Coupang, Inc. Q3 FY2022 Earnings Call

Good afternoon. My name is Paula, and I will be your conference operator today. I would like to welcome everyone to the Coupang Third Quarter 2022 Earnings Conference Call. Now I'd like to turn the call over to Mike Parker, Vice President of Investor Relations. You may begin your conference.

Thanks, operator. Welcome everyone to Coupang's third quarter 2022 earnings conference call. 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 include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and in our filings with the SEC, including our most recent annual report on Form 10-K and subsequent filings. During today's call, we may present both GAAP and non-GAAP financial measures. Additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures are included in our earnings release and our SEC filings, which are posted on the company's Investor Relations website. And now, I'll turn the call over to Bom.

Thanks everyone for joining us today. I'm excited to share with you some highlights from our third quarter operating results. Revenues increased to $5.1 billion, growing 27% year-over-year on an FX neutral basis and over 10% year-over-year on a U.S. dollar basis. This was driven by an increase in both active customers and revenue per active customer. We generated over $1.2 billion in gross profit with a record 24.2% gross margin, representing over $3.4 billion in gross profit recorded year-to-date. Our adjusted EBITDA was $195 million for the quarter at a 3.8% adjusted EBITDA margin. Our cumulative adjusted EBITDA year-to-date is positive $170 million. And in Q3, we achieved positive net income of $91 million for the consolidated business, improving $415 million year-over-year. First on Product Commerce, while the macro environment remained uncertain around the world, the Korean retail in Q3 grew at a strong pace of 7% year-over-year. Even as the world reopens post-COVID, our growth has been resilient. Our FX-neutral revenue recorded a robust 27% year-over-year growth. Our active customers for Product Commerce grew even faster than the 7% year-over-year active customer growth for the consolidated business. The spend of our customer cohorts even our oldest continues to compound at a fast rate and that strong spend growth can be seen across all categories, even our most mature. We still don't know the entitlement spend of our customers in any category, much less in aggregate in a total commerce market projected to exceed $600 billion by 2025. That momentum positions us well to support merchants, suppliers, and consumers to succeed in the current economic environment. Over 70% of our merchants are small and medium enterprises, or SMEs with less than $2.5 million in annual revenues. Those merchants generated growth on Coupang that was multiples of the overall retail market. We believe we have become the number one source of growth for our SMEs. Q3 marked the third quarter in a row of significant profitability improvement. While we continue to see positive impact from increasing economies of scale and margin accretive offerings, most of the recent improvement has been the result of investments in technology, infrastructure, supply chain optimization, and process innovation, including automation. For instance, typically inventory loss grows as you increase the breadth of selection in Fresh, especially across multiple regions. We set out to break this trade-off and provide customers with the widest assortment of Fresh at the lowest cost. Our teams found ways to leverage machine learning among other means to better predict changes in customer demand by region and optimize inventory orders and placement. That was a key driver of the over 50% year-over-year reduction in Fresh inventory losses in Q3 alone. There are numerous such efforts across the company to improve efficiency, many of which have been ongoing for years. The rate of improvement won't be consistent or as dramatic each quarter, but we are excited about the potential ahead. Above all, the results of the quarter reflect our accelerating flywheel that is powered by our relentless focus on customer experience and operational excellence. We obsess about how to make experiences richer and prices lower for our customers. And our unique e-commerce network scale and design enable our superior customer service and efficiency. Over the past 7 years, we invested billions of dollars to build a network that integrated from inception, fulfillment and last mile logistics. Today, we have built the largest fulfillment infrastructure in the market. We also believe we have the largest last mile network of directly employed drivers. And from order to delivery to returns, virtually every aspect of our customer experience is orchestrated by our technology. Our homegrown technology directs the movement of our goods and tens of thousands of drivers and staff across our integrated network of over 40 million square feet of infrastructure, stacked side-by-side, that would be the equivalent of 500 soccer fields or an area larger than that of Central Park in New York. That distinct integration of technology, fulfillment infrastructure and last mile logistics allows us to break traditional trade-offs between selection, service and price for our customers. Because of it, we are able to deliver millions of items via dawn delivery, ordered as late as midnight and arriving at the door before 7:00 AM with unlimited free shipping. Because of it, our customers can leave items for return outside their door without the hassle of packaging in a box or even printing a label. And because of it, we are able to eliminate box packaging for over 85% of our rocket deliveries as well as deliver most of our Fresh orders in eco-bags that we pick up and reuse. Much of the efficiency gains we've captured are exclusive to a network of our design. We customize processes upstream to generate efficiencies downstream and alter design downstream to optimize processes upstream. The integration also allows us to deliver Fresh products in the same last mile trucks with our general merchandise deliveries, without a separate cold chain delivery network. Box less and eco-bag deliveries make customer lives easier and drive significant reductions in packaging waste and the number of trips our trucks made to complete deliveries, which result in lower emissions. Our increasing scale will help us to fulfill our potential, but we will also continue to invest in automation, including machine learning and robotics. This will make work even easier for workers and prices even lower for our customers. In addition to better service and low prices, we will continue to expand both first-party and third-party selection for our customers. That includes new selection on Rocket enabled by fulfillment and logistics by Coupang or FLC. FLC provides hundreds of thousands of merchants access to the speed, efficiency and convenience of rocket delivery and returns. We're excited to share the benefits of billions of dollars of investment in infrastructure and technology with tens of thousands of small and medium enterprises that have traditionally been excluded from shelves and offline stores. This will help them capture the growth and savings generated by our end-to-end integrated operations. In turn, they'll help customers gain access to even wider selection with the experience of rocket and build an even richer ecosystem that benefits both small businesses and customers alike. Finally, let me touch on developing offerings where revenues increased 10% year-over-year on a constant currency basis, driven by our Eats offering. As reiterated recently, our focus in Eats has been on creating a profitable foundation and the dramatic improvements in economics over the last few quarters reflected in the gross profit improvement of nearly $42 million year-over-year. We're also excited by the customer engagement that we're seeing in our initial efforts in Coupang Play, FinTech and International. We're in the very early stages of these offerings, but we believe they have the potential to expand the total addressable market for Coupang and extend our innovations to customers in new sectors and new markets. We will continue to invest with discipline in keeping with our operating principles, starting with small investments, testing rigorously, and allocating more capital to opportunities that maximize our long-term cash flows. As you've seen with our execution and product commerce, we'll be disciplined and long-term oriented in our investments in developing offerings. Overall, the results of Q3, despite the challenging environment, reflect the focused execution of our teams and the fruits of significant investments over many years. While we remain vigilant about the persistent short-term pressures in the macro environment, we also continue to be excited by the strong underlying trends that we're seeing in the business. Now, I'll turn the call over to Gaurav to review the financials in more detail.

