Q4 2021 Coupang Inc Earnings Call
We have posted a presentation in conjunction with today's earnings release. It can also be found on our IR website.
Now I'll turn the call over to Bob.
Thanks, everyone for joining us today.
Before we discuss our Q4 results and outlook for the year ahead here are some highlights for the quarter.
Constant currency revenue increased 39% year over year for robust two year CAGR of 64%.
We continue to grow more than twice as fast as the Korean E Commerce segment, extending our leadership position.
Our customer base increased over 20% year over year for the 16th straight quarter and.
And grew 7% on a quarter over quarter basis, and our unmatched customer experience is driving deeper engagement nearly 20% of active customers used three or more coupon offerings in Q4, a five fold increase from the previous year.
Revenues nearly tripled in two years and that blistering growth led to our prioritizing projects to support scaling over improving efficiency and operating leverage 2021 was a tale of two halves.
In the first half of the year, we saw some of the benefits of that strategy, we're able to scale the business at high rates, even on a sizable base in the second half we faced sudden capacity constraints. There were complicated by volatility in demand from Covid surges labor supply shortages worsened in Q4 and that.
Efforts to secure a last minute capacity proved to be costly with limited returns.
Fixed cost leverage also took a hit as fresh doubled its logistics footprint in 2021 and under utilization was higher in Q4, largely from our inability to secure additional labor for the new facilities.
As a result in the second half of 2021, our strong underlying profit drivers were obscured by short term disruptions and timing of investments. The question was how short term those disruptions would be.
We spent much of Q4 redirecting resources to strengthening not just adding capacity and improving operating leverage those efforts are bearing fruit.
So far in Q1, we secured a record capacity, while driving and over 250 basis point increase in gross margin quarter over quarter. We're.
We are on track in Q1 to deliver the highest gross margin since Covid began and that still includes COVID-19 related costs and investments in new initiatives.
We're excited that 2022 is off to a good start.
We're also seeing some positive macro developments the overall retail market grew 10% year over year and the latest forecast now project that Korea total commerce market, excluding autos will grow at a CAGR of 6% over the next four years to exceed 600 billion.
By 2025.
And the E. Commerce segment is expected to grow over that same period to $290 billion were less than 10% of that today, despite being the largest e-commerce player in the market and our market share of total retail remains in the single digits.
We have a long runway ahead of us.
And our flywheel is strengthen our share of product ecommerce growth increased every quarter in 2021, we're the largest in e-commerce scale growing over twice as fast as the segment even in Q4.
While membership grew from $6 million at the end of 2020 to nearly $9 million by the end of 2021.
Our customer cohorts are still compounding at an impressive rate.
Every single annual cohort grew approximately 30% year over year or higher in 2021, even our oldest from 2010.
In other words, we still don't know how high the entitlement spend will be ultimately.
Even for our oldest customer cohorts.
Our growth is driven by the superior customer experience enabled by our unmatched e-commerce infrastructure.
We deliver millions of products within hours nationwide 365 days, a year with free shipping and returns for while members.
No. Other player offers our selection at everyday low prices with the speed and convenience of our services.
That is all made possible by the scale of our e-commerce infrastructure now spanning over 40 million square feet.
We believe we have a larger footprint than the rest of the E Commerce players combined.
And in the past year alone, we added 15 million square feet widening our lead in the market.
And it's not just our <unk> offering our merchant driven spend also grew at a multiple of the E. Commerce segment and continued to gain significant share of this past year.
2022 will be an important year on our journey towards long term adjusted EBITDA margins of 7% to 10% or higher.
Retail product profit has increased for seven consecutive quarters.
Advertising continues to grow at a rapid clip.
Our renewed focus on long delayed efficiency projects have already started to drive improvements in operating and fixed cost leverage in Q1.
The line of sight, we have on these drivers gives us confidence in our long term EBITDA margins of 7% to 10% or higher and this should become more evident as we share our progress throughout the year.
So far in Q1 as I mentioned, we're seeing an over 250 basis point improvement quarter over quarter and gross margin for the whole business.
Mature offerings like core are profitable.
As fresh increases utilization of its newly built capacity, we expect it to follow the same trajectory.
At the same time, we intend to invest in newer initiatives, where we see significant long term opportunity.
On East Hyper growth continued in 2021, we believe eats as quickly scale to become the leader in the fast delivery category generating billions of dollars of volume in just its second full year of operation.
