What the Leaders Say

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group’s December quarter 2023 results conference call. At this time, all participants are in listen-only mode.

Rob Lin — Head of Investor Relations

Good day, everyone, and welcome to Alibaba Group’s December quarter 2023 results conference call. With us are Joe Tsai, chairman; Eddie Wu, chief executive officer; Toby Xu, chief financial officer. We have also invited Jiang Fan, CEO of Alibaba international digital commerce group, AIDC, to join the call. This course is also being webcast on the IR section of our corporate website.

A replay of the call will be available on our website later today. Now, let me cover the safe harbor. Today’s discussion may contain forward-looking statements, including, without limitation, statements about our new organization and governance structure, strategies, and business plans, as well as our beliefs and expectations about our business prospects such as the future growth of our business, revenue, and return on investment. Forward-looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations.

Eddie Wu — Chief Executive Officer

Hello, everyone. Over this past quarter, we delivered steady growth while making organizational adjustments that align with our strategic focus. At the same time, we took a deep look at our core business operations and the competitive landscape. We concluded that to maintain our competitive edge, we must increase our investment in core capabilities and adopt a more aggressive approach toward competition in order to win growth.

Our top priority is to reignite the growth of our two core businesses: e-commerce and cloud computing. During the quarter, the execution of our user-first and competitive pricing strategies in Taobao and Tmall Group, TTG, was effective, resulting in healthy year-over-year GMV growth as the number of active buyers and order volume showed a robust increase. The number of merchants continued to grow at a double-digit rate. And I’ll elaborate on the outlook and plans for 2024 in a moment.

In cloud computing, we’re committed to our strategy of prioritizing public cloud. We have proactively optimized our business structure, reduced revenue from project-based contracts, and increased investment in public cloud products. These structural adjustments are showing results, and Alibaba Cloud’s overall profitability capability continues to improve. We’ve also upgraded Alibaba Cloud’s sales operations, establishing different sales and service systems to serve different types and sizes of customers.

By improving our customer coverage and service capabilities, we will enhance our growth rate. In the international commerce business, we focused on expanding cross-border offerings and enhancing the shopping experience. This quarter, all of AIDC’s retail platforms achieved growth, resulting in international digital commerce overall revenues growing at a rapid rate of 44% year over year. Cainiao continued to develop its global smart logistics network, with cross-border logistics fulfillment solutions contributing to 24% year-over-year revenue growth, as well as realizing strong synergies with the cross-border e-commerce business.

Next, I’d like to share the strategic priorities for TTG in investing and capturing growth opportunities. TTG operates in the world’s most competitive e-commerce market, which is China. As we carefully evaluate TTG’s competitive position within the China e-commerce market, we note that TTG continues to be No. 1 in GMV share and is the leading platform for consumer shopping.

The Growth Strategy of Tech Giant: A Deep Dive into the Plans and Financial Performance

Reinvigorating the User Experience

As the tech industry continues to evolve at a breakneck speed, reinvigorating the user experience has become the cornerstone of success for many tech giants. Embracing a user-centric approach, TTG is set to embark on a journey of comprehensive capability upgrades in 2024. The company’s primary focus will be on delivering an incredible Taobao experience, offering quality products at attractive prices with exceptional service, and catering to the diverse needs of various consumer segments.

Investment Priorities

TTG is channeling its investments into four key areas. Firstly, the company plans to bolster its product supply by expanding the selection of branded and direct-from-manufacturer products. Next, TTG aims to enhance competitive pricing and efficiency by optimizing its business model relationships with merchants on the platform.

Furthermore, the tech giant is committed to investing in improving the overall consumer service experience and increasing purchase frequency. By elevating the shopping experience and service quality, TTG anticipates a significant boost in purchase frequency and the efficiency of user growth.

Rapid Growth and Innovation

Amid an uncertain international environment and fierce market competition, Alibaba International Digital Commerce Group (AIDC) has achieved rapid growth, with total orders surging by 24% year on year. The company’s three major growth drivers center around enhanced consumer experience, product and technology innovation, and targeted expansion in priority markets.

