Instacart (CART) Q4 2023 Earnings Call Transcript

Instacart (CART 0.43%)
Q4 2023 Earnings Call
Feb 13, 2024, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Instacart fourth quarter and fiscal year 2023 financial results conference call. At this time, all participants on a listen-only mode. After the speakers' presentation, there'll be a question-and-answer session.

[Operator instructions] Please be advised, today's conference call is being recorded. I will now hand the conference over to Rebecca Yoshiyama, vice president of investor relations. Please go ahead.

Rebecca Yoshiyama -- Head of Investor Relations

Thank you, Valerie, and welcome, everyone, to Instacart fourth quarter 2023 earnings call. On the call with me today are Fidji Simo, our chief executive officer; and Nick Giovanni, our chief financial officer. Shortly, we will open up the call for live questions. During today's call, we will make forward-looking statements related to our business plans and strategy, future performance and prospects, including our expectations regarding Q1, and full year 2024 financial results and potential share repurchases.

These forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those anticipated by these statements. You can find more information about these risks and uncertainties in our last form 10-Q filed with the SEC. We assume no obligation to update these statements as after today's call, except as required by law. In addition, we'll also discuss certain non-GAAP financial measures.

These non-GAAP financial measures have limitations and should not be considered in isolation from, or as a substitute for, our GAAP results. A reconciliation between these GAAP and non-GAAP financial measures is included in our shareholder letter, which can be found on our investor relations website. Now, I'll turn the call over to Fidji for her opening remarks.

Fidji Simo -- Chairman and Chief Executive Officer

Thanks, Rebecca, and hi, everyone. I hope you had a chance to read our shareholder letter, which highlights why we are the category leader and top innovator in online groceries. I also provided color on our solid Q4 results and why we're set up for an even stronger 2024. Our product experience is the best it has ever been with leading selection, quality, and speed.

For example, we recently rolled out EBT SNAP with Kroger and Costco, and we also launched Whole Foods on our marketplace in Canada. These new and expanded partnerships deepen our selection advantage with some of the largest grocers in North America. We also continue to improve on speed and order quality. In Q4, our fulfillment speed got faster even as we batched more orders.

And at the same time, our found and fill rates increased for the sixth quarter in a row. Over the past year, we've also overhauled our inventory systems and established an even stronger formula for consumer habituation. This allows us to invest more in marketing and incentives in deliberate ways that we believe are more highly correlated with resurrections, activations, and deeper engagement. As the industry leader, this will allow us to generate more value for our partners and accelerate online grocery adoption over the long term.

These critical advantages, product enhancements, and marketing investments all contribute to our strong Q1 outlook while we expect to deliver accelerating year-over-year GTV growth for a fourth consecutive quarter. And this growth continues to be higher quality with the majority coming from orders rather than AOV. In short, with every order we complete, we are getting better and smarter, which allows us to reinvest and generate even more orders. This virtuous cycle enabled by our scale and combined with our leadership position makes it incredibly hard for any other player in the industry to replicate the experience we deliver.

That's why we continue to deepen our lead over competitors. Based on third-party data, we increased our share of sales among digital first platforms in Q4 and in 2023 with more than 50% of share of small baskets under $75 and more than 70% share of large baskets over $75. While other players work on problems we solved five years ago, we are busy inventing the technologies that can transform the grocery industry over the next five years. For example, we know that the future of grocery is omnichannel, which is why we're investing in new technologies like our Caper Cart.

We are also exploring more ways to further leverage our incredibly unique and vast data sets to help retailers and brands modernize their operations over the coming years while doing all of these while maintaining a relentless focus on profitable growth and our long-term financial targets. In order for Instacart take on our most ambitious tasks, we also need to streamline how we operate. Today, we made the tough decision to lay off approximately 250 of our talented team members. This will allow us to reshape the company so we can focus on our most promising initiatives and execute more efficiently through a flatter organization.

Separately, with the departure of three of our execs, Asha, Varouj, and JJ, we're also taking the opportunity to streamline my management team and create more autonomous teams with all the levels they need to execute on our critical initiatives. We will be looking for a new CTO, but do not expect to backfill the COO and chief architect roles. Over the past few years, these leaders have developed a strong bench of talent that I look forward to working with more directly. I am confident that this will enable us to execute with even more focus and efficiency moving forward and want to thank all of our teams, especially those whose roles were impacted today, for getting us to this point.

Overall, I'm proud of the performance we delivered in 2023, and I'm excited for how we're set up for an even better 2024. I believe we have an incredibly strong leadership position that, when combined with accelerating growth, will generate more shareholder value over time. Thank you for your support and being on this journey with us. Now, I'll turn the call over to Nick to provide more of an update on our financials.

Nick Giovanni -- Chief Financial Officer

Thanks, Fidji. 2023 was a transformational year across our product operations and financials. In Q4, we once again accelerated GTV growth and expanded profitability, all while investing in new initiatives to support our future growth. Let me provide a bit more color on our Q4 results and our future outlook, starting with GTV and orders.

In Q4, we delivered GTV of $7.9 billion, up 7% year over year and above the high end of our guidance range. This outperformance was largely driven by stronger-than-expected orders growth, especially around the holidays. Our strong Q4 results generated positive momentum for us to start 2024. In Q1, we expect GTV to be $8 billion to $8.2 billion, representing year-over-year growth of 7% to 10% and our fourth consecutive quarter of accelerating GTV growth.

