Investor Day 2016 Part 2

Jun 14, 2016

Slides

Okay. Good afternoon. We have had a long day. I know there is so much information, probably information overload. When I sit although we have been prepared this for a while, when I sit down there and watch every single leaders presenting, I just feel so proud of being part of this team. So last earnings call, I talked about that starting from fiscal 2017, we're going to give further degree of clarity and disclosure to the capital market. And I mentioned a couple of things. I mentioned about the revenue guidance and also give further disclosure on the financial performance for different business and more disclosure on the Investea businesses, such as Cainiao. And we said that we're going to talk more and give additional information on Investor Day. So here we are. This is all I'm going to talk about. So I'll cover 5 topics today. Number 1, revenue guidance. I'm going to give the guidance. Number 2, segment reporting. How we're going to report? How we divide a segment and what kind of matches we're going to put in the segment reporting. Broader value proposition versus GMV. I got a lot of questions these days on this GMV disclosure. And more disclosure on the progress of the business initiatives. Number 5, how to value our company? That's a big topic. Revenue guidance. So you can tell from today's discussion that our business is getting more and more comprehensive. We, together with our affiliates, pretty much have all the building blocks for commerce in China. So it's not only about marketplace, it's also about cloud computing, also about the logistics, payments, financial services, local services, digital entertainment and search and all of that embedded. And Lazada and YouKu are the 2 businesses newly joined the family, which is finished a transaction this quarter. So when you look at this business, we are more confident than ever that so why don't you just give a guess, That we our value proposition is moving to the next level. So for some of the players are still addicted to one single metric, we have so much to show you. And then for revenue, next year, we expect the revenue growth is going to be over 48% year over year. I see the consensus number is 39% to 40%. And some people may have difficult to add in the Youku Lazada. Youku is easier, right? It used to be a listing company, and there are consensus out there that you can find. Lazada, I can share with you the number because their number have also been disclosed in their parent company's financial rockets, right? Their top line last year was around US275 million dollars and they incurred a loss at around US300 million So if I take that 2 new business out, our revenue growth would still be 36% year over year compared to the 33% year on year growth we had for last year's revenue. It clearly shows the revenue acceleration for the coming year. So having said that, I want to caution that the revenue growth contribution coming from YOUKU and the Lazada will reduce the margin of our core business because these two businesses are still in the development stage, which I think people understand. Okay. Segment. We're going to report in the 4 major segments. So this is from the left to the right. We have our marketplace. This is the core business have been there for years. We're adding new elements. And we're going to have cloud computing and mobile media and entertainment. This is a new segment we separate out and just kind of disclose separately. And then other initiatives, including new OIS, including Automation, some new innovative initiatives. And then for each of these businesses, we're going to report to you that revenue, operating income losses, depreciation, amortization, share based compensation expense, non GAAP EBITDA. So basically give open up the book. And by providing the segment reports, I think it gives you more clarity. You can see more clearly about the margin level for our core business. Our core business margin have been very healthy. You've read our earnings, it stayed at around 60% in the past. I have that mentioned that during my speech in the earnings. And we're going to also have a small allocated corporate overhead. Okay. Broader value proposition versus CMV. Based on today's discussion, we all we're talking about is how we having helped merchants to improve their business efficiency and move their efficiency level to the next stage. So I still remember in that 2014, when we prepared the prospectus for our IPO, we had this one sentence written in the prospectus, said that we are helping to transform the businesses being conducted in China. And now this is happening. So I think you have already get the message and there are tons of information we bring to you. So in the old model, people kind of built their model by use the GMV and take rate. So if you still are going to look at the take rate and GMV, I got a question on Maggie, will the take rate go up? If our value proposition is much broader, the take rate would definitely go up, right? There is no question. But the thing is that you missed to capture the other values we're providing. And then when you look at the revenue we get, it's not no longer simply