Alibaba Group Holding Limited
Q4 2016 Earnings Call Transcript

Published: 5 May 2016

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Alibaba Group March Quarter 2016 and Full Fiscal Year 2016 Results Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a Q&A session. I would now like to turn the call over to Jane Penner, Head of Investor Relations of Alibaba Group. Please go ahead.

[Jane C. Penner:]

Good morning, everyone, and welcome to Alibaba Group's March quarter 2016 and full fiscal year 2016 earnings conference call. With us today are Joe Tsai, Executive Vice Chairman; Daniel Zhang, Chief Executive Officer; and Maggie Wu, Chief Financial Officer. Also, as you know, we distribute our earnings release through Alibaba Group's Investor Relations website located at www.alibabagroup.com. So please refer to our IR website for our earnings releases as well as the supplementary slides that accompany the call. You can also visit our corporate website for the latest company news and updates. Please check it out. This call is also being webcast from the IR section of our corporate website. A replay of the call will be available on our website later today. Now, let me quickly cover the Safe Harbor. Today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations. Factors that could cause actual results to differ materially are set forth in today's press release. To also understand these risks and uncertainties, please refer to our latest annual report on Form 20-F and other documents filed with the U.S. Securities and Exchange Commission. Any forward-looking statements that we make on this call are based on assumptions as of today and we do 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 non-GAAP EBITDA, including non-GAAP EBITDA margin and non-GAAP net income are expressed on a non-GAAP basis. We have also adjusted our net cash provided by operating activities to remove purchases of property and equipment and intangible assets, excluding acquisition of land use rights and construction in progress, and to adjust for changes in loan receivables relating to micro loans of our SME loan business which we refer to as free cash flow. Our GAAP results and reconciliations of GAAP to non-GAAP measures can be found in our earnings press release. With that, I will now turn the call over to Joe.

[Chung Tsai:]

Thank you, Jane. Thank you all for joining us. Today, we reported excellent results. Our revenues grew 39% year-on-year for the quarter. There are now 423 million shoppers who have bought something on our China retail platform in the past year, and 410 million mobile users who were active on our China retail mobile apps during the month of March. In these challenging times for the global economy, Alibaba is bucking the trend. Why? I want to offer a couple of perspectives, one macro and the other one that is specific to Alibaba. First, take a look at the Chinese consumer. Chinese households today have aggregate net cash reserves of over US$4.6 trillion. This accumulated wealth and liquidity is the result of real double-digit wage growth over the past decade. In contrast, in early 2008 on the eve of the global financial crisis, household debt in the United States was 98% of GDP, and the average American family was in heavy debt. Chinese consumers have a healthy balance sheet and ability to spend. This will propel China's shift from an export and investment-led economy to a consumption-driven economy. Alibaba rides the secular tide as we enable more products and services, whether they are domestic or import, to reach the consumer. Another perspective comes from looking at Alibaba's businesses. We have a balanced portfolio of businesses in our ecosystem that are in various stages of growth, profit trajectory and cash generation. Depending on years in gestation, we group these businesses into what I call, first, core cash flow; second, emerging traction; and third, long-term strategic bets. So I'll go through each of them. First, core cash flow. Our core commerce business is strong and extremely cash generative. We achieved 41% year-on-year revenue growth in China retail marketplaces for the quarter, with high and sustainable operating margins. On the strength of our core business, we delivered US$8 billion in free cash flow in fiscal 2016. This enables us to invest for the future. Second, emerging traction. We are excited that several of our businesses have emerged with high growth traction and expanding operating leverage. AliCloud is today one of the largest cloud computing businesses in the world. In the latest quarter, this business grew revenues 175% year-on-year, which is a – it's an acceleration of the 126% growth rate from the prior quarter. Another emerging traction star is mobile Internet services, including mobile search and mobile media. In this quarter, we have provided a glimpse into the potential of the mobile lifestyle in China, in addition to mobile commerce as revenues from mobile Internet services and mobile operating systems grew around 50% year-on-year. Third, long-term strategic bets. Alibaba has an incredible track record of making long-term bets successful. Here, a bit of historical perspective is important. Take Taobao Marketplace as an example. We started Taobao in 2003 when online shopping in China was virtually nonexistent. For five years, we didn't generate any revenues. Instead, we focused on acquiring users and building an e-commerce ecosystem. Taobao didn't produce meaningful profits until 2010. That is seven years after its founding. History teaches us that it pays to be patient. We are used to investing in long-term initiatives with long-term gestation periods. New initiatives typically take five years to seven years to grow into substantial profitability, and this growth usually takes on a step-function trajectory rather than in a straight line. The ability to remain patient is a competitive advantage. Going forward, we're prepared to continue investing in high-potential businesses that are highly strategic to Alibaba. From digital entertainment to local services, to international expansion, these businesses contribute to losses in our current income statement. However, we invest in them so that they can graduate to emerging traction and then on to core cash flow businesses in the future. Now, I would like to turn to Daniel who will discuss recent exciting developments and offer a strategic view of the future.

