Alibaba Group Holding Limited

Ladies and gentlemen, thank you for standing by. Welcome to Alibaba Group's March quarter 2022 and full fiscal year 2022 results 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. I would now like to turn the call over to Rob Lynn, head of investor relations of Alibaba Group. Please go ahead.

Good day, everyone, and welcome to Alibaba Group's March quarter 2022 and full fiscal year 2022 results conference call. With us today are Daniel Zhang, Chairman and CEO, Joe Tsai, Executive Vice Chairman, Toby Xu, Chief Financial Officer. This call is also being webcasted from the IR section of our corporate website. A replay of the call will be available on our website later today. Now, let me quickly cover the safe harbor. Today's discussion may contain forward-looking statements. Forward-looking statements involve inherent risks and uncertainties that may cause... When the right moment comes, you better not miss.

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actual results to differ materially from our current expectations. For detailed discussion of the risks and uncertainties, please refer to our latest annual report on Form 20-F and other documents filed with the U.S. SEC or announced on the website of the Hong Kong Stock Exchange. Any forward-looking statements that we make on this call are based on assumptions as of today, and we do not undertake any obligation to update these statements except as required under applicable law. Please note that certain financial measures that we are using on this call, such as adjusted EBITDA, adjusted EBITDA margin, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income, non-GAAP diluted earnings per share, ADS, and free cash flow, are expressed on a non-GAAP basis. Our GAAP results and reconciliation of GAAP to non-GAAP measures can be found in our earnings press release. Unless otherwise stated, growth rate of all stated metrics mentioned during this call refer to year-over-year growth versus the same quarter last year. In addition, during today's call, management will give their prepared remarks in English. A third-party translator will provide simultaneous Chinese translation on another conference line. Please refer to our press release for details. During the Q&A session, we will take questions in both English and Chinese, and a third-party translator will provide consecutive translation. All translations are for convenience purpose only. In the case of any discrepancy, management statement in the original language will prevail. With that, I will now turn to Daniel. Thank you, Rob.

Hello, everyone. Thank you for joining our earnings call today. We completed a solid fiscal year amidst the macroeconomic challenges in China due to the resurgence of COVID and tremendous uncertainties in the global geopolitical landscape. During the fiscal year, we achieved the target of 1 billion AACs in China with annual net increase of 113 million. Globally, we reached 1.31 billion AACs with annual net increase of 177 million. And we achieved a total GMV of 8.3 trillion RMB with close to 8 trillion RMB in China and 341 billion RMB outside of China. Our cloud computing business completed its first profitable fiscal year while maintaining market leadership in China. Now, I would like to share a bit more about the latest situation in China with the recent resurgence of COVID. As you all know, Omicron started to spread in China in March and has impacted several major consumption and manufacturing centers, such as Pearl River Delta, including Shenzhen, the Yangtze River Delta, including Shanghai and Beijing. During the second half of April, over 80 cities in China reported confirmed COVID cases, and most are national economic centers. Such widespread impact has brought significant uncertainties to the China economy. We saw the national retail sales reporting negative year over year growth in March and April, and online sales of physical goods also reported a historical decline year over year. The resurgence of COVID has also impacted our business to varying degrees. Overall speaking, we saw a low single-digit decline in revenue growth in April compared to the same period last year. Online physical goods GMV of our China retail marketplaces, excluding unpaid orders, saw a year-over-year decline in the low-teens percentage in April. To give you a sense of the scope of impact, based on our consumer address, Cities with new COVID cases in April represented more than half of our China retail marketplaces' GNV. These cities also included major merchant hubs such as Shanghai, Shenzhen, and their nearby cities, where supply chain and logistics disruptions have resulted in widespread impacts.

