The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q ("Form 10-Q"), as well as our audited consolidated financial statements included in our 2021 Form 10-K. This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading "Special Note Regarding Forward-Looking Statements" in this Form 10-Q. As a result of many factors, including, without limitation, those factors set forth in the "Risk Factors" section of our 2021 Form 10-K and the "Risk Factors" section of subsequent Quarterly Reports on Form 10-Q, our actual results or timing of certain events could differ materially from the results or timing described in, or implied by, these forward-looking statements.
Overview
We are a leading e-commerce player inKorea . We believe that we are the preeminent online destination for e-commerce in the market because of our broad selection, low prices, and exceptional convenience across our owned inventory selection as well as products offered by third-party merchants. Our unique end-to-end fulfillment, logistics, and technology network enables Rocket Delivery, which provides free, next-day delivery for orders placed any time of the day, even seconds before midnight-across millions of products. Our structural advantages from complete end-to-end integration, investments in technology, and scale economies generate higher efficiencies that allow us to pass savings to customers in the form of lower prices. The capabilities we have built provide us with opportunities to expand into other offerings and geographies. Beginning in the first quarter of 2022, we organized our operations into two segments: Product Commerce and Developing Offerings. These segments reflect the way management evaluates its business performance and manages its operations. See Note 14 - "Segment Reporting" to the condensed consolidated financial statements included elsewhere in Part I, Item 1 of this Quarterly Report on Form 10-Q. Our Product Commerce segment primarily generates revenues from online product sales of owned inventory to customers inKorea and from commissions earned from merchants that sell products through the Company's mobile application and website as well as related advertising services associated with these offerings. Our Developing Offerings segment focuses on our nascent offerings and primarily generates revenues from our online restaurant ordering and delivery services, online content streaming services, fintech, as well as related advertising services associated with these offerings. 19
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Key Financial and Operating Highlights:
Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 % Change 2022 2021 % Change Total net revenues$ 5,037,821 $ 4,478,114 12 %$ 10,154,507 $ 8,684,974 17 % Total net revenues, constant currency(1)$ 5,667,005 $ 4,115,480 27 %$ 11,201,183 $ 8,041,965 29 % Gross profit(2)$ 1,153,793 $ 658,494 75 %$ 2,197,199 $ 1,391,000 58 % Net loss(4)$ (75,491) $ (518,601) (85) %$ (284,785) $ (813,634) (65) % Net loss margin (1.5) % (11.6) % (2.8) % (9.4) % Adjusted EBITDA(1)$ 66,172 $ (122,147) NM(3)$ (24,700) $ (255,113) (90) % Adjusted EBITDA margin(1) 1.3 % (2.7) % (0.2) % (2.9) % Net cash (used in) provided by operating activities$ (18,262) $ 30,883 NM(3)$ (73,201) $ (152,466) (52) % Free cash flow(1)$ (195,465) $ (137,687) 42 %$ (485,065) $ (467,837) 4 % Segment adjusted EBITDA: Product Commerce$ 97,840 $ (47,873) NM(3)$ 100,717 $ (117,162) NM(3) Developing Offerings$ (31,668) $ (74,274) (57) %$ (125,417) $ (137,951) (9) %
Trailing Twelve Months Ended June 30, (in thousands) 2022 2021 %
Change
Net cash (used in) provided by operating activities$ (331,313) $ 74,378 NM(3) Free cash flow(1)$ (1,099,605) $ (624,215) 76 % _____________ (1)Total net revenues, constant currency; total net revenues growth, constant currency; adjusted EBITDA; adjusted EBITDA margin; and free cash flow are non-GAAP measures. See "Non-GAAP Financial Measures and Reconciliations" below for the reconciliation of the Non-GAAP measures with their comparable amounts prepared in accordance with accounting principles generally accepted inthe United States of America ("U.S. GAAP"). (2)Gross profit is calculated as total net revenues minus cost of sales, and includes$158 million related to inventory losses from the fulfillment center fire for the three and six months endedJune 30, 2021 . (3)Non-meaningful (4)Net loss includes$296 million related to fulfillment center fire losses for the three and six months endedJune 30, 2021 . We have experienced and may continue to experience uncertainty in our business and the global economy due to the duration and intensity of the COVID-19 pandemic; effectiveness and extent of vaccinations; supply chain disruptions including those of our vendors and suppliers; constraints in logistics and fulfillment related labor costs including costs to attract and retain employees; and consumer confidence which may impact our results. These drivers make it challenging to reasonably quantify the direct impact the pandemic has had, or may have in the future, on our business versus those impacts that may have been, or may be, indirectly related to the pandemic. For additional details, refer to Part I-Item 1A. "Risk Factors" contained in our 2021 Form 10-K.
