M&A Announcement

Oct 16, 2015

Press Release

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group's Analyst Conference Call. At this time, all participants are in listen only mode. After management's prepared remarks, there will be a question and answer session. I would now like to turn the call over to Jane Penner, Head of Investor Relations of Alibaba Group. Please go ahead. Good evening and good morning, and welcome to the call, and thank you for joining us on such short notice. Joining me on the call today are Joe Tsai, Alibaba Group's Executive Vice Chairman and Maggie Wu, Chief Financial Officer. Our management team will share thoughts on the announcement today. They have prepared remarks on the proposed transaction and then we'll take your questions. This call will last for approximately 30 minutes and the webcast of the call as well as the press release will be available on our Investor Relations website. Now let me quickly cover the Safe Harbor. Today's discussion will contain forward looking statements made under the Safe Harbor provisions of the U. S. Private Securities Litigation Reform Act of 1995. Such forward looking statements are based upon information available to us as of today's meeting and our actual results may differ materially due to a number of factors and risks. Please refer to our filings with the SEC for a detailed discussion of these risks. Except as required by law, we assume no obligation to update any forward looking statements we may make here today. Also, there will be no comments on Alibaba Group's results of operations. And now, I'd like to turn the call over to Joe Tsai. Thank you, Jane. Good morning or good evening, depending on where you are. Today, we are pleased to announce that Alibaba has made a non binding proposal to Youku's Board of Directors to acquire all the outstanding shares of Youku that we do not already own at a price of $26.60 per ADS for cash consideration. Alibaba has been a shareholder of Youku since May 2014. And the more time we have spent with their management, the more we have come to appreciate both their leadership position in the market and the potential to add value to the participants in our ecosystem through closer integration. Our proposal was included in the press release we issued earlier today. We believe the all cash consideration we are offering is both full and fair and creates immediate and substantial value for the YOUKU shareholders. More importantly, we believe the combination will strengthen YOUKU's market position and will lead to improved financial and operational performance in the face of an increasingly challenging industry environment. Alibaba is uniquely positioned in the China market to help accelerate Youku's growth and we believe together, we can build China's leading digital entertainment company. Under our proposal, Youku would continue to be led by its Founder and CEO, Victor Ku. Since our initial investment in May 2014, we have worked closely with Victor and will continue to support him and his leadership team to drive the business after the confirmation of the proposed transaction. Before we cover the strategic rationale for this proposed transaction, I want to set the context with a comment on Alibaba's overall strategy and how we think about the industry. As we originally highlighted in our IPO perspectives, digital entertainment is core to our strategy of promoting consumption of goods and services. The difference between digital content consumption and online shopping is that virtual goods and services do not require logistics. As we have said before, Alibaba's growth is leveraged to the gaining to gaining the wallet share of consumers. Beyond material goods, the increasingly sophisticated Chinese consumer will demand entertainment content and services. While digital penetration in entertainment is currently low, it is rising quickly as younger generations are consuming content primarily in mobile, desktop with digital TV formats, on the go and on demand. That's why we see significant growth potential in digital entertainment. China's online digital revenue is expected to grow from $4,000,000,000 in 20.14 to $14,000,000,000 by 2018, representing a compounded annual growth rate of 39%. In the past year, you have seen us take a number of initiatives to build out our offering to address this market, ranging from the launch of Tmall Box Office and the acquisition of the strategic shareholding in Alibaba Pictures. Our vision is to distribute content to a broad set of users through any device they may be using, whether it is a mobile phone, desktop computer, an Internet enabled set top box or a smart TV. Youku fits this vision perfectly. Youku is the leading mobile and online video company in China with over 500,000,000 monthly unique users. Its video platform enables users to search, view and share high quality video content across mobile and desktop screens. As we have witnessed in our own e commerce business, the shift towards mobile usage and consumption is very, very rapid. What excites us about Youku is its clear leadership position in mobile video. YOUKU's users spent 2,000,000,000 hours in total on its mobile platforms in August and the per user time spent on mobile is highest among its peers. We believe there are 3 major strategic benefits from outright ownership of Youku. 1st, we would enhance the distribution of our entertainment content offerings through multiple screens. Multi screen means convenient and seamless access to digital entertainment on mobile phones, desktop computers and TVs. The addition of Youku would enable us to reach more viewers through mobile and desktop screens in addition to our own OTT TV strategy. By identifying common unique users on Alibaba and Youku platforms and integrating their user accounts, we will be able to package and deliver content seamlessly to users through multiple devices. Youku will also enable us to develop a uniform content acquisition strategy across different distribution channels. Given that content costs can be amortized over a much larger user base, we expect to lower content cost per user significantly. 