Q2 2023 Coupang Inc Earnings Call
Hello, My name is Christa and I will be your conference operator today at this time I would like to welcome everyone to coupon 2023 second 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. If you would like to ask a question. During this time simply press star followed by the number five on your telephone keypad.
If you would like to withdraw your question press Star and the number five once again thank.
Thank you.
Now I'd like to turn the call over to Mike Parker, Vice President of Investor Relations you May begin your conference.
Great.
Welcome everyone to coupons second quarter 2023 earnings conference call.
I'm pleased to be joined on our call today by our founder and CEO bombed him.
Our CFO or whatnot.
The following discussion including responses to your questions reflects management's views as of todays 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 those 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'll turn the call over to Paul.
Thanks, everyone for joining us today before gloves goes over our financial results in greater detail I'd like to take a moment to frame. Our Q2 results that are five key takeaways first we continue to deliver expanding profitability and sustained high growth not one at the expense of the other.
Cause of our years of unparalleled investment and an unrelenting focus on both the customer experience and operational excellence.
Second our flywheel is accelerating both revenue and active customers increased at a faster pace this quarter.
Worth highlighting that the growth of active customers accelerated from 1% year over year in Q4 of last year to 5% in Q1 to 10% this quarter.
Additionally, all of our customer cohorts, even our oldest continue to increase their spend and the number of categories. They were purchasing on coupons.
All of these trends underscore how differentiated our value proposition and a retail market that we believe is defined by high prices and limited selection there.
There are also a reflection of our early stage of growth. We are just single digit share today of a massive retail market expected to reach $550 billion in the next three years.
It's hard to overstate just how early we are on this journey.
Third we reached another significant milestone this quarter delivering in the trailing 12 months $2 billion of operating cash flow and over $1 billion of free cash flow.
We also delivered our fourth consecutive quarter of significant GAAP profitability with $145 million of net income in Q2 in.
In addition, our free cash flow has converged with adjusted EBITDA as promised.
We're more confident than ever that we will deliver on our long term guidance of higher than 10% adjusted EBITDA.
Fourth we are seeing powerful momentum in our growth initiatives, we're less than a decade old as a retailer and only a few years into newer categories like fashion and beauty Accordingly, all of our categories on rocket are still growing at a fast rate and newer categories like fashion and beauty are growing significantly faster.
And then our overall business and high growth isn't limited to our first party offering third party sales in virtually every category, including fashion and beauty are growing at a multiple of the retail market.
And our emerging merchant services like advertising and fulfillment and logistics by coupon I felt C. R.
We're growing more than twice as fast as our overall business.
Finally, we're also seeing exciting potential and progress in developing offerings, particularly in east and in Taiwan.
We spent several quarters, achieving positive unit economics, and improving almost every customer experience metric.
You've reinvested or positive contribution margin back in the form of a discount of up to 10% for while members on unlimited orders.
In the regions, where we've launched our eats benefit we've already seen an 80% increase in total while members participating in E.
And a 20% increase in average while members spend on.
This has helped drive over 500 basis points of segment share gain in those regions.
Moreover, we've been delighted by the value each is generating across our ecosystem.
Customers, who purchase each have significantly higher spend in e-commerce and high retention unwell membership each has the potential to accelerate the flywheel for our business as a whole.
In light of the success of this strategy, we've made our unlimited each discount a permanent feature of our while membership program and with the majority of what remember still yet to place an order on eats we believe the lions share of growth is ahead of us.
Taiwan is another investment that is thus far exceeding our expectations. We have always believed that the transformational commerce experience we've enabled in Korea.
<unk> customers around the world.
We're seeing this play out in Taiwan in.
In Q2 coupon was the most downloaded app in Taiwan and in the 10 months since we launched rocket delivery, Taiwan has scaled faster than rocket delivery in Korea did in its first 10 months post launch.
Our bar for new initiatives is high we have exited investments that didn't meet our internal thresholds and deferred countless others that ranked below our most attractive opportunities.