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During the same period, while our user traffic and engagement have remained resilient, patterns of consumption across categories on our platforms have shifted. Fashions and electronics consumption decreased. Demand for essential supplies such as food and FMCG products increased significantly, with more consumers stockpiling at home. Emerging categories such as healthcare, active wear, and outdoor products also grow rapidly. We have seen a major recovery in local logistics capacity compared to April. We believe operating stability and sustainability during this period is the primary concern of all businesses. Ensuring stability of supply chain and logistics aimed at the uncertainties is the best way to improve consumption sentiment and foster a more positive environment for business operations. We are also facing uncertainties in the macro environment outside of China. During the quarter, the status order growth slowed down to 32% year-over-year as offline consumption gradually recovered post-pandemic in Southeast Asia. With Malaysia, Vietnam, and Thailand achieved higher than regional average order growth rates. Trendio continued its market leadership in Turkey with quarterly order volume growing by 48% year-over-year. The order volume of AliExpress decreased year-over-year this quarter, mainly due to the impact of European Union's policy change in VAT exemption. recovery of local supply chain and offline consumption post-pandemic as well as international logistics disruptions due to the regional conflict. Despite geopolitical conflicts and uncertainties, we will continue efforts to develop our globalization strategy in consumption. We will serve international consumers through a combination of cross-border and local commerce models. and proactively invest in our global logistics networks as part of our overseas digital commerce infrastructure buildup. Facing the challenges of geopolitical and macroeconomic uncertainties, many companies started to focus on high-quality growth with cost control and loss cutting. For Alibaba, high-quality growth has been a principle for years, especially during the pandemic. We see the benefits of a solid foundation that we have built over time carrying out this principle. Number one, the high quality consumer that we serve. Number two, the high quality infrastructure we are building for digital commerce. And number three, the high quality technology innovations that drive the vast potential of our cloud computing business. I will elaborate more in the following sections. First of all, the high quality consumer base. We serve the largest and the highest quality consumer base in China by Taobao and Tmall. Among our 1 billion AACs in China, 124 million consumers spend more than 10,000 RMB annually on Taobao and Tmall, and 98% of those consumers continue to stay active in the following years. Looking ahead, we will continue to strengthen our comprehensive consumer application portfolio with clearly differentiated user value propositions and address the diversified needs of different consumer segments in accordance with their consumption power and mindset, especially those of our core customers. What does it mean? In pre-purchase stage, it means establish a clear consumer mindset, stimulating consumer interest through increasing user engagement and time spent on consumption-related contents, and influencing consumer decision. In post-purchase stage, it means an enhanced fulfillment and customer service experience. I believe this is a winning formula for earning consumer mindshare and wallet share in a highly competitive landscape. Secondly, the high quality infrastructure for digital commerce. Over the years, Alibaba has established a comprehensive infrastructure for digital commerce based on a hybrid model combining intercity and intra-city fulfillment. Through digital user outreach, effective organization of product and services supply, as well as fulfillment service capabilities covering cities and communities, Our infrastructure has become an important way for consumers to obtain daily necessities during the pandemic. In particular, over the last few years, we have created our location-based commerce business by building core capabilities in supply chain and fulfillment and online-offline integrated distribution networks on top of a pre-existing marketplace model. Based on our data in March and April, an average order value of customers in our location-based commerce business has increased significantly as consumers in COVID-affected areas rushed to stock up. As a result, while our order volumes were negatively impacted by the fulfillment capacity constraint during the pandemic, GMV of these location-based commerce business have shown robust young year growth. Taking Shanghai as an example, while Olima's food delivery business has been significantly impacted, deliveries of retail categories have grown rapidly. In particular, demands for groceries and pharmaceuticals are extremely strong, with young year growth above 100%. As Erlangma continued to enhance its operations and reduce unique logistic cost, its unique economics also improved significantly to almost break even during the quarter. Our infrastructure is playing an important role during the pandemic. For example, our different businesses, including Fisherpool, Tao Xian Da, Timo Supermarket, Erlangma, et cetera, are providing essential supplies in cities impacted by COVID in China. Through these efforts, we hope to integrate business capabilities with social responsibility, leveraging the power of digital commerce and technology in the fight against COVID, and providing essential supply support for local communities. Let me name a few examples. Sunart, and other business units supported the supply and delivery of essentials to the residents by dispatching thousands of couriers and frontline workers from various regions in China to Shanghai. Ulema delivered more than 2.5 million pharmaceutical medicine orders to homes in Shanghai in April 2022. It also launched emergency delivery services for vulnerable groups in the city and addresses nearly 70,000 emergency requests during the month.

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Tanya Logistics build an emergency logistics system that encompasses disaster preparedness management, emergency transportation, transit, and distribution to deal with contingencies. AMAP, our map navigation tool, launched the map of PCR test sites, which cover more than 350 cities in China by mid-May. Users can easily search for locations and opening hours of nearby test sites. Taobao and Tmall have launched a series of targeted relief measures that would help merchants in Shanghai and those participating in our June 18 shopping festival to ease their cash flow pressure, reduce operating costs, and speed up the consumption or resumption of work and production to the largest extent possible. Thirdly, the high-quality technology innovations that drive the vast potential of our cloud computing business. Alibaba Cloud's competitive advantage is its world-class perpetual technology and products that support the highly demanding and complex business across Alibaba Group, while serving customers across a wide range, a wide variety of vertical globally. In fiscal year 2022, Alibaba Cloud continues to be the leader in terms of market share in China and achieved a full year probability for the first time. Its GAAP revenue reached 74.6 billion RMB during the year with 23% year-on-year growth. Before intersegment elimination, cloud revenue for the fiscal year has exceeded 100 billion RMB. During the past quarter, Alibaba Cloud's revenue increased by 12% year-on-year. The growth deceleration was a result of several factors. including the decline in corporate activities and a delay in project delivery due to the impact of COVID restrictions, slowdown in the growth of internet industry customers, and the gradual termination of contracts by a top customer for our public cloud services outside of China. We believe these impacts are temporary. While China's internet industry customers show a deceleration in cloud service demand as the entire sector faced a challenge of growth ceiling in user traffic and time spent. Digitalization of other industries is just starting, and we see plenty of opportunities. Cloud computing and data intelligence services are fundamental to every business in every sector undergoing digital transformation. According to the industry estimates, China's cloud market size will reach 1 trillion RMB by 2025. Alibaba Cloud will continue to elevate its core technology and products to maintain its leadership in its highly potential market. The cumulative results of Alibaba's strong management and operations over the years has produced a high-quality customer base, a sophisticated digital commerce infrastructure, and world-class technology innovation. We also have a multi-engine growth strategy, robust financial conditions, and a profitable business and a strong cash flow. These provide important assurance in the face of a macro uncertainty, and more importantly, a source of confidence as we continue to pursue healthy and sustainable development for the future. In the new fiscal year, we will focus even more on cost control and continue to improve our operating efficiency. This includes streamline unprofitable businesses, improving cash cycles, and enhancing investment efficiency in personnel, fixed assets, and other areas to maintain financial flexibility amidst uncertainties. Recently, the Chinese government has released important policy signals on its commitment to stabilize the economy and the job market in response to COVID impacts. They have also issued clear statements on promoting the development of internet platform economy through a healthy regulatory environment. Yesterday, the State Council held a national meeting to mobilize the implementation of several economic policies. As one of the representative companies of China Internet Platform Economy, Alibaba is committed to supporting China's development through the combination of technology innovation and commercial innovation. We aim to serve Chinese consumers' pursuit for a better life as well as the digital transformation needs of different industries.

