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 day, everyone, and welcome to Alibaba Group's conference call. With us today are Daniel Zhang, Chairman and CEO; Toby Xu, Chief Financial Officer. This call is also being webcast from the IR section of our corporate website. Now let me quickly cover the safe harbor. Today's discussion may contain forward-looking statements, including statements describing Alibaba Group's new organization and government structure, strategic benefit of this new structure and potential future financing activities. Forward-looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from those contained in any forward-looking statements. In particular, the timing and implementation details of Alibaba's new structure and whether the new structure will yield the expected strategic benefits are subject to uncertainties. Any forward-looking statement that we make on this call are based on assumptions that we believe to be reasonable as of today and do not undertake any obligation to update these statements, except as required under applicable law. For today's call, we will go straight into Q&A session. You are welcome to ask questions in Chinese or English. Please limit your questions that refer to this announcement only. A third-party translator will provide interpretation 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. Operator, please connect the speaker and SI conference line now and start the Q&A session. Thank you.

[Operator Instructions] Your first question comes from Yang Bai from CICC.

[Interpreted] The transformation plan of the Alibaba Group is obviously being very well received by the market, and I do believe it will help unlock value for the group. Could you please tell us more about the key objectives of the new organizational and governance structure?

[Interpreted] Yes. This is Daniel. I will take that question. Before I start though, I would like to take the opportunity to thank our shareholders and capital market partners for their ongoing and continuing support. The question that you just asked was actually addressed in the internal letter that I circulated within the company. But basically, since 1999, Alibaba has continued to grow over its 24-year journey to date. Through that process, we've been evolving as a company. Our business models have also been evolving, iterating, and we've continued throughout our history to continually leverage advancements in the relations of production in order to unleash new productive forces, value creation and drive progress. An example of that is when we turned 1 Taobao into 3 Taobaos, so to speak, 12 years ago. And this kind of evolution has unleashed tremendous productivity. Therefore, this organizational transformation represents that same kind of courage that we've always brought to bear in driving these kinds of organizational transformations to unleash productivity. Perhaps the biggest difference in respect of this organizational transformation compared to previous ones is that Alibaba today has already grown into a much larger and more complex organization. We have a wide range of businesses of different natures, different stages of development. They're competing in different market environments and serving different customers. Therefore, this reorganization is more necessary than any previous one, but it's also more challenging, but we do believe that this new organizational transformation will allow all of our businesses to become more agile, enhance their decision-making and enable a faster response to market changes. As I've been saying over the past few years to our employees, we've been stressing the idea of agility and being a more nimble and agile organization for several years now, this is all the more important in the context of rapidly changing market dynamics and heightened competition. It's important that we have that agility to move quickly and respond faster to change. This transformation will also create greater ownership and provide incentive plans to the management teams and employees of our business groups and our other investments, which will drive entrepreneurial innovation that will stimulate growth in our business. And that's very important. So I also said in my internal letter circulated within the company that across all of our businesses, all the business units we need to become more entrepreneurial and unleash more ownership across all of those different businesses. We are fully confident that this new organizational structure will further enhance value for the company as a whole and will be a benefit to our important stakeholders, including our shareholders.

The next question is from Alex Yao from JPMorgan.

[Interpreted] Based on previous disclosures, we know that Alibaba Group already has 6 large business segments, each segment has its own President and management. Going forward, each of these business segments will now also have their own Board of Directors. Could you explain, please, what will be the key differences going forward compared to the previous structure, what will change, what will not change and when will the new structure become effective?

[Interpreted] Thank you, Alex. This is Daniel. I'll also take that question. We actually began laying the groundwork for this transformation over the past few years. We've already put in place those several large business segments. In terms of our financial reporting, you're also clearly seeing the performance of those different businesses with our new segment reporting approach. With this new transformation, I think one of the largest changes will be that each of the segments within the company today will each become an independently operating company. Therefore, the relationship between the group and each business group company will change. Alibaba Group will be in the nature of a holding company that is the controlling shareholder of the business group companies. And as the controlling shareholder, the Alibaba Board will continue to have control over the boards of these new companies, in particular in the initial phase. However, the nature of the relationship will change. Alibaba will be more in the nature of an asset and capital operator than a business operator in relation to the business group companies. Each business group company will have its own corporate entity. In addition, they'll also have their own Board of Directors and their own governance structures, and of course, perhaps of most interest to the market, each of these companies will be set up to enable financing from third parties. So when conditions are right, these companies can indeed go to the market to seek financing from third parties or IPO. So these are some of the largest changes you can expect to see. We expect that these changes will unleash more vitality from our business units. As regards what will not change and what has not changed because this is equally important, so I would like to spend a moment on that. But for the vast majority of our companies, our mission will remain unchanged, making it easy to do business anywhere. That mission remains directly relevant and highly relevant to all of those different businesses. At the same time, we will continue to share the same vision of being a good company that lasts 102 years. So that will continue to be a shared vision across all of the companies. At the Alibaba Group level, I, as Chairman and CEO, and Toby, as CFO, will continue to play our due role at the level of the holding company to focus on the long-term development of Alibaba Group as a whole, putting customer first -- putting employees first, customer second and shareholders third, but continuing to work on unleashing and realizing that value.

