Alibaba Group Holding Limited (NYSE:BABA) Q1 2024 Earnings Call Transcript

Alibaba Group Holding Limited (NYSE:BABA) Q1 2024 Earnings Call Transcript August 10, 2023

Alibaba Group Holding Limited beats earnings expectations. Reported EPS is $2.4, expectations were $1.97.

Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group’s June Quarter 2023 Results Conference Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a Q&A session. I would now like to turn the call over to Rob Lin, Head of Investor Relations of Alibaba Group. Please go ahead.

Rob Lin: Thank you, and good day, everyone. Welcome to Alibaba’s June Quarter 2023 Results Conference Call. With us today are Daniel Zhang, Chairman and CEO; Joe Tsai, Executive Vice Chairman; Toby Xu, Chief Financial Officer. We have also invited Trudy Dai, the CEO of Tabo and Tmall Group during the call. This call is also being webcasted from the IR section of our corporate website. A replay of the call will be available on our website later today. Let me quickly cover the safe harbor. Today’s discussion may contain forward-looking statements including without limitation statements about the outlook of our businesses and our organization. Forward-looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations.

For detailed discussion of these risks and uncertainties, please refer to our latest annual report on Form 20-F and other documents filed with the U.S. SEC were announced on the website of Hong Kong Stock Exchange. Any forward-looking statements that we make on this call are based on assumptions as of today, and we do not undertake any obligation to update these statements except as required under applicable law. Please note that certain financial measures that we use on this call, such as adjusted EBITDA, adjusted EBITDA margin, adjusted EBITA, adjusted EBITA margin, non-GAAP net income, non-GAAP diluted earnings per share or ADS, and free cash flow are expected on a non-GAAP basis. Our GAAP results and reconciliations of GAAP to non-GAAP measure can be found in our earnings press release.

Unless otherwise stated, growth rate of all stated metrics mentioned during this call refers to year-over-year growth versus the same quarter last year. With that, I will now turn to Daniel.

Daniel Zhang: Thanks, Rob. Hello, everyone. Thank you for joining our earnings call today. We started the fiscal year with a robust quarter. The latest macro data indicates some uncertainties in the pace of post-COVID recovery. But as economic and consumer activities continue to resume, our business has demonstrated encouraging trends, economics resilience, confidence in the consumption recovery and the significant potential from an integrated development of the digital economy and the real economy. The solid quarter also showed promising early results of our reorganization, which is beginning to unleash new energy across our businesses. Our revenue reached RMB234 billion, grew at 14% year-over-year and the growth was achieved across our different business segments.

Our adjusted EBITDA increased 32% year-over-year to RMB45.4 billion, showing progress in our continued focus on operating efficiency and the quality of operation. Next, our growth results of each of our major businesses. First, let me invite Trudy to share the Taobao and Tmall Group updates.

Trudy Dai: Greetings everybody. This is Trudy, and it’s my pleasure to speak with you again. In the just concluded June quarter, under our putting users’ first strategy, the Taobao app’s user base has been put on a rapid track of growth. From April of this fiscal year, the average number of DAUs each month has grown by 6% or higher year-over-year. Last month, July, growth was over 7%. Based on third-party data, our DAU leadership in the e-commerce space continues to widen. More and more users are choosing to use the Taobao app. At the same time, our building a prosperous ecosystem and realizing technology-driven innovation strategies are also starting to yield results. Since we launched the value for money battle this fiscal year, we’ve seen a very clear trend of merchant growth on Taobao and Tmall.

In the June quarter, we on-boarded a large number of new merchants, a significant portion of whom quickly started contributing to that value for money battle, winning over and converting users. So our value for money battle will continue and will be an area of major investment. We need to give users the experience of good merchandise is not expensive on Taobao and Tmall, and we need to guide merchants to enhance value for money in order to achieve business scale growth and long-term stable returns. In fact, we saw initial evidence of this in the June quarter. Merchant confidence in doing business on our platform increased significantly and merchant spending also grew with an increase of over 20% in the daily average number of merchants paying for advertising.

