Earnings Call Transcript - BABA Q4 2021

Rob Lin, Head of Investor Relations

Good day and good evening, everyone, and welcome to Alibaba Group’s March quarter 2021 and full fiscal year 2021 results conference call. With us today are Daniel Zhang, our Chairman and CEO; Joe Tsai, Executive Vice Chairman; Maggie Wu, 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 our website later today.

Daniel Zhang, Chairman and CEO

Thank you, Rob. Hello, everyone. Thank you for joining our earnings call today. We delivered another solid quarter, making the strong finish to this eventful fiscal year. China started this past year with the national battle against the COVID-19 outbreak and ended the year as the first country in the world to effectively control the pandemic and return to normal life. Based on IMS estimates, China was the only major economy that achieved positive real GDP growth in 2020. According to the National Bureau of Statistics, China recorded retail sales of RMB 42 trillion during the 12 months ended March 31, 2021, and the GDP growth in the quarter ended March 2021 reached 18.3% year-over-year. Against the backdrop of this macroeconomic recovery and accelerated digitalization in China, Alibaba Group achieved healthy growth across all businesses. During the past fiscal year, we made significant progress in our three key strategies, namely domestic consumption, globalization and cloud computing. Such progress demonstrated the tremendous power of Alibaba’s digital commerce infrastructure as well as our long-term commitment to invest for the future and to create value for our consumers, merchants and partners through innovations.

