Coupang, Inc. (CPNG) Q1 2022 Earnings Call Transcript

Coupang, Inc. (CPNG -0.95%)
Q1 2022 Earnings Call
May 11, 2022, 5:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

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. [Operator instructions] Thank you. Now, I'd like to turn the call over to Mike Parker, vice president of investor relations. You may begin your conference.

Mike Parker -- Vice President, Investor Relations

Thanks, operator. Welcome, everyone to Coupang Inc.'s quarterly earnings conference call for the first quarter ended March 31st, 2022. I'm pleased to be joined on our 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.

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. You should not place undue reliance on forward-looking statements. Actual results may differ materially.

Please refer to today's earnings release, as well as the risks and uncertainties described in our most recent annual report on Form 10-K, filed with the SEC on March 3rd, 2022, and in other filings made with the SEC for information about factors which could cause our actual results to differ materially from those forward-looking statements. During today's call, we will present both GAAP and non-GAAP financial measures. As a reminder, these numbers are unaudited and may be subject to change. 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, which are posted on the company's investor relations website at ir.aboutcoupang.com.

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

Bom Kim -- Founder and Chief Executive Officer

Thanks, everyone, for joining us today. Let me begin with a few highlights from our first quarter operating results. On a consolidated basis, Q1 constant currency revenues grew 3% quarter over quarter and 32% year over year. Our Q1 growth rate continues to be multiples of the e-commerce segment, and we're confident that we'll continue to grow significantly faster than the segment for years to come.

Our active customers grew to over 18 million, an increase of 13% year over year, and our unmatched customer experience is driving even deeper engagement. All of our cohorts, even our oldest, are still compounding at a fast rate, and our oldest active customers are spending on Coupang over 60% of their total estimated online spend today. We're excited about very significant growth potential in what is projected to be the third largest e-commerce opportunity in the world, exceeding $290 billion by 2025. In the first quarter, we also recorded the highest gross profit and gross margin in the history of the company, generating over $1 billion in gross profit and exceeding 20% in gross margin.

That represents a 42% improvement in gross profit year over year and an over 450-basis-point improvement in margin quarter over quarter, driven largely by initiatives around process improvement, automation, and supply chain optimization. As a result, our consolidated adjusted EBITDA recorded an improvement of $194 million from Q4 of 2021. As we previewed in our last earnings call, we begin reporting our operating results this quarter in two segments. One, product commerce, which represents our core e-commerce and fresh offerings; and two, developing offerings, which represents our more nascent initiatives like Eats, video, fintech, and international expansion.

First, on product commerce, we've provided guidance in our last call that product commerce would be adjusted EBITDA profitable in late 2022. We are pleased to report that in the first quarter, we were adjusted EBITDA profitable, a $72 million improvement year over year and $128 million improvement quarter over quarter. Product commerce gross profit grew 42% year over year and gross profit margin increased approximately 330 basis points from Q4 to reach 22% in Q1, our highest ever. Both core and fresh improvements powered these gains even as both experienced significant year-over-year and quarter-over-quarter growth.

While we saw some headwinds from inflation and supply chain disruptions in the past quarter, our results were net positive due to improvements around process and technology, utilization of capacity, supply chain optimization, and continued scaling of advertising, among other areas. Most are part of continuous improvement programs that were launched before 2022. The progress of some were obscured in past quarters by short-term disruptions and timing of investments, others accelerated as we directed resources that were previously supporting the explosive growth and operational challenges brought on by the pandemic. Some headwinds will likely persist, but we will continue to strive for operational excellence, and we remain confident in our ability to drive the inputs that we control in our business.

We communicated in our prior earnings call that the trajectory toward our long-term adjusted EBITDA target would become more evident in our progress this year. Looking forward, we expect product commerce to remain profitable and for adjusted EBITDA to continue its March upwards over time. However, the rate of improvement will not always be as dramatic as the results produced by these programs will materialize unevenly each quarter. We believe continued improvements in operational efficiency, supply chain optimization, and scaling of merchant services, among other drivers, will expand our consolidated adjusted EBITDA margins to at least 7% and potentially higher than 10% over the long term.

On growth, our flywheel and product commerce continues to build momentum. Product commerce revenues grew at 30% year over year on a constant-currency basis and 2% quarter over quarter in spite of the product e-commerce segment in Korea growing 8% year over year and negative 5% quarter over quarter. Our share of product e-commerce growth increased every quarter in 2021 and that share was even higher in the first quarter of this year. Active customers grew over 36% over the past two years, but the number of customers buying six or more categories increased over 70% in the same time period, and the percentage of active customers using three or more Coupang offerings nearly tripled over last year.

