京東 (JD) 2023 Q1 法說會逐字稿

Hello and thank you for standing by for JD.com's First Quarter 2023 Earnings Conference Call. (Operator Instructions) Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Sean Zhang, Director of Investor Relations. Please go ahead.

Thank you. Good evening and good day, everyone. Welcome to JD.com First Quarter 2023 Earnings Conference Call. For today's call, CEO of JD.com; Mr. Lei Xu, will kick off with opening remarks. Our CFO, Ms. Sandy Xu, will discuss the financial results. After that, we'll open the call to questions from analysts.

Let me quickly cover the safe harbor. Please be reminded that during this call, our comments and responses to your questions reflect management's view as of today only, will include forward-looking statements and please refer to our latest safe harbor statement in the earnings press release on our IR website, which applies to this call.

We will discuss certain non-GAAP financial measures. Please also refer to the reconciliations of non-GAAP measure to the comparable GAAP measure in the earnings press release. Also, please note, all figures mentioned in this call are in RMB, unless otherwise stated.

Now let me turn the call over to Mr. Xu, our CEO. Xiansheng, please.

[Interpreted] Hello, everyone. This is Xu Lei. Thank you for joining JD.com's First Quarter 2023 Earnings Call. In the face of profound changes in external environment of the industry, together with our own proactive adjustments to our business, JD achieved a high-quality performance in Q1.

As many of you know, during the past 3 years of COVID, JD spared no efforts to maximize our business model and supply chain capabilities and allocated tremendous resources and energies to ensure daily supplies and provide reliable services to our customers and up and downstream business partners. JD was able to play an important role in the economy and people's livelihoods throughout that challenging period.

In 2023, we've covered in the past, the macroeconomy and consumption have started to pick up but the organic forces driving consumption demand are not yet sufficient. We've seen different paces of recovery for different categories as well as changes in the demographic structure and people's lifestyles and spending patterns.

JD has taken initiative to embrace the new external environment and industry dynamics in the post-COVID era. 2023 is a year of proactive adjustment for JD and a year that will set a solid foundation for JD's long-term development. Here, I will go through our major adjustments in 3 areas and some of the progress we've achieved so far.

First, we are refocusing on our core business. Since last year, we have carried out a set of adjustments on the supply side, with the goal of long-term healthy and sustainable growth. This includes optimizing our product mix and sales channels in order to further improve our operating efficiency and quality.

Also, I shared last time, we have always encouraged innovative business initiatives while we need to regularly review these new initiatives within each business sector and focus our resources on those businesses that can create long-term value. Therefore, we scaled back on some of our new businesses. As we have been building a healthier business model, we've seen stronger profitability in both JD as a whole and in our core business, with this reporting quarter setting a new record among all quarter 1 in our history.

This again demonstrates we have a lot of upside in terms of long-term profitable growth while improving the overall health of our businesses, our core categories, such as home appliance and home goods, 3C and electronics as well as categories such as liquor and baby and mom products that are seeing industry-wide challenges have all been maintaining and even expanding their leadership positions and market share. This trend has continued to strengthen so far in Q2 as we see consumption progressively recovering.

Second, we are improving efficiency of management and operations. We've recently rolled out an organizational readjustment for core segments such as JD Retail and JD Logistics with the purpose of further streamlining company hierarchy, building a more flat, nimble and efficient management structure and further empowering frontline business team. After the adjustment, JD Retail, which has tens of thousands of employees, will have just 3 levels in the reporting line from an entry-level procurement employee to CEO, which will be the flattest managerial structure among all similar sized industry players.

The reorganization will bring greater decision-making power to the execution teams closest to the market and users, incentivize each business unit and to give young talent more growth opportunities. This type of organizational structure is an essential driving force for us as we embrace the post-COVID era and pursue a new chapter of growth.

