JD.com Q1 2023 Earnings Call Transcript

There are 6 speakers on the call.

Operator

Hello and thank you for standing by for jd.com's First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After management's prepared remarks, there will be a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Operator

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.

Speaker 1

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.

Speaker 1

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.

Speaker 1

We'll 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'll discuss certain non GAAP financial measures. Please also refer to direct consideration of non GAAP measures 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.

Speaker 1

Xu, our CEO. Xu Long, please.

Speaker 2

Hello, everyone. This is Xu Lei. Thank you for joining jd.com's Q1 2023 earnings call. In the face of profound changes in external environment as 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 energy 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's challenging period.

Speaker 2

In 2023, with COVID in the past, the macro economy and consumption have started to pick up, but the organic forces driving consumption demand are not yet sufficient. We've seen different phases 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 progress we've achieved so far. First, we are refocusing on our corn 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.

Speaker 2

This includes optimizing our product mix and the 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 corn 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 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.

Speaker 2

This trend has continued to strengthen so far in Q2 As we see consumption progressively recovering. 2nd, 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 for the empowering frontline business team, after the adjustment, JD Retail, which has tens of thousands of employees, We 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 incentivize each business unit and give young talent more growth opportunities. This type of organizational structure It's an essential driving force for us as we embrace the post COVID era and pursue a new chapter of growth. 3rd, We are further enhancing our marketplace ecosystem and user experience.

Speaker 2

User forecast 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 account for a relatively small proportion of sellers on our platform. In terms of progress the merchant side, since the launch of our Spring Down program that includes a number of supporting measures for SMEs, We have accelerated the expansion of our merchant base.

Speaker 2

In particular, the number of third party merchants with recorded transaction So 20% sequential growth in Q1, among which merchants in the fashion, home goods and supermarket categories increased rapidly. Merchants remain motivated to allocate resources to our platform, thanks to our advantages in providing them with lower cost and On the user side, our main JD app maintained healthy traffic growth in this quarter In Q1, the number of repurchasing users and paid users of JD Retail experienced a rapid year on year growth Nearly 20% 30%, respectively, and their proportion of our total users continue to rise, leading to a higher frequency and ARPU in the quarter. In particular, the number of JD Plus members reached 35,000,000 by the end of Q1 and Plus members 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 current users, while at the same time addressing Diverse demands of new users.

Speaker 2

We still have a lot of upside in user acquisition. I hope my sharing today environment and embrace new opportunities in the post COVID era. While such adjustments will impact us for now, But we 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.

Speaker 2

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 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 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 important To have worked closely with Sandy for 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 MAX's CEO. I will also work together with her and do my best to ensure a seamless transition in

Speaker 3

the coming months. With that, I'll hand over to Sandy. Thank you, Shizong, and hello, everyone. It's a great honor to become the 3rd CEO of jd.com, and I deeply appreciate the trust from Richard Shizong and the Board. Richard and Shizong have set a strong foundation for our future endeavors, and they will continue to guide our long term I look forward to further driving the high quality and sustainable growth of the company and bringing more In the Q1 of 2023, we continued to build on our progress in business and organizational adjustment and began to see encouraging trends, including improved user engagement, as Qizong just shared, We rejuvenated 3P marketplace performance, improving NPS score and resilient profitability, among others.

Speaker 3

Also as elaborated by Zhizong, our ongoing business adjustment as well as the reorganization announced in April could result in moderate 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 an ever evolving business environment with adaptability, Strategic agility and resolve. 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 RMB243 1,000,000,000 in Q1 as we continued to focus on user quality and building deeper user engagement.

Speaker 3

We are encouraged to see that during the quarter, JD Retail LTM average GM per user Pensions of our core user base. Breaking down the revenue mix. Product revenues were down 4% year on year in Q1. I will discuss category performance shortly. Service revenues grew by 34% year on year in Q1, among which Marketplace and marketing revenues grew by 8% year on year.

