Ali conference call transcript: Ali underestimated, in addition to hard fighting, buybacks, spin-offs will not fall

Highlights:

1. Revenue is still poor: Alibaba's revenue in the quarter was 242.5 billion yuan, an increase of 10% year-on-year, lower than the market expectation of 245.4 billion, Taobao Tmall's unprecedented negative growth in customer management revenue, and Alibaba Cloud's growth stalled to 20% are all drags;

2. Profit continued to be poor: Non-GAAP net profit of 44.6 billion, market expectations of 44.2 billion, considering that expectations have been fully communicated in advance, it does not mean much to exceed or not to exceed.

3. The number of users barely passed: This quarter, domestic e-commerce users (including Taobao Tmall, Hema/Yintai, 1688, etc.) have a net increase of 19 million annual active buyers, reaching 880 million as a whole, and in the case of obviously touching the ceiling, such growth is also passable;

4. Platform retail fell to the bottom: the customer management revenue represented by Taobao Tmall showed an unprecedented negative growth (-1.3% year-on-year) year-on-year, basically sticking to the lower limit of expectations;

5. Macro is not good and competition is intensifying, Taobao Tmall transaction volume continues to grow in single digits, merchant support is still increasing, and the realization rate of platform retail continues to decline.

Alibaba Beijing time on the evening of February 24, the U.S. stock market pre-market announcement of the third quarter of fiscal 2022 as of the end of December last year, the following is Alibaba's fiscal third quarter conference call content.

Interpretation of financial reports

First, the management reports incremental information:

China e-commerce business

Taote has gained a large number of new users for our retail business in China. We have 1 billion high-quality aAC users, and we believe we have basically reached the vast majority of consumers with purchasing power in China.

The focus in the future will shift from user growth to user retention and ARPU growth.

In the e-commerce sector, despite the overall slowdown in consumption growth and the intensification of competition, the overall AAC retention rate in the natural year of 2020 was 86% in 2021, which remained stable compared with previous years, indicating the healthy user stickiness of our platform.

Due to the increasing number of new users from the sinking market, our overall ARPU decreased by single digits year-on-year in 2021. But among users who spend more than 10,000 yuan a year, the ARPU of our AACs is still growing year by year.

Looking ahead, we hope to further strengthen user activity and dwell time through the construction of a variety of consumption scenarios. According to the characteristics of each category, enhance our influence in the consumer decision-making process, focusing from increasing the overall platform AAC to increasing the AAC of each category, and finally increasing the user's wallet share.

Taote's AAC reached 280 million at the end of the quarter, a net increase of 39 million per quarter, and payment orders increased by more than 100% year-on-year. The proportion of price-sensitive consumers on Taobao is significantly higher than that of Taobao APP, which has strong complementarity. We have many ways to achieve the business value of these users, especially the connection between origin and consumer to achieve the improvement of supply chain integration efficiency.

Tao Cai Cai has successfully expanded the consumption scenarios of price-sensitive consumers in the groceries and fresh product categories. More than 50% of Taocai AAC is the first time we have consumed it on our platform. We will shift our focus to quality growth by optimizing efficiency, and expect to gradually narrow the operating losses of these two businesses in the coming quarters.

Local living business

The AAC of our home and store businesses combined to 372 million, up from 17 million in the previous quarter and up 22% year-over-year in total order volume.

Ele.me has significantly improved its unit economic cost by optimizing user growth and logistics costs. AutoNavi set a record high of more than 200 million during the National Day holiday, and the number of trading users during the quarter continued to grow during the quarter. We believe that the process of upgrading AutoNavi from a tool service as a map to a destination life service platform is becoming clearer and clearer.

Looking ahead, we hope that the construction of a variety of scenarios will increase the user's activity and activity time, and the influence of decision-making links. Increase the AAC of the platform as a whole to increase the AAC of different categories, and ultimately increase the user's wallet share.

