Coupang, Inc. (CPNG) Q4 2021 Earnings Call Transcript

Coupang, Inc. (CPNG -0.52%)
Q4 2021 Earnings Call
Mar 02, 2022, 5:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and thank you for holding. My name is Emma, 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 Michael Senno, vice president of investor relations. You may begin your conference.

Michael Senno -- Vice President, Investor Relations

Thanks, operator. Welcome to Coupang Inc.'s quarterly earnings conference call for the fourth quarter and full year ended December 31, 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 November 12, 2021, and in 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. 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.

In addition, we have posted a presentation in conjunction with today's earnings release that can also be found on our IR website. Now I'll turn the call over to Bom.

Bom Kim -- Founder and Chief Executive Officer

Thanks, everyone, for joining us today. Before we discuss our Q4 results and outlook for the year ahead, here are some highlights for the quarter. Constant currency revenue increased 39% year over year for a robust two-year CAGR of 64%. We continue to grow more than twice as fast as the Korean e-commerce segment, extending our leadership position.

Our customer base increased over 20% year over year for the 16th straight quarter and grew 7% on a quarter-over-quarter basis, and our unmatched customer experience is driving deeper engagement. Nearly 20% of active customers used three or more Coupang offerings in Q4, a fivefold increase from the previous year. Revenues nearly tripled in two years, and that blistering growth led to our prioritizing projects to support scaling over-improving efficiency and operating leverage. 2021 was a tale of two halves.

In the first half of the year, we saw some of the benefits of that strategy. We were able to scale the business at high rates, even on a sizable base. In the second half, we faced sudden capacity constraints that were complicated by volatility in demand from COVID surges. Labor supply shortages worsened in Q4, and efforts to secure last-minute capacity proved to be costly with limited returns.

Fixed cost leverage also took a hit as Fresh doubled its logistics footprint in 2021, and underutilization was higher in Q4, largely from our inability to secure additional labor for the new facilities. As a result, in the second half of 2021, our strong underlying profit drivers were obscured by short-term disruptions and timing of investments. The question was how short term those disruptions would be. We spent much of Q4 redirecting resources to strengthening, not just adding capacity and improving operating leverage.

Those efforts are bearing fruit. So far in Q1, we've secured record capacity while driving an over 250-basis-point increase in gross margin quarter over quarter. We're on track in Q1 to deliver the highest gross margin since COVID began, and that still includes COVID-related costs and investments in new initiatives. We're excited that 2022 is off to a good start.

We're also seeing some positive macro developments. The overall retail market grew 10% year over year, and the latest forecast now project that Korea's total commerce market, excluding autos, will grow at a CAGR of 6% over the next four years to exceed $600 billion by 2025. And the e-commerce segment is expected to grow over that same period to $290 billion. We're less than 10% of that today, despite being the largest e-commerce player in the market, and our market share of total retail remains in the single digits.

We have a long runway ahead of us. And our flywheel is strengthening. Our share of product e-commerce growth increased every quarter in 2021. We're the largest in e-commerce scale, growing over twice as fast as the segment, even in Q4.

Our WOW membership grew from 6 million at the end of 2020 to nearly 9 million by the end of 2021. Our customer cohorts are still compounding at an impressive rate. Every single annual cohort grew approximately 30% year over year or higher in 2021, even our oldest from 2010. In other words, we still don't know how high the entitlement spend will be ultimately, even for our oldest customer cohorts.

Our growth is driven by the superior customer experience enabled by our unmatched e-commerce infrastructure. We deliver millions of products within hours nationwide, 365 days a year with free shipping and returns for WOW members. No other player offers our selection at everyday low prices with the speed and convenience of our services. That is all made possible by the scale of our e-commerce infrastructure now spanning over 40 million square feet.

We believe we have a larger footprint than the rest of the e-commerce players combined. And in the past year alone, we added 15 million square feet, widening our lead in the market. And it's not just our 1P offering. Our merchant-driven spend also grew at a multiple of the e-commerce segment and continued to gain significant share this past year.

