Earnings Call Transcript - DASH Q2 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the DoorDash Q2 2021 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Andy Hargreaves. Please go ahead.

Andy Hargreaves, Host

Thank you very much, Grace. Hello, everyone, and thanks for joining us for our second quarter 2021 earnings call. I'm pleased to be joined today by our Co-Founder, Chair and CEO, Tony Xu; and our CFO, Prabir Adarkar. I would like to remind everyone that we'll be making forward-looking statements during this call, including statements regarding our expectations of our business, future financial results, and guidance and strategy. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those described in our forward-looking statements, and some such risks are described in our risk factors included in our SEC filings, including Form 10-K. You should not rely on our forward-looking statements as predictions of future events. We disclaim any obligation to update any forward-looking statements, except as required by law. During this call, we will focus or we will discuss certain non-GAAP financial measures. Information regarding our non-GAAP financial results, including a reconciliation of such non-GAAP results to the most directly comparable GAAP financial measures, may be found in our investor letter, which is available on our Investor Relations website. These non-GAAP measures should be considered in addition to our GAAP results and are not intended to be a substitute for our GAAP results. Finally, this call in its entirety is being audio webcast on our Investor Relations website. An audio replay of the call will be available on our website shortly after the call ends. Grace, we’ll go straight into questions today. So please go ahead and take the first question.

Operator, Operator

Okay. Your first question comes from the line of Ross Sandler from Barclays. Your line is open.

Ross Sandler, Analyst

Hey, guys. Good afternoon. Two questions. Tony, your non-restaurant delivery business has several strategies in place, both in marketplace and in drive. What are you most excited about thus far? What's adding the most to your financial performance? And the second question is, in the letter, you mentioned that same-store sales for your merchants are up about 35%. I assume that's dramatically higher than anybody in the peer set. But if overall GOV starts to decelerate and normalize next year, how does that work as far as continuing to add merchants while growing same-store sales and any thought on how you balance that out and what that might mean for merchant retention? Thanks a lot, guys. Nice quarter.

Tony Xu, CEO

Great. Hey Ross. I'll take the first question, and I'll let Prabir start the second. So, on the first question regarding new categories, I mean, you're right. We're super excited about our progress. In Q1, we announced that about 70% of our business was coming from orders outside of restaurants, and that has grown sequentially and certainly faster than our restaurants business. It does touch upon our strategy of creating both a marketplace where we're generating incremental demand and really building best-in-class point solutions category-by-category, or bringing everything inside the neighborhood to consumers in minutes, not hours or days. On the other side, we are also building a first-party capability on behalf of retailers and merchants, so they can create their own digital businesses. The goal of DoorDash has always been to create the largest local commerce marketplace as well as the largest local commerce platform. We think that this strategy is certainly playing out, not just in our core and original category of restaurants, but also heading into other categories.

Prabir Adarkar, CFO

And Ross, just to add-on to Tony’s point. The reason we are excited about these new categories, mainly in the marketplace, is that what the early data suggests is that when consumers buy from other categories in our marketplace in addition to the food category, they subsequently increase their retention and engagement with the marketplace as a whole compared to customers who do not buy across categories. So we're seeing this behavior, it's super exciting, it's improving the value proposition of DashPass, which is why we're investing behind it on both the marketplace as well as for drive. Now for drive, it’s a slightly different strategy because we don't own the customer in drive. But as we add more orders from other categories to the ecosystem, we're just creating node density and order density that I believe lowers our cost structure, and then the rest of the flywheel. On the second question, I think I understand what you're getting at. From a merchant standpoint, the marketplace GOV is just one portion of the sales that we generate. It doesn't capture the value of drive orders, right? So remember that. The true sales from a merchant perspective is very different than what's implied by the GOV growth. Secondly, the order frequency is currently at all-time highs for both our DashPass subscribers as well as for non-DashPass users. Both user cohorts have achieved, not just year-on-year, but lifetime high order frequency, and that will continue to increase as our selection, affordability, and quality improves, leading to GOV growth for our merchants.

Operator, Operator

Okay. Your next question comes from the line of Brian Fitzgerald from Wells Fargo. Your line is open, sir.

Brian Fitzgerald, Analyst

Thanks, guys. I had two questions. One was around the beat and the guidance. How much of that was driven by international versus new categories? If you could parse that out or give us some color on that? And then could you talk to the kind of different take rates or pricing points you rolled out last quarter? Can you talk to us about the adoption rates? Is there a tendency to move up or down versus cohorts of somebody who started at a certain percentage and then started moving up to 25% to 35%? Thanks.

Prabir Adarkar, CFO

Sure. So Brian, on the first question, we saw strength across the board in core consumer metrics. The performance wasn't driven by just one part of our business beating expectations; we saw strong order frequency development, a pickup in DashPass subscribers not just in the U.S. but also growth in our international region. Our international business grew faster both quarter-on-quarter and year-on-year compared to our U.S. business. Retention and order frequency for our consumer cohorts, both those acquired this year and existing cohorts pre-COVID, continue to benefit. So overall, we are seeing strength across all these fundamental consumer metrics that led to the order volume beat that translated to GOV in the rest of our P&L. As for the buy-side packages, the majority of restaurants have chosen either the premium or the plus package, with the premium mix outperforming our expectations. The impact on our take rate will not be noticeable because there are other factors like DashPass mix and fundamental efficiency improvements that usually are much larger in magnitude than shifts created by the pricing packages.

