Earnings Call Transcript - BABA Q3 2021

Operator, Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group's December Quarter 2020 Results Conference Call. I would now like to turn the call over to Rob Lin, Head of Investor Relations of Alibaba Group. Please go ahead.

Rob Lin, Head of Investor Relations

Thank you. Good day, everyone, and welcome to Alibaba Group's December Quarter 2020 Results Conference Call. With us are Daniel Zhang, Chairman and CEO; Joe Tsai, Executive Vice Chairman; Maggie Wu, CFO. This call is also being webcast on our IR section of our corporate website. A replay of the call will be available on our website later today.

Daniel Zhang, Chairman and CEO

Thanks, Rob. Hello, everyone. Thank you for joining our earnings call today. Alibaba Group delivered another strong quarter. Our revenue increased 37% year-over-year to reach RMB 221 billion, while adjusted EBITDA increased 21% year-over-year to reach RMB 61.3 billion. Annual active consumers and GMV of our China retail marketplaces continue to enjoy healthy growth with Taobao Deals surpassing 100 million mobile MAUs for the first time. We celebrated another milestone with Alibaba Cloud, which achieved its first profitable quarter with positive adjusted EBITDA. These business trends are all quite encouraging and are supported by a China economy that has recovered rapidly from the pandemic. Maggie will provide more details on our operating and financial performance in a few minutes.

Maggie Wu, CFO

Thank you, Daniel. Thank you, everyone, for joining us today. Let me start with financial highlights for the quarter. Our annual active consumer in our China retail marketplace reached 779 million, and mobile MAUs reached 902 million. So both have shown net adds of over 20 million in the quarter's time. Our total revenue was RMB 221 billion, up 37% year-on-year. Starting from this quarter, we consolidated Sun Art, which is a newly acquired company. And if we take out the impact of Sun Art consolidation, the revenue growth will still show strong growth of 27% year-on-year. This strong revenue growth is mainly coming from the strong growth of our core commerce business as well as the strong revenue growth of our cloud computing business. Our adjusted EBITDA was RMB 68 billion, up 22% year-on-year, primarily driven by healthy profit growth of our core commerce segment. If we take out Sun Art, the adjusted EBITDA growth would have been 21% year-over-year. Our cloud computing business continued to deliver solid revenue growth of 50%. We're very pleased that adjusted EBITDA for AliCloud turned positive for the first time. We continue to maintain a strong cash position of USD 70 billion. Our non-GAAP free cash flow grew 23% year-over-year to RMB 96 billion during this quarter.

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 question in the language you asked. Please note that this translation is for convenience purposes only. In the case of any discrepancy, our management statement in the original language will prevail. So operator, please connect speaker and SI conference line now. And then please start the Q&A session when we are ready. Thank you.

Operator, Operator

First question comes from the line of Eddie Leung of Bank of America.

Eddie Leung, Analyst

My question to you has to do with your relationship with merchants. We know that online, there are an increasing number of different channels available to merchants, including your traditional competitors, and also new and emerging competitors and with the popularity of many programs on the rise. At the same time, we note the increasing scrutiny of antimonopoly practices by the regulatory authorities in China. So I'm wondering if in that context, you're seeing any changes in terms of merchant retention rates. And also from an operational perspective, is there anything you can do to improve given that merchants now have more available different channels?

Daniel Zhang, Chairman and CEO

Thank you. This is Daniel, and I will take that question. Indeed, it's true that today, there is an increasing diversity in terms of the variety of Internet user products available, and all of them can be utilized as an opportunity to engage in e-commerce. If you have the users and you're able to hold on to those users, and you couple that user base with online payment capabilities and third-party delivery capabilities, then anybody essentially can engage in e-commerce. It's a way of taking advantage of that user traffic. At present, the reality for most merchants, if not all, is that there are multiple different platforms out there that they can choose to work with, and that is the reality. Although we do have very few exclusive flagship store arrangements with a small number of merchants, with respect to those merchants, their goods are also available through other channels, through their own channels, with distributors or other channels, and that is a fact that's for everybody to see. Our advantage is that we are extremely focused on consumption, and we are the #1 platform when it comes to consumer mindshare for consumption, providing a very high-quality consumer experience. That is why for all merchants, although they do have a choice of multiple platforms and are present on multiple platforms, we are probably, for most of them, the most important platform. Looking at merchants, in terms of retention rates, in terms of activity or their focus on the platform, we see no decline. To the contrary, we tend to see increases, because e-commerce is becoming a more and more important retail format for merchants, in general. Alibaba provides a wide range of services, including sophisticated management tools for merchants to manage their online business as well as their online and offline combined businesses that contribute to enhanced overall efficiency for merchant operations. This is fundamentally different from a one-off campaign-driven approach that you would see, for example, with live streaming or short-form videos that drives a single campaign. We are focused, in contrast to that, on providing a whole suite of tools and services to drive overall merchant performance, helping them increase their sales and maintain healthy profitability. That is the reason why we are the premium platform that merchants choose to work with.