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We also will be on the front lines in the fight against COVID and ensuring the availability of food and other essential supplies to community in need. We look forward to the introduction and implementation of policies that will enable the internet platform companies to contribute more towards stabilizing the market, creating jobs, and furthering high-quality development of China economy. The history of economic development has always been filled with twists and turns. In the long run, we strongly believe in the resilience and the potential of the China economy. We will strengthen our fundamentals during this unique period, focus on innovation and customer value creation, and continue investing and planning for Alibaba's long-term growth. Thank you, everyone, for your time. I will now turn the mic over to Toby, who will walk you through the details of our financial results.

Thank you, Daniel. Hello, everyone. Let me walk you through the details of our financial results. For the quarter ended March 31st, 2022, total revenue was RMB 204 billion, an increase of 9% that was primarily driven by the revenue growth of China commerce segment by 8% to RMB 140 billion, local consumer services segment by 29% to RMB 10 billion, and cloud segment by 12% to RMB 19 billion. Income from operations for the quarter was RMB 16.7 billion compared to a loss from operations of RMB 7.7 billion in the same quarter of last year. The year-over-year change of RMB 24.4 billion was primarily due to RMB 18 billion anti-monopoly fine levied in the March 2021 quarter in a mark-to-market adjustment of SBC expenses of RMB $13 billion in the March 2022 quarter. Excluding these impacts, income from operations would have decreased by RMB $7 billion, primarily due to changes in adjusted EBITDA. Adjusted EBITDA decreased by RMB 6.8 billion to RMB 15.8 billion year-over-year in the quarter. The decrease was primarily due to RMB 7.4 billion decrease in China commerce segment EBITDA that mainly reflected investments in Tao Caicai and Taobao Deal, impacts from COVID, as well as losses incurred by Sunnart. However, it's important to know that the combined losses of Taobao Deal and Tao Caicai declined quarter over quarter as we focused on driving high quality growth for our China commerce segment. Importantly, during the March 2022 quarter, we are also making progress in improving operating efficiency and instill cost discipline through the company. This has resulted in narrowing losses year over year of RMB 1.2 billion for local consumer services, narrowing losses of RMB 732 million for DME segment, and improving profitability of RMB 618 million for cloud segment. Cost of revenue ratio, excluding SBC, increased to 68% in the quarter ended March 31st, 2022. The increase was primarily due to, firstly, higher proportion of direct sales businesses such as Fresh Apple and Tmall Supermarket that increased the cost of inventory as a percentage of revenue. And secondly, growth of Tao Cai Cai and China businesses that led to an increase in logistic costs as a percentage of revenue. Excluding SBC, product development expenses as a percentage of revenue slightly increased to 6% in the quarter ended March 31, 2022, reflecting our continued investments in tailings to drive technology and product innovation. Sales and marketing expenses, excluding SBC as a percentage of revenue, remain stable at 13 percent in the March quarter compared to the same quarter of last year. Excluding SBC and the impact from anti-monopoly fine, general and administrative expenses as a percentage of revenue will be flattish in the quarter. Non-GAAP net income attributable to ordinary shareholders in the quarter was R&B 21.5 billion, a decline of 6.9 billion, primarily due to decrease in adjusted EBITDA. GAAP net losses attributable to ordinary shares was R&B 16.2 billion. The difference between GAAP net losses and non-GAAP net income was primarily due to increase in the market prices, a decrease in the market prices of our equity investments in publicly traded companies. As of March 31st, 2022, we continue to maintain a strong net cash position of RMB 343 billion or US dollar 54 billion. Our strong net cash position is supported by robust cash flow generation In fiscal year 2022, net cash flow from operation and free cash flow were RMB 142.8 billion and RMB 98.9 billion, respectively. Majority of the difference is operating capex spending at RMB 42 billion, reflecting our investment in cloud business and logistic fulfillment infrastructure. Free cash flow in March quarter 2022 was an outflow of RMB 15 billion, mainly due to the payment of final settlement or installment in the amount of RMB 9.1 billion of the RMB 18.2 billion, the anti-monopoly fine and a decrease in profit. Importantly, we have continued to enhance returns to shareholders through share repurchases, given our strong balance sheet and free cash flow generation capability. In fiscal year 22, we repurchased approximately $60 million of our ADSs for approximately US dollar $9.6 billion under our share repurchase program. On March 22, our company's board has authorized an increase of our share repurchase program for U.S. dollar 15 billion to U.S. dollar 25 billion. Since April the 1st to May 25th, we have repurchased another U.S. dollar 3.4 billion in ADSs. As of May 25th, we still have an unused amount of U.S. dollar 12 billion under the share repurchase program.

