Coupang Inc. Q1 2023 Earnings Call
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Thanks, operator, welcome everyone to coupons.
Good afternoon, my name is ash.
Good afternoon, My name is Ashley and I'll be your conference operator today at this time I would like to welcome everyone to the coupon 2023 first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
And if he 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. Please start to now I'd like to turn the call over to Mike Parker Vice President of Investor Relations you May begin your conference.
Thanks, Operator, welcome everyone to coupons first quarter 2023 earnings conference call.
I am pleased to be joined on the call today by our founder and CEO , Tom Kim and our CFO Gorgon on.
The following discussion including responses to your questions reflects management's views as of today's date only.
We do not undertake 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 slides accompanying this webcast and our SEC filings, which are posted on the company's investor Relations website.
Now I will turn the call over to Paul.
Thanks, everyone for joining us today before we dive in here are five key takeaways from our strong start to 2023.
First we continued to deliver results because we focus on what matters, most customer experience and operational excellence.
We continued our trend of growing at a high multiple of the overall retail market and taking a significant portion of its growth.
Third we are reigniting active customer growth.
Fourth we continued to drive margin improvements and generated meaningful free cash flow in Q1, a significant milestone.
Finally, we are rolling out a new benefit to our wound members that will drive additional savings for each customers and Meanwhile, even harder to resist before.
Before growth goes over our financial results in more detail I wanted to frame them in the context of our continued opportunity and long term strategy as I mentioned, we continued to grow at a high multiple of the overall retail market and year after year that trend has continued to accelerate.
One reason for that sustained growth is the structure of careers retail market, which differs dramatically from that of markets like the U S.
According to one study Korean consumers had access to less than 10% of the offline retail space per capita enjoyed by their U S counterparts, we continue to defy the broader slowdown in the retail market, because we offer customers something very different and the limited assortment and high prices.
They see an offline retail.
And there is immense potential to amplify that value and growth by increasing selection on rocket delivery. When we started rocket in 2014, our selection consisted primarily of consumables.
As the latest 2018 non consumables accounted for just a third of total units sold <unk>.
Expanding the selection in non consumables categories accelerated their growth and today. They account for the majority of units and revenue on rocket.
Both groups continue to grow at a high multiple of the overall retail market and we're still far from offering the full selection of popular brands and products across all market categories.
As we expand both our first party and third party selection on rocket now enabled by fulfillment and logistics by coupon or FMC, we expect that trend to continue for years to come.
Despite our rapid growth our penetration in all categories, including consumables remains low.
We're still at a single digit market share of our massive retail market projected to approach $550 billion in the next three years, it's hard to overemphasize, how staggering the opportunity before us and how early we are on this journey.
We're also confident that we can expand margins to our target of 10% or higher adjusted EBITDA. Thanks to the long runway, we see for operational improvements.
Majority of the nearly 600 bps improvement in profit margin. This quarter came from operational improvements and product commerce not benefits from advertising eats or while membership. It was also not driven by one time cost cutting measures like layoffs.
And more importantly, we achieved these profit improvements without sacrificing the customer experience in other words without raising prices to increase margins rolling back benefits or compromising service levels to illustrate while some online grocery services rolled back free shipping programs and any.
Increased free shipping thresholds to as high as $150 to reduce losses.
We achieved profitable economics in our fresh offering while sticking to our low prices and free shipping offer for all orders above just $11. This is the best free shipping program for online grocery that we know of in the World. We did this by streamlining operations and reducing waste all wildly.
Spending selection and delivering nearly all fresh orders via dawn and same day delivery.
Another example of our operational improvements as our effort to increase recovery rates on returned items, which led to a 30% year over year decrease in loss per unit sold such efforts to minimize waste and enable us to improve margins amid inflationary headwinds and offer market leading benefits like <unk>.
30 day free returns on all rocket orders for a while members and this quarter, we fulfilled our commitment to deliver positive free cash flow for the entire business.
Our sustained focus on operational excellence allowed us to achieve this milestone even as we continued to invest hundreds of millions of dollars in capex and hundreds of millions more in developing offerings over the past year.
Because we take the long view, we don't expect every initiative to bear fruit immediately or evenly every quarter. Instead, we trust in our ability to drive significant operational improvements over time, enabling us to continue lowering prices for customers and expanding margins for the business for many years to come.
That along with the opportunity to scale other margin accretive offerings and automation gives us confidence that we have a lot of upside in margin expansion.
