DoorDash, Inc. (DASH) Q2 2021 Earnings Call Transcript

DoorDash, Inc. (DASH 1.64%)
Q2 2021 Earnings Call
Aug 12, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the DoorDash Q2 2021 earnings call. [Operator instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Andy Hargreaves.

Please go ahead.

Andy Hargreaves -- Vice President, Finance and Investor Relations

Thank you very much, Chris. Hello, everyone, and thanks for joining us for our second-quarter 2021 earnings call. I'm pleased to be joined today by our co-founder, chair, and CEO, Tony Xu; and our CFO, Prabir Adarkar. I would like to remind everyone that we'll be making forward-looking statements during this call, including statements regarding our expectations of our business, future financial results and guidance and strategy.

Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those described in our forward-looking statements and such risks are described in our risk factors included in our SEC filings, including Form 10-K. You should not rely on our forward-looking statements as predictions of future events. We disclaim any obligation to update any forward-looking statements, except as required by law. During this call, we will discuss certain non-GAAP financial measures.

Information regarding our non-GAAP financial results, including a reconciliation of such non-GAAP results to the most directly comparable GAAP financial measures, may be found in our investor letter, which is available on our investor relations website. These non-GAAP measures should be considered in addition to our GAAP results and are not intended to be a substitute for our GAAP results. Finally, this call, in its entirety, is being audio webcast on our investor relations website. An audio replay of the call will be available on our website shortly after the call ends.

Chris, we'll go straight into questions today. So please go ahead and read the first question.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Ross Sandler from Barclays. Your line is open.

Ross Sandler -- Barclays Investment Bank -- Analyst

Hey, guys, good afternoon. Two questions. Tony, your nonrestaurant delivery business has several strategies in place, both in marketplace and in drive. What are you most excited about, thus far? What's adding the most to your financial performance? And second question is, in the letter, you mentioned that same-store sales for your merchants is up about 35%.

I assume that's dramatically higher than anybody in the peer set. But if overall GOV starts to decelerate and normalize next year, how does that work as far as continuing to add merchants while growing same-store sales? And any thought on how you balance out that? And what that might mean for merchant retention? Nice quarter.

Tony Xu -- Co-Founder, Chairman, and Chief Executive Officer

Hey, Ross, I'll take the first question, and I'll let Prabir start the second. So on the first question, with respect to new categories. I mean, you're right, we're super excited about our progress. In Q1, we announced that about 7% of our business was coming from orders outside of restaurants.

And that has grown sequentially, and it's grown certainly faster than our restaurants business. And it does touch upon the strategy of creating both a marketplace where we're generating incremental demand and really building best-in-class point solutions category by category where we bring everything inside the neighborhood to consumers in minutes, not hours or days. And then, on the other side, we are also building a first-party capability on behalf of retailers and merchants so that they can create their own digital businesses. The goal of DoorDash has always been to create the largest local commerce marketplace, as well as the largest local commerce platform.

And we think that this strategy is certainly playing out not just in our core and original category of restaurants but now also heading into other categories.

Prabir Adarkar -- Chief Financial Officer

Yeah, and Ross, just to add on to Tony's point, I mean, the reason we are about these new categories, both in our marketplace -- primarily in the marketplace, in addition drive, is -- what the early data suggests is that when consumers buy from other categories in our marketplace, in addition to the food category, they subsequently now then increase their retention and engagement with the marketplace as a whole compared to customers who do not buy across categories. And so we're seeing this behavior. It's super exciting. It's improving the value proposition of Dash products, which is why we are investing behind it, both on the marketplace, as well as for drive.

Now for drive, it's a slightly different strategy because we don't own the customer relationship in drive. But as we add more orders from other categories to the ecosystem, we're just creating density and order density that, frankly, lowers our cost structure and then, you know the rest of the flywheel. So that's on the first part of your question. On the second question, I think I understand what you're getting at.