Operator, Operator

Thank you. Next up, we have Youssef Squali from Truist Securities. Your line is open, sir.

Youssef Squali, Analyst

Yes. Two questions for me. When I read the letter, I noticed that it's really peppered by language mostly about the need for a higher level of investment. So can you maybe quantify the higher level of investment in DoorDash supply and new categories and international? How long do you anticipate this investment cycle to last? What's the primary driver? You've obviously been aggressively investing to date, but it seems like this is a step up from what you've been doing so far. Thank you.

Prabir Adarkar, CFO

Hi, Youssef. So just to step back, I want to reiterate how we manage the business and the philosophy, which is that we're super early in terms of opportunity, not just in food but also in ads and other categories like convenience, grocery, and packed food. We're a tiny fraction of the potential of these categories, and that's why we're investing. So our investments are largely driven by new categories and building our international business. While we won't break out the quantum of the investment, we are fortunate in having a large, growing U.S. business with improving margins, creating a larger profit pool for investments in these opportunities.

Operator, Operator

Thank you. Next up, we have Douglas Anmuth from JPMorgan. Your line is open, sir.

Douglas Anmuth, Analyst

Thanks for taking the questions. I was hoping you could talk a little bit more about the Japan market launch. I know it's fairly new, but just curious about the nuances in that market relative to the U.S., and then if you could also talk about how you're thinking about Europe as well? Thank you.

Prabir Adarkar, CFO

Yes. I mean, in Japan, we launched the market, and I don’t think it's been two months yet, so it's too early to draw conclusions. When we launch a new market, we're super focused on product-market parameters rather than financial parameters. We look for retention improvements, order frequency improvements, and ensuring that customers create a habit with us rather than just retaining for discounts. It’s been two months, and while it’s too early to declare victory, we’re encouraged by early signs. We are currently in one market, Sendai, and the opportunity exists since these markets are relatively under-penetrated compared to core urban city centers. There's a lot more work to do, and we'll keep you updated on progress. Regarding other geographies, one of our objectives is to become an international company; we currently operate in Canada, Australia, and Japan, and we'll expand economically in other markets as they become larger and generate profit pools.

Operator, Operator

Thank you. Next up, we have Brad Erickson from RBC Capital Markets. Your line is open, sir.

Brad Erickson, Analyst

Hey, thanks. I guess two for me. One, just within the guidance, it seems like you're looking for Q4 to be maybe a little bit less than seasonally normal. Is that a reflection of your comments in the letter around uncertainty? Or is there something else influencing that view? And then for my second question, you've had a ton of gross profit upside over the past few quarters, and in the letter, there's mention of reinvestment in a few areas. Can you remind investors how you view those choices philosophically as you balance growth versus profitability? Thanks.

Prabir Adarkar, CFO

Sure. So Brad, on the first question regarding guidance, Q1 was elevated due to several factors. Markets were just beginning to reopen, vaccination rates were low, and the inorganic impact of stimulus checks was driving consumer demand. As we look into the second half, there are two aspects embedded in our guidance. First, there's the typical summer seasonality; we generally see consumer acquisition slow during Q3, and order rates drop as consumers go out more due to better weather. Secondly, we are incorporating a level of conservatism into our outlook because of uncertainty regarding how the world looks in the second half as markets continue to reopen. There are plenty of unknowns, and we want to embed that uncertainty into our guidance. Regarding your question about gross profit upside, we invest flexible across the P&L. One reason we provide GOV guidance instead of revenue guidance is to allow us to deploy the right strategy without worrying about revenue targets. Moving forward, factors that will continue to improve take rate include improving logistics network efficiency, enhancing consumer experience, and increasing drive orders. However, there are headwinds such as increasing DashPass orders, investments in new categories, and investments in international markets which may lower take rates in the early stages.

Operator, Operator

Thank you. Next up, we have Steven Fox from Fox Advisors LLC. Your line is open, sir.

Steven Fox, Analyst

Hi. Good afternoon. Just two questions from the letter. I was curious if you could expand on. You mentioned three points of category share in the quarter, and then you also mentioned gaining more DashPass subscribers. Can you give us a little bit of color around what you're seeing that's driving that? What's behind the numbers basically? Thanks.

Prabir Adarkar, CFO

Yes. It comes down to a superior product; the best combination of selection, affordability, and quality translates into category-leading spend retention. Our category-leading spend retention drives market share gains. DashPass is a significant component of that since it helps solve the affordability lever, resulting in a higher order frequency among DashPass subscribers compared to non-DashPass users. This leads to increasing order frequency and improved retention, which in turn drives market share growth.

Operator, Operator

Thank you. Our next question comes from the line of Ron Josey from JMP Securities. Your line is open.

