Alibaba Group Holding Ltd Q4 FY2020 Earnings Call

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group's March Quarter and Full Fiscal Year 2020 Results Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. I'd now like to hand the call over to Rob Lin, Head of Investor Relations of Alibaba Group. Please go ahead.

Good day, everyone, and welcome to Alibaba Group's March quarter 2020 and fiscal year 2020 results conference call. With us are Daniel Zhang, Executive Chairman and CEO; Joe Tsai, Executive Vice Chairman; and Maggie Wu, Chief Financial Officer. This call is also being webcast from our Investor Relations section of the corporate website. A replay of the call will be available on our website later today.

Thank you, Rob. Hello, everyone. Thank you for joining our earnings call today. We have finished an extraordinary quarter and delivered an outstanding fiscal year. Despite the impact of the COVID-19 pandemic, Alibaba achieved a historical milestone of US$1 trillion in GMV across our Digital Economy this fiscal year, a strategic goal that we set for ourselves five years ago. We, at Alibaba, have always been aiming for the stars while keeping our feet on the ground. The $1 trillion GMV milestone reflects the strength of Alibaba’s Digital Economy, as well as our strong execution against a clear strategic vision.

Thank you, Daniel. Thank you to everyone joining us. I'd like to start my prepared remarks by addressing the impact of COVID-19 on our financials and recent trends. Back in February, given the potential uncertainties of the COVID-19 pandemic, we guided the market that our overall revenue growth rate would be negatively impacted for the March quarter and that some businesses such as China retail marketplaces and local consumer services might show negative revenue growth. I'm pleased to report we delivered better-than-expected March quarter results. The government took effective measures to limit the spread of the virus through lockdowns, social distancing measures, and travel restrictions. With the virus spread under control in China, these restrictions started to ease in early March, leading to a recovery of supply chain and logistic delivery capacity. This, in turn, enabled a quick recovery for our China retail marketplaces, improving fundamentals for local consumer service businesses.

Thank you, Maggie. However, as this is our earnings call, you are welcome to ask questions in Chinese or English. A third-party translator will provide consecutive interpretation for the Q&A session, as our management will address your questions in the language you ask. Please note that the translation is for convenience purposes only; in the case of any discrepancies, our management statement in the original language prevails. So, operator, I’d like to open it up for questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Your first customer line is Binnie Wong from HSBC. Please ask your question.

Thank you, Daniel, Maggie, and Rob. My question is regarding your strategy in lower-tier cities. I know that last week you issued a new release, a new patch release to Taobao providing new support for merchants as well as other new features, and 70% of the uptake for that new patch release has, in fact, been from the lower-tier city. So can you please speak to us about your strategy going forward for the larger cities?

Thank you. I will take that question. Given the size and scale of Taobao as a retail platform and where it's at today, with 700 million users, the fact is that we've penetrated all segments of the market from the high end down to the low. The increase in the user base over the past year—70% of that came from lower-tier cities. So what we're doing in the lower-tier cities is deploying a more diverse and broad range of different services, including on Taobao, with more value-for-money offerings, as well as live streaming and other kinds of engagements that are targeted for these users, especially those who are looking for good value. And as you've noted, we have a new special price addition of Taobao targeted for users in lower-tier cities with a focus on providing them value-for-money offerings. At the same time, we see significant potential for further growing our user base; the current figure for annual active consumers—780 million—represents only 45% penetration of the population in lower-tier cities and rural areas of China. So there is still lots of room to grow in those regions, and we intend to do so together with Alipay by driving a digitalization strategy in those areas that will convert people into consumers. Thank you.

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

Thank you. My question is regarding the long-term impact of live streaming on the industry, specifically celebrity hosts and KOL live streaming. The question is, if merchants need to pay these celebrities, these KOLs, will that impact profitability of platforms going forward?

Thank you, and that's a really good question. What we're seeing is the emergence of live streaming as a new kind of sales methodology or sales channel with the emergence of KOLs and celebrity influencers online. The role they play in the context of retail is sales—they're serving as salespeople and making money through sales commissions. In the long-term, how this trend will play out really comes down to capturing the intrinsic commercial value of having online influencers and KOLs do live streaming in an efficient and effective way. If you have a one-off sales event with a celebrity influencer, you can get users to make a one-off purchase. Fine, but can you keep that user long-term, continue to market to them, and extract the full value from that relationship? It’s important if you're paying money to these influencers that part of that is to supplant existing channel costs and save costs there. More importantly, it’s about getting new consumers into your ecosystem so they can become long-term consumers. This is critical to Alibaba because we are a diversified ecosystem with multiple channels and formats for engaging consumers. So that's precisely what we're looking at doing with these kinds of live streaming approaches; it's just one part of an overall integrated approach through which we hope to develop long-term relationships and create long-term value.

Okay. Next question.

Thank you. Next question comes from the line of Piyush Mubayi from Goldman Sachs. Please go ahead.

Thank you for taking my question. I have one question regarding the guidance you provided for next year. What are the drivers of that growth assumption or guidance, and particularly, what are the underlying macro assumptions you've made, and more generally, what will the platform mix be like regarding the 1P versus 3P mix that you're likely to see that underpins that guidance? Thank you. I'll go back to the queue afterward.

