Alibaba [BABA] Conference call transcript for 2021 q2
2021-08-03 15:00:59
Fiscal: 2022 q1
Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group's June Quarter of 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 June quarter 2021 results conference call. With us today are Daniel Zhang, our Chairman and CEO; Joe Tsai, Executive Vice Chairman; Maggie Wu, our Chief Financial Officer. This call is also being webcast from the IR section of our corporate website. A replay of the call will be available on the website later today.
Daniel Zhang: Thanks, Rob. Hello, everyone. Thank you for joining our earnings call today. We started this fiscal year with a strong quarter. Over the past 22 years, Alibaba has grown into a company encompassing consumer Internet and industrial Internet, with multiple engines driving our long-term growth. In consumer business, we operated the largest consumer marketplace globally with 1.18 billion annual active consumers as of June 30, 2021. During the first fiscal quarter, our annual active consumers grow from 890 million to 912 million in China and from 240 million to 255 million outside of China, representing quarterly net adds of 45 million in total. At the beginning of this fiscal year, we announced the plan to invest all of our incremental profits this year into core strategic areas, such as technology innovation, support programs for merchants to lower their operating cost, user acquisition and experience enhancement, merchandising and the supply chain capability, infrastructure development and the new business initiatives.
Maggie Wu: Thank you, Daniel. Hello, everyone. Let me start with financial highlights for the June quarter. We delivered a strong revenue growth of 34% year-on-year to RMB206 billion during this quarter, which is mainly driven by robust growth of our China commerce retail business, Cainiao logistics and international commerce businesses. Total adjusted EBITA was RMB42 billion, a decrease of 8% year-over-year. Our main China retail marketplace businesses continue to generate solid profitability. But as discussed last quarter, we're investing our excess profits in key strategic areas, and have increased spending in specific programs designed to support our merchants. For businesses other than commerce with so improving profitability of our cloud computing segments, and narrowing losses for DME segment. For June quarter, net income was RMB42.8 billion or US$6.6 billion. Non-GAAP net income was RMB43.4 billion or US$6.7 billion, up 10% year-over-year. Alibaba has evolved into a multi-engine company with businesses across different runways, and our revenue continues to be more and more diversified. During the quarter, customer management revenue contributed 39% of overall revenue, where it used to be a much higher percentage of total revenue in the past years. We now have many more revenue streams from a diversified base of businesses that are also fast growing. Businesses such as Cainiao and international retail commerce grew 50% or more, and were important drivers of our organic revenue growth. Talk about the investment in key strategic areas. Within our commerce segment, we're investing in a number of key strategic areas to strengthen consumer experience, enhance loyalty, penetrate into less-developed areas in China, and further expand our presence internationally. Now, let's look at the financial impacts of these investments during the quarter. First, Idle Fish and Taobao Live have achieved a robust user growth, as we increase our investment in these growth businesses. We have also increased our spending as specific programs throughout the quarter to support our merchants' operations in our China retail marketplaces. Service fees for several software tools designated to improve their marketing and business analytic capabilities were raised.
Rob Lin: Hi, everyone. For today's call, you are welcome to ask questions in Chinese or English. Third-party translator will provide consecutive interpretation for the Q&A session. Our management will address your question in the language you asked. Please note that the translation is for convenience purpose only. In the case of any discrepancy, management's statement in the original language will prevail. So now, operator, please connect speaker, and slide conference slides down, and then we'll start the Q&A. Thank you.
Operator: Thank you. First question comes from the line of Thomas Chong of Jefferies. Line is open, please go ahead.
Thomas Chong: Thank you very much management. Good evening and thank you for taking my question. My first question has to do with the multi-app strategy that you presented in your prepared remarks just now. In particular, we note that Taobao Deals is developing very well with robust growth in the user base. I'm wondering if you could tell us please what KPIs you have set and are looking at in terms of the ongoing development of Taobao Deals, in terms of the kind of user-base you intend to reach and your monetization strategy. Secondly, I'd like to ask about the recent media reports we've all been reading about increased connectivity that is expected to be realized in the Internet industry. I'm wondering how management views these reports, these ideas of opening up more connectivity and cooperation across different platform companies in terms of traffic, in terms of collaboration with the other portals. Thank you.