[Daniel Yong Zhang:]

Thanks, Joe. Hello, everyone, and thank you for joining our earnings call today. I'm pleased to report that we ended the fiscal year on a very strong note with a strong execution in our three key strategies of globalization, global development and big data cloud computing. We reached two important milestones this fiscal year. First, our annual GMV surpassed RMB3 trillion and we became the world's largest retail commerce company. Second, our annual revenue surpassed the RMB100 billion. The continued strength of our business is reflected in the growth of our annual active buyers, which has reached 423 million. The total revenue growth rate this quarter is the highest over the past four quarters, and the revenue growth rate of China retail marketplaces is the highest in the past six quarters. We are on a path to realizing our vision of achieving US$1 trillion in GMV by fiscal year 2020, and we want to serve 2 billion consumers. Today, we are laying down solid foundations by transforming our e-commerce business and investing in driving businesses such as cloud computing and the media and the digital entertainment platforms to achieve our ambitious vision. Over the past year, our retail commerce business has executed a significant and a successful transformation from PC to mobile first. At the time of our IPO, mobile contributed less than 40% of our GMV, less than 20% of our China retail commerce revenue, and we had only 188 million mobile monthly active users. Today, 73% of our GMV comes from mobile, and our mobile MAU has reached 410 million. We have completely reinvented the user experience and the services to capitalize on the unique relationship that consumers have with their mobile phone in daily life. Today, our merchants and consumers engaged significantly across a multi-screen social commerce platform, driven firmly by user interaction and big data. Taobao has long involved beyond just for shopping. Consumers come to Taobao for discovery and entertainment and to socialize in virtual communities for each other with shared interests or lifestyles during their shopping journey. Internet celebrities, merchants, trendsetters are among the growing active population contributing rich and relevant content in the form of photos, videos, live streaming, recommendations, reviews and the lifestyle guides which encourage conversations between users through sharing, comments and the liking features. Tmall is now positioned more clearly than ever as the engine of digital transformation of the retail landscape in China. Brands and retailers continue to turn to Tmall as the trusted partner and destination for consumer engagement, customer relationship management and brand building. We remain focused on category expansion and sharpening brand mix for consumers. We continue to grow core e-commerce business by increasing our consumer base and broadening our product assortment, namely through spreading our two wings of globalization and rural development. Tmall Global GMV has increased 180% year-over-year. We continue to work closely with business partners to help sell their quality products to China. Our acquisition of a controlling stake in Lazada, a leading online retail marketplaces operator in Southeast Asia, will allow access to 550 million consumers in one of the most promising markets for e-commerce. Our rural development continues to be (12

[Wei Wu:]

