Coupang, Inc.
Q3 2021 Earnings Call Transcript

Published: 12 Nov 2021

[Operator:]

Good afternoon. My name is Josh and I will be your conference operator today. At this time. I would like to welcome everyone to the Coupang 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, Thank you. Now I would like to turn the call over to Mr. Michael Senno, Vice President of Investor Relations. Please go ahead.

[Michael Senno:]

Thanks Operator. Welcome to Coupang, Inc.'s Quarterly Earnings Conference Call for the third quarter ended September 30th, 2021. I'm pleased to be joined on the call today by our founder and CEO, Bom Kim, and our CFO, Gaurav Anand. 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 are forward-looking statements. You should not place undue reliance on forward-looking statements, actual results may differ materially from these forward-looking statements. Please refer to today's earnings release, as well as the risks and uncertainties described in our most recent quarterly report on Form 10-Q, filed with the SEC on August 16th, 2021, and then other filings made with the SEC for information about factors which could cause our actual results to differ materially from these forward-looking statements. During today's call, we will present both GAAP and non-GAAP financial measures. Additional disclosures regarding these non-GAAP measures, including reconciliations of non-GAAP measures to the most comparable GAAP measures are included in our earnings release and our SEC filings, each of which is posted on the Company's Investor Relations website at ir.aboutcoupon.com. And I'll remind you that these numbers are unaudited and maybe subject to change. Let me now turn the call over to Bom.

[Bom Kim:]