It was the most downloaded mobile app and all of Korea in 2021, and just two years, it's achieved double digit segment share nationally and a lead position in some key regions.
Now, we're focusing on digesting that growth investing in initiatives that will increase operating leverage and explore synergies with our product commerce offerings.
We expect execution in these areas to meaningfully improve profitability in 2022 and position us to be more efficient in our next phase of expansion.
To provide more visibility on profitability.
We plan to report product commerce as a separate segment, starting with our Q1 earnings release.
We hope that our progress in 'twenty, two we'll highlight the underlying strength of the business.
There's a lot to be excited about for 2022, and we're off to a strong start with.
We're determined to capitalize on what we believe is a generational opportunity to create value for customers employees shareholders and other stakeholders.
Now I'll turn the call over to <unk> to go through the financials in more detail.
Thanks, Don.
Demand trends and the nimbleness, even against the highest income from Covid.
Q4 reported revenue grew 34% year over year.
The 9% in constant currency and had a robust full year constant currency CAGR of 64%.
<unk> exceeded annualized revenue of $20 billion for the first time.
Net revenue continue to drive outsized growth, increasing 68% year over year.
Advertising and EEP offerings continue to scale happening.
Quarterly active customers.
<unk> million increase in <unk> and.
Our superior customer value proposition our product offerings.
We need to attract new customers and drive record levels of customer retention.
<unk> added 3 million active customers year over year, the best Q4 in our history and we still have a significant opportunity to expand that base duty that could be 7 million active in <unk> in Korea.
Net revenues increased 11% on a reported basis and 15% on a constant currency basis as customers are spending across more categories and offerings.
As engagement increases and more customers will be built into our funnel.
Expect increasing wallet share will drive sustained strong growth and revenue per customer.
Starting in Q1, we plan to report two segments to provide better visibility on profitability of our Medicare offerings.
Product Commerce will include a <unk> offering along with Bae and associated advertising offerings.
<unk> inhibits segment.
And then nascent initiatives like video and.
And international expansion.
With that in investment mode.
As Bob noted short term headwinds and timing of investments obscure about improving underlying profitability.
Invested approximately $130 million and incremental COVID-19 related expenses in Q4.
Which is approximately evenly spread across cost of sales and operating general and administrative costs.
Over the past few months, we have made significant progress ramping up labor capacity and optimizing operations to relieve these incremental costs.
We currently expect approximately $60 million to $70 million of related costs in Q1, and then expected to further decline in <unk>.
We plan to remain disciplined going forward and managing any short term constraints and expect to operate within that band capacity.
Gross profit increased 24% year over year to $806 million in Q4, while gross margin declined due to increased investments in growth initiatives.
Verdict Commerce segment margin expanded quarter over quarter in Q4, even with the highest quality related costs.
Adjusted EBITDA losses increased to $285 million, primarily due to the incremental COVID-19 related costs and the in place capacity related to patient expansion and higher investments in our growth initiatives.
We continue to invest in each group.
Right.
And on.
On the offering.
An increased investment and Nathan initiatives like <unk>, our video offering international and feedback.
We are already seeing improved profitability in early 2000.
And are well positioned to make.
Meaningful progress throughout the year.
<unk> margin for the whole business has expanded globally.
50 basis points.
Two about 18% thus far in Q1.
The improvements have been driven by declining COVID-19 related costs.
Improved operational efficiency and continued growth in high margin.
AD revenue and retail product profit.
We expect that gross margin and adjusted EBITDA margin will continue to show meaningful improvement in 2020.
On growth, we have added a strong revenue momentum into early 'twenty.
Constant currency revenue growth is the name of our peoples and profitability and we expect it to be in the low 30% Green.
One day.
Demand has been a few percentage points higher than that but we have chosen to stay discipline and avoid last minute capacity investments that proved costly with limited returns in late 2021.
We are not giving formal guidance on growth beyond <unk> as consumer behavior, evidenced challenging to forecast in the current COVID-19 environment.
However, we have grown more than twice as fast as the E Commerce segment every quarter.
Last several years.
And we are confident that with our superior customer experience and strong execution, we will continue to grow significantly faster than the E Commerce segment for years to come.
Turning to our profit guidance for full year 2022 we expect an adjusted EBITDA loss below $400 million.