One of our fastest-growing offerings is Rocket Fresh, the largest national online grocery service in the market. Rocket Fresh offers customers what we believe is the largest selection of fresh groceries in Korea delivered to their doors within hours of purchase via same-day or dawn delivery, enabled by a national network of cold chain fulfillment centers and proprietary delivery logistics. Just three full years of operation removed from launch, Rocket Fresh delivers billions of dollars in orders on an annualized basis and the number of customers using Rocket Fresh increased 50% year over year in Q1. However, just 35% of Coupang's total active customers used the offering in Q1, which highlights the significant opportunity ahead.

WOW membership also continues to attract more members and deepen their engagement with Coupang, we estimate that WOW is by far the largest paid subscription service in the market, with three or four times the number of paid members as the next largest e-commerce or retail membership program. We've added seven new services and benefits to the program since its launch three years ago and more on the way. We're on a journey to make WOW an indispensable part of our customers' lives. Just these offerings like Rocket Fresh and WOW have delivered more value to customers on the foundation of our Rocket delivery network.

Fulfillment & Logistics by Coupang, FLC, promises to compound the value of Rocket delivery for customers by increasing the selection available on the network exponentially. Our 3P merchant spend also continues to grow at a multiple of the overall e-commerce segment, and we see an opportunity to accelerate penetration by improving our merchant-facing tools and services. We're excited about the potential impact of scaling our merchant services, including FLC, in the years to come. Second, on developing offerings.

Revenues from our developing offerings segment increased 79% year over year on a constant-currency basis, driven chiefly by our Eats offering. As we mentioned in our last earnings call, our primary focus in Eats is on improving profitability meaningfully to position us to be more efficient in our next phase of expansion. The progress of related efforts were reflected in the adjusted EBITDA for the segment, which improved $66 million quarter over quarter. We expect Eats to continue to make improvements and losses in developing offerings to decrease further.

While our focus in Eats this past quarter has been primarily on improving operating leverage, we're also encouraged by the underlying strength of customer engagement in the offering. Our newer Eats customers are increasing their order frequency in line with our more mature customers, whose order frequency levels we believe are exceeding those of leading global peers. We're also exploring synergies between Eats and our other offerings to amplify these unmatched levels of engagement. Developing offerings includes initiatives outside of Eats that have the potential to expand our opportunity beyond the e-commerce segment, beyond the $290 billion projected by 2025.

Specifically, we're investing in initiatives to capture additional spend in areas like video, fintech, and international. We will continue to execute in all of these areas in line with our operating tenants, which we previously shared in the second quarter of last year. One, we exist to deliver new moments of WOW for customers. Two, we don't start with what looks easy.

We work backwards from imagining jaw-dropping customer experiences, and we embrace the hard work required to challenge trade-offs that customers take for granted. Three, we will employ technology, process innovation, and economies of scale to create amazing customer experiences and drive operating leverage and significant cash flows over time. Four, we always prioritize growth in long-term cash flows. And five, we are disciplined capital allocators.

We start with small investments, then test, and iterate rigorously. We invest more capital over time in opportunities that have the best long-term cash flow potential. 2022 is off to a good start. The momentum in our business is becoming clearer with each passing quarter.

And we expect our investments in both customer offerings, as well as in operational excellence to continue to create new moments of WOW and improve our operating leverage. Now, I'll turn the call over to Gaurav to go through the quarter and our outlook in more detail.

Gaurav Anand -- Chief Financial Officer

Thanks, Bom. Our demand was strong, even as conditions surrounding COVID started to normalize. In the first quarter, we grew 32% year over year in constant currency, which, with foreign currency impact, is 22% year over year on a reported basis. We are currently at an annualized runrate of over $20 billion in revenue.

Our unparalleled customer offerings continue to attract new customers and drive strong customer retention. Net revenue per customer increased 8% year over year on a reported basis and 16% on a constant-currency basis as more customers continue to be more engaged across all categories and offerings. Q1 gross profit increased to a record high of over $1 billion, a 42% increase year over year. This represents the best performance in the company's history.

This helped drive the improvement in adjusted EBITDA losses to $91 million and a minus 1.8% EBITDA margin for the quarter. These results have come, in part, to our focus on driving efficiencies throughout operations. As an example, this includes enhanced utilization of machine learning to better estimate delivery times and create more efficient route assignments, as well as increased investments in automation, including robotics, within our fulfillment network. As we look forward to the remainder of 2022, we expect to continue our momentum in driving meaningful profit improvements.