coming from this distribution kind of a revenue. We also are adding marketing revenue. The productivity level we try to bring to the merchants to the next level. So this part about the efficiency of the merchants operation, we haven't really substantially monetized yet. I want to talk about our value proposition from another angle. This is a merchant's angle. So when you look at one merchant's P and L, this is their typical P and L, revenue, cost of revenue, distribution costs, sales marketing expense, R and D, financial costs. We are helping them on every single line of these items. So we lease out our businesses that has been bringing value to each of the lines and also what value we bring to them. For example, revenue, right? This huge marketplace is bringing 423,000,000 new active buyer to the merchants and brands and help them to reach sales to increase revenue. And when you look at the cost of revenue, this morning, Sophie talked about our 1688.com, this is a wholesale platform that enable the top up merchants one click away from sourcing in a more efficient way. And also these merchants incur logistic costs, now our timeouts helping to improve the logistic efficiency so that their costs get reduced. And then distribution costs, that's our core help to sell, Mediate, Alibaba Park. And then the marketing, there's more and more brands and merchants come to us because they realize that we're besides helping them to achieve transaction, we're also helping them to acquire consumers, help them on the consumer retention. And this is such an ongoing and real time process. And then R and D, we have the cloud business helping and SME always had a difficult time to get loan. Our ANZ Financial is helping them. So I studied the research talking about the retail company's margin in China. It is very low. Actually, it's a low single digit nowadays. And we believe that by providing all of this value to the merchants, we're going to help to improve these companies' margin, and then we'll get our fair share. So when people talk about take rate, are you going to take rate increase from 2.5% to 3.5%, we're talking about the potential as big as this. Okay. I hear you just say, just tell us whether you're going to drop GMV, right? Are you going to stop reporting GMV? The answer is no, of course, we're going to continue to report GMV. GMV is still a very important metrics because you hear our Chairmans talking about our longer term goal, the 5th largest economy, our CEO talk about the RMB6 1,000,000,000,000 year 2020 fiscal. What we're going to make change of is that we're going to this shows our revenue per active buyer, shows the proposition. We're going to change to annual disclosure from a quarterly disclosure. So why is that? Number 1, I think you've all understand that all this broader value proposition we talked about. And while other companies really see this GMV as the single important key metric, We actually shows the real value. You raise from the revenue. You see our margin by segment. You see all of these reporting metrics talk about our business progress. And we internally are not really seeing this GMV as the top as the KPI for example, Taobao. They already removed the GMV from their KPI list. So we don't manage this business by managing the monthly, quarterly GMV. Then it doesn't make sense for us to report to the market on a quarterly basis. However, we're going to still update you on the GMV on annual basis because we still remain our longer term, midterm goal unchanged. I could understand your question and the concerns. I guess the number one concern you have is that how can I build a model, right, without the GMV? But do you really think you have the GMV is a real driver for your model building? So the old model is like the GMV times take rate. I know this is a complex business and not easy to build not easy to value. But when you use that model, if take rate off by 0.1%, your revenue off by 3,000,000,000, right? So that's why we provide the revenue guidance to kind of off that load, give you more clarity, make things easier. And the second question you may have is that, is Alibaba covering up any problems with the business by stop reporting GMV, right? That's not if that's the case, why are we still talking about the $6,000,000,000,000 right? It doesn't make and I could share with you actually today is June 14. The quarter has like a 16 day to go. Our Q to date GMV growth is very healthy. It's above 22% year on year growth. And we're going to report June quarter GMV in our June quarter release. And then the next time we're going to talk about GMV would be in our March quarter. We got to have more disclosure on progress of business initiatives. So you have seen this in our 20 F and our earnings. We provide a breakdown of shareable results for these equity investee companies, and we also bring up the full disclosure for China since so many people talk about Sanyan. And we got this question SEC investigation, etcetera. I think whether we should consolidate Tanya is not determined by Jack, Xiaomi, it's determined by the U. GAAP, right? It's the ASC 810 and read all of this literature. So I think we will be very cooperative and we