2nd, the transaction would add a strong and unique owned and operated media property to our advertising platform, Alibaba. And this would enhance our ability to offer marketing solutions for brand advertisers. Youku would provide Alimama with a strong position in the video advertising market given its leadership market share and strong user engagement as measured by time spent. We believe that the video advertising market is poised for robust growth in the future. Advertising dollar spend has been moving from traditional TV to the Internet. Online video advertising spend in China is expected to grow at a compound annual growth rate of 31% from 2015 to 2018, which is the fastest growth rate among all forms of Internet advertising. 3rd, marrying user data from media and entertainment with our e commerce data would strengthen our ability to develop better targeted products and services, as well as targeted marketing. The integration of entertainment and e commerce data sets ecommerce datasets would add a new dimension to our user profiles and help us accelerate the understanding of our users. In addition, the access to mobile viewership data can enable us to promote similar content via subscription based offerings on our OTT TV platform. Participants in our ecosystem, such as merchants and brand advertisers, would benefit from data integration. A deeper understanding of our users would enhance our ability to develop better targeted marketing solutions. Next, I would now like to turn over to Maggie, who will discuss the financial details of the proposed transaction. Thank you, Joe. Hello, everyone. First, I would like to put the size of our potential commitment in perspective. Alibaba currently owns approximately 18.3% of the outstanding shares of Youku. If the transaction were consummated, we expect that the additional cash required to purchase all of the share capital that we do not already own would be approximately US4.6 billion dollars We note that Youku has US1.1 billion dollars in net cash on its balance sheet as of June 30, 2015. So we estimate that our net cash outlay would be reduced to approximately US3.5 billion dollars The potential impact of this transaction, in short, is about growth in users and growth in revenues. We expect the proposed transaction to expand the market opportunity and the long term growth potential for Alibaba. Youku has over 500,000,000 monthly unique visitors in the quarter ended June 30, 2015, and the multi screen monthly user time spent in June grew 50% year on year. Youku generated US681 million dollars in revenues in 2014 US443 million dollars for the first half of twenty fifteen, representing a year on year growth rate of 53%. Consensus analyst revenue forecast for the full calendar year 2015 is US1 $1,000,000,000 It should be noted that our proposal is non binding and are reaching a definitive agreement with the company is subject to negotiation and due diligence. If a definitive agreement is entered into, closing of the transaction would be subject to Youku's shareholder approval and the process of privatizing a U. S. Public company. Thus, because of the time it would take to complete the proposed transaction, we do not expect the transaction would materially impact our financials in the fiscal year ending March 2016. Youku is in the early stage of rapid growth. Similarly, we do not expect this transaction to fundamentally change Alibaba's overall margin structure. At this point, I think we're ready to take a few questions. Thank you. Ladies and gentlemen, the question and answer session of this call will start in a moment. The first question comes from the line of Eddie Leung from Merrill Lynch. Lynch. A stake just last year. So what has changed in the past year to trigger your intentions to own YOUKU as a wholly owned subsidiary if the deal will be approved? And then secondly, you mentioned some of the synergy. So just wondering if you could give us a little bit more color on some of the financial factors or operating metrics that you would focus on going forward to measure the success of achieving these synergies? Thank you. Okay. Hey, Eddie, I'll address your questions. First on timing, since we made an investment in YouKu in May of last year, we've worked with them in various parts of the business, working with them on the advertising side and also certain integration on data. So for example, we try to map the ID of users shopping on Taobao with the ID of users that are viewing video on their Youku platforms and are able to see very good results when we build a better customer profile. But without owning the company entirely, a lot of these cooperations are just only partial. We're not able to get the entire data sets. So that's an example. So for us, we would like a closer integration of our resources and also the fact that we have worked now more closely with the team, we are impressed by Victor and his leadership team. So it's pretty natural that we make a proposal to acquire the whole company. On the issue of synergies, I think we will be looking at potential, for example, on the front of targeted marketing and better understanding of our user base through media data sets and e commerce data sets to create better products and services. These are the areas that could potentially generate synergies for us. Understood. Thank you. Thank you. The next question comes from the line of Robert Lin from Morgan Stanley. Please go ahead. Hi. Good morning and good evening. Thanks for taking my questions. I guess, Joe, you've mentioned before about a lot of the synergies. I guess there's for Youku, there's probably biggest cost is content as well as bandwidth and colocation. You kind of quantify on how when we talk to the studios, how much we can save in terms of content costs as well as on the potential transfer to like a cloud service for the bandwidth costs? How much that could help in this process? And then second question would be more the users. As you said, we have mapped a lot of data between the two companies. What's the overlap of the users between Youku and Alibaba? And essentially trying to