Transcript
Good afternoon. My name is Alexander and I will be your conference operator today. At this time, I would like to welcome everyone to the Coupang Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. Now, I would like to turn the call over to Michael Senno, Vice President of Investor Relations. You may begin your conference.
Thanks, operator. Welcome to Coupang Inc.’s quarterly earnings conference call for the first quarter ended March 31, 2021. I am pleased to be joined on the call today by our Founder and CEO, Bom Kim, and our CFO, Gaurav Anand. The following discussion, including responses to your questions, reflects management’s views as of today’s date only. We do not undertake any obligation to update or revise this information except as required by law. Certain statements made on today’s call are forward-looking statements. You should not place undue reliance on forward-looking statements. Actual results may differ materially from these forward-looking statements. Please refer to today’s earnings release as well as the risks and uncertainties described in our prospectus filed with the SEC on March 11, 2021 and other filings made with the SEC when available for information about factors which could cause our actual results to differ materially from these forward-looking statements. During today’s call, we will present both GAAP and non-GAAP financial measures. Additional disclosures regarding these non-GAAP measures, including reconciliations of non-GAAP measures to the most comparable GAAP measures, are included in our earnings release and our filings with the SEC, each of which is posted on the company’s Investor Relations website at ir.aboutcoupang.com. I remind you that these numbers are unaudited and may be subject to change. And with that, let me turn the call over to Bom.
Thanks, Michael. Since this is our first earnings call, before we talk to the results, I’d like to take a moment here to speak about why we are so excited about the decades-long opportunity ahead of us at Coupang. To understand Coupang, we begin with our mission to create a world where customers wonder how they ever lived without Coupang. Our customer orientation is our most important advantage. We work backwards from the customer from a vision of a world where our customers have it all: jaw-dropping convenience without the convenience tax. Historically, online shopping has forced customers to choose between amazing service, low prices, and broad selection. Delivery within hours isn’t amazing if your selection shrinks to that of a convenience store or if it forces you to pay higher fees or prices. We aim to break these trade-offs. It’s only when we deliver all three in harmony—amazing service, low prices, and broad selection—that we deliver a true wow experience for our customers and sustained long-term growth for the company. So, we built an end-to-end integrated e-commerce system that we believe is setting a new standard for commerce globally. We have ingrained into our culture a willingness to be brave, to take risks, to make bold choices, and to learn from our failures. These values are at the core of our DNA and drive our continuous innovation today. Here is an example: a few years ago, while almost all Rocket orders were one-day delivery, we learned that many customers were returning home late at night and were only able to use what they had ordered the following day, which meant that our one-day delivery was, in effect, a two-day experience. So, we launched Dawn and Sunday Delivery with access to not just convenience store selection, but millions of items from computers to baby food. Customers can order seconds before midnight, head off to sleep, and wake up to find their items waiting at their doorstep before 7 a.m. via Dawn Delivery for free. It’s like Christmas morning every day. And how convenient was our service? As customers could get every brand of cereal on Rocket, but still have to drive out to a store for milk. So, we launched a nationwide online grocery service, offering customers one of the largest selections of fresh goods delivered within hours at low prices. As a result, we have quickly become the leading nationwide online grocer. And why couldn’t returns be as effortless as placing an order online? For returns on Rocket, you simply open the app, tap a few times, and leave the item out in front of your door for pickup. No packaging, no printing of a label, or cumbersome scheduling with a carrier required. The moment our driver scans the item in front of your door at pickup, we initiate the refund, and returns within 30 days on Rocket are completely free. We tackled another convenience tax at e-commerce: packaging waste. The packaging required to protect items during shipment, but because we control the entire process end-to-end, we found a way to protect items without boxes. Today, more than 75% of the deliveries we process and ship are box-less, in a simple sleeve with no additional cardboard, air cushions, or bubble wrap. And we didn’t stop there. We asked, can we get rid of all disposable packaging? We introduced