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Before I start with our segment results, I'd like to highlight something in the December 2021 quarter financial results. In the December quarter, the net income attributable to ordinary shareholders was understated by RMB $7.3 billion. This was caused by a goodwill impairment charge that should have been partially attributed to non-controlled interest but was fully recorded in net income attributable to ordinary shareholders. This does not impact our non-GAAP measures and does not impact revenue, income from operations, or total net income for the December quarter. The attribution has been rectified and properly reflected in the full-year consolidated financial information for the fiscal year 2022. This attribution has no impact on the consolidated financial information for the March 2022 quarter. Now, let's look at our segment results. Revenue from our China commerce segment in March quarter was on the $140 billion, an increase of 8% year over year. Customer management revenue remained stable year over year at RMB 63 billion, despite a low single-digit decline in Taobao and Tmall online physical goods GMV, excluding unpaid orders. For the March quarter, the combined GMV growth of January and February was flat, but was offset by a decline in GMV in March, driven by COVID-19 impacts. If we further break down custom management revenue growth into advertising and commission revenue, total advertising revenue delivered positive growth during the quarter. Commission revenue recorded a high single-digit decline due to GMV decline and a higher order cancellation and delays as a result of logistic bottleneck from COVID-19 resurgence in March. Direct sales and others revenue in March quarter was R&B 73 billion, an increase of 14 percent year-over-year, primarily driven by robust revenue growth of Freshepo and Timor supermarket. China commerce segment adjusted EBITDA decreased by R&B 7.4 billion year-over-year to R&B 32.1 billion in the March quarter. The decline reflected investments in Tao Cai Cai, Taobao deal, as well as over RMB 1 billion losses incurred by Sunnot, primarily due to one-off asset impairments and special provisions. We are making progress in our commitment to improve efficiency and narrow losses for Taobao deal and Tao Cai Cai that have been successful in acquiring new consumers in less developed areas. During the quarter, Taobao deals had over 300 million annual active consumers. More than 20 percent of these AAC of Taobao deals were consumers that did not shop on Taobao or Tmall in fiscal year 2022. And Taotaizai had over 90 million AAC, of which more than 50 percent were first-time fresh producer buyers on our various platforms. At the same time, the combined losses of Taobao deal and Taotai's decline of quarter over quarter, we expect to combine the Taobao deal and Taotai's losses to continue to narrow as we focus on driving high quality growth for our China commerce segment. Onto our major direct sales businesses. Except for Sunnah, as mentioned, losses narrowed year over year for FreshHippo, Tmall Global, and Tmall Supermarket. We have continued to expand our direct sales business to enrich product supply for our marketplaces, strengthen supply chain capabilities for various verticals, and offer comprehensive high-frequency fulfillment services that seamlessly integrate with physical stores and pickup stations. These businesses delivered solid top-line growth during the quarter. and we expect them to contribute more to the overall segment revenue mix, which will continue to affect China commerce EBITDA margin. Our international commerce segment revenue in March quarter was RMB 14.3 billion, an increase of 7% year over year. The increase was primarily driven by Lazada and Alibaba.com, our international wholesale business. Lazada delivered solid order growth of 32%, while Alibaba.com grew transaction value completed on its platform by 22%. The slower year-over-year growth rate as compared to previous quarters was mainly due to, firstly, revenue decline of Trendio that was negatively impacted by the ongoing depreciation of Turkish Lira against RMB. And secondly, orders declined for AliExpress, which was mainly driven by the ongoing impacts from VAT rules, as well as supply chain and logistics disruptions for parcels entering the Eurozone due to Russia and the Ukraine conflict, and then slowing China export growth and supply chain disruptions from COVID-19 impacts. International commerce segment adjusted EBITDA losses was a loss of RMB 2.6 billion in March quarter. Losses slightly increased year over year, mainly driven by trendiest investments in new businesses, such as international businesses and local consumer services in Turkey. Partly offset by continued profit growth of Alibaba.com, narrowed losses of AliExpress and narrowed losses of Lazada, through optimization of OPEX and logistics cost. Revenue from local consumer services was RMB 10.4 billion in March quarter, an increase of 29% year over year, driven by more efficient use of subsidies in higher average order value driven resilient GNV growth for Ulema. Local consumer service adjusted IPATAR losses reduced by $1.2 billion year-over-year to RMB $5.5 billion, primarily due to the narrow losses of our two-home business, driven by optimized user acquisition and reduced delivery costs. Revenue from China after intersegment elimination was RMB $11.6 billion in March quarter, an increase of 16% year-over-year, primarily contributed by the increase in revenue from consumer logistics services as a result of service upgrades for enhancing consumer experience, partly offset by the decrease in international orders that was mainly impacted by the supply chain and logistics disruptions for parcels entering the Eurozone due to Russia and Ukraine conflict. During the fiscal year 2022, 69% of China's total revenue was generated from external customers. China adjusted the IPTA loss was RMB 912 million. Loss widened by RMB 327 million year over year, primarily due to increase in operating cost from expansion of our global smart logistics infrastructure as well as the impacts from COVID-19 resurgence in China and Russia and Ukraine conflict. Going forward, we will continue our efforts in building comprehensive logistics and the fulfillment infrastructure in China and internationally, laying the foundation for sustainable long-term growth for our digital commerce businesses. Revenue from our cloud segment after inter-segment elimination was RMB 19 billion in March quarter, an increase of 12% year-over-year. Revenue growth was slower in March quarter compared to prior quarters, reflecting slowing economic activities, softening demand from customers in China internet industry, and delays in completing hybrid cloud projects due to COVID-19 impacts. Excluding revenue generated from a top customer in the internet industry that gradually faced out using our cloud services for its international business, our cloud segment revenue after inter-segment elimination would have grown 15% year over year during March quarter and 29% for fiscal year 2022. Excluding this customer, our customer base and industry coverage continues to diversify. The next top 10 non-affiliated customers contribute to less than 10% of ARTI Cloud's revenue in fiscal year 2022. Importantly, revenue contribution from non-internet industries continues to increase as well. During the March quarter, revenue growth was strong in telecommunications, financial services, and retail industries, but declined in selected internet verticals, including online education and entertainment. Adjusted EBITDA of cloud segment, which comprises of Alibaba Cloud and Dintalk, was a profit of RMB 278 million in March quarter, which improved by RMB 618 million year-over-year. This is primarily attributable to ongoing improvement in cloud profitability, partly offset by increasing losses from Dintoc. In the new fiscal year, our cloud segment will focus on high-quality revenue growth, invest in talents and R&D, and improve operating efficiency and expand internationally.

