Earnings Call Transcript - JD Q3 2024

Sean Zhang, Director, Investor Relations

Hello and thank you for standing by for JD.com's Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question and answer session. Today's conference is being recorded. 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. And 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 Xu, CEO

Thank you, Sean. Hello, everyone. Thanks for joining us today to discuss our Q3 2024 results. We had a solid Q3 with improved operating and financial results. Our top-line growth accelerated sequentially. Our active user base and shopping frequency expanded with stronger momentum. Our bottom line achieved another substantial uplift. At the heart of this achievement is our relentless focus on building supply chain capabilities and logistics infrastructure, which enable us to continuously unleash strength in delivering lower cost, higher efficiency, and best-in-class user experience. This is the key competitive strength that we are focused on as we face an ever-changing macro and competitive landscape. JD has been dedicated to establishing core supply chain capabilities since day one, along with putting significant efforts into building out retail and logistics infrastructures around the country to better serve consumers and contribute to the real economy of local areas nationwide. This enables us to play a key role in contributing to the trading program, both online and offline. JD is best positioned to support this program, not only with our strong user market share in home appliance and 3C categories, but more importantly, with our supply chain capabilities and our fulfillment infrastructure. Consumers are attracted to JD's platform for the wealth of product selections. Our integrated service covering every step from dismantling, shipment to installation of heavy, bulky appliances, and a smooth checkout process using trading subsidies. The trading program has proven to be very effective in unlocking consumption potential and driving the technological upgrade of the entire industry chain. We expect to continue playing our role in this effort to better serve customers and suppliers, stimulate consumption, and promote healthy industry development. In Q3, our revenues for the general merchandise category increased by 8% year-on-year, a healthy momentum that has been sustained for three consecutive quarters this year. It was primarily attributable to our supermarket category, which delivered another double-digit revenue growth year-on-year. The supermarket category continued to enrich its product portfolio during the quarter to cover different price tiers. It has also launched many initiatives, such as direct shipment from suppliers to customers, which gained strong traction among our users. With improving user experience, we saw a healthy increase in both user base and user engagement in the supermarket category, particularly with a robust 20% increase in shopping frequency during the quarter. In our fashion category, apparel and sports and outdoors both recorded double-digit revenue growth year-on-year during the quarter, thanks to our efforts to enhance product selection, improve user experience, and drive user mindshare for shopping for clothing on JD. Our supply chain strength is at the core of our progress in operations and financials. Going forward, we will continue to focus on a few key areas to drive our high-quality, sustainable growth in the long run. First, user growth and engagement. Our quarterly active customers have been growing at double-digit rates year-on-year for the last four quarters in a row, with Q3 being the highest. The growth was distributed across market tiers and user groups, including new and existing users. Our JD PLUS program is on the right track. A set of metrics, including active class number and shopping frequency, continue to improve. All this progress in user growth and engagement speaks to the fact that we've been providing the best-in-class experience to users of different income spectrums and demands with the right products, price, and service offerings. On this robust momentum, we will continue to invest with discipline in user growth and user experience. In addition to users, we made progress on price competitiveness and platform ecosystem. We further improved our price competitiveness as we continue to leverage the strengths of our 1P supply chain capabilities as well as our enriched 3P product offerings and white label goods. As a result, we are better able to serve our existing users and new users. Our NPS for price competitiveness increased year-on-year for another quarter. Particularly, we saw a steeper trajectory of user-based expansion and order volume growth in lower-tier markets compared to that of higher-tier markets on our platform. Low price is the essence of retail, and our commitment to that will never change. To reinforce our everyday low-price mindset, we have launched a series of campaigns, such as the monthly Super 18 sales that offer a selection of discounted products on the 18th of every month, the weekly Black Friday offering deals mainly covering the supermarket category, daily late-night flash sales, and half-price clothing promotions. These offerings have been well received by our users. We continue to make progress on our platform ecosystem. We onboarded more 3P merchants during the quarter, particularly SMEs and those from industry belts, expanding our product offerings at different price tiers. As such, our active merchant base maintained a healthy year-on-year growth. We also made solid progress in user engagement, leading to accelerated year-on-year growth in 3P order volume and the number of users who purchased 3P products on our platform, both of which reached record high growth levels in Q3. Our NPS for 3P offerings rose year-on-year as well. Our commission revenues returned to positive growth in Q3, in line with our expectations as the impact of discounted commission fees fully lapsed. Advertising revenues in our retail business grew by double digits year-on-year, thanks to the healthy growth of our ecosystem and improved traffic allocation efficiency for both 1P and 3P merchants. Though we are still at the very beginning of exploring the potential of our platform ecosystem to drive our business scale and profitability, we will prioritize further optimizing our tools and infrastructure to better empower merchants, hence improving user experience on our platform. Moving into Q4, we just concluded our single-stake grant promotion. With this year's theme of cheaper and better, our supply chain strengths were on display. Our team expanded the product assortment for both our 1P and 3P offerings, providing competitive prices and serving users with a best-in-class experience. We observed a positive response from users, with both user numbers and order volume recording double-digit growth during the promotion. Finally, we are encouraged by a more supportive policy environment that aims to realize the huge potential of consumption in China and drive industry upgrades, create employment, and lift household income, all of which will further build consumer confidence. While we see consumer sentiment start to improve, we understand that it takes time for the benefits of these policies to materialize. We will continue to execute our strategies, building up supply chain capabilities, and fully tapping into our potential to drive lower cost, higher efficiency, and best-in-class user experience. We believe this will lead us to further expand our market share and profits. With that, I will turn it over to Ian for our financial highlights. Thank you.

