Alibaba Group Holding Limited (NYSE:BABA) Q3 2023 Earnings Call Transcript February 23, 2023
Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group’s December Quarter 2022 Results Conference Call. 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.
Robert Lin: Thank you. Good day, everyone, and welcome to Alibaba Group’s December Quarter 2022 Results Conference Call. With us today are Daniel Zhang, Chairman and CEO; Joe Tai, Executive Vice Chairman; Toby Xu, CFO. This call is also being webcast from the IR section of our corporal website. A replay of the call will be available on our website later today. Now let me quickly cover the safe harbor. Today’s discussion may contain forward-looking statements. Forward-looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations. For a 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 the 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 EBITDA, adjusted EBITDA margin, non-GAAP net income, non-GAAP diluted earnings per share or ADS and free cash flow are expressed on a non-GAAP basis. Our GAAP results and reconciliation of GAAP to non-GAAP measures can be found in our earnings press release. Unless otherwise stated, growth rate of all the metrics mentioned on this call refer 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. This past quarter, our business and operations experienced significant challenges due to the rapid change in the COVID situation during December. Despite these challenges, we delivered double-digit year-on-year growth in our adjusted EBITDA and free cash flow through effective business management, cost optimization and operating efficiency. With the lifting of COVID-related measures at the end of peak wave, everything is now quickly getting back on track. In general, consumer confidence and business confidence are rising. Logistics has resumed normal operations with the entire supply and manufacturing chains becoming active. Digital transformation across different industries and sectors has accelerated significantly.
Against this backdrop, our various businesses are showing positive trends. Recently, the IMF raised the estimated GDP growth for China to 5.2% this year. Given the expectation for economic recovery, following the lifting of COVID-related measures and China’s reopening, I have chosen progress as a key word internally to set the tone for Alibaba’s development this year. We need to respond quickly to the change in the macro environment and the major cycles. The theme of progress represents the need to adapt to the trends in the macro environment and for Alibaba’s own development. In China’s post-COVID economic development, although different businesses across our complex ecosystem face their own unique circumstances, we remain confident in our streamlined strategic pillars of consumption, cloud computing and globalization.
Now I will share how our business performed this past quarter in a different — in a difficult COVID environment, together with some color on the situation in January and February and how we plan to capture opportunities across our businesses. During December quarter, the China consumer market was highly impacted by COVID cases. Pohang and Tmall GMV dropped mid-single digit year-on-year, and the consumption demand was quickly suppressed. In terms of category, apparel and other discretionary goods were weak, while health care and wellness-related grow strongly. This is consistent with the better trend released by the National Bureau of Statistics of China. From January to early February of this year, overall sales of online physical goods remained weak, and our China commerce continues to be highly impacted due to COVID cases as well as people traveling home or to other places during the spring festival holidays.
But as the influence of COVID cases at spring festival travel subsided in February, especially recovery in categories such as apparel and sports and outdoors, as work and life return to normal, all of our merchants have also expressed their strong desire to get to business. We expect this recovery will continue. In our operations, we are strengthening the user experience and customer value proposition on Palbo and Tmall to reinforce our market leadership with the following measures. First, enhanced user stickiness and time spent. Polvo and Tmall are home to China’s most comprehensive population of online shoppers and is the most efficient consumer transaction platform. We are building on our competitive advantage by continuing to introduce a variety of consumption-related content in the form of short-form video, live streaming and other formats to strengthen consumer stickiness, product discovery, influence and user engagement.
Second, enhance value for money proposition. Price is always a key factor in consumer purchasing divisions. We will continue to improve competitive pricing on products through the design of marketplace mechanisms, promotional marketing features and the retail model innovations such as cobas direct from factory goods and farm-to-table offerings. Third, labor for digital retail. We will capture to consumers quite sensitive needs for highly frequency everyday necessities through our neighborhood digital retail business such as and that fulfill orders from local supply chains using local deliveries. In local consumer services, restaurant order volume growth rate picked up towards the end of this quarter due to increased home-based consumption from COVID cases.
