Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included under Item 8 of this Annual Report on Form 10-K. 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 Item 1A, Risk Factors, and elsewhere in this Annual Report. See Part I, 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 in three categories: Local, Goods and Travel. See Item 8, Note 21, 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 accessed through our websites and mobile applications.
Product Revenue from Goods Category: We generate product revenue from our sales of first-party Goods inventory, which are direct sales of merchandise inventory. For product revenue transactions, we are the primary party responsible for providing the good 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 title passes to the customer upon delivery of the product. We have transitioned to a third-party marketplace in North America as of the end of 2020 and will 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.
In 2020, the COVID-19 pandemic has led to significant disruption in our business. See Strategy, Restructuring and Cost Reduction and Factors Affecting our Performance below, and Item 8, Note 3, COVID-19 Pandemic, for more information about the impacts of COVID-19 on our business.
Strategy
In February 2020, we announced a strategic plan to focus on our local experiences marketplace, which included exiting our Goods category. However, due to the significant disruption in our business due to the COVID-19 pandemic we continue to sell Goods on our platform. In the third quarter 2020, we announced an updated strategy and plan to prioritize expanding our Local inventory and modernizing our marketplace by improving the merchant and customer experiences. While both of these are important to building a successful marketplace, we believe the most critical of these is expanding Local inventory.
To validate our strategic priority of expanding Local inventory, early in the third quarter 2020 we launched a test in four markets in North America to determine if growing inventory would result in improved billings and units performance. To grow Local supply, we focused on leveraging three types of inventory: Deals with few restrictions, new, lower discount Offers, and Market Rate supply. At the conclusion of our test in December 2020, 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. We also intend to continue to make enhancements to the customer and merchant experiences in 2021.
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Restructuring and Cost Reduction
During the year ended December 31, 2020 we took significant actions to improve our cash position and materially reduce our cost structure. 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.
The first phase of our restructuring actions included an overall reduction of approximately 1,200 positions globally and the exit or discontinuation of the use of certain leases and other assets by the end of 2020. The majority of the first phase of workforce reductions and impairments of our right-of-use and other long-lived assets occurred during the second quarter 2020. In the third quarter 2020, we initiated the second phase of our restructuring plan, which included additional workforce reductions and the exit of our operations in New Zealand and Japan. We expect to incur total pre-tax charges of $75.0 million to $105.0 million in connection with our multi-phase restructuring plan through the end of 2021. Once fully implemented, we expect our multi-phase restructuring plan to result in $225.0 million in annualized cost savings. During the year ended December 31, 2020, we recorded $64.8 million in pre-tax charges in connection with our restructuring actions. See Item 8, Note 16, Restructuring and Related Charges , for more information.
In addition to the actions described above, we took several steps to reduce costs, preserve cash in the near-term and improve liquidity, including, but not limited to: furloughing staff; continuing to sell Goods on our platform instead of quickly exiting the category; reducing marketing expense by significantly shortening payback thresholds and delaying brand marketing investments; transitioning merchants to redemption payment terms, instead of fixed payment terms; implementing a hiring freeze; eliminating broad-based merit increases for employees; replacing cash compensation with equity compensation in 2020 for Board members; and amending our Credit Agreement to, among other things, provide covenant relief through the first quarter of 2021. See Liquidity and Capital Resources for further information.
How We Measure Our Business
We use several operating and financial metrics to assess the performance 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. generally accepted accounting principles ("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 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 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.
• 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
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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.
• 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 indicator of the total volume of business conducted through our marketplaces.
Our gross billings, units and TTM active customers for the years ended December 31, 2020, 2019 and 2018 were as follows (in thousands):
Year Ended December 31,
2020 2019 2018
Gross billings $ 2,619,058 $ 4,613,531 $ 5,202,814
Units 99,219 150,879 172,305
TTM Active customers 29,577 43,620 48,159
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. We have transitioned to a third-party marketplace in North America as of the end of 2020 and will begin to transition 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 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.
The following table presents the above financial metrics for the years ended December 31, 2020, 2019 and 2018 (in thousands):
Year Ended December 31,
2020 2019 2018
Revenue $ 1,416,868 $ 2,218,915 $ 2,636,746
Gross profit 677,294 1,186,129 1,320,601
Adjusted EBITDA 49,739 227,248 269,807
Free cash flow (112,309) 3,955 121,160
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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 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 Item 8, Note 16, Restructuring and Related Charges , for information about our restructuring plan.
Factors Affecting Our Performance
Impact of COVID-19 . During the COVID-19 pandemic, various government restrictions 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. See Item 8, Note 3, COVID-19 Pandemic, for more information about the impacts of COVID-19 on our business and Item 1A, Risk Factors .
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.
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 must also continue to improve the customer experience on 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.