provide all of this information and we want to be as transparent as we can be. So if anybody want to consolidate Cainiao, you just go ahead, do it and see the impact because I can't do it. I have to comply with the gap. So starting from this new fiscal year, we're going to start to report to you number of direct paying customers for our Ali Cloud business. This will be a new mattress you're going to see, because this business is getting more and more interesting to the investors and shows strong growth and potential. So I'll have that report in place on a quarterly basis. Okay. How to value our company? I think everybody has their answer. From my point of view as the CFO of the company, I think this is a complex business to value, and it's not easy. When you look at all of these parts, right? So the only way to me is that these businesses are in different development stage and different cost structure, right, different valuation method probably should apply. So some of these have profitability, some of these in the early stage. We would recommend you to look at the sum of part. So when you look at this marketplace business, right, we're going to show you all of these the strong growth, high margin, value proposition moves to the next level. Cloud is growing at a fascinating speed. And then within the mobile and media entertainment sector, we have 2 major businesses. One is UC, UCWAP, the other is UCOOL. And you probably should start look into detail of these. For example, you see by the time we invested, it was like US2.3 billion dollars business. I think the last round of investment is higher than that. But by that time, there was no Shenma. And in the past 2 years, we have developed this Shenma. Shenma already turned into the 2nd largest mobile search company in China. You have a comparison, right? Baidu is out there. And then so youku. This is a problem because we have been giving multiples on the results of the entire business, which that some of the business is still in the loss position. We have been punished by giving like 20 times of that losses and offset with our valuation. That's not the right way. If you look at YOUKU as an example, YOUKU is still in the loss making stage, but it is RMB5 1,000,000,000 around RMB5 1,000,000,000 business by the time we invest. And then other others, we have AutoNavy, the MAP business. And you have that they recently financed at USD60 1,000,000,000 and we have a 37.5 profit sharing arrangement with them. And eventually, if the regulation allows, we're going to convert that to 33% of equity holding. And Kobi and so each one of this, we also have other 3 investments. You can read from our balance sheet that we have invested over US50 $1,000,000,000 dollars But this investment including Youku, Weibo, InTime, Xi'an, all of that, we our leaders have talked about the integration and value creation kind of work we've done with these Investec Companies. Then if you take out all of these others, leave the marketplace business alone, you could work out the multiples, which is very, very low. So that concludes my financial discussion. We are up probably, yes, I'll turn to Joe for his discussion on M and A. Thank you. Okay. So on the last session and then we go into Q and A after this. And I think I've been given 15 minutes, so I'll try to make it quick. I'll be asked to talk about strategic investments and strategic M and A. But this is really a question about allocation of capital, okay? And if you think about a company or any company, any public company, there's a number of ways to utilize your capital. For a company like us, we generated $8,000,000,000 of free cash flow in the fiscal last fiscal year. So we have a lot of cash and we also raised cash in the IPO. So what do we do? Well, there are several ways of doing it. You can invest in new businesses, okay? You can what I'm talking about is excess cash. That's in addition to what you already invest in your own business in terms of CapEx. So what you could do is you can make acquisitions, you can make new investments in other businesses. That's number 1. Number 2 is, you can buy back your own stock, right? You can buy back your own stock. Number 3 is, you can give the money back to your shareholders in the form of a dividend, okay? And number 4, you could let the cash accumulate on your balance sheet. What we choose to do are the first two things, beyond our own CapEx, our own business like cloud and things like that. Beyond that, what we choose to do is to invest or acquire new businesses. And second, we also choose to buy back our stock. If you think about it, a share repurchase is a reinvestment in your existing assets and it's anti dilutive, it's an accretive transaction. So that's what we have decided to do from a capital allocation standpoint, invest in new invest will require new businesses and buy back our own stock. We of course, at this stage, we don't plan on give money back to our shareholders in the form of dividends. I think you would all be very disappointed if we decided to do that. The market is too big. The opportunity set and the potential is too big for us to think about paying dividends. All right. Now I first want to so