Thank you, Daniel. Hello, everyone. We had a very strong quarter. Revenues grew 39% year-on-year to RMB24.2 billion with China retail marketplace revenue growing 41% year-on-year. Activity on the platform is robust, with 423 million annual active buyers and 410 million mobile MAUs. We have completed a successful mobile transition, with mobile revenue as a percentage of total China commerce retail revenue reaching 71%. Here are some financial highlights. Our March quarter year-on-year revenue growth rate of 39% was the highest of any growth rate in the past four quarters, and it was driven primarily by the robust growth in our online marketing service revenue and exceptional growth of our cloud computing businesses, which grew 475% year-on-year. We believe this growth in our China retail marketplace clearly demonstrates a recognition of the broader value proposition we provide to our merchants and brands. For full fiscal year 2016, revenue grew 33% to over RMB100 billion. Our ability to monetize the users on our platform continues to improve. Revenue per annual active buyer has been increasing for several quarters, reaching RMB189 in March quarter. On the mobile front, mobile revenue per mobile user has also been increasing for several quarters, reaching RMB123 in March quarter. We believe the monetization improvements this quarter are driven, and it will continue to be driven, by two trends in our business. First, the increased engagement of users on our commerce media platform as we launch social and community products on Taobao Marketplace; second, the broad value proposition created by this engagement that we offer to merchants and brands. This includes not just sales generation but also marketing, brand engagement, customer acquisition, retention and the future opportunity for up-sell. So let's take a look at the quarterly revenue breakdown. Cloud computing and Internet infrastructure revenue grew 175% year-on-year. The growth was primarily due to an increase in the number of paying customers which has more than doubled since the year-ago quarter to more than 500,000, and also to an increase in their usage of more compacts offering such as our content delivery networks and database services. Other revenue increased to 14% year-over-year. The growth was primarily driven by the increase in revenue from mobile Internet services, provided the UCWeb and AutoNavi. Excluding revenue related to the SME loan business from both these quarter and the March quarter 2015, other revenue would have increased 51% to RMB1.5 billion this quarter. Please recall that a year-ago quarter included interest income from the SME loan business that was disposed to Ant Financial in February 2015. Quarterly margin trends, you can see that our non-GAAP EBITDA margin was 48%, slightly lower than 49% in the March quarter of last year. Full year fiscal 2016 non-GAAP EBITDA margin was 52% versus 53% in full year fiscal 2015. We do see operating leverage from our core business, offset by our strategic investments. Our core marketplace business continues to be very healthy, with EBITDA margin at around 60%, reflecting operating leverage. We will continue to develop and consolidate new businesses. For example, we'll be consolidating Youku, Lazada in the coming quarters. And they have information publicly disclosed, which that you can tell they're still in the loss making, but they are strategically important to us. Going forward, we will be giving you further transparency of core marketplace performance as well as our new business performance. Cost of revenue excluding stock-based compensation was RMB8.5 billion. As a percentage of revenue, it increased year-over-year, primarily due to an increase in costs associated with our new business initiatives, mainly our mobile operating system, entertainment and OTT service. In addition, logistic costs relating to fulfillment (21

[Operator:]

Thank you, ma'am. Ladies and gentlemen, we will now begin the question-and-answer session. [Operation Instructions] We have the first question from Erica Poon Werkun from UBS. Please ask your question.

[Poon Erica Werkun:]

Yeah, thank you very much. My – I have two questions. My first question is about your value adding to merchants. I think you've been talking about how Alibaba's role with merchants has been evolving from one of the sales channel to become more of a holistic marketing channel. Could you share with us how many and what type of your merchants are working with Alibaba on these marketing initiatives? And my second question is in the earlier remarks, Joe talked about bringing key initiatives from investment phase to cash generation. Just wonder if you can share with us where you are in the investment cycles for these strategic initiatives like cloud computing, digital entertainment and local services? And wondering if you can frame the size of investments for these initiatives into 2000, or rather fiscal 2017? Thank you.

[Daniel Yong Zhang:]

Well, thanks, Erica. This is Daniel. I would like to answer the first question. As you know that actually today on our China retail platform, we have – in both Taobao and Tmall, we have – together we have hundreds of active – hundreds of millions of active sellers on our platform. And all these sellers are our active marketers and they spend marketing dollar on our P4P, on our display ads, and also in our affiliate network. And today, their evaluation of the effectiveness of the marketing dollar spending is not only to look at the immediate sales and immediate ROI on our marketplace, but for a lot of the retailers and the brands, they have the offline business, they will also look at the effectiveness of this marketing spending in terms of acquisition of the new customers, in terms of the managing their existing customers and retain customers. So actually this will – as I said in my script, this will ultimately benefit their entire business both online and offline. So actually today, we have – this is our solid marketer base, and we expect that they will continue to do so in our enhanced ecosystem, not only in our marketplace today but also in our in shape (31