Third, we are further in-housing our marketplace ecosystem and user experience. User focus has been built into JD's DNA. On top of our continuous efforts to optimize costs and efficiency, we are committed to providing users with best-in-class product offerings, prices and shopping experiences, addressing user demand on all fronts, including superior selection, speed, quality and value, both 1P and 3P models are means to serve users.

JD's goal this year is to build a robust ecosystem that attracts more third-party merchants, particularly the tremendous number of high-quality SMEs that accounts for a relatively small proportion of sellers on our platform. In terms of progress on the merchant side, since the launch of our (inaudible) program that includes a number of supporting measures for SMEs, we have accelerated the expansion of our merchant base.

In particular, the number of third-party merchants with recorded transaction saw 20% sequential growth in Q1, among which merchants in the fashion, home goods and the supermarket categories increased rapidly. Merchants remain motivated to allocate resources to our platform, thanks to our advantages in providing them with lower cost and better efficiency of operations.

On the user side, our main JD app maintained healthy traffic growth in this quarter, with DAU growing double digits year-on-year in March. Moreover, as we continue to focus on user quality in Q1, the number of repurchasing users and paid users of JD Retail experienced a rapid year-on-year growth of nearly 20% and 30% respectively. And their proportion of our total users continue to rise, leading to a higher shopping frequency and ARPU in the quarter.

In particular, the number of JD Plus members reached 35 million by the end of Q1 and Plus members spent 8.4x of the average annual amount of non-Plus members, sustaining their high shopping frequency and spending power. What's also worth highlighting is that lower-tier market users who have stayed with JD for over a year, saw healthy growth momentum in both user scale and ARPU in Q1 and April as well.

In addition, as we continue to push forward our everyday low price strategy, we're happy to see that NPS score of our main JD app increase on a sequential basis. This makes us more confident that as we continue to build up the supply side and enhance our user service and user operation we are able to ensure best-in-class experience for our core users, while at the same time, addressing diverse demands of new users. We still have a lot of upside in user acquisition.

I hope my sharing today has made it clear that 2023 is the best timing for JD's proactive adjustment as we undergo a fluid external environment and embrace new opportunities in the post-COVID era. While such adjustments will impact us for now but will provide a necessary foundation for us to seize the long-term strategic opportunities.

The progress we've achieved so far is strong evidence that our adjustment is moving forward steadily and in the right direction. From a long-term perspective, we believe JD is still on a healthy and sustainable track of high-quality growth as our long-term strategies remain unchanged and our core competitiveness and driving forces are constantly improving. We will remain committed to creating lasting value for our users, business partners and shareholders.

Finally, I've submitted my retirement request to the Board to spend more time with my family and the Board has approved it. Over the years, it's been a great honor working at and growing together with JD, creating value for our users, business partners and the society and working side by side with Richard and our passionate, hardworking and dedicated management team. I'm very grateful to the trust and support from Richard and the Board of Directors.

It's also been a fortune to have worked closely with Sandy over the past years, with her profound insight and vision for our businesses, outstanding professional achievements and strong dedication. Sandy is the perfect candidate of the next CEO. I will also work together with her and do my best to ensure a seamless transition in the coming months.

With that, I'll hand over to Sandy.

Thank you, Xiansheng and hello, everyone. It's a great honor to become the third CEO of JD.com. And I truly appreciate the trust from Richard, Xiansheng and the Board. Richard and Xiansheng have set a strong foundation for our future endeavors and they will continue to guide our long-term strategic developments.

I look forward to further driving the high quality and sustainable growth of the company and bringing more value to our customers, business partners and the society. Now let's turn to our financial performance. In the first quarter of 2023, we continued to build on our progress in business and organizational adjustments and began to see encouraging trends, including improved user engagement, as Xiansheng just shared, rejuvenated greenfield marketplace performance, improving NPS score and resilient profitability, among others.

Also, as elaborated by Xiansheng, our ongoing business adjustment as well as the reorganization announced in April could result in moderated growth, especially as measured by revenues in the short term. And yet, with the encouraging trends we've seen and our focus on building a team that can thrive in a very evolving business environment with adaptability, strategic agility and results, we are more confident than ever in our ability to deliver healthy, sustainable growth for the long run.

