Earnings Call Transcript - CPNG Q2 2022

Operator, Operator

Good afternoon. My name is Abby, 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. And now I'd like to turn the call over to Mike Parker, Vice President of Investor Relations. You may begin your conference.

Mike Parker, Vice President of Investor Relations

Thanks, operator. Welcome everyone to Coupang, Inc.’s quarterly earnings conference call, for the second quarter ended June 30, 2022. 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. You should not place undue reliance on forward-looking statements. Actual results may differ materially. 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 May 12, 2022, 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 are posted on the company's Investor Relations website at ir.aboutcoupang.com. And now, I’ll turn the call over to Bom.

Bom Kim, CEO

Thanks, everyone, for joining us today. Let me begin with some highlights from our second quarter operating results. First, we achieved an adjusted EBITDA of $66 million for the entire business, an improvement of $157 million quarter-over-quarter and $188 million year-over-year. Second, we recorded $1.2 billion in gross profit and a 22.9% gross margin, representing a 250 basis point improvement quarter-over-quarter and a 470 basis-point improvement year-over-year. Third, constant currency revenues grew 27% year-over-year and 3% quarter-over-quarter, and revenue per active customer for the overall business grew 20% year-over-year and 4% quarter-over-quarter on a constant currency basis. In short, the spend of our customer cohorts continues to compound at a fast rate, and we continue to grow at multiples of the overall e-commerce segment in Korea. In just three short years, by 2025, that e-commerce segment is projected to exceed $290 billion in sales. While we’ve grown to significant scale, we remain a small portion of what is expected to soon become the third largest e-commerce opportunity in the world. And our growth is powered by our relentless customer focus. We’ll always strive to make experiences richer and prices lower for our customers. We increased our investments in free Rocket shipping, exclusive discounts, and free video content for our WOW members by 50% over last year to a record $500 million in Q2 alone. In addition to providing unmatched delivery and service levels, we continue to offer the best prices to our customers. A recent study found Coupang to have a 25% to 60% average price advantage compared to major competitors for top selling items across the categories surveyed. Now, a few details on the operating results of our individual segments. To provide more visibility into the underlying performance of our business, for the first time in Q1, we broke out Product Commerce as a segment representing our core e-commerce and Fresh offerings separate from the Developing Offerings segment, which captured our investment in nascent initiatives like Eats and International. In Q2, Product Commerce generated $98 million of adjusted EBITDA, an improvement of $95 million quarter-over-quarter and $146 million year-over-year. We continued to see strong gross profit margin results in Product Commerce, with improvements of 150 bps quarter-over-quarter and 380 bps year-over-year. Despite ongoing inflationary headwinds, these positive results were driven by levers that we highlighted in Q1: benefits from investments in technology, infrastructure, automation, supply chain optimization, and scaling margin-accretive offerings, including advertising. We believe the progress we’ve made and the 2% adjusted EBITDA that we recorded in Product Commerce in Q2 is just a glimpse of the significant long-term profitability of our business. The rate of improvement won’t be consistent or as dramatic each quarter, but we’re excited about the potential ahead. On growth, Product Commerce revenues grew at 27% year-over-year and 3% quarter-over-quarter on a constant currency basis. In contrast, the broader product e-commerce segment in Korea grew 6% year-over-year and zero percent quarter-over-quarter. Our share of product e-commerce growth has increased every quarter since we’ve gone public, and this quarter was no exception, setting a new record. Increasing customer adoption and engagement across more offerings is accelerating our flywheel. Nowhere is that more evident than in our Fresh offering. After just three full years of operation, Fresh's annual run rate stands at nearly $3 billion, on the back of what we believe is the best value proposition for an online fresh offering in any market. We believe we provide the largest fresh selection of any retailer in the market, and we’re the only online grocer that offers free shipping for orders above just $11. What’s more, customers can have their Fresh orders delivered via dawn or same-day delivery along with millions of non-Fresh items because we deliver both fresh and non-fresh orders on the same logistics infrastructure. Customers love the convenience of ordering everything in a single checkout experience, and the combined scale of both offerings generates economies that