While our business is typically strongest in Q4 and Q1 due to seasonality and while this year we have the benefit of Leap Day in Q1, even after accounting for both of these factors, we expect an encouraging step-up in our anticipated growth compared to the 5% growth we delivered for full year 2023. Now, on transaction revenue. In Q4, transaction revenue was 7.1% of GTV compared to 7.2% in Q3 '23 and Q4 '22. While we continue to drive fulfillment efficiencies, in Q4, we found more opportunities to invest in consumer incentives, and these hit contra revenue instead of marketing spend, which hits marketing expense.

Incentives allow us to better target behaviors that we believe will lead to stronger customer acquisition, resurrection, and habituation. Next, for advertising and other revenue. In Q4, ad and other revenue was up 7% year over year, in line with our expectations. And in Q1, we expect year-over-year growth for ad and other revenue to be largely in line with Q4 '23.

It's important to remember that advertising growth lags GTV growth. So, while many of our brand partners are excited by our ongoing acceleration of GTV growth, it will take time before this is reflected in ad and other revenue. Turning to adjusted operating expenses, we generated strong operating leverage in Q4 with adjusted operating expense as a percentage of GTV decreasing to 5.3% compared to 6.1% in Q4 22. Today, we also announced a restructuring plan, which we expect to result in a one time charge of $19 million to $24 million.

This charge will not impact our adjusted operating expenses because they are one time in nature, but they will result in cash outlays. On an ongoing basis, we do not expect the restructuring to materially change our adjusted operating expenses in Q1 or the balance of the year as we plan to reinvest anticipated cost savings in future growth. Putting all this together in Q1, we expect adjusted EBITDA of $150 million to $160 million. This outlook includes seasonally lower advertising and other revenue and continued investments in marketing and consumer incentives to drive long-term growth.

For the -- for the full year 2024, we are not providing specific guidance, but we do expect adjusted EBITDA to increase year over year in both absolute dollar terms and as a percent of GTV. We also remain disciplined when it comes to our approach to equity dilution. We remain committed to being profitable on an adjusted EBITDA basis even after deducting the net value of equity we grant each year. And in 2024, we expect net dilution to be low single digits before any share repurchases.

We also expect to deliver GAAP profitability and generate positive operating cash flow. We are confident in our ability to execute, which is why we have increased our share repurchase program by an additional $500 million, bringing our share repurchase capacity to approximately $930 million as of February 9th. Our lockup expires when the market opens on Thursday, February 15th, and we plan to opportunistically repurchase shares. Overall, our business fundamentals are strong, GTV growth has accelerated for three consecutive quarters, and we are guiding to our fourth consecutive quarter of accelerating growth in Q1.

We are the category leader, and we have increased our share compared to digital-first platforms in both small and large baskets. And we're focused on driving profitable growth to generate more value for our partners, teams, and shareholders over time. With that, we'll open up the call for live questions. Operator, you may begin.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Douglas Anmuth of JPMorgan. Your line is open.

Doug Anmuth -- JPMorgan Chase and Company -- Analyst

Thanks for taking the questions. I wanted to first ask about cohort dynamics. Perhaps, if you could provide a little color just on the trends among the '20 and '21 cohorts and how you think about their contribution to the business. And, you know, just as you see that maturation basically how the impact that's having on order growth.

Thanks.

Fidji Simo -- Chairman and Chief Executive Officer

Thank you. So, as we've mentioned, our mature cohorts are -- continue to decline, but the decline has improved now for three quarters in a row. And 2020 and 2021 cohorts, as we reported last quarter, represent less than 50% of all GTV. So, all of that is encouraging.

We are not able to pinpoint when these cohorts would get to flat nor when they would potentially return to growth. But we are monitoring that very closely, and we're encouraged by the fact that we're seeing continuous improvement quarter after quarter for the third quarter in a row. We are also very encouraged by the fact that we're continuing to add new cohorts that continue to perform well. In fact, the 2023 cohorts in terms of new GTV was higher than the cohorts that we attracted pre-pandemic in 2019.

And so, we continue to get contributions, both from the mature cohorts, but also from the growth in new cohorts.

Doug Anmuth -- JPMorgan Chase and Company -- Analyst

Great. Thank you, Fidji.

Operator

Thank you. One moment please. Our next question comes from the line of Ron Josey of Citi. Your line is open.

Ron Josey -- Citi -- Analyst

Great, thanks for taking the question. Fidji, I wanted to ask a little bit more about priority orders now accounting for 38% of total. And I think in the letter, you even talked about 25% are now delivered in 30 minutes or less. Talk to us a little bit more about why do you think priority orders are growing or accounting for as many total orders as possible? And when we think about those delivered in 30 minutes or less, fair to think these are lower AOV, so more frequent customers.

I guess that's question one. And then, Nick, just on, you know, really interesting and good to hear GTV growth is expected to accelerate in 1Q. We'd love to hear more about the drivers there as we lap tougher EBT SNAP comps, but also maybe insights on the incentives that might be working. Thank you.

Fidji Simo -- Chairman and Chief Executive Officer

Thanks, Ron. So, on priority order we think that the growth in priority order really reflects the fact that the No. 1 reason that people use Instacart is convenience, and priority order allows them to just get their groceries delivered faster. Now, we think that there's a lot that we can do with that.

We're testing different levels of fees because we think our fees are still well below competitors to offer a priority service that is so fast. So, that it's something that we're going to continue testing with. But we also want to reinvest some of that to develop options that are on all ends of the spectrum. And what I mean by that is that on one end of the spectrum, you have people who value convenience over price and value priority delivery.

