Q3 2022 Coupang Inc Earnings Call
Paul.
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The speaker's remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question Crow Star one again.
Now I would like to turn the call over to Mike Parker, Vice President of Investor Relations you May begin your conference.
Yeah.
Thanks, Operator, welcome everyone to coupons third quarter 2022 earnings conference call I am pleased to be joined on the call today by our founder and CEO , Don Kim and our CFO Gaurav and arm.
The following discussion including responses to your questions reflects management's views as of todays date, only we do not undertake.
Take any obligation to update or revise this information except as required by law.
Certain statements made on today's call include forward looking statements actual results may differ materially.
Additional information about factors that could potentially impact our financial results is included in today's press release and in our filings with the SEC, including our most recent annual report on Form 10-K and subsequent filings.
During today's call, we may present, both GAAP and non-GAAP financial measures additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures are included in our earnings release, and our SEC filings, which are posted on the company's investor Relations website and.
And now I'll turn the call over to Paul.
Thanks, everyone for joining us today I'm excited to share with you some highlights from our third quarter operating results.
Revenues increased to $5 1 billion growing 27% year over year on an FX neutral basis and over 10% year over year on a US dollar basis. This was driven by an increase in both active customers and revenue per active customer.
We generated over $1 2 billion and gross profit with a record 24, 2% gross margin representing over $3 4 billion and gross profit recorded year to date.
Our adjusted EBITDA was $195 million for the quarter at a three 8% adjusted EBITDA margin.
Our cumulative adjusted EBITDA year to date is positive of $170 million.
And in Q3, we achieved positive net income of $91 million for the consolidated business improving $415 million year over year.
First on product commerce, while the macro environment remains uncertain around the world. The Korean retail market in Q3 grew at a strong pace of 7% year over year.
Even as the World Reopens post Covid, our growth has been resilient, our FX neutral revenue recorded a robust 27% year over year growth our active customers for product commerce grew even faster than the 7% year over year active customer growth for the consolidated business.
This trend of our customer cohorts, even our oldest continues to compound at a fast rate.
And that strong spend growth can be seen across all categories, even our most mature.
We still don't know the entitlements spend of our customers in any category much less in aggregate and a total commerce market projected to exceed 600 billion.
By 2025.
That momentum positions us well to support merchants suppliers and consumers to succeed in the current economic environment.
Over 70% of our merchants are small and medium enterprises or smes with less than $2 $5 million in annual revenues those merchants generated growth on coupon that was multiples of the overall retail market. We believe we have become the number one source of growth for Smbs.
Q3 marked the third quarter in a row of significant profitability improvement.
While we continue to see positive impact from increasing economies of scale and margin accretive offerings. Most of the recent improvement has been the result of investments in technology infrastructure supply chain optimization and process innovation, including automation for.
For instance, typically inventory loss grows as you increase the breadth of selection and fresh, especially across multiple regions. We set out to breakthrough tradeoff and provide customers with the widest assortment of fresh at the lowest cost.
Our team has found ways to leverage machine learning among other means to better predict changes in customer demand by region and optimize inventory orders and placement that was a key driver of the over 50% year over year reduction in fresh inventory losses in Q3 alone.
There are numerous such efforts across the company to improve efficiency, many of which have been ongoing for years.
The rate of improvement wont be consistent or as dramatic each quarter, but we're excited about the potential ahead.
Above all the results of the quarter reflect our accelerating flywheel that is powered by a relentless focus on customer experience and operational excellence we.
We obsess about how to make experiences richer and prices lower for our customers and our unique E Commerce networks scale and design enable a superior customer service and efficiency.
Over the past seven years, we invested billions of dollars to build a network that integrated from inception fulfillment and last mile logistics.
We have built the largest fulfillment infrastructure in the market. We also believe we have the largest last mile network of directly employed drivers.
And from order to delivery to returns virtually every aspect of our customer experience is orchestrated by our technology.
Our homegrown technology direct some movement of our goods and tens of thousands of drivers and staffers seamlessly across our integrated network of over 40 million square feet of infrastructure.
<unk> side by side that would be the equivalent of 500 soccer fields or an area larger than that of Central Park in New York.
That distinct integration of technology fulfillment infrastructure and last mile logistics.
Allows us to break traditional tradeoffs between selection service and price for our customers because of it we're able to deliver millions of items via dawn delivery order does the latest midnight in arriving at the door before seven a M with unlimited free shipping.
Because of it our customers can leave items for return outside their door without the hassle of packaging in a box or even printing a label and because of it we're able to eliminate box packaging for over 85% of our rocket deliveries as well as deliver most of our fresh orders in <unk> that we pick up and reuse.