But the way I view it is, first, if you think about it from a merchant standpoint, the marketplace GOV is just one portion of the sales that we generate. It doesn't capture the value of drive orders, right? So remember that. So the true sales, from a merchant perspective, is very different than what's implied by the GOV growth. The second is, if you look at what happened to our order frequency over time, we're currently at all-time highs.

And the order frequency is high, both for our DashPass subscribers, as well as for non-DashPass users. And so both sets of -- both cohorts of users have actually achieved not just year on year but lifetime high order frequency, and that will continue to increase over time as our selection improves, the affordability improves and as quality improves. That will then continue to drive GOV growth for our merchants.

Ross Sandler -- Barclays Investment Bank -- Analyst

OK, thank you.

Operator

Your next question comes from the line of Brian Fitzgerald from Wells Fargo. Your line is open.

Brian Fitzgerald -- Wells Fargo Securities -- Analyst

Thanks, guys, I had two questions. One was around the beat and the guidance. How much of that was driven by international versus new categories, if you could parse that out or give us some color on that? And then, could you talk to the kind of different take rates or pricing points you rolled out last quarter? Can you talk to us about the adoption rates? Is there a tendency to move up or down versus cohorts of somebody who started at a certain percentage and then, started moving up to 25% to 35%? Thanks.

Prabir Adarkar -- Chief Financial Officer

Sure. So Brian, on the first question, we basically saw strength across the board on just core consumer metrics, right? So it wasn't that one part of our business beat and another didn't. But across the board, we started to see, as I alluded to earlier, strong order frequency development. You saw pickup on DashPass subs not just in the U.S.

but also growth in our international regions. As a matter of fact, our international business, actually, grew faster both quarter on quarter and year on year compared to our U.S. business. We continue to see strength on retention and order frequency for our consumer cohorts, both those cohorts that were acquired this year compared to new cohort we had pre-COVID and retention order frequency benefits for existing cohorts that were acquired prior to the pandemic.

So across both new cohorts and existing cohorts, retention and order frequency continues to be above pre-COVID levels. So a long way of saying we are seeing strength across all these fundamental consumer metrics that then ultimately led to order volume beat that then translate to GOV in the rest of the P&L. On your question around the pricing packages, what I would say is the majority of restaurants have chosen either the premium or the plus package and the premium mix actually has outperformed our expectations. And so on the whole, it's performing in line, slightly better than expectations.

If it's a take rate question, I don't think the impact on our take rate will be noticeable because there are other factors like DashPass mix and fundamental efficiency improvements that usually are much larger in magnitude than the shifts that are created by the pricing packages. 

Brian Fitzgerald -- Wells Fargo Securities -- Analyst

Got it. Very clear. Thanks, guys.

Operator

Thank you. Next up, we have Youssef Squali from Truist Securities. Your line is open, sir.

Youssef Squali -- Truist Securities -- Analyst

Yeah, two questions for me. When I read the letter, I noticed that it's really peppered by language mostly about the need for a higher level of investments. So can you maybe quantify the higher level of investment in DashDoor supply and new categories and international kind of that you qualified? How long do you think or do you anticipate this investment cycle to last some? Just kind of what's the primary driver? You've, obviously, been aggressively investing to date, but it seems like this is a step-up from what you've been doing so far? Thank you.

Prabir Adarkar -- Chief Financial Officer

Yeah, hi, Youssef, so maybe just to take a step back, I just want to reiterate and remind people of how we manage the business and the philosophy, which is we're super early in terms of the opportunity not just in food but also when you add in these other categories that we have now recently entered into, such as convenience, grocery, pet food, alcohol and others. So we are a tiny, tiny fraction of the potential of these categories. And that's why we're investing. So if you take a look at where we are investing, it's largely driven by new categories and to build our international business.

We're not going to break out the quantum of the investment. But I will say that we are fortunate in that we've got a U.S. business that is, firstly, large; second, growing; and third, has improving margins, which increases the larger profit pool that we can then use to invest in these other opportunities that are ahead of us. 