Operator, Operator

Our next question is from the line of Gregory Zhao of Barclays.

Gregory Zhao, Analyst

Just a very quick question as to whether you could give us any guidance on capital expenditure trends in the next few years. We know that there are a number of important new technologies where you're making progress coming out of DAMO Academy with the cloud. We can expect to see expenditures in infrastructure, cloud infrastructure, R&D as well as in computing power. If you could just please give us some guidance on where you see capital expenditure heading in the next few years.

Maggie Wu, CFO

Thank you for your question. On the issue of CapEx, if you look back to the presentation I just delivered, you'll see that we gave the figure there for the December quarter. For the quarter as a whole, it was RMB 5.8 billion. Included within that figure was RMB 4.9 billion for operating CapEx, so that covers IT. In absolute terms, that is a relatively small figure, and indeed, as a proportion of our revenues, it would still be a single-digit percentage, in the mid-single digits. Comparing that against our international peers, it's not very high. Going forward, our plans for the future will be to strengthen, increase our investment in technology, in R&D, and in the DAMO Academy. We hope to see, going forward, CapEx increasing, both as an absolute value as well as a percentage of revenue.

Operator, Operator

Next question is from the line of Alex Yao of JPMorgan.

Alex Yao, Analyst

My question has to do with Daniel's opening statement in which he talked about the evolving policy environment and Alibaba's commitment to take on more social responsibility. So specifically, my question is taking on more social responsibility, how will that translate in operational terms into changes on the operations side? And if you could perhaps help us think through a bit how those kinds of operational changes may have an impact on the company's financials?

Daniel Zhang, Chairman and CEO

Thank you for your question, and I do think that is a very good question. As a platform economy, Alibaba has always taken very seriously its social responsibility and has made this very much part of the mainstream of our efforts to develop as a platform. We have indeed done a lot of work on this front in years past. As we move forward, as a platform economy deeper integrates with the overall economic and social development of the country, we plan to take on even more social responsibility. Something very important for Alibaba, in particular, is mainstreaming that responsibility and making it part and parcel of everything we do, whether it's helping to create jobs, stimulating employment, helping SMEs on every front from product distribution to manufacturing. On the manufacturing side, we can play a role, helping them to export their products. There are many things that Alibaba can do. The key point here is that for Alibaba, social responsibility is not separate from our operations; our business is at the mainstream of everything we're doing, around operations and business as a platform. Taking on more social responsibility, in this sense, is conducive to driving prosperity of the platform. More prosperity on the platform, again, enables us to take on more social responsibility; the two are mutually reinforcing. So we don't look at it in terms of the economic value that can be generated by social initiatives; rather, we see this in terms of holistic ecosystem value. That's how we've always approached it, and we will continue to approach it in that same way.

Operator, Operator

Our next question is from the line of Alicia Yap of Citigroup.

Alicia Yap, Analyst

Congrats on the solid results. My question is related to the reinvestment in strengthening your overall marketplace business. I understand this will be for some time, and you will continue to deleverage the marketplace EBITDA. But then is there any way management could help us rank in terms of the investment stages and also the resources that we will put into accordingly? For example, Taobao Deals, Taobao Live, the Short Videos, and also Taobao Grocery. How do we evaluate some of these reinvestments that have achieved certain results and then that you will scale back? So any colors in terms of ranking the importance and also the stages of some of these seed investments currently?

