Q2 2022 Coupang Inc Earnings Call
Of $66 million for the entire business and improvement of $157 million quarter over quarter, and a $188 million year over year.
We recorded $1 2 billion in gross profit and 22, 9% gross margin, representing a 250 basis point improvement quarter over quarter, and 470 basis point improvement net of the fire year over year.
<unk> constant currency revenues grew 27% year over year, and 3% quarter over quarter and revenue per active customer for the overall business grew 20% year over year, and 4% quarter over quarter on a constant currency basis in short the spend of our customer cohorts continues to compound at a fast rate.
And we continue to grow at multiples of the overall E Commerce segment in Korea in just three short years by 2025 that E. Commerce segment is projected to exceed $290 billion in sales.
While we've grown to significant scale, we remain a small portion of what is expected to soon become the third largest e-commerce opportunity in the world.
And our growth is powered by a relentless customer focus we will always strive to make experiences richer and prices are lower for our customers. We increased our investments in free rocket shipping exclusive discounts and free video content for our while members by 50% over last year to a.
A record $500 million in Q2 alone.
In addition to providing unmatched delivery and service levels. We continue to offer the best prices to our customers. A recent study by KPMG found coupon to have a 25% to 60% average price advantage compared to major competitors for top selling items across the category surveyed.
Now a few details on the operating results of our individual segments to provide more visibility into the underlying performance of our business for the first time in Q1, we broke out product commerce as a segment, representing our core e-commerce and fresh offerings separate from the developing offerings segment, which capture.
Our investment in nascent initiatives like <unk> International.
In Q2 product commerce generated $98 million of adjusted EBITDA, an improvement of $95 million quarter over quarter and $146 million year over year.
We continued to see strong gross profit margin results in product commerce with improvements of 150 bps quarter over quarter 380 bps year over year net of the fire. Despite ongoing inflationary headwinds. These positive results were driven by levers that we highlighted in Q1 benefits from investments in technology infrastructure.
Automation supply chain optimization, and scaling margin accretive offerings, including advertising, we believe the progress we've made and the 2% adjusted EBITDA that we recorded in product Commerce. In Q2 is just a glimpse of the significant long term profitability of our business the rate of improvement wont be consistent or as dramatic.
Each quarter, but we're excited about the potential ahead.
On growth product Commerce revenues grew at 27% year over year, and 3% quarter over quarter on a constant currency basis. In contrast, the broader product E. Commerce segment in Korea grew 6% year over year and zero percent quarter over quarter.
Our share of product E. Commerce growth has increased every quarter since we've gone public and this quarter was no exception setting a new record.
Increasing customer adoption and engagement across more offerings is accelerating our flywheel nowhere is that more evident than in our fresh offering. After just three full years of operation fresh annual run rate stands at nearly $3 billion on the back of what we believe is the best value proposition for an online fresh offer.
In any market.
We believe we provide the largest fresh selection of any retailer in the market and we're the only online grocer that offers free shipping for orders above just $11.
What's more customers can have their fresh orders delivered via dawn or same day delivery, along with millions of non fresh items, because we deliver both fresh and non fresh orders on the same logistics infrastructure.
Customers love the convenience of ordering everything in a single checkout experience and the combined scale of both offerings generate economies that are difficult to match for any offline retailer or standalone fresh grocer online.
And fresh is still far from its full potential the vast majority of our active customers did not make a purchase and fresh in Q2, highlighting the significant opportunity to scale. This offering in the years ahead.
We're also encouraged by the progress of fulfillment and logistics by coupon or MLC, which allows <unk> merchants to leverage our rocket delivery services and infrastructure for growth.
The offering promises to unlock for customers the speed and convenience of rocket delivery for millions of additional skus and it allows us to share the value and growth of our rocket offering with potentially hundreds of thousands of merchants many of whom are small businesses with limited access to shelves of offline retailers.
As of the end of Q2 over 90% of the <unk> merchants benefiting from the services provided by FSC, where small and medium enterprises or SME with less than two and a half million dollars in sales.
<unk> has the potential to unleash exponential value for both customers and small merchants in the years to come.