Thanks, Bom. As a reminder, we continue to look at our business through the perspectives of product commerce segment, representing our general merchandise and fresh offerings and our developing offerings segment which includes our investment in nascent initiatives like Eats, Play, FinTech and International. Our teams have executed remarkably over the last three quarters reaching notable milestones in each quarter. We had positive adjusted EBITDA for product commerce in Q1, achieved positive adjusted EBITDA for the consolidated business in Q2, and delivered a positive net income of $91 million for the consolidated business in Q3. We are really proud of our teams and their execution. At the start of the year, we provided guidance for 2022 that we expected to achieve adjusted EBITDA of minus $400 million for the total company for the full year, and that our Product Commerce segment would be profitable by Q4 of this year. As of Q3, our adjusted EBITDA year-to-date for the entire business is over $170 million. We continue to see strong demand again this quarter, our total net revenue grew 10% year-over-year on a reported basis for 27% year-over-year and 8% quarter-over-quarter in constant currency. And more importantly, we continued the trend of growing at a multiple of the e-commerce segment growth. Our top line growth was driven by both strong customer adoption and deeper penetration with existing customers. Active customers grew 7% year-over-year, and the active customers in product commerce grew even faster. Our net revenue per active customer increased 19% year-over-year and 7% quarter-over-quarter on a constant currency basis, reflecting greater engagement by our customers. Our customers come to us every day for our unrivaled customer experience, low prices, and vast assortment and we strive to exceed those expectations with each interaction. We continue to invest hundreds of millions of dollars into our customers this quarter through investments in pre-rocket shipping and returns, discounted pricing, and free video content for our WOW members. Q3 marked another record quarter for gross profit margin. We generated over $1.2 billion of gross profit, a 64% year-over-year improvement. Our gross profit margin was 24.2%, an increase of nearly 800 basis points year-over-year and 130 basis points quarter-over-quarter. Product Commerce continued the trend of strong gross profit margin expansion, increasing by over 720 basis points year-over-year and 150 basis points quarter-over-quarter, ending this quarter at 24.6%. The drivers for this improvement remain consistent with the factors we have highlighted throughout this year, benefits from investments in technology, infrastructure, automation, supply chain optimization and scaling margin accretive offerings. This quarter, we showed a large improvement in operating expenses as a percentage of revenue improving by 160 basis points quarter-over-quarter, despite additional investments in fulfillment and headcount. Our operating margin performance demonstrates our ability to leverage our scale, while we continue to invest with discipline for future growth. We do want to note that the reduction of operating expenses in absolute dollars was affected by the higher FX rate. We also had a record $195 million of adjusted EBITDA which is 3.8% of revenue. Product Commerce generated an adjusted EBITDA of $239 million or 4.8% of revenue, driven by gross margin expansion and leverage in other operating and general expenses. This level of adjusted EBITDA margins in our Product Commerce reinforces our belief that we are on track to deliver our entitlement margin over the long-term. In the short-term, revenue remains hard to predict in these uncertain times. But we are pleased with our track record of growing at multiples of the Korean e-commerce segment and expect that trend to continue. And while we don't expect profitability improvement every quarter, we do expect to generate meaningful profit expansion over time. We are committed to maintaining discipline in our investments in nascent long-term opportunities. We invest in these offerings because we are excited about the opportunity to expand the total addressable market and generate greater cash flows over the long-term. Earlier this year, we communicated that we expected these investments in Fintech, Coupang Play and International would not exceed $200 million in 2022. Our year-to-date results thus far are consistent with that expectation.

