Earnings Call Transcript - CPNG Q2 2024

Operator, Operator

Hello, everyone. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the Coupang 2024 Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. 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's Second Quarter 2024 Earnings Conference Call. I'm pleased to be joined on the call today by our Founder and CEO, Bom Kim; 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, our slides accompanying this webcast, and SEC filings, which are posted on the company's Investor Relations website. And now, I'll turn the call over to Bom.

Bom Kim, CEO

Thanks, everyone, for joining us today. Before we dive into the results for Q2, here are three takeaways from another strong quarter. First, our results continue to be driven by years of investment and innovation to provide what we believe is the best retail customer experience on the planet. Second, our focus on innovation and operational excellence helps us break traditional trade-offs, so we can provide that superior customer experience at the lowest cost and in turn, strengthen growth and profitability. One example is that we delivered the vast majority of our fresh orders using eco-bags that replaced almost all of the delivery-related disposable packaging. That saves us packaging costs, helps the environment, and allows us to provide free delivery within hours and do so profitably. That's just one example of how we strive to provide the best customer experience at the lowest cost and generate growth while expanding profitability, not one at the expense of the other. Third, our developing offerings are generating strong growth and exciting momentum for the future. Our historical investments in product commerce were misunderstood at the time, but today they help generate the strong growth in cash flows you see each quarter. We believe our investments in developing offerings are building the next set of offerings that will further compound our growth and cash flow generation in the future. Now, a few numbers to highlight from our second quarter performance. This quarter, we grew constant currency revenues 30% over last year or 23% excluding Farfetch, which we acquired in Q1 of this year. Adjusting for the fulfillment and logistics by coupon or FLC accounting change we've had since Q2 of last year, the growth would have been 660 basis points higher than the 23% constant currency growth rate, excluding Farfetch. Our product commerce active customers grew 12% year-over-year. It's important to note, however, that while new customers contribute to future growth, our growth today and tomorrow is powered primarily by the increasing spend of our existing customers, and we believe our future growth opportunity is massive and largely untapped because we still account for a small percentage of overall retail spend, even among our oldest and best customer cohorts. That's why all of our customer cohorts continue to increase their spend, even our oldest and highest spending cohorts. We can't stress enough how small a share we are of the massive and highly fragmented $560 billion commerce opportunity in the market and how early we are in that journey. This quarter, we saw the growth in our marketplace, which includes both third-party and FLC, significantly outpace the growth of our overall business. For the 13th consecutive quarter, our marketplace sales have grown faster than our first-party sales. Marketplace sellers are not only growing faster than our first-party, they're also growing exponentially faster than the overall Korean retail market. Many of these marketplace sellers who have enjoyed this tremendous growth are SMEs, and that doesn't include sellers who were once SMEs but are now large businesses, thanks to the growth they've enjoyed on Coupang. We're proud that we've helped over 9,000 SMEs graduate from SME status since 2020. We continue to invest in services that power that marketplace growth and FLC's growth trajectory is worth highlighting. In Q2, the number of sellers joining FLC grew 25% quarter-over-quarter and over 150% year-over-year. Now, a few words on developing offerings. We continue to be pleased with the progress and momentum we're seeing in Eats, where customer adoption continues on its strong trajectory since we launched our WOW free delivery program last quarter and merchants are benefiting from that growth. In just three months, residents on Coupang on average have seen a nearly 30% growth in volumes. In Taiwan, we're focused on breaking the same trade-offs for the Taiwanese customer that we did for the Korean customer to win their loyalty and trust. Our conviction of the potential in Taiwan is as strong as ever. While Korean products are just part of the assortment that we offer to customers in Taiwan, we're enabling tens of thousands of Korean companies to get their products to Taiwanese consumers, and our growth has helped triple their total sales volumes this year over last year. On Farfetch, as we stated last quarter, our goal is to generate close to positive adjusted EBITDA on a run-rate basis by the end of the calendar year. We're executing to plan and are on track to achieve these goals for the year so far. Though we're still in the very early stages of our journey, we're excited about Farfetch's progress and potential. It's important to highlight that in the markets we serve, we see massive potential that is still largely untapped. Our strategy to capture that potential has been unwavering; disciplined investment and operational excellence to deliver customer WOW, the best selection, service, and savings for our customers. We believe to our core that the happiness of our customers is the key to maximizing opportunities in the long term for our suppliers, merchants, employees, and shareholders. Now, I'll turn the call over to Gaurav to review our results in greater detail.