Now let me walk you through our financial results in Q1. Our net revenues grew by 1.4% year-on-year to RMB 243 billion in Q1 as we continued to focus on user quality and building deeper user engagement. We are encouraged to see that, during the quarter, JD Retail LTM average GMV per user and shopping frequency continued to increase year-on-year for 6 quarters in a row, mainly driven by the expansion of our core user base.

Breaking down the revenue mix. Product revenues were down 4% year-on-year in Q1. I'll discuss category performance shortly. Service revenues grew by 34% year-on-year in Q1 among which marketplace and the marketing revenues grew by 8% year-on-year. We are encouraged to see that 3P revenues delivered robust momentum in the quarter reaching the highest growth rate in the last 4 quarters.

Notably, growth of 3P advertising revenues meaningfully outpaced that of 1P in the quarter which is primarily driven by our continuous efforts to support merchants, particularly SMEs, leading to a substantial merchant base expansion in the quarter. We believe this is an important step forward in our business adjustment to build a vibrant marketplace ecosystem and further enrich product supplies and user experience on our platform. Logistics and other services revenues grew by 61% year-on-year in Q1.

Now let's turn to our segment performance. JD Retail experienced a soft revenue performance in Q1 while continue to expand on both fulfilled gross margin and operating margin. As communicated before, the continuous improvement of our profitability and bottom line growth indicates that we are moving in the right direction towards building a healthy, sustainable business model.

In terms of revenues, JD Retail reported a 2% year-on-year decline in Q1. By category, electronics and home appliance revenues were down slightly by 1% year-on-year during the quarter, mainly due to the lagging recovery of durable goods consumption compared to other discretionary categories. That said, we continue to notably outperform the industry in Q1, thus effectively defending our market share in this category.

More importantly, our outperformance in electronics and home appliance industries becomes more pronounced heading into Q2. And we are confident to not only defend but also to further increase our market share in this category, thanks to our strong supply chain capabilities, user mind share and solid progress in both online and off-line channels.

General merchandise revenues were down 9% year-on-year in Q1, a mixed result of our business adjustments and the high comp for supermarket category last year due to the stockpiling during COVID. Since we are on the topic of supermarket category, I'd like to share that it once again achieved an impressive margin improvement as our business adjustment aimed to build a healthier product mix is yielding results.

Our emerging categories such as health care products and services, apparels and accessories delivered double-digit top line growth in the quarter demonstrating our broad-based user mindshare across categories. I want to highlight JD Retail's profitability improvement. JD Retail's fulfilled gross margin was up an exceptional 95 basis points year-on-year to 8.9% in Q1, mainly driven by our efforts to optimize cost and efficiency and the improving economies of scale.

This also boosted JD Retail's operating margin to 4.6%, up 101 basis points from a year ago, another impressive margin expansion in 4 consecutive quarters in a row. Our core retail business remains well on track of our long-term margin trajectory as we are making proactive adjustments to set JD in a stronger position for achieving sustainable growth. JD Logistics saw a 34% revenue growth year-on-year in Q1, excluding the impact of consolidation of Deppon, JD Logistics growth rate was 7%. This is mainly contributable to the resilient growth in revenues from external customers, the proportion of which reached 69% in Q1.

In terms of profitability, JDL's non-GAAP operating loss margin was 3.1% in the quarter, primarily due to the extra resources allocated in response to COVID in January and February. Dada reported revenues of RMB 2.6 billion in Q1 and non-GAAP operating loss of RMB 217 million in the quarter.

Intracity on-demand retail business remains as an important pillar for us. And we are glad to see that JDDJ and Shop Now have expanded to cooperate with over 300,000 offline stores and provided more than 2,000 cities and counties with on-demand retail services that cover a wide range of categories.