On the other end of the spectrum, we want options for people who value price over convenience, like no-rush delivery. And we want to continue to invest in all of these options so that every consumer can find value on Instacart based on what they value the most. In terms of what you mentioned on kind of the value of these customers, I would say the thing that's very unique about how we deliver from a lot of grocers is that even for orders that are very fast, we're still delivering from their entire selection from, you know, their entire store. And so, a lot of the priority orders actually look very similar to the rest of the orders in terms of adding the full assortment, having, you know, meat and produce in them.

And so, from that perspective, we think that them continuing to grow is a good thing. As long as, you know, we can have options for everyone on the spectrum.

Nick Giovanni -- Chief Financial Officer

And as it relates to your question about the Q1 guide, the drivers of the growth step-up are broad-based. It starts with acquiring new customers. To recall, we're still in the early stages of online grocery adoption. As the leader, we continue to attract many new customers.

We also see improvement in our mature cohorts as we're better able to resurrect them and engage them. And that's led to the year-over-year decline in the mature cohorts improving from Q1 to Q2 to Q3 to Q4. You also asked about EBT SNAP. EBT SNAP is not expected to see favorable comps in Q1.

We called out that the main drivers of the headwind that we were experiences with EBT SNAP was one cut of benefits that happened at the end of Q1 last year. And so, you wouldn't expect to see a benefit until we lap that this year. And secondly, the other thing that drives EBT SNAP is launching new partners. And as Fidji just mentioned with Costco and Kroger, we've done that recently.

So, we do expect that the base of our EBT business can start to grow, but that's not a key driver of the Q1 growth guide.

Fidji Simo -- Chairman and Chief Executive Officer

And, Ron, I think you had one last question on incentives and what was driving that. I just want to touch on that quickly, which is we massively overhauled our incentive system in the last year so that we can target the right customers with the right incentives at the right time and really evolve the habituation formula so that we know what drives retentive behavior. To give you some examples, we know that when you add meat and produce to your basket, you're going to retain with us longer. When you add -- when you start buying from a club retailer like Costco, you become a more retentive customer.

So, a lot of the incentives that you're seeing are spend into are incentives that are really meant to drive retentive behaviors, not incentives that are meant to drive one-time GTV where you are discounting your groceries and you're never going to come back. We don't do these kinds of incentives. We really focus on incentives that drive habituation.

Ron Josey -- Citi -- Analyst

Thank you, Fidji. Thank you, Nick. Super helpful.

Operator

Thank you. One moment, please. Our next question comes from the line of Justin Post of Bank of America. Your line is open.

Justin Post -- Bank of America Merrill Lynch -- Analyst

Great, I'll ask a couple that's just high level. Can you talk about your supply? I thought the Whole Foods deal was very interesting, but just where you are on supply and demand in the marketplace. Do you need more supply and how the pipeline looks maybe with traditional grocers or new categories? And then, I think there are some questions on the headcount cuts as kind of still a growth company. Maybe talk about, is this just kind of a reorganization for growth? Or how would you, big picture, describe it? Thank you.

Fidji Simo -- Chairman and Chief Executive Officer

Thanks, Justin. So, on selection, which is I think what you mean by supply, it's important to know that we are, by far, the category leader in terms of selection with about 80% of the grocery market being represented on Instacart. And yet, we continue to add more and more retail banners. We have 1,500 retail banners, 85,000 locations, and we're continuing to expand both with some of the large retailers, as well as midmarket and emerging grocers.

And we had some holdouts. Whole Foods was one of them so that's why we're really excited to see them come back on the platform. And we think that we can drive a lot of incremental value for their customers. But we're also really excited to deepen the type of selection that we offer with retailers that are already on the platform.

So, if you look at the big guys like Kroger, Costco, they've been with us for many years, but we still roll out new services with them like EBT SNAP that allow us to not only make their selection available but also make it available to more people with a service like SNAP. So, I hope that answers your supply question. In terms of headcount, so the thing that's important to realize is that we had already been very disciplined in terms of headcount. And I would say over the last two years, we had slowed down hiring, we slowed down the backfill of attrition.

We raised our performance bar. So, we had already managed headcount pretty tightly. But for this particular change, the thing that we had in mind was really reshaping the company to streamline in certain areas and really refocus and double down in other areas of growth. And so, if you look at our big outcome initiative, whether it's growing Caper Cart, whether it's growing retail media and offsite ads, all of these new initiatives that hold a lot of promise are things that we want to be able to fund fully, and that means like really reshaping the organization and streamlining in certain areas.

And so, that's the context by which this layoff should be interpreted into. We are very committed to growth. We think that since reorganization actually sets us up much better for doubling down on our most promising growth initiatives.

Justin Post -- Bank of America Merrill Lynch -- Analyst

Great. Thank you.

Operator

Thank you. One moment, please. Our next question comes from the line of Eric Sheridan of Goldman Sachs. Your line is open.

Eric Sheridan -- Goldman Sachs -- Analyst

Thank you so much for taking the question. Maybe two, if I can. Fidji, last quarter, we spoke about turning small basket shoppers into larger basket shoppers and some of the focus of the company in there. I want to know if we get an update on the way you're thinking about the evolution of shoppers from convenience and smaller basket into more regular way utility and larger basket size over time and how you're aligning investments against that potential transition and behavior.

And then, Nick, in terms of the shareholder return policy of the company, we get a question a lot from investors on how the balance will be struck between offsetting dilution, while at the same time, wanting to probably increase the liquidity of the stock. And then, you have a lockup expiration coming soon. How do you think about the balance of that to strike across your broader goals of sort of returning capital to shareholders? Thanks so much.