On developing offerings, we believe our actions reflect both the enterprising and disciplined aspects of our strategy.
Everything we do at coupon revolves around wowing, our customers and creating new moments of Wow is hard to do.
Building truly differentiated offerings requires bold in unconventional thinking as well as investment of time and capital.
But we employ a disciplined investment approach, we start with small bets than test rigorously and invest more capital over time, but only into the opportunities we feel strongest about it's the same proven disciplined approach we use to build our earlier offerings.
And our international initiatives, we shuttered our operations in Japan, where we werent producing the returns we would hope for in contrast, we like what we've been seeing in Taiwan, which is showing the same signs of transformative potential that we saw in Korea, when we launched <unk> delivery.
While it's still early and we will remain disciplined capital allocators investing more only if the underlying metrics that validate our convictions were excited about the potential we're seeing.
Another such area is our <unk> offering we promised last year that we would focus on streamlining efforts that would improve profitability and explore synergies with other offerings. The structural changes we made over the past years have enabled <unk> to become self funding and we built a foundation that position.
Is it to scale with higher efficiencies.
In April we began rolling out a 5% to 10% discount on all orders for while members on it.
The latest major benefit added to our membership program.
We've observed that customers, who purchase eats much like fresh have higher levels of spend and engagement on general merchandise offerings and while members who purchased each spend over twice as much as while members who don't.
We believe this benefit will generate savings for customers growth for merchants higher engagement for rocket and increased membership in our <unk> program.
This benefit has the potential to be another major catalyst that compounds the value across our e-commerce and membership offerings and accelerates our entire flywheel.
In summary, we're excited about all that's in motion in 2023, and keeping with our operating tenants that we're sharing again in our presentation this quarter.
We'll bring our operational rigor to all of our initiatives investing more capital over time only in opportunities that have the best long term cash flow potential there's a lot to be excited about what's happening here at <unk> and we look forward to updating you on our progress in the upcoming quarters and now I will turn the call over to Bob.
Thanks, Bob.
This quarter, we continued our trend of strong revenue growth.
<unk> worked diligently to deliver on our exceptional customer promise that fuels our demand.
Reported net revenue, 13% year over year on a reported basis or 20% in constant currency.
<unk> revenue grew 21% on an FX neutral basis.
At the same rate as in Q4.
Active customers grew 5% Bureau, with yet in Q1 exceeding the 1% growth in Q4.
And we've accelerated customer growth and product commerce with grew faster at 8% dealer with yet and <unk> will exceed the 5% growth in Q4.
Overall, our Q1 results demonstrated robust growth amidst challenging retail conditions with accordion retail market growing at 4% in the first quarter. We continued our brand of growing at multiples of the overall market.
<unk> remains a key driver of that growth.
The stomach continue earning two bucket, but it's low prices unparalleled delivery experian and its vast selection that continue to expand rapidly.
I'm with FMC.
The key driver that is appealing to activate that silicon expensing on bucket, even more in Q1 FSC units sold increased nearly 90% from a year ago.
It continues to scale rapidly, reaching 10% of our revenue and <unk> opened up both in units sold this quarter.
We are also constantly improving the malignant experian, including by reducing average onboarding time by a code simplifying and Lindsay and bonding and gaining the contracts to clarify the value proposition.
And as FMC remains a very small portion of our overall transaction added another if our growth and efficiency and that's across our entire business remains massive.
So I think in Q2 the contract changes will impact how the related affiliated revenue is reported on a gross versus net basis due to the accounting rules.
That will also affect our calculation of revenue growth and gross profit margin rate.
For example, <unk> net apathy in Q1, 2023 and growth ability in <unk> 2022 the <unk> revenue growth in constant currency. It would be 540 bps lower and gross profit margin would be 120 bps higher.
We expect this accounting change will be fully reflected in our reporting by Singapore as merchants gradually transition to the new contracts.
This change has no impact on Fmc's economics are gross profit, we see gross profit dollar as a more meaningful indicator of the underlying growth and profit potential of our business going forward.
We continue to work on initiatives to drive higher levels of profit without sacrificing price selection our service quality.
In the first quarter, we delivered record gross profit of over $1 4 billion.
With a gross profit margin of 24, 5%.
This represents a 36 both in vitro with your improvement in gross profit dollars and a margin increase of over 400 bps year over year, and 50 bps quarter over quarter.
This profit expansion is being driven by our product Commerce segment, where gross profit margin grew by 24, 7% an increase of over 300 bps year over year.
