Alibaba Group Holding Limited (BABA) Q3 2021 Earnings Report, Transcript and Summary

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.

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.

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 suppressing 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.

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 a strong growth of 27% year-on-year. Okay. So this strong revenue growth, 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, and adjusted EBITDA was RMB 61 billion, up 21% year-on-year, primarily driven by healthy profit growth of our core commerce segment. If taking 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%. And we're very pleased that the 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.

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. And our management will address your question in the language you asked. Please note that this translation is for convenience purpose 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're ready. Thank you.

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

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?

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 even with respect to those merchants, the fact is that 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 mind share for consumption, and we're providing a very high-quality consumer experience. So 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, be it in terms of retention rates, in terms of activity or their focus on the platform, we see no decline. And to the contrary, we tend to see increases, and that is 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. So 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 that whole suite of tools and services to drive overall merchant performance, helping them increase their sales and maintain healthy profitability. And that is the reason why we are the premium platform that merchants choose to work with.

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

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 perhaps 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.

Thank you for your question. Well, 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. And included within that figure was RMB 4.9 billion for operating CapEx, so that covers IT. So 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. And so we hope to see, going forward, CapEx increasing, both as an absolute value as well as a percentage of revenue.

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

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?

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. And in years past, we've indeed done a lot of work on this front. Going forward, as a platform economy ever more deeper integrated with the overall economic and social development of the country, we do plan to take on yet more social responsibility. Something very important for Alibaba, in particular, is mainstreaming that responsibility and making it part and parcel of everything we do, be it helping to create jobs, to stimulate employment, helping SMEs on every front from product distribution all the way through manufacturing. On the manufacturing side, we can play a role and also helping them to export their products. There are many things that Alibaba can do. And I think the key point here is the social responsibility for Alibaba is not something separate from our operations, and our business rather is at the mainstream of everything we're doing around operations and business as a platform. So taking on more social responsibility in the sense is conducive to driving prosperity of the platform. And more prosperity on the platform, again, enables us to take on more social responsibility, the 2 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.

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

Congrats on the solid results. My question is related to the reinvestment in strengthening your overall marketplace business. So 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 resource that we will put into accordingly, for example, Taobao Deals, Taobao Live, the Short Videos and also the Taobao Grocery. How do we evaluate some of these reinvestment has achieved the 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 investment currently?

Thanks. Let me answer this question. First of all, I think as we always said, we always invest for the future. And for our investment in the seed business, in new business, in core commerce, actually, we think these are new businesses, but we view these new opportunities from the entire, I mean, ecosystem point of view. So we think to enhance our leadership position in core commerce, we need a different, I mean, applications, different services to meet different -- to meet the customers demand from different perspective. So like today, as we -- as you know, that we -- our Taobao Deals enjoyed very rapid growth. And 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 the investment in Taobao Deals is very important measures for us to target the customers in low-tier cities even in the rural areas and leverage our supply power from like other business in Alibaba, like 1688, so on and so forth. We have very effective supply, and value for money supply to meet the demand of the customers with low purchasing power. And in terms of our investment in Taobao Live, it has been for a while. And today, if you look at the Taobao Live business, it's very -- it's already very sizable. And every day, we have tens of thousands of live streaming on our platform, which not only initiated by the KOL, but also done by many storefront owners. So I think we are -- we highly integrate the live streaming together with our retail platforms. And live stream become a very effective marketing tool for our storefront and also create new business opportunities for KOL. So in this regard, we will continue to invest in the live streaming. But we don't -- once again, we don't view live streaming as a separate business. Instead, actually, live streaming is a very important new retail format in the commerce platform. So I will stop here for translation first. Well, in terms of Taobao groceries, as I said in my script, we are developing a very unique model based on the customer value proposition as opposed to subsidization to ensure the good user experience and the business sustainability. I think the very important thing is that we try to build a -- our own model as opposed to what you see in the market, just burn money for -- certify the customers for scale. I don't think this is a sustainable model. Instead, we have such a tremendous user base already in Taobao. And so that's why we position -- we -- in Taobao mobile app, we have our Taobao Grocery as a major customer interface for this new business. And so far, we -- based on our initial test, we saw very good results. And this Taobao Grocery business not only help us to have more supplies to the local customers, especially in the low-tier cities, but also help us to recruit many new customers while assistance of these, I mean, community leaders. So we will continue to invest in this business, but we will try to leverage all the resources we have in Alibaba and in some new retail business, in our investing companies and in our multiple supply channels. So from a financial perspective, I think we don't manage our core commerce business by EBITDA. We think the growth of the user base and growth of the consumption in multiple categories across countries is a key. So we -- our strategy is very clear, and we are very confident to invest more in this area. Thank you. Yes. Just to add one more point on Taobao Grocery. Today, we're still in the pilot test for Taobao Grocery in some of the cities. And so today, only a small portion of Taobao users can access the service. But over time, we will roll this service out across the country and the collaboration with multiple suppliers across Alibaba business. Thank you.

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

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 the SaaS side? And how we should think about the margin trend as well?