Maggie Wu, Chief Financial Officer

Thank you, Daniel. Hello, everyone. Let me start with financial highlights for the fiscal year 2021 and for the March quarter. Our total revenue was CNY 717 billion, an increase of 41% year-over-year. Excluding the consolidation of Sun Art, our revenue would have grown 32% year-over-year to CNY 674 billion. This well exceeded our revenue guidance given at the beginning of the year, which was CNY 650 billion. For the March quarter, our total revenue was CNY 187 billion, up 64% year-over-year. Excluding Sun Art, the growth would have been 40%, still very strong. The growth was driven by the robust revenue growth of our China commerce retail business as well as continued growth of cloud computing businesses. Total adjusted EBITDA was CNY 170 billion, an increase of 24% year-over-year. And for the March quarter, it was RMB 23 billion with an increase of 14% year-over-year primarily driven by healthy profit growth of our market-based core commerce business, partially offset by increased investments in new businesses and key strategic areas. Total adjusted EBITDA increased 25% year-over-year to CNY 197 billion for the year and increased 18% year-on-year for the March quarter. So net income was CNY 143 billion for the fiscal year, which includes the one-time fine levied and increases in SBC expenses. The non-GAAP net income for the year was CNY 172 billion, a 30% year-on-year growth. In the March quarter, we showed a net loss of CNY 7.7 billion primarily due to the antimonopoly fine of RMB 18.2 billion. Excluding this impact and certain other items, non-GAAP net income was RMB 26 billion, an increase of 18% year-over-year. We continue to maintain a solid cash position of USD 72 billion with strong cash flow generation capability. Our free cash flow grew strongly at 32% to RMB 173 billion or around USD 26 billion. Now let’s look at the fiscal '21 revenue in more detail. Our revenue continues to be more diversified on the back of strong organic growth. The revenue of our China retail marketplaces continued to grow strongly as reflected by our customer management revenue growth of 24%. Our Alibaba Cloud and Cainiao businesses were the two fastest-growing businesses and important drivers of our organic revenue growth. Both have also achieved important financial milestones with the cloud computing business proving its capability to be profitable in December quarter and continuing to show increasing profit in March quarter, and Cainiao generating positive cash flow. These two growth businesses exemplify our track record of committing to invest in businesses over the long term that we believe can create tremendous value for our ecosystem. It is important to note that we have continued to invest and grow new seed businesses such as Taobao Deals; Taobao Grocery; Fresh Hema market, which is the Community Marketplaces business; and new features on the core platform such as Taobao Live and short-form video. These initiatives address new consumption demands and behaviors that will continue to expand our addressable markets in China and create many cross-selling opportunities in our ecosystem. We believe these businesses have the potential to be the long-term revenue growth drivers that continue to catalyze our multi-growth engine in the future. Let’s look at our overall cost trends. Excluding SBC as a percentage of revenue, the cost of revenue ratio increased in March quarter and fiscal year due to the higher proportion of direct sales business. This increase was primarily attributable to the higher proportion of our direct sales business from the consolidation of Sun Art as well as the growth of Tmall supermarket. These direct sales businesses will continue to strengthen our New Retail initiatives, especially in the development of our product sourcing capability. Sales and marketing ratio also increased in March quarter and fiscal year given the increase in marketing and promotion spending to drive user growth and engagement. I would like to remind everyone that we added 84 million annual active consumers on our China retail marketplace in fiscal 2021, especially in lower-tier cities, with Taobao Deals ending the year with 150 million inactive consumers. G&A expense ratio was significantly higher at 13% for the quarter, primarily due to the expensing of the one-off antimonopoly fine. Excluding this item, G&A ratio would have decreased by 1 percentage point to 4%. Revenue and adjusted EBITDA. These slides provide you with an overall summary of our segment revenue and profitability for the March quarter and fiscal year. Starting this quarter, for the purpose of presenting our market-based core commerce adjusted EBITA, we expanded the list of our new initiative businesses that we break out in order to present the progress of our strategic investments as well as the profitability of our market-based core commerce business. This is on a like-for-like basis. The new initiative businesses, which now include our New Retail business, Local Consumer Services, Lazada, Taobao Deals and Cainiao, represent strategic areas where we are executing to capture incremental opportunities. As previously mentioned, we are very excited about the growth prospects of these fast-growing businesses that will not only increase our addressable market but also require long-term investment commitments. We believe these new businesses will be the drivers of our multi-engine revenue growth in the future. So under this new presentation, for fiscal 2021, our market-based marketplace-based core commerce adjusted EBITA was CNY 229 billion, growing 17% year-on-year. Combined losses of strategic investment areas were CNY 34.6 billion, reflecting investment in New Retail, Local Consumer Services, Lazada as well as addition of losses reflecting our aggressive investment in Taobao Deals. Core commerce adjusted EBITA reached CNY 194 billion. The cloud computing and DME continued to narrow losses during this fiscal year. Our innovation initiatives recorded adjusted EBITA loss of RMB 10 billion, up RMB 1.8 billion as we continued to invest in technological research and innovation. Overall, our adjusted EBITA for fiscal year grew 24%, reflecting the strength of our core commerce business that was partly offset by the investment we made in the new initiative areas. Segment reporting, I wouldn’t go into detail for each one of them, just some highlights. So for the core commerce, CMR grew 40% year-over-year to CNY 64 billion. This growth was driven by solid growth of our China retail marketplaces. Overall, online GMV grew 33%, reflecting the rapid recovery of growth in apparel, accessory and home furnishing categories, etc. FMCG also exhibited solid growth during this quarter. In March quarter, China retail others revenue grew 134% to CNY 60 billion due to consolidation of Sun Art. In March quarter, marketplace-based EBITA reached CNY 44 billion, up 28% year-on-year, reflecting solid CMR growth, partially offset by the increase in the marketing and promotional spending for user acquisition and increasing engagement on our China retail marketplace. Let’s take a look at the cloud computing business. Ali Cloud revenue grew 37% year-over-year to CNY 17 billion during the quarter. This lower revenue growth during the quarter was due to a change in our relationship with a top cloud customer in the internet industry. This customer has a sizable presence outside of China that used our overseas cloud services. They have decided to terminate the relationship with us regarding their international business due to non-product-related requirements. We expect the impact of reduction in revenue from this customer to affect our year-on-year growth rate when compared to prior years. Excluding this customer impact, Alibaba Cloud top 10 non-affiliated customers together accounted for no more than 8% of Alibaba Cloud total revenues. So you get a sense of this concentration; revenue is really not high. Going forward, we believe that our cloud computing revenue will be further diversified across customers and industries. Alibaba Cloud was profitable for the quarter and generated an adjusted EBITA of RMB 308 million. Our cloud business has delivered profits over the last two quarters, which demonstrates that we can run this business on a profitable basis. We believe it is still more important to drive market share leadership, given the rapid growth of the industry. We will continue to invest in innovative technologies, expand customer servicing capabilities and enable a robust developer ecosystem for the cloud business in the future. Our DME business for the quarter grew to CNY 8 billion in revenue, 12% year-on-year growth. This is a sector that’s impacted by the pandemic as well. Income statement selective financial metrics. So when you look at the interest and investment income, it was RMB 111 million in March quarter. This year-over-year increase is primarily due to the decrease in net loss arising from the fair value changes of our investments. Our share of results of equity method investees was RMB 6 billion during March quarter. Our free cash flow was an outflow of CNY 658 million this quarter. This was also a similar pattern in last years. The cash flow outflow during this quarter was mainly due to our increased strategic investment as well as an increase in marketing and promotional spending for user acquisition and retention. And at the same time, there was merchant deposit fund, which is a practice that we discussed in the earnings release, that we just take out from the free cash flow calculation. So, let’s take a look at the non-GAAP net income attributable to shareholders, which was CNY 5.5 billion for the quarter. This was mostly due to expensing of a CNY 18.2 billion fine, partially offset by the reduced net loss arising from the fair value changes of our investments. Now, outlook and guidance. So total revenue, excluding Sun Art consolidation, was CNY 674 billion for fiscal 2021, which, as I mentioned, surpassed our annual revenue guidance. This was driven by robust performance of our core business as well as continued growth of cloud. Going forward, we expect to generate over RMB 930 billion in revenue in fiscal 2022, considering the total market potential as well as our strong profit and cash flow generation capability. This gives us the internal resources to focus on long-term value creation. In fiscal 2022, we plan to invest all of our incremental profits and additional capital into supporting our merchants and developing new businesses and the key strategic areas that will help us increase consumer wallet share and penetrate into new addressable markets. That completed our prepared remarks. Let’s open up for Q&A.