30 bps quarter over quarter.
We believe the improvements we are delivering we've.
We've got a continuation of the improvements we highlighted <unk> 2022 are structural and sustainable.
We fundamentally improved our operational processes and scale automation, we continued investing in technology and infrastructure, we optimize our supply chain and we are scaling of higher margin products and offerings.
There remains significant potential for further profit expansion from each of these levers in the long term.
As our business continues to.
We remain focused on maintaining discipline in our operational spend this quarter, we delivered a euro with the improvement of nearly 180 bps in <unk> expenses as a percentage of revenue. Despite the headwind from the annual increases in labor rates net income for the quarter was $91 million and then.
<unk> of $300 million.
Over the last year B.
We also continue to maintain a very low overall equity dilution rate.
Over the past 12 months, our dilution rate was only one 2% all from equity compensation Awards.
<unk> employees.
We also had another record quarter for <unk>.
EBITDA at <unk>.
$241 million for a margin of four 2%.
Represent an improvement of 600 bps year over year, and 20 bps quarter over quarter.
Broken down by segment, Oklahoma generated a record $288 million adjusted EBITDA, our pipeline blend both in margin.
Remain confident in our ability to achieve our long term margin target of 10% or higher.
Developing offering recorded minus $47 million and adjusted EBITDA, representing a $46 million improvement over the last year.
Revenue declined 17% year over year on a constant currency basis. This was largely due to a contraction in east.
Affected by 11% year over year decline in the overall food delivery segment.
But we are pleased with the improvement in profitability, we have made in EEP and excited about the new benefit London tube, which.
Which we expect to spend the <unk> membership program and drive more growth in vertical bombers overtime.
We're also encouraged by the long term opportunities we are seeing in Taiwan, we will continue to be disciplined, but when we see signals that make more investment we won't be shy about leaning in.
<unk> was a year of significant milestones and we begin 2023 with another major achievement.
For the first quarter since the launch of a rocket be delivered positive free cash flow of $451 million for the trailing 12 months.
This represents an improvement of $1 $5 billion year over year, driven by $1 1 billion in operating cash flow.
We anticipate that this trend of meaningful free cash flow will continue and that the free cash flow generated and adjusted EBITDA will continue to converge.
Regarding our expectation for future top line revenue growth, we anticipate that we will continue to see strong demand and drive our growth at multiples of the broader retail market.
That selling a significant portion of market growth each quarter.
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. The star then the number one on your telephone keypad. Please limit yourself to two questions per person.
Just for a moment to compile the Q&A roster.
And we will take our first question from Eric.
Child with Goldman Sachs. Please go ahead.
Okay. Thank you. Thank you for the opportunity to ask questions.
I appreciate the extra color on FSC.
My first question is during the opening remarks, I think our I've mentioned that FSC on a unit sold basis grew by 19% year over year.
Can we safely say that.
<unk> growth is also similar to the unit sale basis growth.
My second question is can you maybe talk about the relative profitability.
<unk> weather.
Its rise in the Jamie mix should be a credit to the Bottomline margin. Thank you.
Alright, thanks for the question.
<unk> is scaling.
Roughly in line with the unit growth that we that we mentioned.
I do want to emphasize that despite its high growth adults, who represent just 4% of total units sold.
And.
The opportunity before us is massive.
Our selection on market has historically driven greater growth.
And we are of the same conviction that expansion of selection through efforts LLC will continue to drive greater growth for the entire business over the long term.
From a margin perspective <unk> is margin accretive. However, we are reinvesting some of that to market. This service and drive adoption at this very early stage.
Okay.
And once again as a reminder, that is star and one for your questions. We will take our next question from Stanley <unk> with Jpmorgan. Please go ahead.
Thank you Claude.
Opportunity.
Congratulations on good results first question for me is so what is the key rationale and strategy behind the recent discount all favor for each business.
Is <unk> bad news is stronger counter measure I E people discounts not a concern to you.
Any chance of further price competition going forward.
My second question is the <unk> growth remains significantly superior to the industry growth can you. Please share the growth momentum of each category, how is checking in apparel and electronics categories. Specifically thank you.
Thanks for the questions.
Our eats benefit is the 10th and latest benefit we've added on while for customer since launch and we are still looking to add more as.
As we mentioned.
Finding the ROI of this benefit.
In our e-commerce offerings, and while membership any growth to each would be would be a bonus or IC.