eco-bags for Rocket Fresh, which replaces nearly all disposable packaging with completely reusable bags that are picked up by our delivery network for reuse. Today, our trucks that once left full and returned empty are coming back with returns from customers and eco-bags for reuse. We estimate that in Q1 alone, we saved over 8,000 tons, or over 15 million pounds, of packaging waste due to innovations like box-less delivery and eco-bags. Breaking trade-offs is hard work. That’s why few have done it. But it’s our life’s work, and we are passionate about it. We have invested the last seven years and billions of dollars into countless internal systems, algorithms, and 25 million square feet of e-commerce infrastructure. Today, 70% of the Korean population lives within seven miles of one of our centers. We also manage the largest fleet of full-time drivers in Korea, directly employing 15,000 delivery drivers who utilize our proprietary software and custom-designed trucks. Proprietary technology is critical to our ability to provide a wide selection, delivery experience, and free shipping. Our dynamic orchestration technology, for example, predicts and assigns the fastest and most efficient path for every order out of hundreds of millions of combinations of inventory processing, truck, and route options within seconds of an order being placed. We are a technology company at our core, and the homegrown technology that underpins our value proposition is designed to optimize our one-of-a-kind end-to-end integration. As a result of our unmatched e-commerce investment in the market and years of scaling iteration, we remain the only major e-commerce company in Korea that delivers 365 days per year, guaranteeing one-day delivery or faster on millions of items and keeping our promise on nearly 100% of our Rocket orders, even on peak days before Lunar New Year or Korean Thanksgiving. And it’s not just delivery speed; our unique investments and growing scale create operational efficiencies, which we can pass on to our customers in the form of lower prices. According to a recent third-party study, Coupang’s prices were cheaper on average across all surveyed product categories, and we estimate that Rocket customers saved over $200 million in shipping fees in the first quarter alone. The most exciting part is that we are still early in the journey. All of the things that we built are getting better every year, and we plan to build more square footage of infrastructure over the next year than in any year since our inception. Our plan is to increase our nationwide footprint by over 50% in the coming year. We have differentiation that will keep growing over time. The size, growth, and structure of the market is another tailwind. Korea is a massive e-commerce opportunity. It’s the fifth largest globally and grew at a 20% CAGR over the last five years, second only to China. And it’s the largest e-commerce opportunity not won by Amazon or Alibaba, but there is a broader play here. Similar to China, Korea is leapfrogging the offline retail revolution. The U.S. has more than 10 times the offline retail footprint per capita of Korea. We believe we are at the center of two revolutions: not just the transition from offline to online, but also a retail revolution that happened first offline in the U.S., but is now starting online in Korea. The market also boasts a highly connected, tech-savvy consumer base with high mobile usage. We believe these structural characteristics create strong tailwinds for e-commerce that will lead to higher online penetration than other markets. That makes this a broader commerce opportunity. Korea’s total commerce market is expected to exceed $530 billion by 2024, and we were still less than 5% of the total market last year. And Coupang has been rapidly gaining traction, growing at a multiple of the overall e-commerce segment over the last few years, even as our scale increased. That trend continued in Q1, with year-over-year revenue growth approximately three times faster than the overall Korean e-commerce segment. Our cohort behavior confirms that trend. As we showed in our S-1 filing, our annual cohorts are accelerating in size and spend each year, further evidence of the engagement and loyalty that our customer experience creates. And even our oldest cohorts are still increasing their spend, indicating that we are still at the early stages of our growth cycle. All the benefits we offer customers are amplified by a Rocket WOW membership, fueled by access to services like dawn and same-day delivery, as well as our streaming video offering Coupang Play. Rocket WOW members purchase with significantly higher frequency and across more categories than non-WOW members. Fundamentally, Coupang is not a consumer goods company, or delivery company, or even an e-commerce company. Coupang is, at its essence, a company that challenges trade-offs and delivers wow in customers’ daily lives. We started with product e-commerce, but have since launched two new services in Fresh and Eats. I’d like to spend a moment on the early success. In Rocket Fresh, we