To provide additional context on our new product Commerce segment, we expect it to turn profitable by Q4, a significant improvement from the negative two 6% margin in Q4 of 2021.
On growth initiatives, we continue to invest in eats.
As it improves profitability.
And bad loan the blend to include investments in nascent growth initiatives that have shown early promise.
Investments across video and the National expansion <unk> will increase somewhere around $85 million in 2021 to approximately $200 million in 2022.
We are investing more to further integrate on these offerings and build what we believe can be meaningful growth drivers beyond 2020.
In closing we are off to a great start with solid demand train and an improved profitability profile that we expect will continue to get better as the year progresses.
Operator, we are now ready to begin the Q&A.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad. Please limit your questions to two per person.
For just a moment to compile the Q&A roster.
Your first question comes from the line of Eric <unk> with Goldman Sachs. Your line is now open.
Yes, hi, Thank you for this opportunity.
Two questions first is on <unk>.
So what is the ultimate goal for the company around <unk>.
Is it to become the.
The number one market share player in the market or is there some other motive where for the business.
And the second question is.
I think about the guidance. So obviously you mentioned.
Adjusted EBITDA guidance of less than $400 million loss.
And you also mentioned that you are seeing low 30% range for the revenue in the first quarter in constant currency.
Could you help us take.
Some steps so what would be the revenue growth assumptions associated with that.
I think other than industry deceleration due to comps and probably reopening.
Beyond that there could be some idiosyncratic factors that supports growth beyond the first quarter.
And in wholesale.
Obviously, you mentioned about that on a gross margin basis that it would be helpful for the trajectory.
Throughout the year as well as the Opex trend as well thank you.
Okay.
Hi, Eric Thanks for the questions. So I'll take the first part on each.
It's been the fastest growing <unk> service in our history.
As we mentioned in just its second full year of operations, which is now scaled to billions of dollars of orders and has grown to become what we believe is the leader in the fast delivery category the SaaS delivery model.
Is what we believe will win the space and it has in other markets that we studied.
We're also excited about the growth potential that still remains the last quarter, 70% of our active customers didn't place a single order on each.
But first we will focus on digesting our record growth and we believe our culture of operational excellence will help build the right foundation for efficient and ultimately profitable growth. There. Additionally, there are synergies with our product commerce site that we've yet to tap that.
That we believe has the potential to expand the value proposition for customers and drive additional operating leverage in a way that we couldnt were a standalone company.
Still a very early stage there of what we believe is a long term opportunity.
On the guidance question around EBITDA.
Hi.
In Q1, we're seeing growth in the low 30, so far demand was actually several points higher.
We don't see a reason right now.
For the quarter TBA later in the year, but it's very hard to predict as you mentioned there are so many variables in play.
Historically, we haven't given guidance on revenue and <unk>.
We will stick with that policy.
Now in any scenario, we expect to grow significantly faster than the E Commerce segment.
As we have in the last several years, we've grown at least twice as fast with E. Commerce segment every single quarter.
And the overall market opportunity appears.
Only be getting bigger I think we mentioned quickly briefly.
Briefly that the latest forecasts have now overall commerce, excluding auto and fuel to expand at a CAGR of 6% over the next four years.
E Commerce segment projected to approach nearly $300 billion by 2025. So we continue to be confident that we will grow significantly faster than the E. Commerce segment for a long time to come and as you mentioned you asked about what assumptions are in the EBITDA loss guidance. The near term revenue remains extremely hard to predict.
But we do have more confidence overall efficiency initiatives and investments and that's why we felt comfortable.
We're comfortable giving guidance around around the EBITDA.
Okay.
Your next question comes from the line of Stanley Yang with Jpmorgan. Your line is now open.
Okay.
Hi, thank.
Thanks for your help.
Thank you for the question.
Questions first question is about your EBITDA guide.
Guidance, So you mentioned the $100 million.
Adjust EBITDA negative just AB <unk> satisfaction.
So guidance churn meeting investment.
International video and Fintech, So should we assume dis <unk> 2 million.
<unk> is kind of the negative EBITDA included into the flow.
So you're asking.
So how much negative EBITDA, Wisconsin each in French.
The close out of these businesses.
What will be the key margin.
Margin growth charters.
Do you also assume some meaning this will take up of the system to certain strategic centers in the second half so.
So that was my first question and my second question is.
Do you think is the labor tightening labor supply issue is.
He is a structure issue and persistent niche and create an e-commerce market even after geely.