There are tens of millions of shoppers online with yet to join while I from our perspective, while members get the best experience in the world at the best price, but our focus continues to be on creating even more value surplus.
For our members our strategy here.
Is in service of that goal our goal is to make wild the best deal on the planet for customers.
And regarding growth.
As you know we are in.
This single digit share of the overall market opportunity.
Well majority of the retail market is offline with high prices and limited selection, we're growing at a multiple of the market because we're providing something much better.
Rocket delivery wide selection low prices convenience and speed while membership as I. Just mentioned is still in its early stages with tens of millions of shoppers who have yet to join.
Active customers brokers re accelerated because of that.
All of our categories are growing a testament to how early stage, we are at and how low the penetration is.
And.
Yes.
A tiny share of that $550 billion.
<unk> retail market projection in just the next three years.
We expect that trend to.
To continue.
But we're confident as we've demonstrated quarter after quarter.
We will continue to grow at a multiple of the market in any scenario.
And as a reminder, that is star and one for your questions. We will take our next question from James Lee with Mizuho Securities. Please go ahead.
Great. Thanks for taking my questions two here.
Guys, maybe give us an update what the trend looks like in <unk>. So far maybe in March and maybe exit <unk> March and maybe into April how are we looking into the revenue growth in <unk> and also secondly.
The capex expectation for FY2023 can we get some color on that in terms of looking at fulfillment Center investment.
Is that level of investment still shifting towards owned versus lease.
Hi, James I'll take the.
The guidance on the growth question, we've historically not given top line guidance.
We're not focused on sharing month to month updates because the variability.
Can often be high within a quarter.
If we see anything that is meaningfully different from recent quarters, we'll let you know.
Yes.
On the Capex.
A question that.
James.
We continue to invest in our Capex in a disciplined way.
<unk>, a big changes in the Capex with the AVN overtime.
And.
Is that a trailing 12 month free cash flow.
<unk> merging with adjusted EBITDA.
So we'll continue to invest in a disciplined manner as we can.
On the nuclear and scale.
Okay. If I can squeeze in one more question here, maybe Bob how should we think about maybe churn AI, how that would improve your base.
Yes.
And maybe give us a sense, how do you plan to implement the technology.
We've been working with.
With machine learning models across all aspects virtually all aspects of our business I think generative AI is exciting.
Like all these new technologies.
We will continue to.
To invest in and look at all the tools that we can harness.
To deliver a better customer experience and to drive operational excellence.
Great. Thank you.
Once again as a reminder, that is star and one for your questions. We will go next to Joe <unk> with Barclays. Please go ahead.
Thank you very much for taking my questions.
I have two as well first question is about.
I heard you mention there were some accounting changes final contracts that sort of artificially depressed yakov.
Is that about the net other.
Revenue lie.
Is that why the growth was 6%.
14% for the net retail sales.
And could you please repeat the magnitude of that accounting change.
Yeah.
My second question is about the east.
That's great offering for up to 10% discounts for a while.
Morris I was just wondering.
As you all for your additional benefits too.
While members.
Yeah.
Expanding.
Coverage now.
Network I know you guys have done.
On restructuring that business loss.
You also just wanted to see where you are in terms of that footprint no doubt.
Thank you.
Hi, Jeremy Thanks, Thanks for your questions on the.
The accounting change as Laura mentioned, it's exactly that just an accounting change and it doesn't reflect the underlying growth or profitability of the business.
And the accounting change it doesn't mean, we're simply removing <unk> revenues from our calculations.
Clarify adjusting.
The net <unk> revenues in both 2022 and 2023, our constant currency growth rate in Q1 would have been about 18% year over year or 200 basis points lower.
However, if we were to calculate our Q1 numbers with the accounting change that starts in Q2.
We would calculate with <unk> net revenue in 2023 and <unk> gross revenue in 2022, resulting in a 540 basis point impact on our 20% constant currency growth revenue rate.
Our revenue growth rate in Q1.
And gross margins would be a 120 basis points higher.
Again this is simply an accounting change that doesn't reflect.
Our underlying growth or profitability.
And to clarify it has not taken.
It is not in effect yet it starts in Q2 and illustrating the.
The impact of it with our Q1 numbers.
I think the second question that you mentioned was about.
Each each.
Coverage.
With this benefit we are rolling it out right now and so.
Of course, we intend to keep.
Rolling it out to the rest of the country over the coming months and quarters.
And we are pleased with.
The investment we made over the last year to build a strong foundation for both better customer experience and higher efficiencies. We believe we're poised now to provide the best customer experience at the best cost.