Increasing traffic to our websites and mobile applications. The traffic to our websites and mobile applications, including from consumers responding to our emails and search engine optimization ("SEO"), has declined in recent years, and we have experienced further declines in traffic due to the impacts of COVID-19. As such, we must focus on improving the effectiveness of our emails, as well as developing sources of traffic in addition to email and SEO and optimizing the efficiency of our marketing spend.
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Results of Operations
North America
Operating Metrics
North America segment gross billings, units and TTM active customers for the years ended December 31, 2020, 2019 and 2018 were as follows (in thousands, except percentages):
Year Ended December 31, % Change
2020 2019 2018 2020 vs 2019 2019 vs 2018
Gross billings
Service gross billings:
Local $ 1,038,542 $ 2,021,052 $ 2,161,192 (48.6) % (6.5) %
Goods 167,617 95,855 113,863 74.9 (15.8)
Travel 86,551 306,012 352,247 (71.7) (13.1)
Total service gross billings 1,292,710 2,422,919 2,627,302 (46.6) (7.8)
Product gross billings - Goods 333,479 563,694 796,393 (40.8) (29.2)
Total gross billings $ 1,626,189 $ 2,986,613 $ 3,423,695 (45.6) (12.8)
Units
Local 36,896 64,976 74,533 (43.2) % (12.8) %
Goods 20,797 25,632 35,330 (18.9) (27.4)
Travel 676 1,514 1,567 (55.4) (3.4)
Total units 58,369 92,122 111,430 (36.6) (17.3)
TTM Active customers 17,494 26,505 30,579 (34.0) % (13.3) %
Comparison of the Years Ended December 31, 2020 and 2019:
For the year ended December 31, 2020 North America gross billings declined by $1,360.4 million, units declined by 33.8 million and TTM active customers declined by 9.0 million. 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, travel restrictions, as well as business restrictions and shutdowns.
Comparison of the Years Ended December 31, 2019 and 2018:
For the year ended December 31, 2019, North America gross billings declined by $437.1 million, units declined by 19.3 million and active customers declined by 4.1 million. These declines were primarily due to the decline in traffic, including traffic from email and SEO, as well as our efforts to improve the efficiency of our marketing spend, which led to a decrease in the number of active customers.
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Financial Metrics
North America segment revenue, cost of revenue and gross profit for the years ended December 31, 2020, 2019 and 2018 were as follows (dollars in thousands):
Year Ended December 31, % Change
2020 2019 2018 2020 vs 2019 2019 vs 2018
Revenue
Service revenue:
Local $ 432,183 $ 721,038 $ 752,863 (40.1) % (4.2) %
Goods 35,276 16,236 18,283 117.3 (11.2)
Travel 17,686 57,939 71,856 (69.5) (19.4)
Total service revenue 485,145 795,213 843,002 (39.0) (5.7)
Product revenue - Goods 333,479 563,694 796,393 (40.8) (29.2)
Total revenue $ 818,624 $ 1,358,907 $ 1,639,395 (39.8) (17.1)
Cost of revenue
Service cost of revenue:
Local $ 53,143 $ 77,539 $ 81,511 (31.5) % (4.9) %
Goods 6,424 3,071 2,981 109.2 3.0
Travel 4,779 12,200 13,911 (60.8) (12.3)
Total service cost of revenue 64,346 92,810 98,403 (30.7) (5.7)
Product cost of revenue - Goods 278,647 458,352 650,308 (39.2) (29.5)
Total cost of revenue $ 342,993 $ 551,162 $ 748,711 (37.8) (26.4)
Gross profit
Service gross profit:
Local $ 379,040 $ 643,499 $ 671,352 (41.1) % (4.1) %
Goods 28,852 13,165 15,302 119.2 (14.0)
Travel 12,907 45,739 57,945 (71.8) (21.1)
Total service gross profit 420,799 702,403 744,599 (40.1) (5.7)
Product gross profit - Goods 54,832 105,342 146,085 (47.9) (27.9)
Total gross profit $ 475,631 $ 807,745 $ 890,684 (41.1) (9.3)
Service margin (1)
37.5 % 32.8 % 32.1 %
% of Consolidated revenue 57.8 % 61.2 % 62.2 %
% of Consolidated cost of revenue 46.4 53.4 56.9
% of Consolidated gross profit 70.2 68.1 67.4
(1) Represents the percentage of service gross billings that we retained after deducting the merchant's share.
Comparison of the Years Ended December 31, 2020 and 2019:
North America revenue and gross profit decreased by $540.3 million and $332.1 million, for the year ended December 31, 2020. Those declines 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 ongoing transition of our Goods category to a third-party marketplace model. In a third-party marketplace model, we generate service revenue which is presented on a net basis. The increase in service margin was due to a shift in mix of offerings sold and higher variable consideration from unredeemed vouchers due to our shift towards payment on redemption terms in North America.