Key Business Metrics and Non-GAAP Financial Measures
We review the key business and financial metrics discussed below. We use these measures to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.
Key Business Metrics Three Months Ended (in thousands, except net revenues September 30, December 31, per Active Customer) June 30, 2021 2021 2021 March 31, 2022 June 30, 2022 Active Customers 17,022 16,823 17,936 18,112 17,885 Total net revenues per Active Customer $ 263$ 276 $ 283 $ 283 $ 282 20
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Table of Contents Active Customers As of the last date of each reported period, we determine our number of Active Customers by counting the total number of individual customers who have ordered at least once directly from our apps or websites during the relevant period. A customer is anyone who has created an account on our apps or websites, identified by a unique email address. The change in Active Customers in a reported period captures both the inflow of new customers as well as the outflow of existing customers who have not made a purchase in the period. We view the number of Active Customers as a key indicator of our potential for growth in total net revenues, the reach of our network, the awareness of our brand, and the engagement of our customers.
Net Revenues per Active Customer
Net revenues per Active Customer is the total net revenues generated in a period divided by the total number of Active Customers in that period. A key driver of growth is increasing the frequency and the level of spend of Active Customers who are shopping on our apps or websites. We therefore view net revenues per Active Customer as a key indicator of engagement and retention of our customers and our success in increasing the share of wallet.
Non-GAAP Financial Measures and Reconciliations
We report our financial results in accordance withU.S. GAAP. However, management believes that certain non-GAAP financial measures provide investors with additional useful information in evaluating our performance. These non-GAAP financial measures may be different than similarly titled measures used by other companies. Our non-GAAP financial measures should not be considered in isolation from, or as substitutes for, financial information prepared in accordance withU.S. GAAP. Non-GAAP measures have limitations in that they do not reflect all the amounts associated with our results of operations as determined in accordance withU.S. GAAP. These measures should only be used to evaluate our results of operations in conjunction with the correspondingU.S. GAAP measures.
Free Cash Flow
Free cash flow is defined as cash flow from operations less purchases of property and equipment, plus proceeds from sale of property and equipment. We believe that free cash flow is an additional and useful indicator of liquidity that provides information to management and investors about the amount of cash generated from our core operations that, after purchases and sales of property and equipment, can be used for strategic initiatives, including investing in our business and strengthening our balance sheet. Free cash flow has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of otherU.S. GAAP financial measures, such as net cash provided by operating activities. A limitation of free cash flow is that it may be calculated differently by other companies in our industry, limiting its usefulness as a comparative measure. We expect our free cash flow to fluctuate in future periods as we invest in our business to support our plans for growth.