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Revenue from our digital medium and entertainment segment in March quarter was RMB 8 billion, a decrease of 1% year over year. Adjusted EBITDA was a loss of 2 billion RMB, narrowed by 0.7 billion RMB year over year. Let me close with a short recap of last fiscal year and then our outlook. In fiscal year 22, we have faced with increasing challenges from many fronts. These have been brought about by slowing macro activities, increased competition, and COVID resurgence domestically, as well as changes in geopolitical conditions internationally. But they also bring into focus the fact that There is much we can do to create value for our customers and key stakeholders. During this past year, we have made a number of achievements that position us well for the future. First, we have reached a historical milestone of over 1 billion active consumers for all our consumer-facing businesses in China. This was made possible through the strong execution and growth of businesses such as Taobao Deal and Tao Caicai. Our unique value proposition of having both e-commerce and location-based commerce businesses at scale position us well to serve these 1 billion consumers in China. Second, we are seeing increasing benefit from our development of an integrated intercity and intra-city logistic network that allows us to offer multiple delivery and fulfillment options to our consumers. This network also allows us to further increase penetration in categories such as grocery, FMCG, and consumer electronics in the future. Lastly, in fiscal year 22, we have spent over $120 billion in technology-related costs and expenses that continue to strengthen our leading position in China's cloud market, support to the sophisticated technological demands of our consumer-facing businesses and advance our research and development in the next generation technologies. Now, in terms of guidance, since mid-March 2022, we have seen significant impacts to our domestic businesses from COVID-19 restrictions in China, particularly in Shanghai. Considering the risks and uncertainties arising from COVID-19, which we are not able to control and are difficult for us to predict, we believe it's prudent at this time not to give financial guidance that is typically provided at the start of the fiscal year. Looking forward in fiscal year 23, emphasizing what Daniel has mentioned, we will focus and execute several key operations principles and financial objectives, including, first, generate sustainable and high-quality revenue that reflects our ongoing commitment to developing high-quality consumers, high-quality digital commerce infrastructure, and high-quality technology innovations. We believe these efforts will continue to build a strong and durable relationship with our consumers and customers. Second, we will focus on optimizing our overall cost structure. We will control cost and improve returns for our major businesses that are already at significant scale compared to peers. For growth businesses, we will also optimize in spending and at the same time identify increasing monetization opportunities that use sustainable high-quality revenue. The incremental revenue generated will be invested back to the respective businesses and create value for their customers, thereby creating a virtuous growth loop to achieve long-term profitability. At a high level, we will seek to improve gross margin of our direct sales businesses, optimize logistics and fulfillment costs for consumer-facing businesses, and control our overall sales and marketing span. Third, continue to build an energy efficient cloud infrastructure and a global warehouse and a logistic network that enhance our competitiveness in China and international markets. At the same time, we expect ongoing improvement in efficiency and utilization of these infrastructures can benefit both our customers in our own self-operated businesses. Lastly, we seek to maintain strong operating cash flow generation and a strong net cash position that gives us the financial flexibility to invest in businesses and capabilities that expand the pie and benefit all of our key stakeholders. We have a lot of work ahead of us, but by being steadfast, and executing the key strategic and financial objectives that we have set out, we believe Alibaba will emerge stronger in the future. Thank you. Now let's turn to Q&A.

Hi, everyone. For today's call, you are welcome to ask questions in Chinese or English. A third-party translator will provide consecutive interpretation of the Q&A session, and our management will address your question in the language you ask. Please note that the translation is for convenience only. In the case of any discrepancy, our management statement in the original language will prevail. If you are unable to hear the Chinese translation, bilingual transcripts of this call will be available on our website within one week after the meeting. Operator, please connect speaker and SI conference lines now. and start the Q&A session. Thank you.

Thank you. Ladies and gentlemen, if you have a question at this time, please press star then 1 on your telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To give more people the opportunity to ask questions, please keep yourself to no more than one question at a time. As a reminder, to ask a question, please press star then 1. Our first question comes from the line of Ronald Kung with Goldman Sachs.

