Alibaba Group Holding Limited
Q3 2022 Earnings Call Transcript

Published: 24 Feb 2022

[Operator:]

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group's December Quarter 2021 Results Conference Call. At this time, all participants are on listen-only mode. After management's prepared remarks, there will be a question-and-answer session. I would now like to turn the call over to Rob Lin, Head of Investor Relations of Alibaba Group. Please go ahead.

[Rob Lin:]

Good day, everyone and welcome to Alibaba Group's December Quarter 2021 Results Conference Call. With us on the line today are Daniel Zhang, Chairman and CEO; Joe Tsai, Executive Vice Chairman; Maggie Wu, Chief Financial Officer; Toby Xu, Deputy Chief Financial Officer. This call is also being webcast on the IR section of our corporate website. A replay of the call will be available on our website later today. Now, let me quickly go over to our safe harbor. Today's discussion may contain forward-looking statements. Forward-looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations. For detailed discussion of these risks and uncertainties, please refer to our latest Annual Report on Form 20-F and other documents filed with the US SEC were announced on the website of Hong Kong Stock Exchange. Any forward-looking statements that we make on this call are based on assumptions as of today, and we do not undertake any obligation to update these statements, except as required under applicable law. Please note that certain financial measures that we use on this call, such as adjusted EBITDA, adjusted EBITDA margin, adjusted EBITA, adjusted EBITA margin, non-GAAP net income, non-GAAP diluted earnings per share or ADS, and free cash flow are expressed on a non-GAAP basis. Our GAAP results and reconciliation of GAAP to non-GAAP measures can be found on our earnings press release. Unless otherwise stated, growth rate of all stated metric mentioned during the call refers to year-over-year growth versus the same quarter last year. In addition, during today's call, management will give their prepared remarks in English. A third-party translator will provide simultaneous Chinese translation on another conference line. Please refer to our press release for details. During the Q&A session, we will take questions in both English and Chinese, and a third-party translator will provide consecutive translation. All translations are for convenience purpose only. In the case of any discrepancies, management statements in the original language will prevail. With that I will now turn the call over to Daniel.

[Daniel Zhang:]

Thank you, Rob. Hello, everyone. Thank you for joining our earnings call today. This quarter Alibaba Group's business continued to make steady progress. We remain focused on building long-term capabilities centered around customer value creation, despite the resurgence of COVID. China's market economy slowdown and increasing competition. In the fourth quarter of 2021 China's GDP grew 4% while total retail sales rose 3% year-over-year. Both decelerated from the previous quarter due to the confluence of COVID price increase of raw materials and other factors. At the same time, the overall trend of digitization across both consumption and industrial sectors became increasingly apparent and accelerated. Large Internet companies in China have entered commerce through various ways and digital construction format and user experiences have become increasingly diversified. Against this backdrop, we believe our most important proposition and the biggest opportunity for healthy and sustainable long-term growth are

[Toby Xu:]

Thank you, Daniel. Good morning and good evening, everyone. This quarter, revenue was around CNY 242.6 billion, up 10% year-over-year. Our top three revenue contributing segments were China commerce, cloud and international commerce, which grew by 7%, 20% and 18% year-over-year, respectively. While our China commerce statement may be impacted by slowing macro and increased competition, our cloud and international commerce segment maintained solid growth and are expected to become increasingly important growth drivers in the future. These two segments will continue to contribute to diversification of our revenue base. Income from operations decreased by RMB 42 billion to RMB 7 billion, which included a RMB 25 billion impairment of goodwill in relation to the digital media and entertainment segment. Excluding this impact, the income from operations would have been RMB 32 billion, a decrease of 34%. Adjusted EBITA decreased by 27% year-over-year to RMB 45 billion. The decrease was primarily due to our increased investments in growth initiatives such as Taobao Deals, Taocaicai, Lazada and Ele.me, as well as our increased spending for user growth. Many of these growth initiatives saw strong growth momentum, as highlighted by Daniel. Additionally, we have increased the merchant support through incentives to drive merchant adoption of new value-added services, as well as strategic reductions in selected service fees to lower merchants' operational expenses in a slowing consumption environment. We believe this near-term spending builds goodwill with our customers and support sustainable long-term growth for our China commerce businesses. Now on cost trend for the quarter. Excluding SBC as a percentage of revenue, cost of revenue ratio increased to 60% during the quarter. The increase was primarily attributable to

[Rob Lin:]

Consecutive interpretation for the Q&A session and our management will address your questions in the language you asked. Please note that the translation is for convenience purpose only. In the case of any discrepancy, our management statement in the original language will prevail. So, operator, please connect speaker and SI conference lines now and start the Q&A session when ready. Thank you.