So for Taiwan is leaping over that bar.
In view of that progress, we will invest at a higher level in Taiwan This year.
As always we will remain disciplined capital allocators investing more only if the underlying metrics continue to validate our conviction.
Our updated estimate of investment in developing offerings, including Taiwan play and each will be around $400 million in 2023.
We expect our investment in developing offerings to remain generally at these levels and in every case, we remain committed to generating meaningful free cash flow at the consolidated level.
In summary, we're excited about the momentum we've built and the massive market opportunities. We have before US we will continue to execute with unwavering focus on customer experience operational excellence and allocate capital with rigor and discipline with that I will turn the call over to Gaurav.
Thanks, Paul.
<unk> delivered another strong quarter of disciplined execution across our business.
As a contra revenue profit and cash flows as the demand pool.
On customers and driving efficiency and innovation throughout our operation.
Our total net revenues accelerated this quarter growing 16%.
On a reported basis and 21% in constant currency.
This growth was driven by our polymer segment, which also saw revenue growth of 16% on a reported basis and 21% in constant currency.
Again, this quarter, our <unk> offering, including FSC expanded faster than won't be driven by growth in small and medium enterprises.
SME.
As we noted last quarter starting in Q2.
Certain contract changes that resulted in the accounting changes just wondering tendency that menu, which has changed from a grass basin.
Using the same accounting treatment as last quarter, our growth rate in Q2 would have been an estimated 300 bips higher.
That there couldn't be bundles and globally.
That growth is a multiple of the overall retail market, which grew at three 1% deal to one dealer.
I think that's somewhat.
Continues to accelerate increasing 10% to $19 7 million in Q2.
We added one 8 million active customers over the last year.
The underlying strength of our business can be seen in our gross profit.
This quarter, we generated a record $1 5 billion in gross profit representing 32% growth the other one yard and 7% over the last quarter.
Gross profit margin was 26, 1% a 320 bps improvement the other with you on.
This margin was positively impacted 100 bps by the FMC accounting change.
As Lee mentioned.
We expect FX will continue driving further margin expansion in the future.
You may not see meaningful improvement every quarter.
We expect this FASB accounting change will be fully reflected in our reporting by Q4 of this year.
<unk> fully transitioned to the new contract.
And this change has no impact on Fmc's economics at the gross profit we continue to see gross profit dollars as a more meaningful indicator of the under.
Growth of our business going forward.
Customers increasingly come to coupon.
Our selection unmatched delivery speed and low pricing.
<unk> rocket delivery experience across millions of B and.
Filthy product.
No comparison in the market.
We continue to generate further improvements and other general and administrative spend driven by both operational efficiencies and fixed cost leverage.
G&A expense as a percentage of revenue in Q2 decreased 66 bps the other way.
Even as we continue to make targeted investments into growth opportunities.
This quarter, we did.
And of course, net income of $145 million and earnings per share of eight.
Thanks.
This includes $26 million of income tax expense with an effective tax rate.
Painful thing.
To date actually of 20 people.
We also generated $300 million.
Adjusted EBITDA in Q2, but a record consolidated.
EBITDA margin of five one pumping.
This represents a 380 bps improvement together with York and hundred bps, what other one quarter with nearly $950 billion.
EBITDA generated over the trailing 12 months.
Our core commerce segment generated $408 million.
EBITDA in Q2 with a margin of seven 2%.
This is an improvement of nearly 520 bps year over year and 200 bps what are the one quarter.
We are increasingly confident in that.
And if you achieve an entitlement at different EBITDA margins.
Then buzzing with significant opportunities still in front of us.
Further margin expansion through supply chain optimization operational efficiencies and scaling new offerings like <unk>.
However, we don't expect the gains will be consistent each quarter.
Adjusted EBITDA loss for us.
Offerings segment increased $207 million this quarter.
$76 million.
Two things.
As Bob noted we are pleased with the progress we are making across our developing offerings.
