Earnings Call Transcript - DASH Q3 2023

Andy Hargreaves, VP of Investor Relations

Thank you very much. Good afternoon, everybody, and thanks for joining us for our Q3 2023 earnings call. I am very pleased to be joined today by Co-Founder, Chair and CEO, Tony Xu; and CFO, Ravi Inukonda. We will be making forward-looking statements during today’s call being our expectations for our business, financial position, operating performance, our guidance, strategies, our investment approach, and the consumer spending environment. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those described. Many of these uncertainties and risks are described in our SEC filings, including Form 10-Ks and 10-Qs. 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 discuss certain non-GAAP financial measures. Information regarding our non-GAAP financial measures, including a reconciliation of such non-GAAP measures to the most directly comparable GAAP financial measures may be found in our earnings release, 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 is being audio webcasted on our Investor Relations website. And an audio replay of the call will be available on our website shortly after the call ends. Operator, I will pass it back to you and we will begin taking questions.

Operator, Operator

Our first question comes from Nikhil Devnani with Bernstein. Please go ahead.

Nikhil Devnani, Analyst

Hey, guys. Thank you for taking my question. I had a two-parter on the U.S marketplace. So everyone is obviously worried about a variety of headwinds and a softening consumer, yet your business is accelerating in the U.S. Can you comment on, one, what drove that acceleration? And then as a follow-on, I think the perception is your marketplace is highly discretionary, but given all the data you see in how consumers actually use your service, would you agree with that assessment? And how do you think about the sensitivity of demand?

Tony Xu, CEO

Hi, Nikhil, it's Tony. Maybe I'll start and Ravi, feel free to chime in. On the first part of the question, I mean, you're absolutely right. I think we saw a phenomenal quarter where frankly, every line of business has accelerated in growth and improved in its unit economics. And that's impressive, especially given the fact that we're a lot larger today than we were a quarter ago and certainly a year ago. In terms of the U.S. restaurant business or the marketplace in general, I mean, a few phenomena are going on, but really it's the result of product improvements we've made. Whether you look a quarter ago or a year ago, we've added selection to the platform on the restaurant side, and we've added a lot of selection on the non-restaurants front, literally going from nearly 0 three years ago to a multi-billion-dollar business that's at scale now growing fast and contributing quite significantly. We have over 100,000 stores on the platform that are outside of restaurants. When you look outside of restaurants and into the convenience or grocery or alcohol segments, almost half of new customers that come into the industry in the U.S. come to DoorDash first. And so that's certainly adding in terms of the selection. Second, we've continued to improve the quality of service, whether it's our timeliness, our speed, our accuracy. Third, we've improved the affordability of the programs, both for our non-DashPass members as well as for our DashPass cohorts. And fourth, we've improved customer support all along the way. It's really the result of many years of work on the fundamentals and mastery of that and continuing to see opportunities to continue improving the product, both in terms of efficiencies and product quality to the customer that's leading to the growth of all of the lines of business in the U.S., and that's what you kind of saw culminate in some of the numbers that we reported in Q3. I think with respect to the second question, our business has always been very dynamic in terms of all of the headwinds and tailwinds it's faced in the 10 years that we've been building DoorDash. That's certainly been true in the last three years. Obviously, we lived through a global pandemic. We lived through peak pandemic. We've lived through peak inflation. We've lived through lots of other macro factors, including some of the ones impacting us today. It's virtually impossible to estimate or isolate the quantum impact of any one of these macro factors, but I think it's a lot easier to think about things that we do control. As mentioned in the answer to the previous question, we've continued to improve our product. That’s certainly within our control. The first category, the restaurants category, is resilient; while sure, maybe not every meal has to be eaten when it comes to delivery or takeout, every category that lends itself towards convenience. Food is the most resilient and highest frequency category. This is true in every line of eCommerce. In fact, if you look at our cohort performance, which we talked a little bit about in our shareholder letter this quarter, you see that virtually every single cohort, including those that just joined our platform a couple of months ago are doing way better than any of the cohorts even during the pandemic. We still have a tiny fraction of what's addressable; in the U.S. restaurants category, we're less than double-digit percentage sales of the industry. Globally, within restaurants, we are a much smaller single-digit percentage. If we included all the other categories that we've now entered, we are barely noticeable. We have a long runway left and more work to do to get our product to where we'd like it to be, but improvements we've made in the years leading up to these moments have certainly helped us build a product that endures.

Nikhil Devnani, Analyst

Thanks, Tony.

Operator, Operator

Our next question comes from the line of Ross Sandler with Barclays. Please go ahead.