Ronald Josey, Analyst

Great. Thanks for taking the question. I wanted to ask you, Tony, about the demand you're seeing for newer categories and also just the power of convenience. Can you talk about these dynamics of newer category orders? How are you marketing down to customers who may not be aware that you offer products like pet goods or alcohol? Insights on strategy and awareness of these new categories would be helpful. Thank you.

Tony Xu, CEO

Sure. We're still pretty early in that process. Consumers engage with us 20 to 25 times a week, giving us many opportunities to connect with them. Our goal is to deliver the best-in-class solution whether they are shopping across multiple categories or within a single category. The growth isn't reliant on just one use case; we're still learning. There’s a long distance to cover. Even in our core category of restaurants, we only capture single-digit percentages of the market, and we’re an even smaller fraction in other categories. We aim to invent technologies that continuously meet consumer preferences, as consumers always lean towards greater convenience, and that will drive future product development.

Prabir Adarkar, CFO

Tony, to add to that, in Q1, we mentioned that less than 10% of our MAUs use categories outside of food. There's a significant opportunity to increase awareness and drive conversion within our existing MAUs without needing to acquire customers specifically for these new categories.

Ronald Josey, Analyst

That does. Thank you. That's super helpful. You talked in the letter about complexity across these categories and being up for the challenge. Can you help us understand what those complexities are?

Prabir Adarkar, CFO

Sure. I understand what you’re referencing, Ron. It serves as a rallying cry for our team. We’ve enjoyed tailwinds in the past 18 months, and we must not become complacent. The environment is competitive, and every change will be a challenge, so we need to stay focused on building the best products for our merchants and consumers.

Operator, Operator

Thank you. Our next question comes from the line of Deepak Mathivanan from Wolfe. Your line is open.

Deepak Mathivanan, Analyst

Hey, guys. Thanks for taking the questions. Two quick ones from us. First, your sales and marketing expenses were up nicely in 2Q. Can you give some color on where these incremental spending went? Is this related to new category efforts? And then for my second question regarding the non-food categories, several different models have been seen between marketplace, drive, warehouses, and more hands-on models with in-store shoppers. Given the new partnerships announced, can you talk about your preferred strategy to attack these categories? Thanks a lot.

Prabir Adarkar, CFO

Yes. On your sales and marketing question, the uptick was primarily driven by our Dasher acquisition costs. We were undersupplied and made significant investments in acquiring Dashers, acquiring more Dashers than ever in our history. Additionally, we faced higher advertising rates due to the rideshare industry competing for the same pool of Dashers. So those factors led to elevated Dasher costs this quarter. Looking forward, we expect elevated advertising rates to normalize over time. Regarding your second question, we focus on providing the best product experience in terms of selection, quality, and price, working in concert with our retail partners. Every activity needs re-imagination. There isn't a one-size-fits-all solution for every merchant, and we aim to build the best-in-class experience for both individual categories and overall.

Operator, Operator

Thank you. Our next question comes from the line of Spencer Tan from Evercore ISI. Your line is open.

Spencer Tan, Analyst

Hey. Thank you. Just have two questions. Regarding the potential permanent commission caps in New York City and San Francisco, could you provide us an update on where those stand today and how you view the overall impact on your business? Also, regarding Grubhub and Just Eat Takeaway strongholds like in New York City or Chicago, how are you seeing the competitive environment in Q2 and quarter-to-date?

Tony Xu, CEO

Yes. Regarding the commission caps, we're seeing city officials allowing capitalism to take its course as most of these caps are being lifted, especially as the country reopens. For the limited cases in San Francisco and New York City, our view is that permanent caps are unnecessary because platforms like DoorDash already offer plans below those proposed commission caps. These caps could negatively impact restaurants by resulting in higher consumer prices, reduced sales for restaurants, and decreased opportunities for Dashers. The arbitrary nature of these caps raises constitutional concerns, and Mayor London Breed from San Francisco noted that this ordinance unnecessarily outweighs any public good. Regarding the competitive environment in Chicago and New York City, we hold the number one position in Chicago and have gained share in both the second quarter and the first quarter of this year. In New York City, we aren't number one yet, but reaching that position is a clear priority for us. We've continued to gain share in the second quarter, with competitive shifts mainly occurring between other two peers in that market.

Operator, Operator

Thank you. Grace, it looks like we don't have any more questions in the queue. Can you pass it to Tony for quick closing remarks?

Tony Xu, CEO

Great. Thanks, Andy. Was there another question, Grace?

Operator, Operator

No. You may proceed, presenter.

Tony Xu, CEO

Great. Thanks, everyone. I just wanted to take a moment and celebrate the fact that we fulfilled our 2 billionth order in the second quarter. As someone who has seen this journey from the very beginning, I can tell you it took us over seven years to achieve our first billionth order, and only nine months later, we were able to see our second billionth order. So I just want to take a moment to reflect on that milestone and thank all of our audiences, the team at DoorDash, and all of our shareholders for what is a great achievement. Thank you very much, and we'll see you soon.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.