended March 31, 2021, our net cash used in operating
activities from continuing operations was $46.4 million, as compared with $14.4
million net income from continuing operations. That difference is primarily due
to a $53.1 million net decrease from changes in working capital and other assets
and liabilities. The working capital impact was related to seasonal timing of
payments to inventory suppliers and the impact of COVID-19. The difference
between our net cash used in operating activities and our net income from
continuing operations is also due to $7.7 million of non-cash items, including a
$32.2 million foreign currency translation gain that was reclassified into
earnings due to our substantial liquidation of Japan, depreciation and
amortization and stock-based compensation.
For the three months ended March 31, 2020, our net cash used in operating
activities from continuing operations was $236.4 million, as compared with a
$210.9 million net loss from continuing operations. That difference is primarily
due to a $208.9 million net decrease from changes in working capital and other
assets and liabilities. The working capital impact was related to the seasonal
timing of payments to inventory suppliers and the impact of COVID-19. The
difference between our net cash used in operating activities and our net loss
from continuing operations due to changes in working capital was partially
offset by $183.4 million of non-cash items, including $109.5 million of goodwill
impairment, $22.4 million of long-lived asset impairments, depreciation and
amortization and stock-based compensation.
For the three months ended March 31, 2021, our net cash used in investing
activities from continuing operations was $12.7 million, which included
purchases of property and equipment and capitalized software of $12.0 million.
For the three months ended March 31, 2020, our net cash provided by investing
activities from continuing operations was $19.6 million. Our net cash provided
by investing activities from continuing operations included the proceeds from
the sale of an investment of $31.6 million, which was partially offset by
purchases of property and equipment and capitalized software of $10.6 million.
For the three months ended March 31, 2021, our net cash provided by financing
activities was $62.6 million. Our net cash provided by financing activities
included $200.0 million of proceeds received from the issuance of the 2026
Notes, partially offset by $6.6 million in cash paid for issuance costs for the
2026 Notes and the revolving credit agreement, $23.8 million related to the
purchase of capped call transactions, and $100.0 million in payments under our
revolving credit agreement. As noted above, we have classified $169.8 million of
the proceeds of the 2026 Notes that will be used to repurchase the Atairos Notes
in restricted cash.
For the three months ended March 31, 2020, our net cash provided by financing
activities was $141.3 million. Our net cash provided by financing activities
included $150.0 million of borrowings under our revolving credit facility,
partially offset by $3.8 million of distributions to noncontrolling interest
holders and $3.3 million in taxes paid related to net share settlements of
stock-based compensation awards.
In July 2020, we entered into the First Amendment of our Credit Agreement in
order to, among other things, provide us operational flexibility and covenant
relief in light of the ongoing impacts of COVID-19 on our business. In March
2021, we entered into the Second Amendment to, among other things, extend the
covenant relief through the fourth quarter 2021. In March and April 2021, we
also issued the 2026 Notes and used a portion of the net proceeds from the 2026
Notes offering to purchase the capped call transactions. We intend to use the
remaining net proceeds, together with cash on hand, to repurchase the Atairos
Notes in May 2021. See Note 5, Financing Arrangements, for additional
information.
We believe that our cash balances, excluding borrowings under the Amended Credit
Agreement, and cash generated from operations will be sufficient to meet our
working capital requirements and capital expenditures for at least the next 12
months. We plan to continue to actively manage and optimize our cash balances
and liquidity, working capital and operating expenses, although there can be no
assurances that we will be able to do so.
                                       41

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As of March 31, 2021, we had $176.8 million in cash held by our international
subsidiaries, which is primarily denominated in Euros, British Pounds Sterling,
Canadian dollars, and, to a lesser extent, Australian dollars. In general, it is
our practice and intention to re-invest the earnings of our non-U.S.
subsidiaries in those operations. We have not, nor do we anticipate the need to,
repatriate funds to the United States to satisfy domestic liquidity needs
arising in the ordinary course of business.
In May 2018, the Board authorized us to repurchase up to $300.0 million of our
common stock under our share repurchase program. As of March 31, 2021, up to
$245.0 million of common stock remained available for purchase under our
program. The timing and amount of share repurchases, if any, will be determined
based on market conditions, limitations under the Amended Credit Agreement,
share price, available cash and other factors, and the share repurchase program
may be terminated at any time. Repurchases will be made in compliance with SEC
rules and other legal requirements and may be made, in part, under a Rule 10b5-1
plan, which permits share repurchases when we might otherwise be precluded from
doing so.
                                       42

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Contractual Obligations and Commitments
Our contractual obligations and commitments as of March 31, 2021 did not
materially change from the amounts set forth in our 2020 Annual Report on Form
10-K, except as disclosed in Note 6, Commitments and Contingencies.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of March 31, 2021.
Critical Accounting Policies and Estimates
The preparation of condensed consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts
and classifications of assets and liabilities, revenue and expenses, and related
disclosure of contingent liabilities. Management bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates.
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon our condensed consolidated financial statements, which
have been prepared in accordance with U.S. GAAP. Our significant accounting
policies are discussed in Item 2, Note 2, Summary of Significant Accounting
Policies in our Annual Report on Form 10-K for the year ended December 31, 2020.
In addition, refer to the critical accounting policies and estimates under Part
II, Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations in our Annual Report on Form 10-K for the year ended
December 31, 2020.
                                       43

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Recently Issued Accounting Standards
In October 2020, the FASB issued ASU 2020-10, Codification Improvements. This
ASU amends a variety of Topics, including presentation and disclosures of
financial statements, interim reporting, accounting changes and error
corrections. This ASU will be effective for annual reporting periods beginning
after December 15, 2021 and interim periods within those annual periods
beginning after December 15, 2022 and early adoption is permitted. We are still
assessing the impact of ASU 2020-10 on our condensed consolidated financial
statements.
There are no other accounting standards that have been issued but not yet
adopted that are expected to have a material impact on our condensed
consolidated financial statements.
                                       44

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