that's kind of a quick summary of what we've decided to do. But here, I want to talk about our philosophy in terms of allocating capital, all right? I would say, when we do M and A or new investments, it's never done for financial reasons in the sense that we never calculate what's the accretion to EPS, is this going to be accretive to our earnings or not. It's always done with strategic thinking in mind. Strategic thinking meaning that is the acquired business going to add value in the long run to Alibaba, not in the next quarter, not in the next 3 quarters, in the long run, 3 years, 5 years, maybe 10 years. That's the mindset we approach new investments. So I want to make sure you understand that's our philosophy. So how we look at capital allocation? I've said, we focus on synergies, what the acquired asset brings to Alibaba in terms of value creation as opposed to the standalone value of the acquired asset, okay? That's very, very important. You could say, oh, normal sort of investor types will say, oh, we bought this company last year it was worth $1 this year it's worth $2 Well, I don't care about the standalone value. I care what value it brings to Alibaba, okay? And number 2, when we make an acquisition, the outcomes are likely binary outcomes. In other words, we could actually lay a big goose egg after the acquisition if we don't integrate the asset well into our business. So with that in mind, with that kind of risk profile in mind, we are very, very careful in thinking through how we're going to utilize the asset, how we're going to integrate the asset and how much value the asset will bring to us. So success or failure of M and A is really not about how much capital you spend. It's really about post acquisition, the people involved and the innovation that you bring to the table in terms when it comes to integration and when it comes to working with the acquired company. And the aspect that drives value creation is innovation and transformation. We're in a business where we are transforming the way companies do their business every day. Transformative change is not measured in percentage terms. Transformative change, when you create value from transformative change, it's valued in multiples. So we ask ourselves not whether it's going to generate a 16% return on invested capital. We asked ourselves, is this thing going to be a 10x or 100x kind of return? That's the question. And that's because the industry we're in. If I'm in the utilities business, I would tell you totally differently. I would do a DCF, I would do ROIC calculation. But this is we're talking about making acquisitions to transform the your business to transform the industry. Okay. So I want to review the just to review the last couple of years of sort of where we've spent capital. If you look at the last 2 years, our most top most significant acquisitions investments, our top 10 make up about 2 thirds of the capital we employ. So you read in the newspaper, Alibaba has done this and that and every week there seems to be something new that we're buying or investing in. But if you look at the core of what we are investing in, they're really just 2 thirds of that is in the top 10 deals over the last 2 years. And what I want us to say here is the companies that we acquire or we have invested in have provided very strong strategic moat around our core business. Our core business being the core commerce business, but we have acquired businesses in mobile media, in entertainment, in local services, etcetera, and also logistics to create this strategic mode. And that's kind of the mindset that we as we approach these acquisition opportunities. To bring this into more sort of granular terms, look at this table. The last this is roughly where we put our capital in the last year or so. We've acquired YOUKU and catapulted us into a leading position in entertainment. And it has put together it has very nicely fit into our whole entertainment strategy as a major both content and distribution asset. You have heard from Weidong about the Youku business. We made an investment, very significant investment in Suning, so that we have become much, much more competitive in the electronics category because we want to work with Suning to explore the omnichannel opportunities. I'll give you some examples of an omnichannel opportunity later when we talk about the specific case studies. We also may continue to invest in Cainiao. As you heard from Judy, Cainiao just raised around a financing of RMB10 1,000,000,000 that's about US15 $1,500,000,000 We're 48 sorry 47 percent of that. So we invested pro rata into that the CaiNYO company because we believe in building out that ecosystem of logistics partners and strengthening the information network and the data network that Cainiao is. Today, I would say after listening to Judy's presentation, I feel pretty good to say that what the capital that we put into Cainiao is very, very well spent because it is the only way to scale up to handle 145,000,000 packages in the next 3 or 4 years, 145,000,000 packages per day. That's the projection that Judy just gave you. We also put capital into local service businesses. We invested together JV