This all goes to show that more and more merchants are taking Taobao and Tmall as their first choice platform for stable operation of long-term business. As for realizing technology-driven innovation, we’ve already upgraded merchant tools with AI, enabling merchants to open stores, launch new products, operate their businesses and conduct marketing campaigns with much greater efficiency and helping to optimize store display and product descriptions, thereby significantly enhancing the shopping experience for users. As a result of these strategies, the Taobao and Tmall Group recorded close to RMB80 billion in CMR this quarter, a year-over-year increase of 10%. Within that, we saw very strong willingness to invest among merchants coming to Taobao and Tmall from other platforms.

As for the platform itself, continue to be committed to reducing costs and raising efficiency. We’ll spend where it makes sense to, and we’ll save where we can. As a result, despite our huge investments in users in the value for money battle and in AI, the Taobao and Tmall Group recorded a 9.1 year-on-year increase in adjusted EBITDA in the June quarter, slightly lower than CMR growth. Also during the just concluded 618 Taobao and Tmall Shopping Festival, we achieved a two-wheel drive effect of user scale and purchasing power. The data showed that within the two factors that drove GMV growth during 618, growth in number of paid orders and an average order size was remarkably similar. So that means that the contribution of each of those two factors was balanced.

On the one hand, the number of 88 VIP members and GMV both grew by double digits year-over-year. And on the other hand, as part of our value for money battle during this year’s 618, we launched during the first time a Taobao Good Price Festival, marking the first time in the history of 618 that there was a dedicated promotion channel for Taobao merchants. This Tabou Good Price Festival proved effective in promoting value for money offerings and in attracting more users from lower-tier cities and young users to visit and also to make purchases. So if I were to sum up the June quarter in one sentence, I would say, our three strategies of putting users first, building a prosperous ecosystem and realizing technology-driven innovation are starting to yield results.

Throughout the remainder of the fiscal year, we will continue to implement these three key strategies. Specifically, first, we will do our utmost to meet the needs of diverse groups of Chinese consumers and to satisfy their demands around shopping, around consumption, and also around daily life. To do that, we will continue to invest heavily in developing content around shopping, consumption and daily life. Second, we will also continue to invest heavily in the value for money battle in two different ways. On the one hand, we will continue in line with our mission to support small and medium merchants with targeted programs such as those for merchants in industrial clusters and for new SME merchants. And in parallel, we will build a more advanced open and inclusive merchant ecosystem and attract more merchants to engage in the value for money battle so as to create a virtuous cycle on Taobao and Tmall of merchant ecosystem, revenue growth, stronger profitability, and that is precisely what our mission has always been.

Third, we’ll continue to invest in AI. It is our conviction that technology creates commercial value. Taobao and Tmall have the largest collection of merchants and of merchandise on the Internet and are the most fertile soil anywhere on the Internet to explore AI applications. Hence, in this technological revolution, the Taobao app has the greatest potential to become a one-stop smart portal for life and consumption enabled by AI, satisfying the broadest variety of diverse needs across our huge base of 1 billion users. At Alibaba, we often say, seeing is believing. I’m confident as CEO that over this three-year management cycle, with the execution of these three key strategies, the Taobao and Tmall Group will create a virtuous investment cycle from investment in users and user growth leading to merchant growth, leading to transaction growth, further leading to revenue and profit growth and feeding back into further investment in users and user growth.

Along the way, though, there will likely be occasional months with volatility or setbacks in our operations. Under the leadership of the Taobao and Tmall Group’s Board of Directors and management team, we will remain firmly committed to our three key strategies to continuing to invest in users, providing strong support for merchants and upgrading our platform with technology for the long term, and we’re fully confident in the results we will achieve for the long term. Thank you very much.