are difficult to match for any offline retailer or standalone fresh grocer online. And Fresh is still far from its full potential. The vast majority of our Active Customers did not make a purchase in Fresh in Q2, highlighting the significant opportunity to scale this offering in the years ahead. We’re also encouraged by the progress of Fulfillment & Logistics by Coupang, or FLC, which allows 3P merchants to leverage our Rocket delivery services and infrastructure for growth. The offering promises to unlock for customers the speed and convenience of Rocket Delivery for millions of additional SKUs, and it allows us to share the value and growth of our Rocket offering with potentially hundreds of thousands of merchants, many of whom are small businesses with limited access to shelves of offline retailers. As of the end of Q2, over 90% of the 3P merchants benefiting from the services provided by FLC were small and medium enterprises, or SMEs, with less than $2.5 million in sales. FLC has the potential to unleash exponential value for both customers and small merchants in the years to come. Another investment we’re especially proud of is our effort to create a more sustainable environment. We invested in process and infrastructure changes to eliminate our box packaging for over 85% of our Rocket deliveries, which not only saves on box and plastic packaging waste but also allows us to reduce the number of trips our trucks make to complete deliveries, leading to a significant reduction in emissions. We’ve gone one step further in Fresh, delivering most of our Fresh orders in completely reusable eco-bags. Customers take their products and leave the eco-bags for pick up and reuse, like empty milk bottles left on the porch in the old days of milk bottle delivery. That has allowed us to eliminate virtually all Styrofoam and most of the one-time packaging waste in our Fresh deliveries. We estimate that for 2022, these two efforts alone will save the equivalent of 8 million trees and offset the majority of the carbon footprint of our existing delivery fleet, even as they deliver unmatched savings and convenience to our customers. Our small victories on this front serve as a powerful reminder that smart innovation, sustainable practices, and good business can go hand in hand. Now, on Developing Offerings: Revenues increased 24% year-over-year, but declined 7% quarter-over-quarter on a constant currency basis, driven primarily by our Eats offering. The decline in quarter-over-quarter revenue is due in part to the post-COVID slowdown in the online food delivery segment in Korea. Growth has also not been our priority this past quarter, as we mentioned in our last call. Our primary focus in Eats continues to be on making structural improvements that will improve customer experience and position us to be more efficient in our next phase of expansion. Adjusted EBITDA losses in the Developing Offerings segment decreased $62 million quarter-over-quarter. The key driver for this improvement was optimization efforts in our Eats offering, including enhancements in operating efficiency. Developing Offerings also includes promising initiatives outside of Eats that target additional customer spend beyond our current e-commerce segment. Specifically, investments in video, fintech, and international have the potential to expand the TAM for Coupang beyond the forecasted $290 billion in e-commerce sales by 2025. As we do with all parts of our business, we will continue to invest and execute in keeping with our operating tenets, which we first shared publicly shortly after our IPO last year: One, we exist to deliver new moments of wow for customers. Two, we don’t start with what looks easy. We work backwards from imagining jaw-dropping customer experiences, and we embrace the hard work required to challenge trade-offs that customers take for granted. Three, we will employ technology, process innovation, and economies of scale to create amazing customer experiences and drive operating leverage and significant cash flows over time. Four, we always prioritize growth in long-term cash flows. And five, we are disciplined capital allocators. We start with small investments, then test and iterate rigorously. We invest more capital over time in opportunities that have the best long-term cash flow potential. In closing, I want to thank our employees for their dedication in executing these tenets, even during some of the most trying times in recent history. It would have been easy for the team to make a tradeoff between customer experience and operational discipline, to choose one and give up the other. Despite the unprecedented challenges of the last few years, our teams refused to compromise on customer experience, and focused relentlessly on strong execution to delight customers and drive operational excellence. Gaurav and I are honored to represent such an amazing team, and we’re excited to work together to continue to break trade-offs and deliver even greater moments of wow for our customers in the years to come. Now, I'll turn the call over to Gaurav to review the financials in more detail.

