Earnings Call Transcript - JD Q1 2024

Sean Shibiao Zhang, Director of Investor Relations

Thank you. Good day, everyone. Welcome to JD.com's First Quarter 2024 Earnings Conference Call. For today's call, the CEO of JD.com, Ms. Sandy Xu, will share her opening remarks; and our CFO, Ms. Ian Shan, will discuss the financial results. Then we'll open the call to questions from analysts. Before turning the call over to Sandy, let me quickly cover the safe harbor. Please be reminded that during this call, our comments and responses to your questions reflect management's view as of today only and will include forward-looking statements. Please refer to our latest safe harbor statement in the earnings press release on our website, which applies to this call. We'll discuss certain non-GAAP financial measures. Please also refer to the reconciliation of non-GAAP measures to the comparable GAAP measures in the earnings press release. Also, please note, all figures mentioned in this call are in RMB unless otherwise stated. Now let me turn the call over to our CEO, Sandy. Sandy, please.

Sandy Xu, CEO

Thanks, Sean. Hello, everyone, and thanks for joining us today to discuss our Q1 2024 results. We kicked off the year with encouraging momentum in Q1. Our top line growth accelerated and market share expanded while our bottom line trended healthily in the quarter. More importantly, our users showed strong enthusiasm for our further improved shopping experience and differentiated services, and our Net Promoter Score, the NPS, notably improved year-on-year. This is a result driven by our strong execution amidst evolving industry dynamics. Our teams stayed focused on our own strengths, strategies and pace of development and continued to drive steady progress across all our strategic initiatives in improving user experience, price competitiveness, and platform ecosystems. Our strong execution is reflected in our improved category performance in Q1. To start with, our general merchandise had a great quarter as our supermarket category returned to healthy growth while fashion and home goods maintained robust momentum. Particularly, the bounce back of our supermarket category is a great example of how we are able to drive strong business performance by focusing on the key aspects of user experience, namely, product quality and selection, price competitiveness, and service quality. After spending the past year on strengthening procurement capabilities and upgrading fulfillment network and operating efficiency, our supermarket category recorded double-digit GMV and revenue growth in Q1 with increased order volume and shopping frequency. We expect supermarket's momentum to continue throughout the rest of the year, and it will remain an important growth driver in the long run with massive total addressable market. Our electronics and home appliances category remained resilient in Q1. We are confident in our market-leading position and proven supply chain capabilities in this category, and we will continue to focus on our own strategies to scale the business and profits with differentiated value-add services, such as one-stop trade-in services, new product launches, more competitive price offerings, and a more dynamic platform ecosystem. Now let me share some operating highlights we achieved in Q1 in executing on our strategies. First, user engagement. We are excited to see a series of positive signs in both our user base and user behavior in Q1. Our quarterly active customers delivered another robust growth year-on-year during the quarter, driven by growth across all user groups, including new users, existing users as well as our Plus numbers. As to user behavior, shopping frequency on our platform delivered a substantial double-digit year-on-year growth in Q1, more than offsetting the decrease in average order value as a result of our low price offerings. This led to a relatively stable ARPU in Q1 compared to the same period last year. In addition, driven by our expanding user base and shopping frequency, our order volume continued to increase at a double-digit rate year-on-year in Q1, a pace we have seen for three consecutive quarters. This robust momentum with users makes us confident to say that our relentless focus on the user experience is paying off. We rolled out a number of user experience initiatives, and the team made solid progress in executing them. As such, our NPS continued to rise in Q1 on both 1P and 3P. We believe this is an important driver of our sustainable growth along the way. We are leveraging our core capabilities in the supply chain to differentiate user experience on our platform. For example, the