Daniel Zhang: Thank you. Well, on your first question regarding the multi-app strategy, as I said in my earlier remarks, with the development of Taobao Deals, we are working on building a more complete app matrix to better serve the different needs of different consumers. We already have a very large consumer base with over 900 million AACs. And they all have different preferences. In fact, the same user could well have different preferences and different needs when interacting in different contexts for different use cases. So it's very important to us to be able to cater to all of those different kinds of needs and demands with an appropriate product matrix. Taobao Deals has a very clear value proposition, namely offering users the best value for money and it's precisely that extremely clear positioning and value proposition that has allowed Taobao Deals to grow so well. An important goal of Taobao Deals is to help us grow the user base, adding incremental new users, especially from the less developed regions of China, and also to cater to the special demands of certain consumers when they're looking for value for money. So Taobao Deals is all about growing the user base, growing the business and catering to these different kinds of demands. And we're particularly pleased to note that the development of Taobao Deals has already resulted in incremental growth of our user base in China, our AAC number in China by 10 million. Of course, while leveraging Taobao Deals to satisfy these kinds of demands, we're also hard at work to building a highly efficient supply chain direct from manufacturer or producer, including industrial manufacturing bases, the agricultural production bases, direct-to-consumer logistics and supply chain. Second, let me address the question about connectivity. We're aware that there have been media reports in this connection. And this will be a question of interest I'm sure to many investors. Our view on connectivity has been consistent and extremely clear. We believe that connectivity is a core value of the Internet. We also believe that openness is a fundamental and should be a fundamental characteristic of the digital economy. When you can achieve circulation of users of information of data, not only within, but across and among different platforms that certainly will be conducive to realizing greater social value to a greater extent than the smaller circulation that could only be achieved within the same platform. So we do see cross-platform openness and connectivity as a positive trend that could unlock greater dividends in the Internet era. We note that this issue of connectivity and openness is also a concern to our merchants and consumers. For merchants, and in particular, for SMEs, it would certainly reduce their traffic acquisition costs and help improve their operating efficiency and make it more convenient for them to do business at lower cost. Similarly for consumers, it would enable a better user-experience across platforms for shopping, for payment, for accessing different services and bring a greater level of convenience to them as well. So for all of the key stakeholders on Internet platforms, we see this as a positive. We also take note of the launch by MIIT of a regulatory review and rectification project on Internet companies, with a particular focus on practices like the discriminatory blocking of links to other platforms or blocking of services offered by other companies. We will attach great importance to this review and rectification project, and of course, ensure our compliance with all regulatory requirements. And to borrow a popular saying lately, we will work to find common ground and move forward together.
Rob Lin: Next question.
Operator: Thank you. Our next question is from the line of Eddie Leung, of Bank of America Merrill Lynch. Please go ahead.
Eddie Leung: Good evening, guys. Thank you for taking my question. Just 2 quick questions about regulation. The first one is we have seen some regulatory focus on data in general. So how might that affect our compliance and IT infrastructure costs? And then, secondly, in the past few months, we have also seen media reporting regulators seem to be looking at the use of heavy subsidies in the industry, including some . So, how might that affect our investment strategy and user acquisition tactics in some of these new initiatives? Thank you.