Gaurav Anand, CFO

Thanks, Bom. Our demand continues to remain strong, despite the post-COVID re-opening impacts seen here in Korea. Our total net revenue grew 12% year-over-year on a reported basis, or 27% in constant currency. Quarter-over-quarter we grew minus 1.5% on a reported basis or 3.1% in constant currency. Our Active Customers grew 5% year-over-year, but declined quarter-over-quarter by 1%. While Active Customers in Product Commerce increased both year-over-year and quarter-over-quarter, Active Customers in our Eats offering declined, due in part to a minus 11% contraction quarter-over-quarter in the overall online food delivery segment after the loosening of COVID restrictions. As Bom noted, we continue to see strong growth in our net revenue per active customer, increasing 20% year-over-year on a constant currency basis, as our customers continue to deepen their engagement with our services. Q2 marked another record quarter with gross profit of $1.2 billion, representing a 75% year-over-year improvement, or 41% excluding the impact of the FC fire in 2021. Our gross profit margin was 22.9%, a 250 bps quarter-over-quarter improvement. This improvement is a continuation of the drivers that we saw earlier in Q1 this year: benefits from investment in technology, infrastructure, automation, supply chain optimization, and scaling margin-accretive offerings, including advertising. And for the first time as a public company, we reached positive adjusted EBITDA for the total company, with $66 million in adjusted EBITDA for Q2. This represents a $157 million quarter-over-quarter improvement that follows a $194 million quarter-over-quarter improvement in the prior quarter. Over the past two quarters, we’ve driven a total improvement of over $350 million, a reflection of our disciplined execution across our business. We provided guidance at the beginning of the year that we expected adjusted EBITDA losses to be below $400 million for the full year 2022. We are now raising that guidance to achieve positive adjusted EBITDA for the full year. While we are encouraged by the ramp in profitability that we have been able to achieve over the last two quarters, the rate of improvement going forward will be a bit uneven quarter-to-quarter due to the cadence and sequencing of optimization efforts, variances in investments, and some seasonality impacts among other factors. As we stated at the beginning of the year, forecasting revenue growth this year with the reopening of the market after COVID remains challenging. However, as Bom noted, we are confident that we will continue the trend of growing significantly faster than the overall Korean e-commerce segment. Overall, we are pleased with our results this quarter. We believe that our position and customer value proposition will continue to drive significant revenue expansion, as well as increase our operating leverage. In light of our performance to date, we are more convinced than ever of our potential to generate long-term 7% to 10% or greater adjusted EBITDA margins.

Operator, Operator

Your first question comes from the line of Stanley Yang with JPMorgan.

Stanley Yang, Analyst

Thanks for the great results and congratulations. I have two questions. First, regarding your adjusted EBITDA in the second quarter, the quarter-over-quarter improvement has been dramatic, exceeding US$150 million. Can you break down the drivers of this EBITDA improvement by segment or by product? My second question is about when you expect free cash flow to turn positive. Additionally, what is your outlook for the growth and utilization of fulfillment capacity? Given the slowdown in e-commerce market growth this year, do you have any plans to further enhance the 3P partner service, Jet Delivery? What are your expectations for Jet Delivery volume growth this year and next year? Do you believe the increased adoption of Jet Delivery will be margin-accretive?