International e-commerce business

AAC reached 301 million in December, a net increase of 16 million in the quarter. Overall orders increased 25% year-over-year. Lazada and Trendyol grew by 52% and 49%, respectively.

AliExpress was negatively affected by changes in the EU VAT exemption policy and the growth rate was reduced.

We believe that the future expansion of overseas consumer markets will be based on the combination of local supply and cross-border supply. Giving full play to China's advantages in cross-border supply while effectively organizing local supply, the balance between the two is the direction of our long-term efforts.

The construction of logistics networks is the focus of our globalization strategy, the basis for the integrated supply of cross-border and local products, and the support of high-quality consumer experience.

At present, through the business scenarios provided by Lazada, AliExpress and Trendyol, Cainiao has formed logistics capabilities in Southeast Asia and Europe. We will continue to invest in it as a focus of our globalization strategy in the future.

Cloud business

The internationalization of cloud computing is another fundamental guarantee that supports our globalization strategy. During the quarter, Alibaba Cloud continued to invest in expanding its international infrastructure, adding two data centers in South Korea and Thailand in the Asia-Pacific region. Alibaba Cloud currently provides cloud computing services in 25 regions around the world.

Revenue grew 20% year-over-year, with strong demand growth in the financial services and telecommunications sectors partially offsetting slower customer demand in some of the Internet sectors.

By 2025, China's cloud market will reach the trillion level, and the process of industrial digitalization has just begun. Alibaba Cloud has long been committed to serving the real economy and serving the digitalization of all industries.

The core system of the Beijing Winter Olympics is 100% running on Alibaba Cloud. This is the first time in the history of the Olympic Games that cloud computing has replaced traditional IT infrastructure to support the planning and operation of the Games. In the past, each Olympic host city had to repeat a lot of IT infrastructure and dismantle it after the Olympics. By replacing physical infrastructure with cloud-based services, hardware costs will be significantly reduced and application development and deployment will be more efficient.

We see similar digital opportunities and benefits in many industries of the future, such as new energy vehicles, financial services and healthcare. These industries have a lot of potential and there is a huge demand for cloud computing and digital intelligence. We will use Alibaba Cloud's proprietary technologies and products to provide tailor-made industry solutions.

During Investor Day last December, we announced Alibaba's carbon neutrality goals. By 2030, we will be committed to achieving carbon neutrality in Alibaba Cloud Scope 1, 2, and 3, alibaba Group achieving carbon neutrality in Scope 1 and Scope 2, and halving the carbon intensity in Scope 3.

In addition, we introduced the concept of "Scope 3+" to promote the Alibaba ecosystem to reduce carbon emissions by 1.5 billion tons by 2035. Looking ahead, we will continue to focus on health and sustainable development, serve the people's livelihood, especially small and medium-sized enterprises, support the digital transformation of the industry, serve the real economy, and benefit our society.

Financial aspects

revenue:

Group revenue for the quarter was approximately RMB242.6 billion, representing a year-on-year increase of 10%. The three segments that contributed the most revenue were China Commerce, Cloud Computing and International Commerce, which increased by 7%, 20% and 18% year-over-year, respectively, and operating profit decreased by 42 billion yuan to 7 billion yuan, including a goodwill impairment provision of 25 billion yuan related to the digital media and entertainment segment. Excluding this impact, operating income was $32 billion, down 34% year-over-year. Adjusted EBITA was $45 billion, down 27% year-over-year.

Revenue from china's commercial business increased 7% year-on-year to RMB172 billion. Customer management revenue was down slightly by 1%. The reason is the weakness of macro consumption and the intensification of industry competition.

By category, total FMCG and household goods traded (GMV) grew faster than the overall average year-on-year. GMV growth in apparel and accessories and consumer electronics was below the overall average.

At the same time, we have increased our support for merchants through incentive measures to promote merchants to adopt new value-added services, and strategically reduce some service charges to reduce merchants' operating expenses. The increase in merchant support has led to a slower increase in customer management revenue than GMV.