Much of the efficiency gains we've captured are exclusive to our network of our design.
<unk> customized processes upstream to generate efficiencies downstream and ultra design downstream to optimize processes upstream.
The integration also allows us to deliver fresh products and the same last mile trucks with our general merchandise deliveries without a separate cold chain delivery network box lists and eco back deliveries may customer lives easier and drive significant reductions in packaging waste and the number of trips our trucks make the complete deliveries, which.
Result, and lower emissions.
Our increasing scale will help us fulfill our potential.
But we will also continue to invest in automation, including machine learning and robotics.
This will make work even easier for our workers and prices, even lower for our customers.
In addition to better service and low prices will continue to expand both first party and third party selection for our customers that includes new selection on rocket enabled by fulfillment and logistics by coupon.
ELC SLC provides one hundreds of thousands of merchants access to the speed efficiency and convenience of rocket delivery and returns we're.
We're excited to share the benefits of billions of dollars of investment in infrastructure and technology with tens of thousands of small and medium enterprises that have traditionally been excluded from shelves in offline stores. This will help them capture the growth and savings generated by our end to end integrated operations.
In turn they will help customers gain access to even wider selection with the experience of rocket and build an even richer ecosystem that benefits, both small businesses and customers alike.
Finally, let me touch on developing offerings, where our revenues increased 10% year over year on a constant currency basis, driven by our <unk> offering.
As we stressed recently our focus in <unk> has been on creating a profitable foundation and the dramatic improvements in economics over the last few quarters are reflected in the gross profit improvement of nearly $42 million year over year.
We're also excited by the customer engagement that we're seeing in our initial efforts in coupon plate Fintech and international we are in the very early stages of these offerings, but we believe they have the potential to expand the Tam for coupon and extend our innovations to customers in new sectors and new markets, we will continue to ins.
<unk> with discipline in keeping with our operating tenants, starting with small investments testing rigorously and allocating more capital and opportunities that maximize our long term cash flows.
As you've seen with our execution and product commerce, we will be disciplined and long term oriented and our investments in developing offerings.
Overall the results of Q3, despite the challenging environment reflects the focused execution of our teams and the fruits of significant investment over many years.
While we remain vigilant about the persistent short term pressures in the macro environment. We also continue to be excited by the strong underlying trends that we're seeing in the business.
Now I'll turn the call over to grow to review the financials in more detail.
<unk> as.
As a reminder, we continue to look at that business to the perspectives of credit Karma segment, representing our general merchandise and pest offerings and are developing offerings segment, which includes our investment in Nathan initiatives like <unk> play.
And international.
Our teams have executed remarkably over the last three quarters leasing notable milestones in each quarter.
We had positive adjusted EBITDA for <unk> Commerce in Q1 achieved positive adjusted EBITDA for the consolidated business and Hugo and delivered a positive net income of $91 million for the consolidated business in Q3.
We are really proud of our teams and their execution.
At the start of the year, we provided guidance for 2022 that would be.
We expected to achieve adjusted EBITDA of minus $400 million for the total company for the full year.
And that product Commerce segment will be profitable by Q4 of this year.
As acuity existed EBITDA year to date for the entire business is over $170 million.
We continue to see strong demand again this quarter. Our total net revenue grew 10% year over year on a reported basis or 27% year over year, and 8% quarter over quarter in constant currency.
And more importantly, we continued the trend of growing at a multiple of the E Commerce segment growth.
Our top line growth was driven by both strong customer adoption and deeper penetration with existing customers.
I think thats somewhat grew 7% year over year the.
I think customers in <unk> commerce grew even faster.
Net revenue per active customer increased 19% year over year, and 7% quarter over quarter on a constant currency basis, reflecting greater engagement by our customers.
Our customers come to Us every day.
Invaluable customer expedience low basis and that assortment.
And the Safeway exceed those expectations with each interaction.
We continue to invest hundreds of millions of dollars in blood customers this quarter, who in.
Investment in pre rocket shipping undergone discounted pricing and fee video campaign or a wild members.
Q3 marked another record quarter for gross profit margin, we generated $1 $2 billion of gross profit.
64% year over year improvement.
Our gross profit margin was 24, 2% an increase of nearly 800 bps year over year.
Other than 30 bps quarter over quarter.
Our next commerce continued the trend of strong gross profit margin expansion, increasing by over 720 bps year over year.
<unk> hundred 50 bps quarter over quarter.
And in this quarter that could be four 6%.