North America cost of revenue decreased by $208.2 million for the year ended December 31, 2020 primarily due to the decrease in transaction volume and gross billings and the impacts of the ongoing transition of our Goods category to a third-party marketplace model.
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Comparison of the Years Ended December 31, 2019 and 2018:
North America revenue and gross profit decreased by $280.5 million and $82.9 million for the year ended December 31, 2019. Those declines were primarily driven by a decline in transaction volume due to fewer customers and lower customer traffic, including traffic from email and SEO, as discussed above.
The decrease in gross profit was partially offset by a $197.5 million decline in cost of revenue, which was primarily due to the decrease in transaction volume and gross billings.
Marketing and Contribution Profit
We define contribution profit as gross profit less marketing expense. North America contribution profit for the years ended December 31, 2020, 2019 and 2018 was as follows (dollars in thousands):
Year Ended December 31, % Change
2020 2019 2018 2020 vs 2019 2019 vs 2018
Marketing $ 96,039 $ 214,069 $ 273,787 (55.1) % (21.8) %
% of Gross Profit 20.2 % 26.5 % 30.7 %
Contribution Profit $ 379,592 $ 593,676 $ 616,897 (36.1) % (3.8) %
Comparison of the Years Ended December 31, 2020 and 2019:
North America marketing expense and marketing expense as a percentage of gross profit declined for the year ended December 31, 2020 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 decline in our North America contribution profit for the year ended December 31, 2020 was primarily attributable to a $332.1 million decrease in gross profit, as discussed above, partially offset by a $118.0 million decrease in marketing.
Comparison of the Years Ended December 31, 2019 and 2018:
North America marketing expense and marketing expense as a percentage of gross profit declined for the year ended December 31, 2019 as compared with the prior year as we leveraged improved marketing analytics to drive efficiency in our marketing spend and maximize the lifetime value of our customer base.
The decline in our North America Contribution profit for the year ended December 31, 2019 was primarily attributable to a $82.9 million decrease in gross profit, as discussed above, partially offset by a $59.7 million decrease in marketing.
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International
Operating Metrics
International segment gross billings, units and TTM active customers for the years ended December 31, 2020, 2019 and 2018 were as follows (in thousands, except percentages and gross billings per unit):
Year Ended December 31, % Change
2020 2019 2018 2020 vs 2019 2019 vs 2018
Gross billings
Service gross billings:
Local $ 421,845 $ 855,820 $ 865,271 (50.7) % (1.1) %
Goods 61,860 51,663 71,492 19.7 (27.7)
Travel 69,428 190,571 207,490 (63.6) (8.2)
Total service gross billings 553,133 1,098,054 1,144,253 (49.6) (4.0)
Product gross billings - Goods 439,736 528,864 634,866 (16.9) (16.7)
Total gross billings $ 992,869 $ 1,626,918 $ 1,779,119 (39.0) (8.6)
Units
Local 16,567 33,069 32,055 (49.9) % 3.2 %
Goods 23,685 24,269 27,300 (2.4) (11.1)
Travel 598 1,419 1,520 (57.9) (6.6)
Total units 40,850 58,757 60,875 (30.5) (3.5)
TTM Active customers 12,083 17,115 17,580 (29.4) % (2.6) %
Comparison of the Years Ended December 31, 2020 and 2019:
For the year ended December 31, 2020 International gross billings declined by $634.0 million, units declined by 17.9 million and active customers decreased by 5.0 million. Those decreases 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, travel restrictions, as well as business restrictions and shutdowns. The decline in gross billings was partially offset by a $11.9 million favorable impact from year-over-year changes in foreign currency exchange rates.
Comparison of the Years Ended December 31, 2019 and 2018:
For the year ended December 31, 2019 International gross billings declined by $152.2 million, units declined by 2.1 million and active customers decreased by 0.5 million. Those decreases were primarily due to weak consumer sentiment in Europe, especially in the United Kingdom, and intense competition in our Goods business. The decline in gross billings was also driven by an $83.1 million unfavorable impact from year-over-year changes in foreign currency exchange rates.