Business Model and Supply Chain Evolution

AIDC’s success has been attributed to its business model and supply chain services upgrade. The introduction of the AE Choice model on AliExpress has propelled significant order growth, offering consumers a hybrid business model that combines POP with a fully entrusted model, all underpinned by supply chain efficiency. The revamp has resulted in an expansive user base and transaction growth on the platform.

Innovation and Market Expansion

Product and technology innovation form a pivotal part of AIDC’s strategy, with a concerted focus on catering to local preferences in various countries and regions. The deployment of AI-based digital foreign trade products has further enhanced operating efficiency and merchant engagement.

The group’s sustained growth in key markets, such as Turkey and Europe, underscores its global footprint and the potential for increased user penetration in overseas markets. AIDC remains committed to maintaining rapid growth momentum and providing consumers with differentiated services.

Financial Performance and Outlook

With a healthy financial performance in the past quarter, TTG has witnessed steady business momentum and improved operating efficiency in several major ventures. The total consolidated revenue reached RMB 260.3 billion, marking a 5% increase. However, non-GAAP net income experienced a marginal decrease, largely due to changes in investment values and impairments. Notably, the company maintains a robust net cash position, indicating stability and resilience amidst market fluctuations.

As TTG and AIDC forge ahead with their growth strategies and continued innovation, investors will be keenly observing the unfolding developments in the tech landscape, poised for potential opportunities and challenges that lie ahead.

Alibaba Group Maintains Steady Growth Amidst Investments and Strategic Shifts

Strong Momentum in Taobao and Tmall

The latest financial report from Alibaba Group reflects the company’s steady progress amidst a myriad of challenges and strategic adjustments. The revenue for Taobao and Tmall Group witnessed a 2% increase, indicative of a positive trend. Notably, the online GMV achieved healthy growth, with a significant increase in order volume during the quarter.

Robust Merchant Growth and Monetization Potential

Alibaba’s efforts to onboard a wide range of brands and merchants have yielded positive results, with the number of operating merchants growing at double digits over the past four quarters. The company is also witnessing strong growth in paying merchants, providing a strong foundation for future monetization potential. Importantly, this trend signifies increasing consumer demand for price-competitive products offered on Alibaba’s platform.

Cloud Intelligence and International Commerce Deliver Strong Performances

Alibaba’s Cloud intelligence group experienced a 3% increase in revenue, with an impressive 86% increase in adjusted EBITA. This growth reflects the company’s dedication to improving revenue quality and profitability. Additionally, the international digital commerce group delivered exceptional results with a 44% increase in revenue, primarily driven by solid revenue growth from AliExpress.

Investments in Future Growth and Market Leadership

Despite the increased losses in Alibaba International Digital Commerce Group (AIDC), the company is committed to sustaining rapid order and revenue growth, necessitating continued investments to drive further expansion. Furthermore, Alibaba’s strategic partner, Cainiao, exhibited a 24% growth in total revenue, underscoring the company’s intention to increase investments in expanding cross-border logistics capabilities.

Commitment to Returning Cash to Shareholders

Amidst these developments, Alibaba remains resolute in its commitment to returning cash to shareholders. The company has consistently bought back shares, resulting in a 3.3% reduction in share count in the 12 months leading up to December 31, 2023. Additionally, Alibaba’s board of directors has approved the upsize of the share repurchase program by another U.S. $25 billion through March 2027, signaling strong confidence in the company’s business fundamentals and cash flow generation capability.

Embracing Future Challenges

As Alibaba navigates through its revitalization process, the company is targeting at least a 3% annual reduction in total share outstanding for the next three fiscal years, underscoring a long-term commitment to enhancing shareholder value. These strategic initiatives demonstrate Alibaba’s unwavering determination to adapt to evolving market dynamics and to drive sustained growth.

The Path Forward for Taobao and Tmall Group

In-Depth Analysis of Recent Conference Q&A Session

Insights on Take Rates and Platform Strategy

During the recent Q&A session, executives from Taobao and Tmall Group engaged in a discussion about the factors impacting take rates within their platform. Ronald Keung from Goldman Sachs raised questions about the slight fall in the blended take rate and its implications. Specifically, Keung inquired about the driving forces behind the take rate increase on Taobao and the long-term potential of these rates relative to global and Chinese peers.