[Chung Tsai:]

Okay. Hey, Erica. Thanks for your second question. So I'll – both myself and Maggie will cover that. You mentioned the different businesses and different investment phases, and you wanted to sort of understand the sizing of investments. I think you mentioned cloud computing. I'll cover that and then I'll let Maggie talk about the digital entertainment. So as you can see, the cloud computing business grew 175% of revenues year-on-year. In absolute dollar terms, it's also coming into a significant dollar level. So we're very, very excited about this business. As I said in my prepared remarks, we are now already one of the largest cloud computing businesses in the world. So we're benchmarking not just in China but also against the world. And the business, as you know, can gain tremendous scale. When it reaches tremendous scale, it has a tremendous amount of operating leverage. So we are looking at over the course of this year that this business will not require a lot of additional investment into the business as it's generating cash flow. So that is how we look at the cloud computing business, high growth and also coming into a high trajectory in terms of operating leverage. I'll turn the mic over to Maggie to talk about digital entertainment.

[Wei Wu:]

Right. So digital entertainment is a relatively new area that we invested. The way you look at it, the major assets there right now is Youku. We also have music, have sports that are relatively small. So we just closed the Youku transaction in April. It's very recent. And then if you look at the market consensus for Youku before our acquisition, Youku was also a public company, you will notice that there are going to be a couple percentage points of margin dilution to ours. But the thing is that like Joe said in his remarks, when we look at all of our past business, we have this history of investing in long-term initiatives with patience. So new initiatives, very interestingly, typically it takes like five years to seven years to grow into substantial profitability. So we're going to, in near-term, continue to invest in this digital entertainment area. This is just the beginning of the business.

[Jane C. Penner:]

We'll take the next question, operator.

[Operator:]

Thank you, ma'am. We have the next question from the line of Sean Zhang from 86Research. Please ask your question.

[Sean Zhang:]

Thank you. Congratulations on a strong quarter. We recently noticed you are rolling out product level and store level (34

[Daniel Yong Zhang:]

Thanks. This is Daniel. For the first question, yes. We, as a platform, actually our value add to our merchant is that to enable them to operate their software effectively. So today, what we are doing is to use the big data we have to help the merchant to tailor-made their storefront and -- to the right audience and in the right location. So, so far, we are still in the – actually in the beta test, and that we work closely with couple of partners, a couple of sellers and to do that. And so far, the result is very encouraging because of the targeting, because of the data-driven service, actually the effectiveness of the ROI of the traffic actually improved very dramatically. (36

[Jane C. Penner:]

Next question, please.

[Operator:]

Thank you, ma'am. We have the next question from the line of Robert Lin from Morgan Stanley. Please ask your question.

[Robert Lin:]

Good morning and good night and good afternoon, everyone. Congratulations on the very strong results. I guess I have two questions here. I guess one is on the international. We announced the acquisition of Lazada. And we also noticed that the international retail has accelerated after our restructuring of the AliExpress platform. Can you provide some insight on how we plan to integrate the two platform, more in the medium term about – are we separate operated, and then potentially cross-sell with four (38

[Daniel Yong Zhang:]

Thanks. This is Daniel again. And I'd like to answer the first question about international expansion. Yes, Lazada is a very important acquisition, and as people know, Lazada now has a very good brand recognition in South Asia countries and especially in five country, six country, they are all in the leading position. And in this market, actually, we have over 500 million consumers, and so that's why we think this is a good vehicle for us to expand to this area. And yes, in our portfolio, we also have our self-operated self-built-up AliExpress business, and we are happy to see that there is a good synergies between AliExpress and Lazada. And in terms of the countries coverage, actually AliExpress is now – it's very strong in Russia, very strong in some European countries and in the U.S., while Lazada is very strong in Southeast Asia. So actually we – this give us a wider coverage, and this is good for us to achieve our 2 billion consumer vision. And in terms of synergy we can generate from these two businesses, it's obvious. What we want to do is actually first to leverage the merchant base we have not only in AliExpress but also in our China retail platform to help more Chinese merchants on-boarding Lazada and help them to get access to the consumers in Southeast Asia. Actually, we are happy to see the Auto acquisition. A lot of clients actually call me and ask these questions and show their interest. And we expect that we will kick off this process right as a key – as a very important component of the integration. And in terms of profitability, I will say as we always do, we will invest in this international business and actually we – what we will care about is a mind share of the – in a local country and the customer engagement and retention. And we believe if the customer is with us, the merchant will be with us, and we will generate value. We can provide – as long as we can provide value to the merchant to get access to the customers to serve the customers, then we can generate enough economics from this international business. Thank you.