Thank you, Daniel, Toby, and Rob. Congratulations on your performance. You are very resilient. We can see that the revenue of CMR is basically flat. So GMB has a low single digit decline, but CMR is flat. Daniel, you mentioned that the advertisement has a better performance. Thank you.

Thank you, Daniel, Toby, and Rob, and congratulations on the resilience that we see in the results that you've just released. We did see that CMR revenues were flat, but there was nonetheless low single-digit growth in GMV, and Daniel also spoke about how advertising was performing well. Certainly from April onwards, with the impact of COVID, there's been an impact there, including on CMR revenue. But I'm wondering what we're seeing in May in terms of the performance of the parcel network, and if things are picking up, and what we're seeing currently in terms of GMV and orders in May. Thank you.

Thank you for your question. Actually, this is the situation. First of all, Daniel talked about the current situation in April in his script. From the perspective of the entire GMV change, in April, Daniel mentioned that there was a drop of more than 10%. At the same time, from the point of view of the entire CMR, in fact, from the past, you can see that the entire change between our CMR and our GMV is basically in line. Of course, there may be some ups and downs in this. Because many times, the CMR may have certain consequences in the entire ups and downs process. And this will also reflect the Thanks for your question. In Daniel's speech earlier, he did give you a presentation on the situation in April. Overall, as Daniel said,

GMV was down by around 10%. Typically, CMR does tend to move in line with GMV, but there can be a lag. And it's the case that many merchants may need to invest in order to grow their revenues.

China China China China China Thank you.

Well, talking about the situation in May, the situation in May over the past couple of weeks, with the resumption of express deliveries and with the beginning of the normalization of the situation in Shanghai, Certainly, we see things improving, but it will take time for all of the outstanding parcels to be delivered and also for merchants to make their preparations for the upcoming 6-18. In fact, preparations will be beginning tonight, but we certainly are seeing signs of improvement going into the month of May.

Okay, next question.

Our next question comes from the line of Eddie Leung with Bank of America.

Good evening, guys. Thank you for taking my question. I think you guys started to mention about some of the longer term initiatives because of the COVID lockdowns. So just looking ahead, assuming a reopening, Do you see any long-term structural change in your operation, customer demand, and product mix after these lockdowns? And what type of investment do you need to make to handle the potential changes? Thank you.

Good evening. Thank you for accepting my question. You also mentioned the impact of the epidemic. You are making some long-term changes. If you can unseal it completely, what kind of changes do you think you need to make in this long-term strategy, including at the operating level or in terms of customer demand or product structure? What kind of long-term changes do you think need to be made?

Thank you for the question. I think during this widespread COVID in March and April, we do see a shift of the consumption pattern. And I think after this wave, I think what we see that actually consumers in China they will tend to have some stocks at their home to prepare for the uncertain situation. So how to grow, for example, the supply by bulk and how to give them an on-demand, but not necessarily speedy delivery, but it's an on-demand and on-time delivery, I think is very important. And for us, I think we are Actually, we believe we are in a good position, which we have both our national wide platform, as well as the networks with major delivery partners. But at the same time, we have our intra-city and instant delivery forces on the ground in all of these major cities. So how to leverage these infrastructure and enhance these capabilities and capacities is our priority in the future to support the various needs of the product. So product-wise I think it's more diversified to bulk sales for preparation for the future and maybe for the small package just for the instant delivery and for the instant needs. You need to diversify retail formats as well as the delivery and the fulfillment network to support both of this. Thank you.

Thank you.

Thank you.

And our next question comes from the line of Thomas Chong with Jefferies. Hold on a sec. Would the translator still need to translate?

Yes, in March and April, during this wave of the epidemic, we did see some changes in the trend of consumption. So I think after this round of epidemic, the trend of consumers in the future, they will have more hope to store more goods at home, so that they can deal with the uncertain situation of the future. So for us, this is one aspect, we have to be able to To meet the demand for this stock, then the future is to be able to meet this kind of urgent and timely delivery, but not necessarily the fastest delivery. Well, I think we have a lot of conditions on this side because we have a national platform and these leading We are also working with our partners. At the same time, we also have the power of in-house, in-person, and in-person delivery in various big cities. So, we are looking at how to use these infrastructure, and in the future, we can support the demand for such a stock. This can provide a more diversified service to meet such needs.

Operator, next question.

Our next question comes from the line of Thomas Chong with Jefferies.

晚上好,謝謝管理層接受我的提問。 我的問題是關於consumer spending那一段的。 管理層可不可以分享一下在不同的客戶群, 就是一個比較高收入的,中等收入的, 或者是比較低等的收入的話, How will their spending change over the past few months? Will there be some low-income people who are more cautious about the price? Another question is about June 2018. I would like to see the management of June 2018, our KPI this year, and our KPI for the second half of the year. Thank you, and good evening, management. My question has to do with consumer spending.

I'm wondering what changes you've seen in consumer spending within different segments of consumers, high income, middle income, and low income consumers. Are low income consumers perhaps tending to be more cautious during this recent period? Also, I'd like to know what KPIs you set for this year's 6-18 and how you see recovery in the second half of the year. Do you think that once logistics capabilities have recovered, that will set the stage for recovery? Or will we have to wait a bit longer, perhaps, to see consumer sentiment also recover? Thank you.