[Technical Difficulty] Yu from Morgan Stanley.

[Interpreted] Under the new structure, the business group companies will have more operational autonomy and an independent Board of Directors. My question is, will we expect to see new strategies and new strategic plans coming out of these new business groups in the short term?

[Interpreted] Okay. This is Daniel. I missed all these changes. One thing that will not change -- of course, the governance structures will be changing, but there will be business continuity across our range of different businesses. One of the reasons that we've chosen to announce this transformation in March is because we're beginning our new fiscal year in April. So strategy and business planning for the business groups will commence immediately in connection with that new fiscal year planning cycle. That's underway right now. With the transition into the new structure, the management teams of the business groups will be working on planning and mapping out strategy, of course, not just for the coming year but for the coming years. As entrepreneurs, as business owners, we'll be working on that long-term business strategy, setting plans for each stage and each phase of development, our 6 business groups, including the ones that have been in operation for a long period of time now with respect to their management teams. This transformation will ensure that they are passionate and excited and motivated about the future and can usher their respective businesses forward in line with a strong strategic plan that can unleash their vitality.

The next question is from Ronald Keung from Goldman Sachs.

[Interpreted] I'm wondering if you could give us a timeline for when these different businesses will IPO or tell us which might go IPO first?

[Interpreted] Okay. Thank you. This is Toby. Across all of our business groups and these business group companies, apart from the Taobao Tmall Commerce Group, each business group company will be set up in a way that enables financing from third-parties, spin-offs and IPOs. We believe that the market is the best litmus test. So each business group company can pursue independent fundraising and IPOs as and when they are ready. After going public, we will continue to evaluate the strategic importance of these companies to Alibaba. And on that basis, we will decide whether or not to continue to retain control. That will be an important strategic consideration.

The next question is from Arafat Alafate from UBS.

[Interpreted] We look forward very much to seeing the reorganization unlock value for the Alibaba Group. In addition to this reorganization, can I just confirm we'll continue to execute the existing share buyback program?

[Interpreted] Yes, this is Toby. Thanks for that question. First of all, I'd like to state that our commitment to the existing share repurchase program has not changed. Going forward, we will continue to evaluate our share buyback program periodically based on the free cash flow generated from and cash investment needs of our business group companies and other investments. In addition, we will continue to monetize certain of the less strategic investments in our investment portfolio in order to improve our capital structure. So those are our plans. I would also like to particularly note the share buyback is only one of the methods to enhance shareholders' value. Going forward, we will now have even more options to enhance shareholders' value after the restructuring. As these business units become independent companies, as they potentially go IPO, there will be even more ways that we can enhance value for our shareholders.

The next question is from Alicia Yap from Citigroup.

[Interpreted] My question is as follows, before this reorganization, Alibaba Group had built a lot of synergies across the various business units. I'm wondering how those synergies will be impacted under the new structure?

[Interpreted] Thank you, Alicia. That's been a very important question for us that we've looked at closely in the context of this restructuring because these business groups have, as you said, established a lot of synergies, strong synergies over the years in terms of data, in terms of consumers, technology, other key functions as well. So it's a very important question for us as well, an important issue that we can continue to maintain and build on those synergies in order to create value for customers in the market. Those synergies are hugely important and is a key differentiator for us in the context of intense market competition. So first, we believe that following these years of development, there are a very stable cooperative relations across the different businesses. They serve one another. They work together. As an example of that, all of Alibaba's own businesses are now on Alibaba Cloud, and that's created a lot of efficiency, including lower costs. So that's a kind of synergy that will certainly continue. And this kind of stability doesn't rest on an administrative directive issued by the group level, rather it relies on and is driven by the strong value that can be created through these synergies. And a lot of our businesses have unique needs and unique characteristics. Over the years, we've worked out ways to unleash that kind of synergy and those relationships are already very stable. So that will not change simply by virtue of restructuring, whereby the different business units become independent companies. If anything, the new organizational structure will be a better test, a market test, if you like, of the ability of the different businesses to work together and serve each other and jointly create and unleash value. Within the Alibaba Group, we often talk about the businesses as mutually serving one another. As mutual and reciprocal providers and recipients of services in this new context, the value of these services, the quality of these services, the cost and reliability of these services can be better evaluated and better benchmarked by the market. So we see this as a very positive move that if anything will continue to enhance those very strong and important synergies.

The final question is from Thomas Chong from Jefferies.

[Interpreted] My question has to do with progress on the primary listing status in Hong Kong, could you please update us on the latest developments there? Is Alibaba still pursuing a primary listing status in Hong Kong? Or has anything changed?

[Interpreted] This is Toby. I'll take that very quickly. We will continue to evaluate market conditions and external circumstances, that will take time, but we do continue to make that evaluation. Thank you.

Operator, that's the last question. Well, thank you, everyone, for attending today's conference call. If you have any further questions, feel free to reach out to me and my team, and we'll follow up with you as soon as possible. Thank you.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]