Fidji Simo -- Chairman and Chief Executive Officer

So, Eric, on small baskets and large baskets, we obviously are a category leader in both small baskets and large baskets, 50% share of small baskets, 70% share of large baskets. Our core use case is the weekly shop, and that's incredibly important because that represents three quarters of the grocery market and even more of the profits. But we also know that in order to continue addressing all of the grocery needs of our customers, small baskets are also really important because that's kind of the fill-up use case where you may have like forgotten something in your weekly shop or you may not have planned for a particular meal. And so, we really want to address all of the use cases.

And that's why you have seen us really invest in small baskets over the last few years, in particular, through convenience where we're able to deliver these small baskets out of the stores of retailers offering a lot of selection, as I was saying earlier, but with faster speed. And that has contributed to the big share gains that we have been able to demonstrate in small baskets. And so both are incredibly important. I think the thing that differentiates us from new entrants is that we are very strong at both, and we are also very strong at converting a small basket customer to a large basket customer.

We do that five times better than new entrants and food delivery companies. And that's a very key competitive advantage because it allows us to serve the entire market but, over time, also convert more basket customers into like most profitable weekly shops use case.

Nick Giovanni -- Chief Financial Officer

And, Eric, on your question around returning capital, we announced a $500 million share repurchase authorization in November. Through February 9th, while the lockup was still in place, we repurchased $70 million. And we talked on the last call about wanting to be balanced while the float was still very low in the aftermath of the IPO. Now, the float should increase when our lockup release comes off on the 15th.

And so, ahead of that, we received authorization to increase by an additional $500 million our share repurchase authorization, and we plan to be opportunistic in the market as volumes increase. That's only part of how we manage dilution. It starts with managing headcount, managing the equity that we give out to employees. We've introduced last year a cash equity choice program, which allows us to reduce the amount of equity that we give in exchange for more cash.

And we care very deeply about making sure that we can, you know, reduce dilution over time. And so, our share return program is not just about offsetting dilution. It's about opportunistically repurchasing shares in addition to everything else that we do to manage dilution.

Eric Sheridan -- Goldman Sachs -- Analyst

Appreciate the color. Thank you.

Operator

Thank you. One moment, please Our next question comes from the line of Nikhil Devnani of Bernstein. Your line is open.

Nikhil Devnani -- AllianceBernstein -- Analyst

Hi there. Thanks for taking the question. Just a couple, please. So, you know, given the breadth of selection you have already, it seems that user growth is increasingly important to the GTV equation going forward.

So, what kind of user growth do you think is feasible over the medium term? And how would you characterize the contribution of new customers as well today versus in years prior? So, the extent to which new customers are still driving this GTV equation even after kind of the COVID influx that we saw? And then, as a follow-up, when I look at the Q1 guide, what would cause that adjusted EBITDA to step down, given your top line is improving and you've taken some headcount costs out as well? Thank you.

Nick Giovanni -- Chief Financial Officer

Thanks for the question. So, as it relates to user growth, we definitely think that user growth is important and that means acquiring new customers and also reengaging customers who have shopped less frequently. And both of those things are contributing to the improving growth that we've seen throughout 2023 and continuing with our guide for Q1 2024. So, we talked about in 2023 the new cohort of customers that we activated was larger than the pre-pandemic levels.

And so, that's a very encouraging sign and something that confirms our belief that we're very early in the online adoption of grocery. It was obviously interrupted by the pandemic. And now that the pandemic is behind us, the steady online adoption of groceries is something that will be a key driver of new customer growth. We're also getting better at engaging customers who -- from our mature cohorts.

And so mature cohorts shrank last year, but the size of the decline improved consistently from Q1 to Q2 to Q3 to Q4. And that's because our product is getting a lot better. As Fidji mentioned in the letter and in her comments, the product has never been better. It's never had more affordability choices, it's never had better selection, it's never had better speed, never had higher quality.

And that really helps. But in addition to that, we've revamped our incentive systems. So, we're getting better at targeting customers to make sure that we can engage with them and convert them to becoming habituated loyal Instacart customers. And that's one reason why you've seen transaction revenue tick down a bit.

It's because incentives are going up. We don't break down all of the components of transaction revenue, but it's not because retailer and consumer fees are lower. It's because we're deciding to reinvest the efficiencies that we're gaining into incentives. And you'll also note in Q4 that sales and marketing expense was down year over year.

It doesn't mean we're spending less on marketing, we're just choosing to spend it in incentives rather than pay marketing. And we'll continue to evolve those choices as we go forward based on where we're seeing the best returns in the market. As it relates to the guide for $150 million to $160 million, year over year, you will see that transaction revenue was elevated in Q1 of last year. You can see over the course of the last three quarters, it has dropped back down.

That's consistent with our strategy of how we want to reinvest in the business. Quarter over quarter, there's a tough comp because of ad seasonality. This happens every Q4 to Q1.

Nikhil Devnani -- AllianceBernstein -- Analyst

Thanks. Appreciate it.

Operator

Thank you. One moment, please. Our next question comes from the line of Ross Sandler of Barclays. Your line is open.

Ross Sandler -- Barclays -- Analyst

Hi. Sorry. One question on advertising and then one question on the Whole Foods. Nick, your advertising revenue line came in broadly with your expectations.

The growth rates are coming down a bit, and we've heard different things from different companies that, you know, cater to CPG digital advertising in the fourth quarter. So, I guess, what are you guys seeing in that area both in 4Q and heading into 1Q? And then, the Whole Foods partnership is pretty interesting, given we all know the reason why we had to break up many years back. But what was the rationale for bringing them back online from, I guess, the Whole Foods side? And could that potentially play out in the U.S. at some point? Any thoughts there? Thanks a lot.