Thank you. Yes, cloud community is a very promising business. We do believe that in the future, all the industrial sectors, they need cloud services. Today, the market also has in the market, we also see a very fierce competition. But obviously, we -- Alibaba has a very big advantage in term -- in many areas. First is that by leveraging our huge scale, e-commerce, financial services and logistics, we are able to build a very scalable cloud infrastructure, which support our own business first today, and we roll out this infra to serve third-party clients. So in this case, in terms of internal scalability, we are in a very superior position. The second advantage we have is the data intelligence capabilities and applications we have to serve our clients. Actually, in China, today, when you talk with many clients who want to use cloud, actually, their purpose is not about only moving to the cloud. Instead, what they want is by moving to the cloud, they are able to better usage -- to better use of their data. So the data intelligence capability and applications are the key. In this regard, we are obviously in a -- once again, in a very superior position. We have a lot of expertise -- experiences in internal data usage and data intelligence. Yes. And the third advantage we have is about the technology. For years, we invested in the cutting-edge technology for cloud very aggressively via our DAMO Academy, via our recruitment of the first-class engineers and the scientists. So today, we are -- in terms of some of the key product features in cloud such as database, such as storage, such as the middleware services, so on and so forth, we are -- our product and services, our quality of the product and services are very -- are better than our competitors. So I think we get very good feedback from our customers. So I think the technology is still the key. In summary, we invest a lot in technologies in the area of IaaS and PaaS. In terms of SaaS, we work very actively with our partners in different industries, try to create a SaaS ecosystem, cloud-based SaaS ecosystem. So this is our general strategies for cloud, and we are very confident about the future of this business. Thank you.

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

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. And the impact that, that 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?

Thanks very much. And indeed, 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 be able to sustain them at the same levels that they have been at. And we're very grateful for that. And 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. And we know that others in the same market are getting different kinds of questions, and the expectations are different. Now 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 and put in first place profit growth going forward or whether, instead, we would prioritize investing in our future growth and in new businesses? And Alibaba's answer to that is very 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, looking at the last 12 months or actually the figure I can give you is from the last 9 months, the past 3 quarters, adjusted EBITA was RMB 147.8 billion. That's very strong. But that figure already includes various reinvestments of profit that we have made. So I think we're in a good place and have the ability to continue to invest. You can also look at our profit increment, say, over the last 2-year period, if you compare the first 9 months of this year to the first 9 months of the year before last, you're talking about a fairly 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 as the new businesses grow, we will expect to continue to scale up our investments. So looking at the potential, the huge potential that exists in the market, today's situation of competition and our own progress and where we're at, as I said in my prepared remarks earlier, our approach will be to continue to invest, to scale up our investment. We will never prioritize margin that will never be #1 for us, and it never has been in the past. And when it comes to profit growth, I think we have a very strong foundation in place, in particular with Taobao, Tmall and the China retail marketplace. We're building on a very strong foundation of profitability.

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

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

Thank you. For the impact of the COVID, here in China, in some cities, government take new approaches to lockdown some of the areas in the cities and encourage people to stay at the home cities instead of going back to the hometown for their Chinese New Year. So we are closely monitored the progress of these new measures. And so far, I think we haven't seen a very material change of the consumption of the business. But obviously -- because for January, it's very -- if you look at apple-to-apple to last year because last year, Chinese New Year is in late January, while this year is in the middle of February. So we have some time gap between 2 Chinese New years. As a result of the -- of some lockdowns in some of the cities, from the logistic perspective, we see some challenge because of this lockdown. But I think because for the last mile delivery force, because of the staying at the city policy, I was -- we expect this -- I mean, last -- the capacity will be enough for the last mile while the transportation might be a challenge because of some lockdowns. Thank you.

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

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

For this smart transportation and autonomous driving, I think we do it from different angles. For smart transportation -- for our AliCloud business, actually, we closely worked with some partners in create the smart transportation solutions based on the cloud infrastructure. And I think this vertical solution will be widely used in many areas to create this, I mean, smart transportation capabilities. Well, for autonomous driving, actually, our DAMO -- in our DAMO Academy, we have a dedicated team working on this for years. And so far, what we focus is about to apply this autonomous driving into the logistics area. And we've already deployed many -- I mean, autonomous cars are in school campuses, in some residential areas to the last-mile delivery and from the service station to the buyers at home or student's dormitories. So -- and so I think this will have -- today, I think this is still under early stage. But I would say autonomous driving will have the wider range of the applications. So we will closely monitor the progress, and once again, we will invest for the technologies to make sure we are in the leading position in this area. Thank you.

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

My question is about the new businesses you're 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 because 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. So looking at the new businesses, how do you see the synergy, the 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?

Thank you. This is Daniel, and I'll take the first part of that question. Indeed, we're constantly working to incubate new businesses, including in core commerce. We've talked quite a bit about that today, but also in other areas. And our approach in terms of the incubation process is always to be patient and to make it a long-term commitment. So some of these, we're already starting to see become -- well, to gain traction and become quite successful already, including Taobao Deals and including Taobao live streaming. And in all of these cases, these are businesses that have been through a period of incubation and investment, and it's taken patients to get to where they are. Any business that we incubate, we're constantly looking for ways to create new differentiated value, a good user experience and to drive efficiency, and we're indeed investing in some even earlier stage offerings as well, both in core commerce and in other segments seeking, in all instances, to differentiate a solution or a service to satisfy customer demand.

Part of your question was about which of the businesses are seeing losses narrow the most? And my answer to your question in a nutshell would simply be that all of the businesses that have been loss-making, we're seeing losses narrowing across the board. So with respect to Ele.me, digital, media and entertainment, New retail, Lazada, even the smaller businesses like cross-border and, of course, the larger businesses like cloud and Cainiao where losses have been relatively large in the past, as you see now, they're solidly on track towards healthy profitability. So I guess the biggest change looking at where things are now would be with local services. So certainly, Ele.me and also Cainiao. And this is also a question that we ask ourselves on a daily basis and have had a lot of internal discussion around, i.e., in our loss-making businesses, should our primary goal be trying to further narrow the losses or should it be trying to further drive business growth? And you know our answer to that has been that we're reinvesting selectively and following a lot of study and discussion, reinvesting to grow the business. Now the next quarter will be the final one of the financial year and an appropriate time for us to look forward to and offer overall guidance for the next year. And so we expect to be doing that with you the next time we see you.

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

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