Your first question comes from the line of Eric Cha from Goldman Sachs.

Hi, Kim. Thank you for the opportunity to ask questions and congrats on the great set of results. I have two questions. First on the Product Commerce gross profit margin. And I understand that there were commentary around this in your early presentation, but would you give us a bit more details around what this quarter leverage was for the product commerce gross profit margin to yet again go up as much as it did? And a bit of a near-term outlook would be helpful. And also does this change your long-term target or outlook in any way? And the second question is, the revenue seems to be up 7% sequentially constant currency, but your operating expenses seem to be flat also adjusted for FX. Would be great if you can let us know where this operating leverage came from? Was there any specific efforts from the company this quarter? Or can we consider this as being structural going forward?

On gross profit margin, you are seeing benefits from continuous improvement programs and many years of investment in technology, infrastructure, and supply chain optimization among others. These are consistent with the drivers that we've mentioned in the last few quarters, and you are seeing gains. In the past few quarters, the gains won't come every quarter, but we expect to continue to see benefits from these improvements over time. This past quarter, process improvements including automation were also big drivers. I mentioned the inventory waste challenge in fresh; offering a wide selection creates the risk of inventory waste, in fact, increases the risk of inventory waste. Our teams were able to leverage machine learning, greatly improve forecast accuracy, inventory placement, and help to reduce fresh inventory waste by over 50% in Q3 alone. Those are the kinds of initiatives that we continue to invest throughout the company. There are many such efforts currently ongoing. We understand the drivers that we believe will get us to that long-term margin opportunity, which as we've stated before is 7% to 10% or higher EBITDA. Those are the drivers that have led to 830 basis points of gross profit margin improvement year-to-date. We are excited about that long-term potential, but it is important to note that they will not happen overnight. And as you can imagine, Eric, we won't realize gain every quarter.

Yes. On the operating expenses, Eric, you're right to note that in constant currency it was flat quarter-over-quarter. We generated efficiencies with process improvements and innovative projects in our fulfillment costs, which are in those numbers while we continue to increase headcount; we also generated a few basis points of leverage with our scaling there. So you can consider it structural as we continue to invest in both these areas in a disciplined way.

Your next question comes from Stanley Yang of JPMorgan.