Okay, Piyush, this is Maggie. Let me try to answer your question. We all know that we’re facing risks and uncertainties—many of which we’re unable to predict or control. For instance, when we'll see the vaccine come, how much impact geopolitical issues will bring, it's hard for us to factor those in. The guidance we provide primarily reflects assumptions we believe to be reasonable today. Regarding the recovery speed of each of our businesses, particularly in China retail, local services, and international businesses, based on what we've seen today, we see quarter-to-date transaction volume and user activities already experiencing growth at a similar rate to the December quarter level. That's the basic assumption we used. You mentioned the 1P and 3P mix. From our revenue breakdown for the fiscal year 2020, the 1P business as a percentage of total revenue is around 16% to 17%. We believe that percentage will continue to increase but not dramatically. The important thing is that when people think about your revenue content, taking a portion of 1P, remember that 1P usually represents low margins. However, looking at our profit growth—this is another point I want to make; we are a group that has such strong core growth and also has multiple engines, not only Taobao and Tmall but also cloud, New Retail, local services, and logistics. Strong revenue growth brings in the power for us to invest in those strategically important areas, and these investment areas are doing better and better, which reflects in our profit growth.

Next question, please.

Thank you. Our next question comes from the line of Alex Yao from JP Morgan. Please go ahead.

Thank you. I noted in your earlier remarks your comments about advertising revenue in the first quarter performing well, driven by a good performance of recommendation feeds. In that context, I'd like to ask about your plans for monetization of recommendations. I imagine that in your answer, you'll talk about the need to balance the interests of merchants against the desire for monetization. So perhaps I could go ahead and just ask the second part of the question. Namely, is there any technical or technological method that could be adopted to fully protect the merchants’ interests or even better serve them while also providing more opportunity for monetization? If so, is that something that could happen this year?

Thank you. I'll start with the latter part of your question. The answer is yes. There is technology that can do precisely that, and that technology is AI, artificial intelligence. We are already working on applying it in a way that ensures a good user experience by balancing advertising content versus our free content for users, while also leveraging that technology for merchants to drive better return on their investment. We are moving forward cautiously in growing revenues from recommendation feeds, hoping to find the best possible balance, leveraging technology between user experience and creating value for merchants.

Thank you. I’d just like to add a couple of points to Daniel’s already clear answer. The key word I'd like to add is multi-engine approach. Looking at our revenue over the last three years, revenue from CMR and commissions accounted for about 70% compared to 40%. This means that our strategic investments are beginning to produce new channels of revenue. You can see this growth in our figures over the last three years for CMR as well, dropping from 90% down to about 70%. We now have multiple new revenue areas to tap into, including recommendations we talked about but also live streaming and numerous other new sources of revenue. So, going forward, we will continue to take a prudent approach with our monetization.

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

Hi, good evening. Thanks management for taking my questions. My question is more about the spending power of buyers post-virus. Can management comment on the overall spending power of consumers these days? And with that, can you comment on the trend in ASP and order frequency that we would expect as people speed up the migration to online?

Okay, let me answer this question. First of all, we are a huge consumer platform with different tiers of consumers. We see that consumers engage with us and find what they want in different categories at varying price ranges. However, we do see a shift in product categories this quarter due to the pandemic. For example, there's been strong growth in food and grocery business, as people are cooking at home during lockdowns. They are unable to go to restaurants, so they need more food and groceries, which are daily necessities. Therefore, our FMCG categories grew around 40% in Tmall starting from the new fiscal year, a strong indicator that people are spending more in these categories. Conversely, spending on apparel and fashion has decreased, as people are wearing face masks and don’t need makeup. So, I believe spending is still there, but the focuses have shifted. Regarding overall spending power, China has a famous high saving rate, and we see strong consumption power remaining to maintain lifestyles. So far, we haven't seen significant changes in consumption power, but as I said, categories being targeted are different. For beauty, skincare remains strong, while makeup is declining due to face masks.

Next question.

Thank you. Our next question comes from the line of Jason Helfstein from Oppenheimer. Please go ahead.

Thank you. I just want to go a little bit deeper into that last point. You said that online physical goods GMV grew 10%, and you broke down that you saw 25% in categories benefiting more from COVID, offset by areas where they didn't spend money. What do you think is more reflective of consumer health? Is it that 10% number, or is it really that kind of 25%, indicating that consumers have the ability to spend more but aren’t because they don’t need these items, consistent with what you just talked about, not needing makeup while wearing a mask? Also, can you talk about how that relates to your outlook for the next quarter? Thank you.

Okay, let me answer this question. As previously mentioned, our Tmall grew about 10% in the March quarter, while the combined growth rate for FMCGs and consumer electronics on Tmall was about 25%. To get a comprehensive picture of future development, I cited in my remarks that since the New Year, the quarter-to-date overall growth rate for our China retail marketplace mirrors those of the December quarter. That serves as a clear indicator for where we are today. However, it’s important to acknowledge uncertainty surrounding pandemic containment, and we are closely monitoring the situation. We strongly believe that the consumption power in China remains robust, and we will leverage our digital platform to continue our leading position.

