Transcript
Good afternoon, and thank you for holding. My name is Emma, 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 Mr. 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 fourth quarter and full year ended December 31, 2021. I'm 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 most recent quarterly report on Form 10-Q filed with the SEC on November 12, 2021, and in other filings made with the SEC 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. As a reminder, these numbers are unaudited and may be subject to change. 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 SEC filings, which is posted on the Company's Investor Relations website. In addition, we have posted a presentation in conjunction with today's earnings release that can also be found on our IR website. Now I’ll turn the call over to Bom.
Thanks, everyone, for joining us today. Before we discuss our Q4 results and outlook for the year ahead, here are some highlights for the quarter. Constant currency revenue increased 39% year-over-year for a robust two-year CAGR of 64%. We continue to grow more than twice as fast as the Korean e-commerce segment, extending our leadership position. Our customer base increased over 20% year-over-year for the 16th straight quarter and grew 7% on a quarter-over-quarter basis, and our unmatched customer experience is driving deeper engagement. Nearly 20% of active customers use three or more Coupang offerings in Q4, a fivefold increase from the previous year. Revenues nearly tripled in two years, and that blistering growth led to our prioritizing projects to support scaling over improving efficiency and operating leverage. 2021 was a tale of two halves. In the first half of the year, we saw some of the benefits of that strategy. We were able to scale the business at high rates even on a sizable base. In the second half, we faced sudden capacity constraints that were complicated by volatility in demand from COVID surges. Labor supply shortages worsened in Q4, and efforts to secure last-minute capacity proved to be costly with limited returns. Fixed cost leverage also took a hit as Fresh doubled its logistics footprint in 2021, and underutilization was higher in Q4, largely from our inability to secure additional labor for the new facilities. As a result, in the second half of 2021, our strong underlying profit drivers were obscured by short-term disruptions and timing of investments. The question was, how short-term those disruptions would be? We spent much of Q4 redirecting resources to strengthening, not just adding capacity and improving operating leverage. Those efforts are bearing fruit. So far in Q1, we've secured record capacity, while driving an over 250 basis point increase in gross margin quarter-over-quarter. We're on track in Q1 to deliver the highest gross margin since COVID began, and that still includes COVID-related costs and investments in new initiatives. We're excited that 2022 is off to a good start. We're also seeing some positive macro developments. The overall retail market grew 10% year-over-year, and the latest forecast now projects that Korea's total commerce market, excluding autos, will grow at a CAGR of 6% over the next four years to exceed $600 billion by 2025. And the e-commerce segment is expected to grow over that same period to $290 billion. We're less than 10% of that today, despite being the largest e-commerce player in the market, and our market share of total retail remains in the single-digits. We have a long runway ahead of us. Our flywheel is strengthened. Our share of product e-commerce growth increased every quarter in 2021. We're the largest in e-commerce scale, growing over twice as fast as the segment even in Q4. Our WOW membership grew from 6 million at the end of 2020 to nearly 9 million by the end of 2021. Our customer cohorts are still compounding at an impressive rate. Every single annual cohort grew approximately 30% year-over-year or higher in 2021, even our oldest from 2010. In other words, we still don't know how high the entitlement spend will be ultimately, even for our oldest customer cohorts. Our growth is driven by the superior customer experience enabled by our unmatched e-commerce infrastructure. We deliver millions of products within hours nationwide, 365 days a year, with free shipping and returns for WOW members. No other player offers our selection at everyday low prices with the speed and convenience of our services. That is all made possible by the scale of our e-commerce infrastructure now spanning over 40 million square feet. We believe we have a larger footprint than the rest of the e-commerce players combined. In the past year alone, we added 15 million square feet widening our lead in the market. And it's not just our 1P offering. Our merchant-driven spend also grew at a multiple of the e-commerce segment and continued to gain significant share this past year. 2022 will be an important year on our journey towards long-term adjusted EBITDA margins of 7% to 10% or higher. Retail product profit has increased for seven consecutive quarters. Advertising continues to grow at a rapid clip. Our renewed focus on long-delayed efficiency projects has already started to drive improvements in operating and fixed cost leverage in Q1. The