Rob Lin, Head of Investor Relations

Hi, everyone. So for today’s call, you’re 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 question in the language you ask. Please note that the translation is for convenience purposes only. In the case of any discrepancy, the management statement in their original language will prevail. Operator, we can connect to the speaker and SI conference lines and start the Q&A session when ready. Thank you.

Alex Yao, Analyst

I have some questions on the investment side. First of all, I’d like to know if you could please clarify the remarks made, I believe, by both Maggie and Daniel in your presentations regarding the intention to completely reinvest all incremental profit in the coming year. Does that mean that we’re talking about an outlook with a 0 profit growth in the coming financial year? Secondly, you listed a lot of different areas into which that investment will be channeled. I’m wondering if you could tell us which of those will be the top priorities. And thirdly, Daniel in his remarks spoke of how these investments will be managed in a prudent fashion with internally defined KPIs to monitor investment effectiveness. I’m wondering if you could please tell us more about how that will work and, on those KPIs, how performance has been year-to-date.

Maggie Wu, Chief Financial Officer

Yes. Let me start by answering as to what we intended with this announcement of our investment of incremental profits and what the priorities will be in terms of making this investment. So as we stated in our earnings guidance, we plan to invest all incremental profit in the coming year into growing our business further and investing for the future. Does that mean then that in the coming year there will be no prospect of profitability or profit growth? Or will maximum profit growth be restricted to what it was this year? Well, let’s look at what we can achieve with this investment first. In the market, as you know, there are very few companies that can do what we’ve done in terms of investing a lot of money into future business growth and strategic initiatives while still enjoying very robust profit growth. So I think it’s fair to say that there’s a huge potential for us to further grow, be it in our core market or in other areas. There’s still lots of scope and lots of room for us to do new things and grow the business. And I think any long-term investor would say that promising to maintain a certain level of profit or prioritizing a higher level of profit would be a foolish thing to do because in the market today, there are so many competitors who are investing large amounts to gain a foothold in the market and to grow the market. And we’re in a great position to create value and capitalize on our existing resources to drive future growth going forward. So that is the intention. We’re going to be investing in a highly targeted and highly disciplined way in order to lay a foundation for even better growth going forward. And at the end of the day, users will vote with their feet. So we see these investments ultimately as playing out in terms of growing the business and more deeply engaging users. And then by way of follow-up in terms of the specific areas we intend to be investing in, as we talked about, certainly core commerce, New Retail, as Daniel mentioned in his remarks, the Community Marketplaces business, Taobao Deals but also our international business, local services and logistics. And then another way of breaking down the investments, not by business but in terms of results that we see, certainly these would include growth in the user base, enhanced engagement, as well as the provision of more value to merchants.