2022 will be an important year on our journey toward long-term adjusted EBITDA margins of 7% to 10% or higher. Retail product profit has increased for seven consecutive quarters. Advertising continues to grow at a rapid clip. Our renewed focus on long-delayed efficiency projects have already started to drive improvements in operating and fixed cost leverage in Q1.

The line of sight we have on these drivers gives us confidence in our long-term EBITDA margins of 7% to 10% or higher, and this should become more evident as we share our progress throughout the year. So far in Q1, as I mentioned, we're seeing an over 250-basis-point improvement quarter over quarter in gross margin for the whole business. Mature offerings like core are profitable. As Fresh increases utilization of its newly built capacity, we expect it to follow the same trajectory.

At the same time, we intend to invest in newer initiatives where we see significant long-term opportunity. On Eats, hyper-growth continued in 2021. We believe Eats has quickly scaled to become the leader in the fast delivery category, generating billions of dollars of volume in just its second full year of operation. It was the most downloaded mobile app in all of Korea in 2021.

In just two years, it's achieved double-digit segment share nationally and a lead position in some key regions. Now we're focusing on digesting that growth, investing in initiatives that will increase operating leverage and explore synergies with our product commerce offerings. We expect execution in these areas to meaningfully improve profitability in 2022 and position us to be more efficient in our next phase of expansion. To provide more visibility on profitability, we plan to report product commerce as a separate segment starting with our Q1 earnings release.

We hope that our progress in '22 will highlight the underlying strength of the business. There's a lot to be excited about for 2022, and we're off to a strong start. We're determined to capitalize on what we believe is a generational opportunity to create value for customers, employees, shareholders, and other stakeholders. Now I'll turn the call over to Gaurav to go through the financials in more detail.

Gaurav Anand -- Chief Financial Officer

Thanks, Bom. Our demand trends remain robust, even against the heightened comps from COVID. Q4 reported revenue grew 34% year over year, 39% in constant currency, and had a robust two-year constant currency CAGR of 64%. We exceeded annualized run rate revenue of $20 billion for the first time.

Net other revenue continues to drive outsized growth, increasing 68% year over year as our advertising and Eats offerings continue to scale rapidly. Quarterly active customers reached nearly 18 million, increasing 21% year over year. Our superior customer value proposition across our offerings continues to attract new customers and drive record levels of customer retention. We added 3 million active customers year over year, the best Q4 in our history, and we still have a significant opportunity ahead to expand that base to reach the 37 million active Internet buyers in Korea.

Net revenues per customer increased 11% on a reported basis and 15% on a constant-currency basis as customers are spending across more categories and offerings. As engagement increases and more customers go deeper into our funnel, we expect increasing wallet share to drive sustained, strong growth in revenue per customer. Starting in Q1, we plan to report two segments to provide better visibility on profitability of our mature offerings. Product commerce will include our core 1P and 3P offering, along with Fresh and associated advertising offerings.

The growth initiatives segment will include Eats and other nascent initiatives like video, fintech, and international expansion, which are in investment mode. As Bom noted, short-term headwinds and timing of investments obscured our improving underlying profitability. We invested approximately $130 million in incremental COVID-related expenses in Q4, which is approximately evenly spread across cost of sales and operating, general, and administrative costs. For the past few months, we have made significant progress ramping up labor capacity and optimizing operations to reduce these incremental costs.

We currently expect approximately $60 million to $70 million of related costs in Q1, and then expect it to further decline in Q2. We plan to remain disciplined going forward in managing any short-term constraints and expect to operate within our planned capacity. Gross profit increased 24% year over year to $806 million in Q4, while gross margin declined due to increased investments in growth initiatives. Product commerce segment margin expanded quarter over quarter in Q4, even with the higher COVID-related costs.