integrated trade-in services we provide in our electronics and home appliances category are at an industry-leading level. And we are further working on this to provide users hassle-free services, including coordinated delivery, installation of new devices and dismantling of used devices. In addition, our supermarket category also made full use of its supply chain to roll out differentiated services, including direct shipment from suppliers to end users, and 24-hour fresh milk delivered to users since production, among others. Our service offerings are catching up on the 3P side as well. For example, our RMB 59 threshold for free shipping now also covers almost all of the 3P products on our platform. We also made progress to expand coverage of our free doorstep picking up for return service among 3P merchants. We are encouraged to see 3P user experience on our platform continue to improve, and our 3P NPS score trended upward in the quarter. Moving on to our low-price offerings. Our price NPS continued to increase in Q1, both sequentially and on a year-on-year basis, as our improved price competitiveness increasingly resonates with users. Meanwhile, growth of our user base in lower-tier cities accelerated in Q1, exceeding our growth rate in higher-tier cities. Order volumes and shopping frequency generated by users in lower-tier cities continued to record double-digit year-on-year growth in the quarter, faster than that of our total users. Moreover, growth of low-ticket-sized order volume continued to accelerate meaningfully in the quarter. All this reflects our increased attractiveness to price-sensitive customers and our abilities to serve them effectively. With our 1P supply chain capabilities and enriched offerings of 3P, we are strongly positioned to pursue low price in a sustainable way. This is the essence of retail, the core of our business model, and the key competence that helps us stay ahead of price competition. Next, moving on to our platform ecosystem. We were encouraged to see our active merchant base continue to rapidly expand on our platform in Q1, driven by our effective supporting measures and optimized operating tools. Both our 3P user base and 3P order volume continued to grow at a faster pace in Q1 compared to previous quarters. Our marketplace and marketing revenues returned to positive growth in Q1 as we navigated one-off impacts in the past quarter. This was primarily driven by the growth in our advertising revenues while commissions remained soft due to our strategy to prioritize ecosystem development over monetization at the current stage. I want to point out that the low 3P monetization rate at the moment does not reflect the true potential of our marketplace and marketing revenues, and we anticipate more upside going forward. That said, we maintain our strategic priority of building a vibrant and thriving platform ecosystem where both our 1P and 3P merchants are adequately incentivized to better serve users. On a separate note, 2024 marks the 10th anniversary of our listing on NASDAQ. Looking back on the past decade, our revenues have scaled up significantly by 16 times from RMB 69 billion in 2013 prior to our listing to over RMB 1 trillion last year. Our non-GAAP net income attributable to ordinary shareholders has expanded by an even more impressive 157 times from RMB 224 million to RMB 35 billion. The total amount we returned to our shareholders through dividends and share buybacks has surpassed the total capital raised over the course of the past 10 years. And we have created full-time jobs for over 500,000 employees with social insurance and housing fund benefits. As of the end of 2023, a 13 times increase compared to 10 years ago. We are proud of our achievements in the past as we created tremendous value for our users, employees, shareholders and for society as a whole. We have a clear vision to navigate the next decade with our ever-improving user experience, stronger price competitiveness, and thriving platform ecosystem. To conclude, 2024 is marked with our consistent strategies and continued execution. And we are pleased to kick the year off with a quarter of accelerated growth and healthy profitability. As we focus on executing our strategies, we will further improve the user experience, which leads to stronger user mindshare and user growth, thus helping to reinforce our market position and expand our market share. This will keep us on a sustainable path of healthy profit and cash flow that allow us to continue to execute and deliver for the rest of the year and the years to come. With that, I will turn it over to Ian for our financial highlights. Thank you.

