JD.com, Inc.

Hello, and thank you for standing by for JD.com's first quarter 2020 earnings 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. Today's conference has been 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, Ruiyu Li. Thank you. Please go ahead.

Thanks to all the winners, and welcome to our First Caller 2020 Earnings Conference call. Joining us today on the call are Mr. Richard Wills, CEO of Genie.com, Mr. Lei Xu, CEO of Genie Details, and Mr. Yuzhou Wang, CEO of Genie Logistics, Sun Yifang, our CFO, and Professor Mao, our CFO. For today's agenda, Sun Yifang will discuss highlights from the First Caller of 2020, and other management will join the Q&A section. Before we continue, I refer you to our state-covered statement in the Earnings Facility, which applies to this call, as we will make forward-looking statements. Also, this call includes discussions on second-round tax financial matters. This refers to our earnings review, which contains a compilation of market matters to the most direct, comparable gas matters. Finally, take note. I would like to otherwise state that all the speakers mentioned during this conference were from R&RB. Now I would like to turn the call over to our executive officer.

Thank you, Ruiyu. Hello, everyone. Thank you for joining us today. 2020 has been an unprecedented year for all of us. As we mentioned on our last earnings call, JD.com and its heroic 200,000 strong frontline employees have been a unique force in supporting the livelihood of hundreds of millions of consumers, helping them to adapt to a new normal under the social distancing measures, and making notable contributions to productive and sustainable societies throughout the COVID-19 crisis. In that process, we also navigated through all the operational difficulties and disruptions resulted from the COVID-19 outbreak and delivered a solid set of financials for our shareholders in the first quarter of 2020. We accomplished many impossible missions by leveraging our unparalleled supply chain and logistics capabilities that were invested over the past 15 years, as well as a strong corporate culture that cares deeply about our frontline employees, who in turn take great care of our valued customers. Our net revenues grew by 20.7% in the first quarter, ahead of our internal expectations, as we ensured the supply and fulfillment of essential products to our consumers amid this tough environment. The strong top line growth was accompanied by even stronger user engagement. Our active customers in the past 12 months reached a total of 387 million, up 25% from a year ago, the highest growth rate in eight quarters, with 25 million net additional customers on top of an already strong peak season net addition in the December quarter. Similar to Q4 last year, over 70% of new customers in Q1 came from lower tier cities. The lower tier city customers contributed over 50% of our fulfilled GMV in Q1, which sets a new record. In the meantime, our mobile DAU grew 46% in Q1, the fastest in nine quarters. The level of user activity on our platform, notably accelerated as we earned a greater consumer mind share by being the only fully functioning e-commerce platform with diverse product offerings and superior logistics services immediately after the outbreak. This is further evidenced by our number one internal KPI, the Net Promoter Score, which reached all-time highs across all of our core businesses. Category-wise, revenue growth of general merchandise accelerated to 38%, the highest growth rate for the past six quarters, driven by our newly integrated omni-channel supermarket business group, growing 47% in the first quarter, as well as strong performance from healthcare, cosmetics, and household product categories. Our omni-channel supermarket group basically combines our FMCG fresh produce, seven fresh and convenience store business units, most of which were launched and developed from zero in the past six years. By 2019, the revenues of this group reached over 115 billion RMB, roughly 20% higher and the revenues of the largest offline supermarket chain in China, making us the largest retailer for this category in the country. If you consider the fact that most offline supermarkets also sell home products and appliances, our leadership gap will be even wider. In addition, our JV Health business unit is also gaining consumer mindshare. with quarterly active customers for medicine categories increased by triple digits. Net revenues from JD Health increased 65% year on year in the first quarter, surpassing the revenues of the largest offline pharmacy in China. As I have communicated with many of you probably every time we spoke in the past, we will secure market leadership across most of our core categories. One by one. And these are just two notable examples, while a few others are hidden champions. I'm thrilled that we have achieved quite a few of these milestones before my retirement. It's just a matter of time, and the snowball will continue to grow. For