Direct business and other revenue increased 21% year-over-year, with major revenue contributions coming from Gaoxin Retail, Hema and Tmall Supermarket. The main reason for the deceleration in growth was the weakening of the impact of Gaoxin's retail consolidation factor, as the merger was completely discontinued in the quarter.

China Commerce's adjusted EBITDA declined by $14 billion to $58 billion. The reason is increased investment in Taute and Taocai's growth programs, as well as higher spending for user growth and merchant support.

Investments in Tao Te and Tao Cai Cai generated strong transaction growth and improved unit economic efficiency. Taote's payment orders increased by more than 100% year-on-year.

At the same time, we have successfully implemented a number of initiatives to optimize logistics costs and improve the delivery experience for consumers.

Taocai's GMV increased by 30% sequentially, and UE per order continued to improve due to increased regional order density and improved gross margin due to increased supply chain capabilities.

We will shift our focus to the quality of growth. We expect Taote and Taocai to gradually narrow operating losses in the coming quarters.

International commerce revenue increased 18% year-over-year, driven by transaction growth in Lazada and Alibaba.com businesses. Orders for Lazada grew by 52 percent and Alibaba .com increased by about 50 percent. Year-over-year revenue growth slowed this quarter compared to the previous quarter. Adjusted EBITA losses widened by $1.5 billion to $3 billion, primarily due to increased marketing merchandising spending on user acquisition and user stickiness, partially offset by higher profit growth in the International Wholesale Commerce business.

AliExpress revenue grew in single digits due to the european imposition of VAT on cross-border parcels worth less than €22, resulting in a year-on-year decline in AliExpress orders;

Second, the sharp depreciation of the Turkish lira against the renminbi had a negative impact on Trendyol's revenue. Trendyol's monetary revenue increased 60% year-over-year during the quarter, driven by a strong order growth of 49%.

Revenue from local living services increased by 27 percent due to a 22 percent increase in order volume and more efficient use of subsidies that drag down revenue. Adjusted EBITDA losses increased by 700 million yuan to about 5 billion yuan, mainly due to the increase in the loss of AutoNavi Map's destination business, Ele.me slightly increased year-on-year, but due to our strict user acquisition expenses and reduced distribution costs, the quarter-on-quarter narrowed. In an environment of slowing consumption, we have encouraged merchants to adopt new value-added services through incentives and strategically reduced charges for certain services to reduce merchants' operating expenses and support the long-term sustainable growth of business in China.

Cainiao Logistics segments offset a 23% increase in revenue to RMB19.6 billion, primarily due to growth in fulfillment solutions and value-added services provided to China's commercial retail business, as well as higher revenue from third-party merchants in cross-border and global commerce. During the quarter, 67% of total revenue came from external customers.

The adjusted EBITDA loss was a small loss of RMB92 million, driven by economies of scale and improved gross margins for cross-border and international operations.

cloud computing:

Revenue after offsetting between divisions was $19.5 billion. The solid 20% year-over-year increase reflects strong growth in subscriber revenue in the financial and telecommunications sectors. The impact of a single head customer's decision to discontinue using our overseas cloud services based on non-product-related requirements continues.

These two factors partially offset this growth due to declining customer demand in sectors such as internet industry and online entertainment and education. Excluding the impact from the internet industry's biggest customers, Alibaba Cloud's internal business will offset revenue by 29% year-on-year.

Revenue contributions from non-Internet industry customers have grown steadily. Non-Internet industry customers accounted for 52% of revenue. The adjusted EBITA of $134 million was primarily due to economies of scale earnings in its core cloud computing business, partially offset by increased investment in DingTalk.

Digital Media and Entertainment:

Revenue was RMB 8 billion. Losses narrowed slightly year-over-year in the quarter.

Cost: Cost of operations as a percentage of total revenue increased to 60% in the quarter. The first reason is that our direct sales business accounts for a relatively high proportion, and the proportion of direct business rises; the second is the strong growth of Taocaicai, Hema and Tmall supermarkets, resulting in an increase in logistics costs as a proportion of revenue.