The driver for this improvement remained consistent with the factors. We have highlighted 12 this year benefit from investments in technology.
<unk> automation.
<unk> optimization and scaling margin accretive offerings.
This quarter, we sold a large improvement in <unk> expenses as a percentage of revenue improving 160 bps of revenue quarter over quarter.
Despite additional investments in fulfillment and head count.
Our operating margin performance demonstrates our ability to leverage our scale, while we continue to invest with discipline for future growth.
We do want to note that the reduction of <unk> expenses in absolute dollars was affected by the higher efficacy.
We also had a record $195 million of adjusted EBITDA, which is three 8% of revenue.
Verdict commerce generated an adjusted EBITDA of $239 million.
Our four 8% of revenue driven by gross margin expansion and leverage and other operating and general expenses.
This level of existing EBITDA margins and our product commerce reinforces our belief that we are on track to deliver embankment margin over the long term.
In the short term revenue remains hard to predict in these uncertain times, but we are pleased with our track record of growing at multiples of the Caribbean E Commerce segment and expect that trend to continue.
And while we don't expect profitability improvement in the quarter, we do expect to generate meaningful profit expansion over time.
We are committed to maintaining disciplined investments and Mason long term opportunities.
Invest in these offerings because we are excited about the opportunity to expand the Tam and generate greater cash flows over the long term.
Earlier this year, we communicated that we expected these investments in Fintech, <unk> and international would not exceed $200 million in 2022.
Year to date results, thus far are consistent with that expectation.
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. Please press Star then the number one on your telephone keypad.
Please limit your questions to two per person.
Our first question comes from the line of Eric Choi with Goldman Sachs.
Hi team. Thank you for the opportunity to ask questions and congrats on the great set of results.
I have two questions first on the product commerce gross profit margin.
I understand that there were commentary around this in your earlier presentation.
But would you give us a bit more details around what this quarter leverage where for the product commerce gross profit margin to yet again go up as much as it did.
And a bit of a near term outlook would be helpful. And then also does this change your long term target or outlook in any way.
And the second question is the revenue seems to be up 7% sequentially.
Constant currency, but your opex seems to be fine also adjusted for FX would.
Would be great. If you can let us know where this operating leverage came from was there any specific efforts from the company this quarter.
Or can we consider this as being structural going forward.
That's it thank you.
Hi, Thanks, Thanks, Eric for the question on the gross profit margin you're seeing benefits.
From continuous improvement programs and many years of investment in technology infrastructure supply chain optimization. Among others. These are consistent with the drivers that we've mentioned in the last few quarters and you are seeing gains in the past few quarters the games won't come.
Every quarter, but we expect to continue to see benefits from these improvements over time this past quarter process improvements, including automation will also big drivers.
I mentioned the.
Inventory waste challenge in fresh offering wide selection creates the risk of inventory in fact increases the risk of inventory waste our teams were able to.
Leverage machine learning greatly improved forecast accuracy and inventory placement helped reduce fresh inventory waste by over 50% in Q3 alone. Those are the kinds of initiatives that we continue to invest throughout the company. There are many such efforts currently ongoing.
We understand the drivers there.
That we believe will get us to that long term margin opportunity.
Which as we've stated before is 7% to 10% or higher EBITDA.
Ed.
Those are the drivers that have led to 830 bps of gross profit margin improvement year to date.
We are excited about that long term potential but it is important to note that they will not happen overnight and as you can imagine we won't realize gains every quarter.
Yes on the on the <unk> expenses I think you are right to note.
In constant currency was flat quarter over quarter.
We are.
Generated efficiencies ecosystem <unk> innovative projects.
Our fulfillment costs, which are in those numbers.
While we continue to increase had cone.
<unk> also submitted a few points of.
<unk> leverage with a ceiling there.
So.
We believe it's a structural as we continue to.
Invest.
And both of these areas in a disciplined way.
Yes.
Thank you.
Your next question comes from Stanley Yang with Jpmorgan.
Okay.
Thank you very much for your great resort and congratulation again.
<unk> and <unk>.
Net profit tiny positive buzz unless elevated then.
Inc.
Our expectation so and I think that's a big milestone optical coms financial history and meaningful step for tier long term EBITDA margin guidance can you. Please guide the next financial lifestyles, such as free cash flow turning positive point.
I think our margin guidance achieving timing.
And the second question is what will be the key strategic changes whilst return free cash flow positive Independencia are you going to pursue more aggressive development.
Developing business investments.
Related to this question is going to ramp up rocket delivery and cross border product in Taiwan do you plan to enter Taiwan market with sizable investments like in Korea, or do you have a different approach in Taiwan or other international market expansion.