Next question?

Thank you. Next question comes from the line of Gregory Zhao from Barclays. Please go ahead.

Thank you and congratulations on the strong performance. My question relates to cloud services. Internationally, players like Microsoft and Google, who have already achieved significant scale in terms of size and revenues, continue to maintain rapid growth in their revenues and even acceleration. In contrast, Alibaba and its competitors in China seem to see a different trend where things are somewhat slower. I'm wondering if you could compare the China market versus the international market for cloud, what are the underlying differences, and what might be potential short-term bottlenecks to make a significant leap forward in accelerating revenue and profit in cloud?

Thank you. First of all, I'd like to say that in the past year, Alibaba Cloud Intelligence reached a very important milestone: RMB40 billion in revenue, achieving 58% growth even in the March quarter. We do not see a slowdown; on the contrary, we think the growth is substantial. Several factors drive this growth, including increasing demand across all sectors of the economy to adopt cloud services. Looking ahead, we anticipate that IT spending in China will continue to enhance as organizations transition to the cloud. The cloud not only serves as a means to provide infrastructure but also offers companies a way to leverage big data and cloud-enabled computing to enhance efficiency and create value. Various algorithms and analytics will be developed in the cloud to meet different sector needs and unleash brand new value for our clients. Alibaba’s value proposition includes cloud plus intelligence—we provide more than just cloud services. In different countries, definitions of cloud services can vary, internationally and in China. For Alibaba, if it is simply about shifting traffic to save costs, it represents a low value-added offering—that's not our focus. We aim for higher value-added cloud-enabled offerings that can truly create value. Regarding differences between the Chinese cloud market and the international cloud market, I would argue that in more developed markets like the U.S., the SaaS ecosystem and developer community is more advanced. In China, the developer ecosystem and SaaS are still emerging, and Alibaba is keen to collaborate with developers to build a robust ecosystem in China.

Next question?

Thank you. Our next question comes from the line of Alicia Yep from Citigroup. Please go ahead.

Congrats on the strong results. My questions are about the subsidy measures that you help provide merchants. Do you think that is actually more effective than commission rebates? Or do merchants prefer more free traffic? And given that recommendation feeds are becoming quite effective for merchants, does that mean over the next few quarters we won't need to provide more preferential commission rates, or is that a separate issue and the CMR commission growth direction will still diverge?

Alicia, let me first answer your question. We are trying to support our merchants, especially SMEs during the pandemic. However, we have to maintain a fair and transparent policy for all merchants on our platform. That's why we decided to use subsidies to waive annual fees and provide reduced commissions for some business areas. Regarding free traffic, this is a very interesting question. When we decided to support merchants, we had to consider the user experience on our platform because we are a marketplace. We have to consider the interests of both merchants and consumers. If we provide free traffic to specific merchants, their operating conversion rates may not be sufficiently attractive to customers, which is why we want to avoid one-sided approaches. We want to ensure a good user experience while still alleviating financial pressures on our merchants—this is how we contemplate this policy.

Yes, let me supplement that a little bit, Alicia. For subsidies and preferential commission rates, these are two separate matters. The subsidy is about waving annual fees for merchants on the Tmall platform during COVID-19 to help them through this tough time. Preferential commission rates are an ongoing effort we have throughout this year. Regarding both the subsidy and preferential commission rates, our operational philosophy is that we do not believe in merely burning money to grow GMV; we believe that our investments should support sustainable growth rather than just throwing money away. If you look at our profitability this year, we are targeting somewhere over RMB140 billion, and we maintain a cash reserve of around US$50 billion. So we have money to invest, but we emphasize helping our merchants sustainably and effectively.

Operator, one last question.

Final question comes from the line of Mark Mahaney from RBC. Please go ahead.

If you were to discuss the biggest structural changes that you think will occur to your business or to the digital economy due to the COVID-19 crisis, what would you say they are? You highlighted increased online grocery shopping, but beyond that, step back and tell us what you believe are going to be the most significant structural changes—permanent changes—in the way that consumers interact digitally because of this crisis. Thank you very much.

I think, in addition to the increased category penetration for food and groceries, a very important change is in the education sector and the penetration of customers who were not experienced Internet users or online shoppers before COVID-19. For example, during the pandemic, many older individuals have moved online to purchase everyday necessities. This reflects not only category penetration but also user penetration in the digital space. Secondly, this situation has transformed working methods and education delivery. This is why, during my earlier remarks, I highlighted that DingTalk has seen very robust growth, as it has become an essential platform for people working from home and improving efficiency. Similarly, for students and schools, DingTalk has evolved into a crucial platform for online classrooms. So, I believe these are fundamental changes that will persist even after the pandemic.

Thanks everyone for joining the call today. If you have any further questions, please feel free to contact the Alibaba IR team. Thank you very much.

Thank you.

Thank you.

Thank you. Ladies and gentlemen, this does conclude our conference for today. Thank you for participating. You may all disconnect.