Fidji Simo -- Chairman and Chief Executive Officer

Thanks, Ross. So, on advertising, the drivers that you're seeing are, one, we are lapping in Q4 the launch of shoppable gift and shoppable video a year ago, which was a big increase in advertising revenue. The second thing you're seeing is that advertising revenue usually lags GTV growth. And what I mean by that is that advertisers make budget decisions today based on the sales growth that they saw in prior quarters.

And so the slowdown that we're seeing in advertising is really a result of the underwhelming GTV growth that we saw last year. The good news, though, is that we are seeing reacceleration of the GTV growth for three consecutive quarters and guiding to a fourth one, and we fully expect that if GTV continues to reaccelerate, advertising will also reaccelerate. You mentioned some weakness among some advertisers. We are seeing that in pockets, but it is not widespread.

And even when advertisers are struggling in their business overall, we are not the first line to be cut because they know that our advertising is very high ROAS and is highly performant, so we don't tend to be the first thing that they cut. Now, moving to your second question on Whole Foods. We are very excited to bring them back. In Canada, Whole Foods did not offer delivery to consumers so we are an opportunity for them to launch the service and reach an incremental customer.

They are very focused on the customer experience as we are and given all of the great experience that we've developed both in terms of quality, speed, ability to deliver at scale. They were excited to partner with us in Canada and vice versa. Nothing to announce about U.S., but we always take a long-term view of this partnership, and our goal is to provide as much value to Whole Foods and their customers as possible as we do with every single one of our retail partners.

Ross Sandler -- Barclays -- Analyst

Thank you.

Operator

Thank you. One moment, please Our next question comes from the line of Colin Sebastian of Baird. Your line is open.

Colin Sebastian -- Robert W. Baird and Company -- Analyst

Thanks. Good afternoon. Appreciate the questions. Fidji, you talked about improvements in operating KPIs like found and fill rates and batch rates.

And I think a lot of that is based on the data platform and the use of machine learning. If you could maybe talk about how much of additional improvement do you think is still embedded in the platform with those initiatives? And then, related to that, how much of a competitive advantage or differentiator is that? I think you indicated you were doing things five years ago that some of your digital competitors are now trying to achieve in the market. Thank you.

Fidji Simo -- Chairman and Chief Executive Officer

Absolutely. So, we already have very high found rates and fill rates. And so, they have been improving for the sixth consecutive quarter. But right now, it's really a game of basis points because we're already delivering with such high quality, but every basis point of improvement matters.

And we really sweat the details to make sure that our customers get the exact order that they wanted, or if products aren't on the shelves, that we replace the products with a highly satisfactory replacement. And we do that through a variety of methods. One is our depth of integration with retailers. We get their catalog data updated constantly.

We get planogram data, which allows us to show inside of shopper app where the items are located inside the store so that our shoppers can go and find them. With some retailers, we go as far as integrating with electronic shelf tags like we do with [Inaudible] where, from the shopper app, you can literally light up the shelf to tell you exactly where an item is going to be so that again, we increase the likelihood that shoppers are going to find this items in-store. And so, that's like deep retailer integrations that are very defensible and a very deep competitive advantage. Then, you combine that with the fact that our shoppers are in the aisles of grocery stores every day.

So, they know what's on the shelves, often better than what retailers know themselves. And it has allowed us to really develop great predictive algorithms to understand what's going to be in stock versus what's not going to be in stock, what's a suitable replacement that's going to generate a positive experience. And just to give you an idea, we make more than 75 million replacements a quarter with 95% satisfaction. And so, the combination of deep retailer integration data that we collect every day and predictive analytics model really allows us to deliver the superior experience that creates a very significant competitive advantage.

There's still some room to grow, but I think we are already very much at the top of our game there and are continuing to chip away at the remaining few percent to make sure that we are delivering the best possible experience. And that's why customers and retailers trust us with their business in one case and delivering their meat and their produce in another.

Colin Sebastian -- Robert W. Baird and Company -- Analyst

OK. Thank you.

Operator

Thank you. One moment, please. Our next question comes from the line of Jason Helfstein of Oppenheimer. Your line is open.

Jason Helfstein -- Oppenheimer and Company -- Analyst

Thanks. Two questions. Just first, just can you elaborate on the point about advertising correlates more with trailing GTV, not current quarter? I think you made a point. And second, Nick, can you clarify the comment about how GTV growth would step up? Did you mean per quarter through the rest of 2024 or just broadly for all of 2024? Thank you.

Fidji Simo -- Chairman and Chief Executive Officer

So, on advertising, the way budgeting work is that all advertisers set budget this quarter based on the sales performance that they saw in the past. So, if we have been growing at a lower rate in the past, have seen sales growth that's a little bit more muted, they're going to allocate fewer budgets in the upcoming quarters based on that. But then when GTV growth reaccelerates, then they end up allocating more budget. We have actually seen this trend play out in the past.

If you look back at our financials, you will see that in Q2 of 2022, for example, we had actually a decrease in year-over-year investment rate because we were coming off of several quarters of fairly low GTV growth. And then, as soon as GTV reaccelerated, advertising rate accelerated again in the following quarter. And so, that's what I meant by the trailing aspect of it. It's not uniform across the board.