Adjusted EBITDA losses increased to $285 million, primarily due to the incremental COVID-related costs, underutilized capacity related to Fresh expansion, and higher investments in our growth initiatives. We continue to invest in Eats to drive growth and iterate on the offering and increased investments in nascent initiatives like on Coupang Play, our video offering, international and fintech. We are already seeing improved profitability in early 2022 and are well-positioned to make meaningful progress throughout the year. Gross margin for the whole business has expanded over 250 basis points to about 18%, thus far, in Q1.

The improvements have been driven by declining COVID-related costs, improved operational efficiencies, and continued growth in high-margin ad revenue and retail product profit. We expect that gross margin and adjusted EBITDA margin will continue to show meaningful improvement in 2022. On growth, we have carried our strong revenue momentum into early 2022. Constant-currency revenue growth has remained above 30% through February, and we expect it to be in the low 30% range for Q1.

Demand has been a few percentage points higher than that, but we have chosen to stay disciplined and avoid last-minute capacity investments that proved costly with limited returns in late 2021. We are not giving formal guidance on growth beyond Q1 as consumer behavior remains challenging to forecast in the current COVID environment. However, we have grown more than twice as fast as the e-commerce segment every quarter for the last several years. And we are confident that with our superior customer experience and strong execution, we will continue to grow significantly faster than the e-commerce segment for years to come.

Turning to our profit guidance for full year 2022, we expect an adjusted EBITDA loss below $400 million. To provide additional context, on the new Product Commerce segment, we expect it to turn profitable by Q4, a significant improvement from the negative 2.6% margin in Q4 of 2021. On growth initiatives, we continue to invest in Eats as it improves profitability. In parallel, we plan to increase investments in nascent growth initiatives that have shown early promise.

Investments across video, international expansion, and fintech will increase from around $85 million in 2021 to approximately $200 million in 2022. We are investing more to further iterate on these offerings and build what we believe can be meaningful growth drivers beyond 2022. In closing, we are off to a great start with solid demand trends and an improved profitability profile that we expect will continue to get better as the year progresses. Operator, we are now ready to begin the Q&A.

Questions & Answers:

Operator

[Operator instructions] Please limit your questions to two per person. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Eric Cha with Goldman Sachs. Your line is now open.

Eric Cha -- Goldman Sachs -- Analyst

Yes. Hi. Thank you for this opportunity. I have two questions.

First is on Eats. So what is the ultimate goal for the company around Eats? Is it to become the No. 1 market share player in the market? Or is there some other motive for the business? And the second question is, I think, about the guidance. So obviously, you mentioned adjusted EBITDA guidance of less than $400 million loss.

And you also mentioned that you are seeing low 30% range for the revenue in the first quarter in constant currency. Would you help us take us through some steps? So what would be the revenue growth assumptions associated with that? Do you think other than industry deceleration due to comps and probably reopening, beyond that, there could be some idiosyncratic positive factors that support Coupang's growth beyond the first quarter? And then also, obviously, you mentioned about the gross profit margin, but it will be helpful for the trajectory throughout the year, as well as the opex trend as well. Thank you.

Bom Kim -- Founder and Chief Executive Officer

Hi, Eric, thanks for the questions. So I'll take the first part on Eats. Eats has been the fastest-growing service in our history. As we mentioned, in just the second full year of operations, it's now scaled to billions of dollars of orders, and has grown to become what we believe is the leader in the fast delivery category.

The fast delivery model is what we believe will win the space, and it has in other markets that we studied. We're also excited about the growth potential that still remains. Last quarter, 70% of our active customers didn't place a single order on Eats. But first, we'll focus on digesting our record growth.

And we believe our culture of operational excellence will help build the right foundation for efficient and ultimately profitable growth there. Additionally, there are synergies with our product commerce side that we get to tap that we believe has the potential to expand the value proposition for customers and drive additional operating leverage in a way that we couldn't wear Eats as stand-alone company. It's still at a very early stage there of what we believe is a long-term opportunity. On the guidance question around EBITDA.