We are increasingly more confident about these opportunities, especially each dive on entry.
We now expect adjusted EBITDA losses for developing offerings to be around $400 million in 'twenty two 'twenty three.
We are encouraged by the momentum we are seeing in these offerings.
Our ability to compound value across our ecosystem and to accelerate the entire flywheel.
We will continue to remain disciplined and abide by our operating tenants.
To always take the long view and prioritize our capital allocation to deliver the highest levels of long term shareholder value.
We have demonstrated this discipline in building a retail offering in Korea over the years.
We have hit another significant milestone this quarter generating $2 billion in operating cash flow and $1 1 billion and free cash flow on a trailing 12 month basis.
And free cash flow has now converged with that adjusted EBITDA as we had guided.
We believe the progress we have made thus far is sustainable and will continue.
Driven by expansion in overall profitability as well as improvements in working capital management and disciplined Capex spend.
And we again they think this free cash flow, while also continuing to invest into nation building opportunities like <unk> and international.
While we are proud of the resiliency our reporting to me even more proud of the way in which our teams are relentlessly focused on evolving our customers every day.
We are excited to continue working to Blake tradeoffs for customers and creating novel when customers when Doug I'll do that it doesn't live without coupons.
Operator, we are now ready to begin the Q&A.
Okay.
At this time I would like to remind everyone in order to ask a question press the star.
Then the number five on your telephone keypad, if he would like to withdraw your question Press Star and then number five once again.
Please limit your questions to two per person, we'll pause for just a moment to compile the Q&A roster.
And your first question comes from the line of Stanley Yang of Jpmorgan. Your line is open.
Yeah.
Hi, Good morning, Thank you for the opportunity to ask questions and congratulate on credit Reserve I've two questions first on FX.
You mentioned, the FSA is growing 20% faster than normal product can you. Please guide the proportion of FSP business out of your total TMT and how would you expect to go throughout the year.
Each categories are driving the pastor at that C Corp.
My second question is out of your developing I'll say the loss guidance of 4 million U S. Dollar how much do you expect from the international expansion what are the key takeaways from the list and the rest of the marketing in Taiwan.
And we I'd like to know the coupons with value position with Taiwan consumers at this point.
And Oh.
Appreciate if you could provide some long term target guidance. Thank you.
Alright.
Thanks for your questions all on FMC.
FMC is scaling rapidly as you point out it's growing more than twice as fast as our overall business.
Just to remind everyone is driven by the benefits we are providing for both consumers and merchants <unk> enables merchants to leverage rocket delivery network to grow their businesses and that's been particularly meaningful for small and medium enterprises or SME, many of whom are turbocharging their businesses.
By getting access.
To the billions of dollars of investment we've made in infrastructure and technology that they couldn't have built on their own consumers of course also benefit from being able to find more and more selection available on rocket services like dawn deliveries and walked it returns.
More selection on rocket historically has driven greater growth and we're seeing that play out and where the FMC it's worth noting.
Despite the high growth that we've mentioned <unk> still represents a small percentage of total units sold.
And we're just a fraction of the total selection in the market on FMC.
We believe the vast majority of growth lies ahead.
To your question about categories on <unk>.
<unk> is driving growth across all categories, including categories that.
There are emerging like fashion and beauty.
We're especially excited about <unk> potential.
Ban selection dramatically for customers in all categories.
Especially in a highly fragmented and long tail categories like fashion and beauty.
Your second question on Taiwan.
One as we mentioned is growing faster than Korea did over the same time period post the launch of a rocket.
Our value proposition is the same as we've always believed that the transformational customer experience rebuilt in Korea would resonate with customers in other markets.
That's so far it is playing out in Taiwan.
While we just started our service in a market, where we're already leveraging in Taiwan. Many of the things that we built and learned in Korea.
We're also pleased that customers have responded positively to getting expanded access to Korean selection, we're providing taiwanese customers access to millions of our products from a Korean assortment over 70% of which comes from Korean SME, it's by the way.