Sales and marketing ratios increased to 15%. This growth is due to increased marketing and promotional spending on user acquisition and user stickiness by our mobile commerce clients such as Taobao Transactions, Taobao, Lazada, and Ele.me.

The ratio of product development and general and administrative expenses was unchanged from the same period last year.

Share repurchases

During the quarter, we repurchased approximately $10.1 million of American Depositary Shares for approximately $1.4 billion through our share repurchase program.

In the nine months ended December 2021, we repurchased approximately 42.2 million American Depositary Securities for approximately $7.7 billion, representing 51% of the Group's $15 billion share repurchase program.

Our current share price does not fairly reflect the value of the company. At the current price level, we plan to continue to repurchase shares.

Second, the analyst Q&A session

Q: Around the growth rate of the business, especially the growth rate of the core business, we are generally given a guide, what will be the overall growth rate of Q1 in 2022?

Last quarter we saw data released by the National Bureau of Statistics on the macro situation, and total retail sales rose by just 3% in December. Alibaba's business and the macro situation were also affected by competition, and only achieved growth in units. GMV growth in the first quarter remained resilient, and we haven't seen the January numbers yet, but we think it's resilient.

Q: What are the views of different categories in the next few quarters, such as FMCG, apparel, consumer electronics, etc.? And are there any cases where consumption has bottomed out?

We do not give guidance on quarterly overall and segment GMVs. Let me introduce the overall situation, in addition to the macro environment, the penetration rate of the category in e-commerce still has two aspects: one is the size of the absolute value of this category in the social zero, and the other is the penetration rate of e-commerce now.

If you look at it from these two aspects, for clothing and consumer electronics, it has reached a relatively high penetration rate in the development of e-commerce, reaching 30%-40%.

However, for FMCG, food, especially fresh products, the absolute market capacity is very large, because it is a rigid demand, every family needs, and the e-commerce penetration rate is still relatively low.

We will see that in the future, these categories have good opportunities for digital penetration, the model is diversified, and the far-field, near-field, and fulfillment systems must have a good integrated design to provide a good experience.

In terms of user stratification, Ali has Hema, RT-Mart, Ele.me, Tmall supermarket, Taocaicai, etc., combining online and offline, and combining far and near.

Q: What about the competitive landscape and the future strategy for live e-commerce?

After several years of development, live broadcasting has become a very important new user experience mode and product promotion method for digital business, and we regard the platform of Taobao live broadcasting as part of the "field" of retail digital commerce, and complement other "fields" to serve consumers together.

We believe that the nature of commodity forms and commodity categories is different, different ways of selling and interacting, live broadcasting is a good way, but it is not the only way, we hope that according to the needs of users, use live broadcasting, become a diversified way of user interaction.

Q: Tao te and Tao Cai Cai, mentioned earlier the problem of reduced losses in the next few quarters. What are the impact on UE in terms of competition and policy, and what are the highlights of the business to share? If UE improves, will the loss improve as the order volume grows?

Taote and Taocai business are very important businesses in our Chinese business and bear different responsibilities. In the past year, many new user growth has been obtained through Taote; in taocaicai, we have established a supply chain and logistics fulfillment network to serve sinking consumers in the past year.

For these two businesses, in addition to the scale, we will also look at the efficiency, some efficiency is from the scale, and some are from the pursuit of overall efficiency. For example, taocai vegetables bring UE improvement with the increase of single quantity density; taote can also see the improvement of efficiency.

From a competitive point of view, these businesses are seen as part of our Chinese business, and we look at competitors but more likely to look at ourselves. Efficiency will be further improved in the future, and the overall loss will be further narrowed in the next few quarters.

Q: Is there any preliminary judgment on how long the sluggish consumption situation will last? Think this year's consumption is V or L or the top half of V? What changes are needed to make consumption more exuberant, government stimulus policies, relaxation of epidemic control or other changes?