Ross Sandler, Analyst

Hey, guys. If I can ask three quick ones, that would be great. First, Tony, on the international footprint. We are well past the year into the Wolt integration. How do you feel about that? Are there any geographies that you think might be interesting from an M&A perspective in the future for international? Second question is we keep getting this one a lot from the investment community. Maybe you guys can clearly the air on the GLP-1 diet drugs. Is there any way to think about how that might impact your business in the future? It's obviously not impacting it now. Lastly, Instacart is now a public company. Just curious to get any milestones on grocery GOV as we sit here at the end of '23 from you guys? Thanks a lot.

Tony Xu, CEO

Great. Hey, Ross. I'll do my best to take them the first two in order and maybe I'll let Ravi take the third one. So I think the first question was around international. We are very excited about our execution on the international front. We continue to grow at multiples of what we see around the world, virtually across any geography. That doesn't mean that we are pleased yet with where our product is; we still have a lot of room left to go. But I think our outperformance has occurred due to the hallmarks of any great marketplace, which are the fundamental characteristics of great retention, order frequency, and unit economics. When you look at our international business, our new categories business, or our restaurant business, you see all of these characteristics present. That’s why we've been interested in leaning in and making the investments we've made at size, at scale, because of what we see. The international business continues to see those points of execution. The investment thesis behind our partnership with Wolt centered on two big pieces: the leading world-class retention and order frequency, and the question of whether we can invest behind that in a concentrated way and hopefully add to the excellent execution they've already seen. So far, the answer has been yes. Miki and the team now run our entire portfolio, including the Wolt portfolio and the DoorDash portfolio outside of the United States. The second part of the thesis was that there is a long runway for growth in these countries, and we continue to see that as well. In the 27 countries outside of the U.S. that we operate in, we are in some ways behind where the U.S. is from a penetration and product adoption perspective. There are many more population segments we must address and more merchant partners we've yet to partner with. There's a lot more customer challenges, especially given that some of these places are behind from a technology standpoint. There's a lot of work to do, but it also means there’s a lot of runway ahead. That’s why you've seen continued momentum, and it's adding to the overall growth of the company. I think your second question was around some of the recent discussions externally about a certain class of drugs. First and foremost, I hope that they actually work. I am a big believer that when great science meets the challenges of its time, it can solve a worthy problem. We don't see any immediate or noticeable impacts on the business relative to the commentary about this class of drugs. It’s hard to size any one macroeconomic factor, whether it’s a headwind, a tailwind, or a side wind. Instead, we focused on continued improvement on our product speed, quality, and execution. The dynamic changes we make in our product can outweigh many of the macro factors.

Ravi Inukonda, CFO

Ross, on your third question around grocery. We are really pleased with the performance of the grocery business. Our focus has been on how do we increase the usage and adoption of not just our grocery business but all of our new verticals. We are seeing more users ordering from both restaurants and new verticals. This is driving an acceleration in new verticals overall compared to the prior quarter. Specifically regarding the GOV, our GOV has doubled year-on-year. When you couple that with the efficiency we've seen in the business, we’ve considerably improved unit economics. We have a strategic advantage because we have a network of consumers and Dashers built out, allowing us to improve unit economics at a much faster pace. We look at signals around retention, order frequency, and unit economics; we're very pleased with the improvement across all three. We will continue to invest behind improving selection and product quality, as we believe this will generate a strong long-term ROI for us.

Operator, Operator

Our next question comes from the line of Deepak Mathivanan with Wolfe Research. Please go ahead.

Deepak Mathivanan, Analyst

Hey, guys. Thanks for taking the question. Just wanted to ask a couple of ones. So first, I wanted to ask about the product initiatives for 2024. You entered into a lot of categories and new markets in 2022. 2023 was more of a year of execution and refinement that helped profitability, obviously, as an incremental driver. What are the big business opportunities for '24? Or should we view it as another year of execution and refinement of existing businesses? That's the first question. And then the second one, the acceleration in the order frequency at this scale in the core restaurant business is pretty impressive. Are you seeing some of the less common use cases, such as breakfast orders or corporate orders helping incrementally in the recent quarters? Can you help unpack the trends in use cases a little bit?