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Financial Metrics
International segment revenue, cost of revenue and gross profit for the years ended December 31, 2020, 2019 and 2018 were as follows (dollars in thousands):
Year Ended December 31, % Change
2020 2019 2018 2020 vs 2019 2019 vs 2018
Revenue
Service revenue:
Local $ 138,274 $ 287,611 $ 306,700 (51.9) % (6.2) %
Goods 11,757 9,441 14,602 24.5 (35.3)
Travel 8,477 34,092 41,183 (75.1) (17.2)
Total service revenue 158,508 331,144 362,485 (52.1) (8.6)
Product revenue - Goods 439,736 528,864 634,866 (16.9) (16.7)
Total revenue $ 598,244 $ 860,008 $ 997,351 (30.4) (13.8)
Cost of revenue
Service cost of revenue:
Local $ 12,362 $ 17,945 $ 17,273 (31.1) % 3.9 %
Goods 1,261 932 1,350 35.3 (31.0)
Travel 1,327 2,775 3,051 (52.2) (9.0)
Total service cost of revenue 14,950 21,652 21,674 (31.0) (0.1)
Product cost of revenue - Goods 381,631 459,972 545,760 (17.0) (15.7)
Total cost of revenue $ 396,581 $ 481,624 $ 567,434 (17.7) (15.1)
Gross profit
Service gross profit:
Local $ 125,912 $ 269,666 $ 289,427 (53.3) % (6.8) %
Goods 10,496 8,509 13,252 23.4 (35.8)
Travel 7,150 31,317 38,132 (77.2) (17.9)
Total service gross profit 143,558 309,492 340,811 (53.6) (9.2)
Product gross profit - Goods 58,105 68,892 89,106 (15.7) (22.7)
Total gross profit $ 201,663 $ 378,384 $ 429,917 (46.7) (12.0)
Service margin (1)
28.7 % 30.2 % 31.7 %
% of Consolidated revenue 42.2 % 38.8 % 37.8 %
% of Consolidated cost of revenue 53.6 46.6 43.1
% of Consolidated gross profit 29.8 31.9 32.6
(1) Represents the percentage of service gross billings that we retained after deducting the merchant's share from revenue.
Comparison of the Years Ended December 31, 2020 and 2019:
International revenue and gross profit decreased by $261.8 million and $176.7 million for the year ended December 31, 2020. 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 $9.5 million and $3.2 million from year-over-year changes in foreign currency exchange rates.
Cost of revenue decreased by $85.0 million for the year ended December 31, 2020 primarily due to the decrease in transaction volume and gross billings and a $6.3 million unfavorable impact from year-over-year changes in foreign currency exchange rates.
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Comparison of the Years Ended December 31, 2019 and 2018:
International revenue and gross profit decreased by $137.3 million and $51.5 million for the year ended December 31, 2019. Those decreases were primarily driven by a decline in gross billings as a result of weak consumer sentiment in Europe, especially in the United Kingdom, and intense competition in our Goods business, as well as unfavorable impacts on revenue and gross profit of $45.3 million and $19.3 million from year-over-year changes in foreign currency exchange rates. The decrease in gross profit was also driven by a customer shift toward lower margin offerings.
The decline in gross profit was partially offset by a decrease in cost of revenue of $85.8 million, which was primarily due to the decline in gross billings, as discussed above, a shift in our Goods category mix from product revenue transactions, which are reported on a gross basis, toward service revenue transactions, which are reported on a net basis, and a $26.0 million favorable impact from year-over-year changes in foreign currency exchange rates.
Marketing and Contribution Profit
International contribution profit for the years ended December 31, 2020, 2019 and 2018 were as follows (dollars in thousands):
Year Ended December 31, % Change
2020 2019 2018 2020 vs 2019 2019 vs 2018
Marketing $ 58,495 $ 125,286 $ 121,950 (53.3) % 2.7 %
% of Gross Profit 29.0 % 33.1 % 28.4 %
Contribution Profit $ 143,168 $ 253,098 $ 307,967 (43.4) % (17.8) %
Comparison of the Years Ended December 31, 2020 and 2019:
International marketing expense and marketing expense as a percentage of gross profit decreased for the year ended December 31, 2020 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 $0.7 million unfavorable impact from year-over-year change in foreign currency exchange rates.
The decrease in international contribution profit for the year ended December 31, 2020 was primarily attributable to a $176.7 million decrease in gross profit, partially offset by a $66.8 million decrease in marketing.
Comparison of the Years Ended December 31, 2019 and 2018:
International marketing expense and marketing expense as a percentage of gross profit for the year ended December 31, 2019 increas ed as we continued to invest in the long-term potential of our International segment, partially offset by a $6.2 million favorable impact from year-over-year change in foreign currency exchange rates.
The decrease in our contribution profit for the year ended December 31, 2019 as compared with the prior year was primarily attributable to a $51.5 million decrease in Gross Profit.
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Operating Expenses
Operating expenses for the years ended December 31, 2020, 2019 and 2018 were as follows (dollars in thousands):
Year Ended December 31, % Change
2020 2019 2018 2020 vs 2019 2019 vs 2018
Marketing $ 154,534 $ 339,355 $ 395,737 (54.5) % (14.2) %
Selling, general and administrative 603,185 806,945 870,961 (25.3) (7.4)
Goodwill impairment 109,486 — — — —
Long-lived asset impairment 22,351 — — — —
Restructuring and related charges 64,836 31 (136) NM (122.8)
Total Operating expenses $ 954,392 $ 1,146,331 $ 1,266,562 (16.7) (9.5)
% of Gross profit:
Marketing 22.8 % 28.6 % 30.0 %
Selling, general and administrative 89.1 % 68.0 % 66.0 %
Comparison of the Years ended December 31, 2020 and 2019:
Marketing expense and marketing expense as a percentage of gross profit declined for the year ended December 31, 2020 due to accelerated traffic declines, significantly shortened payback thresholds and lower investment in our offline marketing and brand spend in light of COVID-19.