We guided in our last earnings call that we expect an adjusted EBITDA loss in 2022 of no more than $400 million. In light of the trends in the business, including our first quarter performance, we are confident in our ability to exceed that adjusted EBITDA target this year. We believe our product commerce profitability will continue to improve. However, the cadence and sequencing of our efforts will result in potentially disproportionate benefit quarter to quarter.

As Bom mentioned, we will maintain a disciplined investment approach with our developing offerings like Eats, video, international, and fintech. We are optimistic about our ability to continue our strong trend of growing at multiples of the Korean e-commerce segment, but we also recognize that there are unpredictable variables in the near term, such as the impact of ongoing reopening here in Korea and the pent-up demand for travel. We are more excited than ever about our opportunity to create long-term enterprise value. Our early results in 2022 support our journey toward long-term adjusted EBITDA margins of 7% to 10% or higher than we have previously guided to.

We believe our already strong position in the market will only continue to strengthen and drive our top-line revenue potential, which in turn will generate more opportunities to expand our operating leverage. Moreover, much of our revenue opportunities ahead are concentrated in higher-margin categories and offerings. We have the opportunity to add significant selection in less penetrated categories that are more profitable. Greater scale increases our fixed cost leverage and enables us to capture more efficiency through technology and automation.

Additionally, scaling merchant services, including advertising offerings should also continue to drive higher-margin growth. In closing, we are excited about the momentum we have built in the first quarter but are even more excited about what is in front of us. The drivers we highlighted for substantial revenue and profit growth continue to give us confidence in our long-term growth and adjusted EBITDA margin potential. Operator, we are now ready to begin the Q&A.

Questions & Answers:

Operator

[Operator instructions] Please limit your questions to two per person. Your first question comes from the line of Eric Cha with Goldman Sachs. Your line is open.

Eric Cha -- Goldman Sachs -- Analyst

Hi, thank you for the opportunity. I have two questions to ask. Firstly, on gross profit margin and EBITDA trend. First quarter, obviously, very strong.

How do you anticipate the upcoming quarter's trend for the two this year? You briefly, I think, mentioned on the drivers, but more detailed elaboration would be helpful. Second, I realize that you've not changed your guidance. Can you confirm this for us, please? And if so, any chance during the year whether there could be change in guidance? Or maybe put it in a different way, any changes in your investment plans into video, fintech, and international? And if I may add, can you also share this quarter's COVID impact as well? Thank you.

Gaurav Anand -- Chief Financial Officer

Sure. Thanks, Eric. So, we had a strong first quarter. And in light of this first quarter performance and the current trends, Eric, we are very confident in our ability to exceed this adjusted EBITDA target that we gave this year.

The product commerce profitability will continue to improve through the year, though the benefits that you see quarter over quarter may be disproportionate. And versus our plan in the developing services, we don't intend to increase investments versus the plan. So overall, we are confident in our ability to exceed the adjusted EBITDA that we gave.

Bom Kim -- Founder and Chief Executive Officer

On the improvement side, most of the 450-bps improvement came from continuous improvement programs. As I mentioned, that were launched before this year around process and technology, around supply chain optimization, among other drivers. And some of these efforts, as I've mentioned in the past, were happening in the backdrop. They were obscured by short-term disruptions or timing of investments.

And some of these accelerated this past quarter as more resources were directed toward them that had, you know, previously been dedicated to dealing with pandemic-related challenges. These -- as Gaurav just mentioned, we expect product commerce segment to remain profitable or -- and to continue to show improvement over time. Of course, the impact won't be equal every quarter. But we do expect to see benefits continue to come from greater economies of scale, improved operational excellence from these projects that I mentioned, growth of higher-margin categories and services.

These are the same drivers that drove the record improvement, you know, our highest gross margin in the company's history this past quarter. And they're the same drivers that give us confidence in our ability to achieve 7% to 10% or higher adjusted EBITDA margins in the long run. And I think on COVID, I don't have the exact number. There is some COVID costs still, of course, that -- in Q1, but those are decreasing over time.

Eric Cha -- Goldman Sachs -- Analyst

Thank you.

Operator

Your next question comes from the line of James Lee with Mizuho. Your line is open.

James Lee -- Mizuho Securities -- Analyst

Great. Thanks for taking my questions. I have two here. With COVID cases start to come down, can you guys talk about any changes in consumer behavior? Are you seeing any sort of shift to offline shopping or even to, like, services industry like travel similar to what we see in the U.S.? And if so, which category are you seeing most impact? Which category do you think is more resilient? And second question is for Gaurav.