Ian Su Shan, CFO

Thank you, Sandy. And hello, everyone. In Q1, we delivered a solid performance on both top line and bottom line. Since the beginning of the year, we have repurchased a total of 98.3 million Class A ordinary shares, equivalent to 49.2 million ADS, for a total of USD 1.3 billion, amounting to around 3.1% of our ordinary shares outstanding as of December 31, 2023. We have also completed our USD 1.2 billion annual cash dividend payment in April 2024. These moves demonstrate our commitment to creating value for our shareholders through shareholder returns, and more importantly, through our sustainable business growth over the long term as we've done since our listing on NASDAQ in 2014. With that, let me turn to our Q1 financial performance. Our net revenues grew by 7% year-on-year to RMB 260 billion in Q1. Breaking down the mix. Product revenues were up 7%. Within product revenues, our electronics and home appliances category was up 5% in the quarter, thanks to the resilience of mobile phones and home appliances, but it was offset by the softness of PC due to industry headwinds. Our general merchandise category returned to a solid revenue growth year-on-year as supermarket categories rebounded to achieve double-digit revenue growth in the quarter. Other categories on general merchandise, such as fashion and home goods, also maintained strong momentum in the quarter. Service revenues grew by 9% year-on-year in Q1, primarily driven by logistics and other service revenues which are up 14% year-on-year in the quarter. Marketplace and marketing revenues returned to positive growth in Q1 as we supported 3P merchants and nurtured our platform ecosystems. Our advertising revenues resumed healthy momentum in Q1 as we improved traffic allocation efficiency on both our platform for both 1P and 3P merchants. Commission revenue under marketplace and marketing continues to decrease at this stage due to our supporting measures to merchants to cultivate our platform ecosystem. Now let me turn to our segment performance. JD Retail revenues increased by 7% year-on-year in Q1. I would like to highlight that, even as we dedicate ourselves to low-priced offerings, JD Retail profit margin continued to increase in the quarter driven by higher 1P product sales gross margin across almost all categories. This again demonstrates the beauty of JD's business model. With strong supply chain capabilities at our call, we are able to continuously extend our economies of scale and pass the benefits to our users. In addition, we continue to improve our user experience, including lowering the threshold for free shipping, improve user engagement through initiatives like our sponsorship. As a result of these efforts, we achieved higher user shopping frequency and increased order volume. JD Retail non-GAAP operating profit decreased by 5% and operating margin was down 50 basis points year-on-year to 4.1% in Q1, in line with our strategic initiatives. Moving on to JD Logistics. Revenues of JD Logistics increased by 15% year-on-year in Q1 with strong momentum for both of its internal and external revenues. However, JD Logistics' non-GAAP operating margin increased to 0.5% in the quarter, a meaningful improvement compared to a loss margin of 3.1% a year ago. This is the result of JD Logistics further optimizing its fulfillment network and operating efficiency, increased scale benefits, as well as healthier revenue growth. Turning to New Business. Please note that, from Q1 2024, we'll start to record Dada's results under New Business. Therefore, this segment mainly includes JD Property, Dada, Jingxi and overseas business. Revenues of New Business were down 19% in Q1, primarily due to the adjustment of Jingxi business. Excluding the impact of the disposal of assets of JD Property, non-GAAP operating loss of New Business was RMB 670 million in the quarter, narrowing from RMB 846 million in the second quarter a year ago. Moving on to our consolidated bottom line. Our non-GAAP net income attributable to shareholders came in at RMB 8.9 billion, a 17% increase year-on-year, with non-GAAP net margin came in at 3.4%, 30 basis points year-on-year. This was primarily driven by increased gross margin, the effective investments in user experience and JD Logistics' improved bottom line performance. Non-GAAP diluted net income per ADS grew by 19% year-on-year in the quarter to RMB 5.65. Our last 12 months free cash flow as of the end of Q1 was RMB 51 billion compared to RMB 19 billion in the same period last year. The year-on-year increase of free cash flow was mainly due to our further optimized cash conversion cycle, improved profitability, moderated CapEx as well as seasonality factor. Notably, our last 12 month inventory turnover reached a historical low level of 29 days in Q1 compared to 32 days in the same period last year, which also contributed to our increase in free cash flow. By the end of Q1, our cash and cash equivalents, restricted cash and short-term investments added up to a total of RMB 179 billion. To conclude, we're encouraged by our solid results in Q1, and we are confident to deliver our operating targets while staying focused on executing our long-term strategies. 2024 not only marks the 10th anniversary of our listing on NASDAQ, it's also the start of a new chapter for JD to serve more users and provide them unparalleled user experience by developing an ecosystem that bolsters the prosperity of both 1P and 3P. With that, I will turn it to Sean. Thank you.

Sean Shibiao Zhang, Director of Investor Relations

Sure. Thank you, Ian. We apologize for the breaking up during today's call. So for the Q&A session, you're welcome to ask questions in Chinese or English. Our management will answer questions in the language you ask. We'll provide English translation when necessary for convenience purposes only. In case of any discrepancy, please refer to management's statement in the original language. Okay. Operator, can we open the call for Q&A? Thank you.

Ronald Keung, Analyst

Sandy, Ian and Sean. I have a question on our growth and then how do we balance growth and profitability. Let me ask first in Chinese, and I'll translate my question.

Sandy Xu, CEO

Thank you, Ronald, for your question. First, I want to highlight that China has a large consumption market that continues to grow healthily. However, this market is fragmented, with over 300 cities in China having populations exceeding 1 million. In 2023, we estimate that the online sales penetration of physical goods in China is around 30%, and we expect this figure to increase as e-commerce platforms become more efficient and adapt their business models. Certain categories, such as computers and home appliances, show higher potential for online penetration, although they already have relatively high online consumption rates. On the other hand, there is considerable potential for online growth in categories like supermarkets, home goods, automotive, sports and outdoors, and services. These categories are not only the fastest-growing on our platform but also have significant room for further online penetration. We believe we are still dealing with a substantial total addressable market. Regarding JD's core strengths, JD is the largest retailer in China. By leveraging our 1P business, we can utilize our supply chain capabilities to offer a superior and differentiated user experience while effectively managing costs and efficiency. This has allowed us to develop our platform ecosystem. Over the past year, we focused on enhancing user experience, providing low-price offerings, and building our platform ecosystem through proactive initiatives that emphasize business health, such as improving procurement, lowering costs, and upgrading customer service, including expanding free shipping, enhancing our price guarantee service, offering free returns, and implementing refund-only policies. These enhancements to user experience have led to positive changes in user growth and engagement. In Q1, both JD Group and JD Retail saw double-digit growth in quarterly active users, continuing the high growth trend from Q4 of last year. We've also noted an increase in shopping frequency as users become more engaged with our platforms. Additionally, our Net Promoter Score (NPS) has shown consistent improvement in Q1, both year-on-year and sequentially, for both our 1P and 3P sides. While the influx of new users last year caused some fluctuations in our NPS, our ongoing improvements in platform governance and risk control have led to an upward trend in user satisfaction. Overall, our efforts have produced promising results, as we see users return to engaging with our diverse, affordable, and high-quality products at faster speeds, which gives us confidence in our long-term growth and market expansion.