Toby Xu, the Chief Financial Officer, responded by attributing the overall drop in take rate to a mix shift driven by growing consumer demand for price-competitive products. Xu illustrated the strategic success in executing the user-centric strategy for Taobao and Tmall, emphasizing the early signs of progress. On the issue of lower take rates compared to other platforms, Xu remained optimistic, highlighting the potential for increasing take rates through enhanced operating efficiency and enabling merchants to improve their efficiency.

Eddie Wu, the Chief Executive Officer, further elaborated on the strategic focus, emphasizing the connection between purchase frequency, GMV growth, and take rates. Wu highlighted a strategy centered on increasing purchase frequency to drive GMV growth and, subsequently, develop highly optimized advertising products for SME merchants to achieve higher monetization in the future.

Value Proposition and Revenue Structure

Alicia Yap from Citigroup delved into the platform’s strategies, questioning the shift towards a light asset strategy for Taobao and Tmall Group and the potential impact on EBITA. Wu responded by outlining the revenue structure, with a focus on customer management revenue (CMR) as the primary driver of revenue and profits. Wu emphasized the importance of retaining customers, increasing purchase frequency, and leveraging competitive advantages in certain categories while noting the platform’s comprehensive capabilities for merchants.

Regarding the platform’s differentiation from competitors, Wu highlighted Taobao’s robust marketing tools, live streaming capabilities, and strong private domain tools, positioning it as the platform with the most comprehensive set of capabilities for merchants. He also emphasized the dedication to precisely targeting customer needs and driving increased purchase frequency and GMV through product offerings and services.

Shareholder Return and Buyback Strategy

Jiong Shao from Barclays raised inquiries about shareholder return, expressing appreciation for the increased buyback but seeking clarity on the pace of the buyback and the constraints related to capital control. The questions pointed to the considerations and potential challenges related to the allocation of cash reserves and buyback execution.

While the Q&A session provides valuable insights into the strategic thinking and operational dynamics of Taobao and Tmall Group, it also signifies an opportunity for investors to gain deeper comprehension of the company’s competitive positioning, revenue drivers, and capital allocation strategies. As the e-commerce landscape continues to evolve, understanding the nuanced approaches and long-term potential of key players like Taobao and Tmall Group remains crucial for informed investment decisions.

Alibaba Unveils New Financial Strategy and Future Directions

Share Buyback Strategy

Toby Xu, the Chief Financial Officer of Alibaba, addressed questions regarding the company’s share buyback strategy. Xu emphasized the strength of the company’s balance sheet and the availability of offshore cash for the buyback program. He asserted that the company is under-leveraged and can increase leverage to procure sufficient cash for share repurchases. The company aims for a net reduction of the share count by at least 3% annually over the next three fiscal years.

Potential IPOs of Freshippo and Cainiao

Joe Tsai, the Chairman of Alibaba, provided insights into the potential IPOs of Freshippo and Cainiao. Tsai underscored the importance of reflecting the intrinsic value of various business units within Alibaba Group. While initial intentions included spinning off companies and raising capital, market conditions have prompted a shift in focus towards generating synergies among the group’s businesses to reflect overall value maximization. However, the company continues to explore value creation through separate financings of its business units in the future.

Investment and Return Recorded

Kenneth Fong from UBS inquired about investment and return recorded. Toby Xu highlighted the company’s commitment to improving Return on Invested Capital (ROIC) from single to double digits in the following years. Xu emphasized the importance of focus on core businesses, including e-commerce and cloud computing, for the company’s investments. Meanwhile, Joe Tsai addressed the progress of noncore asset sales and the committee’s focus on capital management and executing capital markets sales transactions.

Value Return to Shareholder Initiatives

Alex Yao from J.P. Morgan Chase raised questions about Alibaba’s buyback strategy and the target yield for the next couple of years. Toby Xu reiterated the company’s seriousness in the buyback program, pointing to the historical track record of upsizing share buyback programs. Xu affirmed the board’s approval for another upsize, indicating the company’s strong commitment to the initiative.