SG&A decreased for the year ended December 31, 2020 primarily due to lower payroll-related expenses due to furloughs and restructuring actions. SG&A as a percentage of gross profit increased for the year ended December 31, 2020 due to the decline in demand and traffic as a result of COVID-19.
During the first quarter 2020, we performed an interim quantitative impairment 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 year ended December 31, 2020. See Item 8, Note 3, COVID-19 Pandemic, for additional information about goodwill and long-lived asset impairments.
Restructuring and related charges increased for the year ended December 31, 2020 related to severance and benefit costs for workforce reductions, impairments and other facilities-related charges, and professional advisory fees resulting from our restructuring activities. See Item 8, Note 16, Restructuring and Related Charges , for more information.
Comparison of the Years ended December 31, 2019 and 2018:
Marketing expense and marketing expense as a percentage of gross profit for the year ended December 31, 2019 decreased as we leveraged marketing analytics to drive efficiency in our marketing spend and maximize the lifetime value of our customer base and decreased our offline marketing spend during the year.
SG&A decreased for the year ended December 31, 2019 primarily due to the absence of expense related to our patent litigation with IBM of $34.6 million recorded in 2018, lower facilities and payroll-related expenses and a $16.6 million favorable impact from year-over-year changes in foreign currency exchange rates.
Other Income (Expense), Net
Other income (expense), net includes interest income, interest expense, gains and losses on fair value option investments, adjustments for observable price changes of investments, impairments of investments and foreign currency gains and losses, primarily resulting from intercompany balances with our subsidiaries that are denominated in foreign currencies.
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Other income (expense), net for the years ended December 31, 2020, 2019 and 2018 was as follows (dollars in thousands):
Year Ended December 31,
2020 2019 2018
Interest income $ 6,351 $ 7,744 $ 6,420
Interest expense (33,192) (23,593) (21,909)
Changes in fair value of investments (1,405) (72,497) (9,064)
Foreign currency gains (losses), net 17,919 (5,960) (20,325)
Impairments of investments (6,684) (9,961) (10,156)
Upward adjustment for observable price changes of investment — 51,397 —
Other 43 (459) 2,026
Other income (expense), net $ (16,968) $ (53,329) $ (53,008)
Comparison of the Years Ended December 31, 2020, 2019, and 2018:
The change in Other income (expense), net for the year ended December 31, 2020 as compared with the prior year is primarily related to a $71.1 million decrease in losses from changes in fair value of investments, and a $23.9 million increase in foreign currency gains (losses), net, partially offset by a decrease in unrealized gain of $51.4 million as a result of an upward adjustment for observable price changes on an other equity investment.
The change in O ther income (expense), net for the year ended December 31, 2019 as compared with the prior year was primarily related to $69.4 million loss from changes in fair value of our investment in Monster LP, partially offset by an unrealized gain of $51.4 million as a result of an upward adjustment for observable price changes on an other equity investment. See Item 8, Note 8, Investments, for additional information. The change in Other income (expense) was partially offset by a $14.4 million decrease in foreign currency losses for the year ended December 31, 2019. Foreign currency gains (losses) primarily result from intercompany balances with our subsidiaries that are denominated in foreign currencies.
Provision (Benefit) for Income Taxes
Comparison of the Years Ended December 31, 2020, 2019, and 2018:
Provision (benefit) for income taxes for the years ended December 31, 2020, 2019 and 2018 was as follows (dollars in thousands):
Year Ended December 31, % Change
2020 2019 2018 2020 vs 2019 2019 vs 2018
Provision (benefit) for income taxes $ (7,504) $ 761 $ (957) 1,086.1 % 179.5 %
Effective tax rate 2.6 % (5.6) % (92.8) %
Our U.S. Federal income tax rate was 21% for the years ended December 31, 2020, 2019 and 2018. The primary factor impacting the effective tax rate for the years ended December 31, 2020, 2019 and 2018 was the pretax losses incurred in jurisdictions that have valuation allowances against their net deferred tax assets. 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 Item 8, Note 17, 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 .
The effective tax rate for the years ended December 31, 2020 and 2019 also reflected the reversal of reserves for uncertain tax positions due to the closure of tax audits and due to the closure of applicable statutes of limitation. The year ended December 31, 2020 was also impacted by the carryback of federal net operating losses due to the income tax relief provided by the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). The effective tax rate for year ended December 31, 2018 also reflected a $6.4 million income tax benefit resulting from the impact of adopting Topic 606 on intercompany activity in certain foreign jurisdictions.