Operator

Thank you. Next, we have Douglas Anmuth from J.P. Morgan. Your line is open, sir.

Douglas Anmuth -- J.P. Morgan -- Analyst

Thanks for taking the questions. I was hoping you could just talk a little bit more about the Japan market launch. I know it's fairly new, but just curious what some of the nuances are in that market relative to the U.S.? And then, if you could also talk about how you're thinking about Europe as well. Thank you. 

Prabir Adarkar -- Chief Financial Officer

Yeah. I mean, Japan, we launched the market. I don't even think it's been two months, so it's too early to draw any conclusions. But whenever we launch these markets, in the beginning, I mean, we're super focused on, I'm going to call it, product market parameters more so than actual financial parameters.

So let me describe what I mean. We're looking for retention improvements. We're looking for order frequency improvements. We're looking to ensure that customers aren't retaining simply for discounts versus creating a habit with us.

And so, again, it's been two months. I don't want to -- it's too early to declare victory or anything like that, but we are encouraged by what we see. We're currently in one market, which is largely -- which is Sendai. And what we are noticing is that the opportunity is available because these markets are relatively underpenetrated compared to core open city centers.

And so lots more work to do, and we'll keep people posted on the progress. And then, in terms of just other geographies, I mean, I'll just remind you of our priorities, one of which is to become an international company. And we exist in -- we operate in Canada and Australia and Japan today. And over time, as these other markets get bigger and start generating profit pools, and we can afford to do so, we will expand, obviously, in an economically efficient manner in other geographies. 

Douglas Anmuth -- J.P. Morgan -- Analyst

Thank you.

Operator

Thank you. Next, we have Brad Erickson from RBC Capital Markets. Your line is open, sir.

Brad Erickson -- RBC Capital Markets -- Analyst

Hey, thanks. I guess, two for me. One, just within the guidance, it seems like you're looking for Q4 maybe a little bit less than seasonally normal. Is that just a reflection of your comments on the letter around uncertainty? Or is there something else instructing that view? And feel free to recharacterize that view if you want.

And then, second, a follow-up from an earlier question. You've had a ton of gross profit upside here over the past few quarters, and I guess, in the letter, obviously, talking toward reinvestment in a few areas. Can you just remind investors as to how the team views those choices philosophically as you trade off growth versus profitability? Thanks.

Prabir Adarkar -- Chief Financial Officer

Sure. So Brad, on the first question with respect to the guidance, let me start by saying Q1 was elevated a little bit because of a couple of things. As these markets have just begun to reopen, vaccination rates were lower. And then, to compound all of that, you had the, let's call it, inorganic impact of stimulus checks that was driving consumer demand.

And so that led to an elevated Q1. As we look into the second half of the year and what's embedded in our guidance, there's really two things. The first is what I call ordinary course summer seasonality. So in general, in Q3, you see the pace of consumer acquisition slows a little bit, and you have lower order rates simply because consumers are going out during the summer because the weather improves.

So that's one aspect. The second is we're baking in a level of conservatism because there is uncertainty in terms of what the world looks like in the second half of the year as markets continue reopening. Remember, it's unclear whether we are even out of the pandemic at this point and, if so, what the long-term effects are. And so there's plenty of unknowns here as a result of which we wanted to make sure we embed that uncertainty into our second-half outlook.

On your gross profit upside question, the way to think about it is we invest flexibly across the P&L. One of the reasons we do not provide revenue guidance but instead provide GOV guidance and EBITDA guidance is because depending on the opportunities that are available to us, we can take one of several actions in order to drive growth. We can invest through sales and marketing in terms of customer acquisition or Dasher acquisition. We can invest in pricing through lower prices that would then impact take rate or we can invest in incentives to drive up quality, which should then have further downstream impacts on the take rate, as well as on our cost of sales.