Ian Su Shan, CFO

So this is Ian to address the second part of your question. To follow up on what Sandy just said, we're confident that our full year growth for 2024 will exceed China's total retail sales of consumer goods, and we will achieve stable profits for both JD Group and JD Retail. Additionally, we remain committed to our disciplined investments focused on improving user experience and increasing our market share. From JD's perspective, business growth and profitability enhance each other. Our business model relies on a supply chain centered around user experience, which improves both supply chain efficiency and user satisfaction. We believe that our long-term sustainable profits will come from our strong market position and exceptional user experience. By consistently investing in product quality, pricing, and service, we can provide a superior user experience, driving GMV growth and expanding our market share. As our business grows and our market position strengthens, our supply chain advantages and efficiency also improve, leading to healthy profit growth. This allows us to continue investing in product, pricing, and service to further enhance user experience, creating a cycle of business growth, improved user experience, and long-term profit growth.

Alicia Yap, Analyst

Congratulations on the solid results. My first question is regarding the impact of the appliance trade-in policy. If it is implemented during a period of conscious consumer spending, will it be sufficient to stimulate consumer spending? Additionally, what incremental growth does JD expect from this trade-in policy? For my second question, management has indicated that FMCG is a key category for supporting growth this year. Aside from the low base and easier comparisons, do you believe consumers will actually increase their spending in the FMCG category? If consumer demand remains unchanged from last year, will FMCG still serve as a primary growth driver this year? Do you expect JD to gain more market share in this category?

Sandy Xu, CEO

Thank you, Alicia, for your question. Regarding the trade-in service, it has been about ten years since China last introduced nationwide trade-in initiatives. Many households in China are now ready to replace their home appliances and other durable goods. The old products they currently use are often inefficient, consume a lot of energy, and may pose health and safety risks. However, many families are still using them due to the high replacement costs. The new trade-in policy aims to offer incentives to meet this ongoing demand by encouraging families to trade in their old items for new ones at a lower cost, thus improving the quality of life. We have observed that governments at all levels are actively promoting the implementation of trade-in policies. The Ministry of Commerce has released an action plan to encourage trade-ins for consumer goods, and local governments are conducting research and making arrangements. We are working with various government levels and look forward to the introduction of additional subsidies that will directly benefit consumers. Currently, JD has partnered with over 100 brands, including major companies like Haier, Midea, Gree, and others, to establish a Trade-in Alliance for Household Appliances and Home Goods. This alliance has launched trade-in subsidy promotions in 20 cities and regions across China, aimed at providing cost-saving and convenient trade-in services to consumers nationwide. Since the start of 2023, more than 16 million users have used JD for trading in their old appliances for new ones, and we have seen a 200% year-on-year increase in first-time users of our trade-in service. This year, our trade-in program has represented mid- to high single-digit percentages of JD's home appliance sales, and with government support for this initiative, we expect to see additional sales in this category. We anticipate that sales driven by trade-ins will make up a larger portion of our overall sales in this sector. Regarding the FMCG question, the FMCG sector is showing positive growth. According to Q1 NPS data, FMCG categories, especially basic living goods, have demonstrated strong growth. FMCG and fresh produce are sectors experiencing significant sales increases, despite having relatively low online penetration. We have observed online platforms and e-commerce businesses gradually gaining market share from traditional offline markets. JD's Q1 data indicates that the strong rebound of FMCG has significantly contributed to the overall increase in our general merchandise sales and revenues, leading to our growth rate exceeding the corresponding industry growth reported by NBS. In terms of our supermarket strategies, we have made significant improvements in this category as we explore each subcategory to enhance product offerings and lower procurement costs, thus benefiting our consumers. To meet user demand and address consumption challenges, we are investigating various strategies such as open sourcing products and custom product development to offer high-quality items at competitive prices with excellent service. Our logistics fulfillment network reform has enabled us to reduce the threshold for free shipping, tailored to different product categories. We are reforming our fulfillment network in response to the substantial evolution of JD's business scale and category mix over the years. We adjust the design and algorithms of our fulfillment network periodically. For example, our city-based warehouse model provides a superior shopping experience compared to the industry standard of centralizing product distribution. However, this model requires us to enhance efficiency, reduce parcel movement times, and further minimize delivery distances through algorithm upgrades, thus continually lowering overall fulfillment costs. Ultimately, we believe that fostering growth in the supermarket category necessitates a return to retail fundamentals, emphasizing better cost efficiency and user experience. Looking ahead, despite intense competition in the supermarket sector and varied strategies employed by industry players, we are confident about the growth potential in this category and consider it a vital driver of our overall growth.

