Earnings Call Transcript - BABA Q1 2022

Rob Lin, Head of Investor Relations

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, Chairman and CEO

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 grew 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 costs, user acquisition and experience enhancement, merchandising and supply chain capability, infrastructure development, and new business initiatives.

Maggie Wu, Chief Financial Officer

Thank you, Daniel. Hello, everyone. Let me start with financial highlights for the June quarter. We delivered strong revenue growth of 34% year-on-year to RMB 206 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 RMB 42 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, we're seeing improving profitability in our cloud computing segments and narrowing losses for the DME segment. For the June quarter, net income was RMB 42.8 billion or US$6.6 billion. Non-GAAP net income was RMB 43.4 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. In 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. Idle Fish and Taobao Live have achieved 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, Head of Investor Relations

Hi, everyone. For today's call, you are welcome to ask questions in Chinese or English. A third-party translator will provide consecutive interpretation for the Q&A session. 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 discrepancy, management's statement in the original language will prevail. So now, operator, please connect to the speaker, and slide conference slides down, and then we'll start the Q&A. Thank you.

Operator, Operator

Thank you. First question comes from the line of Thomas Chong of Jefferies. Line is open, please go ahead.

Thomas Chong, Analyst

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 and collaboration with the other portals. Thank you.

Daniel Zhang, Chairman and CEO

Thank you. 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 annual active consumers. 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. It's very important for us 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 cater to the special demands of certain consumers when they're looking for value for money. Taobao Deals is all about growing the user base, growing the business, and catering to these different kinds of demands. We're particularly pleased to note that the development of Taobao Deals has already resulted in incremental growth of our user base in China, with our annual active consumers in China increased by 10 million. Of course, while leveraging Taobao Deals to satisfy these demands, we're also hard at work to build a highly efficient supply chain direct from manufacturer or producer, including industrial manufacturing bases, agricultural production bases, direct-to-consumer logistics, and supply chain. To address your second question about connectivity, we're aware that there have been media reports in this connection. 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 should be a fundamental characteristic of the digital economy. Achieving the circulation of users, information, and data, not only within but also across and among different platforms will certainly be conducive to realizing greater social value than the smaller circulation that could only be achieved within the same platform. We see cross-platform openness and connectivity as a positive trend that could unlock greater benefits in the Internet era. This issue of connectivity and openness is also a concern for our merchants and consumers. For merchants, particularly for SMEs, it would reduce their traffic acquisition costs, help improve their operating efficiencies, and make it more convenient for them to do business at lower costs. Similarly, for consumers, it would enable a better user experience across platforms for shopping, payment, accessing different services, and bring greater convenience to them as well. For all key stakeholders on Internet platforms, we see this as positive. We also take note of the launch by MIIT of a regulatory review and rectification project on Internet companies, focusing on practices like the discriminatory blocking of links to other platforms or blocking services from other companies. We will attach great importance to this review and rectification project and ensure our compliance with all regulatory requirements. We will work to find common ground and move forward together.

Rob Lin, Head of Investor Relations

Next question.

Operator, Operator

Thank you. Our next question is from the line of Eddie Leung, of Bank of America Merrill Lynch. Please go ahead.

Eddie Leung, Analyst

Good evening, guys. Thank you for taking my question. Just two 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? The second, 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. How might that affect our investment strategy and user acquisition tactics in some of these new initiatives? Thank you.

Joe Tsai, Executive Vice Chairman

Okay, let me answer these two questions. First about data, in recent months, the Chinese regulators issued a data-security law in June. They also have issued guidance and are waiting for comments about the data security review. We believe this is very important and will safeguard the long-term development of the digital economy. As digitalization is an inevitable trend and data is becoming—a common understanding that data is the core asset for companies, people, and even countries. Adopting legislations relating to data security is very important. And to emphasize, China is not the only country doing this. When you look at what happened in the U.S. and Europe, regulations on critical information infrastructure, personal data protection, and so forth has already been implemented. For Alibaba, digitalization is the core of our business. Data security is always the core tenet. We're carrying out self-compliance checks on the latest regulatory requirements and believe that further strengthening data protection will enhance the long-term health development of the digital economy. For the second question about subsidies and the way of acquiring new customers, we are happy to see the recent actions and guidance from the regulators for an orderly market. As always, we believe that subsidies cannot create the long-term value of the business or customers. If you look at Alibaba's history, we have never grown our business based on subsidies. We strongly believe that key elements still revolve around value creation for the long term.

Eddie Leung, Analyst

Many thanks, Daniel and translator.

Rob Lin, Head of Investor Relations

Thank you. Next question, please.