So we retain that flexibility because depending on the environment we're in and depending on the exact challenges, we wanna be able to deploy the right strategy without having to worry about a revenue guide. Now as you look to the future, the factors that will continue to improve take rate, and I'll go through those, just as a reminder for people, is first, as we improve the efficiency of the logistics network, that will have a positive impact on take rate. As we improve the quality of the consumer experience, that will lower our refunds and credits and have a positive impact on take rate. As we drive more -- drive orders, no pun intended, as we do more drive orders, that will have a positive impact in take rate.

In terms of headwinds to take rate, it's really three things. As we drive increased mix of DashPass orders, I'll remind the folks that, with our DashPass orders, we have lower unit revenue but significantly higher engagement as a result of which that's a trade-off we are happy to make. Second is we've increased our investment in new categories. And third is we increased our investment in international.

Because of the early stages of the evolution of these investments, usually they come with a lower take rate. And so you're seeing the blending effect in our take rate as a result of these investments. 

Brad Erickson -- RBC Capital Markets -- Analyst

That's great. Thanks.

Operator

Thank you. Next up, we have Steven Fox from Fox Advisors LLC. Your line is open, sir.

Steven Fox -- Fox Advisors LLC -- Analyst

Hi, good afternoon. Just two questions from the letter I was curious if you could expand on. You mentioned three points of category share in the quarter. And then, you also mentioned gaining more DashPass subscribers.

Can you give us a little bit of color around what you're seeing that's driving that? What's behind the numbers basically? Thanks.

Prabir Adarkar -- Chief Financial Officer

Yes. I think it comes down to a superior product, which is -- the thing we aim to deliver is the best combination of selection, affordability and quality. And what those three things translate into is category-leading spend retention. So our category-leading spend retention I think will translate into these market share gains that you're seeing.

DashPass is one component of that because DashPass is how we solve the affordability lever, and we've continued to increase DashPass subscribers who have higher order frequency compared to non-DashPass subscribers, and that's then now leading to increasing order frequency over time, as well as improved retention, which then drives market share growth.

Steven Fox -- Fox Advisors LLC -- Analyst

Great. Thank you.

Operator

Thank you. Next one, we have Ron Josey from JMP Securities. Your line is open.

Ron Josey -- JMP Securities -- Analyst

Great. Thanks for taking the question. I wanted to maybe, Tony, ask a little bit more about additional -- the demand you're seeing for newer categories and also just the power of convenience. And so can you just talk about these dynamics of newer category orders? We know they're growing faster.

Do most of these orders come from restaurant orders to begin with as an add-on? How are you marketing that? How are people being aware that you offer pet goods and alcohol and everything else? So just maybe some insights on strategy and awareness of these new categories would be helpful. Thank you.

Tony Xu -- Co-Founder, Chairman, and Chief Executive Officer

Sure. I would say that we are still pretty early in that process. I mean, if you think about it, the greatest privilege we have is that our consumers eat 20 to 25 times a week. And so in terms of shots on goal or their willingness to come back to the app daily, we have the luxury to have a wide surface area and a large number of opportunities to actually engage with them.

And most of what we're trying to do is we are trying to offer a best-in-class solution for them, whether that's shopping across multiple categories or whether that's shopping in within one category. And so for us, it's not coming from one type of use case or one type of occasion. We're still in that learning process. I think we have a long ways to go, I think the industry has a long ways to go.

I mean, even within our core category, I want to remind folks, of restaurants, we're single-digit percentages of the restaurant industry. And when you add in some of these other categories, we are a much, much smaller fraction. And so I think there's a long ways to go before we can start truly inventing technologies that will continue to change consumer preferences. The one thing that we do know is that consumers always lean toward the direction of greater and greater convenience.

And so that you should expect from future products to come.

Prabir Adarkar -- Chief Financial Officer

Just to remind you, in Q1, we had said that less than 10% of our MAUs actually use other categories. So Tony's point about the surface area and shots on goal, there's a lot of opportunity just to increase awareness and drive conversion just within our existing MAUs itself without having to actually require customers specific to these new categories. Does that make sense?