offer one of the largest selections of groceries online, with the only nationwide dawn and same-day delivery service. We also offer, according to a recent third-party study, the lowest fresh prices among competitive services. As a result of our value proposition, Fresh revenue in Q1 was more than 2.5 times the revenue in the same period last year. Coupang Eats started small and focused on the Gangnam region in Seoul until the middle of 2020. A little less than a year later, Eats launched in Jeju Island and is now national. In Q1, Coupang Eats was the most downloaded mobile app in Korea, and the service has scaled faster than any in our history. Despite rapid growth in 2020, our penetration in both categories remained low. While Fresh and Eats were the first new services we have launched since product commerce, they won’t be the last. We are confident about the runway ahead, and we will continue to invest aggressively in these and more offerings in the future. Finally, we are excited to be reporting our first-quarter results because we think they validate the investments we have made and speak to the continued execution of our strategy. In Q1, we delivered total revenue growth of 74% year-over-year, and our quarterly active customers increased 21% to 16 million. Keep in mind that our strong first-quarter growth comes against two headwinds. First, a comparison against a strong quarter last year that experienced large order spikes due to the COVID-19 outbreak, which started in Korea in late January, and second, a challenging operating environment that persists due to the pandemic. To that second point, we had 20 complete closures of operational centers due to COVID at various times in Q1, averaging nearly two closures per week. In spite of those and countless other challenges, we upheld our high on-time delivery rates. It’s a testament not only to the capabilities that we have built in our end-to-end integrated network and technology, but also to the dedication of our teams. The lost operational bandwidth and opportunity costs were real, but our team’s commitment and hard work helped make our workplace safer while keeping our promise to our customers. I couldn’t be prouder of our teams. In conclusion, we are excited to be on this journey with our shareholders, and we are just getting started. While our business will continue to evolve, we won’t change how we operate. We will always work backwards from an ambitious goal for the customer. We won’t hesitate to make difficult decisions and bold investments for the long term. We will keep attacking trade-offs between service, selection, and price to create a world where customers wonder, how did I ever live without Coupang? With that, I will turn the call over to Gaurav.
Thanks, Bom, and thank you everyone for joining today. Before going into the quarter, let me begin with the framework we use to manage our financial profile. Our primary objective is to delight customers, as we believe that building enduring customer relationships will maximize long-term value for all our stakeholders: our customers, vendors, sellers, and shareholders. On the financial front, that means we intend to prioritize these investments to drive long-term cash flows over short-term profit optimization. With investments, we have continued to use the same disciplined approach to deploy capital that we have always used, similar to how we develop offerings like Fresh and Eats. When our teams see a sizable market and an opportunity to create a differentiated customer experience, we start with small investments to test and then focus on iterating on the product and model until we build confidence in customer behavior and unit economics. Only then do we scale investments. While we remain bold and ambitious in pursuing new opportunities, we start small and our teams have to earn their way into bigger investments. Turning to our first-quarter results, we delivered strong 74% reported revenue growth and a 63% increase on a constant currency basis. That came against challenging comparisons to last year’s first-quarter revenue benefit from the COVID pandemic. For context, while the Korean e-commerce segment declined on a quarter-over-quarter basis, Coupang grew total revenue 11% quarter-over-quarter and 9% on a constant currency basis. Last year, February was the first full month we saw revenue spike due to COVID. Our constant currency revenue growth in February and March remained in the high 50% range. There remains uncertainty around how consumers will respond to developments in the pandemic. However, we are very excited as the fundamentals of our business are as strong as they have been. Quarterly active customers grew 21% year-over-year in Q1 to 16 million as our customer retention rate remains very high and our superior experience continues to attract new customers. Revenue per active customer grew 44%. The higher mix of new customers who initially spend less impacted the growth rate, but we are happy to make that trade as our customer cohorts have proven to have strong retention and increase spend over time. In terms