Another investment, we're especially proud of is our effort to create a more sustainable environment.
We invested in process and infrastructure changes to eliminate our box packaging for over 85% of our rocket deliveries, which not only saves on box and plastic packaging waste, but also allows us to reduce the number of trips our trucks make the complete deliveries leading to a significant reduction in emissions.
We've gone one step further and fresh delivering most of our fresh orders and completely reusable eco bags customers take their products and leave the eco extra pickup in reuse.
Empty bottles left on the porch in the old days of milk bottle delivery that has allowed us to eliminate virtually all styrofoam and most of the onetime packaging waste and our fresh deliveries.
We estimate that for 2022. These two efforts alone will save the equivalent of 8 million trees and offset the majority of the carbon footprint of our existing delivery fleet.
Even as they deliver unmatched savings and convenience to our customers.
Our small victories on this fund serve as a powerful reminder, that smart innovation sustainable practices and good business can go hand in hand.
Now on developing offerings revenues increased 24% year over year, but declined 7% quarter over quarter on a constant currency basis, driven primarily by our <unk> offering.
The decline in quarter over quarter revenue is due in part to the post COVID-19 slowdown in the online food delivery segment in Korea.
Growth is also not been our priority this past quarter as we mentioned in our last call. Our primary focus in each continues to be on making structural improvements that will improve customer experience and position us to be more efficient in our next phase of expansion.
Adjusted EBITDA losses in the developing operating segment decreased $62 million quarter over quarter. The key driver for this improvement was optimization efforts and our eats offering including enhancements and operating efficiency.
Developing offerings also includes promising initiatives outside of <unk> that target additional customer spend beyond our current E. Commerce segment, specifically investments in video Fintech and international have the potential to expand the Tam for coupon beyond the forecasted 200.
<unk> $90 billion in E Commerce sales by 2025, as we do with all parts of our business, we will continue to invest and execute in keeping with our operating tenants, which we first shared publicly shortly after our IPO last year.
One we exist to deliver new moments of wild for customers.
We don't start with what looks easy we work backwards from imagining jaw dropping customer experiences and we embraced the hard work required to challenge trade offs that customers take for granted.
We will employ technology process innovation and economies of scale to create amazing customer experiences and drive operating leverage and significant cash flows over time.
We always prioritize growth and long term cash flows.
And five we are disciplined capital allocators, we start with small investments then test and iterate rigorously, we invest more capital over time and opportunities that have the best long term cash flow potential.
In closing I want to thank our employees for their dedication in executing on these tenants even during some of the most trying times in recent history.
It would have been easy for the team to make a tradeoff between customer experience and operational discipline to choose one and give up the other.
Despite the unprecedented challenges over the last few years, our teams refused to compromise on customer experience and focus relentlessly on strong execution to delight customers and drive operational excellence.
<unk> and I are honored to represent such an amazing team and we're excited to work together to continue to break tradeoffs and deliver even greater moments of Wow for our customers in the years to come.
Now I'll turn the call over to Gaurav to review the financials in more detail.
Thanks, Paul.
Our demand continues to remain strong despite the post COVID-19 reopening impacts seen yet in Korea.
Total net revenue grew 8% year over year on a reported basis or 27% in constant currency.
Quarter over quarter. These new minus one 5% on a reported basis or three 1% in constant currency.
I think customers grew bypass and deal with Europe , but declined quarter over quarter by 1%, while active customers and product commerce increased both year over year and quarter over quarter.
<unk> customers in our <unk> offering decline.
New inbox.
Minus 11% contraction quarter over quarter and the overall online food delivery segment after the loosening of restrictions.
As Bob noted, we continue to see strong growth in our net revenue, but active customer.
Leasing 20% year over year on a constant currency basis.
Our customers continue to deepen their engagement with our services if.
You will be another record quarter with gross profit of $1 2 billion.
Okay isn't being 75% <unk> improvement.
41%, excluding the impact of the FC fire in 2021.
Our gross profit margin was 22, 9%.
250 bps.
At quarter improvement.