Notably, non-restaurant order volume growth rate was far higher than what it was for restaurants. The business saw an increase in revenue due to higher average order value Ongoing improvements in operating efficiencies resulted in lower expense ratios in marketing and logistics. continued to demonstrate positive unit economics and it will continue to improve. During COVID, Olam adjust operating strategies safeguarded its delivery capabilities and supporting supply recovery. During peak COVID cases, AMS user scale and scale of services used were briefly affected. As cases eased, usage of Amap quickly recovered. Ride hailing and hotel room booking volume growth very rapidly. Amap has become a new platform, providing various destination-based consumer services.
Fliggy’s domestic and outbound travel activity also quickly grew during the Spring Festival holidays. As a result of our ongoing developments of the supply chain and the service capability over the past 2 years, recovery of Fliggy’s domestic airplane ticket and hotel booking was significantly faster than the overall domestic travel performance reported by the China National Tourism Administration, and noticeably better in comparison to 2019 before the cave outbreak. In international commerce, our various business made steady progress. Chandi continued to deliver strong growth as overall order volume grew over 50% year-on-year with local consumer services growing even faster. When Turkey was suddenly hit by earthquakes in early February, we actively organized and deliver support for emergency relief.
![Alibaba, shopping, online](https://imonkey-blog.imgix.net/blog/wp-content/uploads/2023/02/25055903/taras-shypka-iFSvn82XfGo-unsplash.jpg?auto=fortmat&fit=clip&expires=1755993600&width=480&height=320)
Photo by Taras Shypka on Unsplash
So far, all our employees in Turkey are safe. Trends business operations remain stable, and they have mobilized resources to aid disaster relief. As for Lazada, as the business continued to optimize for order volume growth, we also reduced loss per order by more than 30% year-on-year. We remain firmly committed to continuing to invest in Lazada’s region of Southeast Asia. Through close collaboration with Cainiao, AliExpress greatly optimized and bound order deliveries on key routes as Roger services quality continue to improve and the impact of VAT and the foreign exchange rate in Spain and France continued to ease order volume is starting to show positive growth. Our globalization strategy will continue to be firmly focused on Southeast Asia and Europe through a mix of localized retail and cross-border commerce.
We will continue to make sustainable long-term investments and build businesses that can withstand economic cycles. is celebrating its tenth anniversary this year. It has built a robust comprehensive business covering China and course for the international logistics. Last mile, logistics technology and more. It is also continuing to make progress in green logistics and emergency response logistics. In China, continue to expand its delivery services for our Tmall customers. During the most recent November 11, more than 18 million orders from Taobao Tmall were delivered to customers’ doorsteps daily at its peak, which includes those delivered directly to dose through or through Taobao post location in residential communities. Taobao has also built its own international logistics network over the past few years.
As of this past quarter, it had more than 15 international sorting centers in operation. Our cloud business overall revenue growth rate this quarter was 3% year-on-year. The growth rate for public cloud was double-digit year-on-year, which was partially offset by a decline in hybrid cloud revenue from project delays due to COVID. In terms of revenue by industry, financial services, education and automobiles are among the growth drivers. We also announced an important organizational change towards the end of last year. I took on the role of acting President of Alibaba Cloud, in addition to my current role as Chairman and CEO of Alibaba Group. This decision was based on a few considerations. First, cloud computing is one of Alibaba’s core strategies for the future.
Innovation and other technologies will have an impact not just as on Alibaba Cloud for the entire Alibaba Group. Second, Alibaba Cloud is also the foundation through which Alibaba serves the real economy and will continue to drive physical digital integration. Third, we believe this is a critical period for technological breakthrough and development in the nurses of cloud computing and AI. As one of the leading cloud computing service providers globally, we strongly believe in the vast potential of industrial digitalization and the role of cloud computing as infrastructure to the digital economy. Going forward, we will focus on a few areas to reinforce and strengthen our market leadership position as we look at the opportunities ahead. First, enhance the stability and the security of our cloud computing services while continuing to optimize performance and manage costs through technology investment.