As a result, our intracity on-demand retail business Shop Now maintained its robust momentum with year-on-year GMV growth rate of 60% in Q1. Finally, revenues from new businesses scaled back to RMB 3.5 billion in Q1 as we continue to adjust the investment pace in both (inaudible) and international businesses, while JD Property maintained its robust growth momentum.

In terms of profitability, operating loss of new businesses continued to narrow down substantially on both year-on-year and sequential basis. As shared previously, we will continue to explore new initiatives and encourage innovations that generate better synergies with our core businesses and capabilities. We are pulling off those that we don't see a clear path for meaningful returns in the foreseeable future.

Moving to the consolidated bottom line. As we continue to focus on our core businesses to drive high-quality growth and further optimize operating efficiency, we recorded RMB 7.6 billion non-GAAP net income attributable to ordinary shareholders in Q1 and non-GAAP net margin [arrived] 3.1%, up 144 basis points compared to a year ago.

Finally, our LTM free cash flow as of Q1 was RMB 19 billion. This was mainly driven by the deferrable payment of accounts payable. The impact of which is exaggerated when sales growth rate moderates, a typical phenomenon for retailers. As we are working to drive healthy sustainable growth, we believe our free cash flow will go back to normal levels going forward.

By the end of Q1, cash and cash equivalents, restricted cash and short-term investments added up to a total of RMB 203 billion. During the quarter, we also did share buyback of RMB 1.1 billion. The share buyback, coupled with our previously announced cash dividend demonstrated our confidence in JD's future prospects and commitment to returning shareholders despite the short-term volatility in the stock market as we go through our proactive adjustments.

To conclude my remarks, we ended Q1 with strong footing in improved operating efficiency and expanding profitability, boding well for our proactive business reorganization. We are working to build an adaptive and efficient business model, a more ownership-oriented team and ultimately, to achieve profitable expansion and the market share gain in the long run, the same narrative of JD's development over the past 20 years.

JD has gone through many cycles and always emerged stronger, thanks to our visionary moves and steadfast execution. We will continue to commit ourselves to the 3P sense of retail, user experience, cost and efficiency and through the right way to create long-term value for our customers, business partners and shareholders.

With that, let's open the call to the Q&A. Thank you.

Thank you, Sandy. For the Q&A session, analysts are welcome to ask questions in Chinese or English. And our management will answer your questions in the language you ask. We'll provide English translation when necessary and for convenient purpose only. In the case of any discrepancy, please refer to our management statement in the original language. Operator, we can open the call for Q&A.

(Operator Instructions) The first question comes from Thomas Chong with Jefferies.

(foreign language) My first question is about recent organizational adjustment. Can management share about the rationale behind as well as the impact to JD? And my second question is about the subsidies program. It has been launched for about 2 months. Can management share about -- from the perspective of user growth, merchant participation and GMV growth?

(foreign language) Thank you for your question. This is Sandy. Let me answer the question about the organization restructuring. As you might noticed in the news we have undergone such changes for JD Retail and JD Logistics business. And I would take JD Retail's restructuring as an example, to give you more explanations on it.

So the previous level of JD Retail's business group has been removed and replaced with business departments. Former leaders of business groups will now act as leaders of business departments. And the business departments that used to oversee various product categories will be further split into numerous operational units that focus on specific product categories and each of these units will have greater decision-making and management responsibilities and their KPIs will be tied closer to their operating results which will help to incentivize entrepreneurship at every level and better align team interests with those of investors.

[Interpreted] This is Xu Lei. I would add a few words regarding my role change. So Sandy, she will be the third CEO of JD.com. She is no stranger to our investors and analysts. In the past nearly 5 years, Sandy and I have been working closely from JD Retail's business to the group level.

And some of you might recall in 2018, it's only because of my close teamwork with Sandy that made it possible for us to ride through this so-called darkest moment. So Sandy has played a very important role. And without her, I don't think I can make it. And plus Sandy is a very young leader and still have a lot of energies and she has been widely recognized with her professionalism and dedication inside and outside the company.