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Income (Loss) from Discontinued Operations
In connection with a strategic initiative to optimize our global footprint, we sold or ceased our operations in 12 countries between November 2016 and March 2017. The financial results of those operations have been presented as discontinued operations in the consolidated financial statements.
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 year ended December 31, 2020, special charges and credits also included charges related to our restructuring plan, goodwill and long-lived asset impairments and strategic advisor costs. For the year ended December 31, 2018, special charges and credits also included a charge related to our patent litigation with IBM. 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.
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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 years ended December 31, 2020, 2019, and 2018 (dollars in thousands):
Year Ended December 31,
2020 2019 2018
Income (loss) from continuing operations $ (286,562) $ (14,292) $ 1,988
Adjustments:
Stock-based compensation 39,010 81,615 64,821
Depreciation and amortization 87,522 105,765 115,828
Acquisition-related expense (benefit), net 6 39 655
Restructuring and related charges (1)
64,836 31 (136)
Goodwill impairment 109,486 — —
Long-lived asset impairment 22,351 — —
Strategic advisor costs 3,626 — —
IBM patent litigation — — 34,600
Other (income) expense, net 16,968 53,329 53,008
Provision (benefit) for income taxes (7,504) 761 (957)
Total adjustments 336,301 241,540 267,819
Adjusted EBITDA $ 49,739 $ 227,248 $ 269,807
(1) Restructuring and related charges includes $21.6 million of long-lived asset impairments and $1.7 million of additional stock compensation for the year ended December 31, 2020.
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 entire 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.
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The following table represents the effect on our consolidated statements of operations from changes in exchange rates versus the U.S. dollar for the years ended December 31, 2020 and 2019 (in thousands):
Year Ended December 31, 2020 Year Ended December 31, 2019
At Avg. 2019 Rates (1)
Exchange Rate Effect (2)
As Reported At Avg. 2018 Rates (1)
Exchange Rate Effect (2)
As Reported
Gross billings $ 2,607,185 $ 11,873 $ 2,619,058 $ 4,696,950 $ (83,419) $ 4,163,531
Revenue 1,407,327 9,541 1,416,868 2,264,279 (45,364) 2,218,915
Cost of revenue 733,270 6,304 739,574 1,058,791 (26,005) 1,032,786
Gross profit 674,057 3,237 677,294 1,205,488 (19,359) 1,186,129
Marketing 153,865 669 154,534 345,568 (6,213) 339,355
Selling, general and administrative 602,162 1,023 603,185 823,527 (16,582) 806,945
Restructuring charges 64,859 (23) 64,836 27 4 31
Income (loss) from operations $ (282,683) $ 5,585 $ (277,098) $ 36,366 $ 3,432 $ 39,798
(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 December 31, 2020, cash balances, including outstanding borrowings under our Amended Credit Agreement, were $850.6 million.
Our net cash flows from operating, investing and financing activities from continuing operations for the years ended December 31, 2020, 2019 and 2018 were as follows (in thousands):
Year Ended December 31,
2020 2019 2018
Cash provided by (used in):
Operating activities $ (63,598) $ 71,283 $ 190,855
Investing activities (21,346) (67,591) (135,982)
Financing activities $ 176,798 $ (92,619) $ (84,417)
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 from continuing operations. Our free cash flow for the years ended December 31, 2020, 2019 and 2018 and reconciliations 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):
Year Ended December 31,
2020 2019 2018
Net cash provided by (used in) operating activities from continuing operations $ (63,598) $ 71,283 $ 190,855
Purchases of property and equipment and capitalized software from continuing operations (48,711) (67,328) (69,695)
Free cash flow $ (112,309) $ 3,955 $ 121,160
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 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 prior periods, we began to increase our use of redemption payment terms with our North America merchants, and we accelerated this transition in 2020 to improve liquidity as our business was impacted by COVID-19. We largely completed the transition to redemption payment terms in the third quarter 2020.
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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 year ended December 31, 2020, our net cash used in operating activities from continuing operations was $63.6 million, as compared with our $286.6 million loss from continuing operations. That difference was primarily attributable to $295.6 million of non-cash items, including $109.5 million of goodwill impairment, $22.4 million of long-lived asset impairments, $21.6 million of restructuring-related impairments, depreciation and amortization and stock-based compensation, partially offset by a $72.6 million net decrease from changes in working capital and other assets and liabilities. The working capital decrease was due to the impacts of COVID-19, partially offset by the transition to a third-party goods marketplace in North America.