Our strategy is this in Taiwan, we will keep investing and executing in a disciplined and intelligent manner.
We'll continue to test learn and iterate rapidly to improve our customer experience and operations in the market.
While we're encouraged by what we see I wanted to note that we have a lot of work to do it's still very early in our journey and we look forward to sharing more on this front when the time is right.
Your next question comes from the line of Eric Chen of Goldman Sachs.
Your line is open.
Alright, thank you for their potential to ask questions and congrats on the strong quarter.
Two questions for me I think along with the F. O. C. You also mentioned that AD growth is growing faster than two fold compared to the revenue.
Our understanding is that at market environment isn't wasn't that great inquiry argue two macro pressure in second quarter.
So what do you think is driving this outperformance and where do you think coupon ads are a in terms of penetrate AD penetration against that G. M D and and how much runway for growth do you think a coupon still has.
And the second question is I'd like to ask some follow up questions around Taiwan.
So you mentioned that youll be disciplined so.
What would prompt you to maybe not pushed to Taiwan anymore.
You've done in Japan, So I think you pulled out of Japan, So what would be some of the.
The situation, where you would not pursue.
Taiwan anymore, and and I think Sunny I also asked us but beyond this year, what sort of capex cycle should we be expecting specifically towards Taiwan. Thank you.
Alright, thanks for your questions.
On advertising.
Historically more selection more suppliers and merchants has led to more customer engagement that in turn has led to more opportunities to advertise.
We've seen and we expect selection growth and increasing customer engagement to be key drivers of AD growth in the future.
As you pointed out and as we've mentioned our advertising business is growing more than twice as fast as our overall business but.
We're still very far from our full potential.
<unk>.
We mentioned before that.
Operational improvements outside of that drove the bulk of the profit margin expansion this past year.
But as continues to make.
Progress.
Make strides and we believe it has the potential to contribute to a higher share of margin gains in the future.
Pleased and optimistic on that front.
The second point about Taiwan or strategy on how we're going to be disciplined on investment levels.
Beyond this year.
Excuse me.
Perhaps it's worth taking a step back and describing a little bit about our strategy and our investment level on developing offerings as a whole.
We look at investments in developing offerings.
As a pool of investments the compounds value across the ecosystem and accelerates the entire flywheel.
At every turn we will assess and allocate allocate dollars within that.
To investments that provide the most promising results will reduce or exit investments as you pointed out and as we have done at times in the past.
When they don't meet our high thresholds.
With these investments our objective is to maximize long term shareholder value.
We laid out our strategy a strategy to achieve that in our operating tenants, which we shared in one of our first earnings calls post IPO, we will continue to remain disciplined and abide by those operating tenants.
We published again in our earnings presentation this quarter.
We have noted our guidance for developing offerings investment in 2023 is $400 million.
We expect our investment to remain at these levels, but in every scenario, we expect to generate meaningful free cash flow at the consolidated level and it's worth noting that this quarter our level of investment in developing developing offerings was at that level and we're still generating significant free cash flow at the consolidated level.
Yes.
Your next question comes from the line of John <unk> from Citi. Your line is open.
Yeah.
Thanks for taking my questions and congratulations for the results I have.
I have two questions.
Assuming according to product commerce their vision I'm trying to understand each part of gross skills. So it just takes a quarter I heard that.
About the gross rate comparison.
The Alere Q&A, but could you please share some more color about the revenue contribution of that dose.
Pricing and that they'll see in the second quarter.
And specifically regarding Taiwan.
It would be also helpful. If you could share potential capex as tenants in Taiwan for the next few years and what would be cool plus key focus competitive advantage in Taiwan I'm asking this question in the context of <unk>.
Petitions.
<unk> local players are already operating one day delivery option. So.
How would you describe the competitive landscape in Taiwan.
Hi, John Thanks for the question.
I think on product commerce.
It's important to note that we just have a single digit share and the overall retail market opportunity active customers are only about half of the total active shoppers available.
Our active customer growth is accelerating.