[Operator:]

Thank you. The first question comes from the line of Piyush Mubayi of Goldman Sachs. Please go ahead. Your line is open.

[Piyush Mubayi:]

Thank you for the opportunity. Thank you, Daniel, Toby for the presentation. My one question around the growth rates for the business and particularly the core business. Given what parcel numbers are looking like for the month of January and I don't want to read too much into that number and the exit run rate we saw for NBS data for the month of December, I wonder if you could want to talk us through the exit run rate for the third quarter for the December quarter for GMV growth, as well as CMR growth rate. And also, if you could broadly guide us to what you think the growth rates we could be expecting in the first quarter of calendar 2022? Thank you.

[Toby Xu:]

Okay. Thank you very much for this question. As I explained in my script, in the last quarter, actually the overall macro condition, if you look at the MBS data, the retail sort like the growth rate for December board MBS is only like 3%. And our business as I explained also impacted by the macro condition, as well as competition so which give us also like the single-digit growth. That's for the December quarter. Then for the new 2020, the first quarter, as I explained, currently our growth rate, we still have a relatively resilient growth in our GMV. And of course, the market condition is also -- at this stage is quite -- we still don't see the January number, but we probably will be waiting for the number to out. But at this stage, I think our growth rate is still resilient.

[Piyush Mubayi:]

Toby, what I meant by exit run rate by December itself?

[Rob Lin:]

Next question?

[Operator:]

Thank you. Our next question comes from the line of Thomas Chong of Jefferies. Please go ahead. Line is open.

[Thomas Chong:]

Good evening, management. Thank you for taking my questions. My first question has to do with your outlook for the performance of different categories in the next few quarters going forward including FMCG, apparel and electronics. Can you share with us your forecast on growth and trends in those different categories? Secondly, I'd like to hear from management as to when you think we'll see a turnaround in the consumption slowdown. Do you think that we'll see a pickup in momentum by say the June quarter or the September quarter? And finally, I'd like to hear from management please on competition. What will be the future impact of increased competition in the e-commerce space? And what is your strategy to deal with it? Thank you.

[Daniel Zhang:]

Thank you. This is Daniel and I'll be happy to take this question. First of all when it comes to GMV either by category or overall GMV it is our consistent policy not to give guidance. But I can answer your question in overall terms in the following way. So we can look at the macro environment and the e-commerce penetration in different categories from a number of angles. First of all, we can look at the share of different categories in total retail sales and then we can look at the current e-commerce penetration rate of those same categories. So if we look at those two categories you singled out apparel and electronics due to the rapid development of e-commerce over these past years, penetration in those categories is now relatively high. We're looking at something like 30% or 40%. However, if you look at the other categories you mentioned like FMCG and food, especially fresh foods and groceries, the overall size of the market in those categories is very large yet e-commerce penetration still remains relatively low. And you'll recall that I talked about this in the presentation I gave at Investor Day back in December, we see very good opportunities for driving online conversion deeper in those categories. Now of course in order to do that, and in order to ensure a good user experience, we need to have highly integrated fulfillment systems and a range of different offerings that cater to different kinds of demand. And that's precisely what Alibaba has put in place with a matrix that includes Hema, RT-Mart with integrated online and off-line operations, our third-party delivery platform Ele.me well as Tmall supermarket. So we're organizing supply both from nearby and from nationwide in different consumption scenarios, catering to different kinds of users from the highly affluent through to the more price-sensitive. And by pursuing this matrix strategy, we expect to be able to deepen our penetration in these categories substantially. On your second question I would say that live streaming certainly has become a very important part of the digital commerce ecosystem. It's an important means of enriching the user experience and marketing in particular certain kinds of categories. And the Taobao live stream ecosystem therefore is an important part and highly integrated into our overall ecosystem as a complementary part of a larger offering. However different categories and different products are best marketed to consumers in different ways with different kinds of interaction. So live streaming is indeed good but it's certainly not the only means of getting there. And we do need a multifaceted and rich matrix of services through which to reach users and market products.