Second, continue to build a dynamic developers and industry ecosystem for cloud computing. Third, collaborate with partners to provide intelligence-based industry solutions to our customers in different industries and sectors. Fourth, continue to push forward a holistic cloud-based service product that integrate into, our intelligent online workplace collaboration platform and application development platform. Lastly, in this exciting area of disruptive breakthrough initiative by generative AI, computer power is essential. On one hand, we will continue building our own large-scale pretraining model. We are also ready to capture the market opportunities to provide the computing power for the various generative AI models and its applications.
This year marks Alibaba Group’s 24th year and in Chinese traditional culture, this means we have gone through 2 complete current cycles. We captured 2 historical opportunities of e-commerce in China for the consumer Internet and start to cloud computing in China for the industrial Internet. We will continue to capture the vast opportunities ahead through the impact of technology, both on commerce and other expenses of our society and environment. Although there are many uncertainties in the journey ahead that are very difficult to evaluate, we remain highly confident in the future of Alibaba and China’s development. Thank you, everyone. Let me pass the microphone to Toby, who will share our financial results.
Toby Xu: Thank you, Daniel. Let me start with financial highlights for the quarter. This quarter, our total revenue was RMB 248 billion, an increase of 2% year-over-year. Income from operations was RMB 35 billion, an increase of RMB 28 billion year-over-year, mainly driven by an RMB 22.4 billion decrease in impairment of goodwill in relation to digital media and entertainment segment at an RMB 7.2 billion increase in adjusted EBITDA. During December quarter, we have continued to improve operating performance of our loss-making businesses by enhancing operating efficiency and optimizing costs that resulted in 16% year-over-year increase in adjusted EBITDA to RMB 52 billion. Overall adjusted EBITDA margin improved by 3 percentage points to 21%.
Now let’s look at cost trends as a percentage of revenue, excluding SBC. Cost of revenue ratio remained stable year-over-year at 60% in December quarter. Our direct sales businesses and logistics services continue to grow, driving up our cost of inventory and logistics, but we were able to keep our cost of revenue ratio stable, primarily through optimizing content costs, traffic acquisition and improving operation efficiency. Product development expenses ratio remained stable during the quarter. Sales and marketing expenses ratio decreased 3 percentage points year-over-year to 12% in December quarter, reflecting our continued effort in optimizing user acquisition and user retention spending across businesses. General and administrative expenses ratio remained stable at 3% in December quarter.
Non-GAAP net income was RMB 49.9 billion, an increase of RMB 5.3 billion or 12% year-over-year, mainly due to increase in adjusted EBITDA, partly offset by a decrease in equity pickup of our equity method investees results. Our GAAP net income was RMB 45.7 billion, an increase of RMB 26.5 billion year-over-year, primarily due to the increase in non-GAAP net income and RMB 22.4 billion decrease in Google impairment mentioned earlier. As of December 31, 2022, we continue to maintain a strong net cash position of RMB 379 billion or USD 55 billion. Our strong net cash position is supported by healthy cash flow generation. In December 2022 quarter, cash from operating activities was RMB 87 billion, and free cash flow were RMB 82 billion, respectively, which were up by RMB 7 billion and RMB 10 billion versus 1 year ago.
Majority of the difference between operating cash flow and the free cash flow was operating CapEx at RMB 5.8 billion, down by RMB 3.5 billion versus 1 year ago. Net cash inflow from investment and acquisition activities, including disposals, was RMB 1.9 billion, compared to an outflow of RMB 4.7 billion in the same period last year. Importantly, we have continued to enhance returns to shareholders through share repurchases given our strong balance sheet and free cash flow generation capability. During the quarter, we repurchased approximately RMB 45.4 million of our ADS for approximately USD 3.3 billion and our share repurchase program. Now let’s look at our segment results. Revenue from China commerce segment in December quarter was RMB 170 billion, a decrease of 1% year-over-year.