David I'll take the.
Sadly I'll take the first part of your.
Question.
So as you pointed out suddenly we are really excited about the milestones we have hit this year in Q4, we got to adjusted EBITDA positive.
E Commerce.
In Q2, we got to adjusted EBITDA positive for the entire company in Q3, we got a positive net income for the entire company for the next milestone that we are focused on is the <unk>.
Being free cash flow positive.
Historically prior to <unk> when the equity one our free cash flow was roughly equivalent to or better than our adjusted EBITDA.
This year.
We have made some strategic investments.
Including one time Capex in <unk>.
Owning facilities and building facility.
Large inventory buys and areas of growth.
But overtime, we expect this relationship between free cash flow and adjusted EBITDA to normalize.
That's our next milestone to deliver.
Thanks for the question and just I think GOR.
<unk> Q1, not Q4, but.
On the product Commerce adjusted EBITDA positive I think to your question about.
Whether there'll be strategic changes in our investment approach.
In the future, whether Taiwan other markets will be sizable investments.
First of all we're excited about the long term opportunity in markets beyond.
Beyond Korea.
We do believe that.
But we are confident that we can be intelligent and disciplined in our execution. We also believe we have opportunities to leverage many strengths that we've already built.
Including technology processes, and even selection and as you've seen us demonstrate in our core offerings.
We execute in keeping with our operating tenants.
We communicated.
Earlier this year that we expected our investments in Fintech and play in international would not exceed $200 million in 2022, our year to date results. Thus far are consistent with that expectation our investment approach is not dependent.
On our financial results from our from our core offerings.
It's always been in keeping with our disciplined approach our operating tenants that we shared shortly after we went public last year, we test we test and iterate, we make sure that we're confident of long term free cash flow potential before we invest more and when we do invest more.
A reflection of that confidence so we don't expect our philosophy, our culture to change.
We hope to continue to show and show you that we execute well, we can execute in an intelligent and measured fashion.
Thank you.
Your next question comes from Sam <unk> of Morgan Stanley .
Hi, good morning, if I could.
Good evening.
Thank you for the opportunity to.
Two questions from my side.
As you look into the fourth quarter.
Is seasonally strong for us.
Korea, but then I think in the past you've also seen that the fourth quarter tends to be a little bit more promotional and competitive.
Does that imply that we should be expecting some of that promotional activity to impact your gross margin in the fourth quarter is my first question.
Second question is can we get some.
Kind of color on how much advertisement revenue.
We're generating.
Run rate that we could expect for the year and what kind of potential you see from as I think.
<unk> looked at some of the international benchmarks like Amazon.
I think J D.
5% plus of GMB apparently.
<unk> generated in terms of advertisement.
Would that be some kind of a benchmark that we could also look forward to as you grow your advertising business. Thank you very much.
I think to your question about quarterly guidance.
We expect.
Two.
Okay.
We intend to share annual guidance at the beginning of the new year as we did this year.
I think while we're excited about our progress to date, we exceeded our adjusted EBITDA guidance for the year.
These are on.
Uncertain times, and we'd like to refrain from making specific.
Revisions I think in.
<unk>, if you look at our <unk>.
Business AMD.
Our growth and our customer spend.
Growth in particular is really driven by the experience that we've built over many years the constant everyday low priced fast delivery vast assortment it really isn't dependent on <unk>.
Short term periodic.
Promotions.
And as we pointed out the spend of our customers continues to compound at a fast rate, we're seeing strong growth across all categories, even our largest.
And.
That everyday promise selection of low prices fast delivery is what we're focused on that.
That continues to be the driver for growth.
It certainly has been the driver for growth over the last few quarters, we can expect it to be the driver of growth.
And quarters and years to come.
On ads were.
We're pleased with the progress that it's making it's bren.
It's been a positive story.
Over the last year, and it's still early and far from where we want it to be we have opportunities to improve.
That service.
And expand functionality and I think it's also important to note that we have seen synergy between ads in not only our product commerce with many offerings.
Beyond that as well and it will continue to benefit from the continued growth of our overall business.
So it's still very early in that journey and we're excited about the potential to come.
Thank you and congrats again on the great results.
Your next question comes from the daily.
<unk> of Bank of America.
Thank you. Thank you for the opportunity for a question I have one quick question regarding your labor cost.
Operating expenses.
<unk>, where the headline and core inflation are rising rapidly.
Do you expect to see.
Any incremental burden on your labor.
Specially for de risk weight, either logistic center.
I was working in the last mile delivery, especially on coupon Frank.