of our revenue mix, despite the difficult year-over-year comparison, net other revenue growth accelerated relative to prior quarters, increasing 126% year-over-year. The higher growth is related to revenue from Coupang Eats and advertising, two newer offerings that have continued to scale over the past year. Gross profit increased 70% to $733 million in Q1. Our gross margin was about 40 basis points lower than last year due to the revenue mix across our offerings and additional investments, but we are encouraged that the underlying operating leverage in the business is improving. With our new offerings like Fresh and Eats, we continue to prioritize investments to drive growth and build scale. Also, Bom noted how our teams continue to navigate operational challenges related to COVID safety protocols and shutdowns, which have come with an opportunity cost of building efficiency efforts in the near term. As we move past COVID, further scale new offerings, and optimize operations and supply chain, we expect to see increasing efficiencies and meaningful gross margin expansion longer term. Excluding equity compensation and depreciation, operating, general and administrative costs increased to 20.9% of revenue in Q1. The increase is mainly from investments in technology to support continued product enhancements and more corporate personnel. The first quarter also includes non-recurring costs related to our IPO. As a result of the higher expense growth, our adjusted EBITDA loss was $133 million in the first quarter. For cash flow, we focused on trailing 12-month numbers, which we believe are better indicators of ongoing business performance. Trailing 12-month operating cash flow was negative $197 million in the first quarter due to the timing of inventory investments and payable cycles related to the same period last year. Last quarter, we made inventory investments following strong growth late last year to offer customers broader selection. Meanwhile, Q1 2020 cash flow benefited from an initial surge in sales from the COVID lockdown, and inventory replenishment lagged a bit. But our cash conversion cycle is unchanged, and we expect these factors to normalize as the year progresses. Overall, we are pleased to have carried our operating momentum into 2021, and we are confident that the investments we are making and our focus on operational excellence to deliver an exceptional customer experience will continue to pay off. I will now turn the call back to the operator to begin the Q&A.
Thank you. We have your first question from Stanley Yang with JPMorgan. Your line is open.
Thank you for your first-quarter results. I have two questions. First question is regarding the competitive landscape. E-Mart and other market players have announced a low-price strategy which I believe poses a challenge to Coupang’s growth momentum. So, what are your countermeasures, and should we expect any disruptive marketing competition in the second quarter and beyond? My next question is: can you provide insights into the 1P versus 3P GMB mix change during the first quarter? Can you share any GMB trends and any product category trends in terms of GMB?
Hi, thanks for the question. I will take the first part of that and I think maybe Gaurav you can tackle the second question. As we stressed in our opening, I think the most important competitive advantage that Coupang has is really our orientation. We have always worked backwards from the customer. It’s never been appealing to us to be reactive to competitive changes. We believe that enduring long-term trust with customers comes from consistently delivering the best experience at the lowest price every day to all customers. That’s an important context we have built. We have invested billions of dollars into our end-to-end network. In Fresh, we believe we are the only nationwide dawn delivery and same-day delivery service. We believe we have the best selection. We also believe we have the lowest price because of the structural advantages and efficiencies that we have shared back with our customers. For example, we have the lowest shipping free shipping threshold in Fresh that we know of, which is about $13 minimum or KRW 15,000. That’s the kind of everyday low price and fast delivery experience that we are delivering consistently at scale. It’s not an easy thing to do. We have built hard things and invested a lot of capital to build that unique end-to-end network. That’s why you are seeing the growth that you saw in the first quarter. In Q1, Fresh was 2.5 times the size it was in Q1 of 2020 and that’s not on a small scale. So, even at large scale, you are starting to still see very high growth, and that’s not because we reacted to any competitive strategy; we’re not depending on short-term promotions, that’s because we built the infrastructure and the technology nationwide to provide the best selection, the best service, at the lowest price consistently, every day, to everyone. And we will continue to invest in that. Fresh is one of our new initiatives that we are really excited about, and we will continue to focus on.