line of sight we have on these drivers gives us confidence in our long-term EBITDA margins of 7% to 10% or higher, and this should become more evident as we share our progress throughout the year. So far in Q1, as I mentioned, we're seeing an over 250 basis point improvement quarter-over-quarter in gross margin for the whole business. Mature offerings like core are profitable. As Fresh increases utilization of its newly built capacity, we expect it to follow the same trajectory. At the same time, we intend to invest in new initiatives where we see significant long-term opportunity. On Eats, hyper growth continued in 2021. We believe Eats has quickly scaled to become the leader in the fast delivery category, generating billions of dollars of volume in just its second full year of operation. It was the most downloaded mobile app in all of Korea in 2021. In just two years, it's achieved double-digit segment share nationally and a lead position in some key regions. Now we’re focusing on digesting that growth, investing in initiatives that will increase operating leverage and explore synergies with our product commerce offerings. We expect execution in these areas to meaningfully improve profitability in 2022 and position us to be more efficient in our next phase of expansion. To provide more visibility on profitability, we plan to report product commerce as a separate segment, starting with our Q1 earnings release. We hope that our progress in 2022 will highlight the underlying strength of the business. There's a lot to be excited about for 2022, and we're off to a strong start. We're determined to capitalize on what we believe is a generational opportunity to create value for customers, employees, shareholders, and other stakeholders. Now I'll turn the call over to Gaurav to go through the financials in more detail.
Thanks, Bom. Our demand trends remain robust even against the heightened comps from COVID. Q4 reported revenue grew 34% year-over-year, 39% in constant currency and had a robust two-year constant currency CAGR of 64%. We exceeded annualized run rate revenue of $20 billion for the first time. Net other revenue continues to drive outsized growth, increasing 68% year-over-year as our advertising and Eats offerings continue to scale rapidly. Quarterly active customers reached nearly 18 million, increasing 21% year-over-year. Our superior customer value proposition across our offerings continues to attract new customers and drive record levels of customer retention. We added three million active customers year-over-year, the best Q4 in our history, and we still have a significant opportunity ahead to expand that base to reach the 37 million active Internet buyers in Korea. Net revenues per customer increased 11% on a reported basis and 15% on a constant currency basis as customers are spending across more categories and offerings. As engagement increases and more customers go deeper into our funnel, we expect increasing wallet share to drive sustained strong growth in revenue per customer. Starting in Q1, we plan to report two segments to provide better visibility on profitability of our mature offerings. Product Commerce will include our core 1P and 3P offering, along with Fresh and associated advertising offerings. The Growth Initiatives segment will include Eats and other nascent initiatives like video, fintech and international expansion, which are in investment mode. As Bom noted, short-term headwinds and timing of investments obscured our improving underlying profitability. We invested approximately $130 million in incremental COVID-related expenses in Q4, which is approximately evenly spread across cost of sales and operating, general and administrative costs. For the past few months, we have made significant progress ramping up labor capacity and optimizing operations to reduce these incremental costs. We currently expect approximately $60 million to $70 million of related costs in Q1 and then expect it to further decline in Q2. We plan to remain disciplined going forward in managing any short-term constraints and expect to operate within our planned capacity. Gross profit increased 24% year-over-year to $806 million in Q4, while gross margin declined due to increased investments and growth initiatives. The Product Commerce segment margin expanded quarter-over-quarter in Q4, even with the higher COVID-related costs. Adjusted EBITDA losses increased to $285 million, primarily due to the incremental COVID-related costs, underutilized capacity related to Fresh expansion, and higher investments in our growth initiatives. We continue to invest in Eats to drive growth and iterate on the offering and increased investments in nascent initiatives like on Coupang Play, our video offering, international and fintech. We are already seeing improved profitability in early 2022 and are well positioned to make meaningful progress throughout the year. Gross margin for the whole business has expanded over 250 basis points to about 18% thus far in Q1. The improvements have been driven by declining COVID-related costs, improved operational efficiencies, and continued growth in high-margin ad revenue and retail product profit. We expect that gross margin and adjusted EBITDA margin will continue to show meaningful improvement