Daniel Zhang: Now I will share the updates on our other major businesses. Alibaba International Digital Commerce Group, AIDC, delivered 41% overall revenue growth this quarter, and its retail business achieved 60% revenue growth year-over-year. This was driven by solid order growth of our international retail parking places at around 25% year-over-year growth. Advertising revenue growth because of the enhancement of our monetization and higher direct sales revenue contribution as AliExpress expands its new choice model. Alibaba also delivered a record order growth based on its defeated country strategy, accelerating progress in high-priority markets such as Philippines and Thailand. In Turkey, Trendyol continued to maintain its growth momentum and market leadership.

We are starting to see economics of scale in our international retail businesses as enhancing monetization and operating efficiency reduced adjusted EBITDA loss. AIDC’s adjusted EBITDA loss decreased by 17% year-over-year during the quarter. Looking ahead, we will continue to expand the trust model, leverage the capabilities of an integrated cross-border supply chain and enhanced consumer experience with higher certainty in logistics and service level. This plan is to expand the tourist model from Anixter to certain of our other retail platforms with upgrading our product and services, especially in providing a better localized experience. During the quarter, revenue from local service group grew 30% year-over-year, driven by strong combined order growth across both Orama and Amap.

Amap daily active users and two destination services expanded due to the strong recovery in community and travel demand after the panic measures were lifted. With a long-term strategic focus on technology leadership, Amap released new product features such as traffic light comedown and a tunnel navigation during the quarter, which were well received by its users. Its market share in map navigation services continue to expand. During the quarter, Orama focused on investing in its own service capability enhancement and a more inclusive partnership strategy, which helped sustain healthy order growth while maintaining positive unit economics. Taobao’s revenue during the quarter grew 34% year-over-year, primarily driven by the volume increase of international fulfillment solutions services, meaning survey AliExpress and the China domestic consumer logistics services.

China’s adjusted EBITDA of the quarter was RMB877 million due to the continued focus on quality of operation and lower transportation costs as international air cargo price came down. Looking ahead, China will continue to invest and build logistic network for cross-border and domestic parcels and leveraging Alibaba’s multiple digital commerce use cases to expect its network effect. Tania will also share part of its savings from this operating efficiency improvement and the transportation cost reduction with its customers through price strategy adjustments and pursue higher economics of scale on a larger revenue base. During the quarter, Alibaba Cloud revenue grew 4% year-over-year. The growth rate was negatively impacted by the normalization of CDN demand as usage of video streaming, remote working and remote learning paying down when offline activities resumed after a measures were lifted.

The growth rate was also partially impacted by revenue decline from a top customer. In the past quarter, we have received strong demand for model training and related AI services on cloud infrastructure, which were only partially fulfilled due to the near-term supply chain constraints globally. We believe the growth opportunity driven by AI services have just begun. We believe that technology evolution both by AI is not a short-term opportunity at the beginning of a new era as one of the world’s leading cloud service provider. We will continue to invest in forming a full spec product and technology leadership across us, post and mask layer. This is key for us in capturing AI opportunity and set 18 advantage for AliCloud versus other players in China, which mainly focused on one of the layers.

We will leverage and expand this advantage when serving the needs of our customers including training and service needs for large language start-ups as well as industry demand for customized models and vertical models. We believe the high performance and the low-cost computing power required for model training and services will open up brand-new opportunities for cloud computing services. Over the long term, Alibaba Cloud will benefit from application of AI in all industries. In the last layer, we have built model scope a leading open source online community in China for models and the related tools and services, which is very popular among developers. The community hosted over 1,000 AI models, including Meta’s recently released Lama 2 and our own open source model.

The 7 billion parameter version of Tongyi Qianwen, we believe the aggregation and engagement of a model ecosystem will significantly help developers optimize their model and use services on Alibaba Cloud. Since April we; released our own large language model, Tongyi Qianwen audio to test, transcription platform Tongyi Qianwen, and test to image model Tongyi Wanxiang, which together have accumulated millions of users. In this quarter, Alibaba Cloud’s adjusted EBITDA reached RMB387 million, representing year-over-year growth of 106%. This is mainly due to the reduced co-location and bandwidth costs of into as a result of normalized usage after the pandemic as well as enhanced product mix and efficiency improvement, for example, server utilization in our cloud business.