Gaurav Anand, CFO

Thanks, Bom. This quarter, we saw a continuation of the strong momentum across our business that we reported in Q1. In Q2, we again delivered robust growth in revenue, product commerce active customers, gross profit, and adjusted EBITDA. As we go through the numbers, I want to remind everyone of our acquisition of Farfetch that was completed at the end of January this year. Q2 was the first quarter consolidating three full months of Farfetch operating results with no Farfetch financials included in the prior year comparison. Wherever possible, I will provide results for the quarter with and without Farfetch to highlight the performance of our existing business and the impact of the Farfetch acquisition. Our total net revenues grew 25% year-over-year in Q2 or 18% excluding the impact of Farfetch. Adjusting for the effects of changes in foreign currency, total net revenue grew 30% or 23% excluding Farfetch. As a reminder, beginning in Q2 last year, we made certain changes to FLC revenue accounting, changing the accounting from gross to net on a prospective basis. Adjusting for the impact of this change, the growth would have been 660 basis points higher than the 23% constant currency growth rate, excluding Farfetch. Within our product commerce segment, Q2 revenues grew 13% year-over-year or 18% in constant currency. This growth rate would have been 680 basis points higher, after adjusting for the FLC accounting change. With the total retail spend in Korea growing at just 1%, Coupang continues to be a growing value destination for consumers and the primary source of consistent growth for sellers and suppliers in Korea. Net revenues for product commerce active customers grew 5% over the year in constant currency. This includes the short-term dilutive impact of the large number of new product commerce active customers we have added over the last two quarters as well as the impact of the FLC accounting change. The impact of new customers is dilutive because new customers spent less initially, but we have seen their spend levels grow in line with the trajectory of older cohorts over time. It's important to note that the vast majority of our growth is powered by the increasing spend of our existing customers. We continue to see the spend levels of all our cohorts increase, even our oldest and highest spending. We believe there is still a long runway for growth, given that we account for a small percentage of their overall retail spend. As we have shared previously, we believe we have a significant opportunity to grow that small percentage of overall retail spend to much higher levels by improving our selection, service, and savings for customers. As Bom noted, we continue to be encouraged by the progress we are seeing within our developing offerings segment. Developing offerings revenue grew over 270% year-over-year, or 177%, excluding Farfetch. On a constant currency basis, developing offerings segment revenue grew over 280%, or 188% excluding Farfetch. Given the evolving mix of various offerings, services, and channels within our business, we believe a primary indicator of the underlying growth in our business is gross profit. This quarter, we again delivered a record quarter of gross profit, reaching over $2.1 billion, growing over 40% year-over-year with a gross margin of 29.3%. Excluding Farfetch, we delivered $1.9 billion in gross profit for a growth rate of 27% and a margin of 28.3%. This represents an improvement of 220 basis points year-over-year, accelerating even faster than the growth we saw last