Alibaba Group Holding Limited (BABA) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group's Conference Call. [Operator Instructions] I would now like to turn the call over to Rob Lin, Head of Investor Relations of Alibaba Group. Please go ahead.

Thank you. Good morning and good evening, everyone. Thank you for joining today's conference call. First, let me start with the safe harbor statement. Today's discussion may contain forward-looking statements, including statements about regulatory actions, the impact in Alibaba's Group's future business development and financial performance. Forward-looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations. For detailed discussions 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 or 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 obligations to update these statements, except as required under applicable law. So for today's conference call, the speakers with us today are Daniel Zhang, Chairman and Chief Executive Officer; Joe Tsai, Executive Vice Chairman; Maggie Wu, Chief Financial Officer. Joe will provide a brief opening statement, then we will open up the line for a Q&A session. Today's conference call will be conducted in English and will be within 30 minutes. Now I'll pass the line to Joe.

Thank you, Rob. Thanks, everyone, for your time. Good to spend time with you. As you have seen on April 10, Alibaba Group received the Administrative Penalty Decision issued by the State Administration for Market Regulation of the People's Republic of China. The State Administration for Market Regulation, which we refer to as SAMR, is the regulatory agency that is responsible for the administration and enforcement of the Anti-Monopoly Law of China. The Anti-Monopoly Law, we will refer to here as the AML. The penalty decision was the result of an investigation that was commenced in December 2020 relating to activities that would be prohibited under the AML. Specifically, under Article 17 clause 4 of the AML, a business operator that has a dominant market position is prohibited from restricting business counterparties by requiring exclusive arrangements without justifiable cause. The penalty decision described the results of SAMR's investigation and concluded that Alibaba was in violation of Article 17 clause 4 of the AML. As a result, under the remediation and penalty provisions of the AML, the SAMR issued the following actions: number one, Alibaba as a platform operator shall not restrict merchants from doing business or running promotions on competitor platforms. In this connection, the SAMR provided administrative guidance for Alibaba to implement a comprehensive program of rectification, including strictly fulfilling our responsibility as a platform operator, strengthening our internal controls and compliance, upholding fair competition and protecting the interests of our platforms, consumers and merchants. The second action that the SAMR imposed on Alibaba is a monetary penalty of CNY 18.2 billion or approximately USD 2.8 billion. The penalty decision stated that this amount is based on applying 4% -- applying a 4% rate to Alibaba Group's calendar 2019 revenues derived from China. To put this into perspective, under the AML, monetary penalties of up to 10% of revenues can be imposed at the discretion of the authorities. The amount of the penalty is less than 20% of the free cash flow of Alibaba Group in the latest 12 months. We will pay this penalty out of our available liquidity, which, as of December 31, 2020, stood at approximately USD 70 billion in cash, cash equivalents and short-term investments. In response to the penalty decision, we have publicly stated that we accept the penalty with sincerity and will ensure our compliance with determination. Thus, we do not plan to appeal the penalty decision. We have also said that to serve our responsibility to society, we will operate in accordance with law with utmost diligence, continue to strengthen our compliance systems and build on growth through innovation. That's my prepared remark, and we will go straight to Q&A. Thank you.

Thank you, Joe. Now we will open for Q&A. Operator?

[Operator Instructions] Our first question comes from the line of Alex Yao from JPMorgan.

My question is about the potential impact to GMV and the merchant retention. Can you help us understand how to think about the GMV impact, given that some of the exclusive merchant relationship will become nonexclusive? And then on the merchant retention side, are you planning to do anything to incentivize then perhaps the majority of the business of Alibaba, for example, preferential treatment on the commission rates or things like that?

Alex, this is Daniel speaking. Your voice is not that clear. So can I repeat your question, make sure I have the right understanding? So what you asked is about the GMV impact of this new change and how about our capability to retain the merchants. Is that your question?

Yes. Correct.

Okay. Thank you. So let me answer this question. I think for Alibaba, we are operating the China largest e-commerce platform. We have hundreds of millions of users and millions of merchants with us. And our consumer purchasing power is over like RMB 900 per year and which demonstrate to all the merchants that we have the -- all the sectors of the consumers with us and including the sectors who has the most powerful consumption power. So -- and I think that's the key reason why all these merchants are with us. And over years, we work together and we grow with each other. And for Alibaba, it's very clear that we provide the value to the merchant for their growth and for their consumer education, consumer connection and a lot of merchant service back end. And we don't rely on exclusivity to retain our merchants. And if you look at the exclusivity arrangement before, I would say this only cover a couple of -- a number of Tmall flagship stores, which directly operate by brands. But actually, today, all the merchants, they have these multi-platform strategies. And either they work with platform like us with the direct operation by flagship store format or they have their operation or distribution business in other platform or they have their distributors to run the so-called flagship in other platform. So business-wise, we don't think -- we don't expect material negative impact on the change of this arrangement. And once again, we will continue to work with our merchants, provide them with the necessary services, better services they need to grow their business on our platform. Thank you.