We will continue to focus on quality of operation. And as we continue to scale up, we will work to achieve economics of scale that will deliver long-term operating benefits and contribute to our profitability. Our digital media entertainment business group delivered 36% revenue growth year-over-year and the first ever quarter of profitability. This was a result of the following factors. Number one, decreased growth in subscription revenue; number two, higher revenue contribution from [indiscernible], which both benefited from the recovery of off-line shows and cinemas after the pandemic. Number three, Alibaba Pictures launched of several blockbusters and the robust China box-office demand during the quarter. Going forward, we will continue to improve our content production capabilities and enhance DME’s business operating results through high-quality content creation and distribution.

In July, we published our fiscal year 2023 ESG report. Over the past year, we have made progress across the seven strategic mentions of social responsibilities, especially in restoring our green climate. We achieved solid ambition reduction under Scope 1, 2 and 3. We drove a mission reduction across our business ecosystem which was roughly equivalent to the total annual greenhouse gas emissions of 1 million average household in China. Leveraging our unique position, connecting consumers and merchants our product innovation, Carbon 88 Legend platform enables our customers and merchants to join the carbon saving efforts across our ecosystem. Following the announcement of our 1+6+N reorganization in March, the six business groups have started operating in a new way under the leadership of their respective Boards.

The past quarter’s solid performance was also a reflection of early results of this change and further enhanced our confidence towards the future. As part of the new governance framework, we are also further strengthened the Company’s capital management. Moving ahead with our various programs to improve shareholder return under the leadership of the newly established capital management committee, the capital market projects we announced last quarter are all underway, and we have also been continuing sharing — continuing share repurchase activities in the market. We will update you — we will keep you updated on the progress in the future. Lastly, this will be the 36th earnings call I have participated since our IPO in 2014 and the final one as Chairman and CEO of Alibaba Group.

This truly has been a privilege of a lifetime to lead the Company by CEO on our three strategies of consumption, cloud computing and globalization since 2015 and be a part of Alibaba’s high growth period. As Chairman, it was an extraordinarily experience to take on the challenges brought on biopic an unprecedented change in the macro environment over the past four years. This has been an incredible invaluable life experience I sincerely thank our shareholders and analysts for your trust and support over the years. This quarter is combination of my year leadership of Alibaba and the start of my new journey. I hope you continue to support Joe and Eddy and the new management team. As Cloud Intelligence Group moved towards becoming a public company, I look forward to reengaging with everyone in my new role in the journey ahead.

Thank you, everyone. Now I will pass to Toby to go through the financial updates.

Toby Xu: Thank you, Daniel. Due to the strong business momentum and our focus operating efficiency across businesses, we achieved a robust financial performance in the past quarter. Total consolidated revenue was RMB234.2 billion, an increase of 14%. Consolidated adjusted EBITDA increased by RMB11 billion or 32% to RMB45.4 billion in the quarter due to improvements across all business segments. Non-GAAP diluted earnings per share was RMB2.17, an increase of 48%. Additionally, during the quarter, we repurchased $3.1 billion worth of our shares, which accounted for 1.4% of total shares outstanding. This is supported by our continuous generation of strong free cash flow. During the quarter, free cash flow was RMB39.1 billion or $5.4 billion, an increase of 76% year-over-year.

Our strong free cash flow and balance sheet continue to put us in excellent position to strengthen our competitiveness and capture new opportunities. Now let’s look at the cost trends as a percentage of revenue, excluding SBC. Cost of revenue ratio, excluding SBC, decreased 1 percentage point to 61% during this quarter. Product development expense ratio decreased 1 percentage point to 4% during this quarter. Sales and marketing expense ratio remained stable at 12% in this quarter, and general administrative expenses ratio remained stable at 4% in this quarter. Our net income was RMB33 billion, an increase of RMB12.7 billion compared to the same quarter last year. The increase was primarily attributable to the increase in income from operations and the increase in share of results of equity method investees partly offset the net losses arising from the decrease in market prices of our equity investments in publicly traded companies compared to net gains from these investments in the same quarter last year.