Daniel Zhang, Chairman and CEO

Yes. I’d just like to add to that briefly. When it comes to making these investments, we do have three major strategic priorities, as I mentioned in my script. These are domestic consumption, globalization and the cloud or advanced technology part of the business. And we intend to be investing in all three of those because we see large incremental opportunity. Starting with domestic consumption, our AAC number has now reached 890 million in China. This is the latest total figure across the ecosystem, all of the different platforms, with an aggregate AAC figure of 890 million. However, there’s still a lot of scope to grow the frequency of purchase and engagement of these 890 million AACs to convert them into MACs, monthly active consumers, or even DACs, daily active consumers. So huge scope for development there. We have today, within this user base, the broadest and largest multi-tier consumer base in China. So, as I said in my remarks, a major priority for us and for the developing user base is to continue to drive higher levels of purchase frequency across all classes of consumers. And then, although we already have 890 million AACs, still there is quite some scope for further growth in that figure with respect to users in lower-tier cities and in rural areas. In fact, in my script just now, I reported the growth achieved in the past year in our user base, and 70% of those new users came from rural areas. So we will continue, as I said, to strive to grow the user base, adding new users, and have set as a target surpassing 1 billion AACs in the new financial year. Apart from growing the number of consumers and their frequency of consumption, another important initiative for us is helping merchants by reducing their burden, reducing their costs as well as creating and facilitating a conducive environment for their long-term development and success. In this respect, we will have many measures. Some have already been announced, some have yet to be announced, but they all aim at helping merchants. Finally, also in the same area of domestic demand and domestic consumption, another place we’ll be investing is in the continued construction and improvement of our infrastructure, our logistics, our supply chain and merchandising capabilities. This is also an important area where we can discover and satisfy user demand and create long-term value for our users and for the company. In the interest of time, I will not expand any further. I will merely end by saying that we’ll put in place detailed KPIs to monitor all of these investments and ensure that they’re conducted in a disciplined fashion. So the above was always with respect to the domestic consumption piece of our strategy. Turning now to globalization. As was mentioned in my speech earlier, we’re very pleased that we now have 240 million international AACs, and we hope to double that figure going forward. So growing the international user base is also very important to us. Finally, I’d like to talk briefly about technology. We see the cloud as an epoch-defining opportunity, and we’ll continue to invest in cloud technology but also in big data and other kinds of technology as well, including technology to enable the next-generation consumption experience to better support logistics services and in other areas, to ensure the technology is supporting the realization of our domestic consumption strategy, our globalization strategy as well as our cloud and high-tech strategy. We want to enable all of these strategic areas to benefit from further improvement in our technology capabilities.

Thomas Chong, Analyst

May I ask about the trend in terms of the CMR? Given that we have seen the CMR growth rate is very solid, can you comment about the FY '22 outlook, in particular how we should think about the take rate trend for this year? And my second question is about the competitive landscape. Given that we have a wide product selection and very strong technology, how would we leverage our core capabilities in different areas like lower-tier cities penetration as well as our strategic initiative in local service and Sun Art?

Maggie Wu, Chief Financial Officer

Yes. In terms of CMR growth, you’ve seen that we reported 24% year-on-year growth for the quarter. If you look at the past few quarters, that’s been growing strongly considering it has a large base. I believe the CMR growth is going to have continued high potential. If you look at this revenue, actually the TAM is merchants’ budget, right? You pay for the services we provide. Currently, our take is somewhere around 4%. This is mainly where merchants pay for the sales and marketing, branding services provided. So even in this sole area, we still have a lot of potential. And there are also other areas that we could provide merchant services. So take rate has been growing over the past years. I think this year, as we talked about, we’re going to provide more support to the merchants. In our last call, we discussed the details on how we support our merchants, including waiving certain charges, fees and investing in the platforms and infrastructure to support merchants. So we’re not aggressively monetizing the value we created for the merchants, actually. The one thing worth mentioning is that CMR currently accounts for approximately 43% of our total revenue. If you look at three years ago, five years ago, it used to be like 70% to 80%. So it has been growing very fast, but it’s, as a percentage of revenue, coming down. I think that trend will continue. This is because of our multi-engine strategy. We have so many new businesses, and revenue contributed from these new businesses is becoming more and more important and significant to our total revenue. Just one minor correction: The 24% year-on-year growth is for the annual fiscal 2021. For this quarter, the growth rate for CMR was 40%.

Daniel Zhang, Chairman and CEO

Now, let me answer the second question in terms of the technology, how to apply technology into competition. Actually, we always believe that technology is critical in the competition, and we are proud of our technology development and the integration with real operation, even in fierce competition. Let me just give you a few examples. In the matter of consumption area, actually one of the key things is how to acquire and retain customers on our China retail marketplaces. But the key thing is how to use technology to match the most comprehensive product offerings we have on our platforms with the right customers and generate real consumption. So the matching capabilities are all driven by AI and technologies. So I think that’s our big advantage to ensure we have the most effective conversion. Over the years, our conversion rate has continued to grow, which not only grows our GMV but also meets the diversified demands of our customers. The second example I want to give you is that once we acquire new customers, it’s all about how to maximize the lifetime value of these customers via cross-category setting opportunities. So in this regard, we have built a very comprehensive user profile and product features profile to make sure we can maximize our understanding of our customers and provide all their needs during their lifetime cycle. Well, but technology application is not limited to the consumer management side. Actually, it covers all areas. Just a few more examples. For example, in logistics side, technology plays a very important role in Cainiao to build a smart, data-driven logistic network and operating system to serve our merchants both in China and the international market. And on the cloud side, I think technology is key. As I mentioned in my script, we continue to invest in technology to build our competitive advantage in the Art and FaaS products. But our benchmark is not only in China; actually, we benchmark the global leaders in all their core cloud products to make sure we are at the top tier in the world.