Joe Tsai: Okay, let me answer these 2 questions. First about data, well, I think actually in recent months, the Chinese regulators issued the data - I think in June they issued a data-security law. And in recent months they also have issued a guidance and also to waiting for comments about the data security review, we believe this is very, very important. And we believe these laws and registrations will safeguard the long-term development of digital economy, because as digitalization is inevitable trend and data is becoming - is a common understanding that data is the core assets for companies, for people and even for country. So to adopting these legislations relating to data security is very important. And China is not the only country doing this. Actually, when you look at what happened in U.S. and Europe, regulation on critical information infrastructure, personal data protection, so on, so forth has been - already being implemented. So, for Alibaba digitalization is core of our business. Data security is always the core tenet of our business. And as always, we pay highest attention to this topic. And right now, we are carrying out self-compliance checks on the latest regulatory requirement. And we strongly believe that to further strengthen the data protection, we'll enhance the long-term health development of the digital economy. For the second question about the subsidies and the way of acquisition of new customers, I think generally speaking, I think we are very happy to see the recent, I mean, actions and guidance from the regulators for orderly market. As always, we believe that subsidy cannot create the long-term value of the business, cannot create the long-term value of the customers. So if you look at the Alibaba history, actually we never grow our business on subsidy, based on subsidies. We strongly believe that the key thing is still the value creation for the long-term. And so that's why in this year when we plan our incremental investment, we always focus on the value creation. And, we think that for other companies who is continuous loss making, but still try to, I mean, enlarge the scale by subsidies. I think at the end of the day, they have to let the market see the real results of how to make profit.
Eddie Leung: Many thanks, Daniel and translator.
Rob Lin: Thank you. Next question, please?
Operator: Thank you. Our next question is from the line of Alex Yao of JPMorgan. Your line is open. Please go ahead.
Alex Yao: Thank you. A couple of questions, if I may. First of all, I'd like to ask about the KPIs, you are applying and will be applying to evaluate the success of these incremental investments. We see very clearly in the financial results that you've released the spending side of the equation and where these investments have gone. But can you tell us a little bit more please about the ROI on those investments? How you'll be tracking that? What are the KPIs we'll be looking at internally? Will it be user growth or other KPIs perhaps? And then my second question, but we'll follow-up on the earlier question about data. I'm wondering how these new regulatory requirements and developments will perhaps affect Alibaba's ability going forward to make use of data, to collect data, process data, utilize data, especially for monetized services like advertising if you could speak about that in a bit more detail? Thank you.
Maggie Wu: Thank you. Well, if you refer to the PowerPoint that I prepared to go along with my earlier prepared remarks, you will see that we outline all of these incremental investments that we're making, in terms of the different areas they're going to. So as you say, where the expenditure is being channeled is very clear. We have our Community Marketplaces business, Taobao Deals, Local Services, and the international business Lazada, new retail and to a lesser extent also Cainiao. And then on the right hand side of that very same slide, we give data to show how that spending is paying off. And you'll see that in all of those different areas, progress is being made and things are going very well. In terms of GMV, in the Community Marketplaces business in the first quarter by 200% or be it in the GFA RDC area has been increased by 260%. So that's an upfront investment in capacity that will pay off down the road with higher orders and higher GMV. We also showed there that Idle Fish has grown to MAU user base now have over RMB100 million and top of deals, the AAC user base has exceeded now RMB190 million, Ele.me orders up by 150%. So in the different business areas, I think, different metrics should be looked at to understand the return on investment, certainly in the consumer business number of users is a very important metric to keep tracking. As Daniel shared earlier, our total AAC number in China and overseas taken all together has now reached RMB1.18 billion with the domestic user base in China, the AAC number now having reached RMB912 million. So the overall China plus global user base has grown by RMB45 million. Also, as Daniel has previously stated, we have a goal in the foreseeable future within, say, 3 quarters to grow our domestic user base in China to RMB1 billion or more. Now, you may say it's not a very big stretch to get from RMB900 plus million to RMB1 billion. But that's actually a huge difference. If you think of that user base, interacting with all of these different businesses be it local services, be it Idle Fish, be it Taobao, and so on. We're talking about growing that user base further but also significantly enhancing stickiness, so those users avail themselves of all of those different businesses. So just to finish the answer. Internally, we will evaluate the success of these investments in different ways in different businesses. But primarily in 3 dimensions, the first of which, I was just speaking about the user base growth, but also applications and experience. So when it comes to user base, something very important to understand that differentiates us from the other platforms and makes those numbers even more meaningful is that these users are using different apps and different services within the Alibaba Ecosystem, and we'll continue to grow their usage across those different apps. Secondly, when it comes to applications, we're tracking of course order growth and GMV growth, and we'll continue to report to you on that. And then the third dimension is user experience, and that would include improvement in supply as well as in fulfillment. And going forward, we'll certainly be sharing with you more specific KPIs in that context, for example, in our Community Marketplaces' business, our on-time delivery rate, which is already very high. But going forward, we will be reporting to you in more detail on KPIs in each of those 3 dimensions.