The -- in Q1, we're seeing growth in the low 30s so far. Demand was actually several points higher. We don't see a reason right now for the quote of TBA later in the year, but it's very hard to predict. As you mentioned, there are so many variables in play.

Historically, we haven't given guidance on revenue, and we'll stick with that policy. Now in any scenario, we expect to grow significantly faster than the e-commerce segment. As we have in the last several years, we've grown at least twice as fast as the e-commerce segment every single quarter. And the overall market opportunity appears to only be getting bigger.

I think we mentioned quickly briefly that the latest forecasts have now overall commerce, excluding auto and fuel, to expand at a CAGR of 6% over the next four years. And the e-commerce segment projected to approach nearly $300 billion by 2025. So we continue to be confident that we'll grow significantly faster than the e-commerce segment for a long time to come. Now you mentioned -- you asked about what assumptions were in the EBITDA loss guidance.

The near-term revenue remains extremely hard to predict. But we do have more confidence over our efficiency initiatives and investments. And that's why we felt comfortable -- more comfortable giving guidance around the EBITDA.

Operator

Your next question comes from the line of Stanley Yang with JPMorgan. Your line is now open.

Stanley Yang -- JPMorgan Chase and Company

Hi, thanks for your opportunity for the questions. First question is about your EBITDA guidance. So you mentioned $400 million adjusted EBITDA -- negative adjusted EBITDA in 2022. And you also guided $200 million investment from international, video, and fintech.

So should we assume this $200 million investment is kind of a negative EBITDA included in the $400 million on your full year estimate? And also, how much negative EBITDA would come from Eats and Fresh? And on the core side of your businesses, what will be the key margin -- EBITDA margin growth drivers? Do you also assume some meaningful take-up of the customer service for 3P sellers in the second half? That was my first question. And my second question is, do you think this labor -- tightening labor supply is issue -- is a structural issue and a persistent issue in Korean e-commerce market even after reopening? That's my second question. Thanks.

Bom Kim -- Founder and Chief Executive Officer

Thanks, Stanley. Let me take the second part of that first. On the labor capacity issue, there doesn't seem to be a structural constraint from where we stand. As you mentioned, we had some short-term disruptions in Q4.

In Q1, we actually secured record capacity while managing down costs and improving gross margin by over 250 basis points, as we mentioned, so far. And that's in part due to the COVID fear subsiding and our focus on strengthening internal processes. Now we may still see some short-term disruptions from time to time, but based on what we've now been able to do in Q1, we don't see a structural constraint in the market today. Now where certain disruptions happen, we've also learned from our past, and we plan to remain disciplined and avoid some of the last-minute efforts that ultimately proved to be wasteful in the past as we balance growth and efficiency this year.

On the EBITDA guidance, yes, we're investing $200 million in growth -- in new initiatives that had relatively limited budget last year. These have earned their way to additional investment. We believe that these are investments for growth beyond 2022. And we'll continue to -- as we make progress, we'll have more to share at the appropriate juncture.

I think you mentioned -- you asked also about Fresh. Fresh is -- we intend to segment our business as product commerce segment, share the product commerce segment in Q1. And our expectation is that Fresh, which doubled its logistics capacity or infrastructure capacity in 2021, and therefore, had a peak underutilization in Q4, will grow into its facilities that it scales, and that underutilization problem issue will subside -- will improve over time. We intend to drive product commerce on Fresh to profitability by Q4.

And finally, I think on FLC. As we mentioned last quarter, we're confident based on the early results that we've seen that FLC will be a driver of tremendous value for merchants and customers. And we expect FLC to contribute more meaningfully toward the end of this year. There is a lead time to build the technology and infrastructure to scale FLC, but we remain very excited about its long-term potential.

Operator

[Operator instructions] Your next question comes from the line of James Lee with Mizuho. Your line is now open.