[Rob Lin:]

Next question, please.

[Operator:]

Thank you. Our next question comes from the line of Jeremy Lim of UBS. Please go ahead.

[Jeremy Lim:]

Thank you for taking my question. My question has to do with Taobao Deals and Taocaicai where you see them going over the next few quarters in terms UE and further narrowing of losses. If you could talk to us please about how UE has been evolving in the face of competition and market developments there and whether that has been improved also by the scaling up of the businesses with larger order numbers?

[A – Unidentified Company Representative:]

Thank you for your question. Well regarding these two businesses, Taobao Deals and Taocaicai, they were both launched in 2021. I think Daniel already spoke to this in his earlier presentation. We certainly see them as two very important businesses within the context of our China Commerce segment. The two businesses do play different roles. As was presented earlier, Taobao Deals has been very important over the past year in terms of allowing us to drive user acquisition -- very significant user acquisition in the lower tier cities. And the two combined, Taobao Deals and Taocaicai have allowed us over the past year to make great progress in terms of developing the ability to serve consumers in these lower tier cities not only with supply, but also with excellent fulfillment capabilities. With respect to both of these two businesses then while working hard to grow them in terms of scale we're also looking at ways to drive efficiency. Some efficiency improvements are being driven, as you said by growth in scale. But other parts of that efficiency improvement are coming about of particular initiatives that we're taking to enhance efficiency. So, certainly in Taocaicai as order density has increased, we're seeing improvement in unit economics. And we're also seeing efficiency enhancement in Taobao Deals as well. So in terms of where these businesses are heading in the face of competition going forward, we would certainly look at them as part of our overall China commerce business segment. And of course, we do look at our competitors, but more importantly we look at ourselves. And as Daniel said, we're fully confident that we can continue to grow these businesses and enhance their efficiency going forward, and we fully expect to see their losses narrowing over the next few quarters.

[Rob Lin:]

Next question.

[Operator:]

Thank you. The next question is from the line of Alex Yao of JPMorgan. Please go ahead.

[Alex Yao:]

Thank you, management. My question has to do with the outlook for growth in China retail -- China commerce GMV. And indeed this is related to the performance of the overall retail market in China as a whole. How long do you think that this current slump in consumption generally in China will last? When do you think the turnaround will come and consumption will pick up? Do you think it will be like a V-shaped curve or an L-shape curve? Or are we talking about seeing the first half of a V-shaped curve? And what needs to change to bring about that pickup in consumption? Would it require a stimulus from the government, a relaxation of COVID control policies or something further?

[Daniel Zhang:]

Thank you for your question, Alex. Whether it's going to be a V-shaped or a U-shaped recovery is a good question. And like you, I'd be very keen to know the answer to that. All I can say is, looking at user data on our platform and also looking at data on the current macro environment, I think, yes, both of those things you identified certainly would be helpful in stimulating recovery of consumption. So if the impact of COVID could be lessened or if there could be stimulus policy from the government put in place to stimulate consumption, those would be positive developments, yes. But what I would like to emphasize in answering this question, apart from the macro picture, and this is true for us, true for everybody in the retail and commerce space, I think, what really matters is your ability to innovate, to be innovative in terms of supply and leverage that to create new demand. I think a very good opportunity -- a very good example of this kind of opportunity was the recently concluded Winter Olympic Games held in Beijing. It was a great opportunity to stimulate new kinds of demand for participation in winter sport activities and the whole winter sport economy in China. I think that's a great example, but indeed just one example of the way in which new demand can be created and new supply can be created to meet that kind of demand.

[Operator:]

Next question is from the line of John Shaw of Barclays. Please go ahead.

[Unidentified Analyst:]

Thank you, Management. As Toby mentioned in his earlier presentation that you are carrying out share repurchase program. You're re-buying shares. You also have some 70 billion in cash on your books which could be used to create shareholder value. And there's also the possibility in addition to that of spinning off certain hidden assets to create shareholder value. We heard back in December at your analyst event the Trendyol was in the process of raising funds. We've also more recently seen from the media that Lazada may be in the process of raising funds. We know that competitors are spinning off some of their subsidiariesto create shareholder value. So I'm wondering if you could tell us about those kinds of opportunities your plans in those spaces especially around cloud and also around China commerce. Thank you.