in 2022. On growth, we have carried our strong revenue momentum into early 2022. Constant currency revenue growth has remained above 30% through February, and we expect it to be in the low 30% range for Q1. Demand has been a few percentage points higher than that, but we have chosen to stay disciplined and avoid last-minute capacity investments that proved costly with limited returns in late 2021. We are not giving formal guidance on growth beyond Q1, as consumer behavior remains challenging to forecast in the current COVID environment. However, we have grown more than twice as fast as the e-commerce segment every quarter for the last several years. And we are confident that with our superior customer experience and strong execution, we will continue to grow significantly faster than the e-commerce segment for years to come. Turning to our profit guidance for full year 2022, we expect an adjusted EBITDA loss below $400 million. To provide additional context, on a new product commerce segment, we expect it to turn profitable by Q4, a significant improvement from the negative 2.6% margin in Q4 of 2021. On Growth Initiatives, we continue to invest in Eats as it improves profitability. In parallel, we plan to increase investments in nascent growth initiatives that have shown early promise. Investments across video, international expansion, and fintech will increase from around $85 million in 2021 to approximately $200 million in 2022. We are investing more to further iterate on these offerings and build what we believe can be meaningful growth drivers beyond 2022. In closing, we are off to a great start with solid demand trends and an improved profitability profile that we expect will continue to get better as the year progresses.
Your first question comes from Eric Cha with Goldman Sachs. Your line is now open.
Yes. Hi. Thank you for this opportunity. So I have two questions. First is on Eats. So what is the ultimate goal for the company around Eats, is it to become the number one market share player in the market, or is there some other motive for the business? And the second question is, I think, about the guidance. So, obviously, you mentioned adjusted EBITDA guidance of less than $400 million loss. And you also mentioned that you are seeing low 30% range for the revenue in the first quarter in constant currency. Would you help us take us through some steps? So what would be the revenue growth assumptions associated with that? Do you think other than industry deceleration due to comps and probably reopening, beyond that, there could be some idiosyncratic positive factors that support Coupang's growth beyond the first quarter? And then also, obviously, you mentioned about the gross profit margin, but it will be helpful for the trajectory throughout the year as well as the OpEx trend as well. Thank you.
Hi, Eric, thanks for the questions. So I'll take the first part on Eats. Eats has been the fastest-growing service in our history. As we mentioned, in just the second full year of operations, it's now scaled to billions of dollars of orders and has grown to become what we believe is the leader in the fast delivery category. The fast delivery model is what we believe will win the space, and it has in other markets that we studied. We're also excited about the growth potential that still remains the last quarter. 70% of our active customers didn't place a single order on Eats. But first, we'll focus on digesting our record growth. We believe our culture of operational excellence will help build the right foundation for efficient and ultimately profitable growth there. Additionally, there are synergies with our product commerce site that we get to tap, which we believe has the potential to expand the value proposition for customers and drive additional operating leverage in a way that we couldn't achieve if Eats were a stand-alone company. It's still at a very early stage there of what we believe is a long-term opportunity. On the guidance question around EBITDA, in Q1, we're seeing growth in the low 30s so far. Demand was actually several points higher. We don’t see a reason right now for the growth to decelerate later in the year, but it's very hard to predict as you mentioned. There are so many variables at play. Historically, we haven’t given guidance on revenue, and we will stick with our policy. Now in any scenario, we expect to grow significantly faster than the e-commerce segment, as we have over the last several years, we’ve grown at least twice as fast as the e-commerce segment every single quarter. The overall market opportunity appears to only be getting bigger. I think we mentioned that the latest forecasts show that overall commerce, excluding auto and fuel, will expand at a CAGR of 6% over the next four years and the e-commerce segment projected to approach nearly $300 billion by 2025. So we continue to be confident that we will grow significantly faster than the e-commerce segment for a long time to come. Now, as you mentioned, you asked about what assumptions were in the EBITDA lost guidance. The near-term revenue remains extremely hard to predict. But we do have more confidence over our efficiency initiatives and investments. And that's why we felt comfortable giving guidance around the EBITDA.