That's my second question.
Okay.
Thanks.
Thanks, Amit let.
Let me take the second part of that first on the labor.
Capacity issue.
There doesn't seem to be a structural constraint from where we stand as you mentioned, we had some short term disruptions in Q4 and Q1, we actually secured record capacity, while managing down costs and improving gross margin by over 250 basis points as we mentioned so far and that's in <unk>.
Due to the Covid sphere subsiding.
Our focus on strengthening internal processes now we may still see some short term disruptions from time to time.
But based on what we've now been able to do in Q1, we don't see a structural constraints.
In the market today.
Certain disruptions to happen. We've also learned from our past and we plan to remain disciplined and avoid some of the last minute efforts that.
Ultimately proved to be wasteful.
In the past.
As we balanced growth and efficiency this year.
The EBITDA guidance.
Yes, we're investing $200 million and growth.
And new initiatives that have relatively limited budget last year.
These have earned their way to additional investments we.
I believe that these are investments for growth beyond 2022.
And.
And we will continue to.
As we make progress we will have more to shut the appropriate juncture.
I think you mentioned you asked also about.
Fresh fresh as we intend to.
Segment our business.
As product Commerce segment showed the product Commerce segment in Q1 and R. R.
Our expectation is that fresh which doubled its logistics capacity or infrastructure capacity in 2021, and therefore had a peak underutilization in Q4.
We'll grow into it facilities at that scale and that Underutilization problem.
<unk> will will subside.
Proof overtime.
We intend to drive product commerce, corn fresh to profitability by Q4.
And finally I think.
SLC.
As we mentioned last quarter.
We're confident based on the early results that we've seen that FMC will be a driver of tremendous value for merchants and customers and.
And we expect <unk> to contribute more meaningfully towards the end of this year. There is a lead time to build the technology and infrastructure to scale FFC.
We remain very excited about its long term potential.
As a reminder, if you would like to ask a question. Please press the star one on your telephone keypad.
Your next question comes from the line of James Lee with Mizuho. Your line is now open.
Great. Thanks for taking my questions. My question is about capacity growth that you guys. So thank you all growing in FY 'twenty. Two I think this year you were planning to do 50% how should we think about.
Yes.
FY 'twenty two given the fact that you have this initiative becoming more efficiency.
And maybe to the extent looking at capacity growth for FY 'twenty. Two if you guys can break out investments fulfillment versus last mile.
Yes.
Okay.
Yeah.
So thank you for the question so the.
Yes.
<unk>, we added 15 million square feet.
And youre going to add millions more this year.
We believe increasing.
Infrastructure lead in the market by adding much more than anyone else.
And the market.
And in addition, we are going to continue to invest.
Into the future for the fulfillment and logistics.
Our <unk>.
I think the exact capacity plans, we continue to build.
The fine tune.
As we go along but we are pretty.
We'll be continue to be aggressive on our capacity plan.
Just wanted to follow up on your commentary here.
Reconcile your statement you were saying that in the past you were able to fill access access demand.
Rent temporary facility to ramp up the cost at the same time you talk about on the utilized facility peak in <unk> I'm trying to reconcile the two statements Hey, you guys talk about before here.
Sure I think.
Although utilization we model that.
That one mentioned was primarily on the French facilities.
B.
Will it be as you can imagine.
Much more sophisticated than normal coal facilities.
A much longer lead time, so we had.
The aggressive plan on build out looking at a midterm.
Last year and because of the labor challenges between agenda. In Q3, Q4, we were not able to fulfill customer demand on fresh and not able to utilize that capacity.
Because of other constraints.
I think thats, what I wanted to dive into that capacity and utilize capacity is on the fish side, it's much more expensive capacity.
What we are calling it out separately, but then the normal capacity.
But overall, we still continue to be more.
As much more as the Yokels.
Okay. Thank you.
Okay.
Your next question comes from the line of sung ROE with CLSA. Your line is now open.
Alright. Thank you very much I have two questions first one is on the advertising revenue.
Any potential any color here in terms of what is the current scale of revenue and how much do I would like to sneak in some kind of estimate that suit.
And the second question is related to the investments you mentioned that it is actually going to increase from $85 million to $200 million. This year.
Just wondering how much of that is.
Looking at it for the overseas expansion and which market.
We're getting this year.
On the surface. This hasn't been the sounds milestones can you kind of put that.
