Alibaba (Stock: Baba) CEO Daniel Zhang and CFO - Investor Group Conference call on $2.8 B fine.

Today's conference call speakers are Daniel Zhang, Chairman and Chief Executive Officer; Joe Tsai, Executive Vice Chairman; and Maggie Wu, Chief Financial Officer. They will provide a brief opening statement, then we will open the line for a Q&A session. Today's conference call will be conducted in English and will be within 30 minutes. Now I'll pass the line to Joe.

Thank you, Rob. Thanks everyone for your time. Good to spend time with you. As you have seen, on April 10th, Alibaba Group received the administrative penalty decision issued by the State Administration for Market Regulation of the People's Republic of China. The State Administration for Market Regulation, which we refer to as SAMR, is the regulatory agency responsible for the administration and enforcement of the Anti-Monopoly Law of China, which we will refer to here as the AML. The penalty decision was the result of an investigation that was commenced in December 2020 relating to activities that would be prohibited under the AML, specifically under Article 17, Clause 4 of the AML: a business operator that has a dominant market position is prohibited from restricting business counterparties by requiring exclusive arrangements without justifiable cause. The penalty decision described the results of SAMR's investigation and concluded that Alibaba was in violation of Article 17, Clause 4 of the AML. As a result, under the remediation and penalty provisions of the AML, SAMR issued the following actions: Number one, Alibaba as a platform operator shall not restrict merchants from doing business or running promotions on competitor platforms. In this connection, SAMR provided administrative guidance for Alibaba to implement a comprehensive program of rectification, including strictly fulfilling our responsibility as a platform operator, strengthening our internal controls and compliance, upholding fair competition, and protecting the interests of our platform's consumers and merchants. The second action that SAMR imposed on Alibaba is a monetary penalty of RMB 18.2 billion, or approximately USD 2.8 billion. The penalty decision stated that this amount is based on applying a 4% rate to Alibaba Group's calendar 2019 revenues derived from China. To put this into perspective, under the AML, monetary penalties of up to 10% of revenues can be imposed at the discretion of the authorities. The amount of the penalty is less than 20% of the free cash flow of Alibaba Group in the latest 12 months. We will pay this penalty out of our available liquidity, which as of December 31, 2020 stood at approximately USD 70 billion in cash, cash equivalents, and short-term investments. In response to the penalty decision, we have publicly stated that we accept the penalty with sincerity and will ensure our compliance with determination. Thus, we do not plan to appeal the penalty decision. We have also said that to serve our responsibility to society, we will operate in accordance with law with utmost diligence, continue to strengthen our compliance systems, and build on growth through innovation. That's my prepared remark, and we will go straight to Q&A. Thank you.

Thank you, Joe. And now we're open for Q&A. Operator, as a reminder, to ask a question you will need to press star one on your telephone. To withdraw your question, please press the pound or hash key. Please stand by while we compile the Q&A roster.

Our first question comes from the line of Alex Yao from JPMorgan. Please ask your question. Good morning, so thank you for taking my question. My question is about the potential impact to GMV and merchant retention. Can you help us understand how do we think... Are you planning to do anything to incentivize providers and keep programs of merchants on Alibaba, for example, vegetable treatments on the commission rates or things like that? Thank you very much.

Okay, operator, next question.

Our next question comes from the line of Thomas Strong from Jefferies. Please ask your question. Hi, good morning. Thanks management for taking my questions. With regard to our letter to the customers, what measures are we taking to lower the cost of the merchants, and how should we think about the financial impacts? Thank you.

Yeah, Thomas, this is Maggie. Just to add to Daniel's point, I want to give a little bit more color on the financial impact of these initiatives. So like Daniel said, we're going to both reduce fees and charges to help merchants and, at the same time, also invest and spend more for them. So the impact will be reflected in both top line and bottom line. Overall, we have reserved billions of RMB in additional annual spending to support initiatives in the future. Thank you.

Okay, thank you. Thank you. Next question, please.

Our next question comes from the line of Bini Wong from HSBC. Please ask your question. Hi, good morning. Thank you management for taking my questions. So if you think about on the longer term, all these investments that you put in, in terms of when you think about how you translate it into your overall GMV growth, how should you think about the areas that you think that maybe the investments that you have, your investment priorities, into your new strategic investments, and also about your value that you're going to increase to your... going back to the earlier question in terms of how we're going to retain merchants, how we're going to retain the quality of merchants, you said the tools that you provide and balancing with your continuous investment in your new initiative. So your investment priorities here. Thank you.

Thank you. I just want to clarify, Daniel meant to say over 9,000 RMB spending per customer. Okay, thank you. Sorry, now just one quick follow-up here. Do you expect any further investigations or government proceedings on this matter? Should we think about this as coming to a conclusion, or do we anticipate any more on the industry perspective? Thank you.