[Daniel Zhang:]

Thank you. This is Daniel. I'll be pleased to take that question. If you look at where Alibaba Group is today as a business we're very much being driven by a multi-engine strategy. The group has expanded into multiple different business areas that are mutually complementary, but each has unique user value and a unique user community. We believe, that the market has not placed sufficient value on Alibaba's business in terms of how it's being driven by a multi-engine strategy. The full value of each of these businesses together is not being reflected in where we're at today. And this is a big part of the reason why we're pursuing a share buyback strategy. So each of these different businesses including Cainiao including our local services offering in particular Ele.me but also Lazada, Trendyol, which you mentioned are no longer simply internal business units internal divisions of Alibaba Group. They're operating as independent companies. So certainly going forward where we have these businesses that can create a closed loop and operate as stand-alone entities, we will maintain an open attitude to do as we have indeed done in the past deals that bring in more diverse investor bases and help these companies grow as independent entities. In sum, in the long-term, we will certainly pursue strategies that are conducive to the creation of long-term shareholder value and customer value. Thank you.

[Unidentified Analyst:]

Thanks Daniel. Thanks Toby.

[Operator:]

Thank you. The next question is from the line of Eddie Leung of Bank of America. Please go ahead.

[Eddie Leung:]

Thank you management, good evening. Two questions if I might. First of all it has to do with the impact of the growth of the 1P model in certain parts of your business. I'm wondering if the greater share of your business being 1P may lead to a situation where you're competing with merchants on the platform. And then secondly, tying into the previous conversation we had about certain BUs growing fast, driving a lot of user acquisition. And we're seeing a lot of these new users that have joined the Alibaba digital economy coming from a couple of these new BUs. But I'm wondering if some of these BUs become more independent, how can we make sure that there'll be a good synergy between them and the other businesses and the new users they're bringing on forward will also contribute to the overall Alibaba economy? Thank you.

[Daniel Zhang:]

Thank you. This is Daniel. I'll be happy to take that. As to your first question regarding the two different business models, the 1P model versus the platform model. Alibaba really takes no sight and has no preference. To us, it all boils down to which model can best serve the consumer. We put the consumer's interest first. Secondly, when it comes to how we engage with merchants, be it in the 1P model or the platform model, it's fundamentally our concern to find ways to help merchants better serve consumers, not just in terms of helping merchants to sell products to consumers but helping them to develop their brands and to leverage consumer data to engage consumers and to grow their business. So the 1P model for us is absolutely not about erecting a wall between merchants and consumers. It's really about helping to get goods to the consumer more efficiently, with more flexible pricing but at the same time allowing for consumers to be engaged by merchants. And we always hope for consumers to remain in touch with the merchants and for the merchants to be able to leverage data to better manage and grow their businesses. So these several aspects are all integrated. So, what Alibaba is offering to merchants is a highly integrated portfolio of different possibilities including the 1P model including the platform model so different business models; but also multiple scenarios including hyperlocal commerce and nationwide commerce. So, with this complete basket of different offerings, it's possible to better engage consumers and possible for merchants to build their brands and grow a healthy business. On to your second question, which had to do with how to ensure good consumer engagement across all different businesses as they develop we fundamentally believe that we must adopt the consumer the user point of view and looking at how we organize and how we run our businesses because at the end of the day all of our businesses are built on serving the consumer well and we need to be able to do that across all of them. So, something we're working on very, very hard is segmenting the different consumers that we have in China with closing in on 1 billion AACs in China today. It's very important that we segment them and with our different offerings provide differentiated value to these different segments of consumers. So, this is something that's a fundamental importance to us. We're working hard on it every day segmenting the 1 billion consumers and presenting to them a comprehensive consumer business matrix that satisfies their differentiated demand.

[Rob Lin:]

Next question?

[Operator:]

Thank you. The next question is from the line of James Lee of Mizuho. Please go ahead.

[James Lee:]

Great. Thanks for taking my questions. My question is mainly on cloud. Now, given the slowdown we're seeing in the Internet industry, I'm just curious what is your plan to diversify the revenue base. It seems like that's your business plan. And maybe help us understand which vertical logical for your business expansion and why. And lastly along with that line of investment in cloud, what kind of investment do you need to make to expand not only your vertical exposure and also from a product and sales perspective. Thank you.