Operator, Operator

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

Alex Yao, Analyst

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 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? My second question is, I would like to follow up on the earlier question about data. I'm wondering how these new regulatory requirements and developments will perhaps affect Alibaba's ability 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, Chief Financial Officer

Thank you. 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. Where the expenditure is being channeled is clear. We have our Community Marketplaces business, Taobao Deals, Local Services, international business Lazada, and new retail, to a lesser extent also Cainiao. We give data to show how that spending is paying off. In all of these 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, it's increased by 200%, or be it in the GFA RDC area has been increased by 260%. We also showed that Idle Fish has grown to a monthly active user base now over RMB 100 million, and Taobao Deals' annual active user base has exceeded RMB 190 million. Ele.me orders are up by 50%. 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, the number of users is a very important metric to keep tracking. As Daniel shared earlier, our total annual active consumer number in China and overseas has now reached 1.18 billion, with the domestic user base in China now having reached 912 million. So the overall China plus global user base has grown by 45 million. We have a goal in the foreseeable future, within three quarters, to grow our domestic user base in China to 1 billion or more. Internally, we will evaluate the success of these investments in different ways. Primarily in three dimensions: user base growth, applications and experience, and user experience. This includes improvements in supply as well as in fulfillment. We'll certainly be sharing more specific KPIs in that context in the future.

Daniel Zhang, Chairman and CEO

To answer the second question regarding data, Alibaba has always held itself to the highest standards and the strictest requirements when it comes to collecting data and utilizing it. As new legislation and policy requirements are developed, we ensure strict compliance with the requirements of the law as well as with implementation guidance that is further developed. Your question also touched on the potential impact of new laws and policy requirements around data collection and utilization. In terms of revenue growth and business growth, it's important to underscore that Alibaba has never looked at data utilization or algorithm utilization as a standalone KPI. For example, in our consumer advertising business, we have never sought to leverage data or algorithms to achieve maximum monetization. The paramount importance is providing a top-quality user experience and a high level of user satisfaction. We've always approached the utilization of data with the intention of creating value for the community, users, and society. Therefore, we see the enactment of data security legislation and efforts to ensure better protection and stricter use of data as positive in terms of fostering long-term value for society.

Rob Lin, Head of Investor Relations

Thank you. Just a minor correction on the English translation before; I think we meant to say, Ele.me food deliveries order growth was 50%, not 150%. Next question?

Operator, 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, Analyst

Thank you for taking my question. I have two 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? 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. The second is in looking at CMR. Could you give us a feel for how the CMR is trending versus the core GMV for your business? Any color on how GMV projections would look like through potentially the next quarter? I ask because through the quarter over the past quarter, we had, based on NBS data, a sluggish May, but a remarkably better June, and I presume that a lot of the improvement in June was fostered by you and I wonder how the rest of the year looks. Thank you.

Maggie Wu, Chief Financial Officer

Thank you, Piyush, for your questions. Let me address the two and then perhaps Daniel can supplement. Regarding our cloud revenue, we mentioned the impact of one single top cloud customer on our revenue. Without this impact, our cloud revenue would have shown close to 40% year-on-year growth. We see strong growth in various industries within our cloud business like Internet, finance, and retail sectors. This customer impact is expected to continue for the remainder of this year until the full exit of this customer's international revenue. Looking forward, with various changes and new rules and regulations that might impact other customers, such as those in online education, we still believe the addressable market for cloud services is huge. We're focusing on our solutions, products, and technology upgrades to ensure customer experience and business growth. Regarding CMR, there's a linear relationship with GMV growth. The CMR, currently at 39% as a percentage of total revenue, illustrates that we have many new revenue streams coming in, indicating that the overall national GMV growth is becoming essential. Daniel, do you want to supplement?

Daniel Zhang, Chairman and CEO

Just a few words on the cloud business. The most important thing to look at is the long-term total addressable market. Today is just the beginning stage. From a customer portfolio perspective, we see growth in services related to data usage, storage, and analytics. We see higher demand in not just data storage but also data analytics and data security relevant services. This quarter, the growth rate for these services is higher than the average. It's important to have this entry point service offering and, over time, as enterprises move to the cloud, they will have higher service demands and we will up-sell and cross-sell additional services to them.

Piyush Mubayi, Analyst

Thank you, Daniel. Thank you…

Joe Tsai, Executive Vice Chairman

Thank you.

Rob Lin, Head of Investor Relations

Okay, next question?

Operator, Operator

Thank you. Our next question is from the line of Jerry Liu of UBS. Please go ahead.

Jerry Liu, Analyst

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, Chairman and CEO

Thank you. I'll take that question. When you ask about the marketplace-based core and EBITA there, and how we should look at that. We're investing in new businesses. When we used to talk about the marketplace-based core, it was Taobao and Tmall. But now, we're working on building different businesses, each with its unique and compelling value proposition, forming a matrix of marketplace-based core businesses. We see live streaming not merely as a new approach to selling goods online, but as an integral part of a merchant's overall approach to digital operation. One of the key things that Alibaba brings to merchants is our ability to provide multidimensional, multi-use-case, multi-value services, 365 degrees across an entire ecosystem, creating value for merchants. Live streaming is just one part of that. What merchants really want is to conduct lifecycle management of their customers, track and measure various KPIs around their customers, revenue, and profitability—not just the ability to track the success of one or two live streaming sessions. The bigger picture is the customer lifecycle, and we will continue to develop this comprehensive digital ecosystem and suite of services to support merchants.

Rob Lin, Head of Investor Relations

Okay. I believe that's our time for today. I thank everyone for joining today. If you have any questions or follow-ups, please do contact me and the IR team. Thank you very much.

Maggie Wu, Chief Financial Officer

Thank you.

Operator, Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.