Ron Josey -- JMP Securities -- Analyst

That does. Thank you. That's super helpful. And you talked in the letter as well, just a long list of complexities across these categories, and you're up for the challenge.

But maybe help us understand what are the complexities? And that's all I got. Thank you.

Prabir Adarkar -- Chief Financial Officer

Yeah, Ron, I know what you're referring to. It's really meant to be, I would say, a rallying cry with our team. And we have enjoyed the benefit from tailwinds these past 18 months, we cannot let those make us complacent. So the environment is competitive and each inch is gonna be the hard part.

And so we need to stay vigilant and laser-focused on building the best products for our merchants and consumers.

Ron Josey -- JMP Securities -- Analyst

Got it. Thank you, guys.

Operator

Thank you. Your next question comes from the line of Deepak Mathivanan from Wolfe. Your line is open.

Deepak Mathivanan -- Wolfe Research -- Analyst

Hey, guys, thanks for taking the question. So two quick ones from us. First, on your sales and marketing, it was up nicely in 2Q. Can you give some color on where these incremental spend was going? Is this related to new category efforts as we thought those were primarily driven through auto discounts? And then, the second question on the nonfood categories.

There's a number of different models that we have seen out there between marketplace, drive, warehouses and even more hands-on model using in-store shoppers. With all the new partnerships you've announced, can you talk about what's your preferred strategy to attack these categories? Thanks a lot.

Prabir Adarkar -- Chief Financial Officer

Yeah, maybe I'll take the first one, Deepak, on your sales and marketing question, and Tony can take your second. On the first question, the short answer is the uptick in sales and marketing from a Q-on-Q perspective was driven primarily by our Dasher acquisition costs. Remember, when we spoke last at Q1, we were talking about being undersupplied. And so we made significant investments in acquiring Dashers.

We, in fact, acquired more Dashers this quarter than we have ever in the history of DoorDash. And we also experienced higher advertising rates slightly because the rideshare industry and others were competing for Dashers in our pool. So those two things led to higher Dasher costs this quarter than we had planned for, if you think about our guidance. Now as I look to the future, remember -- I will say I expect those elevated advertising rates to come down, maybe not over the balance of this year, it would be somewhat conservative, but in the long term, simply because it's a different pool of people.

We've discussed this in the past. It's a different pool of people that are active Dashers versus those that are interested in rideshare. Over 75% of our Dashers are students or have other part-time or full-time jobs. I think I mentioned to you that over 90% do less than 10 active hours per week.

And then, the nature of the job is fundamentally different because you don't need a car or have to have a car, frankly, in order a Dash. And so given the size of this TAM opportunity for Dashers, we do believe those advertising rates will normalize over the long term. 

Tony Xu -- Co-Founder, Chairman, and Chief Executive Officer

Yeah, and with respect to your second question, what I would say is that, at the end of the day, we take a look at this from the consumer's perspective of what's going to offer the best product experience in terms of selection, quality and price. And we do that in concert and in partnership with all of our retail partners because much of this actually requires invention. I mean, if you think about fundamentally what we are trying to do, regardless of the model in which we operate, we're trying to take the physical world, the physical businesses and all of the activities that they're doing and being able to give those merchant partners a digital way or, frankly, a new way to build their own digital businesses. So every activity has to be reimagined.

And there isn't one-point solution, I would say, that's going to ultimately work for every single merchant nor is there one that's going to ultimately be consistent enough to actually solve all of the unique challenges within each respective category. We both have to -- we both aspire to build the best-in-class category-specific solution, as well as the best-in-class experience across categories. And so we will continuously work with our merchant partners to invent these technologies that will continuously help change consumer preferences.

Deepak Mathivanan -- Wolfe Research -- Analyst

Got it. That's very helpful. Thanks, guys.

Operator

Thank you. Your next question comes from the line of Spencer Tan from Evercore ISI. Your line is open.