now, our general merchandise sales in Q1 contributed more than 40% of our product revenues for the first time and further strengthened our brand recognition and consumer perception as an everything store with increasingly broader selections. On the other hand, the electronics and home appliance categories also performed extraordinarily well on a relative basis, growing nearly 10% as compared to a nationwide decline of 21% in the first quarter, according to the government data. As we discussed many times in the past, Our electronics and home appliance categories can always outperform because our cost structure is 50% lower than our peers, which allows us to provide the best value and best service to the consumers. Another remarkably resilient metric is our fulfilled gross margin, which stood at 8.3% in Q1, comparable to the same quarter last year. These are a few moving pieces in this metric. But essentially, the lower fulfilled growth margin of the omni-channel supermarket business was substantially offset by the incremental gains from procurement economies of scale across all categories, particularly those with the market leadership positions. To a lesser extent, it also benefited from less subsidies used for traffic generation to cultivate consumer habit for online grocery shopping, which has probably leapfrogged for one to two years in the past three months. As a result, we are approaching the inflection point of the supermarket business ahead of our original schedule. Another positive contribution to the fulfilled growth margin was from JD Logistics, where the productivity gains from higher than expected orders More than offset the additional costs from the operational disruptions, higher wages, and staff protective measures. If you look around today, you can probably identify a clear pattern. Those who treat their employees well in the normal time are the most resilient in the time of turbulence. Besides the fulfillment expenses, all other expense ratios declined due to our more disciplined spending amid uncertainties during Q1. Our marketing, R&D, and G&A expense ratios in the first quarter improved 20, 38, and 13 basis points respectively compared to the same quarter last year. As a result, our non-GAAP operating income increased 65% to 3.3 billion RMB and the Nungap operating margin was 2.2%, up 60 basis points from the same quarter last year. On the segment basis, Nungap operating income of JD Retail Group increased by 39% to 4.5 billion RMB in Q1, with operating margin improving to 3.2%, up 44 basis points from the same quarter last year. While the margin improvement may surprise some, it is because we have been investing for the newer categories and never tried to optimize our margin. As I mentioned to many of you in the past, the relatively decent margin business had already been there for quite some time. In this quarter, we just narrowed the loss margin ahead of schedule for certain categories that are under the investment phase. Moving to the bottom line, our non-GAAP net income attributable to ordinary shareholders in Q1 was 3 billion RMB compared to 3.3 billion RMB in the same period last year. The decrease was primarily due to certain one-off gains in Q1 last year. Our free cash flow for the first quarter was negative 3 billion RMB, partly due to our early payments or prepayments to certain suppliers to support their operations and secure certain sought-after merchandise. CapEx was prudent in Q1, and the spending for the development properties was for the existing project. As disclosed, we established a second core fund with GIC in Q1 to dispose another 4.6 billion RMB of logistics assets, which remain the most resilient real estate asset class regardless of the COVID-19 situation. On the financial outlook, we expect net revenue growth in the second quarter to be between 20% and 30% on a year-over-year basis based on the accelerating growth in the first half of Q2 and assuming the COVID-19 situation does not create significant unexpected disruptions in the remainder of this quarter. We are not in a position to provide any full-year guidance on the bottom line, Due to the uncertainties of the pandemic. However, the modern dynamics in our Q1 results may provide some basis for your own assessment on the various development scenarios of the COVID-19. In summary, we are privileged to be in a unique position to leverage on the best of our capabilities to help the society during the COVID-19 outbreak including our broad product selection in consumer staple categories and our superior logistics infrastructure. We're confident that we'll emerge stronger on the other end with accelerated user growth, strengthened brand image, and expanded consumer mindshare. All of these validate our long-term approach to running our business with a customer-centric focus. I'm more confident than ever about our market position and our MIT to long-term growth prospects. This concludes my prepared remarks and we can now move to the Q&A session. Operator?