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA is defined as net income/(loss) for a period before depreciation and amortization, interest expense, interest income, income tax expense (benefit), other income (expense), net, equity-based compensation, impairments, and other items that we do not believe are reflective of our ongoing operations. Adjusted EBITDA margin is defined as adjusted EBITDA as a percentage of total net revenues. We use adjusted EBITDA and adjusted EBITDA margin as key measures to evaluate and assess our performance and allocate internal resources. We believe adjusted EBITDA and adjusted EBITDA margin are frequently used by investors and other interested parties in evaluating companies in the e-commerce industry for period-to-period comparisons as they remove the impact of certain items that are not representative of our core business, such as material non-cash items and certain variable charges. However, other companies may calculate adjusted EBITDA and adjusted EBITDA margin in a manner different from ours and therefore they may not be directly comparable to similar terms used by other companies. Adjusted EBITDA and adjusted EBITDA margin are not measures of financial performance underU.S. GAAP and should not be considered as alternatives to cash flow from operating activities or as measures of liquidity or alternatives to net income/(loss) as indicators of operating performance or any other measures of performance derived in accordance withU.S. GAAP. Adjusted EBITDA and adjusted EBITDA margin have limitations as analytical tools, and you should consider them in addition to, and not in isolation or as substitutes, for analysis of our results as reported underU.S. GAAP.
Constant Currency Revenue and Constant Currency Revenue Growth
The effect of currency exchange rates on our business is an important factor in understanding period-to-period comparisons. Our financial reporting currency is theU.S. dollar ("USD") and changes in foreign exchange rates can significantly affect our reported results and consolidated trends. For example, our business generates sales predominantly in Korean Won ("KRW"), 21
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Table of Contents which are favorably affected as the USD weakens relative to the KRW, and unfavorably affected as the USD strengthens relative to the KRW. We use constant currency revenue and constant currency revenue growth for financial and operational decision-making and as a means to evaluate comparisons between periods. We believe the presentation of our results on a constant currency basis in addition toU.S. GAAP results helps improve the ability to understand our performance because they exclude the effects of foreign currency volatility that are not indicative of our actual results of operations. Constant currency information compares results between periods as if exchange rates had remained constant. We define constant currency revenue as total revenue excluding the effect of foreign exchange rate movements, and use it to determine the constant currency revenue growth on a comparative basis. Constant currency revenue is calculated by translating current period revenues using the prior period exchange rate. Constant currency revenue growth (as a percentage) is calculated by determining the increase in current period revenue over prior period revenue, where current period foreign currency revenue is translated using prior period exchange rates. These results should be considered in addition to, not as a substitute for, results reported in accordance withU.S. GAAP. Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not a measure of performance presented in accordance withU.S. GAAP.
The following tables present the reconciliations from each
Free Cash Flow Three Months Ended June 30, Six Months Ended June 30, Trailing Twelve Months Ended June 30, (in thousands) 2022 2021 2022 2021 2022
2021
Net cash (used in) provided by operating activities$ (18,262) $ 30,883 $ (73,201) $ (152,466) $ (331,313) $
74,378
Adjustments:
Purchases of property and equipment (180,768) (168,665) (419,674) (315,496) (777,841) (699,003) Proceeds from sale of property and equipment 3,565 95 7,810 125 9,549 410 Free cash flow$ (195,465) $ (137,687) $ (485,065) $ (467,837) $ (1,099,605) $
(624,215)
Net cash used in investing activities$ (180,670) $ (155,099) $ (429,698) $ (305,581) $ (799,642) $
(727,498)
Net cash (used in) provided by financing activities$ (117,914) $ 50,674 $ 80,668 $ 3,556,358 $ 101,160 $ 3,681,080 22
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Adjusted EBITDA and Adjusted EBITDA Margin
Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Total net revenues$ 5,037,821 $ 4,478,114 $ 10,154,507 $ 8,684,974 Net loss (75,491) (518,601) (284,785) (813,634) Net loss margin (1.5) % (11.6) % (2.8) % (9.4) % Adjustments: Depreciation and amortization 60,399 46,942 119,639 94,326 Interest expense 6,143 5,848 13,511 30,671 Interest income (7,364) (1,907) (10,898) (2,847) Income tax expense 340 97 585 105 Other expense (income), net 9,229 (373) 8,739 3,453 Equity-based compensation 72,916 50,346 128,509 137,312 Fulfillment center fire losses - 295,501 - 295,501 Adjusted EBITDA$ 66,172 $ (122,147) $ (24,700) $ (255,113) Adjusted EBITDA margin 1.3 % (2.7) % (0.2) % (2.9) % 23
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