This improvement is a continuation of the drivers that we saw earlier in Q1 this year.
Benefits from investment in technology infrastructure automation supply chain optimization, and scaling margin accretive offerings, including advertising.
And for the first time as a public company <unk> positive adjusted EBITDA for the global company.
$66 million and adjusted EBITDA.
This represents a $157 million.
Quarter over quarter improvement that follows a $194 million quarter over quarter improvement in the prior quarter.
Over the past two quarters, we have given our global improvement.
<unk> $350 million.
A reflection of our disciplined execution across our business.
Provided guidance at the beginning of the year that we expected adjusted EBITDA losses will be below $400 million while.
While our full year 2022.
We are nowadays that guidance.
Positive adjusted EBITDA for the full year.
While we are encouraged by the ramp in profitability that we have been able to achieve over the last two quarters that eight of improvement going forward will be a bit uneven quarter to quarter.
Cadence and sequencing of optimization efforts of audiences and investments and some seasonality impacts among other factors.
As we stated at the beginning of the year forecasting revenue growth this year with the reopening of the market after COVID-19 remains challenging.
However, as Bob noted we are confident that we will continue the trend of growing significantly faster than the overall Korean E Commerce segment.
Overall, we are pleased with our results this quarter, we believe that our position in customer value proposition will continue to drive significant revenue expansion as well as increased operating leverage.
In light of our performance debate, we are more convinced than ever of our potential to generate long term they are into 10% or greater adjusted EBITDA margins.
Operator, we are now ready to begin the Q&A.
Thank you.
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 question to per person.
Pause for just a moment to compile the Q&A roster.
Okay.
Your first question comes from the line of Stanley Yang with Jpmorgan. Your line is open.
Well thanks for that.
Great resort and congratulation I had two questions first question.
Just EBITDA.
In the second quarter. The Q2 income interim Linda has been dramatic losing $160 million can you breakdown the driver of this EBITDA.
Increment.
By segment or by product.
My second and the other follow.
Final question that is actually when do you expect the free cash flow turning positive.
And then my next question is.
Uh huh.
What's your outlook so the floating in capacity growth in <unk>.
In the wake of e-commerce market growth deceleration. This year do you have any plan to incrementally strengthen.
<unk> for the service that delivery.
What's your expectation jet delivery volume growth this year and next year do you see the pace of take up of the Jetblue live as margin execute.
Thank you.
Hi, gentlemen, thank you for your question. So first on the drivers of adjusted.
Adjusted EBITDA improvement in most of the impact came from our continuous improvement programs that we also mentioned last quarter and many of which were launched before before 2022.
The main drivers were improvements in technology infrastructure automation supply chain optimization.
And the continued growth of the various offerings like advertising.
I think what hopefully is becoming more clear is that COVID-19 last year really obscure the underlying strength of our business. Some of which are now seeing more clearly it's hard to overstate the unprecedented pressuring problems, we face during the pandemic and how hard the team work to get through that period.
Two to where we are now.
<unk>.
We have operational initiatives underway targeting significant margin improvement ahead.
We do expect benefits to continue to come.
From greater economies of scale and improved operational excellence.
And the growth of our higher margin categories and services, but as we've stressed the rate of improvement will not be consistent.
As a result of the efforts will materialize unevenly.
There are also some pressures from inflation, including higher fuel costs of course, our teams are focused on on generating operational efficiencies to mitigate it.
But there are some short term disruptions.
<unk>.
That we should highlight but we remain confident in our ability to achieve the long term targets of 7% to 10% or higher adjusted EBITDA for the overall business for the long term.
We continue to.
Invest in in our FMC as you mentioned there are dose the timeline isn't dictated by macro trends its really driven mostly by our internal execution.
Continuing to see a very positive response from our customers and merchants.
Which has reinforced our belief that <unk> will create tremendous value for both customers and merchants, but there is a lead time to build the technology and infrastructure to scale LLC.
And we continue to test and iterate and refine processes, it's still very early.
But our confidence is growing that <unk> will be.
A meaningful driver of growth and margin in the long run we look forward to sharing more data points Stanley at the right time.