Pension is going to be under control.
Thank you.
Hi, I'm, sorry, I didn't catch the last or is there you said, we should assume the overseas was I'm sorry.
Hi, overseas expansion should be more moderated and control process, rather than very aggressive expansion in 2022.
Yes, I'll start with the but our strategy is always to be.
Very disciplined in our investments.
To make sure that we.
We test iterate learn.
And that investments are underway.
Two more investors to more.
<unk>.
That we increased investments or competence.
As a general principle and strategy to apply to all of our investments.
We believe there are opportunities certainly beyond the Korean market.
To break tradeoffs between selection service and price we remain excited about that.
There is still.
Relatively early and.
As we make progress, but we'll provide more updates on that front at the appropriate time.
But we remain excited about the opportunity to generate customer Wow.
And to drive meaningful growth beyond 2022.
And that opportunity and on advertising revenue.
It's still.
We're making great progress we're excited about the progress we're making we still have a big gap to where we think the full potential is.
Very early days.
But <unk>.
Advertising will grow with our ecosystem, so we know that.
We will remain focused on.
On the customer experience that ultimately is the driver of our ecosystem and of advertising growth.
Yes, and just to note that $200 million across video international in Fintech.
Your next question comes from the line of Peter Milliken with Scotiabank. Your line is now open.
Okay.
Yes, good morning, guys. Thanks, Nicole.
Just in terms of the margin increase that coming through in the first quarter is that all about cost decreasing or has there been some increase in the markup being charged charging.
And if it is all about cost declines can we just get a bit more granular and how thats changed so rapidly is that.
However, the improvements or something else.
Thanks for the question Peter we did not make a change in our pricing policy, we remain committed to providing the best selection service and price for customers.
The significant gains we're seeing in gross margin.
So far in Q1 have been primarily driven by long engaging long delayed efficiency projects that contributed to operating leverage sourcing optimization and advertising among other factors.
These are the same drivers that give us confidence in the long term EBITDA margins of 7% to 10 plus percent.
We will continue to build out our start in tier one.
And our product Commerce segment in particular.
Is an area, where the progress will be most evident.
We expect to take.
Take that to profitability by Q4.
You will see our progress as the year unfolds.
Right, Okay, and then if I look at the Covid costs.
It was meant to be a $130 million incremental.
Kris.
<unk>.
What was driving that was that hiring out more money too.
Two two.
Every people was it final bonuses worth it.
So the management of the process, the cleanliness or a combination of all three.
Okay.
Yes go ahead.
I think youre on mute.
So those costs are primarily given.
What do you attribute to Covid related to one time, hopefully assuming <unk> human statements they will.
And they are primarily labor related to add additional labor.
As I mentioned dealer.
<unk> growth the last minute spikes that growth occurring last year.
And it can be inefficient from all perspective, but you can do to invest in and continue to fine tune and trying to balance long term capacity versus short term seasonal growth.
The thing that really bad and in addition, there were other cohort.
When you look at costs.
Including the cleaning and.
Social distancing et cetera.
Yeah.
But the incremental cost.
Our.
Primarily labor related.
And so the answer is all three of those.
Pretty much it.
Cool.
Okay, that's fair.
Right.
Going forward do you think that delivery agent.
Delivery fees have increased permanently or is that.
Is that just or if it's something you guys did you have the clarity on.
Yes, there could be some short term disruptions from time to time in the future.
But as we as we mentioned we're encouraged by what we're seeing in Q1 it appears that some of the.
Some of the.
Disruptions war temporary as Covid fear subsided.
And of course, we did strengthen also internal processes to deal with that.
<unk>.
No.
We've seen improvement. So we're encouraged we don't think at this moment that this is a structural or permanent constraints.
Yes.
Disruptions, we saw in Q4 permanent structural.
And.
Other thing was also some of the last minute of the efforts that George mentioned chasing.
Capacity last minute.
That proved to be.
That proved to have very limited returns.
It was extremely costly and we've learned from that.
We intend to stay.
Stay disciplined and avoid some of those efforts as we balance.
Growth and efficiency this year.
Okay, that's great to hear thank you very much guys.
Thank you.
Again, if you would like to ask a question. Please press star one on your telephone keypad, we'll pause for just a moment to compile any last questions.
Okay.
At this time there are no further questions. This concludes today's conference call. Thank you for attending you may now disconnect.
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