Stanley, on your second question of the 1P versus 3P mix change, we continue to see strong growth in both 1P and 3P, and there is no material change in mix at this time. So, we are focused on both services and continuing to drive initiatives in each of them. Over time, we would become agnostic between our own inventory and third-party selection. We will continue to optimize for total gross profit dollars, and assuming no difference in customer experience, we will prioritize whatever is more profitable for a given item.
Thanks. Operator, we can take the next question.
Hi, thank you for the opportunity. I have two questions if I may. The first one is that we noticed strong growth coming from the active users. Just wanted to know what’s driving this? And the second question is there has been a couple of news on Coupang regarding its overseas expansion initiatives. Could you clarify how focused Coupang is on this overseas expansion? And if you are focused, is it on the e-commerce part or is it for other types of initiatives? I would like to know more details around that as well. Thank you.
Thank you. Thanks for your question, Eric. On the first part, we think the drivers of active customer growth are the same drivers that you saw drive the high adoption and spend growth that we shared in the S-1. If you look at our core behavior, our customer adoption continues to accelerate. We think it’s really a combination of validation of our long-term strategy and the investments we have made. We really believe no matter what category you're looking at, customers want all three of those pillars: service, selection, and price. What we are really excited about is that the primary driver of our growth continues to be organic. Word of mouth is spreading. The vast majority of online shoppers in Q1 in Korea did not purchase from Rocket. We are so excited to see that penetration go up. And since these are new customers, we have evidence that once they experience that selection, service, and price differentiation consistently and build that trust, their spend and loyalty to our services grow and accelerate over time. We believe that as we add more offerings like Fresh and Eats, it creates more opportunity for customers to become loyal to our platform and trust in our services. So, we are seeing all those investments compound our customer adoption and loyalty. On the second question regarding overseas expansion, I think it’s important to clarify that we have a tremendous runway ahead. We are so early in our journey in our existing market. This is one of the largest and fastest-growing markets in the world in Korea. The fact that our oldest cohorts are still increasing spend at a fast rate, and our most mature categories are still gaining online share, speaks to the overall growth being three times that of the e-commerce segment. We will explore opportunities in new markets as they arise and pursue them only if we find an attractive opportunity.
Thanks, Eric. Operator, we will take our next question.
Yes, good morning. Thanks, guys. Firstly, do you have any specific plans for what to do with the $3.5 billion you raised from the IPO? It seems like it could give you an even better chance to further your lead in the market. And secondly, logistics is really a great competitive advantage you have. Can you explain any recent developments you have had on the 3P performance side, and whether you think merchants will accept more than one e-commerce platform doing 3P fulfillment or whether they would prefer one company doing that? Thank you.
Hi, thanks for your question. I think those two questions are somewhat related for us. When you look at our investments over the last seven years, we have invested billions of dollars building 25 million square feet of fulfillment and logistics infrastructure, not just that, but a unique tech stack—countless systems, processes, and algorithms to optimize these operations. We are not resting on our lead. Our goal is to extend that advantage. In the coming year, we plan to build more infrastructure than we have ever built in any year in our history. Just in infrastructure alone, we are going to build over 50% of what we have built in our entire history in the coming year. We are going to continue to push and extend our structural advantages. It’s not just advantages in customer experience, it’s efficiencies that come out of that scale. Those savings we are going to pass back to our customers and share with our partners. As for whether merchants will accept more than one e-commerce platform for 3P fulfillment, I think the way to think about it is about who can build infrastructure. Who can build infrastructure that creates structural advantages and efficiencies that can be shared with customers? If you don’t have that scale, that technology, that infrastructure, it’s actually higher costs. We are going to continue to build and then have advantages in both experience and cost, providing the best experience at the lowest costs. We will also continue investing in new offerings. We are excited about the progress we are making in Fresh and Eats, but they won’t be the last. We are constantly testing more opportunities and will invest in those that gain traction.
Thank you, operator.