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

With regard to our letter to the customers, what measures are we taking to lower the cost for the merchants? And how should we think about the financial impacts?

Well, in -- once again, this is Daniel. So in our letter to customers and communities, we said to them that we will continue to -- we will further strengthen our focus on customer value creation and consumer experience. And we will -- so in this regard, we will continue to introduce new measures to lower -- first, to lower the entry barriers and business cost of our merchants on our platform. So I think in this regard, we will do more to help our merchants, including brand partners and retailers, to reduce their operating cost on our platform. For example, during the past few months, we've already, step-by-step, waiving some technology service fee, as we usually do. Even in previous years, we always do that. Like for standard software services with mature technologies, we will waive the technology service fee, while at the same time with the continuous improvement of the technology and upgrading of the technology, we have most premium tech services available for our client. But we still -- this is still a paid service. So over years, more and more mature services will be free, and we will offer new services. But the key thing is to give our merchants more tools, more services for them to run a business on our platform with lower cost. And on the other hand, we will also invest more to improve the -- for example, the merchant training and also for the merchant growth and to optimize their back-end workstation on our platform. So in this regard, it's more like a -- we will have -- we will incur additional costs, and we will -- but we don't view this as a one-off cost. But we view it as a necessary investment to enable our merchants to have a better operation on our platform. So we will do this from these 2 sides. Thank you.

Yes. Thomas, this is Maggie. Just to add to Daniel's, I want to give a little bit more color on the financial impact on these initiatives. So like Daniel said, we're going to both reduce fees and charges to help merchants and brands, at the same time also invest and spend more for them. So the impact going to be both reflected in both top line and bottom line. So overall, we have reserved billions of RMB in additional annual spending to support initiatives in the future year. Thank you.

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

So if you think about on the longer term, right, all these investments that you think you will put in, in terms of when you think about how you translate it into -- later on into your overall GMV growth, how should we think about the areas that you think that, say, maybe the investments that you have or your investment priorities, say, into your new strategic investments and also how your value that you're going to increase to your -- I guess going back to the earlier question in terms of how are we going to retain customer -- I mean merchant retention, how are we going to retain the quality merchants? You said the tools that you will provide and balancing with your continuous investment in your new initiatives. So I guess your investment priorities here.

Well, I would say, why the merchants are with us on our platform, I think operating cost, obviously, is a very, very important factor. But an even more important factor is about growth. It's about the opportunity they can capture to grow their business. So I think on one hand, we will invest on our merchants. But on the other hand, I would say, we still want to enhance our consumer connection and to acquire and retain our customers. So today, we have like around 780 million AAC, annual active users, which is the largest consumer base in the world -- I think in the world and in China. But I think China -- you know that China is such a segmented market and such a sophisticated market. And so that's why we will -- on the consumer side, on the consumer acquisition side, we will continue to invest to -- especially in the lower-tier cities and the rural areas in whatever new formats which is good to acquire these new customers. And -- but very importantly, over these 780 million customers -- annual active users, they have annual purchase like RMB 900 a year. So I think they are -- as I said before, I think this is the most valuable consumer base we have, I think, not only for us but in the market. So in this regard, we will continue to improve our customer experience. We will invest to improve -- for improving of our customer experience and enhance their stickiness. And they are with us not only by their own. But also, behind them, behind these 780 million people are a lot of families. So I think we will extend our coverage in more categories to meet the people's demand, most importantly to unlock the new demand potential by category expansion and the new brand and new category incubation. So I think these are 2, I think, consumer service -- consumer acquisition and retention and also the merchant service are 2 equally important arms for our future growth. Thank you.

Thank you, Daniel. I just want to -- Binnie, I just want to clarify. Daniel meant to say over RMB 9,000 spending per customer.

Okay. Sorry, may I have just one quick follow-up here? Do you expect any further investigations or government proceedings on this matter? Should we think about this as coming to a conclusion? Or do we anticipate any more on the industry perspective?

Maybe we will add Joe to answer that question.

I'm sorry, can you repeat your question?

Sorry. Sure. It is about -- do you expect any other investigations or government proceedings on this matter? Do you think this is maybe coming to a conclusion? Do we anticipate any more in terms of this type of proceedings on this matter?

Right. Okay. Yes. So the regulators are -- have increased on mergers, acquisitions and strategic investment transactions as part of their merger control review process. And the entire industry, including several of our peers' companies, are also subject to the same review. Other than the merger control review on investment transactions, we're not aware of any other investigations relating to the Anti-Monopoly Law.

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

My question is what are the specific requirement that you have to report to the regulators from time to time? I understand there will be a report after the 15 days. And then how often that you would require to submit to a self-evaluation check?