Finally on the Scf quest.
Question, we have not given guidance on it but of course, we continue to work towards it.
Thank you.
Your next question comes from the line of Eric <unk> with Goldman Sachs. Your line is open.
Thank you for the opportunity.
Myself as well congrats on the great set of results.
I have two questions if I may.
So around <unk>, obviously been impacted by the slowdown of the industry, but there also seems to be a bit of a idiosyncratic issues as well.
If I call it if I can call it an issue but.
In what ways do you plan to rationalize the unit economics on that business going forward.
And at the same time, how do you balance.
Youre sort of path to gain market share as well Scott that first question.
My second question is another question on FMC actually so more around the strategy. So how do you plan to acquire the big three P merchants or migrate.
<unk> players to migrate to the LLC.
Would motivate them to do that and how will <unk> impact.
<unk> profitability.
Thank you.
So Eric <unk> as I mentioned, it's still very early we're still testing Iterating, we're building tools.
Infrastructure to scale.
The intent here is to share the value of that.
And the growth that rocket generates with our merchants and of course for our customers as well we're expanding.
Exponentially the value of rocket delivery too.
Many many more.
Products and selection that are provided by by merchants in the broader market. So we're excited about the value that we can create for both customers.
And merchants by sharing rocket deliveries value.
With repeat merchant, but it's still very early and I think as <unk>.
We mentioned in Q1.
Towards the back half of this year, we look forward to sharing more data points.
On your on your question on <unk>.
Youre right that we were affected by the negative 11% quarter over quarter slowdown in the overall food delivery sector.
But we saw significant improvement needs profitability in Q2 due to our focus on improving operational efficiencies. This quarter. We're also exploring synergies between <unk> and other offerings in our ecosystem.
To expand value for customers and improve efficiency before the next phase of expansion and it is important to highlight that long term, we remain very excited about its potential.
And we believe it will be a valuable and profitable offering in our ecosystem.
That generates.
Synergies with other offerings and expand the value proposition for our customers and ecosystem.
Okay.
And your next question comes from the line of Sam Park with Morgan Stanley . Your line is open.
Alright. Thank you. Thank you for the opportunity I think the first time asking questions and once again the results were actually very encouraging.
Given the focus on investors' focus really on margins I was just wondering whether you can provide a little bit more color.
On what.
Where you have seen the biggest gains in terms of gross profit margin improvement.
Sure.
Product Commerce segment.
Particularly.
Could you say that in terms of the utilization of your delivery capacity.
Our higher utilization is a key reason for the improvements.
And I guess, along with along those lines.
How much of.
Improvement do you foresee kind of going through the remaining two quarters of the year.
<unk>.
The low hanging fruits been taken then does that make the slope a little bit more difficult in the second half along with.
The impact of inflation and the slowing market overall or do you still think that there is still a lot of room for these efficiency gains to continue that's my first question.
Second question I think thats given.
The other analysts have already asked on ethos.
I would like to access on the strategic direction.
For a coupon play.
The function of coupon play and just given some of the content investments that coupon has been doing recently.
Obviously, that's it's.
A negative in terms of near term margins, but I was just trying to see whether you had other ways you were thinking of monetizing this service over the longer term. Thank you.
Okay.
So there is many ports to unpack there, but let me start with the product commerce with the overall.
The margin improvement I think this also touches on a question maybe I can go a little bit deeper that Stanley mentioned, we have when you talk about which segment it came.
The margin improvements were driven.
We have a structural advantage in the network and infrastructure that we built.
Big.
In the sense that we the scale advantages.
That are driven in one category benefits the economies of the other so for example, our structural advantage and fresh are combining fresh and general merchandise on the same logistics infrastructure allows us to provide customers not only with the best experience and delivery within hours.
Also the lowest cost structure.
That enables us to provide free shipping and low prices.
You'll continue to see that.
With economies.
Generate greater economies of scale improved operational excellence.
Across multiple segments for that reason.
And of course.
Our margin expansion is aided by the growth of higher margin categories and services much of our growth ahead is concentrated in services and offerings that are higher margin.