The Future of Alibaba: A Focus on Investments and Financing

In deciding on the appropriate amount for a buyback, Alibaba is focused on its capability to generate cash and leverage, aiming for the figure of around $12 billion. The company confirmed its intent to return over $12 billion to shareholders for the fiscal year ’23 through a buyback of $9.8 billion and a $2.5 billion dividend.

Cash-Generating Capabilities and Leverage

Emphasizing its cash-generating capability and leverage, Alibaba plans to allocate approximately $12 billion to buy back shares annually. The commitment to buyback is substantiated by the 3.3% reduction in shares over the past year.

Joe Tsai on Accretion and Dividend Yield

Joe Tsai reiterated a commitment to a 3% accretion per year through the buyback program and highlighted the potential upside of stock price appreciation. He also noted that the combined buyback, accretion, and dividend yield of about 4.4%, almost mirrors the 10-year Treasury yield.

Alibaba’s International Business Strategy

Alibaba International Digital Commerce Group’s CEO, Jiang Fan, revealed that the company’s local business segment has shown significant improvement in efficiency and narrowing losses, with plans for continued progress. When discussing cross-border ventures, the company prioritizes investments based on return on investment and efficiency, particularly in the U.S. market.

Financing and Investment Strategy

In terms of financing for its investments, the company reiterated its focus on responsible financing, aligning its actions with market conditions and leveraging existing offshore cash before seeking additional funding.

Eddie Wu on Synergies and Margin Assumptions

Eddie Wu, CEO of Alibaba Cloud, shared insights into the potential synergy between Alibaba Cloud and the Taobao and Tmall Group, emphasizing the role of AI in driving greater collaboration. The company aims to capitalize on the strong potential for synergy, particularly with a focus on AI-driven advancements.

Alibaba’s Strategic Initiatives and Market Insights

Alibaba has been developing its proprietary large language model known as Tongyi Qianwen. This model is undergoing preliminary testing to harness AI capabilities for advancing search and advertising. According to Rob Lin, Head of Investor Relations, this initiative holds substantial promise for driving improved search conversion and ad monetization.

New Growth and Investment Pace

Evaluating the recent developments in the international market as disclosed by Alibaba, the AIDC international unit experienced widened losses of approximately 3 billion RMB in the latest quarter. The losses primarily stemmed from rapid growth of the new AliExpress Choice model which remains at an early development stage. The company emphasized that the investment priority is to scale up the business, with the expectation that as it grows, the loss will narrow, eventually leading to profitability. Additional contributing factors to the losses were substantial spending on marketing and promotions, as well as investments made in key markets such as the Middle East.

Jiang Fan, Chief Executive Officer of Alibaba International Digital Commerce Group, expressed the company’s intention to continue significant investments, especially in the Choice model. It was highlighted that the Choice model is demonstrating superior user experience and improved retention rates, which is anticipated to yield positive investment returns in the long run. Despite the vision for profitability, the immediate emphasis remains on scaling up the business.

Market Dynamics and Key Partnerships

Alibaba faced inquiries regarding recent media reports on the potential divestment of Ele.me. Alibaba’s Chief Financial Officer, Toby Xu, dismissed the rumors, affirming the criticality of Ele.me as an asset, particularly in the hyperlocal segment.

Jiang Fan emphasized the ongoing importance of the Southeast Asian market for Alibaba. The company’s strategic approach involves a balanced focus on efficiency and growth, targeting the narrowing of losses in the region while maintaining expansion. She also addressed the impact of regulatory restrictions imposed by the Indonesian authorities, asserting compliance as a cornerstone of Alibaba’s operational strategy.

Conclusion

Alibaba’s engagement with analysts demonstrated its commitment to pursuing strategic initiatives while addressing market dynamics and investment priorities. The call revealed the company’s proactive stance in leveraging AI for business enhancement, fortifying its presence in international markets, and responding to market speculation. The disclosures presented a candid and coherent vision for Alibaba’s growth trajectory and investment philosophy.