Speaker 3

We are encouraged to see that 3P revenues Delivered robust momentum in the quarter, reaching the highest growth rate in the last four 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. City Retail experienced a soft revenue performance in Q1, while continuing to expand On both fulfilled gross margin and operating margin, as communicated before, the continuous improvement 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, City Retail recorded a 2% year on year decline in Q1.

Speaker 3

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 continued 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 offline channels. General merchandise revenues were down 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 Our emerging categories such as healthcare products and services, Apparils and Accessories delivered double digit top line growth in the quarter, demonstrating our broad based User mind share across categories.

Speaker 3

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 Nokan. JD Logistics growth rate was 7%.

Speaker 3

This is mainly attributable to the resilient growth in revenues from external customers, the proportion of which reached 69% in Q1. In terms of profitability, JBL'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 February, data reported revenues of RMB2.6 billion in Q1 and non GAAP operating loss of RMB217 1,000,000 in the quarter. Intra City On demand retail business remains as an important pillar for us, and we are glad to see that DDDJ and ShopNow Happy 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 intra city on demand retail business, ShopNow, maintained its robust momentum with year on year GMV growth rate of 60 in Q1. Finally, revenues from new businesses scaled back to RMB3.5 billion in Q1 As we continue to adjust the investment pace in both Jinsea 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.

Speaker 3

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 RMB7.6 billion non GAAP Net income attributable to ordinary shareholders in Q1 and non GAAP net margin arrived at 3.1%, up 144 basis points compared to a year ago. Finally, our IoT and free Cash flow as of Q1 was RMB19 1,000,000,000. This was mainly driven by the deferrable payment of accounts payables, The impact of which is exaggerated when sales growth rate moderates, a typical phenomenon for retailers.

Speaker 3

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 RMB203 1,000,000,000. During the quarter, we also did share buyback of RMB1.1 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 adjustment. To conclude my remarks, we ended Q1 with strong footing in improved operating efficiency and expanding profitability boding well for our proactive business reorganization.

Speaker 3

We are working to Profitable expansion and the market share gain in the long run, the same narrative of JD's development over the past 20 years. City has gone through many cycles and always emerged stronger. Thanks to our visionary moves and steady fast Execution. We will continue to commit ourselves to the 3 key sense of retail, User experience, cost and efficiency and to 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 and A.

Speaker 3

Thank you.

Speaker 1

Thank you, Sandy. For the current session, analysts are welcome to ask questions in Chinese or English, And our management will answer your question in the language you ask. We'll provide English translation when necessary and for convenient purpose only.

Operator

The question and answer session of this conference will start in a moment. In order to be fair to all callers who wish to ask questions, We will take one question at a time from each caller. If you have more than one question, we request you to please join the question queue again After your first question has been addressed. Please pick up the handset to ask your question. The first question comes from Thomas Chong with Jefferies.

Operator

Please go ahead.

Speaker 4

Yes. Thanks management for taking my questions. My first question is about recent organizational assessment. 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.

Speaker 4

Can management share about from the perspective of user growth,

Speaker 2

Thank you for your question. This is Sandy. Let me answer the question about the Organization restructuring, as you might notice 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.

Speaker 2

Former leaders of business groups will now act as leaders of business departments and the business departments that used to oversee various 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 interest with those

Operator

of investors.

Speaker 2

This is Xu Lei. I would add a few words regarding my role change. So Sandy, she will be the 3rd CEO of JD.com. She is no stranger to our investors In the past nearly 5 years, Sunny and I have been working closely from JD Retail's business to the group level. Some of you might recall, in 2018, it's only because my close teamwork with Sandy That made it possible for us to ride through this so called darkest moment.

Speaker 2

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 the CEO 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 16 years ago when I first became the company's external advisor in 2007. And in the future, I will also continue to be to become the 1st Chairman of JD's Advisory Council, and My support to JD will be a lifetime commitment. I just changed the perspective and position, But I will always support JD whenever she whenever the company needs, and this is also a very meaningful and Privilege being for me and thank you.