I noticed quite a bit of outperformance in COGS. Revenue is kind of flattish quarter over quarter, but COGS came down quite a bit. Can you parse that out for us for both the core product and developing business? Thanks.

Bom Kim -- Founder and Chief Executive Officer

On the COVID impact, I mean, there is, of course, a lot of variables at work here related to the reopening around COVID. We're seeing internally a lot of evidence that the consumer behavior changes and the engagement level increases in COVID were not temporary, but for the long term. And we're at a stage right now where our growth across all categories is still at a -- still relatively strong compared to broader conditions. Our demand, for example, in Q1 was strong even as conditions around COVID started to normalize.

The product e-commerce segment in Korea, for example, the broader segment in constant currency was down, was negative quarter over quarter. We were up. Year over year, the product e-commerce segment was up only 8% in the broader e-commerce segment in Korea, 8% up year over year. Our product commerce growth rate was nearly four times of that at 30%.

So there continues to be lots of unpredictable variables related to the opening in the short term. But the long-term trajectory is very clear to us that in any scenario, we'll continue to grow significantly faster e-commerce segment and continue to gain share across all of our categories. You know, we're on pace to gain significant share. In an e-commerce market segment, that's expected to approach nearly $300 billion in sales by 2025 and become the third largest e-commerce opportunity in the world after only the U.S.

and China. Gaurav, do you want to take the second question? Yes.

Gaurav Anand -- Chief Financial Officer

Yeah. James, on the second question, we did give out the split between product commerce margin improvement and developing services margin improvement. And as Bom highlighted earlier, the overall margin improvement was 450 bps. On the product commerce side, most of it came from operational excellence, supply chain improvements, process improvements that we had seeded earlier in the quarter.

On developing services, the improvements came in -- a large part of it came in from Eats while we continue to build on the other initiatives that we have. I hope that answers your question.

James Lee -- Mizuho Securities -- Analyst

OK. Great, thank you.

Operator

[Operator instructions] Your next question comes from the line of Peter Milliken with Deutsche Bank. Your line is open.

Peter Milliken -- Deutsche Bank -- Analyst

Yeah. Good morning, everybody. My question is your share price is down close to three quarters since the IPO. Look, that's happened to a lot of companies in that period of time.

But does that change what investors are demanding of you in terms of your mandates, right? Initially, with the land grab, get dominance, and then build the adjacencies. Are they -- do you feel like they're still completely on side with that? Or is there more of a balance that they're after to also focus on getting to breakeven more quickly perhaps than you would like to target right now? Thanks.

Bom Kim -- Founder and Chief Executive Officer

James, I didn't hear that question as clearly. I don't know if it was just on my end. But I think your question was around has our mandate, has our strategy changed, given the changes in the stock market environment? Sorry. Was it Peter? Sorry, Peter.

Peter, was that the question probably?

Peter Milliken -- Deutsche Bank -- Analyst

Yes, that's the question. [Inaudible]

Bom Kim -- Founder and Chief Executive Officer

You know, one of the things we wanted to point out, we laid out our five operating tenants about a year ago, well before any changes in the market. And we laid out exactly what we were -- you know, we're focused on investing for the long term, creating customer wow, really breaking trade-offs, and also operational excellence. We have a culture -- I mean, it's really core in our DNA, operational excellence. We want to create the best customer experience with the least -- with the highest efficiency.

And I think we laid out the disciplined way in which we were going to allocate capital, the rigorous way in which we were going to test and iterate and improve operational excellence. And as we mentioned, a lot of this program that you're seeing, you're seeing the fruits of a lot of these more evidently in Q1, but they were happening -- they were first -- yeah, they were being produced by programs that started -- you know, many of them well before Q1. Some were bearing fruit that was being obscured by a lot of short-term disruptions, lots of pandemic-related disruptions that we had shared earlier. So, for us, our culture, our strategy remains consistent.

We're disciplined. We're rigorous, and we're also unafraid to take on hard challenges to create customer WOW and operating leverage. So, we hope to show that and continue to show that and continue to demonstrate our progress on both fronts in the quarters ahead.

Peter Milliken -- Deutsche Bank -- Analyst

That's very clear. Thank you. And just a quick follow-up on that. So, on the core and the sort of developing businesses I can see that you're still moving ahead in the same way.

On the more massive businesses like say the media side, is that still the case as well, or do you feel like there's a higher bid that you need to -- before you start putting more resources into something like that?

