Instacart (Maplebear Inc.) (NASDAQ:CART) Q4 2023 Earnings Call Transcript

Instacart (Maplebear Inc.) (NASDAQ:CART) Q4 2023 Earnings Call Transcript February 13, 2024

Instacart (Maplebear Inc.) beats earnings expectations. Reported EPS is $0.44, expectations were $-0.08. Instacart (Maplebear Inc.) isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to the Instacart’s Fourth Quarter and Fiscal Year 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference call is being recorded. I would now like to hand the conference over to Rebecca Yoshiyama, Vice President of Investor Relations. Please go ahead.

Rebecca Yoshiyama: Thank you, Valerie and welcome everyone, to Instacart’s 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.

A B2B food distributor making sure grocery shelves are fully stocked with food.

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: Thanks Rebecca and hi everyone. I hope you had a chance to read our shareholder letter, which highlights why we’re 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 continued 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 sound and fill rates increased for the sixth quarter in a row. Over the past years, we’ve also overhauled our 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 resurrection, 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, where 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 AOVs. In short, with every order we complete, we’re 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 supported data, we increased our share of sales amongst digital 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 worked on problems we solved five years ago, we’re 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’re 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. We’re doing all of this while maintaining our relentless focus on profitable growth and our long-term financial targets. In order for Instacart to take on our most ambitious bets, 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 to a flatter organization. Separately, with the departure of three of our execs, Asha, Varouj, and J.J., we are also taking the opportunity to streamline my management team and create more autonomous teams with all the levers 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 range 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: 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 2023 and Q4 2022. 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 2023. 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 percent of GTV decreasing to 5.3% compared to 6.1% in Q4 2022. Today, we also announced a restructuring plan, which we expect to result in a onetime charge of $19 million to $24 million.

This charge will not impact our adjusted operating expenses because they are onetime 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 and 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 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.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Douglas Anmuth of JPMorgan. Your line is open.

Douglas Anmuth: Thanks for taking the questions. I wanted to first ask about cohort dynamics. Perhaps, Nick, you could provide a little color just on the trends among the 2020 and 2021 cohorts and how you think about their contribution to the business. And just as you see that maturation, basically how the impact that’s having on order growth? Thanks.

Fidji Simo: Thank you. So, as we’ve mentioned, our mature cohorts 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 our GTV. So, all of that is encouraging. We are not able to pinpoint when this cohort would get to flat nor when they would potentially return to growth but we’re 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’re also very encouraged by the fact that we’re continuing to add new cohorts that continue to perform well. In fact, 2023 cohort 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.

Douglas Anmuth: Great. Thank you, Fidji.

Operator: Thank you. Our next question comes from the line of Ron Josey of Citi. Your line is open.

Ron Josey: 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 of 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 really interesting and good to hear GTV growth is expected to accelerate in 1Q. Would 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: Thanks Ron. So, on priority order, we think that the growth in priority order really reflects the fact that the number one 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 are testing different levels of fees because we think our fees are still well below our competitors to offer a priority service that is so fast. So, that is 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 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 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 meat and produce in them. And so from that perspective, we think that them continuing to grow is a good thing as long as we can have option for everyone on the spectrum.

Nick Giovanni: 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. Just 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 experiencing with EBT SNAP was one the 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 EBT — the base of our EBT business can start to grow, but that’s not a key driver of the Q1 growth guidance.

Fidji Simo: 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 incentive 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 us spend into are incentives that are really meant to drive retentive behavior, not incentives that are meant to drive onetime GTV, where we’re 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: Thank you, Fidji. Thank you, Nick. Super helpful.

Operator: Thank you. Our next question comes from the line of Justin Post of Bank of America. Your line is open.

Justin Post: Great. I’ll ask a couple. I guess 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: 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 mid-market 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: Great. Thank you.

Operator: Thank you. Our next question comes from the line of Eric Sheridan of Goldman Sachs. Your line is open.

Eric Sheridan: 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: 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.