Ian Shan, CFO

Thank you, Sandy, and hello, everyone. In Q3, our top-line growth accelerated from last quarter and outpaced the group of domestic total retail sales, driven by strengths across our major business segments and categories. Our general merchandise category continued with strong momentum, and more importantly, we saw a turnaround in revenue growth in our electronics and home appliances category due to our comprehensive support for China's nationwide trading program. With our strong user mind-share, supply chain capabilities, and logistics services that we built over the past two decades, we are able to provide superior customer experience and bring value to business partners and society at large. We achieved an increase in profitability during the quarter as we continued to improve costs and efficiency, especially on the logistics side. Both gross margin and non-GAAP net margin expanded at a solid pace year-over-year in the quarter. Moreover, we returned value to shareholders. During the quarter, we completed our share repurchase program announced in March this year and launched a new $5 billion share repurchase program for the next three years, ending in August 2027. We repurchased a total of 31 million Class A ordinary shares, equivalent to 15.5 million ADS, which accounted for 1.1% of our ordinary shares outstanding as of June 30, 2024. The total value of the shares repurchased in Q3 was approximately $390 million. During the nine months ending September 30, 2024, the total value of the shares repurchased was $3.65 billion, which accounted for 8.1% of our ordinary shares outstanding as of the end of 2023. This reflects our commitment to creating value for shareholders. Our net revenues grew by 5% year-on-year to RMB 260 billion in Q3, with product revenues up 5%. By category, revenues of electronics and home appliances grew by 3% year-on-year, with growth improving sequentially in each month. September was notably strong for home appliances and PCs due to our contribution to the trading program, which has proven effective in boosting consumption. Revenues of general merchandise recorded solid growth of 8% year-on-year in the quarter, with revenues in the supermarket category, apparel, and sports all achieving double-digit increases. We continue to track user engagement metrics, including steady increases in 3P order volume and active users who purchase 3P products on our platform. Our JD Retail revenues were up 6% year-on-year in Q3, thanks to the turnaround in electronics and home appliances and robust growth in general merchandise. JD Retail recorded a gross margin improvement as we continue to drive better scale benefits of 1P, favorable mixed shifts towards higher-margin categories, and higher contributions from 3P. Consequently, we passed savings to our users and offered an enriched portfolio of quality products across different price tiers. JD Logistics revenues increased by 7% year-on-year in Q3, driven by healthy momentum in both internal and external revenues. We are optimistic that JD Logistics' higher efficiency and superior service will continue to benefit JD Group as a critical component of our integrated supply chain. Looking forward, we expect further potential for margin improvement from a favorable category mix and as our 1P versus 3P mix continues to evolve positively over time. For the full year of 2024, we are confident of achieving double-digit growth in our non-GAAP net profit. Our last 12-month free cash flow as of the end of Q3 was RMB 34 billion. We believe our strong profit trajectory will bolster our operational performance and shareholder returns. Thank you.