I'm sorry, can you repeat your question?

Oh sorry, I'm sure it is about: do you expect any other investigations or government proceedings on this matter? Do you think this is maybe coming to a conclusion? Do we anticipate any more in terms of this type of proceedings on this matter? Thank you.

Right, thank you. Yeah, so the regulators have inquiries on mergers, acquisitions, and strategic investment transactions as part of their merger control review process. The entire industry, including several of our peer companies, are also subject to the same review. Other than the merger control review on investment transactions, we're not aware of any other investigations relating to the Anti-Monopoly Law.

Okay, thank you. Okay, so let's take the next question.

Our next question comes from the line of Alicia Yap from Citigroup. Please ask your question. Hi, um, thank you. Good morning, management. Thanks for taking my questions and thank you for doing the call. My question is: what are the specific requirements that you have to report to the regulators from time to time? I understand there will be a report after 15 days, and then how often would you require to submit the self-evaluation check? Thank you.

Okay, thank you. Okay, next question, please.

Our next question comes from the line of Rob Sanderson from Book Market. Please ask your question. Yes, thank you. Good morning, management, and thanks for doing this and for taking my question. So the letter calls this ruling an important action to safeguard fair market competition. It also points to an entirely new phase for internet platform economies and a new starting point for Alibaba. So the China internet landscape has always been under sound regulatory oversight and has always been highly competitive. So how would you encourage global investors to think about the regulatory environment and the competitive intensity in this new phase, not just for Alibaba but for the technology sector in general? And what should we expect this would mean or might mean or could possibly mean for equity valuations and opportunities for global investors on a go-forward basis? Thank you so much.

Sure, I'll take a stab at that question. First, I think this action is very clear, and the regulator's communication to the public is very clear that they are affirming our business model. There's this phrase called the platform economy, and our business model as a platform is actually fully endorsed and affirmed by the authorities. This kind of model is good for the growth of the country's economy and also helps promote innovation. So we feel very comfortable that there's nothing wrong with our business; the fundamental business model of a platform company is sound. These regulatory actions are undertaken to ensure fair competition in order to benefit the public, the consumers, the merchants, all the constituencies in a platform economy. So with this penalty decision, we have received good guidance on some of the specific issues under the Anti-Monopoly Law, and I would say that we are pleased that we're able to put this matter behind us. In terms of how global investors should view our industry as a whole and the regulations of the industry, number one, large-scale internet companies are doing a lot of good things for the economy, just helping grow the economy. In China specifically, the policy of focusing on digitizing the economy to lower the barriers for average citizens to access products and services is very clear, and we're playing in the middle of this, promoting that government policy. From a regulatory standpoint, every large-scale technology company will face scrutiny. In our case, we have experienced this scrutiny, and we're happy to get the matter behind us. But on a going-forward basis, globally the trend is that regulators will be more keen to look at some of the areas where you could have unfair competition. The good thing about this is that we have gone through this process with the regulators, we've gotten to know their thinking very well, it's a very healthy process, and we have a very established plan for correcting some of the practices. Also, we have established very good internal control and compliance systems to continue to comply with the law.

Okay, next question, please. Thank you, Joe, and good luck everyone. We'll take the next last question, please.

Certainly. Our last question comes from the line of Eddie Leung from Bank of America. Please ask your question. Good morning and good evening. Here's a follow-up question on antitrust policy. I think Joe, you mentioned that you are not aware of any more investigations. Just wondering if you have any thought on the potential regulatory measures in the area of data. I think the data regulation is also a very important topic. And then just a technical question, maybe for Maggie, which quarter we will make the expense provision, and will it be part of the operating expenses or below the operating line? Thank you.

Again, Daniel, I'll address the first question. If you have something to supplement as well, please feel free. I'll just say that in the area of data regulation, what we understand is that the regulators are focused on the issue of data privacy and how companies like ourselves have collected and also have large amounts of data, how we assure the public and our customers that data will be well protected. I think that's a global trend, and globally governments are now caring quite a bit about protecting their citizens when it comes to data privacy. Daniel, do you have anything to say on that?

Okay, thank you, Joe and Daniel. I think that's all the time we have for today. So I think that, Rob, maybe Maggie should answer this final tech question Eddie mentioned about accounting treatment.

Oh, the accounting treatment for the fine. Right, very fine. Yeah. So the 18.2 billion RMB fine will be reflected in the March quarter fiscal year 2021. This is our understanding and subject to verification by our auditors. It will be reflected in the GAAP net income but excluded from the non-GAAP net income. Thank you.

Okay, thank you, Maggie. So thank you everyone for joining today. If you have further questions, please feel free to reach out to the IR team of Alibaba Group.