Again this quarter.
Tens of millions of customers have yet to joined Wow.
We continue to grow at a multiple of the market.
And our active customer growth is accelerating because we've made unparallel investments in infrastructure and technology that have enabled us to deliver unmatched customer experience and operational excellence that applies to our <unk> or <unk>, and even Africa, even or third party.
Operators are also growing at a multiple.
Of the overall market.
We are still a tiny share of a retail market that is projected to reach $550 billion in just the next three years.
And as we've demonstrated quarter after quarter, we're confident that in any scenario, we will continue to grow at a multiple of the market.
For Taiwan.
It's too early to discuss specifics, but you can see here that we haven't fulfilled all of our plans and designs to build to build the same kind of transformational customer experience that we built in Korea, but the customer response has been has been terrific.
Hi.
Again, it's early but we have a track record of execution and disciplined investment.
We're encouraged by many things receipt.
We have a lot of things to improve.
And we look forward to sharing more when the time is right.
Yes, John on your first question.
Contribution could open Neil in Q1 call we had exited.
That FMC change impacts.
Net revenue by about 540 Bips.
It gives you an indication on magnitude.
Contribution of revenue.
Occupancy who are who are in that guidance.
Alright. Thanks.
Your next question comes from Sam Park of Morgan Stanley . Your line is open.
Hi, Thank you for the opportunity I have two questions. If you look at the gross.
Profit coming from product Commerce increased.
About $150 million sequentially.
I was wondering whether you can provide us with a little bit more color as to what drove that increase.
Weather.
Contribution in the ramp up of <unk>.
A large part of that increase or whether we're seeing it from better margins from the pure <unk> business or some contribution to coming from advertisement. That's my first question.
The second question is on AI or 30, seeing a lot of vibe and talk about AI.
No that coupons has been using AI and predicting.
The demand at each of the regions and alike and it was just curious.
Given the AI has become such a big topic this year.
Whether that has led to any changes to your AI strategy or whether you have plans to a more or adopt they get more of some of this generative AI.
To your products going forward.
Thanks.
On the.
Gross profit.
The gross margin drivers.
The drivers of margin improvement or.
Consistent with what we've shared before.
We've been driving continuous improvement.
But leverage our years of investment in technology infrastructure supply chain optimization, and new services among others.
Again, we won't we don't expect every initiatives to bear fruit immediately or evenly every quarter.
But we remain very confident and optimistic confident about our outlook.
Long term margin opportunity here and our ability to achieve.
Our long term guidance of higher than 10% adjusted EBITDA.
And we will continue to make significant operational improvements overtime that will.
Enable us to keep lowering prices for customers and expand margins.
On AI.
You're right that the.
AI has been a powerful technology that we've deployed across virtually every facet of our business.
From rocket related operations to surged as customer service supply chain management just to name a few.
We're currently evaluating opportunities to take advantage of the recent advances in AI.
It's consistent with the strategy that we've always held and will continue to invest in AI teams and tools to drive efficiencies and enhance the customer experience.
Yeah.
Your next question is from James Lee of Mizuho. Your line is open.
Great. Thanks for taking my questions and congrats again on the good numbers and and two questions. Here first maybe we can get some more color on food delivery can you maybe talk about your progress in cross selling to members with the discount and also provide some uptake I think in the past you talk.
You want to leverage more of the fixed cost your existing asset drivers e-commerce as opposed to solely rely on variable cost maybe can you speak to that a little bit and second question is more about you know in the past you guys talk about the progress so expanding supply should try a yet you guys had talked about wanted to for sure.
So not.
While celebrating membership is to be able to have more selections and that will drive more adoption to your membership and I was wondering which categories. You are baking progress, which categories you are hoping to make.
Two two hope to to improve going forward. Thanks.
Hi, James Thanks for your questions on the first topic on each.
We have seen synergies across the board.
We mentioned a few of those points in our in our <unk>.
Call earlier, we've seen an 80% increase in total one membership.
