Coupang : First Quarter 2024 Earnings Call Transcript

Q1 2024 Coupang Earnings Call Script

New York: Tue. 5/7/2024, 5:30 PM

Mike Parker:

Thanks, operator. Welcome, everyone, to Coupang's first quarter 2024 earnings conference call. 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 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, our slides accompanying this webcast and our SEC filings, which are posted on the company's Investor Relations website.

And now, I'll turn the call over to Bom. 

Bom Kim:

Thanks, everyone, for joining us today. Before we dive in, here are five takeaways from a strong start to 2024:

1. First, we continue to deliver results because we focus on what matters most- customer experience and operational excellence.
2. Second, we're still single digit share of a massive retail opportunity in Korea and an even smaller share of Taiwan's.
3. Third, newer services like Rocket Fresh and Fulfillment and Logistics by Coupang, or FLC, are gaining momentum. Offerings like these enable us to expand selection on Rocket exponentially for customers and provide critical support to suppliers, particularly small-and-medium enterprises or SMEs, by giving them access to our Rocket infrastructure and network.
4. Fourth, our Developing Offerings are making significant strides, meeting our milestones and in many cases performing ahead of plan.
5. Finally, we continue to invest in infrastructure and WOW benefits to raise the bar, again and again, for what customers should expect as their standard experience. We'll be relentless in our pursuit of new moments of "wow" for customers across selection, price and service.

Now, some numbers to highlight our performance at the start of the year: in Q1, our revenues increased 28% year-over-year in constant currency, or 23% excluding Farfetch, which we began consolidating at the end of January. And adjusting for the FLC accounting change we made beginning in Q2 of last year, these Q1 revenue growth rates would have been over 10 percentage points higher. That robust growth was primarily driven by the increase in spend of all of our existing customer cohorts, even our oldest.

Our Product Commerce Active Customers also grew 16% year-over-year. Newer customers naturally spend less but their spend levels have followed the same trajectory of older customers over time. While new active customers were not the primary driver of this past quarter's revenue growth, the rising number of new active customers should contribute more to growth for the business in the years ahead.

The growth of our Fresh offering was also notable this past quarter, growing 70% year-over-year in units sold. Customers are attracted to what we believe is the widest assortment of fresh goods in the market, low prices, high quality and a free shipping threshold of just $11. This is the best free shipping program for online grocery that we know of in the world. And to top it off, we guarantee that your order placed by midnight will be in front of your door before 7am in the morning.

We're also proud that Fresh provided critical support to farmers and fishers by increasing the inventory we purchase directly from them, while also delivering significant savings in both time and money to customers.

We continue to see impressive growth in FLC, which recorded a 130% increase in units sold year over year. As a result, the assortment available to customers with the convenience of overnight, same-day, or next-day delivery is expanding with each passing day. And FLC is providing critical support to thousands of merchants who are able to grow faster by selling their products with Rocket service levels without investing in prohibitively expensive infrastructure and technology. FLC sellers, over 80% of whom are SMEs, have seen their sales on average more than double within 90 days of converting to FLC.

And on Developing Offerings, we've been pleased with our execution and progress. We've consolidated Farfetch into our Developing Offerings starting this quarter. Our journey at Farfetch is just beginning, and the team is focused on generating close to positive adjusted EBITDA on a run-rate basis by the end of the calendar year. On Eats, customer adoption is accelerating. In the month of March, when Eats launched its free delivery program, Eats recorded the largest year-over-year increase in customers and orders in its history. We continue to make progress in Taiwan where we're working to break meaningful tradeoffs for customers. We're also providing access to wide Korean selection and helping over 21,000 Korean suppliers export their products to the Taiwan market over the last year. It's early days in Taiwan but we're as excited as ever about its potential.

While we're further along in Korea, it's important to note that we're still just single digit share of a massive and highly fragmented $560 billion commerce opportunity. New China commerce entrants remind us that barriers to entry are low and consumers can switch shopping options faster in retail than in almost any other industry, within seconds and with a swipe of the finger. Customers cast a new vote with every purchase they make and will not hesitate to spend their money at another venue they deem to be better. We have to win their vote each and every time by offering them the best selection, price and service. And we strive relentlessly to make that value proposition better every day.

To that end, we plan to continue investing billions of dollars in capex over the next several years to strengthen our fulfillment and logistics infrastructure. We aim to increase the speed of delivery across the market and make free delivery available to even the most remote corners of Korea, including secluded islands and mountain settlements that currently do not have access to our fastest delivery options.

That investment in infrastructure will help Korean manufacturers and SMEs get even better service levels for their products on Rocket. We're also deepening our commitment to Korean manufacturing. We plan to increase the amount of goods that we purchase and sell that are manufactured in Korea, from $13 billion in 2023 to over $16 billion in 2024.

Last year, we provided over $3 billion in WOW membership benefits including free delivery and return services and WOW-exclusive discounts. This year we expect to expand those membership benefits even further, providing over $4 billion in WOW

related benefits for customers in 2024. This includes free access to exciting sporting events we've created, like the MLB season opening games we hosted between the Dodgers and Padres in Korea in March, as well as the world-class European football matches we bring live to fans in Korea each summer. We also recently began providing unlimited free delivery on Eats for WOW members across Korea, to eliminate one of the biggest recurring costs for consumers in food delivery.

2024 will be an important year to strengthen our experience for customers and to expand programs that provide vital support to our manufacturing and SME partners. We remain as energized as ever to transform the lives of every customer and stakeholder we touch, to create a world where everyone wonders "How did I ever live without Coupang?"

Now, I'll turn the call over to Gaurav to review our results in more detail.

Gaurav Anand:

Thanks, Bom. Q1 was a strong start to the year, as we saw sustained momentum continue across our business. We again delivered durable growth in customers, revenue, and profit, driven by our focus on providing even greater value to our customers.