You have emerging brands, for example, who are a lot more flexible, a lot more nimble in how they allocate budget. So, the minute that they see that GTV is increasing and their sales are increasing, they double down and increase their advertising. But for larger companies that are planning on a quarterly basis, sometimes, even on a half basis, it takes a little bit more time for them to digest the change in GTV one way or another and reflect that in the advertising budget.

Nick Giovanni -- Chief Financial Officer

And as it relates to the growth step-up, we are only guiding to Q1. And for Q1, we are guiding to GTV growth of 7% to 10% year over year. And this compares to 5% for all of last year. But through the quarters of last year, it was 2.6% growth in Q1 and 5.6% growth in Q2, 5.9% growth in Q3, 6.8% growth in Q4.

And so, what we're calling for now is a step-up to 7% to 10% in Q1.

Jason Helfstein -- Oppenheimer and Company -- Analyst

Thank you.

Operator

Thank you. One moment, please Our next question comes from the line of Michael Morton of MoffettNathanson. Your line is open.

Michael Morton -- MoffettNathanson -- Analyst

Thank you for the question. I wanted to ask maybe one a little bit longer term just about industry structure. You have like incumbents with the physical network building their own distribution businesses but then also marketplaces competing with Instacart who is the first mover and can do it with a larger scale. But I would love to know, how do you see the actual picking aspect of fulfillment developing over the year as order density increases? Do you think -- there are some in the industry that believe it's going to go to merchant pit, so then like kind of the Whole Foods model that's just bags in the front of the store and the economy workers pick it up? Or does this continue along the Instacart picker model? Just any long-term thoughts there would be great.

Thank you.

Fidji Simo -- Chairman and Chief Executive Officer

Thanks for the question. So, the reason retailers for now with us to do picking and delivery is because we can do that very efficiently, which allows them to save on cost and pass on some of that cost to customers, which then creates growth for them, and with high accuracy and high quality to really respect the relationships that we deal with our customers. We do that in a variety of ways. So, the model you're describing where some retailers might be doing the picking.

And then with the delivery, like some of our retailers, are already using our own picking app to stage their order, for example, for pickup. And so again, we see our role as really developing all of the technologies to help support that industry, and one of them is great picking technology that retailers are integrated with our own system and are currently using inside their store. Now, we have also seen, you know, models thinking about like automated picking and kind of having big warehouses where the picking happens outside of the network stores. And we are tracking that very closely, but we are much less bullish on this model because what we have found is that for these models to work, you need a lot of density of orders.

And that means that these kind of large warehouses end up being very far away from customer. And all of the costs that you save in picking, you end up losing in cost of delivery because you have to drive to a customer that's much further away. We are also seeing that customers actually value speed, and that's why I have emphasized speed so much in my letter because we know it drives conversion. We know it drives growth.

And so, if you're very far away from the customer, you are not able to deliver with the speed that we can in doing that from 85,000 stores. So, all in all, I would say that we strongly believe that we have the winning model here, the model that's most efficient, most responsive to customer needs. And we are continuing to develop all of the technology that retailers need to embrace that model in all of the ways that they find to be good for their business.

Michael Morton -- MoffettNathanson -- Analyst

Thank you so much.

Operator

Thank you. Our next question comes from the line of Andrew Boone of JMP Securities. Your line is open.

Andrew Boone -- JMP Securities -- Analyst

Thanks so much for taking my questions. Can you talk a little bit about the product roadmap for off-platform advertising? Where are you guys today and what can this look like over the next couple of years? And then, Fidji, a bigger picture question on health more broadly. Can you talk about the potential for HSA and what that could mean for the business? Thanks so much.

Fidji Simo -- Chairman and Chief Executive Officer

Thanks, Andrew. So, on off-platform marketplace advertising, step one was taking our entire advertising infrastructure and making it available to retailers on their owned and operated properties through Carrot Ads. And that's a growing part of the business. We are finding more and more retailers be interested in leveraging this technology because that allows them to stand up a retail media network literally overnight and get a new incremental revenue line.

So, that was step one. I would say step two is taking all of the vast set of data that we have on customer behavior and leveraging the data to make advertising on other platforms more efficient and that's where we did the partnership with The Trade Desk. We recently announced a partnership with Google, a partnership with Roku, where we can leverage this incredibly valuable data that we have to make advertising on other platforms more efficient. And that's something that we want to continue to develop with more platforms and scale with more advertisers.

And then I would say the last step is actually expanding our advertising platform beyond online and into the store. And that's why we announced recently add on Caper Cart. And obviously, it's very early. We're just starting to roll out a lot of Caper Cart.

But we think that if we are the advertising platform that allows an advertiser to reach customers both online and in-store and have an advertising product in store that knows exactly what's on your cost right now, which aisle you're on, what you purchased in the past and your loyalty data, we can build a really incredible advertising platform. Again, still early, but that's really the future that we're driving toward. Then, on your question on health and HSA/FSA. We launched it in Q4 as you know.

It's still very early but it's very much kind of reproducing the mental model of EBT SNAP, where if you look at SNAP, SNAP has about $130 billion of funds loaded into SNAP every year. FSA/HSA $65 billion, of which $3 billion of those get forfeited by Americans at the end of the year because some of it is use it or lose it. And we think we can be a really good platform to remind them that they can use these dollars the same way we do with SNAP by leveraging that FSA/HSA code. Again, very early but something that we wanted to plan this season because we have seen such success with SNAP that we want to see if we can reproduce that with FSA/HSA.

Operator

Thank you. Our next question comes from the line of Mark Kelley of Stifel. Your line is open.