James Lee -- Mizuho Securities -- Analyst

Great. Thanks for taking my questions. My question is about capacity growth that you guys, I think, growing in FY '22. I think this year, you were planning to do 50%.

How should we think about FY '22 given the fact that you have this initiative becoming more efficient? And maybe to the extent of looking at capacity growth for FY '22, if you guys can break out investments in fulfillment versus last mile? Thanks.

Gaurav Anand -- Chief Financial Officer

Thank you for the question. So the -- in '21, we added 15 million square feet. And we're going to add millions more this year. We believe we are increasing our infrastructure lead in the market by adding much more than anyone else in the market.

And in addition, we are going to continue to invest into the future for the fulfillment and logistics for 3P. I think the exact capacity plans, we continue to build and fine-tune as we go along, but we are pretty -- going to continue to be aggressive on our capacity build plan.

James Lee -- Mizuho Securities -- Analyst

And Gaurav, just one follow-up on your commentary here. I just want to reconcile your statement. You're saying that in the past, you're able to fulfill excess demand by ramping a number of facilities that ramp up the cost. And at the same time, you talk about underutilized facility peak in 4Q.

I'm trying to reconcile the two statements that you guys talked about before here. Thanks.

Gaurav Anand -- Chief Financial Officer

Sure. I think the underutilization remark that Bom mentioned was primarily on the Fresh facilities. Eats -- Fresh facilities, as you can imagine, are much more sophisticated than the normal core facilities and have much longer lead time. So we had an aggressive plan on build-out looking at midterm last year.

And because of the labor challenges, which we mentioned in Q3, Q4, we were not able to fulfill customer demand on Fresh and not able to utilize that capacity because of other constraints. So I think that's what Bom is referring to. That capacity, underutilized capacity is on the Fresh side, it's much more expensive capacity. That's why we are calling it out separately than the normal capacity.

But overall, we still continue to build more, as much more as the year goes.

James Lee -- Mizuho Securities -- Analyst

OK. Thank you

Operator

Your next question comes from the line of Seung Ro with CLSA. Your line is now open.

Seungjoo Ro -- CLSA -- Analyst

Hi. Thank you very much. I have two questions. First one is on the advertising revenue and its potential.

Any color here in terms of what is the current scale of the revenue? And how much do you think it can actually get to? And the second question is related to the investments. You mentioned that it is actually going to increase from $85 million to $200 million this year. I was just wondering how much of that is allocated for the overseas expansion? And which market are you targeting this year? On the surface, this doesn't really sound much. So should we kind of interpret that as the overseas expansion is going to be [inaudible] controlled?

Bom Kim -- Founder and Chief Executive Officer

Hi, Seung, I didn't catch the last word there. You said that we should assume the overseas was? I'm sorry?

Seungjoo Ro -- CLSA -- Analyst

Overseas expansion should be more moderated and controlled process rather than a very aggressive expansion in 2022.

Bom Kim -- Founder and Chief Executive Officer

Yeah, I'll start with the -- our strategy is always to be very disciplined in our investments to make sure that we test, iterate, learn, and that investments earn their way to more investment, that we increase investments or confidence. So that's a general principle and strategy that we apply to all our investments. We believe there are opportunities, certainly beyond the Korean market to great trade-offs between selection, service, and price. We remain excited about that.

Of course, there are -- it's still relatively early. And as we make progress, we'll provide more updates on that front at the appropriate time. But we remain excited about the opportunity to generate customer WOW and to drive meaningful growth beyond 2022 in that opportunity. And on advertising revenue, it's still -- we're making great progress.

We're excited about the progress we're making. We still have a big gap to where we think the full potential is. Very early days. But advertising will grow with our ecosystem.

So we know that -- we remain focused on the customer experience that ultimately is the driver of our ecosystem and of advertising growth. Yeah. And just to note, the $200 million is across video, international, and fintech.