Before I go through the numbers in detail, I want to remind everyone that our acquisition of Farfetch was completed earlier this year at the end of January. As a result, two months of Farfetch financials are now included in our quarterly consolidated results and in our Developing Offerings segment, with no adjustments made to any periods prior to the date of the acquisition.

In Q1, our total net revenues grew 23% year-over-year, or 18% excluding the impact of Farfetch. On a constant currency basis, total net revenues grew 28%, or 23% excluding Farfetch. Adjusted for the FLC accounting change, the growth would have been 10 percentage points higher than the 23% constant currency growth rate excluding Farfetch. The adjustment is a result of the change in FLC revenue accounting last year, from gross to net.

Product Commerce segment revenues grew 15% year-over-year in Q1 on a reported basis, or 20% in constant currency. Adjusted for the FLC accounting change, the growth rates would have been over 10 percentage points higher. Our growth rate continues to compound at high multiples of the growth rate of the total retail spend in Korea, which grew at 2% this quarter.

We observed increasing spend by all of our cohorts, even our oldest, along with a 16% year-over-year increase in Product Commerce active customers, as we added

2.9 million active customers over the last year. This demonstrates the tremendous value that customers come to expect from Coupang, as we continue to make significant investments to provide the broadest selection, the fastest and most reliable delivery, at the lowest prices.

Product Commerce segment revenues per active customer grew 3% year-over-year in constant currency. This includes the short-term dilutive impact of the large number of new Product Commerce active customers we have added over the last few quarters as well as the impact of the FLC accounting change. We believe a large amount of future growth will continue to come from the spend of newer customers converging to the much higher spends of the older customer cohorts.

We continue to see exciting momentum building in our Developing Offerings segment, where segment revenues grew over 330% year-over-year, or 134% excluding Farfetch. On a constant currency basis, Developing Offerings segment revenues grew over 340%, or 143% excluding Farfetch.

Q1 produced a record $1.9 billion in gross profit, with a gross profit margin of 27.1%. Excluding Farfetch, we delivered $1.8 billion in gross profit with a margin of 26.5%, a

margin improvement of 200 basis points year-over-year, and 90 basis points quarter- over-quarter. Product Commerce gross profit increased 31% year-over-year, and gross profit margin increased 100 basis points quarter-over-quarter to 28.3%. Our margin improvement continues to be driven by investments in process, technology, and automation, as well as further optimization in our supply chain and the scaling of margin accretive offerings, including ads and FLC.

OG&A expense as a percentage of revenue increased 390 basis points this quarter versus last year. This change was primarily due to the inclusion of Farfetch, whose expenses also include $58 million of one-time costs this quarter relating to the acquisition and subsequent restructuring activities.

We generated $59 million of income before income taxes, and $5 million of net income attributable to Coupang stockholders this quarter. This resulted in diluted earnings per share of zero cents. Excluding Farfetch, net income attributable to Coupang stockholders was $98 million for the quarter and diluted earnings per share would have been 5 cents.

Our consolidated operations generated $281 million of adjusted EBITDA this quarter. This does not include the one-time costs relating to the acquisition and subsequent restructuring activities in Farfetch. The Q1 adjusted EBITDA margin was 3.9%, which was favorably impacted 30 basis points from the accounting change in FLC. Adjusted EBITDA over the trailing twelve months was $1.1 billion with a margin of 4.3% this quarter, representing a 100-basis point improvement year-over-year.

Excluding Farfetch, we recorded $312 million of adjusted EBITDA this quarter and $1.1 billion over the trailing twelve months. This resulted in a TTM adjusted EBITDA margin of 4.5%, a 110-basis point improvement year-over-year. We believe we are still far from realizing the full margin potential of our business, and are confident in our ability to continue expanding consolidated margins on an annual basis this year.

Product Commerce segment delivered $467 million of adjusted EBITDA, an increase of 62% year-over-year and a margin of 7.2%. This represents a margin expansion of 210 basis points over the last year and includes a 60-basis point benefit from the FLC accounting change. The growth in margin continues to be driven by further operational efficiencies, improvements from supply chain optimization, and the contribution from the growth of our higher margin categories and offerings.

Our Developing Offerings segment adjusted EBITDA loss was $186 million, increasing $139 million year-over-year. This was driven by our increased level of investments in these early-stage opportunities, as well as a $31 million impact from the consolidation of Farfetch.

Last quarter we provided guidance that we anticipate incurring adjusted EBITDA losses in Developing Offerings of approximately $650 million in 2024, excluding Farfetch. With the addition of Farfetch in Developing Offerings we now estimate that our 2024 adjusted EBITDA losses for Developing Offerings will be around $750

million. We also anticipate that Farfetch will reach close to positive adjusted EBITDA run-rate by the end of the calendar year.

We ended the first quarter with roughly $5.6 billion in cash, increasing 35% over last year. This was a result of generating $2.4 billion in operating cash flow and $1.5 billion of free cash flow over the trailing twelve months.

This quarter we saw an increase in the effective income tax rate driven by consolidation of pre-tax losses in Farfetch. With the inclusion of Farfetch, we now anticipate we will experience a temporarily high book tax rate between 95% to 100% in 2024. This is just an accounting tax rate, as we expect our cash tax obligation to be closer to 20% to 25%, excluding Farfetch losses. Over the long-term, we expect to normalize to an effective tax rate closer to roughly 27%.

Shortly after quarter-end, we repurchased $178 million of our Class A common stock from one of our early-stage investors. We are continually evaluating our capital allocation strategy, assessing various opportunities, including share repurchases, to generate long-term shareholder value.

Operator, we are now ready to begin the Q&A.