The positive operating profit and net profit came sooner than we anticipated, marking a significant milestone in Coupang's financial history and a meaningful step toward achieving your long-term EBITDA margin guidance. Could you provide insight into upcoming financial milestones like when free cash flow will turn positive and the timing for reaching your EBITDA margin guidance? Additionally, what key strategic changes do you foresee once you achieve positive free cash flow in the future? Will you pursue more aggressive investments in business development? Related to this, it seems you are increasing your rocket delivery services and cross-border products in Taiwan. Do you plan to invest heavily in the Taiwan market as you did in Korea, or do you have a different strategy for Taiwan? What are your plans for expanding into international markets?

Stanley, I'll take the first part of your question. So as you pointed out, Stanley, we are really excited about the milestones we have hit this year. In Q4, we got to adjusted EBITDA positive for Product E-Commerce. In Q2, we got the adjusted EBITDA positive for the entire company. And in Q3, we got the positive net income for the entire company. Our next milestone that we are focused on is being free cash flow positive. Now historically prior to 2021, our free cash flow was roughly equivalent to or better than our adjusted EBITDA. This year specifically we have made some strategic investments, including one-time CapEx in owning facilities and building facilities, large inventory buys in areas of growth. But overtime, we expect this relationship between free cash flow and adjusted EBITDA to normalize. That's our next milestone to deliver.

I believe Gaurav meant to refer to Q1 instead of Q4. Regarding the Product Commerce adjusted EBITDA being positive and your question about potential strategic changes in our investment approach, particularly concerning Taiwan and other markets, we are excited about the long-term opportunities outside of Korea. We are confident in our ability to be intelligent and disciplined in our execution. We also see opportunities to leverage the strengths we have built, including technology, processes, and selection. As demonstrated in our core offerings, we adhere to our operating principles. Earlier this year, we communicated that our investments in Fintech, Play, and International would not exceed $200 million in 2022, and our year-to-date results align with that expectation. Our investment strategy does not rely on the financial performance of our core offerings; it has always followed a disciplined approach consistent with the principles we introduced after our public launch last year. We test and iterate, ensuring we are confident in long-term cash flow potential before increasing our investments. When we choose to invest more, it reflects that confidence. Therefore, we do not foresee any change in our philosophy or culture and aim to continue demonstrating our ability to execute intelligently and thoughtfully.

Your next question comes from Seyon Park of Morgan Stanley.

Two questions from my side. As you look into the fourth quarter which is seasonally strong for Korea. But then I think in the past, you've also seen that the fourth quarter tends to be a little bit more promotional and competitive. Does that imply that we should be expecting some of that promotional activity to impact your gross margin in the fourth quarter? It’s my first question. Second question is, can we get some kind of color on how much advertisement revenue you are generating? What's the kind of run rate that we could expect for the year and what kind of potential you see from ads? I think if we look at some of the international benchmarks like Amazon or I think JD, 5% plus of GMB apparently is being generated in terms of advertisements. Would that be some kind of a benchmark that we could also look forward to as you grow your advertising business?

Regarding your question about quarterly guidance, we plan to share annual guidance at the start of the new year as we did this year. While we're pleased with our current progress, having surpassed our adjusted EBITDA guidance for the year, these are unpredictable times, and we prefer not to provide specific revisions. Generally speaking, our business growth and our customers' spending growth are largely driven by the experience we have developed over many years. The consistent everyday low prices, quick delivery, and wide selection are not reliant on short-term promotions. As noted, our customers' spending continues to grow rapidly. We are seeing strong growth across all categories, including our largest, and our everyday promise of selection, low prices, and fast delivery remains our focus. This has consistently driven our growth over the last few quarters and is expected to continue doing so in the future. We are also pleased with the progress in our advertising segment, which has been a positive story over the past year, although we still have a long way to go. There are opportunities to enhance this service and expand its functionality. It's also worth mentioning that we've observed synergy between ads and our product commerce, with many additional offerings as well. This segment will benefit from the overall growth of our business, and we're excited about the potential ahead.

Your next question comes from Susie Lee of Bank of America.

I have one quick question regarding your labor costs and operating expenses. So in Korea, as you're aware, those headline and core inflation are rising rapidly? And do you expect to see any incremental burden on your labor cost, especially for those working in either logistic center or those working in the last mile delivery, especially your Coupang friends? And if there is any upward burden on your labor cost, how would that potentially impact your overall operating expenses and the margin?