Operator

Your next question comes from the line of Peter Milliken with Scotiabank. Your line is now open.

Unknown speaker -- Scotiabank -- Analyst

Yeah. Good morning, guys. Thanks for the call. Just in terms of the margin increase that's been coming through in the first quarter, is that all about cost decreasing? Or has there been some increase in the markup that you've been charging? And if it is all about cost declines? Can we just get a bit more granular in how that's changed so rapidly? Is that pure kind of COVID improvement? Or something else?

Bom Kim -- Founder and Chief Executive Officer

Thanks for your question, Peter. We did not make a change in our pricing policy. We remain committed to providing the best selection service and price for customers. The significant gains we've seen in gross margin, so far, in Q1 have been primarily driven by long -- engaging long-delayed efficiency projects that contributed to operating leverage, sourcing optimization, and advertising, among other factors.

These are the same drivers that give us confidence in the long-term EBITDA margins of 7% to 10-plus percent. We'll continue to build on our start in Q1. And our product commerce segment, in particular, is an area where the progress will be most evident. We expect to take that to profitability by Q4, and you'll see our progress as the year unfolds.

Unknown speaker -- Scotiabank -- Analyst

Right. OK. And then if I look at the COVID costs from 4Q, it was meant to be a $130 million incremental increase. What was driving that? Was that paying out more money to delivery people? Was it sign-on bonuses? Was it sort of management of the process, the cleanliness, or a combination of all three?

Bom Kim -- Founder and Chief Executive Officer

Yeah, go ahead, Gaurav. I think you're on mute.

Gaurav Anand -- Chief Financial Officer

I'm sorry. So those costs are primarily driven by what you attribute to COVID-related onetime, hopefully. There was -- assuming -- we assume it's reversible. And they are primarily labor related to add additional labor.

As Bom mentioned, we were chasing growth, the last-minute spikes that were occurring last year. And it became really inefficient from our perspective, but we continue to invest. And we continue to fine-tune trying to balance long-term capacity versus short-term seasonal growth. It was primarily that.

And in addition, there were other COVID-related costs, including the cleaning and social distancing, etc. But the incremental cost were primarily labor-related.

Bom Kim -- Founder and Chief Executive Officer

The answer is all three of those are pretty much in play.

Unknown speaker -- Scotiabank -- Analyst

OK. That's good to know. And look, going forward, do you think that delivery agent -- delivery van fees have increased permanently? Or is that just -- or is it just something you don't really have the clarity on?

Bom Kim -- Founder and Chief Executive Officer

Yeah. Again, there could be some short-term disruptions from time to time in the future. But as we mentioned, we're encouraged by what we've seen in Q1. It appears that some of the disruptions were temporary, as COVID fears subsided.

And of course, we did strengthen also internal processes to deal with that. We've seen improvements. So we're encouraged. We don't think at this moment that this is a structural or permanent constraint, the disruptions we saw in Q4 were permanent or structural.

And the other thing was also some of the last-minute efforts that Gaurav mentioned, chasing capacity last minute, that proved to be -- that proved to have very limited returns and was extremely costly. And we've learned from that, and we intend to stay disciplined and avoid some of those efforts as we balance growth and efficiency this year.

Unknown speaker -- Scotiabank -- Analyst

OK. That's great to hear. Thank you very much, guys.

Bom Kim -- Founder and Chief Executive Officer

Thank you.

Operator

[Operator instructions] At this time, there are no further questions. [Operator signoff]

Duration: 37 minutes

Call participants:

Michael Senno -- Vice President, Investor Relations

Bom Kim -- Founder and Chief Executive Officer

Gaurav Anand -- Chief Financial Officer

Eric Cha -- Goldman Sachs -- Analyst

Stanley Yang -- JPMorgan Chase and Company

James Lee -- Mizuho Securities -- Analyst

Seungjoo Ro -- CLSA -- Analyst

Unknown speaker -- Scotiabank -- Analyst

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