Your next question comes from the line of Stanley Yang with JPMorgan. Your line is now open.
Hi, thanks for your opportunity for the questions. First question is about your EBITDA guidance. So you mentioned $400 million adjusted EBITDA, negative adjusted EBITDA in 2022, and you also guided $200 million investment from international video and FinTech. So should we assume these $200 million investment is kind of a negative in our EBITDA included in the $400 million for your full year estimate? And also, how much negative EBITDA would come from Eats and Fresh? And in the course of the businesses, what will be the key margin, the EBITDA margin growth drivers? Do you also assume some meaningful take-up of the fulfillment service for 3P sellers in the second half? That was my first question. And my second question is, do you think this labor tightening, labor supply issue is a structural issue and persistent issue in the Korean e-commerce market even after reopening? That’s my second question.
Thanks, Stanley. Let me address the second part of your question first. Regarding the labor capacity issue, we don't perceive any structural constraints on our end. We experienced some short-term disruptions in Q4, but in Q1, we achieved record capacity while reducing costs and enhancing our gross margin by over 250 basis points, which we’ve discussed. This improvement is partly due to the easing of COVID-related concerns and our commitment to strengthening internal processes. While we may still encounter occasional short-term disruptions, our performance in Q1 suggests there are no structural constraints in the market currently. We anticipate some disruptions may occur, but we have learned from past experiences and intend to remain disciplined to avoid last-minute efforts that have previously been wasteful as we seek to balance growth and efficiency this year. Regarding guidance, we are investing $200 million in new initiatives that had limited funding last year. These initiatives have proven their worth and warrant additional investment. We view these as long-term growth investments beyond 2022. As we make progress, we will share more information at the right time. You also inquired about Fresh. We plan to segment our business into a product commerce category, which we will share in Q1. Our expectation is that Fresh, which doubled its logistics capacity in 2021 and experienced peak underutilization in Q4, will optimize its facilities as it scales, and this issue of underutilization will improve with time. We aim to achieve profitability for Fresh's product commerce by Q4. Lastly, on the fulfillment services for third-party sellers, as stated last quarter, we are confident that our fulfillment service will provide significant value to merchants and customers based on early results. We expect that our fulfillment services will play a more significant role by the end of this year. There is a necessary lead time to develop the technology and infrastructure for scaling our fulfillment services, but we remain very optimistic about its long-term potential.
Your next question comes from James Lee with Mizuho. You may proceed.
Great. Thanks for taking my questions. My question is about capacity growth. You guys are thinking of growing in FY ’22, I think this year you were planning to do 50%. How should we think about FY ’22 and the fact that you have this initiative becoming more efficiency and maybe to the extent looking at capacity growth for FY ’22, you guys can break out investment fulfillment versus last mile? Thanks.
Thank you for the question. So in ’21, we added 15 million square feet and we are going to add millions more this year. We believe increasing our infrastructure lead in the market by adding much more than anyone else in the market. In addition, we are going to continue to invest into the future for the fulfillment and logistics for 3P. I think the exact capacity plans we continue to build and fine-tune as we go along, but we are going to continue to be aggressive on a capacity build plan.
And Gaurav, just one follow-up on your commentary here, I just want to reconcile your statement. You're saying that in the past, you're able to fulfill excess demand by renting facilities that ramped up the cost. And at the same time, you talk about underutilized facility peak in 4Q. I'm trying to reconcile the two statements that you guys talk about before here. Thanks.
Sure. I think the underutilization remark that Bom mentioned was primarily on the Fresh facilities. Fresh facilities, as you can imagine, are much more sophisticated than the normal core facilities and have much longer lead time. So we had an aggressive plan on build-out looking at mid-term last year. And because of the labor challenges we mentioned in Q3, Q4 we were not able to fulfill customer demand on Fresh and not able to utilize that capacity due to other constraints. So I think that's what Bom is referring to. That capacity, underutilized capacity is on the Fresh side, it's much more expensive capacity. That's why we are calling it out separately than the normal capacity. But overall, we still continue to build more, as much more as the year goes.
Your next question comes from the line of Seung Ro with CLSA. Your line is now open.