So everyone, including myself, members of the Board and [SEO] Committee, all believe that she is the capable leader to lead JD into the new phase of healthy and high-quality growth. And for myself, my JD story can be traced back to 16 years ago, when it first became the company's external adviser in 2007. And in the future, I will also continue to be -- to become the first Chairman of JD's Advisory Council. And my support to JD will be a lifetime commitment, just a change of perspectives and position but I will always support JD whenever the company needs and this is also a very meaningful and privilege thing for me. And thank you.

[Interpreted] So thank you, Mr. Xu Lei. He has made a great achievements and contributions to the development of the company. And I would also take this opportunity to emphasize on our strategies which will remain unchanged in the long term and will continue to focus on our business philosophy, to focus on our cost efficiency and users' experience and to continue to create value for the customers, industries and the society.

And our key growth drivers will continue to focus on our lower-tier markets to build a open ecosystem and on-demand omnichannel retail and by leveraging the economies of scale and of our operating efficiencies, we will continue to diversify our revenue structures to achieve healthy and sustainable growth in the long run.

So let me answer questions about our discounts program. As we mentioned in our last quarter call, we had a series of programs offering competitive prices and services that consumers truly appreciate and enjoy, including the RMB 10 billion subsidy program, low cost and free shipping, flash sale and more formats. This is based on our continuous investment and accumulation in the supply chain which results in higher efficiency and lower costs.

On the supply side, we are constantly improving our open ecosystem to offer users a wider selection of price ranges, products categories, including brands and other white label products. We also leverage our supply chain advantages to realize economies of scale and pass on the benefits to consumers. Therefore, JD's ability to offer everyday low price is based on our focus on everyday low cost.

We will drive several user experience changes this year by making adjustments on marketing strategies, guiding users to embrace our everyday low-price concept instead of stocking up goods only at promotion. Thus, we will see the share of everyday sales increase this year, which is in line with our goal of everyday low price and returning to the essence of retail. This will also help stabilize the whole industry's supply chain operations that's enhancing the efficiency and value creation for our partners' brands and third-party merchants.

So the performance of this discount program since it was launched 2 months ago, has met our expectation with our joint investment in marketing resources with brands and merchants, we strive to provide consumers with tangible benefits. Only by truly passing on benefits to users, can we attract them, which in turn attracts brands and sellers. By serving users well, we can also serve the brands and merchants well. We have noticed improvements in user traffic, engagement and repeat purchases, as well as a significant increase in the number of active third-party merchants. So we're confident in our ability to control the overall cost -- overall impact of this program and this program has limited impact on our margins.

The next question comes from Ronald Keung with Goldman Sachs.

(foreign language)

[Interpreted] JD's GMV growth rate in Q2 has been faster than Q1 and the growth rate of GMV is also faster than that of revenues. We've seen the number of third-party merchants with active sales continue to rise and their GMV growth is faster than 1P businesses. And also there's the factor that last year, this quarter, the 3Ps comps relatively lower.

In terms of organization structure change, we are gradually implementing the detailed plans, so the impact will be released over a certain period of time in the following quarters.

So for JD's core retail business, we have always been centered on our customers. So any model that better satisfies consumers' diversified demand should be offered to them and it will also attract users to make purchases. And JD platform offers both 1P and 3P models to serve consumers and we should always keep the decision making right to the consumers. And one of our unique advantage is that these 2 models are actually complementary to each other.

So for several categories, JD's self-operated model is highly competitive. For example, high-ticket size products, products that require higher level of quality and service assurance for consumers and products that can generate lower cost and higher efficiency through economies of scale. At the same time, as JD's consumers and the purchasing demands become increasingly varied and differentiated, we need to enrich our supply side through the marketplace business model.

So our current adjustments, including the holistic management of 1P and 2P and the considerations on the KPIs tied to the performances to give better choices and more options to the users. So for the short-term, business adjustments can indeed affect revenue growth, especially for certain categories. However, we believe that through these adjustments, categories such as -- like our supermarket categories will remain JD's most important growth driver and return to a healthier growth trajectory in the long term.