Tony Xu, CEO

Sure. Deepak, maybe I can start and take the questions and then Ravi, feel free to chime in. The first question, which stems on '24 and some of the initiatives that we are thinking about. Our goal is to grow and to empower local economies. So we are always looking for problems to solve and jobs to be done. We want to ensure a strong point of view, providing solutions that are at least 10 times better than the current problems. If we rewound the clock to 2019, we were considering potential new problems to solve. Many came directly from our customers. For instance, when we began in the restaurant category, consumers began asking us what else we could do for them. Similarly, for merchants, there were questions before the pandemic on how they could become omni-channel. This is when we developed products like DoorDash Drive and established DoorDash Storefront, continuing to serve various merchant cohorts and segments. We are also building further services on how we can help merchants build their first-party channels along with our third-party channel at DoorDash. Our thinking for '24 or '25 is similar, where we start with our core set of businesses, currently five, up from one in 2019. While the opportunities are more varied now, we believe that each of these five businesses are still in their early innings, even the U.S. restaurants business. We are also looking for opportunities to solve more problems. We always approach this in a disciplined way, taking small bets initially, and only going all-in once we believe we’ve nailed product-market fit with a reliable growth model established. Your second question was around maintaining the growth in engagement and frequency of our customer base. It’s important to recognize that we have significant work left to do. There isn't a single initiative that's leading to the improvements; rather, it stems from years of effort on selection, service quality, affordability, and enhanced customer support. We continually strive to improve our offerings, and our experience shows us that when we focus on this, we often surprise ourselves with increased return.

Ravi Inukonda, CFO

Yes, Deepak, to add a couple of thoughts to what Tony discussed. We've had a phenomenal year so far, as seen in the growth on both our top line and bottom line. Part of this performance is driven by all the investments we've made in product, new verticals, and international markets over the last couple of years. Seeing strong growth across all lines of business that we operate in is key; these categories are large, presenting numerous customer problems that we need to address and improve. Our philosophy is to continue investing as long as we see solid signals on volume and unit economics, as it drives strong future cash flow in our business.

Operator, Operator

Our next question comes from the line of Ron Josey with Citi. Please go ahead.

Ron Josey, Analyst

Hey, thanks for taking the question. Tony, I wanted to ask a little more about just take rates on a year-over-year basis. They continue to expand and roll down a little bit sequentially. Can you talk more about the progress you're making to keep and/or drive take rates higher, as well as wait times, incentive spend, and advertising? Any insights on where take rates might go? We are now a quarter into Dash's new app layout and have heard comments around grocery prior, but is there any change in behavior you've seen from the new app a quarter in?

Ravi Inukonda, CFO

Let me take the first one on take rate and then I'll let Tony chime in on the second one. We are not managing the business to achieve a specific margin target, let alone across any line of the P&L. If you look at the underlying drivers of the business across various lines, the net revenue margin has increased sequentially as well as year-on-year. What you're seeing is really the mix shift of various lines of business; new verticals and international businesses have been growing faster than the restaurant business. This mix shift is noticeably impacting the overall take rate. Our goal is always to find efficiencies across the P&L and use that efficiency to reinvest back into the business for growth. We did that in this quarter; we found a lot of efficiencies which contributed to the revenue upside you're seeing in the business.

Tony Xu, CEO

In terms of your second question about consumer behavior and the app changes, we continue to see more evidence that consumers appreciate these changes. It's rare to see this; generally, sizable changes meet resistance. However, we witnessed behavior suggesting the opposite— customers are shopping across different categories. This is primarily because we ensured our progress within each vertical was robust in terms of product-market fit before redesigning the entire app experience. As a result, we're seeing customers cross-shop across categories much more naturally, and those numbers continue to increase. Many consumers’ first interaction with DoorDash increasingly tends to occur outside of the restaurant category. These factors contribute to why, when looking at the convenience, grocery, and alcohol segments, about half of the new eCommerce customers enter via DoorDash.

Operator, Operator

Our next question comes from the line of Eric Sheridan with Goldman Sachs. Please go ahead.

Eric Sheridan, Analyst

Thanks so much for taking the question. Maybe just one on a broader topic. We've seen a ruling in New York City on compensation, and investors continue to ask a lot about how the Department of Labor might play out. Any updated thoughts on the regulatory environment overall? And how are you thinking about aligning investments against the potential for nuance in the regulatory environment in the quarters ahead? Thanks so much.

Tony Xu, CEO

Yes. Hey, Eric, it's Tony. I'll start and feel free, Ravi, to chime in. In general, we have the same view on the regulatory landscape today as we had shockingly even ten years ago: by and large, governments, lawmakers, and regulators want to work constructively with companies like ours to co-create the future of work and labor. Our platform's success has attracted tens of millions of Dashers over time and millions signing on monthly. This is due to the fact that they don't earn enough income from full-time jobs; 90% of our Dashers operate less than 10 hours a week, and over 80% have full-time jobs. They see DoorDash as a bridge to earn more income. Most regulators seem to understand this. Our hypothesis is that, while a handful of jurisdictions may create policies that yield negative consequences, most are willing to work cooperatively. New York City's proposed legislation exemplifies this. Acknowledging the potential challenges presented by legislation isn't great, and our goal remains to operate sustainably while addressing any increased costs in the system. We still believe that these regulations can reduce transaction activity, impacting both merchants and Dashers.