As of June 30, 2023, we continue to maintain a strong net cash position of RMB419.2 billion or $57.8 billion. Free cash flow this quarter was RMB39.1 billion, an increase of 76%. The increase reflected an improvement on profitability and a decrease in capital expenditure. Now let’s look at the segment results. Starting this quarter, we have implemented a new organizational and governance structure under which we now have six major business groups and various other businesses. Accordingly, our segment reporting has been updated to reflect our reorganization under our updated segment reporting second, revenue and adjusted EBITDA are presented before consolidation adjustments. We have also provided revenue and adjusted EBITDA trend of each business groups for the last five consecutive quarters in the appendix of the earnings presentation for easy reference.

Now let’s look at the Taobao and Tmall Group. The user first strategy of Taobao Tmall Group is yielding positive user growth momentum and improving user retention on Taobao APP, which we have supported strong revenue growth and successful June 18 shopping festival during the quarter. Revenue for Taobao and Tmall Group was RMB115 billion, an increase of 12%. Customer management revenue increased by 10% to RMB79.7 billion, primarily due to increase in number of paying merchants, increasing merchants’ willingness to invest in advertising our platform and increase in online physical GMV, excluding unpaid orders. Direct sales and others revenue increased 21% to RMB30.2 billion, primarily due to strong sales driven by the consumer electronics category.

Taobao and Tmall Group adjusted EBITDA increased by 9% to RMB49.3 billion. The increase was primarily due to the increase in profit from customer management service and the narrowing losses in certain businesses which was partially offered by Taobao Tmall Group’s investments in growing TaobaoAPP users that has resulted in increasing DAU of 6.5%. Alibaba International Digital Commerce Group revenue was RMB22.1 billion, an increase of 41%. Revenue from international commerce retail business increased by 60% to RMB17.1 billion, the increase was primarily due to solid performance of all major retail platforms and improvements in monetization. Revenue from our international commerce wholesale business remained stable at RMB5 billion compared to the same quarter last year.

AIDC’s adjusted EBITDA loss narrowed by RMB960 million to a loss of RMB420 million in June quarter. Loss is significantly narrowed year-over-year primarily because of improved margins of Trendyol and Lazada, partly offset by the increase in investments in new businesses such as Mirabel and Ali Express choice. Trendyol continued to deliver strong order growth in both of its e-commerce and the local consumer service businesses through robust revenue growth and continuing improvement in operating efficiency. For the first time, Trendyol achieved positive operating results during the quarter. The reduced loss from Lazada is primarily due to improvement in monetization. Local services group revenue in June quarter grew 30% to RMB14.5 billion, primarily due to robust GMV growth of Irma and the rapid order growth of Amap.

Local service Group adjusted EBITDA was a loss of RMB2 billion this quarter compared to a loss of RMB2.8 billion in the same quarter last year, reflecting the continued narrowing of losses driven by Irma’s order growth and the positive unit economics per order as well as rapid order growth of Amap driven by market demand. Total revenue from China grew 34% to RMB23.2 billion, primarily contributed by the increase in revenue from international fulfillment solution services and domestic consumer logistics services. China adjusted EBITDA was a profit of RMB877 million compared to a loss of RMB185 million in the same quarter last year. Profitability turned positive year-over-year primarily because of improved operating results from international fulfilling solution services and domestic consumer logistics services.

Revenue from Cloud Intelligence Group was RMB25.1 billion in June quarter, an increase of 4%. The revenue growth was mainly driven by Alibaba consolidated businesses and the customers within financial services, education, electric power and automobile industries partly offset by our proactive efforts to manage revenue from project-based cloud services. Cloud adjusted EBITDA was increased by 106% to RMB387 million, primarily due to reduced co-location and bandwidth cost of DingTalk as a result of normalization of usage as compared to the same quarter last year. Revenue from our DME Group was RMB5.4 billion, an increase of 36% on primarily driven by growth of online entertainment business as well as a strong recovery of off-line entertainment business.