There are inflationary headwinds. But our results this quarter again, we are net positive because of our investments and our disciplined execution that we continue to see benefits from throughout the year. At least so far, we don't believe that these factors will create a material disruption to our business. And while the macro conditions are uncertain, we continue to be confident about our ability to drive the inputs that we control in our business.

Your next question comes from James Lee of Mizuho.

I have two questions. The first is about consumer behavior. In the U.S., we noticed a shift towards services in offline settings. Are you observing a similar trend? Also, with inflation in Korea, are you seeing any consumer trade-down? The second question is regarding EBITDA guidance. Are there any changes to your previous indications? Should we expect your disciplined investment approach to continue into fiscal year 2023? How should we consider the factors that might affect profitability levels as we move into fiscal year 2023?

James, as I mentioned, we will provide our guidance at the beginning of the New Year, similar to what we did this year. We are encouraged by the underlying strength of the business we are seeing today. However, any adjustments or revisions to our guidance will be shared at the start of the New Year. Your first question was about --

Consumer behavior. Any mix

Consumer behavior. Perhaps it's a reflection of how early we are. The stage of our journey that we are at. But we're seeing strong growth across all categories. Our customer cohorts are compounded. We are still a small percentage. We are a small percentage of the overall commerce market that's projected to exceed $600 billion by 2025. The overall retail market in Korea is also showing signs of strength, growing 7% year-over-year this past quarter, which is reminiscent of the strong growth it had displayed in the years leading into or prior to COVID. So the overall market is growing. We are still a small percentage of it. We are seeing compounded growth still across all categories, even our oldest, even our largest. We still don't know what the full potential spend is for our customers in any category, much less in aggregate. What we do know is that we are still early in the journey and customers want selection, low prices, fast delivery in all categories. We have yet to find an exception to that simple truth.

If I could ask a follow-up question, I've been getting a lot of inquiries about investors in general. In the U.S., Amazon has increased its monthly and yearly prime membership fees earlier this year. From your perspective, do you believe there is an opportunity to raise your pricing? If so, what do you think supports that possibility?

Our focus in Wow continues to be on creating extreme value surplus for our members. We want the benefits to vastly exceed the price they pay. We've added 7 services to Wow since launch. We're still looking to invest in more. We'll keep expanding the value proposition, so that it is in excess of the price they pay for WOW members for years to come. That's our strategy and that's our plan.

Your next question comes from Josh Levin of Autonomous Research.

I have two questions. The first question is, so net revenue per active customer was up quite a bit year-over-year on a constant currency basis. Can you provide some more granular color as to what is driving that and how sustainable that trend might be? How much of that trend is greater frequency of purchase versus a wider diversity of goods purchased? And second, active customers were up just a bit, quarter-over-quarter, but how much would active customers be up if you excluded Coupang Eats customers?

The net revenue per active customer reflects our current growth stage, as we still represent a small share of the overall commerce market. We're observing increased purchasing frequency and broader spending across various categories. Customers are investing more in both existing and new categories, including our oldest ones, with significant spending growth noted in our cohorts. This growth is driven by selection, competitive pricing, quick delivery, and the convenience of our delivery and return services. Our integrated network plays a key role in this, supported by our substantial investments in technology, infrastructure, and processes. We are continuously optimizing this to enhance experiences for our customers, making them better, more reliable, faster, and more cost-effective. We believe this will sustain customer spending growth and increase the number of active customers. Can you please repeat your question about active customers?

Your next question comes from the line of Zhengjun Kim of HSBC.

Thanks for your opportunity to ask.

You may proceed with your question.

Can you hear me? I'm sorry.

My apologies to everyone. I think we're having some technical problems.

Sorry for this. Can you hear me?

Yes. We can hear you.

Okay. Sorry for this. Thanks for the opportunity to ask. Could you please share any data for any operating ratio?

We are having trouble with the operator. So I'm not sure exactly how we can hear the question? Hi, operator. Could you unmute? Okay. Unfortunately, I think we have to end the call here. Thank you, everybody. Thank you everyone for your questions today and for your time. We really appreciate your time and questions. Thank you very much.

Ladies and gentlemen, we do appreciate your participation in today's event. This does conclude today's call. You may now disconnect.