Ravi Inukonda, CFO

Eric, just to add to Tony, regarding New York City, we've received a couple of questions about this too; it's not live yet. We expect a decision from the judge at any moment like everyone else. Our approach to these changes prioritizes efficiency across every market to ensure sustainable unit economics. If we cannot meet our unit economics goals, we acknowledge that increased costs will lead to reduced transaction activity, causing lower sales for merchants and reduced earnings for Dashers. Financially, we've accounted for any impact from the New York City ruling in our Q4 EBITDA guidance. Our aim is to manage the business effectively within the range we've outlined.

Operator, Operator

Our next question comes from the line of Doug Anmuth with JPMorgan. Please go ahead.

Douglas Anmuth, Analyst

Thanks for taking the questions. Recognizing that product improvement factors are outweighing macro, we've heard several companies call out some early 4Q volatility from macro or geopolitical issues. Just curious if you can indicate if anything has shifted there as we move into 4Q? And Ravi, could you elaborate more on improvements to GAAP profitability and how we should view that path in upcoming quarters? Thanks.

Tony Xu, CEO

Sure. I can start on the first question, and Ravi, feel free to respond to the second one. With respect to macro dynamics, it's hard to size any one of these elements. There are numerous factors at play globally today. While it may be true there's volatility, we're observing strong product improvements executing efficiently, thus allowing us to grow at higher rates despite increased scale. When people consider their spending patterns, it's evident that food is a priority category, and convenience trends toward increased ease. Although one might question the necessity of restaurant delivery, it represents a strong and resilient segment due to its frequency. Over the last 60 years, there have only been two years where the restaurant industry in the U.S. faced a decline. Our growing market presence indicates we aren't where we need to be in terms of merchant selection, program affordability, service quality, and customer support. We have several enhancements to work on.

Ravi Inukonda, CFO

Doug, to follow what's discussed, we obviously have a lot of signals in the business. We monitor our metrics closely. When I view the underlying cohorts, they are performing strongly. Over the first nine months of the year, cohorts are advancing positively. User growth remains above double digits, and order frequency continues to rise, indicating the strength within the business. Regarding GAAP profitability, as previously mentioned, GAAP net income is not an explicit target we manage towards. Our focus has always been on maximizing long-term free cash flow. Each business line is becoming more efficient. We've significantly enhanced unit economics across our restaurant, new verticals, and international sectors. I expect every segment to achieve profitability over time, which will contribute to achieving GAAP net income, though this is not an explicit goal.

Operator, Operator

Our next question comes from the line of Brian Nowak with Morgan Stanley. Please go ahead.

Brian Nowak, Analyst

Great. Thanks for taking my questions, guys. Tony, I wanted to revisit one of your earlier comments regarding investing appropriately based on the stage of the product. Can we discuss grocery within that context? Please share examples of investments made this year concerning the state of the product, and tell us where you anticipate more investment in '24 to drive that business faster for longer? Thanks.

Tony Xu, CEO

Sure. This is a topic I spend a lot of time on—initiatives and product reviews. We have several considerations. Firstly, we made decisions on grocery focused on solving specific challenges that customers experience. For instance, we learned that many customers find grocery delivery inconvenient because perishable items require frequent restocking. Thus we positioned our grocery offering to solve this smaller basket topic and integrated with our customers and grocers. This approach exceeded expectations regarding size and growth opportunity. Secondly, we refrained from excessive marketing spending until we felt the product quality was sufficiently high. These examples highlight the importance of making strategic decisions about resource allocation based on solving the right customer problems effectively. In summary, we resolutely focus on identifying critical customer challenges, followed by leveraging our resources efficiently to grow our business.

Ravi Inukonda, CFO

Yes, Michael. To your question on the advertising business, I think the concern you've raised about incrementality is valid. Building a competitive advertising business is predicated on having a robust marketplace that yields high-level incrementality. We are optimistic about the positive trajectory of our grocery division growth, providing a solid start from an advertiser’s perspective. Although there's much work remaining to enhance our advertising product, we believe it aligns well with enterprise merchants from both restaurant and grocery sectors. We recognize the demand and are working diligently to develop our offering. There remains significant potential in our advertising unit, which has been a multi-year endeavor. The next few years will be crucial.

Operator, Operator

There are no further questions at this time. I'd like to thank our speakers for today's presentation, and thank you all for joining us. This now concludes today's call. You may now disconnect.