Hi. Thank you very much. I have two questions. The first is about advertising revenue. Can you provide any insights into the current scale of this revenue and your thoughts on its potential growth? The second question concerns your investments. You mentioned an increase from $85 million to $200 million this year. How much of that will be directed towards overseas expansion, and which markets are you focusing on this year? On the surface, this doesn't seem significant, so should we interpret that as a sign that overseas expansion will be limited? Thank you.
Hi. Seung, I didn't catch the last word there. You said that we should assume the overseas was, I'm sorry?
How your overseas expansion should be a more moderated and controlled process rather than a very aggressive expansion in 2022?
Sure, I'll begin by stating that our strategy emphasizes a disciplined approach to investments. We focus on testing, learning, and ensuring that our investments justify further backing, which builds our confidence for increasing those investments. This principle applies to all our ventures. We see potential beyond the Korean market for balancing selection, service, and price, and we're enthusiastic about these opportunities. It's still early in the process, and we'll share more updates as we progress. We're particularly keen on creating memorable customer experiences and driving meaningful growth beyond 2022. Regarding our advertising revenue, we're making significant strides, though there remains a substantial gap to reach our full potential. It's still in the initial stages, but we believe advertising will continue to evolve alongside our ecosystem. Our focus remains on enhancing customer experience, which is crucial for both the ecosystem and advertising growth. Additionally, the $200 million allocation pertains to video, international, and FinTech initiatives.
Your next question comes from the line of Peter Milliken with Scotiabank. Your line is now open.
Yes. Good morning, guys. Thanks for the call. Just in terms of the margin increase that's been coming through in the first quarter, is that all about cost decreasing, or has there been some increase in the markup that you've been charging? And if it is all about cost declines? Can we just get a bit more granular in how that's changed so rapidly? Is that purely the COVID improvement, or is it something else?
Thanks for your question, Peter. We did not make a change in our pricing policy. We remain committed to providing the best selection service and price for customers. The significant gains we've seen in gross margin, so far, in Q1 have been primarily driven by engaging long-delayed efficiency projects that contributed to operating leverage, sourcing optimization and advertising among other factors. These are the same drivers that give us confidence in the long-term EBITDA margins of 7% to 10%-plus. We'll continue to build on our start in Q1. And our product commerce segment, in particular, is an area where the progress will be most evident. We expect to take that to profitability by Q4, and you'll see our progress as the year unfolds.
Right. Okay. And then if I look at the COVID costs from Q4, there was meant to be a $130 million incremental increase. What was driving that? Was that paying out more money to delivery people? Was it sign-on bonuses? Was it management of the process, the cleanliness, or a combination of all three?
Yes, go ahead, Gaurav. I think you're on mute.
I'm sorry. Those costs are mainly attributed to one-time COVID-related expenses, which we expect to reverse. They are largely labor-related as we added more staff. As Bom mentioned, we were pursuing growth amid last year’s unexpected spikes, which became quite inefficient for us. However, we continue to invest and seek to balance long-term capacity with short-term seasonal growth. Additionally, there were other COVID-related expenses, such as cleaning and social distancing, but the main incremental costs were labor-related.
Okay.
So the answer is all three of those. I think pretty much...
Okay. That's good to know. And moving forward, do you believe that the fees for delivery agents and delivery vans have increased permanently, or is that something you don't have clarity on?
Yes. Again, there could be some short-term disruptions from time to time in the future. But as we mentioned, we're encouraged by what we've seen in Q1. It appears that some of the disruptions were temporary as COVID fear subsided. And of course, we did strengthen also internal processes to deal with that. We've seen improvements. So we're encouraged. We don't think at this moment that this is a structural or permanent constraint. The disruptions we saw in Q4 were not permanent structural. The other thing was also some of the last-minute efforts that Gaurav mentioned, chasing capacity last minute that proved to have very limited returns and was extremely costly. We've learned from that, and we intend to stay disciplined and avoid some of those efforts as we balance growth and efficiency this year.
Okay. That’s great to hear. Thank you very much, guys.
Thank you.
At this time, there are no further questions. This concludes today's conference call. Thank you for attending. You may now disconnect.