Total wall members participating in each seen 20% increase in while members spent on east. In addition, we've seen while members engagement on product Commerce go up we've seen while retention also higher among.
Customers, who engage on each we also of course have behind the scenes lots of opportunities to pursue synergies.
On the operational side I think there will be that we continue to pursue.
Synergies and efficiency gains on multiple fronts.
Really excited.
That we're able to drive a compound the value.
Of these offerings across our whole ecosystem.
And I want to stress again that our goal is to make this all of this is in service of our goal to make while the best deal on the planet for customers.
With the majority of while members.
To have made a purchase on this benefit has the potential to.
Not only drive growth on each but to supercharge their engagement on product commerce and create even more value surplus.
For our members on Wow.
Hum.
On on selection, we're seeing an orange strategy our mission.
Is to is to drive selection expansion across every category and every.
Segment of customer spend.
There are many emerging categories. We're just we're a retailer with.
Less than 10 years under our belt.
And many of our emerging categories like fashion and beauty is just a few years old on market.
So we have.
We have low penetration across all categories, but there are emerging categories with especially low penetration.
And just again highlights how early we are in our journey and we're excited to expand our customer value proposition.
Particularly a long selection.
Cross all categories and all segments for our customers.
Great. Thank you.
Yeah.
We will now take our last question from the line of <unk>.
<unk> Shao of Barclays. Your line is open.
Thank you very much for taking my questions.
Let me add my congrats as well.
First question is a follow up on FERC I think a quarter ago, you talked about the SFC was about 4% of the units.
Could you talk about the percentage of units for the three P part.
And could you also elaborate a bit on the sort of the rate limiting factor.
Sort of prevent FSA to grow even faster is that because of the capacity.
Issue you you have.
Any color you can share about our.
Merchant adoption rate.
Great. If any number you can share that'd be awesome.
My my.
Second question is.
Again, a clarification around E. You talked about the while members using ether up 80%.
Year over year could you talk about penetration rate again.
While members.
The rough percentage of them are currently using using east now.
I heard you are saying that he is now.
Profitable I think I heard a unit economics is positive I just wanted to confirm.
That's.
That's indeed the case thank you so much.
Hi, Joe Thanks for the question. So I think I don't see as you can see.
It's going very fast.
We shared that at Sterling more than twice as fast of a real business.
So I don't think there were any walkers or of course, there's always improvements there as.
As with any new service, we have continuous improvement there are aspects to continue to improve on the consumer side on the merchant side and our teams are hard at work.
To build the right.
On the right technology to wide processes.
The right experiences so thats a continuing work that we continue to do but as you can see <unk> adoption has been very positive on both the consumer front and on the merchant front.
<unk>.
And we've shared I think last quarter you are right I think we can share again this quarter that I felt it still represents a small percentage of total units sold and it has a tiny fraction of the total collection in the market.
And we believe there are many many merchants.
Especially small and medium enterprises.
Or SME.
Is that.
For whom.
It would be.
It would be very expensive to recreate the level of service and growth opportunities that <unk> provides.
And we're excited to expand access to rocket delivery for small merchants, including.
Including Smes and to help them grow. We're also excited to bring the benefit of more and more of the selection to our customers on rocket on rocket services like dawn delivery and rocket returns.
Meanwhile, remember membership engagement on each.
I think we can also share here, but the majority of while members have yet to make a purchase.
And we did focus over the last few quarters too.
To make each.
Unit economics positive we've taken those.
Those positive contribution profits too.
To reinvest in the form of this benefit that we believe are generating ROI not only unique but across.
The whole ecosystem.
In product commerce, while membership.
So that.
I think both MLC and E.
We are still early in our journey.
It is just getting started and we will continue to make progress. There is still lots of work to do still lots of improvements to make across the board and we look forward to updating you in greater detail.
In the future.
Thank you very much.
Okay.
This concludes today's conference call you may now disconnect.
Yeah.
[music].
Okay.
[music].
Hmm.