Customer management revenue decreased by 9% year-over-year to RMB 91.3 billion. Taobao and Tmall online physical goods paid GMV declined by mid-single digit. Customer management revenue declined a few percentage points further versus Pay GMV, mainly due to higher order cancellation rates as a result of supply chain and logistics disruption caused by COVID-related impacts. Direct sales and other revenue grew 10% to RMB 74 billion, primarily driven by strong growth of our Freshippo and Alibaba Health’s direct sales businesses. China Commerce segment adjusted EBITDA increased by RMB 749 million to RMB 58.6 billion in December quarter. Segment EBITDA margin remained stable at 34%. This reflected significant loss reductions from Taobao deal, Fresh hip and Paltai, partly offset by a decrease in profit from customer management services.
Our international commerce segment revenue in December quarter was RMB 19.5 billion, an increase of 18% year-over-year. Revenue from international commerce retail business increased by 26% to RMB 14.6 billion. The increase was primarily driven by accelerated revenue growth of Trendyol as a result of its strong order growth and more efficient use of subsidies. Lazada and AliExpress also saw recovered revenue growth this quarter. Revenue from our alibaba.com wholesale business remained stable year-over-year. International Commerce segment adjusted EBITDA loss narrowed by RMB 2.2 billion to RMB 763 million in December quarter. The loss reduction year-over-year was primarily contributed by the reduced losses from Trendyol and Lazada. Chandi continues to generate strong revenue growth and have enhanced operating efficiency continued narrowing of losses from Lazada was a result of ongoing improvement in monetization rate by offering more value-added services as well as enhanced operating efficiency.
Our local consumer services segment revenue in December quarter grew 6% to RMB 13 billion, primarily due to positive GMV growth of 2 home business, driven by higher average order value of Olam. Local consumer services adjusted EBITDA loss reduced by RMB 1.9 billion year-over-year to RMB 3.1 billion. Most of the loss reduction was driven by Ele.me business, while other major businesses within this segment also saw recorded reduced losses. Ele.me continued to improve its unit economics per order by increasing average order value, reducing delivery cost per order Its UE continued to improve year-over-year and remained positive this quarter. Revenue from Tania, after intersegment elimination, grew 27% year-over-year to RMB 16.6 billion, primarily contributed by the increase in revenue from domestic customer logistics service as a result of service model upgrade since later 2021 to enhance consumer experience as well as increase in revenue from international fulfillment solution services.
In December quarter, 72% of Tania’s total revenue was generated from external customers. Tania recorded adjusted EBITDA loss of RMB 12 million in December quarter, loss reduced by RMB 80 million year-over-year. Revenue from cloud segment after intersegment elimination was RMB 20.2 billion in December quarter, an increase of 3%, mainly driven by healthy double-digit public cloud growth, partially offset by declining hybrid cloud revenue as we continue to drive high-quality recurring revenue growth. Revenue growth from non-Internet industries was 9% and contributed 53% of overall car revenue. The non-Internet revenue growth was mainly driven by solid growth of financial services education, automobile industries, which was partially offset by the decline in public services industry.
Revenue from customers in the Internet industry declined by 4%, mainly driven by declining revenue from the top Internet customer that has gradually stopped using our overseas cloud services for its international business. On the other hand, we saw improving demands from Internet customers in December quarter. Adjusted EBITDA of cloud segment, which comprise of Alibaba Cloud and Ding Talk was a profit of RMB 356 million in December quarter, increased by RMB 222 million year-over-year. Revenue from our Digital Media & Entertainment segment in December quarter was RMB 7.6 billion, a decrease of 6%, primarily due to the decrease in revenue from Alibaba Pictures. Adjusted EBITDA was a loss of RMB 25 million, reduced by RMB 1.3 billion year-over-year, primarily due to the narrowing of loss from Youku driven by disciplined investment in content and production capability.
Let me wrap up with some final thoughts. Our December earnings results continue to demonstrate our ability to execute and achieve the key operating and financial objectives we have set since the beginning of the fiscal year. Despite another quarter of global macro and core uncertainties that weighted on our revenue growth, we have continued to focus on higher quality growth supported by consumers and customer-centric initiatives, improved operating efficiency and cost structure throughout the organization, enhanced shareholders’ return through ongoing share repurchases. Consistency and persistence were key factors to our success in delivering these results in a challenging 2022. As Daniel mentioned, we believe 2023 will be a year of progress for Alibaba.