Spencer Tan -- Evercore ISI -- Analyst

Hey, thank you. Just had two questions. Sir, around the commission caps that could be potentially permanent in New York City and San Francisco, I guess, if you could provide us just an update on where those stand today? And how you kind of view the overall impact to your business? And then, secondly, in kind of Grubhub and just the takeaway strongholds, like in New York City or Chicago, how are you seeing the competitive environment in Q2 and kind of maybe quarter to date? Thanks.

Tony Xu -- Co-Founder, Chairman, and Chief Executive Officer

Yes, I'll start with the first question. I'll let Prabir take the second question. With respect to these commission caps, we are actually largely seeing city officials and allow capitalism to take its course as most of these commission caps are actually being lifted, especially as more and more of the country is reopening and getting back into the sense of normalcy. I think with respect to the limited situations in San Francisco and in New York City, our point of view is that any approach or ordinance toward a permanent cap is, frankly, a, unnecessary because if you actually read some of these commission caps and platforms, like DoorDashers already offer plans well below the commission cap that is proposed.

Second, they're very harmful in the sense that they are hurting the audience that they're trying to help, which are these restaurants, because commission caps, what they do is, they'll ultimately result in increased prices for consumers, lowered sales for these restaurants and reduced work opportunities for Dashers. And finally, because of the arbitrary nature of these commission caps, they're violently unconstitutional. I think the best, I guess, synthesis of the situation might actually come from Mayor London Breed from San Francisco who believes that this ordinance really unnecessarily outweighs any public good. And so that's our take, and that's why you see us take litigation action in San Francisco. 

Prabir Adarkar -- Chief Financial Officer

And Spencer, on your question, I mean, really the two markets you mentioned, Chicago and New York City were, I guess, competitive strongholds for one of our competitors. We are No. 1 in Chicago. We've gained share not just in the second quarter but also in the first quarter of this year.

In New York City, we're not No. 1, but it's a clear priority for us. But to be clear, we have continued to gain share, including in the second quarter. Most of the other competitive share shifts we've seen have occurred between the other two players in that market. 

Spencer Tan -- Evercore ISI -- Analyst

Got it. Thank you, both, and congrats on the quarter.

Operator

Thank you. [Operator instructions]

Andy Hargreaves -- Vice President, Finance and Investor Relations

It looks like we don't have any more questions in the queue. So if it's OK, you can pass it to Tony for a quick closing remarks and wrap it up.

Tony Xu -- Co-Founder, Chairman, and Chief Executive Officer

All right. Thanks, Andy. Was there another question, Grace? 

Operator

No. You may proceed, presenter.

Tony Xu -- Co-Founder, Chairman, and Chief Executive Officer

Great. Well, thanks, everyone. I just wanted to take a moment and celebrate the fact that we fulfilled our 2 billionth order in the second quarter. And as someone who has seen this journey from the very beginning, I can tell you that it took us over seven years to achieve our first billionth order.

And only nine months later, we were able to see our second billionth order. So I just want to take a moment to reflect on that milestone and thank all of our audiences, the team at DoorDash and all of our shareholders in what is a great achievement. Thank you very much, and we'll see you soon. 

Operator

[Operator signoff]

Duration: 29 minutes

Call participants:

Andy Hargreaves -- Vice President, Finance and Investor Relations

Ross Sandler -- Barclays Investment Bank -- Analyst

Tony Xu -- Co-Founder, Chairman, and Chief Executive Officer

Prabir Adarkar -- Chief Financial Officer

Brian Fitzgerald -- Wells Fargo Securities -- Analyst

Youssef Squali -- Truist Securities -- Analyst

Douglas Anmuth -- J.P. Morgan -- Analyst

Brad Erickson -- RBC Capital Markets -- Analyst

Steven Fox -- Fox Advisors LLC -- Analyst

Ron Josey -- JMP Securities -- Analyst

Deepak Mathivanan -- Wolfe Research -- Analyst

Spencer Tan -- Evercore ISI -- Analyst

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