Sure.
Acceleration of our flywheel, we believe should also over the long term drive margin expansion as well. So we're very confident that there is a lot of room for margin expansion over the long term debt and we remain more confident than ever in our ability to achieve the 7% to 10% or greater EBITDA margins in the long term however in the short.
Term as you mentioned there are disruptions like inflation.
That have led to higher fuel costs.
Among other things.
And we continue to work through them.
We will we were net positive this past quarter because of our team's ability to mitigate much of that impact.
But there continues to remain a short term headwind.
Going forward.
On <unk> I think we continue to remain focused on making the structural improvements.
As you mentioned there are.
There are synergies across that we believe we can capture.
Both in creating.
Structural efficiency, both in creating operating efficiency as well as our monetization.
Across offerings in our entire ecosystem.
But we'll again update you as we make more progress.
On that front on play long term, we believe plays an exciting opportunity to enhance our membership experience and capture spend currently not included in the 290 billion e-commerce opportunity in 2025.
So much of our developing offerings the investment is in initiatives.
That allow us to expand the Tam beyond the $290 billion e-commerce opportunity.
Over the next three years.
And we will continue to invest in a disciplined way and those offerings in keeping with our operating principles.
Our next question comes from James can be with Mizuho Securities. Your line is open.
Great. Thanks for taking my questions I have two here.
First demand by categories here in the U S. We're seeing central products outperforming discretionary items due to inflationary pressure and mix shift to services.
Curious are you seeing a similar trend in Korea, and also help us understand what the trends look like in <unk>. So far in July and second question is on FY 'twenty EBITDA guidance how.
How should we think about the.
Ebitdas for developing offering previously you said you plan to lose about $200 million just curious what's your thinking there.
For FY 'twenty two.
Yes.
But.
On your first question.
As we noted earlier our revenue per active customers grew on a constant currency basis, 20% year over year.
And continues our customer spend continues to compound at a fast rate because we are seeing growth and strong adoption across many categories.
And offerings.
We're still very early in our journey.
We represent we're only in the single digit share of the overall commerce market.
We continue to see customers.
Expand there.
Their spend into newer categories from our older categories customers want selection low prices and fast delivery for all categories.
Yet to find an exception to that is that true. So we're seeing broad growth across multiple categories.
I think that was your first question and on your second question.
Okay.
But those are the $200 million investment in developing offerings.
We'll continue to invest as I mentioned in long term opportunities that may not yield revenue growth in the short term.
Oh.
Because we're excited about the opportunity to capture spend in Fintech and video and international for example.
That helped us expand the Tam over the long term and we'll continue to do that and test and iterate investment we're confident.
And the ability to generate long term cash flows.
Continue to be disciplined on that front.
Great No problem, if I can ask you a follow up question is more about your investment philosophy.
Given the fact that you guys have done a great job, becoming more efficient. So how should we think about how you approach intensive balancing growth and profitability going forward, especially in developing offering right. What indicators do you need to see to double down your investments and what do you need to see to really back off.
Continuously to reduce losses.
The one thing I should really one thing that I should point out and I hope is clear as these improvements youre seeing was not created over one quarter.
Many of these programs that are driving this impact today.
That are materializing in the numbers today.
We're made over many many quarters and sometimes over many years.
The continuous improvement programs that drove our drove much of the impact that will continue to drive much of the impact going forward were started before this year.
And it was as I mentioned in earlier.
Coal Covid last year obscured a lot of the underlying improvements and strength.
And we had our business went from our business Triple from 2019 to 2021.
While.
Covid presented unprecedented challenges.
To our operations and we had I cannot overstate how.
Incredible job the team did not only this past couple of quarters, but throughout the couple of years.
The pandemic when we have to.
We refuse to compromise on customer experience and continue to make progress on the underlying.
As structural.
The underlying operational excellence and so I hope that's clear and I hope we don't misinterpret. These results is the.
The output of a.
A few months.
And we that operational excellence is a part of our DNA.
As we mentioned in our.
In our in our principles that we shared not this year, but over a year ago. Shortly after our IPO.