Thanks, Michael. And thank you to everyone for joining us today. We continue to extend our lead in the fast-flowing Korean e-commerce segment, posting total revenue growth of 48% in the Third Quarter. That builds on last year's massive growth for 2 year compounded annual growth rate of 70%. That growth is underpinned by our expanding customer base and compounding customer cohort behavior. Even against elevated COVID costs, we posted our 15th straight quarter of at least 20% year-over-year growth in active customers, and spend grew at least 25% year-over-year for every annual customer cohort, including our oldest cohort from 2010. Our strategy to build compounding customer loyalty and long-term shareholder value is reflected in our core operating terms. One, we exist to deliver new moments of wows for customers and create a world where they asked, "How did we ever live without Coupon? " Two, we don't start with what looks easy. We embrace the hard work of challenging trade-offs customers take for granted. Three, we will employ technology, process, innovation, and economies of scale to create an amazing customer experience. And drive operating leverage and significant cash flows over time. Four; We prioritize growth in long term cash flows. Five; We are disciplined capital allocators. We start with small investments, then increase investments over time in the opportunities with the best long-term potential. The opportunity of the Korean market remains as attractive as ever. The total retail market in Korea, excluding autos, was up 10% year-over-year in Q3 and boasts a 2-year CAGR of 5%. Bolstered by that broader retail market tailwind, the total eCommerce segment grew 20% year-over-year in Q3. And eCommerce, excluding travel, has now grown at least 20% for 12 straight quarters. The Korean e-commerce segment is on track to reach annual sales of approximately $200 billion by 2024 and is projected to become the third largest in the world after only the U.S. and China. Even at our scale as the leader in Korean e-commerce, we continue to grow at a multiple of the e-commerce segment. And our growth is broad-based with all of our offerings growing at least twice as fast as the respective segments. The backbone of our sustained growth is our strong customer retention and engaging. While members who spend and purchase frequency are significantly higher, continue to grow faster than active customers, the number of active customers buying across 6 or more categories has more than doubled from just 2 years ago, further evidence of our strengthening wide . The result is that the customers spend for newer cohorts is starting higher and compounding faster. What's more the 25% or higher growth across every one of our annual customer cohorts did not reflect the full customer demand that we saw in Q3. Korea imposed level for COVID restrictions starting in July, stricter than at any point in the pandemic contributing to a decline in attendance and hiring at our facilities. The shortage was exacerbated by the loss of one of our largest fulfillment centers to a fire in June, and continued operations center closures due to COVID cases. We sacrifice some growth by taking measures such as not accepting orders beyond daily capacity to preserve our delivery promise to customers. In doing so, we maintained average Rocket delivery times under 12 hours and delivered nearly 99% of orders in 1 day. We're investing to expand capacity to keep up with high demand and extend our competitive mode. We increased our fulfillment and logistics infrastructure footprint by over 8 million square feet year-to-date through Q3, and we'll add millions more over the next year. For context, we've now added as much square footage of infrastructure since the beginning of 2020, as we did every year prior to 2020 combined. This includes a significant expansion for a fresh offering, which has been particularly capacity constrain since COVID started and accelerated adoption. We're on track to double our fresh performance that are footprint in 2021. And we believe we now have more than double the total infrastructure footprint of our largest online for competitors combined. We're cautiously optimistic that attendance and higher enrolled rebound much as they did after the government relax the previous round of restrictions in early 2021. In addition, our operational teams are focused on enhancing recruiting processes and making technology improvements that we believe will also help scale our workforce with greater efficiency in the future. Amid this strong demand tailwinds, our underlying profit drivers are also improving the scale. Retail product level profit before operational costs has increased in each of the past 6 quarters. Our highest profit categories are also growing the fastest. We're still far off from entitlement on both margin and ix. And we see a long runway for continued improvement. Our monetization efforts are also gaining traction. Advertising revenue nearly tripled year-on-year in Q3. We're still in the early innings and expect advertising to contribute significantly to margins in the future. Other merchant services are also showing promise. Merchants’ beta testing, our fulfillment and logistics offering are seeing a significant sales uplift. And we expect fulfillment and logistics by coupon to become another meaningful contributor to profits over time. These improving profit drivers were obscured by short-term disruptions and timing of investments. First, we invested approximately $95 million in incremental labor and operational costs following the increase in COVID-19 cases and heightened restrictions in Korea in Q3. Second, a higher percentage of capacity was under-utilized due to the timing of infrastructure investments. For example, as part of our aggressive expansion efforts in Fresh, nearly half of our fulfillment centers in Fresh recently opened or are still under construction. These centers generate a little to no revenue today but account for a sizable portion of our Fresh investments. We believe this capacity will enable us to capitalize on the massive demand for our offerings, drive strong future growth and improve profitability as we scale. Third, we're also investing in WOW membership benefits, expanding our free shipping services, and delivering more orders by same-day or dawn delivery. The rapidly growing share of orders by WOW members creates higher costs in the short-term but over time, as this share stabilizes, we expect cost per order to improve at operating leverage against fixed costs will only continue to grow with scale. Meanwhile, the higher loyalty and engagement from these differentiated experiences will further broaden our customer funnel and accelerate our flywheel. We've also seen some productivity decline as we add record levels of capacity and reduced delivery times for an increasing number of orders in the current environment. We have seen similar dips in past periods of heavy investments. As was the case with previous investment cycles, we expect to ramp up our new facilities, drive process improvements, and leverage increasing order density and other economies of scale to improve unit costs over time. Additionally, we have significant opportunities to amplify efficiency gains with continued investment in technology and automation. Our size and scale put us in a unique position to make such investments. And in doing so, further differentiate our offerings for customers while building on our structural cost advantage. We're also excited to continue investing in our most promising new offerings. Demand for Fresh has outpaced capacity for much of the past year. As I noted, we are aggressively expanding to capitalize on that opportunity and expect significant operating leverage as we grow into the new capacity. Fresh is following a similar trajectory as Rocket, which gained leverage on investments as it scaled, and turned profitable in time is much earlier on that It's been our fastest scaling major offering marked by strong customer adoption and retention. The monthly order frequency for our early cohorts where we first launched, is now approaching the same level as while members. And we're increasingly confident in the long-term profitability that gives us conviction to continue to invest in the near-term to scale Eats. In closing, we're encouraged by the underlying trends of the business and confident that continuing to execute on our operator principles will lead to significant shareholder value creation in the long Now I will turn the call over to Bom, to go through the financials.

[Gaurav Anand:]

