JD.com, Inc.

Hello and thank you for standing by for Jayden.com's third quarter 2020 earnings conference call. And at this time, all participants are in listen-only mode. After the fair management's third remarks, there will be a question and answer session. And today's conference is being recorded. If you have any objection, you may disconnect at this time. And I'd like to turn the meeting over to your host for today's conference, Ruiyu Li. Please go ahead.

Thank you, operator, and welcome to our sub-quarter 2020 earnings conference call. Joining me today on the call are Mr. Lei Xu, CEO of JD Retail, Mr. Zheng Huiwang, CEO of JD Logistics, Sandy Xu, our CFO, and Professor Liang, our CSO. For today's agenda, Sandy will discuss highlights for the sub-quarter 2020, and other management will join the QA session. Before we continue, I refer you to our safe harbor statement in the earnings press release, which applies to this earnings call, as we will make forward-looking statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most direct comparable GAAP measures. Finally, please note that, unless otherwise stated, all figures mentioned during this conference call are in RMB. Now, I would like to turn the call over to our CFO, Sandy.

Thanks, Shuyu. Hello, everyone. Thank you for joining our earnings call today. We are pleased to report a strong set of financial results for the third quarter of 2020. We delivered a solid performance in a seasonally light quarter and set new records for funding operating and financial metrics. JD leads by example in contributing to the society and supporting the recovery of real economy. We have opened up our retail ecosystem, our self-built supply chain infrastructure, and Technology Capacity to empower our suppliers, our merchants and our business partners. We run our business with a long-term philosophy and pursue long-term sustainable growth. Our mission is to improve operating efficiency for the supply chain through technology innovations and we share growth opportunities and economic benefit with our staff, business partners and society. Our unwavering effort in supporting society and our users continue to gain positive recognition and win trust from more and more consumers. This has been reflected in our solid growth of active users and improvement in user engagement across different tiers of cities. Our annual active customers in the past 12 months reached 442 million, adding more than 100 million customers, up 32% from a year ago, the highest growth rate in the past three years. We obtained more than 24 million net additional customers Compared to last quarter, the largest expansion in the seasonally light September quarters in our history. This, once again, validates our long-term operating philosophy to run our business with a customer-centric focus. We continue to generate traction in the lower tier cities, which contributed about 80% of our new users this quarter. We are also inspired by the further enhanced consumer loyalty and engagement of our core users, who appreciate the consistency of products and service quality we deliver every day. Our core users are buying products from more categories from us and more frequently. We have become a part of many users' daily lives. It's worth highlighting that our JDplus members exceeded 20 million in October, an important milestone for our paid membership program. JDplus was the first paid e-commerce membership program in China, designed to better serve our core users. Besides the benefits offered on JDapp, such as shopping rebates and free shipping coupons, JDplus has partnered with over 600 industry leading brands to provide our members with comprehensive privileges in sectors such as movie tickets, travel, hotel bookings, fitness, education, dining and entertainment. Our data shows that JDplus has effectively improved the engagement and retention of our core users. As our Plus members shop more frequently with an APU, average revenue per user, that is multiple times higher than that of non-Plus members. By integrating with the resources of our brand partners, DD Plus has also created an industry benchmark in the paid e-commerce membership. Our Q3 financial results largely reflect our quality user growth with enhanced user engagement. We reported net revenues of RMB 134 billion for the third quarter, a year-over-year growth of 29.2%, maintaining strong growth momentum even on the back of Q2 peak season and over last year's high base. General merchandise revenues grew by 35% year over year, led by the supermarket and healthcare categories. Net service revenues grew 43% year over year, led by the accelerated growth of JD Logistics and strong performance of our advertising business. Our net service revenues contributed to over 13% of total net revenues. making another historical record. As the economy gradually returns to normal from the peak of COVID-19 outbreak, JD Logistics continued to gain trust from its business partners and delivered an accelerated revenue growth. Besides our solid user and top-line growth, there are few notable operating and financial performances we want to highlight. First, JD Retail's operating margin reached 3.9% in Q3, a record in our history, and an improvement of 56 basis points compared to the same quarter last year. What's notable is that our operating efficiency continues to improve even as our product mix shifts from the large ticket