quarter. Product commerce gross profit increased 26% year-over-year to over $1.9 billion and a record gross profit margin of 30.3%. This represents a 310 basis point improvement over the last year and 200 basis points over last quarter. Our margin improvement this quarter was driven by strong growth rates in categories with higher margin composition as well as efficiencies across operations, including benefits from greater utilization of automation and technology, including AI. We also continue to benefit from further optimization in our supply chain and the scaling of margin-accretive offerings. We expect these drivers to continue contributing to further margin expansion over the quarters and years to come. For G&A expense as a percentage of revenue this quarter increased 600 basis points versus last year. This sale was primarily due to the inclusion of Farfetch and its related restructuring costs as well as the estimated $121 million administrative fine that we accrued as announced by the Korea Fair Trade Commission. We generated $3 million of income before income taxes and a $77 million net loss attributable to Coupang stockholders this quarter. This resulted in a diluted loss per share of $0.04. Excluding Farfetch and the estimated accrued fine, net income attributable to Coupang stockholders was approximately $124 million for the quarter, and diluted earnings per share was $0.07. Our consolidated business reported $330 million of adjusted EBITDA this quarter which excludes the one-time costs relating to the restructuring activities in Farfetch as well as the accrued fine. This resulted in an adjusted EBITDA margin of 4.5%. The trailing twelve months was $1.1 billion with a margin of 4.2%. Excluding Farfetch, we recorded $361 million of adjusted EBITDA this quarter and $1.2 billion over the trailing 12 months. With a trailing 12-month adjusted EBITDA margin of 4.6%. We remain confident in our ability to continue expanding consolidated margins on an annual basis going forward. The Product Commerce segment delivered $430 million of adjusted EBITDA with a record margin of 8.2%. This represents a margin expansion of over 100 basis points over the last year. This growth in margin was driven by the expansion in gross profit margin as well as the benefits from further improvements in operational efficiencies. Our segment adjusted EBITDA in developing offerings was a $200 million loss for the quarter, relatively flat to the last quarter, and increasing $93 million year-over-year. This increase was driven by additional investment in these early-stage opportunities as well as a $31 million impact from the consolidation of Farfetch. We remain encouraged by the progress we are making in Farfetch. Our team is focused on doing one of the things we do best at Coupang, driving operational efficiencies through discipline and process improvement. We remain convinced of the ability for Farfetch to get close to positive adjusted EBITDA run rate by the end of this year. Our ending cash balance at the end of Q2 was roughly $5.8 billion, increasing 22% over the last year. We generated $2.2 billion in operating cash flow and $1.5 billion of free cash flow over the trailing 12 months. As we guided to last quarter, in Q2, we saw an increase in the effective income tax rate, driven by consolidation of pre-tax losses in Farfetch and nondeductible expenses. As a reminder, this is just an accounting tax rate, as we expect our cash tax obligation this year to be closer to 20% to 25%, excluding Farfetch losses. Operator, we are now ready to begin the Q&A.