A: We also want to know whether it is V-shaped or U-shaped, from the perspective of user behavior data and macro environment seen by the platform, the easing of the epidemic, or if there is a consumption incentive policy, will definitely help consumption growth.

In addition to macro conditions, this is also the common responsibility of practitioners in the entire consumer industry, how to innovate supply and create demand, in order to truly stimulate consumption.

The just-concluded Olympic Games give a good example, the ice and snow economy has continuously achieved the goal of 300 million people on ice and snow because of the advent of the Winter Olympics, and the ice and snow economy has also become a common theme, which is a good example to prove the importance of demand creation, not only to create demand scenes, but also to create supply, which can make consumption develop better.

Q: As mentioned earlier, another possibility for creating value is to split hidden assets. The December meeting mentioned news of trendyol financing, which was recently reported in financing Lazada. We know that competitors are spinning off some subsidiaries to create shareholder value, and would like to know what management thinks, especially the rookie business?

Alibaba's business development is driven by a multi-service engine, and many businesses that are both related and have their own unique user values and user groups can also form a closed loop.

We believe that the market is not fully reflected in the Aliduo business engine, which is also an important reason why we are promoting the plan to split the business.

In the current business, Cainiao, Local Life Company, Lazada, Trendyol, are all operated as independent companies, and we hope that in the future, more closed-loop design and independent businesses will be corporatized, and we will also be open and introduce more diversified investments to promote the process of the market when needed. We try things that are helpful in creating long-term shareholder value and customer value.

Q: Many businesses have begun to operate themselves, so what proportion of self-operation will compete head-on with platform merchants?

1P vs 3P, Ali has no preference, as long as it can serve the needs of consumers, user interests first.

The second business/customer perspective, whether it is direct operation or platform, we are to help merchants sell products, as well as promote brands and connect users. Direct sales is not to directly erect a wall between users and merchants, so that goods can reach the hands of users at efficient and flexible prices.

In the process of this service, we provide merchants with business across multiple scenarios, platform and direct operation, national and local, and there are brand direct sales and channel direct operations in the far field.

Q: Many user growth is brought about by various BUOs, if the BU is more independent, how to understand the synergy effect of different businesses?

At present, we must adapt to the thinking of consumers and users to organize and operate our different businesses, because in the end, what we have to do is to serve the users of each circle, and then serve all users.

It's very important now that we tier these 1 billion users and provide different services and value to the needs of different circles.

Q: What is the revenue open source plan in the cloud business, may wish to analyze it from various dimensions such as industry development, products, and sales investment?

Our customers are already very diverse (52% of non-Internet customers); The future cloud business is a trillion-level market, and industrial digitalization has just begun.

In the industry, we will focus on industries that will generate massive amounts of data, consume a lot of computing power, and have a high demand for intelligence in the future, which will continue to drive the growth of cloud business.

In terms of investment, the first priority of cloud investment is to strengthen its own proprietary technology, and the second is to strengthen the ecology and let more partners join its own ecosystem.

Q: A year ago, Alibaba Cloud's growth stalled due to the churn of an important customer, so will the overseas revenue of the cloud business accelerate from the march quarter? How to see the price competition of cloud business? Have any businesses postponed going to the cloud because of macro weakness?

The impact of this loss of major customers has weakened over the quarters, and now it has entered a new cycle. Our customers are still very diverse, and the revenue of large customers accounts for only 2%.

In terms of macro impact, each industry is different, such as new energy vehicles, medical health, etc., are industries with very large demand for cloud, requiring computing power and intelligence, not just simple traditional IT replacement, and this Piece of China has just begun.

Q: Cainiao growth is only 15%, the overall is relatively slow, what do you think in the next few quarters?

Cainiao has developed for many years and is now a multi-business development engine. It has the initial rookie wrap and the last kilometer rookie station, with supply chain capabilities.

Now there is also the ability to land the warehouse under Taote, as well as cross-border logistics capabilities, and there is also a lot of space on the follow-up cross-border B2B, we hope that Cainiao has the ability to serve our various businesses, but also the ability to serve other customers.