Daniel Zhang: Thank you. This is Daniel to answer the second question regarding data. Alibaba has always held itself to the highest standards and the strictest of requirements when it comes to collecting data and utilizing data, we've always done that consistently and will continue to do that. As new legislation and new policy requirements are developed, we will ensure the strict and full compliance with the requirements of the law as well as with implementation guidance that is further developed. It is our commitment to deliver robustly on our commitment to data security and data protection. Your question also touched on the potential impact of new laws and policy requirements around data collection and utilization. In terms of revenue growth, business growth, I would simply underscore that Alibaba has never looked at data utilization or algorithm utilization as a single standalone KPI or a single factor that we rely on in growing the business. And to give a specific example to illustrate what I mean by that. In our consumer advertising business, we have never sought to leverage data or algorithms to achieve the maximization of monetization in the consumer advertising space. We think it's much less important to maximize click through rates, compared to the paramount importance of providing a top quality user experience, a high level of user satisfaction. So we've always approached the utilization of data with the intention of growing value for the community, for the users and society. Therefore, we see the enactment of data security legislation and efforts to ensure the better protection and stricter use of data as positive in terms of being able to foster value for society in the long-term and to allow good companies like Alibaba to grow and create more value for their customers and themselves.
Rob Lin: Thank you. Just a minor correction on the English translation before, I think, we meant to say, Ele.me food deliveries order growth 50%, not 150%. Next question?
Operator: Thank you. Our next question is from the line of Piyush Mubayi of Goldman Sachs. Your line is open. Please go ahead.
Piyush Mubayi: Thank you for taking my question. I have 2 questions. The first is on the cloud growth rate, which is down to 29% from 37%. Could you just take us through what happened in the quarter that resulted in that step down in growth rate, when we're seeing the impact of the customer moving out in the previous quarter? So how much of it was that customer? And also, if you could just shed some light on what the core growth rate for the cloud business in China is, that would be helpful? And the second is in looking at CMR. Could you just give us a feel for how the CMR is trending versus the core GMV for your business? And any color on how GMV projections would look like through potentially the next quarter? And I asked that because through the quarter, through the past quarter also we had, even based on NBS data we had a sluggish May, but a remarkably better June, and I presume that a lot of the improvement in June was fostered by you and if that pace of growth is a function of how you're fostering growth I wonder how the rest of the year looks. Thank you.
Maggie Wu: Thank you, Piyush, for your questions. Let me answer the 2 and then maybe Daniel supplement. So for cost revenue, we talked about the top this one single top cloud customer's impact our revenue. So without this impact, our cloud revenue would have been showing close to 40% year-on-year growth. And we do see strong growth in many industries within our cloud business like Internet, finance and retail sector, et cetera. Talk about this one customer impact, we expect this impact to continue for the remainder of this year, until the full exit of this customers international revenue. So, looking forward, as you've seen, there are many changes, and also new rules and regulations comes out there might be impact on other customers, for example, like online education customers. However, overall, we still believe the addressable market for cloud service is still huge. And we just kept focusing on all of these solutions, products and technology upgrade, ensure the customer experience and to grow the business. So that's for the cloud, there will be some near-term comps, and continuing impact from that top customer. One more thing to add to the cloud revenue is about a concentration risk you might have in mind. So if we take that one customer, our top 10 external customers revenue contribution to our total revenue is single-digit. So we're pretty diversified in the cloud revenue. So, question 2 about CMR growth. The CMR growth has this linear relationship with the GMV growth. So, we see that relationship still there. One thing, I want to highlight is that CMR as a percentage of total revenue, right now is 39%. So we do have a lot of new revenue streams coming in, and I think in the revenue pie. Going forward, GMV growth, I think with the total national GMV growth, you can tell from the NBS data. We are quite representative to the total pie if you look at over 1 trillion total GMV as a percentage of total China's consumption is becoming very important and essential. So it can be very different from the whole national online GMV growth. Daniel, you want to supplement? One thing to add before get into Daniel is that the future revenue stream, I think, whatever we're investing nowadays, including all of these new strategic business areas including all these infrastructure like supply chain capability and fulfillment capability construction is aim to - all of these aim to provide value - additional value to our customers. Once, we get the skill of the business - development of the business and the customers keep coming to use our services, there will be opportunities for us to monetize the value provided. So these are going to be new revenue resources to our overall group revenue. Thank you.