Adjusted EBITDA recorded a profit of RMB63 million compared to a loss of RMB907 million. The improved adjusted EBITDA was mainly due to the increase in revenue from Alibaba Pictures in Damai. Revenue from all other segments increased slightly by 1% to RMB45.5 billion, primarily due to the revenue growth contributed by Alibaba Health, Fliggy, Flushable and Intelligent Information Platform, partly offset by the decrease in revenue from Sun Art due to decrease in ticket size resulted from the decrease in customer stockpiling behavior compared to the same quarter last year. Adjusted EBITDA from all other segment was a loss of RMB1.2 billion compared to a loss of RMB2.3 billion in the same quarter last year, primarily due to improved operating results from Freshippo, Lingxi Games and Fliki.

Thank you. And that’s the end of our prepared remarks. We can open up for Q&A.

Rob Lin: On 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. Please note that the translation is for convenience purpose only. In the case of any discrepancy, our management statement in the original language will prevail. If you are unable to hear the Chinese translation, bilingual transcript of this call will be available on our website within one week after meeting. Operator, please connect the speaker in SI conference line now. Please start the Q&A session already. Thank you.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from Ronald Keung with Goldman Sachs. Please go ahead.

Ronald Keung: Can you share — can management share just how have broader consumption trends been tracking after a pretty strong June 18 shopping festival. And following on that within the Tabao Tmall Group, besides the DAU, DAC metrics that are KPIs, how are we thinking about the balance between Taobao Tmalls, for example, other metric, which is market share, versus our Taobao Tmall Group, the absolute profit level if we think of it on a three-year horizon?

Daniel Zhang: Thanks for those questions. Let me start with your first question about consumption trends. Indeed, we’ve seen there is a gradual recovery underway in the Chinese economy and the Chinese government indeed has made many efforts to stimulate economic growth, drive consumption. When it comes to the other KPIs, you asked about market share and profitability, I think that, that comes down to the three key strategies we’re pursuing around growing user scale, building a prosperous ecosystem and realizing technology-driven innovation. We’re looking at creating a virtuous investment cycle by investing in users and user growth, leading to merchant growth, driving higher revenues and then being able to further reinvest in growing users and user scale.

So that’s the positive cycle we’ll be creating. Looking into the future, there certainly will be uncertainties ahead of us on this road. But I think faced with all these uncertainties and potential volatility, the greatest certainty we have is the need to continue to grow our user scale and our merchant scale. And we are very optimistic that as long as we can maintain our leadership in terms of user and merchant scale that the mid- to long-term view of profitability and market share will be excellent.

Operator: Thank you. Your next question comes from Alicia Yap with Citigroup. Please go ahead.

Alicia Yap: Congratulations to you and all the best on your new journey. So looking at the excellent growth numbers you’ve reported in DAUs and also in VIP members, double-digit growth there. And if management could give us a little more detailed information on what lies behind those numbers, for example, in terms of new users, where are they coming from? How are they being acquired? Are they mostly coming from lower-tier cities? And how do those new users compare with existing users in terms of their willingness to spend and their spending power. And when we look at the 88 VIP members and the growth there, what’s primarily driving that? And are we looking more at a higher frequency of purchase that they’re making? Or is it more purchases they’re making big ticket items in some categories?

And then looking at these trends, do you think they’ll continue on into July? And then finally, I’m just wondering, given the weakness that remains in the economy, how accurate do you think our forecasts are of trends going forward and our ability to realize our objectives.

Daniel Zhang: I’ll start with your first question on the increase in DAUs and where new users are coming from. And I would firstly say that our value for money battle we’ve been investing in developing value for money offerings has very much been paying off. At the last earnings call, we discussed our three key strategies. So there are several reasons underlying the good performance that you’ve seen in the June quarter, and I will set out a few of them for you below. First is improvement in the macroeconomic environment and recommencement of consumption, coupled with higher penetration of online purchasing within retail. Secondly, we’re starting to see payoff from our investments in this value for money battle, bringing to the market an increasing assortment of good items at good prices, developing that supply and attracting users with this proposition.