Bom Kim, CEO

Thank you for your questions, Stanley. Regarding the factors contributing to the improvement in adjusted EBITDA, most of the impact stemmed from ongoing improvement programs we discussed last quarter, many of which began before 2022. The key drivers included advancements in technology, infrastructure, automation, supply chain optimization, and the sustained growth of various services such as advertising. It's becoming clearer that COVID last year masked the fundamental strength of our business, some of which is now more visible. The challenges and pressures we faced during the pandemic were unprecedented, and the team worked diligently to navigate that period to reach our current position. We have operational initiatives in place aimed at achieving significant margin improvements going forward. We anticipate that benefits will continue to arise from increased economies of scale, enhanced operational excellence, and the expansion of higher-margin categories and services. However, as we've noted, the pace of improvement will not be uniform due to the uneven materialization of our efforts. We are also facing some inflationary pressures, including rising fuel costs. Our teams are dedicated to creating operational efficiencies to counter these effects, but we do need to point out some short-term disruptions. Nonetheless, we are confident in our ability to reach our long-term targets of 7% to 10% or higher adjusted EBITDA overall. We continue to invest in our FLC, which, as you pointed out, is primarily driven by our internal execution rather than macro trends. We are receiving a very positive response from both customers and merchants, which strengthens our belief that FLC will deliver significant value. There is, however, a lead time for developing the technology and infrastructure to support FLC at scale, and we are consistently testing, iterating, and refining our processes. While it's still early, our confidence is increasing that FLC will be a substantial contributor to growth and margin over the long term. We look forward to sharing more details with you at the appropriate time, Stanley.

Gaurav Anand, CFO

Stanley on the free cash flow question, we have not given guidance on it, but of course, we continue to work towards it.

Operator, Operator

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

Eric Cha, Analyst

Thank you for the opportunity. And myself as well, congrats on the great set of results. I have two questions, if I may. So around Eats, it obviously has been impacted by the slowdown of the industry, but there also seems to be a bit of idiosyncratic issues as well if I call it an issue. But in what ways do you plan to rationalize the unit economics on that business going forward? And at the same time, how do you balance your sort of plans to gain market share as well? That's the first question. My second question is another question on FLC, actually, so more around the strategy. So how do you plan to acquire the big 3P merchants or migrate the current 3P players to migrate to the FLC? What would motivate them to do that? And how will FLC impact Coupang's profitability?

Bom Kim, CEO

So Eric, regarding FLC, it's still in the early stages. We're in the process of testing and refining as we develop the tools and infrastructure needed for scalability. Our goal is to share the benefits and growth that Rocket brings to our merchants. At the same time, we are significantly increasing the value of Rocket Delivery by expanding the number of products and selections offered by merchants in the broader market. We are optimistic about the value we can create for both customers and merchants by sharing Rocket's delivery capabilities with third-party merchants. However, it is still quite early in this journey. As we mentioned in Q1, we expect to provide more data points towards the latter half of this year. In response to your question about Eats, it is true that we were impacted by an 11% quarter-over-quarter decline in the overall food delivery market. However, we experienced a notable improvement in Eats profitability in Q2 due to our efforts to enhance operational efficiencies this quarter. We are also looking into synergies between Eats and our other offerings to enhance customer value and improve efficiency leading up to the next phase of expansion. It's important to emphasize that, in the long run, we are very optimistic about the potential of Eats. We believe it will become a valuable and profitable part of our ecosystem, generating synergies with other offerings and enhancing the value proposition for our customers.

Operator, Operator

Your next question comes from the line of Seyon Park with Morgan Stanley.

Seyon Park, Analyst

Thank you for the opportunity. I think it’s my first time asking questions. And yes, once again, I think the results were actually very encouraging. Given the focus on the investors' focus really on margins, I was just wondering whether you can provide a little bit more color on where you have seen the biggest gains in terms of gross profit margin improvement for the Product Commerce segment, particularly would you say that in terms of the utilization of your delivery capacity, a higher utilization is a key reason for the improvement? And I guess along those lines, how much improvement do you foresee kind of going through the remaining two quarters of the year? Has the low-hanging fruit been taken? And does that make the slope a little bit more difficult in the second half along with the impact of inflation and the slowing market overall? Or do you still think that there is still a lot of room for these efficiency gains to continue? That's my first question. Second question, I think just given the other analysts have already asked on Eats, so I'd like to ask just on the strategic direction for Coupang Play. Just the function of Coupang Play and just given some of the content investments that Coupang has been doing recently, obviously, that's a negative in terms of near-term margins. But I was just trying to see whether you had other ways you were thinking of monetizing this service over the longer term?