For the year ended December 31, 2019, our net cash provided by operating activities from continuing operations was $71.3 million, as compared with our $14.3 million loss from continuing operations. That difference was primarily attributable to $230.2 million of non-cash items, including depreciation and amortization, stock-based compensation, a $69.4 million loss from changes in fair value of our investment in Monster LP and a $51.4 million upward adjustment to another equity investment for observable price changes in an orderly transaction. The difference between our net cash provided by operating activities and our income from continuing operations due to non-cash items was, partially offset by a $145.0 million net decrease from changes in working capital and other assets and liabilities. The working capital impact was primarily related to the decline of billings, and to a lesser extent seasonal timing of payments to inventory suppliers.
For the year ended December 31, 2018, our net cash provided by operating activities from continuing operations was $190.9 million, as compared with our $2.0 million income from continuing operations. That difference was primarily attributable to $206.8 million of non-cash items, including depreciation and amortization, and stock-based compensation. The difference between net cash provided by operating activities and our income from continuing operations due to non-cash items was partially offset by a $17.9 million net decrease from changes in working capital and other assets and liabilities. The working capital impact was primarily related to the seasonal timing of payments to inventory suppliers and also includes $42.1 million of the payment to IBM related to the settlement of our patent litigation.
Our net cash used in investing activities from continuing operations was $21.3 million , $67.6 million and $136.0 million for the years ended December 31, 2020, 2019 and 2018. For the year ended December 31, 2020, our net cash used in investing activities from continuing operations included purchases of property and equipment and capitalized software of $48.7 million, which was partially offset by proceeds from the sale of an investment of $31.6 million . For the year ended December 31, 2019, our net cash used in investing activities from continuing operations included purchases of property and equipment and capitalized software of $67.3 million. For the year ended December 31, 2018, our net cash used in investing activities from continuing operations included net cash paid for a business acquisition of $58.1 million, purchases of property and equipment and capitalized software of $69.7 million and net cash paid of $18.3 million for acquisitions of intangible assets, including $15.4 million related to the settlement of our IBM patent litigation.
Our net cash provided by financing activities was $176.8 million for the year ended December 31, 2020. Our net cash used in financing activities was $92.6 million and $84.4 million for the years ended December 31 2019 and 2018. For the year ended December 31, 2020, net cash provided by financing activities included $200.0 million of borrowings under our revolving credit facility, partially offset by $10.6 million in taxes paid related to net share settlements of stock-based compensation awards and $8.9 million in payments of finance lease obligations. For the year ended December 31, 2019, net cash used in financing activities included $45.6 million in repurchases of common stock under our share repurchase program, $19.7 million in payments of finance lease obligations and $18.1 million in taxes paid related to net share settlements of stock-based compensation awards. For the year ended December 31, 2018, net cash used in financing activities included $33.0 million in payments of finance lease obligations, $24.1 million in taxes paid related to net share settlements of stock-based compensation awards, $9.6 million in repurchases of common stock under our share repurchase program and an $8.4 million payment of a financing obligation related to a business acquisition.
In April 2016, we issued convertible notes with an aggregate principal amount of $250.0 million, due April 2022. We received net proceeds of $243.2 million from the issuance of the Notes. We have used the proceeds from the Notes for general corporate purposes, including repurchases of shares of our common stock. Additionally, we entered into note hedge and warrant transactions with certain bank counterparties that are designed to offset, in
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part, the potential dilution from conversion of the Notes. See Item 8, Note 10, Financing Arrangements , for additional information.
The amendment to the revolving credit agreement (the "Amendment" and the revolving credit agreement as amended, the "Amended Credit Agreement") provides for aggregate principal borrowings of up to $225.0 million. As of December 31, 2020, we had $200.0 million of borrowings and $20.6 million of letters of credit outstanding under the Amended Credit Agreement and were in compliance with all covenants.
In July 2020, we entered into an amendment of our Credit Agreement in order to, among other things, provide us operational flexibility and covenant relief through the end of the first quarter 2021 in light of the ongoing impacts of COVID-19 on our business. We may need to seek additional covenant relief in the future depending on the timing and volatility of the recovery of our business from COVID-19. In addition, the Amended Credit Agreement matures in May 2024. If we do not redeem or refinance the Notes at least 91 days prior to their maturity, the maturity date of our Amended Credit Agreement will spring forward to January 2022, subject to certain exceptions. We continue to evaluate our long-term capital structure, and may need to seek additional financing in the future. See Item 1, Risk Factors and Item 8, Note 10, 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. In 2020, we took several steps to reduce costs and preserve cash in the near-term as described in Item 8, Note 3, COVID-19 Pandemic .
As of December 31, 2020, we had $267.5 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 and Japanese yen. 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 of Directors authorized us to repurchase up to $300.0 million of our common stock under our share repurchase program. As of December 31, 2020, 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 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.