And is there any upward paragon on your labor cost how would that potentially impact.
Overall operating expenses and margin.
And Keith.
Hi, Thanks for the question.
Sure.
Inflationary headwinds.
But our results this quarter again, we're net positive because of our investments our disciplined execution that we continue to see benefits from.
<unk>.
About a year at least so far we don't believe that these factors will create a material disruption to our business.
While the macro conditions are uncertain, we can.
Continue to be confident about our ability to drive the inputs that we control in our business.
Alright, thank you.
Your next question comes from James Lee asked nursing home.
Thanks for taking my questions. Two here first one on consumer behavior in the U S. We saw a mix shift to services it offline.
Curious, what you're seeing whether you're seeing a similar trend.
And also with inflation in Korea are you seeing any sort of consumer trade down and second question on.
EBITDA guidance any adjustment to your prior kind of indications should we assume that your disciplined.
Disciplined approach and investment will kind of carryover in FY 'twenty three how should we think about maybe puts and take.
The profitability levels heading into FY 'twenty.
Alright, thanks for the question.
James as I mentioned, our guidance I think we'll reserve that for the beginning of a new year.
We did this year.
You are right that the underlying strength of the business that we're seeing today, we're encouraged by it but.
But I think the.
I think any adjustments to guidance or revisions, we'd like to we look forward to sharing that at the beginning.
Of the new year.
<unk>.
Your first question was about.
Yes, consumer behavior any mixture of human behavior.
Yeah.
Got it.
Perhaps.
It's a reflection of how early we are the stage of our journey that we're on but we're seeing strong growth across all categories. Our customer cohorts are compounded we're still very small percentage.
We're a small percentage of the overall commerce market that is projected to exceed $600 billion by 2025 the overall.
Retail market in Korea is also showing signs of strength growing 7% year over year. This past quarter, which is reminiscent of the strong growth. It had displayed in the years leading into or prior COVID-19.
So the overall market is growing we're still a small percentage of it where we're seeing a compounding core still across all categories, even our oldest even our largest.
We still don't know what the full potential spenders for our customers in any category much less in aggregate what.
What we do know is that we're still early in the journey.
And customers want selection low prices SaaS delivery in all categories, we have yet to find an exception to that simple truth.
If I can squeeze in a follow up question I get a lot of question fund investors in general in the U S. Amazon has been racing as prime membership.
Monthly pricing.
Pricing I think that that early in the year.
Just wondering from your perspective.
Do you feel like you have any room to increase your pricing and if that's the case.
Why do you think that's the case thanks.
Our focus and while continues to be on creating extreme value surplus for our members we want the benefits to vastly exceed the price they pay.
We've added seven services to while since launch we're still looking to invest in more.
We will keep expanding the value proposition.
So that debt.
It is in excess of the price that pay for while members for years to come and that's our strategy that's our plan.
Your next question comes from Josh Levin of Autonomous research.
Hi, good morning, I have two questions.
First question is so net revenue per active customer was up quite a bit year over year on a constant currency basis can you provide some more granular color as to what is driving that and how sustainable that trend might be how much of that trend is greater frequency of purchase versus a wider diversity of goods purchased and second active customers were up.
A bit quarter over quarter, but how much would active customers be up if you excluded coupon east customers. Thank you.
Thanks for the question.
Okay.
The net revenue.
Proactive as I mentioned.
It's a reflection of the stage of growth that we're at we're still a small percentage of the overall commerce market.
We are seeing greater frequencies wider assortment all the variables that you mentioned.
Seeing customers spend compound in existing categories and new categories, even our oldest.
Even our most mature even argue.
You can move it.
Calgary Youre talking the next significant.
Spend growth.
<unk>.
What's driving that is selection low prices fast delivery the convenience of rocket delivery.
And returns.
Among other services so.
It's what our integrated end to end integrated network delivers its what we invested billions of dollars to build the technology and infrastructure and processes around <unk>.
We continue to optimize that for the experiences get better more reliable faster cheaper.
For our customers.
We believe that we will continue to drive.
Our customers spend growth as well as our active customers on active customers.
As you mentioned.
It was about product commerce, that's right you're right to observe.
That active customers grew 7%.
Year over year for the consolidated business and product commerce active customers grew even faster. So you are absolutely right.
To observe that difference so we're still seeing great momentum.
In both active customer growth.
Okay. Unfortunately, I think we hope to end the call. Thank you for your questions today and for your time really appreciate.
We really appreciate your time and questions. Thank you very much.
Ladies and gentlemen, with you I appreciate your participation in today's event.
This does conclude today's call you may now disconnect.