Bom Kim, CEO

There are several aspects to consider here, so let me begin with the Product Commerce and the overall margin improvement. This relates to a question that Stanley raised. The margin improvements we observed were influenced by our structural advantage in the network and infrastructure we've established, where the scale benefits from one category positively impact others. For instance, our advantage in Fresh, which combines Fresh and general merchandise on the same logistics framework, enables us to deliver an excellent customer experience with rapid delivery and a competitive cost structure that supports free shipping and low prices. As we see more economies of scale and enhanced operational excellence across various segments, this trend will persist. Additionally, our margin growth is supported by the rise of higher-margin categories and services, with much of our future growth focusing on these areas. We believe the acceleration of our flywheel will also contribute to long-term margin expansion. We are confident about the potential for significant margin growth over time and are optimistic about reaching 7% to 10% or higher EBITDA margins in the long run. However, in the short term, we are dealing with challenges, such as inflation and rising fuel costs, which are creating temporary headwinds. Recently, we achieved net positive results due to our team's effectiveness in managing these impacts, but these challenges will persist in the near future. Regarding Eats, we remain committed to making structural improvements and believe there are synergies to be gained in enhancing efficiency and monetization across our ecosystem. We will keep you updated as we progress in this area. In the long term, we view Play as a promising opportunity to enrich our membership experience and tap into spending that is currently outside the projected $290 billion e-commerce market for 2025. Our investments in Developing Offerings are directed toward initiatives that aim to broaden the total addressable market beyond this $290 billion e-commerce opportunity over the next three years, and we will continue to invest in these offerings thoughtfully, in line with our operating principles.

Operator, Operator

Our next question comes from James Lee with Mizuho Securities.

James Lee, Analyst

I have two here. First, on demand on by categories here. In the U.S., we're seeing essential product outperforming discretionary items due to inflationary pressure and mix shift to services. I'm just curious that you're seeing a similar trend in Korea? And also help us understand what the trends look like in Q3 so far in July? And second question is on FY '22 EBITDA guidance. Now how should we think about the EBITDA for Developing Offering? Previously, you said you plan to lose about $200 million. Just curious what's your thinking there for FY '22 now?

Bom Kim, CEO

Regarding your first question, our revenue per Active Customer increased by 20% year-over-year on a constant currency basis, and customer spending continues to grow rapidly due to strong adoption across various categories and offerings. We are still early in our journey, representing only a small share of the total commerce market. We've noticed that customers are expanding their spending into newer categories as well. They desire a wide selection, low prices, and quick delivery across all categories, with no exceptions observed so far. Therefore, we are experiencing widespread growth across multiple categories. As for your second question about the $200 million investment in Developing Offerings, we are committed to investing in long-term opportunities that may not deliver immediate revenue growth. We are particularly excited about the potential in fintech, video, and international sectors, which will help us expand our total addressable market in the long run. We will continue to test and refine our investments while maintaining confidence in generating long-term cash flows and remaining disciplined in that regard.

James Lee, Analyst

Great. So Bom, if I can questions more about your investment philosophy. Given the fact that you guys have done a great job becoming more efficient, so how should we think about your approach in terms of balancing growth and profitability going forward, and especially in Developing Offering, right? What indicators do you need to see to double down the investments? And what do you need to see to really back off continuously to reduce losses?