Okay, thank you. Let me answer that question. First of all, from the point of view of the crowd, we can see that the whole Alibaba retail platform has this China China China China China China China She told a country. I mean, she said, I think that she wants a job. I don't know. I mean, what I want to do is she wants to go. I sound fun to her. So you should be in the shelf. It will be a shame to sound good. I mean, I.

Thank you. Well, on Alibaba's retail platforms, we have a consumer base of 1 billion consumers who are highly diverse, spanning all those different tiers of spending. And so, yes, we certainly do see different patterns there. But what I can tell you is during this special period of time, you really see a divergence between spending on essentials versus non-essentials. In all those different tiers of consumers, demand for essentials has gone up and there's been less price sensitivity, whereas with respect to non-essential purchases, there has been more price sensitivity.

This actually has a lot to do with your question about the trend in the second half of the year. My point of view is this. I think the recovery and growth of the entire consumer market actually relies on two aspects of power. And this is also a

very relevant to the other part of your question about the trend for the coming half of the year. Because in my view, for recovery and growth of consumption to occur, two things need to happen. First, as I mentioned in my script, merchants, in order to be able to operate, need to have a sustainable and robust supply chain and logistics in place. And at the same time, consumption demand needs to return.

China China China China

And in order for consumer demand to recover, it's very important that there be strong expectations for the future. Because only when people have strong expectations of the future, and in particular in their ongoing ability to grow their disposable income, will they be able to grow their consumption. So going beyond essentials, but getting back also to increased spending on the non-essentials, which would be very important for also growing the economy in terms of stimulating GDP growth.

老乡,他也有问到618,我们的expectation. 618刚刚开始,我想作为年终的一个

China China China China China From our point of view, we are also actively preparing. At the same time, what we have seen so far is that from the degree of business registration, from the number of core products, there is a relatively good trend compared to the same period last year. China China China China China China

Yes, and the other part of the question was about this year's 618, which is just getting started. This is an important mid-year event, and coming out of this recent challenging period, merchants are indeed excited. They're looking at it as a good opportunity to recover those losses and achieve good sales. So for us, we're making active preparations to do that, and we're seeing a lot of enthusiasm and a strong trend this year compared against last year in terms of merchant enrollment and in terms of the product offerings. So this is coming up into the holiday season. There's a lot of consumer enthusiasm, and as a platform, we intend to be strongly engaged supportive as was mentioned for 618 we've already put in place many policies to support and help our merchants as well as to ensure that logistics are functioning effectively to help those merchants be able to achieve good sales so these really are joint objectives for merchants and for us as a platform and of course we do very much hope to see a pandemic control measures continue to be effective, which will put in place the necessary conditions to make this a success.

Thank you. Next question.

Our next question comes from the line of Jerry Lu with UBS.

Thank you, Manager Chen. I mainly want to ask about the cost-effectiveness. The company has mentioned a lot about the cost-effectiveness of each business recently. I want to ask, in the following fiscal year, no matter how the consumption and revenue are, Do we have a goal to hope that the profit segment can exceed the income segment? And then during this period of time, there may be a few main projects that control costs. As mentioned before, we are hungry. And now we see that the UEE has made a lot of progress. So we want to know what the main costs of the new year are.

Thank you, management. My question has to do with cost optimization. Cost control, which you mentioned, will be implemented across a lot of businesses. Should we understand that as part of this cost optimization strategy that in the coming fiscal year, the objective is to achieve faster profit growth and revenue growth And we've certainly seen a significant improvement in UE and Ulema and elsewhere. But what will be the major focuses and priorities for cost optimization in the coming fiscal year?

First of all, I think from the whole group level, I think this is still very clear. In fact, in the past few seasons, in the next year, we will continue to do it. We will pay great attention to the whole effect of the discount. And from the perspective of the effect of the discount, I think it is divided into two levels. The first level, I think, is for a lot of businesses. We will have certain, as everyone usually says, some ups and downs. Thank you. This is Toby. I'll take that question. I think for the group as a whole, it's very clear that our strategy in the next few quarters or year as a whole

is going to focus on cost optimization and cost control. And that will involve a couple of things. First of all, for the parts of the business that aren't generating long-term value, we'll find ways to make them more efficient or scale them down with consolidation.

Yes, I think the second layer is at the end of many of our businesses. Then in all of these businesses, based on the different characteristics of the business, we will have a certain goal and requirement to reduce the cost-effectiveness. Here are a few examples. For example, in our overall business, you will see that we now have a relatively large direct sales business. In this business, we can clearly see that the requirements for the business are at the entire profit end. We will raise some higher requirements, which is to increase the efficiency of the whole. At the same time, at the logistics end, we will also raise such requirements for efficiency improvement. Overall, it can give a overall efficiency improvement for such a direct business.

Secondly, we do have a lot of different businesses that are different in nature and therefore we'll be taking different approaches and putting in place different requirements to achieving better cost efficiency but to give you an example around our direct sales businesses and here it's very clear on the one hand in terms of gross margin we're looking to drive higher efficiency and at the same time we'll also be looking at to achieve more cost control, better efficiency in logistics. And it will be the combination of those two things that will drive cost optimization.