Thanks, Bom. Our reported revenue growth of 48% and constant currency growth of 44% are driven by strength across all our product offerings. Net revenue exceeded $500 million for the first time in Q3, increasing 113% year-over-year, led by our Eats and offerings. The flywheel we ignited with our 1P offering continues to strengthen and it is fueling strong growth in 3P and our new product offerings and we expect that momentum to only . Quarterly, active customers increased 20% in Q3 to $16.8 million. Year-over-year growth on a turning customer has been fading and remain consistent throughout 2020 until there is 2021. And customers engagement is rising with customers buying across more categories, and an optimum new offering. Revenue per customer grew 23% in Q3, driven by our compounding spend across all our customer cohorts. Even our oldest consistent cohort grew over 25%. Further evidence that we still have significant potential to capture . We were less aggressive on customer acquisition this quarter to the experience for existing customers. Prioritizing what's best for customers, drives loyalty and engagement and we believe that is the best long-term approach. We are still very early in our growth potential with the opportunity to more than double and active customer count over time as we systematically penetrate the 27 million active internet shoppers in Korea. As Bom noted, we invested nearly $95 million in implemental labor and operations to service as much customer demand as possible in the face of the COVID related headwinds. This included increased operations costs to keep our employees safe and healthy, and higher worker incentives and recruiting costs to navigate deliver constrain. When COVID cases spiked and restrictions increase in Q3 last year, it led to a similar increase in COVID related costs. These costs then decline when restrictions were loosened in the first half of 2021. While we expect these labor and operating investments to remain elevated, at least in Q4, we believe they are temporary and costs to diminish when COVID conditions normalize. Moving down the P&L, gross profit increased 62% year-over-year to $755 million in Q3 with gross margin expanding 130 basis points to 16.3%. Prior to COVID, our gross margin was approaching 20%, and underlined fundamental drivers. And even stronger during the incremental COVID, related costs. And investments will expand infrastructure and grow our long service obscure the full extent on the progress. But we are confident that as we move past these short-term headwinds, we'll unlock meaningful margin expansion. The increased adjusted EBITDA losses in Q3 compared to Q2, primarily spend from the incremental COVID-related labor and operations costs. Excluding such costs from all periods the Q3 adjusted EBITDA margin was similar to the margin in the first half of the year. Investments to scale Fresh and Eats and to develop new long-term growth initiatives continue to drive the balance of adjusted EBITDA loss, offset in part by increasing profits from our mature offerings. operating cash flow was negative $191 million in the third quarter due to higher losses and a modest working capital The working capital reflects less management from accounts payable. Our cash conversion cycle is unchanged and we expect the combination of favorable working capital dynamics in our business and improving profitability to drive cash flows over time. With nearly $4 billion of cash on our balance sheet, we are well-positioned to invest aggressively to extend our lead in Korean e-commerce and capitalize on the significant demand product offerings. And we're excited to build on our momentum and continue driving strong growth for many years to come. Operator, we're now ready to begin the Q & A.

[Operator:]

. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Eric Cha with Goldman Sachs. Please go ahead.

[Eric Cha:]

Yes, hi. Thank you for the opportunity. I think you mentioned in the presentation that was disclosed earlier, there was $95 million incremental labor and operational costs, mostly related to COVID-19 issues. I think there's probably refers to the capacity issues that you flagged during the last quarter earnings call. And I'm sure there's also may have partially affected the Company's towline as well, considering the Company's philosophy for the consumer experience, So I think the key question, that everybody has now is, are you seeing some improvement into the fourth quarter? And if not, when do you expect this to be alleviated and normalize the situation? Not only the cost, but the top-line growth to its full potential? My next question is, I'm pretty sure people will be wondering about this as well -- the active customers. The year-over-year growth still looks pretty solid. But if I'm not mistaken, this would be I think for the first sequential active customer declined for the Company so can we get some color on this, please? Thank you.

[Bom Kim:]

Hi, Eric. Thanks for the question. You're right. There was a strong effect on the top line as well that not only affected our revenue growth, but also affected our active customer growth. First thing on the active customer point, as you point out, it was still strong growth year-over-year, 20% year-over-year, well, but it did not reflect just as our revenues reflect on full demand. We sacrifice to preserve customer experience, several percentage points of revenue growth. Per our estimates, we sacrifice at least 5 percentage points. It was done through measures such as not taking orders when we reach our daily capacity. It's a difficult decision in the short run, but for us it was an easy decision for the -- under our operating principles. We've made difficult choices like this in the past, like it preserves the long-term customer trust, is one of the reasons you see our customer cohorts compounding at the rate that they are. And even in spite of that constraint, we still saw not only strong growth in active customers, but we're growing at a multiple of the e-commerce overall growth rate. We're capturing a higher percentage of every incremental dollar of growth than we ever had. Q3 recorded the highest share, more cents per dollar of incremental growth than in any quarter in our Company's history. As for how long this will persist, it's difficult to say, we've been through these cycles before, as you know, Eric. Last 2020, when restriction levels were heightened in Q3, we saw the same impact on -- similar impact on our labor, on our hiring and our attendance. As restrictions were loosen and social unease and concerns decline, cases decline. We saw a return to normalcy and I think that's a very different phenomenon. That's the difference between Korea, for example and the U.S. is that we've been through a cycle where we've seen glimpses of normalcy. In the early part of the year when things return to attempts of normalcy, we saw those constraint on labor, particularly hiring and attendance, dissipate. As the restrictions have been loosened as of November 1st, but cases still remained high. So, in the near-term, I think the situation still remains very fluid. But we are cautiously optimistic in the long run that we are going to see the return to normalcy that we saw a glimpse of earlier in the year. But we're also not resting and, assuming that that will take care of all the issues, even though in the near-term we face that uncertainty, we continue to make investments in profits improvements, and recruiting, for example, that we think will help us scale more efficiently. There have also been efforts, projects on automation and process improvement, that's a source of capacity increase. Some of those projects have been delayed because we have been trying to keep up with record demand over the last couple of years. So, we'll continue to make investments in automation and process improvements that we believe will help us scale our business going forward. Certainly again, that takes time. It will take several quarters but over the long term we are cautiously optimistic that the current constraints will be transitory in short-sell.