Mark Kelley -- Stifel Financial Corp. -- Analyst

Great. Thank you very much. Nick, a quick one for you just on take rates. As you think about the full year, obviously, you've got a couple of dynamics where you're lapping that big Q1 of last year that you had where you're kind of toward the high end or at the high end of your long-term range? And then, you know, just thinking through the RIF and taking those savings and thinking about marketing and incentives and things like that, I guess what's a good starting point for us to think about take rates for our model.

And then, just a quick one for Fidji. You just brought up ads on Caper Cart. I'm just curious if you think like are those budgets that are likely to come from, are those still retail media budgets? Are those like digital out-of-home budgets that you would might be able to capture? I guess, how should we think about that? And does that open up bigger opportunities outside of what you just mentioned in the last answer? Thank you.

Nick Giovanni -- Chief Financial Officer

Thanks for the question. So, just on take rates, I think you're referring to transaction revenue and ad and other revenue as a percent of GTV. And we do not guide to those specifically for the full year. What we did say is that we do expect adjusted EBITDA to be up not only in dollar terms but as a percentage of GTV year over year.

And one of the reasons we said that is because we want to be able to make investments, whether it's in the contra revenue line or the opex line to drive most efficiently, especially having just overhauled our incentive systems and having seen good results in deploying more incentives. When we decide to spend $1 in incentives and spend $1 in performance marketing, that makes it look like our transaction revenue is lower, but it makes it look like our sales and marketing expense is also lower. And so net-net, it's driving value and it's just hitting in different places in the P&L. It's important to also just remember that the efficiencies that we're delivering, and we did call out that we continue to gain efficiencies in Shopper Pay, also benefits transaction revenue.

But then we have a decision about where to invest that and how to invest that to continue to grow the business. So, we're not providing overall guidance. We're not changing our long-term targets with respect to transaction revenue reaching 6.5% to 7.5% of GTV or ads and other revenue reaching 4% to 5% of GTV. And we continue to believe that we can demonstrate real EBITDA leverage throughout the year.

Fidji Simo -- Chairman and Chief Executive Officer

And on your question on ads on Caper, again, important to realize that it's very early and ads on Caper are a little bit of a different beast because they are really combining the best of online advertising, which is measurability, targetability but then doing that in an in-store environment. And so, like any new innovation in advertising, we are probably going to start to see different advertisers take from different budgets to fund this. Again, very early, but what we're seeing is that advertisers are very excited about the combination of these capabilities. You can imagine, you know, going through the store and you're dropping cookies into your cart and Dreyer's Ice Cream can advertise to you that the ice cream can be found in aisle 5 and then you can do an ice cream sandwich with the cookies you already have in your cart.

And based on your loyalty data, we might already know that you like chocolate ice cream, so we can direct you to that. It's a really incredible experience that we can unlock, but it's still very early. And the other important thing to remember is that we're doing this hand in hand with retailers. We are sharing revenue on ads on Caper.

We are doing it as a way to also create a new advertising revenue stream for them, and we'll want to continue to partner with them closely on making sure that these budgets are incremental to what they're seeing.

Mark Kelley -- Stifel Financial Corp. -- Analyst

Perfect. Thank you very much.

Operator

Thank you. One moment, please. Our next question comes from the line of Deepak Mathivanan of Wolfe Research. Your line is open.

Deepak Mathivanan -- Wolfe Research -- Analyst

Thanks for taking the question. Can I ask a couple on the cohort trends? Can you provide additional color on the rate of decline of the COVID cohort pre-2021 now with us maybe earlier in 2023? At what point can we expect the drag from COVID cohorts to be less and potentially reach some sort of like a stabilization level? And then, secondly, can you also elaborate on the trends that you're seeing in 2022 and 2023 cohorts in terms of the growth rate so we can think about contribution from the newer cohorts? Thank you so much.

Nick Giovanni -- Chief Financial Officer

Thanks for the question, Deepak. So, just to give you some additional context, we mentioned that in the first half of last year, 2023, the mature cohorts were declining double digits, and that in the second half of last year, they were declining single digits. And I'm sure that lots of folks who want to know exactly when they'll get back to flat or when they will turn to growth, but it's just not something that we've guided on. We're very pleased with the consistent improvement that we demonstrated throughout the course of last year.

And then, as it relates to newer cohorts, we haven't called out any different trends. Typically, cohorts grow in the second year compared to the first, and we've mentioned that the new cohorts that we're activating are larger than the pre-COVID cohorts.

Deepak Mathivanan -- Wolfe Research -- Analyst

Got it. Thanks so much.

Operator

Thank you. One moment please. Our next question comes from the line of Steven Fox of Fox Advisors, LLC.

Steven Fox -- Fox Advisors -- Analyst

Hi, good afternoon. I just had two questions. First, a simple one. Any thoughts for the new year on free cash flow conversion, also EBITDA? And then, secondly, on -- there's been a lot of discussion on the found and fill rates.

Can you just sort of -- I guess the one aspect I was curious about, talk about how advantaged you are versus some of either existing or up-and-coming competitors and why technology tied to AI or electronic tags might not lead competitors to close the gap more quickly? thank you.

Nick Giovanni -- Chief Financial Officer

I'll answer the first question quickly on free cash flow. So, we're very pleased that we've been able to demonstrate free cash flow growth, operating cash flow growth, net income and adjusted EBITDA. We don't guide to conversion as it relates to free cash flow as a percent of adjusted EBITDA. It's impacted by things like launching new products, whether that be EBT SNAP or alcohol or Caper.