Kenneth Fong, Analyst

I have two questions. The first is about content. JD has been experimenting with innovative e-commerce content strategies that set us apart from competitors, such as merchandise, live streaming, and recently, WeChat AI live streaming, which have shown very positive results. Can management provide insights into the progress and future strategy for content investment in our core e-commerce platform? My second question concerns shareholder returns. We have significantly increased shareholder returns, repurchasing USD 1.2 billion worth of shares last quarter. How should we understand the future pace, scale, and sustainability of the buyback program?

Sandy Xu, CEO

Thank you, Kenny. I want to discuss live streaming and our content ecosystem. At the start of the year, we committed to enhancing our content ecosystem for JD Retail to provide users with a more diverse and comprehensive experience alongside our excellent shopping service. We believe that premium content will attract new users to JD's platform, lower acquisition costs, and enrich our platform ecosystem. Additionally, we recognize that engaging content is vital for increasing user interaction and time spent on our platform, which will improve our traffic distribution efficiency and conversion rates. Our live streaming initiatives, as you noted, are being driven by category managers during the Singles Day brand promotion, and our recent showcases featuring an AI digital version of our founder Richard reflect our dedication to content innovation, utilizing JD's technological strengths. Notably, Richard's avatar live streaming, the first of its kind in the industry to be hosted by an AI entrepreneur avatar, garnered over 20 million views within the first hour, highlighting our AI capabilities and their relevance in e-commerce. Looking ahead, we will continue to invest in technology focused on JD's core business, including our large language model. We are still in the early phases of building our content ecosystem, and we aim to provide greater visibility and traffic to high-quality, original content and its creators, ultimately helping consumers discover products and make knowledgeable shopping choices.

Ian Su Shan, CFO

Thank you for your question regarding shareholder returns. I would like to highlight our three-year plan for the USD 3 billion initiative. Currently, we have approximately USD 2.3 billion planned for the upcoming years. Year-to-date, we have repurchased a total of 98.3 million Class A ordinary shares, which is equivalent to 49 million ADS, totaling USD 1.3 billion in open markets across NASDAQ and Hong Kong. This accounts for about 3.1% of our total ordinary shares outstanding at the end of 2023. In the long term, our returns will be centered on sustainable and healthy business growth, profitability, dividends, and share buybacks. We are committed to rewarding our shareholders in various ways and sharing in the success of JD's business.

Thomas Chong, Analyst

My first question is about the industry and competition. What should we consider for this year's 618, and how should we view the industry landscape compared to last year? My second question is about our ecosystem strategy. Can management provide insights on the economic contribution of 3P merchants in the upcoming quarters?

Sandy Xu, CEO

Thank you, Thomas. Let me share some plans for the upcoming JD618 grand promotion. This year's grand promotion's theme is quality and affordability. We've noticed a market trend where many low-priced products appear identical. Therefore, as we continue to implement our low-price strategy, our focus for this year's shopping festival is to emphasize JD's ability to offer differentiated good products at inexpensive prices with excellent service. This year's promotional approach and pace will differ from previous years, with all arrangements centered on enhancing user experience. The event will kick off at 8 p.m. on May 31, with products readily available for immediate purchase. We will remain committed to cultivating strong partnerships with our brands and suppliers to further solidify JD's market presence and users' mind share. Additionally, we will step up efforts to support SME merchants and aim to more than double the number of merchants to exceed 1 million sellers, facilitating the growth of more partners. Overall, we are optimistic about the performance of this year's 6/18 promotion. We believe that different market players require different strategies in everyday sales and during grand promotions. What makes JD stand out is still our advantages in supply chain and the reliability we offer to our users. Our business model, based on a robust supply chain and user-centric experience, is resilient and sustainable across various economic cycles. We are confident in our ability to consistently gain market share over the long term with this business model.