The next question comes from Eddy Wang with Morgan Stanley.

(foreign language)

[Interpreted] Yes. I would like to share some insights on the categories of home appliances and home goods. So in Q1, the performance still affected by softer consumption demand in the real estate industry. So the recovery of durable goods consumption, such as household appliances and home furnishing lags behind that of catering, entertainment and other consumer goods. Whereas, the good news is that, through JD's years of building our multichannels and we have always delivered higher than industry performance. So with the economy recovery in the following quarters, we can see -- we expect that demand will come back on JD's platform.

Yes. And for the 3C and electronics category, it also belongs to the durable and the large ticket categories. So JD has a very strong mentality among our consumers. And we have also done innovative measures on the channels, on the services and continue to lead the market share. And we're see -- seeing that the Q4 market is getting better. And admittedly, for these 2 categories, it still takes some time waiting for more recovery of the market and it also depends on the confidence restoration from the factories and the manufacturers. When the confidence is back, I believe the recovery rate will bounce back quickly.

So I have a few words on our 20 -- 618 Grand Promotion. It is very critical and important event for us. And on one hand, we will use this opportunity to strengthen our collaborations with our brand partners. And for certain categories, they do face operating and inventory pressures. So we will leverage the 618 Grand Promotion to make more adjustments on the marketing and operations to conduct more innovations, to create a new high in terms of innovation and partnership.

[Interpreted] So just and one more observation on the 3C and electronic categories. We're seeing the sales in Q4 is picking up. So for those categories that JD has some strength on the market, we are confident to continue to lead the market and have the performance -- have outperformed the industry average in April.

The next question comes from Alicia Yap with Citigroup.

I'm going to ask English. And also congratulations to Sandy on your new role as CEO and also best wishes to Xiansheng. I have questions surrounding the categories core side and also competition. So while, I mean, I will - while I remain quite cautious, especially for the big ticket items like 3C but it's also things like the OEM and the hardware (inaudible) manufacturings are eager to destocking their existing models in preparation for the new models launch in the fall. So how will JD work with them to leverage the upcoming 618 promotion to stimulate the consumer purchasing sentiment? And do you anticipate competition in 3C and appliance to heat up or is JD seeing more competition headwind in the FMCG category? And lastly, can management elaborate on what is JD's next growth expansion story?

Thanks, Alicia. Well, the overall consumption might remain cautious, especially for large ticket size products like 3Cs and home appliance. However, we heard from the brands that all the OEM manufacturers that they are quite willing to provide attractive rebate or discount to boost their sales and also to try to sell through their existing inventory in order to prepare for the new models releasing in the second half year.

So if this is true and then JD will be -- there will be a great opportunity for us, given our stronger relationships, our stronger supply chain capabilities with the brands. And so -- and also, we heard that, in particular, for the brands of home appliances, they are all expecting positive sales growth for the year. In terms of the supermarkets, right? Competition, I would say our competitive advantages are very different from the other competitors.

Again, we are a supply chain-driven platform instead of a traffic-driven platform. So even though we are facing some short-term challenges because of our proactive business adjustment or our proactive channel or product mix adjustment, that I can see that our -- for few gross margin -- for many product categories are still improving. That means we have -- we will continue to gain operating efficiency well and set a competitive pricing in front of the consumers.

So the healthy business is still growing. And I'm pretty comfortable that after all the business adjustments are completed or absorbed this year, we will go back to our normal growth trend.

As we are now approaching the end of the conference call, I will turn the call over to JD.com's Sean Zhang for closing remarks. Please go ahead, sir.

Thank you. Thank you, everyone, for joining the call today and for your questions. If you have further questions, please contact me and our team. We appreciate your interest and support in JD.com and look forward to talking to you again next quarter. Thank you.

Thank you. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]