with Ant Financial in Kobe. And we also invested took a stake in Ele. Me, which is the food delivery business. The difference between Kobe and Ele. Me is that, Kobe focuses on the customers when the customers go to the restaurant. So they obtain information online mostly through a mobile device and then they may get coupons, discount coupons and whatever and they go to the restaurant and they pay with Alipay, all in a closed loop transaction. Note that the Kobe business does not require last mile delivery. The Ele. Me business is a takeout food takeout business that requires last mile delivery. That's why we separated the 2. We are, I guess, a little bit more committed to Cobain in terms of our shareholding percentage at 50%. Our shareholding percentage in Olima is about 20%. And then we've also put capital into our international strategy. As you know, we took a controlling stake in Lazada, which overnight we became the largest e commerce player in Southeast Asia. We've also put capital together with Ant Financial into a company in India called Paytm, which is the largest mobile wallet company in India. The entry point to the India strategy may not be directly e commerce. We've been thinking through a lot of the possibilities of India. It's 1st, it's all mobile. So that's why we want to be in mobile wallet. And the other thing is, if you I don't think we covered it today, but UC Web, our mobile browser is the number one mobile browser in India. But anyway, so we've done a few things to kind of position ourselves strategically in leading positions in entertainment, in logistics, in local services and international expansion. So I think that's money well worth really well worth spent. In addition, we love our own business. We love the core business. We love our existing assets. So we decided over the last 12 months in several transactions to utilize $5,100,000,000 of our own capital to buy back our own stock, very confident of our own business. So that's how we've allocated capital. When you add everything up, I think that number in the bottom is the total, dollars 18,700,000,000 Lo and behold, that is about 10% of our market cap, okay? If you asked me a year ago, hey Joe, would you like to spend 10% of your market cap to get the leading position in entertainment, the leading position in logistics, the leading position in electronics, the leading position in local services and have very strategic assets in the international strategy. Plus, you're going to do very accretive transactions by buying back $5,000,000,000 of your own stock. I mean, it's a no brainer. It's absolutely absolute no brainer for us to do that. So looking back, I think we have utilized the capital very well. We know that this is shareholders' money and we have done a very, very good job in my view of being a fiduciary of your capital. I also want to just cover our sort of strategic M and A Investment Principles. What process or what kind of principles do we utilize as we walk through the process? Things that we do and things that we will not do, okay? On the left hand side is things that we will do. We will always try to make a strategic cooperation in our investee companies. That's the only rationale. It's the only reason why we want to hold an equity stake in an investee company is if it comes with some strategic level cooperation, okay? That's very, very important. And the second thing is the terms on which we make investments is always highly negotiated, meaning that we spend a lot of time negotiating right of first refusal, what happens if the company faces a change of control, because that's the one way you can position yourselves strategically visavis the investee company because you're jointly working together to jointly create value, create value for us, create value for them. You want to make sure that that equity relationship has something a little bit extra in it rather than just a common stock shareholding. And finally, when we make investments, we always invest it in the relationship, meaning that we invest within the management team. We invest in time and effort with people in the relationship. I'm very, very proud that you saw that Yueng Fu came and made a presentation about Alimao. He's the guy who talks about money, making money, all right? He came through an acquisition, but he didn't come through just one acquisition. We actually invested in him 3 times. It's a 3 stage acquisition. We originally owned like 13% and then we owned 65% of his company and then we acquired the whole thing, the whole company and he joined our senior management team. It's that long term perspective in terms when we when you invest in that relationship with the investee company management that allows us to ultimately bring in extremely excellent talent, incredible people into our organization. So M and A is also a way for us to bring in talent. What we don't do on the right hand side, oftentimes, I head up the M and A and Investments. So I sit on the Investment Committee. I actually oversee the team directly that does deals. Oftentimes, you get requests from business units that come and say, hey, let's spend this money to in this deal, let's buy 20% of this company. What