Stanley Yang, Analyst

Thank you for the opportunity to ask a question. Congratulations on the strong results for key metrics. My first question is about product commerce margin, which experienced significant margin expansion in the second quarter. Could you provide more details on the factors affecting margin in that quarter? Additionally, looking at 2024, what do you see as the main tailwinds and headwinds for your rapidly growing tele-commerce margin trend, particularly concerning FSC and increasing margin accretions? My second question pertains to the Eats segment. It seems that the momentum in the Eats market share gained strength in the second quarter. Is the stand-alone margin for Eats improving due to economies of scale? That's my initial question. Following up on that, do you plan to prioritize a top-line focused strategy for market share gains going forward, or are you aiming for a more balanced approach between growth and profitability?

Bom Kim, CEO

Hi, Stanley. Thanks for the questions. On product commerce, as you mentioned, in Q2, we generated nearly $2 billion of gross profit, a margin of 30%, which represents an improvement of over 300 basis points year-over-year. The drivers of that margin expansion continue to be the same that we've seen over the last several quarters and years. These are continuous improvements in our operations and supply chain, scaling of margin-accretive offerings, and greater utilization of automation technology, including AI. We still have a lot of opportunity to improve on these variables. That's one reason why we provided the long-term guidance of over 10% adjusted EBITDA. We pointed this out in the past; margins may be uneven quarter-to-quarter, but we expect our profit margin to continue its march upwards over time towards that target. On Eats, as you point out, we've continued to see strong momentum there, great adoption, and increasing frequency from WOW members who are discovering Eats because of our unlimited free delivery benefit. It's important to note that we're doing that while also continuing to improve our cost structure. That's aided by the benefits of scale and our focus on operational excellence. Eats is currently unit economics positive, and we see that only continuing to improve at scale. As is the case with product commerce, we're obsessed with providing customers with selection, service, and savings, not one at the expense of the other. We'll continue to focus on breaking trade-offs between selection, service, savings, between growth and economics to provide the best experience in restaurant delivery and commerce more broadly.

Gaurav Anand, CFO

Stanley, you had one more question between on FLC margins. So I'll just jump in here. So as Bom had mentioned in his note, we are excited about the progress FLC is making. In Q2, the number of sellers joining FLC grew 25% quarter-over-quarter and was 150% year-over-year. The overall FLC is accretive from a margin perspective, but there are still many areas that need improvement. We are making investments to onboard merchants and will continue to improve our suboptimal processes and tech system there.

Eric Cha, Analyst

Yes, thank you. Thank you for the opportunity to ask a question. I have two. The first question is on Developing Offering. So I've noticed the Developing Offering loss has increased to $20 million in the second quarter. So just simply extrapolating this for the year, would you say there's a potential for Coupang to go, meaningfully go over $750 million to $50 million loss guidance for Developing Offerings? And it would be helpful if you could elaborate a little bit more on the key, the moving parts for the bigger loss compared to the first quarter? And my second question is around G&A for Product Commerce. It seems like gross profit margin increase has been the key driver for the adjusted EBITDA margin improvement for Product Commerce lately. And we don't really have much insight into the cadence of G&A for Product Commerce going forward. So could you explain on what the drivers are for the G&A increase and when we could expect some operating leverage coming from this slide? Thank you.

Gaurav Anand, CFO

Yes, Eric, thanks for your questions. So on Developing Offerings, last year, we updated our full-year guidance of adjusted EBITDA losses of roughly $750 million this year, including Farfetch. So while the timing of these expenses within the various components of Developing Offerings may fluctuate quarter-to-quarter, we still believe our full-year actual results will be in line with the guidance that we have previously provided. On overhead expenses, our expenses as a percentage of revenue this quarter increased versus last year. This was primarily due to the inclusion of Farfetch and its related restructuring costs, the increased investments in developing offerings, and the estimated $121 million administrative fine that we previously mentioned. Within our core operations, we are also investing in technology and infrastructure to build a stronger foundation for future scalability. So while these investments may temporarily decrease our operating margins in the near-term, we will leverage these costs in the next couple of years, and we believe they will create long-term value as they help us better serve customers and support our future growth.

Seyon Park, Analyst

Hi, thank you for the opportunity. I have two questions. First, to follow up on what Dan asked, I found the improvement in the gross profit margin for product commerce this quarter particularly impressive. I understand that a mix of operational efficiencies and the faster growth of higher-margin products are the drivers. Could you share some insights on which of these drivers were especially prominent this quarter? My second question pertains to Taiwan. I understand that management prefers not to provide forward-looking guidance for Taiwan, but could you give us an overview of how far Coupang's services have been rolled out? What services are available, what isn't, and what kind of coverage do you have? Is next morning delivery available for most residents in Taiwan? Thank you.