[Wei Wu:]

Yeah, Rob, this is Maggie. Regarding your question about the logistics costs we pay to Cainiao, when you look at the total costs for the full year, RMB2.37 billion which was about 2% of our revenue paid to Cainiao, that's mainly associated with the logistic fulfillment services Cainiao provided to ATH (42

[Jane C. Penner:]

Next question, operator.

[Operator:]

Thank you. We have the next question from the line of Eddie Leung from Merrill Lynch. Please ask your question.

[Eddie Leung:]

Good evening. Thank you for taking my questions. Two questions. The first one is about product categories. Would you mind sharing more color with us the recent performance of some of your key product categories, because we have read articles and sometimes even press releases about the performance of some categories in certain regions, so wondering if you could summarize some of the trends and share with us? So that's the first question. And then secondly, also a follow-up question on Cainiao. So besides what Maggie mentioned about, for example, the geographical coverage and rural areas, so just wondering where we would see Cainiao going beyond China because we have been seeing more activities on AliExpress as well as some of our (44

[Daniel Yong Zhang:]

Thanks, Eddie. This is Daniel. For the product categories development, let me try to give you some color on this. First, actually what we can see is that the main categories such as apparel and the consumer electronics still show very strong growth and especially Q1, actually for apparel and achieved the wintertime this year achieved quite unusual. And it's not that cold in December and in January, but it is quite cold in February and March. This actually drives sales of apparel to a certain extent, but not dramatically. The reason is because most of the sellers, actually their (44

[Wei Wu:]

Right. So, Eddie, regarding the Cainiao question, I want to make it clear that Cainiao is not a traditional logistics service provider. So by the time we set it up, we invested, right? We have right now 47% shareholding in Cainiao. It tends to be beta, logistic data company, and information company. So when you look at – nowadays we have like 35 million – around 35 million packages being delivered, Cainiao has been only like less than three years old. Before Cainiao was there, the packages had been handled but never been handled at this efficiency as we have seen today. And what Cainiao has been focused on is to line up and set up this information hub, the information center and utilizing the data it has to improve the efficiency and the whole logistic chain rather than just providing fulfillment and delivery services. So having said that, then look at what the (47

[Jane C. Penner:]

Next question, operator.

[Operator:]

Thank you. The next question is from the line of Vivian Hao from JPMorgan. Please ask your question.

[Vivian Hao:]

Hi, management. Thank you for taking my question. I have two questions here. My first one is regarding the related impact from recent tax policy change and also more strict custom checks on daigou for both Taobao and Tmall platform. Can we get a rough sense of like daigou percentage of our total GMV? My second question is regarding the outperformance of cloud computing. Is it possible if we can get a penetration or adoption rate of AliCloud services and not (49

[Daniel Yong Zhang:]

Thanks, Vivian. For the first question, actually on our Taobao and Tmall business we have two main businesses relating to the cross-border import. The first one actually is the Tmall Global which is not daigou, which is a B2C model and we have a lot of foreign partners, foreign brands and retailers on our Tmall Global platform and to do the cross-border sales. And the recent change in government policy still have some impact on Tmall Global business and also I think the entire or import industry also have some impact. But having said that, actually, we are happy to see the government regulate this cross-border import because actually we do – we did reserve – we did observe that there were a couple of (50

[Wei Wu:]