And best price for customers.
Thank you.
And once again as a reminder, that is star and one we will go next to John <unk> with Citi. Please go ahead.
Alright, Thanks for taking my questions I have two questions regarding <unk>.
Our first question is about the same discount promotion as you said.
Again to offer a 5% to 10% discount to market while subscribers in certain regions.
So regarding the initial user feedback do you see an increased order volume and market share in those selected regions in April or May could.
Could you please.
More color on this and what would you expand the promotional coverage to more major regions like <unk> or <unk>.
Second question is regarding competitive landscape so <unk>.
<unk>.
<unk> similar strategies with some more aggressive discount promotions or maintenance that's correct. Some programs in the following days, where they're being sort of changes in the credit strategy of Cooper.
Q.
Hi, John Thanks for your question as I mentioned, our strategy here is really in service of our goal to make Wow.
An amazing program even.
Providing even more value surplus for our customers.
We continue to see.
Customers respond well, but again.
The goal of this I think it would be icing.
Have some growth in the east, but the primary objective here is to generate ROI across our e-commerce offerings.
While membership program as you move in the suburb of Soul.
You should be seeing our benefits expansion reached your neighborhood soon.
We're rolling out to the rest of the soul.
Rest of the <unk> and rest of the country.
Coming months and quarters.
I think that was your.
Second question is will I hope I covered it all.
As a reminder that is star one for your questions. We will take our next question from Julian Mitchell with Credit Suisse. Please go ahead.
Hey, I have answered.
Two questions.
For on the Taiwan can you elaborate more on your strategy in that market.
<unk> does it going to change and impact on our guidance and the like.
The guidance might develop.
Developing an operation on decoration my second.
Yeah.
For all your color on FERC light in terms of my.
Christian could you ask it again.
So can you provide more color it's like the long term color on like the target penetration rate and the margin expansion plan.
Like Dr fashion in my opinion using the service.
More than the other particularly for now thank.
Thank you.
Thanks for your question.
I think regarding Taiwan as I mentioned.
We are seeing we're encouraged by the response we're getting.
We believe the opportunity to break.
Laid off the same transformative potential that we saw in our early days in Korea, we're starting to see some signs of that well of course test and learn.
At this stage.
<unk>.
Your question about whether about developing offerings guidance, our investment levels or within what we anticipate at the beginning of the year, but.
We're delighted by what we've seen and not only are each benefit rollout, but also in Taiwan.
And.
While we are rigorous.
Analyze all the results of the data rigorously we will take.
Take advantage of opportunities, where we feel strong the strongest about our ability to generate meaningful returns and.
If there are.
If and when there are any changes in our expected levels of spend we intend to update the guidance and on SLC target penetration.
And in categories.
Yes.
We've been pleased.
C R.
Selection expansion on rocket has generally been a growth driver across all categories. We have yet to see an exception to the rule that the customers want.
Wide selection low prices.
<unk> service and we were particularly pleased to see the progress, we're making in faster and consumer electronics categories that are.
That are quite URL EBIT earlier in their journey than other categories. All categories are growing but the fashion and consumer electronics grew faster than our overall business.
In Q1.
In SLC, both categories grew even faster than the fast growth rate.
Of.
<unk> overall, so we are excited about the progress, we're making there and our aim is to keep expanding selection in all categories, including fashion consumer electronics.
In the years ahead again, we're still at an early early stage.
With low penetration across all of our categories overall penetration.
Still in the single digits of the entire retail market than MLC also comprising a very small percentage of our overall volume within our business. So.
We expect.
Both of those numbers to both of those penetration levels to go up over time as we focus on expanding selection across all of our categories.
Thank you and we will take our last question from Eric <unk> with Goldman Sachs. Please go ahead. Your line is open.
Thank you. Thank you for the additional opportunity and just one last question.
So.
And some of the new solids, we've been hearing some noise regarding.
Between the brands and coupon.
I just wanted to.
See if there were any impacts from that thank you.
Yes.
Think that Glenn.
As a retailer.
And on a daily weekly monthly basis, continuing to optimize our assortment for our customers.
So at any given point, we are buying some production.
As a continuum.
Ongoing process for any retailer in the world.
And.
Yeah.
I'll answer the question.
Yes, I think.
Some businesses.
Thank you.
I think we remain on our trajectory on all fronts.
Alright.
There are no further questions at this time and this does conclude the conference call you may now disconnect.