Bom Kim -- Founder and Chief Executive Officer

Yeah. You know, we have always had a -- we have outlined in our operating tenants how we test and invest. And, you know, it's early in the international, fintech play. I think those are the services you mentioned.

It was a little -- I couldn't quite make it out.

Peter Milliken -- Deutsche Bank -- Analyst

Yes, something like that. Yes.

Bom Kim -- Founder and Chief Executive Officer

Yeah. Yeah. Again, we have a capped budget. We test within that.

We get proof of concept. We nail it before we scale it. And that continues to be our operating framework in many of these areas. Look, in cases like fintech, it's an evergreen opportunity for us.

It continues to -- these are areas with a vast potential. But as our ecosystem builds -- as our ecosystem grows, that opportunity continues to grow. And so, we're patient and we'll continue to -- in a very disciplined way, test, iterate, and learn.

Peter Milliken -- Deutsche Bank -- Analyst

Got it. Thanks. Thank you. That's very true.

Operator

Your next question comes from the line of Stanley Yang with J.P. Morgan. Your line is open.

Stanley Yang -- J.P. Morgan -- Analyst

Hi. Thanks for taking my question. I have two questions. Can you share about the second quarter operation momentum in terms of the top-line growth and the Q-o-Q margin trend? And what will be the additional drivers of the margin improvement going into the second quarter or second half? Do you expect the temporary setback of the GP margin in case of full reopening in second half? And my next question is about the labor supply issue.

So, tight labor supply has been one of the key constraint of your margin side. Do you see any reserve of this supply issue in the first quarter? And going forward, this will be additional room of the growth, and -- or do you expect any structural headwinds on this regard? And what are the major initiatives to drive labor cost savings or labor efficiency increases? That's two -- those are my two questions.

Bom Kim -- Founder and Chief Executive Officer

Yeah. Stanley, so I think on upcoming quarter, there were lots of -- on growth, there are lots of unpredictable variables in the short term, as we mentioned. But what's clear in Q1, what we continue to see is that we are and we will continue to grow significantly faster in the e-commerce segment. That part is -- that trajectory is becoming clearer and clearer to us every day.

And in fact, as we mentioned, we grew -- our share of growth grew every quarter of last year. That was even higher in Q1. So, I think while we can't speak and predict with precision in the near term, I think, we're very confident in the long-term that in any scenario, we'll continue to gain significant share and continue to grow significantly faster than the market for -- in the e-commerce segment for years to come. You mentioned drivers for margin improvement.

As we mentioned, there were process improvements, technology and automation improvements. There was supply chain optimization. There were also continued scaling of various services. What's exciting for us is that as we get bigger, it's becoming -- we're seeing more benefits coming from economies of scale, from -- you know, increases -- more scale increases our ability to invest either in software and hardware automation and efficiency projects.

Also, our -- some of our biggest opportunities for growth are in higher-margin categories and services. So, for us, growth in the future should be higher margin. And that's what looks -- it's really exciting about growth in margin in the future. I think going forward, the impact or the improvement -- the scale of improvement won't be as dramatic every quarter.

But we do expect to show steady improvement over time. And, you know, as Gaurav mentioned, you will continue to see product commerce remain profitable, show improvement. You will see developing offerings also continue to make improvements quarter over quarter. You mentioned labor supply, we're not seeing any structural constraint in labors capacity.

Of course, there was -- there are always challenges related to -- you know, we had record capacity in Q1 so far. And we've been -- our investments in process improvements and technology improvements, among other things, have really helped us manage -- there are, of course, variables we don't control. We mentioned in our earlier statement that we did see some headwinds from inflation and supply chain disruption, but we were able to offset a lot of that because of the improvements we're making on the drivers that we control. And that's what continues to be the anchor of our, you know, optimism going forward is that we are very confident in our ability to drive the inputs that we control.

And we believe that they will continue to drive our ability to achieve the 7% to 10% or higher in adjusted EBITDA margins over the long term.

Operator

[Operator instructions] There are no further questions. [Operator signoff]

Duration: 35 minutes

Call participants:

Mike Parker -- Vice President, Investor Relations

Bom Kim -- Founder and Chief Executive Officer

Gaurav Anand -- Chief Financial Officer

Eric Cha -- Goldman Sachs -- Analyst

James Lee -- Mizuho Securities -- Analyst

Peter Milliken -- Deutsche Bank -- Analyst

Stanley Yang -- J.P. Morgan -- Analyst

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