they really want to do is they want to spend the marketing budget in order to secure some kind of resource of this investee company. And we're not going to do that. We're not going to invest in equity for BD deal or for something that they should just spend their marketing budget on. The other thing that we don't do is to do an M and A without a people plan. We would you would never acquire a company without thinking through who's going to run it, who's going to integrate it, who's going to be responsible. There's always has to be a person down to a name, That person who's going to be responsible for the acquisition, not the deal team. It's the operating guys that are going to be responsible for creating value out of the acquisition or out of the investee company. We actually end up not doing not making acquisitions of assets that are great assets, not making acquisitions because we didn't have a people plan. And finally, we don't participate in auctions. If you get a call from one of the investment banks and say, hey, you're one of the lucky you, one of the 3 bidders being chosen to bid for this asset. We say, no, thank you. We're not going to be involved in that. How do we measure value creation? Okay? It's very, very important. And the first thing is, we ask ourselves, is the acquired company or is the investee company going to increase our user acquisition or user engagement. That's very, very important. The second thing is does the company improve customer experience, okay? And some of the investments that we've made, for example, in Eusun, which is a logistics company for large appliances and also our partnership with Suning definitely fall in that category in terms of improving the customer experience. And then we also asked ourselves, are we expanding the products and services so that our 423,000,000 active buyers that we can cross sell against them these expanded products and services and thereby creating value. So these are sort of the 3 measurement criteria that we apply when we look at strategic M and A and investments. There are some case studies. Sorry, let me just quickly cover this thing. Some people say, hey, Alibaba, you take like these minority stakes and what does it mean? You don't control it? You don't why do you do that? Well, I have to say in the China market, there is a shortage of serial entrepreneurs. What's a serial entrepreneur? A serial entrepreneur can be found in China. They're in Silicon Valley. They build up companies, then they sell it after 3 or 4 years. And then they say to the acquirer, hey, here's a company, I'm selling it to you, but I'll stay on for 2 years to make sure that we integrate it, build a team and all that. And after that, I leave. That's a very established market in the U. S. And most deals a lot of the deals in the Silicon Valley are done that way. The big companies gobble up the smaller venture backed companies. That's how it's done. In China, that doesn't work because the entrepreneur is either too ambitious or is not confident enough about their business that they want to sell it to you. If someone says to you that, hey, buy my own buy out my entire stake in the company 100%, you should just run away in China because it's not the asset that you want. So with the good companies, you often don't get the opportunity to buy the whole thing and you have to give the management team who are the founders the space, the independence for them to run it. My example of UCWeb, exactly that way. They wanted to have their independence and then through 3 stages, through a lot of patients, we finally were able to buy the whole thing. So the reason to whole minority states instead of full acquisitions are you want to make sure that the management still stays in place, they're incentivized and then you align their interest to their own equity as opposed to the whole mothership. The other reason is that, the asset is really not part of our core operation, but they bring a lot of strategic value to the business. And only through an equity relationship do we feel comfortable that we can share the resources. There's a lot of resource sharing, for example, for us to dedicate all of our orders to one logistics partner. That's resource sharing, resource allocation. Why would you want to do that if you don't have an equity effective equity stake to have some kind of influence and to prevent the company from being acquired by competitors, right? So that's another reason. The third reason is sometimes we see an asset, we like it, we like to buy the whole thing and the deal may be available, but we say, wait a minute, let's we're not sure about the integration risk. Remember that the outcome may be binary, all right? So we say, let's take a step by step approach. That's just part of risk management. So these are the reasons, these are the circumstances under which we don't do full blown acquisitions. We just do minority investments. And I think I'm running out of time. I would prefer to leave it for questions with Jack, Daniel and Maggie. So I'm not going to go through the specific case studies, but all the case studies will be up on the website, so you'll have access to it. So thank you very much.