JD.com, Inc. (NASDAQ:JD) Q2 2019 Earnings Conference Call - Final Transcript

Aug 13, 2019 • 07:30 am ET

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JD.com, Inc. (NASDAQ:JD) Q2 2019 Earnings Conference Call - Final Transcript

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Executive
Sidney Xuande Huang

third-party logistics business saw its gross margin further improve and as Richard mentioned also reached past the breakeven point on the non-GAAP operating income level in the second quarter. By the same token our fulfillment efficiency was benefited as well. During the second quarter, fulfillment expense ratio was 6.1%, the lowest level in our history as a public company since the second quarter of 2014. As Richard mentioned, our fulfillment expense ratio first began to rise in 2014 as we started to expand our logistics network into the lower-tier cities, creating short-term headwinds on our fulfillment expenses.

In 2015, we expanded aggressively into the FMCG categories where the average basket size was much smaller than our average order size at the time, creating further short-term headwinds on our fulfillment expense ratio. We then began expanding our capacity and service offerings in 2017 to drive scale while serving external business customers, which created an additional short-term increase in our fulfillment expense ratio. Now, five years later, when all the dust finally settled down, we emerged as a much stronger and a more efficient, modern logistics operator that can fulfill six and a half times more daily orders than five years ago.

The greater scale, coupled with sophisticated supply chain technologies, have brought operating leverage even as we fulfilled more and more small orders, further enhancing our structural advantage over our major retail peers and bringing more quality to our core economic level. Our marketing expense ratio was 3.7% in the second quarter, reduced from 4.3% in the same quarter last year, mainly due to our redesigned marketing strategy and innovative marketing tools with better position and ROI. Our R&D expense ratio was 2.5%, up from 2.3% in the same quarter last year. The R&D expense amount, on the other hand, has stabilized sequentially from the last quarter as the key talent and IT infrastructure are largely in place.

G&A expense ratio also improved to 2.9% in the second quarter, down from 1.1% in the same period last year. As a result, we achieved another record in both GAAP and non-GAAP operating income in the second quarter with the operating margins improving 2.4% and two percentage points, respectively, from the same quarter a year ago. The significant margin expansion was supported by three key elements; one, JD Retail's gross margin expansion; two, effective marketing programs with better ROI; and three, significant improvement in JD Logistics' operating efficiency, which improved both its third-party operating margin and JD Retail's fulfillment expense ratio. Our GAAP income attributable to ordinary shareholders in the second quarter also set a new record at RMB3.6 billion with a 2.4% net margin, up from 0.4% in the same period last year.

Our free cash flow improved 39% year-over-year to RMB18.3 billion during the quarter, driven by a healthy operating profit in a seasonally strong quarter for cash flow. Now that the one-time impact of the marketplace settlement change has phased out for four quarters, our free cash flow for the