Daniel Zhang, Chairman and CEO

Thanks. Let me answer this question. First of all, as we always say, we always invest for the future. For our investment in seed business, in new business, in core commerce, we think these are new businesses, but we view these new opportunities from the ecosystem point of view. To enhance our leadership position in core commerce, we need different applications and services to meet the customers' demand from different perspectives. Our Taobao Deals enjoyed very rapid growth. This quarter, we reported our MAU for Taobao Deals surpassed 100 million. We are very happy to see the initial results. But we strongly believe that investment in Taobao Deals is an important measure for us to target customers in low-tier cities, even in rural areas, leveraging our supply power from other businesses in Alibaba, like 1688. So on and so forth, we have very effective supply, and value for money supply to meet the demand of customers with low purchasing power. Our investment in Taobao Live has been ongoing for a while. If you look at the Taobao Live business today, it's already very sizable. Every day, we have tens of thousands of live streams on our platform, initiated not only by KOLs but also by many storefront owners. So we highly integrate live streaming with our retail platforms; live streaming has become a very effective marketing tool for our storefronts and creates new business opportunities for KOLs. Regarding Taobao groceries, we are developing a unique model based on the customer value proposition instead of subsidization to ensure good user experience and business sustainability. Importantly, we try to build our model as opposed to what you see in the market, simply burning money to certify customers for scale. We don't think this is a sustainable model. Instead, we have a tremendous user base already in Taobao. So in the Taobao mobile app, we have positioned Taobao Grocery as a major customer interface for this new business. Based on our initial tests, we have seen very good results. This Taobao Grocery business not only helps us have more supplies for local customers, especially in low-tier cities, but also helps us recruit many new customers with assistance from community leaders. We will continue to invest in this business, leveraging all the resources we have in Alibaba and some new retail businesses, in our investing companies, and in our multiple supply channels. From a financial perspective, we do not manage our core commerce business by EBITDA. The growth of the user base and consumption across multiple categories and countries is key to us. Our strategy is clear, and we are very confident in investing more in this area. Thank you. Yes, just to add one more point on Taobao Grocery. Today, we are still in the pilot test for Taobao Grocery in some cities. Currently, only a small portion of Taobao users can access the service. Over time, we will roll this service out across the country and collaborate with multiple suppliers across Alibaba businesses. Thank you.

Operator, Operator

Our next question is from the line of Thomas Chong of Jefferies.

Thomas Chong, Analyst

Congratulations on the positive EBITDA for the Cloud business. May I ask about how we should think about the competitive landscape on the cloud business in the coming years as well as our strategy in the IaaS, PaaS and SaaS side? And how should we think about the margin trend as well?

Daniel Zhang, Chairman and CEO

Thank you. Yes, the cloud community is a very promising business. We believe that in the future, all industrial sectors will need cloud services. The market has fierce competition, but Alibaba has significant advantages in many areas. First, by leveraging our huge scale in e-commerce, financial services, and logistics, we are able to build a very scalable cloud infrastructure, which supports our own business first today, and we roll out this infrastructure to serve third-party clients. This gives us a superior position in terms of internal scalability. The second advantage we have is our data intelligence capabilities and applications to serve our clients. When you talk to clients in China who want to use the cloud, their purpose is not only moving to the cloud. They want better use of their data through cloud services. Data intelligence capabilities and applications are key. In this regard, we are again in a very superior position. We have a lot of experiences in internal data usage and intelligence. The third advantage we have is related to technology. For years, we've invested aggressively in cutting-edge technology for the cloud through our DAMO Academy and the recruitment of first-class engineers and scientists. Today, our key product features in cloud, such as databases, storage, middleware services, and so forth, are better than our competitors. We receive excellent feedback from our customers. Technology remains the key focus. In summary, we invest a lot in technologies in IaaS and PaaS. In terms of SaaS, we work actively with our partners in different industries to create a cloud-based SaaS ecosystem. This is our overall strategy for the cloud, and we are very confident about the future of this business. Thank you.

Operator, Operator

Our next question is from the line of Jerry Liu of UBS.

Jerry Liu, Analyst

My question has to do with the investments that you've talked about that you intend to be making in the next period to come, including around Taobao Deals, live streaming and so on and so forth. The impact that this will be expected to have on EBITA or EBITDA growth, because if you look at EBITA or EBITDA growth over the past few years, the pace of growth has really remained quite stable. Going forward, would we expect to see that growth rate moderate as a result of those investments? Or would that possibly be offset by improvements in the profitability of other new businesses like cloud, Ele.me, or Trendyol?

Maggie Wu, CFO

Thanks very much. It's very interesting that whenever we talk about Alibaba's financial performance and future outlook, we always get questions about our profitability and our margins and whether we expect to sustain them at the same levels that they have been at. We are very grateful for that. It's very much a function of the fact that we have created high expectations by always being able to create profit and maintain healthy margin levels. We know that others in the same market are getting different kinds of questions, and the expectations are different. Of course, we are in the same market with all the other companies, and it is a valid question as to whether we would prioritize profit growth going forward or whether, instead, we prioritize investing in our future growth and in new businesses. Alibaba's answer to that is clear. It's not a question that we even need to think about. We are always investing in future growth. If you look at where Alibaba is today in terms of profitability, over the last 12 months, the figure I can give you is from the last nine months: adjusted EBITA was RMB 147.8 billion. That's very strong, and it already includes various reinvestments of profit that we have made. I think we're in a good place and can continue to invest. You can also look at our profit increment over the last two years; comparing the first nine months of this year to the first nine months of the year before last, it's a substantial figure of RMB 30 billion. So this is our development strategy. We continue to invest in the future, and as we see that strategy paying off and the new businesses grow, we will expect to continue to scale up our investments. Looking at the potential that exists in the market today, the competition, and our own progress and where we're at, as I said in my earlier remarks, our approach will be to continue to invest and scale up our investment. We will never prioritize margin; that will never be our #1 goal, and it never has been in the past. With profit growth, I think we have a strong foundation, especially with Taobao, Tmall, and the China retail marketplace. We're building on a very strong foundation of profitability.