So, Vivian, regarding the cloud question, you've seen that our cloud systems grow very rapidly. If you look at the top line, it's growing at a three digit and we expect that growth trend continue. And I should say that AliCloud is getting very close to the breakeven point. So if we want to turn this business into profit, then we can do it very soon. And I think that the growth is mainly coming from, number one, increase the number of paying customers. We reported we have over 500,000 of paying customers at the end of March compared to 240,000 we reported a year ago. So very rapid growth and these customers across all size and across different industries and another growth driver is the continued expanding variable products and services, and also continued enhancement of the technology and the quality of these products and services. So we are very optimistic to the (54

[Chung Tsai:]

Just to supplement what Maggie said. I think that, Vivian, you also asked about the adoption rate of cloud computing from a merchant base. So the cloud computing business is a business that its customer base is very wide, well beyond just the e-commerce merchants that are doing business on our platform. So we see a lot of potential in different segments -- in corporates, in SMEs and also on government segments. And then in vertical segments like financial services, healthcare, games, developers, so it runs the gamut. So you should think about the customer base of cloud computing as well beyond our existing customer base. Now, our merchant base, right now, a lot of them are using the service effectively for free because they're using the service in sort of one-time situations. For example, on November 11 when there's a surge in volume and traffic and their business, they will come on to our Juhuasuan platform to enjoy the cloud computing service for free. And so in terms of adoption, a lot of them are already on our cloud computing platform, but in terms of paying potential, I think there's a lot of room to grow.

[Jane C. Penner:]

Next?

[Daniel Yong Zhang:]

Vivian, actually, I think that – I am Daniel. I just want to add one more comment on the first question. Yes, actually the government policy change actually do have some impact on our cross-border imports, but I have to say that today, the – in terms of scale, this business is actually in a low base and this won't have any material impact on our entire retail business. And for our C2C global buy, actually this policy change does not have any impact. Thanks.

[Jane C. Penner:]

Next question?

[Operator:]

Thank you. We have the next question from the line of Carlos Kirjner from Bernstein. Please ask your question.

[Carlos Kirjner-Neto:]

Hi. I have two questions, one about (56

[Wei Wu:]

Hi, Carlos. This is Maggie. On the Ant question, if you look at in this quarter we shared some losses from Ant actually increased this quarter. We have all this (57

[Chung Tsai:]

We're going to do our deep dive on Ant Financial on our Investor Day in June.

[Daniel Yong Zhang:]

For the question of customer loyalty programs, yes, customer loyalty is so important in our retail business. And today, we have over 400 million active buyers on our retail platforms, and one of the key operating targets is to maximize their customer spending across categories. And especially today, right after our acquisition of our digital entertainment business, Youku, and also our investment in (59

[Jane C. Penner:]

Operator, we're ready for our final question.

[Operator:]

Thank you. We have the final question from the line of Robert Peck from SunTrust. Please ask your question.

[Robert S. Peck:]

Yes. Thank you. Two questions, please. The first is on Ant Financial. And, Maggie, you talked about a 33% equity ownership. Could you just walk us through that process and how you go from the economic relationship to the equity ownership and how we should track that? And then number two, Joe, if you wouldn't mind just touching base on your thoughts on the Yahoo! process and the 384 million shares they own and your view on those shares? Thanks so much.

[Chung Tsai:]

Yeah. Hey, Rob, I'll address both questions. On the process of Alibaba Group to further participate in the actual equity ownership of Ant Financial is a process of regulatory approval. So in order for us to hold a direct stake, we have to get specific approval from the regulators, from the financial regulators, in China. And that is because ownership in financial institutions by foreign companies is very limited. And there are no precedents for an entity like Ant Financial, and so the regulators are going to be looking at this as a case of first impression. But we're having a very constructive dialogue with them about this. So that's the process. In the absence of a conversion into direct equity, Alibaba Group will continue to share 37.5% of the profits of Ant Financial. So that's an either/or situation. Your second question relates to the Yahoo! process which is something that is a little bit unknown to us because they're running their own process of selling the core business. We're not in that process. We expect that their – if they sell the core business, then they will continue to be a company that will continue to be a 15% shareholder in our company. So nothing will change.

[Robert S. Peck:]

Thanks so much, Joe. Congratulations.

[Jane C. Penner:]

With that, we can close the call, operator.

[Operator:]

This concludes our presentation. Thank you for your participation. You may all disconnect.