figure out, is it incremental user or is it more overlapping users right now? Thank you. Rob, this is Maggie. I'll try to address your I'll address your question on the content synergy. You're right that there are major costs of content and colocation bandwidth as well as staff costs. And it's still early for us to quantify the synergy could be generated. But what I can share with you is that we do see synergy, the cost side, the content and the communication bandwidth. So, for the content, let me elaborate a little bit. So, we also purchased content, Iku, that's that too, and other subsidiaries or investee companies in this ecosystem also have content purchased. So, if we could have the integrated plan to do the purchase, obviously, there are bargain power and could give us better price. That's number 1. Number 2 is the total cost per user to be come down because here is a bigger user base, including Youku into the family. Ali Cloud could help improve reliability of the technology, the infrastructure as well as helping to have the cost savings. Youku is actually after our investment last year, already have a plan, and now they are moving to our cloud platform. So, we'll update you later when we get further analyzed and information on those things. Yeah. When it got Rob, when it comes to overlap with users, monthly uniques at Youku is over 500,000,000 and that's a very substantial user base. And we're very excited that they're a leader in the market when it comes to mobile users and usage time spent. And we think that the YOUKU user base brings a obviously, there's some overlaps, but brings an overall sort of incrementally new dimension in that there are young a lot of young users use Youku, especially on mobile. So we think that is incremental. Okay. Very good. Thank you. Thank you. The next question comes from the line of Carlos Coerner from Bernstein. Please go ahead. Hi, thank you. I have two questions, 1 on the overall entertainment strategy and 1 on the synergies. On the overall strategy, Joe, I think you mentioned that YUKO could become the leading entertainment company in China. You talked about multiple screens. Can you spend some time telling us how you think the service looked like in 3 years? And how does it relate to all your other OTT strategy, all your other video entertainment strategy including your current OTT strategy? How does it hang out together? Do they all carry long form and short form? Do they all have the same revenue model? How does it how should investors think about all these different initiatives and what's the story behind them? And on the synergies, what's so great about our balance sheet model is that when people go there, they go there to shop and I suspect not to consume video entertainment. And probably the conference is also true when people go to Yoku, they want entertainment and probably not shopping. So if you have that, how exactly does the acquisition help drive incremental user growth for Youko! Thank you. Yes. On a 3 year horizon, the multi screen strategy will take on different shapes in the sense that users coming to different screens will see different packages and the content can be sliced in different ways. So you can imagine that on a mobile screen, there will be shorter content. There will be more user generated content on mobile and PC screens. And when you come into the living room, there could be content that is more premium produced content. And one thing about YOUKU is they are also starting to make investments in a category called professionally generated content with channels being produced of basically these are artists or performers that are in a way not huge stars, but they create their own unique content in talk shows and shows focused on food, for example, or on sports and things like that. And that's very interesting to us and that the consumption of that kind of content could be very, very popular and over time could generate advertising revenue in that in those channels. So that's your first question. The second question about cross synergies in terms of user growth, we actually have already tested on the YOUKU platform a watch or a shop while you watch format, where users can view merchandise that are showcased in the shows that they watch and then they can purchase that merchandise at the same time. There are also merchants that are on our platform that have created marketing formats and video that are displayed on the YOUKU platform. So we think there are actually some cross synergies that are pretty interesting. Okay. Thank you. Thank you. The next question comes from the line of Ellen Helliwell from Deutsche Bank. Please go ahead. Great. Thank you very much. Two questions, maybe a smaller architectural or technical question. Was just wondering, I thought that Yoku ad slots are already accessible through the tank system. And so if we're talking about synergizing, sharing data, offering targeting and even offering a Taobao or Tmall merchant access to video inventory on Yoku. Is it not the case that we're already there? And if we are, can you talk about once again maybe some incremental steps that would address that synergy we talked about? Also, my second much bigger picture question, as Joe mentioned, the transaction is indeed a further defining step with regard to Alibaba's provisioning of digital content. I know there have been questions about content cost synergies, but could this in fact be more of a catalyst for a more ambitious content acquisition program? Thank you. Yes. Alan, I'll answer your first question. Talk about, yes, YOUKU already are part of a TAO affiliate program, Mitsubuta. So if you talk about incremental synergy coming out in the future, I think it's more going to come from the data utilization. So in the past, we have been after our investment in UCO last year, we started the unifying ID with Yucrona after 6 years. But to fully integrate the data and get all of these consumer behavior data is not there yet. So eventually, if this transaction goes through, then we could further integrate those data and put them into use and get even more targeted marketing and