But over time, they trend in the same direction. And we believe adjusted EBITDA is a good proxy for the operating cash flow that we generate. Fidji, do you want to touch on --

Fidji Simo -- Chairman and Chief Executive Officer

Yep. So, on your question, very important to note that if you look at online grocery in general, the No. 1 reason for churn is cost. The second reason for churn is order quality.

And that's why order quality is so critical to get right if you want people to retain and continue ordering with you. And order quality even more critical to get right on the core of the weekly shops, things like meat, things like produce, which is why I wrote in my shareholder letter that we obsess over like the ripeness -- your preferred ripeness of bananas, so that we're able to exactly what you want and that's really important to be able to move the industry online. I've described previously all of the deep integration that we have with retailers in order to be able to have this high found rate and fill rates, whether it's catalog integration, planogram integration, collecting a lot of data, millions of replacement, billions of data points on what people prefer. And all of that is contributing a significant advantage.

You ask like whether AI, in particular, is an advantage. I would say we have absolutely leading models on this particular aspect, but much more importantly, if a competitor was coming into the market right now and was able to reproduce all of our models overnight, they still wouldn't have the 10 years of data that we have accumulated on exactly all of the inventory patterns at 85,000 stores, all of the preferred replacement for all of the different parts of the population. They wouldn't have all that data that powers our machine learning models and allowed us to really deliver a completely differentiated experience. So, again, it's really the combination of deep integration with retailers, lots of data, great predictive analytics model that gives us a really substantial edge.

Steven Fox -- Fox Advisors -- Analyst

Great. That's very helpful.

Operator

Thank you. Our last question comes from the line of Mark Zgutowicz of The Benchmark Company. Your line is open.

Mark Zgutowicz -- The Benchmark Company -- Analyst

Thank you. I just had two questions, one on user growth and the other on AOV. First, just curious how your customer acquisition strategy is evolving. Understanding that the secular growth in online grocery has been deliberate and there's only so much you can press here, I'm just curious if you think about the returns you're seeing in customer acquisition, if the rate of improvement that you're seeing there suggests, at some point, you'll see -- we'll see a dollar investment accelerate here relative to GTV.

And then, separately on AOV, just curious if you could maybe break out what the puts and takes or headwinds, tailwinds are this year, both inclusive and exclusive of the broader inflationary environment. Thank you.

Fidji Simo -- Chairman and Chief Executive Officer

So, on user growth, we go back to this idea that this is a massive that's still vastly under-penetrated online, just 12% online penetration, while other categories of commerce are at 25%, 30%. And we're the category leader so we see that our responsibility to accelerate the move of the market online. That is done through a variety of tactics. Marketing is one of them but there are many other ones.

We invest in partnerships. You probably saw what we did with Peacock this quarter. We partner with our retailers so that our retailers can also market to their customers because the very clear data showing that the omnichannel customer is 2x to 4x more valuable than the in-store-only customer. So, retailers have an incentive to get their customers to the omnichannel.

So, we are really using all of these tactics to move the market online. As it pertains to marketing specifically, we try to get more and more efficient with marketing every year and unlock new tactics. And what you're hearing this quarter is that we did shift some of our marketing investments toward incentives because we have really unlocked the ability to deliver incentives in a way that allows us to both acquire customers but also retain them over time by incentivizing the behavior that leads to habituation. And so, we continue to invest in marketing based on long-term goals, not just expecting a return within the quarter, but really investing with a five-year LTV guardrails mine, so that we can, you know, leverage the 10 years of core data that we have to give us some confidence in the return of our marketing.

Nick Giovanni -- Chief Financial Officer

As it relates to AOV, just as context, in 2022, as inflation was increasing, we saw basket sizes increase from 107 in Q1 to 111 in Q4. Last year in 2023, basket size was relatively stable, it was 112 in Q1 and 113 for Q2, Q3, and Q4. But as a result, comparing 2023 to 2022, you saw a decrease in AOV growth year over year. It was at 5% in Q1 then 3% then 2%, then 1%.

And that's why for the last couple of calls, we've been calling out that the GTV growth that we've been delivering is higher quality. And by that, we mean driven more by orders growth. And so we continue to be focused on orders growth and accelerating orders growth. We know that AOV is impacted by some things that are outside of our control like inflation.

We have seen inflation moderate. We've witnessed four quarters in row of relatively stable basket sizes. So, hopefully, that gives you the context that you're looking for.

Steven Fox -- Fox Advisors -- Analyst

Yes, it does. Thanks very much.

Operator

Thank you. This concludes today's conference call. Thank you all for participating. [Operator signoff]

Duration: 0 minutes

Call participants:

Rebecca Yoshiyama -- Head of Investor Relations

Fidji Simo -- Chairman and Chief Executive Officer

Nick Giovanni -- Chief Financial Officer

Doug Anmuth -- JPMorgan Chase and Company -- Analyst

Ron Josey -- Citi -- Analyst

Justin Post -- Bank of America Merrill Lynch -- Analyst

Eric Sheridan -- Goldman Sachs -- Analyst

Nikhil Devnani -- AllianceBernstein -- Analyst

Ross Sandler -- Barclays -- Analyst

Colin Sebastian -- Robert W. Baird and Company -- Analyst

Jason Helfstein -- Oppenheimer and Company -- Analyst

Michael Morton -- MoffettNathanson -- Analyst

Andrew Boone -- JMP Securities -- Analyst

Mark Kelley -- Stifel Financial Corp. -- Analyst

Deepak Mathivanan -- Wolfe Research -- Analyst

Steven Fox -- Fox Advisors -- Analyst

Mark Zgutowicz -- The Benchmark Company -- Analyst

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