Jerry Liu, Analyst

Yes, my question is really on the business model. If we look at the recent past years, we’ve seen an increase in the 1P revenue mix, right, as Alibaba consolidates, Sun Art and as we grow Hema or Freshippo. So today, we talk about investing in Community Marketplaces. From the presentation, it looks like the providers of groceries and FMCG into this business include Sun Art and, I believe, Hema as well. So as we invest in these high-frequency categories, how does this change the long-term business model? How do we envision the ecosystem looking long term? And maybe more specifically, do we have a target 1P-3P mix in mind?

Daniel Zhang, Chairman and CEO

In short, we don’t have any specific goal for 1P-3P mix. We strongly believe that this mix is an organic result, outcome for our operation, and we don’t manage the 1P-3P mix intentionally. Over the years, we have built our two flying wheels in our annual consumption business. One is to continue to build our capability to manage customers smartly and efficiently. In this regard, we said how to create the demand. So on the demand side, we continue to invest to improve our user interface with creativity and technologies. We believe it’s very important for us to engage and enhance our engagement with our customers, not only to have more customers on our platform but also to help them spend more time with us. We strongly believe that a very diversified supply from the merchants from different sources is very important. The selection is very important to enhance user stickiness. So I think that’s the area we continue to invest in to build capability in customer management and demand creation. On the other hand, over the years, we tried to build strong merchandising capabilities and supply chain management capabilities, which we believe is essential for a successful commerce business, including e-commerce business. So that’s why we invest a lot to build our supply-side capabilities. We believe that these capabilities – the advantage of these capabilities will not change even without the user interface upgrading and change. So these two flying wheels are critical successful factors for our long-term growth.

Han Joon Kim, Analyst

I wanted to ask about Taobao Deals. I think it’s been one of the fastest-growing apps in the last year. Are you guys empowering it to kind of grow to 700 million, 800 million users in a few years, or do you just see it as something that is?

Rob Lin, Head of Investor Relations

Han Joon, sorry.

Han Joon Kim, Analyst

Hello? Do you hear me?

Rob Lin, Head of Investor Relations

Han Joon, sorry to interrupt. Can you repeat your question? Maybe get closer to the mic.

Han Joon Kim, Analyst

Sure. It’s regarding Taobao Deals. I’m wondering if we are empowering it to try to get to kind of 700 million, 800 million kind of user base in a few years.

Daniel Zhang, Chairman and CEO

Well, the value proposition of Taobao Deals is very clear. It’s for price-conscious consumers, and we provide on Taobao Deals platform the value-for-money products for these price-sensitive customers. On the supply side, actually we focus on manufacturers and farmers and their direct offer and end-to-end to the customer who care more about price. So I think the value proposition and the simple consumer journey, shopping journey, is key for Taobao Deals, and we are very happy to see the progress we made during the last year. As I said, our MAU in March reached 130 million. For the entire year, our annual active consumer reached 150 million. So I think that’s a good start. Because China is so big and with so many populations with different consumption powers and different segmentation and preferences, we try to provide multiple destinations to the customers with different purposes. So I think Taobao Deals is a good supplement to our other applications, other businesses we have in China retail marketplaces. In terms of the incremental value we create from Taobao Deals, I just gave a good example in my script to you, which is the average spending of our customers on Taobao Deals. Their increased rate of spending for the customers on Taobao Deals is bigger than for the average spending on the China retail marketplace, which indicates that if we provide people multiple choices, the overall total spending within Alibaba Ecosystem will be bigger. So that’s a very good indicator. So that’s why we will continue to invest in Taobao Deals. As to whether this has any impact on other players, I think it’s very important that on Taobao Deals, our goal and value proposition is very clear and straightforward and even simple. We are confident the impact will come because for these customers, they just need a simple choice and price-sensitive advantage. That’s it. So we will strengthen this value proposition on Taobao Deals. While on Taobao Mobile App, our flagship, I think we provide more comprehensive offerings to different segment customers, and they will enjoy more selections and more fun. So the value propositions are quite different. As I said, our goal is to build a metrics - application metrics to serve the customers with different needs. Thank you.

Rob Lin, Head of Investor Relations

Okay. Well, thank you, everyone, for joining today’s call. We have all the materials that will be provided in our IR website. We look forward to meeting with you in the coming months. Please contact me and the IR team of Alibaba. Thank you.

Operator, Operator

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