[Yong Zhang:]

Well, actually after years of effort we've already built a very diversified customer portfolio in our cloud business. And as we shared in our earnings, this quarter 52% of our cloud revenue are from non-Internet customers. I think actually this percentage, actually if you look at the past few years track record is going up. So we will -- over time, we will continue to diversify the -- this portfolio. As I shared in my remarks actually today, we are still in the early stage of industrial digitalization in China. So for all the industries they are going to be a data-driven company and they need a new generation of tech infra to support this digital transformation. So I think in this regard we see a huge opportunity in the coming years. This definitely will be a RMB 1 trillion market. Well in terms of the industries as I said before we keep close eyes on the new industries, I mean which will generate a massive amount of data and which will consume the computing volume high computing power and also need a more intelligent data intelligence technology. So I think for those industries we definitely think it will drive the growth of the cloud business. And also with the mutual collaboration, it's also very good for the -- to build the ecosystem, which is also relevant to your second question. Our investment strategy for the cloud computing is to first to enhance our proprietary technologies. And the second will be to enhance the power of the ecosystem to have more, I mean, strategic partners in the cloud ecosystem.

[Rob Lin:]

Let’s take the last question.

[Operator:]

Yes. Thank you. Our last question is from the line of Alicia Yap of Citigroup. Please go ahead.

[Alicia Yap:]

Thank you, management. Some quick follow-up questions on cloud. We understand that the impact of that one Internet company stopping the use of Alibaba Cloud services around a year ago from the March quarter has been ongoing. But do we expect to see international revenue for cloud reaccelerating, starting from, would you say the March quarter? And how do you view competition and price trends in the cloud space? And in a more macro sense, do you think that there are perhaps many companies out there that need to get on the cloud, but they're perhaps delaying that decision in the current macroeconomic environment for the time being? And then quickly turning just to finow. We saw that growth of finow -- finow's business outside of the Alibaba ecosystem was only 15%. I'm wondering if you could talk to us about how you see finow’s revenue growing going forward with respect to serving external customers.

[Daniel Zhang:]

Thank you. So starting with the first part of your question about the impact of that large cloud customer not making use of Alibaba Cloud services overseas over the past several quarters, indeed we've seen the impact of that reducing progressively quarter-by-quarter and we're now entering a new cycle. But I think, the key point to be made is, that we now have a much more diversified customer base. Especially, if you look at the number of large customers there are now very few a small number of large customers that account for more than 2% of revenue. So we're highly diversified and that positions us well for the future. Regarding the next part of your question, as to the impact of the overall macro environment on the current growth pace of the cloud business, I think you have to look at different sectors differently. There's this broad process of industrial digitalization that's unfolding. But this digitalization is needed both by companies in traditional sectors, but also by other companies in new and emerging sectors. We talked about things like new energy, indeed new energy vehicles health care and other sectors. And these are all sectors that on the one hand require massive amounts of computing power and secondly need to leverage very powerful data intelligence capabilities. So I think we do need to take a sector-by-sector approach to define the strategy and look in particular at those sectors that have those kinds of needs for massive computing power and for data intelligence. And it's really important to understand that, that really is what the cloud is about. The cloud is not simply about replacing traditional IT infrastructure. China is just getting started in this process. Thirdly on Cainiao, following many years of investment in development, Cainiao itself today also enjoys a multi-engine growth strategy. There are many pieces to its business. It has Cainiao Post. It has first and last mile delivery capabilities. It has 2B supply chain services. And now with the growth of Taobao Deals, it's supporting the manufacturer to consumer the m2c business model. Overseas, it's built a very large cross-border parcel service and now supply chain network as well. And going forward with further development in B2B I think we can expect to see the export side also to be very robust. And all of that is underpinned by the international cargo network that Cainiao has built up. So I think there's huge potential for Cainiao, given this diversified business matrix. And as a member of the Alibaba family, we want Cainiao to be well positioned to serve the different parts of Alibaba's businesses internally with an integrated design providing the logistics underpinning as well as to be able to service other customers. And we can find ways to create further growth for it with incremental growth in our different businesses.

[Rob Lin:]

Okay. Thank you, everyone. That was the end of our Q&A session. If you have any questions – further questions, please reach out to the IR team and myself. And thank you for your participation.

[Operator:]

Thank you. And this concludes today's conference call and thank you for participating. You may now all disconnect.