Hi. Yes, thank you for the opportunity. I have two questions. On your 3P business, how should we think about your average on the 3P take rate compared to other marketplaces in Korea? And how fast can this grow along with the expansion of the Jet Delivery services? My second question on your customer base: could you provide more color in terms of age group or certain areas, specifically where we can see potential upside in the population in Korea? Additionally, I would like to know the percentage of Rocket WOW membership among subscribers, as well as any target ratio for Rocket WOW subscribers.
Thank you for the questions. Let me try to cover as much ground as I can. Regarding the age groups and demographics, we are still under-penetrated in almost every age category you can think of. In Q1, according to the sources we found, there were over 37 million online shoppers in Korea. We had 16 million, which is of course a significant jump from where we were year-over-year and continues to grow. According to our cohort data, once customers start adopting our services, you see their spend grow every year and accelerate. We are still very early, and the opportunity for growth is vast across all age brackets. We believe that the vast majority of online shoppers should be using Coupang and shopping on Rocket. We are focused on creating more chances and points of contact to familiarize customers with our services. Some will start on Rocket, some on Eats, and others on Fresh. We are launching various services and testing countless experiments to create more opportunities for engagement with customers.
Thanks, Soyun. Operator, we will take our next question.
Thanks for taking my questions. My question is for Gaurav: can you talk about revenue growth expectations for the second quarter and FY '21? Is the expected deceleration consistent with your prior view? It looks like you guys did a good job on EBITDA; can you assess expectations for the same period as well? For Bom, specifically, could you address competition given the potential capital raising by one of your major competitors, Neighbor? If they choose to increase competition, how do you plan to respond to that new competitive pressure?
Thank you for the questions. As I mentioned earlier, in February and March, we saw the year-over-year comparisons after COVID hit Korea in 2020. The constant currency revenue growth in February and March remained in the high 50s. There is uncertainty going forward, but that’s where we see so far.
Regarding profitability, you will see fluctuations in gross margin in the near term, driven by revenue mix across our different services and our investments. But in the long run, we are seeing strong momentum as evidenced by our growth despite the complex challenges of the pandemic. The investments we made earlier have put us in a position to invest for long-term cash flow over short-term profit maximization. We are fortunate to be in a position of capital, allowing us to think long-term. We're building a generational company capable of breaking trade-offs and providing the best experience at the lowest cost. As for competition, it doesn’t change our strategy. We've been making investments over the last decade in building an end-to-end infrastructure that now blankets the market with technology. Our commitment to unprecedented scale in e-commerce technology will continue. In the coming year alone, we plan to build over 50% of what we have built in our entire history for fulfillment and logistics infrastructure.
Thanks, James. Operator, we will take our last question.
Thank you for the presentation and the opportunity to ask questions. My first question is about operating cash flow. In the first quarter, operating cash flow came down to negative territory from positive figures a year ago. Is this related to the increase in inventory levels? I would like to understand your expectations moving forward for the GMB mix of Grocery or Rocket Fresh. For the second question regarding your fulfillment service, could you explain how many sellers have been onboarded? What kind of feedback have you received, and what monetization opportunities are you seeing?
Thank you, John, for the question. On our operating cash flow, there are no changes to the fundamentals of our business. The negative operating cash flow is primarily due to timing related to inventory procurement and payable cycles. We expect this to normalize moving forward. Our fundamentals still remain strong in terms of inventory management.
Regarding fulfillment services, the essential point is that we are building structural advantages and efficiencies to share with our customers and suppliers. Whether serving in retail or any of our new initiatives, we always start at a small scale to test, learn, and iterate. We began Eats in one part of Seoul and have expanded nationally because of the capabilities we built. We create opportunities for suppliers to engage with us, developing our Rocket system to ensure that we’re providing the best experience at the lowest cost.
Thank you, John.
Mr. Senno, I turn the call back over to you.
Thank you everyone for joining us today. We appreciate the interest. Operator, we can end the call. Thank you.
Thank you.
This concludes today’s conference call. You may now disconnect.