Operator, Operator

Our next question is from the line of Youssef Squali of Truist Securities.

Youssef Squali, Analyst

Just a very quick one. I was wondering if you could discuss the impact of the reimposition of restrictive measures due to COVID-19 so far what you've seen in January and the sustainability of the recovery short term as we go into the fourth quarter.

Daniel Zhang, Chairman and CEO

Thank you. For the impact of COVID, here in China, in some cities, the government is taking new approaches to lockdown some areas and encourage people to stay at home cities instead of going back to their hometowns for the Chinese New Year. We are closely monitoring the progress of these new measures. So far, I think we haven't seen a very material change in consumption or business. However, January is tricky; if you compare it apple-to-apple to last year, the Chinese New Year last year was late January, while this year it's in the middle of February. So we have a time gap between the two Chinese New Years. Due to some lockdowns in certain cities, we do see challenges in logistics. However, we expect the last-mile delivery capacity will be enough, while transportation may be a challenge due to these lockdowns.

Operator, Operator

Our next question is from the line of James Lee of Mizuho Securities.

James Lee, Analyst

Can you talk about maybe investments in some of the new innovations that you see in a marketplace like smart transportation and autonomous driving? It seems like the government is making a concerted effort in terms of building up smart transportation nationally. Can you discuss how you're participating in that build-up and how you're positioned to win that market?

Daniel Zhang, Chairman and CEO

For smart transportation and autonomous driving, we are approaching it from different angles. For our AliCloud business, we work closely with some partners to create smart transportation solutions based on the cloud infrastructure. This vertical solution will be widely used in many areas to create smart transportation capabilities. For autonomous driving, our DAMO Academy has dedicated teams working on this for years. We focus on applying autonomous driving in logistics, and we've already deployed many autonomous vehicles on school campuses and in some residential areas for last-mile delivery. I think this is still in the early stage but is expected to have a wider range of applications. We will closely monitor the progress and continue to invest in technologies to ensure we maintain a leading position.

Operator, Operator

Our next question is from the line of Binnie Wong of HSBC.

Binnie Wong, Analyst

My question is about the new businesses you are investing in. I'm wondering if you could tell us which of those you see as having the largest addressable markets and the greatest amount of synergy. We know that in new retail and in cloud, Alibaba was the first company to get into those spaces. You've been very successful, and now you're the largest in those spaces. Looking at the new businesses, how do you see the synergy, addressable market? Are there any cross-selling metrics that you could share with us to exemplify that kind of synergy that exists? And then the other question, perhaps for Maggie, is around the new initiatives. You told us earlier that losses are narrowing. If you could give us a little more color on which ones are narrowing and the expectations there?

Daniel Zhang, Chairman and CEO

Thank you. This is Daniel, and I'll take the first part of that question. Indeed, we're continually working to incubate new businesses, including in core commerce. We've talked quite a bit about that today, but also in other areas. Our approach to the incubation process is to be patient and commitment long-term. We're starting to see traction, including Taobao Deals and Taobao live streaming. These businesses have gone through a period of incubation and investment, and it takes patience to get where they are. For any business we incubate, we look for ways to create differentiated value, provide a good user experience, and drive efficiency, and we're investing in even earlier-stage offerings, both in core commerce and other segments, seeking to differentiate a solution or service to meet customer demand.

Maggie Wu, CFO

Part of your question was about which of the businesses are seeing losses narrowing the most? To summarize, all businesses that have been loss-making are seeing losses narrowing across the board. This includes Ele.me, digital media and entertainment, new retail, Lazada, as well as smaller businesses like cross-border and larger businesses like cloud and Cainiao, where losses have been relatively large in the past. As things stand, the biggest change is with local services like Ele.me and Cainiao. This is also a daily question we ask ourselves: should we prioritize further narrowing the losses in our loss-making businesses or focus on driving growth? Our answer has been that we're reinvesting selectively, following much discussion, to grow the business. The next quarter will be the final one of the financial year, and an appropriate time for us to look forward and offer overall guidance for the next year. We expect to share that with you the next time we see you.

Rob Lin, Head of Investor Relations

Thank you, Binnie. Sorry for the interruption before. Thank you all for joining us today. If you have any questions, please do reach out to our IR team. All materials should be available on our IR website. Thank you again.

Operator, Operator

Thank you. Ladies and gentlemen, that concludes the conference for today. Thank you for participating. You may now all disconnect.