It is expected that China’s economic activity will recover in 2023, which would capitalize and stimulate a gradual consumption recovery. In 2022, we have strengthened our operational and financial capabilities. We are confident that those enhancements will position us well to benefit from China’s recovery. We exited 2022 with a strong financial position of USD 55 billion in net cash, allowing us the financial flexibility to grow our businesses and improve returns for key stakeholders, including shareholders. In 2023, we intend to increase investments in major businesses that improve their competitive position and growth prospects while maintaining our mindset of enhanced operating efficiency. Thank you. Now let’s turn to Q&.
A – Robert Lin: For today’s call, you are welcome to ask questions in Chinese or English. A third-party translator will provide secular interpretation for the Q&A session. And our management will address your questions in the language you asked. 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 1 week after the meeting. Now operator, please connect our speaker and SI conference lines. Please start the Q&A session already. Thank you.
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Q&A Session
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Operator: . Your first question comes from Alex Yao from JPMorgan.
Alex Yao: I’d like to start by asking a question that addresses the long term. And after that, I’ll come back to some shorter-term questions. But starting with the long term, as you said in your speech, Daniel, Alibaba has now been around for 24 years, marking the completion of 2 complete cycles Chinese culture. And through these 2 cycles over the past 20-plus years, Alibaba has captured digitalization enabled our opportunities around commerce, around logistics and around cloud. So looking forward, what do you think will be the next big area or areas where Alibaba can achieve significant growth. As you yourself said, there are being 2 major opportunities that Alibaba has seized in the first 24 years, e-commerce and cloud. But see, in the next 3 to 5 years, what will be the big opportunities where you think Alibaba can achieve huge growth.
And then coming back to the short term looking at this year, some of the major developments, we’ve seen the very rapid success of chat GPT as well as some important changes in the competitive environment with opportunities and challenges, how do you see Alibaba better marshaling its core competitiveness in the short term and will part of that involve further optimization of costs and driving operational efficiencies.
Toby Xu: Thank you, Alex, and I will take those questions one by one. First, indeed, over the past 20-plus years, the major opportunities for us that we see have been around applying digital technology to commerce, logistics and cloud computing. And this is indeed the long-term strategy of Alibaba. We remain firmly committed, as always, to our 3 core strategies around consumption, cloud and globalization. And when we talk about globalization, it is indeed globalization of our consumption and cloud-based offerings. So to a main firmly committed to those core strategies. We continue to remain focused on those 3 core strategies and not seek out new arenas in which to compete. Well, very simply, it’s because we think that in those doing is high enough and the market is big enough, it’s more than enough for us to accomplish there, especially as we continue to evolve our technology we’re confident that we can continue to find huge opportunities in those 3 core areas, and we can look at them one by one.
Beginning with consumption. If you look at the size of consumption in China today as a percentage of GDP. And if you think about the latest forecast from the international monetary front, the IMF of 5% economic growth in China, imagine what China’s GDP numbers will look like if that can be maintained, 5% per annum growth for a period of 10 years. And if China’s economy does grow by 5% a year for 10 years, you can certainly imagine that the proportion or the size of the contribution of consumption in China within GDP. So we’re talking about 40 trillion on today against 110 trillion. That proportion will certainly be even higher SP-2 Years down the road. Turning to technology. We can look back at the trajectory that we’ve already traveled through 20 years ago, 10 years ago, e-commerce has taken off a completely different look.
It’s continued to evolve. . And we’ve said in the past that we would digitalize Congress in churn. Well, that’s not been completely accomplished. But looking to the future, we now have these exciting new technologies coming to the floor, including generative AI, which you mentioned. And I think that certainly will also be transformative and create new experiences and new formats of consumption. But this digitalization when it comes to consumption is not just having an impact on the consumer side. It’s also having an impact on supply chains and the way they’re organized. And I think that really is just getting started. This is an industry where China is really just getting started, and you can look a few figures to support that. First of all, if you look at the proportion of IT spending within total GDP in China, it’s only 1%.