Sandy Xu, CEO

Thank you, Ronald. To take your first question, in recent months, the government has been rolling out a series of stimulus measures, including the trading policy nationwide to support economic growth and consumption, and these efforts have shown positive progress. JD has swiftly responded by increasing inventory and enhancing service efficiency to support the program, leveraging our experience in supply chain management. We are well-positioned to offer quality products and convenience services at competitive prices to a broad base of Chinese consumers. Our response to the trading program is due to our years of experience in proactively providing trading services, which has made us technologically prepared and systematically comparable for such initiatives. Additionally, JD's unique supply chain capabilities, including our self-operated sales model, logistics and fulfillment capabilities have made us the preferred partner for our customers in the trading program. We have seen promising outcomes so far. The National Bureau of Statistics reported that September sales of household appliances and consumer electronics grew significantly compared to July and August. This trend is also mirrored on JD.com, where the trading program has driven increased sales demand for home appliances and computers. Some customers may not be aware of this policy, and it takes time for them to take advantage of the trading policy. With a supportive fiscal stimulus plan to drive consumer spending, we believe the government’s trading program aims to not only boost short-term consumption but also create jobs and increase household income to restore consumer confidence in the retail and manufacturing sectors. We remain committed to enhancing our supply chain across all categories, focusing on cost efficiency and user experience to deliver better shopping experiences to our customers. Regarding our growth strategies, this year we have advanced our plan, focusing on enhancing user experience and pricing competitiveness. We are lowering our 1P procurement costs by scaling our supply chain to provide competitive prices. We strongly believe in our ability to sustain faster than market growth and continue expanding our market share. Thank you, Alicia, for the question. I will address the first part on growth concerns. Our view is that the government’s trading policies are not solely aimed at short-term consumption increase for home appliances, but are also intended to stimulate employment and increase household income to restore consumer confidence. We remain cautiously optimistic about the overall economic and consumption growth trajectory for next year. Our growth drivers will involve continuing to invest in high-potential growth categories, expanding our product offerings, and overall strengthening our platform ecosystem. Regarding our profit outlook, long-term profit margin improvements will be driven by supply chain efficiency, category mix potentials, and growth of our 1P versus 3P mix over time. We will continuously invest in enhancing user experience and expanding our core supply chain capabilities to bolster our growth trajectory and margin improvement. Hello, Kenneth. Thanks for your question regarding competition and investments. China has a highly promising retail market supported by favorable demographics and an advanced e-commerce infrastructure, providing substantial room for market penetration and growth. We will maintain our focus on enhancing user experience and user growth, developing differentiated supply chain capabilities based on cost efficiency, and building core capabilities for sustainable growth. We've recently introduced measures to enhance user experience by increasing price competitiveness and lowering thresholds for free shipping. Our promotional campaigns have also contributed to our user traffic. For the apparel and beauty category, we are investing significantly to enhance user experience, focusing on expanding product selections, and emphasizing premium service. Most of the products in fashion currently come from our 3P sellers, while we continue stepping up our 1P operational capabilities. We recognize the importance of establishing a competitive advantage in these categories through differentiated offerings. Thank you. Thank you, Thomas, for the question. Our current macro policies have positively impacted overall consumption sentiment and are expected to further improve economic fundamentals and household income. Regarding shareholder return, we executed our share repurchase plan over the first three quarters of the year, repurchasing $3.65 billion of shares. We remain committed to delivering returns through multiple channels based on sustained business growth. We announced a new share repurchase program totaling $5 billion to reduce the total share count in the long run and have plans for steady annual dividend payments based on profitability. Thank you, Jialong, for your questions. The supermarket category is a core part of our business and represents a significant driver for growth. We see great potential in this category, backed by strong operational capabilities, and have achieved double-digit growth this year. Our decision to exit the investment in Yonghui aligns with our focus on core business areas. For the 3P development, our goal is to enhance user experience through a robust platform ecosystem that will provide a diverse selection of products and brands. We continuously invest in creating a winning situation for our merchants. Over time, we expect 3P to become a long-term growth driver generating increased revenue and profitability.

Sean Zhang, Director, Investor Relations

Thank you for joining us today on the call, and thank you for all the great questions. That's a wrap. If you have further questions, please contact me and our team. We really appreciate your interest in JD.com and look forward to talking to you again next quarter. Thank you.