Daniel Zhang: Yeah, just a few words on the cloud business. I think, the most important thing to look at the cloud is about the total addressable market in the long-term. And, I think, all the people can recognize that today is just that beginning stage. And just now, Maggie share with you - in terms of share with you our business situation from a customer portfolio perspective. Now, I just want to add a few words on it from a product perspective. I think today for many enterprise customers that how to run an efficient, I mean, infrastructure is basically the entry-point, I mean, services they need, when they decided to move to cloud. And over time, we are happy to see that they get used to - when they move to the cloud, they will have a higher demand in terms of how to collect and especially the computing and usage of the data. So, that's why they have a high demand not only on the data storage, but also on the data analytics, on the database, and even data security relevant services. So, actually, this is what I said in my remarks that in this particular quarter, we see a very - if you look at the growth rate by product, by services, actually the services for data usage, data storage and data analytics, data securities, actually their growth is higher than average. So I think it's more like we have this entry point services as ours. And then, going forward, we try to up-sell and cross-sell many more services to our enterprise client, when they are in the process of digital transformation.
Piyush Mubayi: Thank you, Daniel. Thank you…
Joe Tsai: Rob Lin: Okay, next question?
Operator: Thank you. Next question is from the line of Jerry Liu of UBS. Please go ahead.
Jerry Liu: Yes, thank you management. I have a question also on investment, which we have been discussing. But I'd like to know if you could tell us a bit more about the investments you're making in the marketplace-based core and also in particular in Taobao Live Streaming.
Daniel Zhang: Thank you. Well, I'll take that question. I think it's a very simple answer. When you ask about the marketplace-based core and EBITA there, and how we should look at that. We're investing as we said in new businesses. So when we used to talk about marketplace-based core, it was Taobao and Tmall. But now, we're working hard on building all of these different businesses, each with its own unique and compelling value proposition, and collectively forming a matrix of marketplace-based core businesses. So that requires that we take a different perspective in evaluating marketplace-based core profit. In terms of live streaming, we see that not merely as a new approach to selling goods online, rather we see it as an integral part of a merchants' overall approach to digital operation. So one of the key things that Alibaba brings to merchants and that distinguishes Alibaba is our ability to provide multidimensional, multi-use-case, multi-value services, 365 degrees across an entire ecosystem, creating value for merchants and live streaming is just one part of that. And what merchants really want and need is the ability to conduct lifecycle management of their customers. The ability to track and measure a range of KPIs around their customers, the revenue, profitability. And not just the ability to track the success of one or two live-streaming sessions. That's just one part of the process. But the bigger picture is the customer lifecycle. So going forward, we will continue to develop this comprehensive digital ecosystem and a comprehensive suite of services to support and enable merchants. And when merchants are supported and enabled in this way, of course, that is how consumers will be able to experience the best possible online experience.
Rob Lin: Okay. I believe that's our time for today. I thank everyone for joining today. And if you have any questions, follow-up, please do contact me and the IR team. Thank you very much.
Maggie Wu: Thank you.
Operator: Thank you. Thank you. Yeah. This concludes today's conference call. Thank you for participating. You may now disconnect.