size but low frequency categories. such as 3C and home appliance to the small TT size but high frequency consumer staple categories. Order volume for the supermarket categories grew by over 48% year over year in Q3. Another key metric illustrating our operating efficiency improvement is our inventory turnover days, which further reduced to 34.3 days in the last 12 months. This is one of the lowest among the top global retailers and our own historical records. Despite the total number of SKUs managed by us continue to increase with our category expansion. Once again, this validates the power of our scale-driven business model and our long-term margin trajectory. Secondly, our 3C and home appliance categories continue to outperform the industry tremendously, and we continue to gain market share. Our unparalleled supply chain capabilities better position us, in particular amid the absence of new flagship products from the leading electronic plants, starting Q3. As we mentioned before, our 3C and home appliance categories have significant operating and cost structure advantages over our peers, enabling us to provide the best value and service to consumers. We continue to expand our supply chain capability further increasing, bringing more customized products to different consumers, and create value for our business partners. Thirdly, JD Logistics is another prominent example of our long-term investment in user-centric experience and supply chain infrastructure. Since we opened our service to third parties in 2017, JD Logistics has made notable progress in providing its customers with integrated logistics services to improve their warehouse management and fulfillment efficiency. As JD Logistics gains more customer recognition, revenue generated from third-party customers contributed nearly half of JD Logistics' total revenues in September. JD Logistics also supports the growth of our 3P merchants on our e-commerce platform. Products marked as delivered by JD Logistics come with more trustworthy and more reliable services and therefore are often the preferred shopping choices of customers and help generate more organic traffic. Moving down the line, our fulfilled gross margin improved to 8.7% this quarter compared to 8.4% in Q3 last year. This was mainly driven by the margin improvement of JD Retail and JD Logistics. With our continuous improvement in operating efficiency, our marketing, R&D, and G&A expense ratios in the third quarter improved across the board by 16 basis points, 30 basis points, and eight basis points respectively. compared to the same quarter last year. As a result, our non-GAAP operating income grew 77%, 5.3 billion RMB, and non-GAAP operating margin was 3%, up 82 basis points from the same quarter last year, the highest level in our history. Moving to the bottom line, Our non-GAAP net income attributable to ordinary shareholders in Q3 grew at 80% year-over-year to 5.6 billion RMB from 3.1 billion RMB in the same period last year. Non-GAAP net margin was 3.2%, up 90 basis points from a year ago and again a historical record. Excluding the temporary relief of the social security benefit, the margin improvements we recorded in the first three quarters have clearly demonstrated the snowball effect that we continue to generate with our scale-driven business model. With our healthy profitability as a basis, we plan to invest in fast-growing businesses, specifically The supermarket category is a key growth area that we are very committed to continuing our investment to further strengthen our consumer man-share and market leadership. As our online B2C supermarket operation continues to generate growth momentum, we have been exploring various new business models in different markets to better capture the growth opportunity in this category. Our aim is always to better serve the diverse needs of our customers with quality products and services. Logistics infrastructure is another strategic area we will continue to invest in to expand our integrated service capacity for the long-term growth. We will also continue to invest in our users and our people. All of these investments truly reflect our long-term operating philosophy. Free cash flow for the quarter improved to 7.5 billion RMB as compared to 63 million RMB in the same quarter last year. Free cash flow for the last 12 months reached over 30 billion RMB, grew by 93% year over year. As of September 30, 2020, Cash and cash equivalents, restricted cash, and short-term investments added up a total of 127 billion RMB. We have a strong liquidity position. In conclusion, JD showed remarkable resilience again in Q3 as China emerges from the pandemic. We delivered both robust top-line growth and year-over-year improvement of profitability while investing in our capabilities in strategic areas. It's quite clear that these achievements were driven by our unique business model and operating philosophy. But more importantly, JB's resilience is underpinned by our relentless focus on offering true value for our consumers. and unreserved empowerment of our business partners through our technology and infrastructure. Many users are still shifting from offline to online and the e-commerce penetration is re-accelerating in many categories. JD is well prepared to capture the secular trend and we will continue to invest for the long term. This concludes my prepared remarks. Let's open the call for questions. Thank you.