We were disciplined.
We test it.
Iterate.
And when we see.
Or.
Our hypothesis confirmed.
And we have more confidence in long term.
Cash flow generation, we invest more and when we don't.
We capped the budget and that's the.
That's the same approach Youll see.
As we as we invest in developing offerings that will.
Have the potential to yield a lot of impact of the business to drive meaningful growth.
Meaningful profits for us in the long term.
Great. Thanks, so much.
Your next question comes from the line of <unk> Li with Bank of America. Your line is open.
Okay.
Hello, Thank you for the opportunity I have two quick questions.
I would really love to get your thoughts on.
Right.
Macro picture.
<unk> spending trend so it seems like investors around the world seem to worry about potential recession.
And a recent inflation may lead to consumer wallet shrinking and also AD budget declines.
Yes.
In the past couple of months.
You witnessed any changes in the behavior of your customers or advertisers like customers, even the market things like they seem to prefer a cheaper product.
Or any signals that the basket size declined for.
For the advertisers they become more prudent and they seem to delay the advertising towards the end of this year or even next year.
So that would be my first question.
And then the second thing is I think.
The change also asks about if possible any chance could you help us understand the latest trend in Europe .
In July and early August .
Thank you.
No.
As I noted.
As we've mentioned there are unpredictable variables in the near term and growth remains difficult to forecast.
But we're very.
<unk> that in any scenario will continue to grow.
<unk> faster than the overall e-commerce sector and as you can see the revenue per active customer.
Growth highlights how fast customer spend is compounding that's happening.
Because of strong adoption across many categories and offerings. So.
We are advertising continues to grow fast.
On both trajectories, we are still very early far from where we want to be so.
So I don't think.
There is.
We just see a general we see a general trend long term trend that we're very encouraged by.
But the short term.
Variables make it very difficult to forecast and I think as we mentioned before this year, especially well.
We will refrain from for making forecasts onshore.
On short term growth.
And we will now take our last question from the line of Peter Milliken with Deutsche Bank. Your line is open.
Thank you and good morning, everyone, Hey, Great result, really not seeing EBITDA profit.
And my question really is how did you.
Bill about improving quarter on quarter. So much would you attribute that more to COVID-19 costs coming out of efficiency costs.
Being driven or through margins being high either through this positive mix shift that you talk about or even pricing in prior.
Higher pricing to horizon.
Yes.
There were no price increases.
Our pricing power.
Good.
<unk> policies and implementation are unchanged, so and as we mentioned in fact, we increased our investments in benefits for our customers and free services and exclusive discount for why members by over 50%.
To a record $500 million in Q2 alone so and we continue to invest not only in the low prices and fast delivery and richer experiences, but also in new benefits and services and offerings.
For the long term.
Like the ones, we highlighted in developing offerings.
And.
As I've repeated.
These efforts were not the result, but these results were not.
Were not produced by efforts in just one quarter.
Our improvements around process technology supply chain optimization.
Automation infrastructure technology.
We're driven by continuous improvement programs that preceded many of which preceded this year now some of those efforts did accelerate as we directed more resources towards them resources that had been previously tied up in response to pandemic related challenges but.
It's not a single <unk>.
Short term variable that drove.
This broad based.
Movement in margin.
Got it okay, and while I have you on the line could you perhaps give us your views on.
Competitive.
We have now we've seen a lot of investment going to your competitors.
At least plan.
Over the last year.
With the post Covid slowdown.
You see that continuing or any sort of change.
I think we can say that more so.
At any point in our history.
Core drivers of our business are unaffected by competition.
Share of product E Commerce growth has increased every quarter since IPO.
Including this past Q2.
And that acceleration is the result.
Of our investments our innovation to provide.
<unk> customer value, a relentless focus on customer value and operational excellence.
That's where we're spending all of our time and energy and I think we're.
We're more confident than ever in our ability to deliver for customers and unaffected by competition.
More so than at any point in our history.
Okay, great. Thank you.
Yeah.
And ladies and gentlemen. This concludes today's conference call you may now disconnect.
[music].