Bom Suk Kim, CEO

Hi Seyon, thank you for your questions. It's important to emphasize that we are still in the early stages of our margin expansion efforts, with plenty of room for improvement. This is why we have seen continuous margin improvements over the past few years, despite some fluctuations between quarters. The upward trend is not always linear, but we are confident in our long-term goal of exceeding 10% adjusted EBITDA. Regarding Taiwan, it's still too early to disclose specifics, but I'm pleased to share that we are encouraged by the progress and momentum there. Our customer experience, selection, service, and savings have not yet reached the level we have achieved in Korea, but we are starting from a better foundation. This strong start is partly because we can utilize what we developed in Korea. We are beginning in a different environment, with our refined selection processes, logistics optimization, supply chain management, and technology investments made over the past decade. We are fortunate to apply much of that knowledge in Taiwan. Although we are early in this journey and our customer experience and operational excellence are not yet where we want them to be, we are excited about our progress and will continue to be disciplined with our spending, investing only when we are confident in the returns. We are also happy that we won't need to make the same kinds of investments in various areas, as we can leverage our previous investments in current markets. Overall, the potential for creating significant differentiation in customer experience and substantial returns for our shareholders is very promising, and we are enthusiastic about the opportunities we see in Taiwan.

Jiong Shao, Analyst

Thank you for taking my question. First, I have a follow-up regarding the margin. I believe Bom mentioned your long-term target of a 10% or greater EBITDA margin. Is that achievable for your first-party business as well? This quarter's gross margin highlighted by Mike was particularly strong. Do you think there's further room for growth in the higher margin categories? Could you elaborate on what those categories are? Are there any new categories you expect to see growth in? My second question concerns the WOW membership fee increase. I understand that the higher fee began for existing members at the start of August, but for new members, it started three months ago. Can you provide insights on member sign-ups or any churn among existing members? Thank you.

Bom Kim, CEO

Hi, Jiong, thanks for the questions. We see a lot of opportunity. I think both Gaurav mentioned earlier that we still represent a very small percentage of overall retail spend. There's a lot of expansion potential that we see in spend in almost every category. So that is just the general trend I think. We represent a very small percentage of a fragmented and massive $560 billion commerce opportunity. That spend will go up as we increase selection across all those categories, improve our service, and continue to expand savings for our customers. On WOW, we generally disclose our WOW membership numbers on an annual basis. So we will share more at year-end. Our focus continues to be on creating massive value surplus for our members. Maybe there's a good chance for us to expand a little bit on what value surplus is for our customers there. We create value surplus through WOW. There are 14 different benefits that we've built over the years and added to the program. As an example, let me just take one of those benefits: free delivery savings and parents with young children as some of the most time and resource-constrained customers in the market. For a monthly fee that's equivalent to roughly the cost of two deliveries, these customers save on 23 free deliveries a month. That's saving more than 10 times the amount they pay. And that's just from free delivery—not including the savings they get on free returns, exclusive discounts, free video streaming, and not to mention hours they save from skipping trips to the store, better spent with their children. We're really focused, laser-focused on increasing these benefits and savings to serve our existing customers to attract tens of millions of retail shoppers who have yet to join WOW. That's where our focus is to continue to strive to make WOW the best deal on the planet for our customers.

James Lee, Analyst

Great. Thanks for taking my questions. Two here. One of free delivery given your market share gains, can you talk about some of the competitive responses you've seen in the market? In terms of restaurant selections in general, maybe help us understand what do you plan to reach maybe parity with your number one peer in the market? And also in terms of potential M&A, I'm just wondering under what conditions would kind of acquisition make sense in the space? Thanks.

Bom Kim, CEO

So the second question, when you said parity, James, could you clarify parity on what you mentioned?

James Lee, Analyst

In terms of restaurant selection.

Bom Kim, CEO

I see. We are, generally speaking, continuing just to add selection. I would say that in some places, our selection is better; probably some places, selection still has areas of improvement to go. I think the most important thing is that we continue to focus on all three of those pillars—selection, service, savings. Delivering on all three pillars has been key to winning long-term customer loyalty and continuing to unlock a lot of growth for the program. So I think that generally is our focus. There are no plans for M&A, as we are focused on interim execution in that space.

Operator, Operator

There are no further questions. This concludes today's conference call. Thank you, and you may now disconnect.