Alicia, actually, you see from this -- from the investigation result, and we are required to submit this -- the report, certification plan in 15 days of that announcement -- after announcement. Actually, what we have done is that we have continuous communication with the regulators. And we reported to them our progress in terms of the elimination of the exclusive arrangement and improving the platform -- and the platform improvement since the commencement of the investigation. So I think we will -- going forward, we will keep this, I mean, communication open and transparent and as -- and to make sure that we are fully compliant with the requirement of the regulators and also share our latest development with them on a timely basis. But I think the -- I think we -- for our -- from our side, we will still continue to focus on the service with our -- to both our customer and merchant. I think in this regard, this is all market-driven activities. And we will -- I don't -- I think we will do as we always do for years and to make sure we do the right for our merchants and for the customers. Thank you.

Our next question comes from the line of Rob Sanderson from Loop Markets.

Yes. So the letter calls this ruling an important action to safeguard fair market competition. It also points to an entirely new phase for Internet platform economies and a new starting point for Alibaba. So the China Internet landscape has always been under sound regulatory oversight and has always been highly competitive. So how would you encourage global investors to think about the regulatory environment and the competitive intensity in this new phase not just for Alibaba but for the technology sector in general? And what should we expect this would mean or might mean or could possibly mean for equity valuations and opportunities for global investors on a go-forward basis?

Well, maybe, Joe, you go ahead. You answer this question. Thank you.

Sure. I'll take a stab at that question and -- at first. So I think this is -- this action is very clear, and the regulators' communication to the public is very clear that they're affirming our business model. There's this phrase called the platform economies and/or platform operators, and our business model as a platform is actually fully endorsed and affirmed by the authorities that this kind of model is good for the growth of the country's economy and also helps promote innovation. So we feel very comfortable that there's nothing wrong with our business, the fundamental business model of the platform company. And these regulatory actions are undertaken to ensure fair competition in order to benefit the public, the consumers, the merchants, all the constituencies in a platform economy. So we're -- so with this penalty decision, we've received a good guidance on some of the specific issues under the Anti-Monopoly Law. And I would say that we are pleased that we're able to put this matter behind us. So I think in terms of how global investors should view our -- the industry as a whole and also the regulations of the industry is that, number one, large-scale Internet companies are doing a lot of good things for the economy, to help grow the economy, that in China, specifically, the policy of focusing on digitizing the economy to benefit -- to lower the barriers for average citizens to access products and services is very, very clear. And we're playing in the middle of this, promoting that government policy. So the -- from a regulatory standpoint, I think every large-scale technology company will face -- in our case, we have experienced this scrutiny, and we're happy to get the matter behind us. But I think on a going forward basis, globally, the trend is that regulators will be more keen to look at some of the areas where you could have unfair competition. So I think the good thing about this is that we are -- we have gone through this process with the regulators. We've gotten to know their thinking very well. It's a very healthy process, and we have a very established plan for correcting some of the practices. And also, we have established very good internal control and compliance systems to continue to comply with the law.

Our last question comes from the line of Eddie Leung from Bank of America.

Just a follow-up question on antitrust policy. I think, Joe, you mentioned that you don't -- you are not aware of any more investigation. Just wondering if you have any thought on the potential regulatory measures in the area of data. I think in the antitrust regulation, it's also a very important topic. And then just a technical question maybe for Maggie. Which quarter will you make the expense provision? And will it be part of the operating expenses or below the operating line?

Again, Daniel, I'll address the first question. If you have something to supplement as well, please feel free. I'll just say that in the area of data regulation, what we understand is that the regulators are focused on the issue of data privacy and how companies like ourselves have collected and also have large amounts of data, how we assure the public and our customers that data will be well protected. I think that's a global trend. And globally, governments are -- now care quite a bit about protecting their citizens when it comes to data privacy. Daniel, do you have anything to say on that?

Joe, I think you have a pretty much very clear expectation. I think we have -- they care about the data privacy and data sharing. I think -- but as you said, this is a very common question not only for China but also for the entire world. So Alibaba, we -- as we always do, we continue to work closely with the regulators to make sure we have the full compliance of the data usage and data collection. So this is an ongoing effort. We have -- we -- so far, we've already invested a lot of resources to make sure we have these -- we do this in the right way. Thank you.

Okay. Thank you, Joe and Daniel. I think that's all the time we have for today.

No. So I think, Rob, maybe Maggie should answer this final tech question Eddie mentioned about accounting treatment.

The accounting treatment for...

So for the fine, correct?

For the fine, yes. So the RMB 80.2 billion fine will be reflected in March quarter 2021 fiscal. This is based on our understanding and subject to verification by our auditors, and it will be reflected in the GAAP net income but excluded from the non-GAAP net income. Thank you.

Okay. Thank you, Maggie. So thank you, everyone, for joining today. If you have further questions, please feel free to reach out to the IR team of Alibaba Group. Thank you very much.

Thank you.

Thank you.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.