Speaker 2

So thank you, Mr. Xu Lei. He has made great And I would also take this opportunity to emphasize on our strategies, which will remain unchanged in the long term and we'll continue to focus on our business philosophies, to focus on our cost efficiency and user experience Continue to focus on our lower tier markets to build open ecosystem and on demand omni channel retail And by leveraging the economies of scale and our operating efficiencies, we will continue to diversify our So let me answer your questions about Our discount 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 RMB10 1,000,000,000 subsidy program, low cost and free shipping, Flash sale and work 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 eco system 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.

Speaker 2

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 on everyday low price and returning to the essence of retail. This will also help stabilize The whole industry's supply chain operation 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.

Speaker 2

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 have limited impact on our margins. Thank you.

Speaker 1

Yes. Thank you. Next question please, operator.

Operator

Thank you. The next question comes from Ronald Keung with Goldman Sachs. Please go ahead.

Speaker 2

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 3rd 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 3 piece comps relatively lower. In terms of Thus, our organizational 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 be centered on our customers.

Speaker 2

So any model that better satisfies consumers' diversified demand should be offered to them and it will also attract users to make purchases. JD platform offers both 1P and 3P models to serve consumers We should always give the decision making rights to the consumers. And one of our unique advantage is that these two models are actually complementary to each other. So for several categories, JD's self operated model is highly competitive. For example, high ticket sized products, We need to enrich our supply side through the marketplace business model.

Speaker 2

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 our supermarket categories will remain JD's most important growth driver and return to a healthier growth trajectory in the long term.

Speaker 1

Thank you. Operator, next question.

Operator

Thank you, Ron. Thank you. The next question comes from Eddie Wang with Morgan Stanley. Please go ahead.

Speaker 2

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 Soft consumption demand and the real estate industry. So the recovery of durable goods consumption such as Household appliances and home furnishing lagged behind that of catering, entertainment and other consumer goods, whereas the good news is that through JD's Years of building our multi channels and we have always delivered a higher than industry performance. So with the economy recovery in the following quarters, we can see we expect the demand We'll come back on JD's platform.

Speaker 2

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 customers and we have also done innovative measures on the channels, And services and continue to lead the market share and we're seeing that the Q4 market is getting better. And admittedly, for these two 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, one, the confidence is that I believe the recovery will bounce back quickly. So I have few words on our 20 618 grand promotion, it is a very critical and important event for us.

Speaker 2

And on one hand, we will use this opportunity to strengthen our collaborations So we will leverage the 618 grant promotions to make more adjustments on the marketing and operations to conduct more innovations to create a new high in terms of innovation and partnership. So just one more observation on the 3C and Electronic categories, we're seeing the sales in Q4 is picking up. So for those Thank you.

Operator

Thank you. The next question comes from Alicia Yap with Citigroup. Please go ahead.

Speaker 5

Hi, thank you. I'm going to ask English. Good evening, management. Thanks for taking my questions. And also congratulations to Sandy on your new role as CEO and also best wishes I have questions surrounding the categories growth and also competition.

Speaker 5

So while I mean, overall, I remain quite cautious, especially for the big ticket items like 3C, but it also seems like the OEM And the hardware handphone manufacturers 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. Thank you.

Speaker 3

Thanks, Alicia. Well, The overall consumption might remain cautious, especially for large TK size products like 3 seats and home appliance. However, we heard from the brands that all the OEM manufacturers that they are quite willing to provide 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 also, we heard that in particular for the brands of Home Appliance, they are all expecting positive sales growth for the year.

Speaker 3

In terms of

Speaker 2

the supermarket, right? Competition. Competition, I would say

Speaker 3

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 proactive channel or product mix adjustment, but I can see that our fulfilled gross margin For many product categories are still improving. That means we have We will continue to gain operating efficiency, well, such competitive pricing in front of the consumers. So the healthy business is still growing.

Speaker 3

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.

Operator

Thank you.

Speaker 5

Thank you.

Operator

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.

Speaker 1

Thank you. Thank you, everyone, for joining the call today and for your questions. 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.

Operator

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

Earnings Conference Call
JD.com Q1 2023
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