Bom Kim, CEO

One thing I want to emphasize is that the improvements you are seeing weren't achieved in just one quarter. Many of the initiatives driving these results were implemented over several quarters, and in some cases, over many years. The continuous improvement programs that have contributed significantly to our success and will keep doing so going forward began before this year. As I mentioned in earlier calls, COVID last year masked many of the underlying advancements and strengths we had. Our business grew threefold from 2019 to 2021, despite the unprecedented challenges presented by COVID. I cannot overstate the remarkable job our team did not only in the last couple of quarters but throughout the pandemic, when we remained committed to customer experience and continued to enhance our operational excellence. I hope it's clear that these results should not be misinterpreted as the result of just a few months. Operational excellence is part of our core values. As stated in our principles shared over a year ago shortly after our IPO, we are disciplined. We test and iterate. When our hypotheses are validated and we have increased confidence in long-term cash flow generation, we invest more. When we don't see that confidence, we adjust our budget accordingly. You'll see this same approach as we invest in Developing Offerings that have the potential to generate significant growth and profits for us in the long run.

Operator, Operator

Your next question comes from the line of Susie Lee with Bank of America.

Susie Lee, Analyst

I have two quick questions. First, I would really love to get your thoughts on like big macro, big picture and consumer spending trends. So it seems like investors around the world seem to worry about potential recession and a recent inflation may lead to consumer wallet shrinking and also ad budget decline. So in the past couple of months, have you witnessed any changes in the behavior of your customers or advertisers, like customers, even the moderate things like they seem to prefer cheaper products or any signals that the basket size declines? Or for the advertisers, they become more prudent and they seem to delay the advertising towards the end of this year or even next year? So that would be my first question. And then the second thing is I think James also asked about this, if possible, could you help us understand the latest trend in your revenue growth in July and early August?

Bom Kim, CEO

As we mentioned, there are unpredictable variables in the near term and growth remains difficult to forecast, but we are very confident that in any scenario, we will continue to grow significantly faster than the overall e-commerce sector. The revenue per Active Customer growth demonstrates how rapidly customer spending is compounding, driven by strong adoption across various categories and offerings. Advertising is also growing quickly. However, we are still in the early stages and are far from our goals. We observe a general long-term trend that encourages us, but the short-term variables complicate forecasting. Therefore, as we mentioned earlier, we will refrain from making forecasts on short-term growth, especially this year.

Operator, Operator

And we will now take our last question from the line of Peter Milliken with Deutsche Bank.

Peter Milliken, Analyst

Great results. Really nice to see EBITDA profits. And my question really is, how did you go about improving quarter-on-quarter so much? Would you attribute that more to COVID costs coming out and efficiency costs being driven? Or through margins being higher either through this positive mix shift that you talk about or even pricing in higher pricing per item?

Bom Kim, CEO

There were no price increases. Our pricing strategy, policies, and implementation remain unchanged. In fact, we increased our investments in customer benefits through free services and exclusive discounts for our WOW members by over 50%, reaching a record $500 million in the second quarter alone. We continue to invest not only in maintaining low prices, fast delivery, and enhanced experiences but also in new benefits and services for the long term, as highlighted in our Developing Offerings. I want to emphasize that these results were not achieved in just one quarter. Our improvements in processes, technology, supply chain optimization, automation, and infrastructure stemmed from ongoing improvement programs that began well before this year. While some of these efforts accelerated as we allocated more resources to them—resources that were previously tied up due to pandemic-related challenges—it is not just one short-term factor that led to this significant overall improvement in margins.

Peter Milliken, Analyst

Got it. Okay. And while I have you on the line, could you maybe perhaps give us your views on the competitive space that we have now? We've seen a lot of investment go into your competitors or at least plan to over the last year. With the post-COVID slowdown, do you see that continuing or any sign of change?

Bom Kim, CEO

I think we can say that more so that at any point in our history, the core drivers of our business are unaffected by competition. Our share of product e-commerce growth has increased every quarter since IPO, including this past Q2. And that acceleration is the result of our investments, our innovation to provide customer value, a relentless focus on customer value and operational excellence. And that's where we're spending all of our time and energy. And I think we're more confident than ever in our ability to deliver for customers and unaffected by competition, more so than at any point in our history.

Operator, Operator

And ladies and gentlemen, this concludes today's conference call. You may now disconnect.