other use. Thank you. And your second question about whether we're going to have a more aggressive content purchase, again, it's still early to say. So I think it takes a little bit of time when the transaction is being closed. We're going to definitely content is a very important area. So we're going to go into it's not only YouKu, but also other assets we invested. Also look at the whole content pool and then decide how much we want to invest. Thank you. Thank you. The next question comes from the line of Doug Anmuth from JPMorgan. Please go ahead. Great. Thanks for taking the question. Joe, I just wanted to ask kind of philosophically how you think about the business model over time. It's been obviously more advertising based and you talked about Alibaba there and some of the benefits. But how do you think we could see something shift more towards subscription based over time here going forward? Or do you see this as kind of multiple revenue sources? And then secondly, maybe a little bit more for U. S. Investors. Can you give us a sense of how video is integrated into Tmall and Taobao now? And then what that could look like over the next few years? Thanks. So you're right that I think right now almost 80% of YUKO's revenue base is advertising. But for example, in the most recent quarter, they've seen very good increase in subscription formats. And as you know, our Tmall box office also has a subscription based service. So I think it's really content specific, certain types of content, long forms of content are and premium content are more conducive to a subscription based service. So there's really not a heavy sort of philosophical component to it. It's really just content specific and we see that the market over time will have more subscription based revenue over time. Okay. And your second question, how is that I think your second question is how is video content integrated into this Tmall and Taobao platform, right? The platform where currently in the Alibaba ecosystem where you are viewing video content is through our OTT TV service. So we have both worked with manufacturers of set top boxes and also smart TVs to integrate our operating system into the hardware, so that we can basically have better control and influence over what kind of content goes on those devices. And so you're viewing the you're viewing the videos on TV platforms. Okay. Thanks, Joe. Thank you. Ladies and gentlemen, we'll be taking the final question for the call. The final question comes from the line of Piyush Mubayi from Goldman Sachs. Please go ahead. Thanks, Joe, Maggie. How does your content, which includes deals with Paramount, Disney and Sony integrate with the content you have at Ali Pictures where you've got Lions Gate? And I know there's a partnership with Paramount also. And the second question I have is with regard to Youku in terms of the customer base it has. Is there a strategy that you can deploy quite quickly to leverage the 8,000,000 SMEs you have nationwide? Because I think there is adequate inventory outside Tier 1 China. Or would you like to pursue a more aggressive stance on the subscription model? And a very tiny technical question, what percentage of your mobile traffic is WiFi? What is on 4 gs? Thank you. Yes, Pierce. I think with a closer partnership with Youku, we're able we're now able to look at content acquisition as a unified strategy. Previously, if you were if you had 2 different content acquisition efforts, it actually is not ideal when it comes to negotiating with the content owners because they, as you know, love to slice and dice the content into different screens and different formats. So having that unified strategy is very, very important. You mentioned, for example, Paramount and Mission Impossible, the deal that Youku has is a licensing of the content. But where Alibaba Pictures fit in with respect to Mission Impossible is that Alibaba Picture actually invested in the movie and then in return also has rights to publish it in China, both in the digital and also in actually theatrical releases. So there are sort of different angles with the same counterparty. But overall, now with more tools in the toolbox and more assets in place, we can form a more unified strategy when we talk to these content owners. I didn't get your second question. You talked about 8,000,000 If I could just extend that question on content, Joe, what about the ability you have to produce self generated content at YOKO? Would you like to take that one step forward given the skill sets we have at Ali Pictures? How much more aggressive would you like to be there? Well, there are I think we are going to explore the area of working together in producing content. So that's certainly a conversation that we're going to have. We haven't had very detailed conversations about that at this point. The question was with regards to the inventory available on Youku, where if I remember correctly, there's a lot of inventory available in Tier 2, Tier 4 China, while Tier 1 China inventory is fairly highly utilized. Would there be a fit here with your very large SME customer base that would help you leverage that inventory quite quickly to translate to a very quick acceleration in revenues? I think there's definitely potential synergies there. But I think we have to be very careful that to map out any kind of huge acceleration of revenue. Some of the inventory, you're talking about the inventory that has to be conducive to SME Commerce as opposed to brand advertisers. And I think we are going to take a closer look at how valuable that kind of inventory is to our merchant, e commerce merchant base. Thanks. And if I may repeat my third question, that was with regards, you talked about how much time is being spent on your network. I think you said 2,000,000,000 minutes in the month of August. If you could split that between PC and mobiles and then in the mobile realm between Wi Fi and 4 gs? Thank you. So, we don't have a split between Wi Fi and 4 gs, but I think if I were to guess a lot of that mobile consumption is on a Wi Fi because of the cost concerns people have using 4 gs. Gs.