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Contractual Obligations and Commitments
The following table summarizes (in thousands) our future contractual obligations and commitments as of December 31, 2020. The table below excludes $25.6 million of non-current liabilities for unrecognized tax benefits, including interest and penalties, as of December 31, 2020. We cannot make a reasonable estimate of the period of cash settlement for the tax positions classified as non-current liabilities.
Payments due by period
Total 2021 2022 2023 2024 2025 Thereafter
Finance lease obligations (1)
$ 5,444 $ 4,717 $ 715 $ 12 $ — $ — $ —
Operating lease obligations (2)
138,641 38,690 35,451 27,025 19,599 16,175 1,701
Convertible senior notes (3)
266,250 8,125 258,125 — — — —
Purchase obligations (4)
82,567 27,365 27,452 27,730 20 — —
Total $ 492,902 $ 78,897 $ 321,743 $ 54,767 $ 19,619 $ 16,175 $ 1,701
(1) Finance lease obligations include both principal and interest components of future minimum finance lease payments.
(2) Operating lease obligations are primarily for office facilities and are noncancelable. Certain leases contain periodic rent escalation adjustments and renewal and expansion options. Operating lease obligations expire at various dates with the latest maturity in 2027.
(3) Represents the principal amount and related interest on our convertible senior notes.
(4) Purchase obligations primarily represent noncancelable contractual obligations related to cloud computing and other information technology services.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of December 31, 2020.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. Our significant accounting policies are discussed in Item 8, Note 2, Summary of Significant Accounting Policies , in the notes to the consolidated financial statements.
The preparation of 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 those estimates under different assumptions or conditions.
We believe that the estimates and assumptions related to revenue recognition, lease recognition and measurement, impairment assessments of goodwill and long-lived assets, income taxes and fair value option investments have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
Revenue Recognition
See Item 8, Note 2, Summary of Significant Accounting Policies and Item 8, Note 15, Revenue Recognition , for information about our revenue recognition accounting policies, including estimates of our refund liabilities and estimates of variable consideration from unredeemed vouchers.
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Leases
See Item 8, Note 2, Summary of Significant Accounting Policies for information about our lease recognition and measurement accounting policies.
Impairment Assessments of Goodwill and Long-Lived Assets
See Item 8, Note 2, Summary of Significant Accounting Policies for information about our accounting policies relating to impairment of goodwill and long-lived assets. Additional information about those accounting policies and estimates is set forth in the following paragraphs.
When determining fair values in impairment tests, we use one of the following recognized valuation methods: the income approach (including discounted cash flows), the market approach and the cost approach. Our significant estimates in those fair value measurements include identifying business factors such as size, growth, profitability, risk and return on investment and assessing comparable revenue and earnings multiples. Further, when measuring fair value based on discounted cash flows, we make assumptions about risk-adjusted discount rates; rates of increase in revenue, cost of revenue and operating expenses; weighted average cost of capital; rates of long-term growth; and income tax rates. Valuations are performed by management or third-party valuation specialists under management's supervision, where appropriate. We believe that the estimated fair values used in impairment tests are based on reasonable assumptions that marketplace participants would use. However, such assumptions are inherently uncertain and actual results could differ from those estimates.
During the first quarter 2020, we determined a triggering event occurred that required us to evaluate our goodwill and long-lived assets for impairment, and we recorded impairment charges as a result of that assessment. During the third quarter 2020, we exited our operations in Japan and New Zealand, which represents the majority of the countries in our Asia Pacific reporting unit. As a result, we combined the remainder of the Asia Pacific reporting unit and the EMEA reporting unit into a single International reporting unit, consistent with how management reviews the operating results of the business. Our two reporting units as of our October 1, 2020 annual goodwill impairment test were North America and International.
Future changes in our assumptions or the interrelationship of the assumptions described above may negatively impact future valuations. In future measurements of fair value, adverse changes in assumptions could result in impairments of goodwill or long-lived assets that would require non-cash charges to the consolidated statements of operations and may have a material effect on our financial condition and operating results.
Income Taxes
See Item 8, Note 2, Summary of Significant Accounting Policies , and Note 17, Income Taxes , for information about our income tax accounting policies.
Fair Value Option Investments
See Item 8, Note 8, Investments , for information about the fair value measurements of our fair value option investments.
Estimating the fair values of our investments requires significant judgment regarding the assumptions that market participants would use in pricing those assets. As the fair value measurements involve significant unobservable inputs, such as cash flow projections and discount rates, they are classified as Level 3 within the fair value hierarchy. Future changes in judgment about the related fair value inputs, including changes that may result from any subsequent financing transactions undertaken by those investees, could result in significant increases or decreases in fair value that would be recognized in earnings. Our election to apply fair value accounting to those investments has and may continue to cause fluctuations in our earnings from period to period.
Recently Issued Accounting Standards
For a description of recently issued accounting standards, please see Item 8, Note 2, Summary of Significant Accounting Policies.
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