[Operator:]

Your next question comes from the line of Susie Lee with Bank of America. Your line is open.

[Susie Lee:]

Hello. Thank you very much for the opportunity. I have two questions. First on the profitability. Well, I recall that during the Second quarter Earnings Call last time, you mentioned that the EBITDA from traditional e-commerce business. excluding Coupang Fresh and Coupang Eats almost break-even. I was wondering that if this -- such a trend continues, hopefully in third quarter, the traditional e-commerce business was able to turn to profit in EBITDA line? So that is my first question. And then the second question is about Coupang Eats. I investors are quite interested in your initiative in Coupang Eats for the market share gains. So, is there any indicator that the management could share with us to help us better understand, your presence in this market? Like could be traffic or number of orders or probably the best indicator would be a market share in terms of GMV or the total gross worth of value? Anything you can share will be super helpful. And thank you.

[Bom Kim:]

Thanks for the questions. I'll start with the second one first on Eats, it continues to --- we continue to see great momentum in that service. It remains our fastest-growing service in the Company's history and we shared in the earnings release that customer adoption, we're excited by the momentum we're seeing there. The Eat App as an indication was the most downloaded app in all of Korea on IOS and the second most downloaded app in Android in all 2021 to date. The only app that has been downloaded more than our Coupang Eat App, which is on Android is the government released for COVID vaccine. And what's actually more encouraging than that than even the adoption, is the retention that we're seeing. Which we think is always a reflection of the customer value proposition that we're still working, we're still far from where we want to be. But we believe we want -- we're focused on creating the best experience at the lowest cost and the retention levels that we're seeing in our customer -- the customer compounding, frequency increases are all moving in a positive direction. In fact, in our earliest areas where we launched cohorts, we're seeing now the frequency of approaching that of WOW member frequency, which is exceptional. We're very excited by the momentum there. It's still early, we're still focused on improving our customer experience, our value proposition around selection, service, and of course, cost structure, which allows us to benefit customers as well as merchants. To your first question on profitability, the underlying drivers of profitability are improving. And as you pointed out, there are always some short-term noises that -- quarter-to-quarter, there is always some noise that might obscure the improvements that we're seeing in the underlying profit drivers. Short-term disruptions like COVID, as you point out, timing of investments. Overall, the store remains consistent. But if you exclude that there's COVID impact in $95 million. Fresh and Eats continues to be our focus for investments. Mature parts of our business are investing, we're able to take the cash flow for mature investments -- mature offerings, and reinvest it in areas like Fresh and Eats. And of course, there are additional initiatives. There is international small amounts and new initiatives like international FinTech and so forth, that we continue to make. But the overall dynamics are moving in the right direction. Timing of investments, as we mentioned, we have a record level of capacity that we're building out. So, we have a higher rate of underutilized capacity. Fresh, for example, nearly half of the facilities are under construction or just open ed, so producing no revenue. Those things will be positive sources of strength for us over the long term, allowing us to create a better experience, continue to expand our value proposition to more customers, but creates some noise in the short-term that might ob secure the improvements that we're making.

[Operator:]

Your next question comes from the line of Stanley Yang with JPMorgan. Please go ahead.

[Stanley Yang:]

Well, thank you. I have two questions. First question is about this ongoing margin pressure. You attribute it to margin pressure to COVID 19 driven labor and logistic close pressure. But how about this competitive landscape perspective, the competitors are trying to catch up the faster delivery logistic capabilities? Is this another reason of structural close pressure in the mid-term? And also separately, when do you expect each digit to reach breakeven or EBITDA at which scale. And the other my question is actually the -- your logistic capacity. So, are you on track with your previous guidance of 50% growth of the footprint center capacity over the next 1 year? And when do you think your 3P fulfillment service to meaningfully take-up? Those are my questions Thanks.

[Bom Kim:]

Stanley, your last question was that around 3P or -- sorry, could you repeat your last question again?

[Stanley Yang:]

Sure.

[Bom Kim:]

I didn't hear the 3P.

[Stanley Yang:]

Yeah. So, the -- all right. Sure. Actually, the 3P fulfillment service is now --

[Bom Kim:]

I see.

[Stanley Yang:]

-- on the testing stage.

[Bom Kim:]