Right. There are some, for example, in the overall corporate level, for example, there are some costs like market fees and so on. We will also use a relatively stricter method and measures to control them. And more broadly, at the group-wide level, another example would be marketing costs. And here we will be taking a more disciplined approach with specific measures. And in many cases, spending will be cut back. Yes, so I think I just gave a few examples to answer your question. From the overall point of view, your question is whether we have a profit and income, etc. We don't have such a standard, but I think what I just said in the script is very important for us in the coming year, especially from the point of view of a CFO. A very important task is to improve our operating efficiency. So we don't have a specific figure to share with you. On the other part of your question is about a ratio. As I mentioned in my script,

As CFO for the group, a big priority for us is driving higher operational efficiency, lowering costs, achieving higher efficiency in order to ensure that we have strong balance sheets and strong cash flow generation capability.

Thank you. Thank you, Tom Berger. Next question.

Our next question comes from the line of Alex Yao with J.P. Morgan.

Thank you for giving me this opportunity. Daniel, I heard you say in the script that the government may come up with some exciting policies to help Internet companies better When the economy is relatively low, we can help consumers and encourage investment and stable employment. These are some potential policy directions. In which areas do you think it is possible, or in which business segments, there may be such an incentive policy? Under such an environment, for Alibaba, we need to make some

Thank you, management. Daniel, in your script, I believe you talked about incentives or stimuli that may be forthcoming from the government to help support the business of Internet platforms and drive consumer spending. I'm wondering if you could tell us what kinds of businesses do you think will benefit from these kinds of incentives and what kind of stimulus we can expect to see and how Alibaba can position itself to capture the benefit of this policy.

Actually, what I was just talking about is that we have seen that in recent times, the country has released a lot of policies China China China China This includes the stability of the supply chain. These are all related to our business with Alibaba. So as an important representative of such a platform company in China, we also hope that as part of the private economy, we can achieve these three aspects in the middle, whether it is a stable economy, China China China China China Thank you. We've seen that the government has been coming out with various policies lately.

aimed at stabilizing the economy, stabilizing employment, ensuring the provision of essentials to people, including yesterday a very important national meeting convened by the State Council to implement measures in six different areas, several of which are highly relevant to the business of Alibaba, including stimulating consumption, ensuring the provision of essentials, and achieving supply chain recovery. So that's all highly relevant to us. As a responsible representative of the platform economy and also as a constituent of China's real economy, Alibaba is, of course, keen to make our due contribution to driving progress in all of these areas. And a very important part of this, of course, is SMEs. These small businesses, because of their scale, have been the most vulnerable to the impact of the pandemic, and we very much want to help them recover. Only when SMEs have recovered can more market-based jobs and employment be generated.

to promote a digitalized private economy development. I think this is still our basic responsibility and our basic ability to be able to make better use of it. At the same time, I want to say to Ali that we are also doing our best to provide better support for our platform customers. Including what I just mentioned, we have also launched five major 25-page guidelines for 618 to support customers to better prepare for 618. For Alibaba, this is where we can have a very unique role to play leveraging

on our resources as a responsible company in society and as the operator of a digital economy. And we see this as a basic responsibility. We've been doing everything in our power to provide support and assistance to merchants. And as mentioned with the upcoming 618 Festival, we have 20 initiatives in five major categories. And recently, during the very difficult period in Shanghai, We had 20 special measures to support merchants during that period. We hope very much to be able to support merchants in these ways to facilitate their recovery and success.

Okay. Next question, please.

And our next question comes from the line of with Barclays.

Thank you very much for taking my questions. You mentioned you just paid the fine for the anti-monopoly sort of new regulation last year. Last year was the year there were a lot of government regulations that were introduced to the Internet industry. Lately, as you know, some of the senior leaders from the government made some comments about any further regulation. I was just wondering, could you share with us your latest thoughts about government regulation for the industry for this year? Thank you.

There has been a lot of supervision and a lot of new laws and regulations. Recently, some very senior government officials have also expressed that they want to further regulate the Internet industry. Could you please share with us your latest views on how the government will further regulate and regulate the Internet industry this year?

Thank you for the question. Sorry, Rob. Sorry, Rob. I was not very clear. My bad. My point was that, for example, one of the vice premiers, Liu He, said about actually some of the regulations last year, many investors were very discouraged by it. Probably government went a bit overboard. I think Liu He mentioned that perhaps Chinese government should wrap up the regulation and or any new regulation and move on and let the industry grow as it should. Sorry if I wasn't clear before.

I didn't make it very clear when I asked the question just now. Actually, I mean, recently, Deputy Prime Minister Liu He said that there were some controls on the Internet industry last year, which made the investors Well, I think we all know that recently Chinese government and Chinese leaders, they shared a very clear message to the market that they want to

they want the platform economy to play an important role in economic development and encourage the healthy development of platform economy. And I think the message is clear, and as part of this platform economy in China, Alibaba is committed to fulfill our responsibilities in terms of helping the development achieve a better life for consumers, to help the merchants as well, especially in the technology innovation, I think, in the core areas. So I think this is what we committed, and we will work hard to make substantial progress in all these aspects. But at the same time, we are closely watching the policy development and to to make sure we are fully compliant with all the regulatory requirements. Thank you.

Thank you.

We know that the leaders of China have issued very clear signals that the platform economy plays an important role in promoting the country's economic development. We also hope that it can play an important role They also encourage the platform economy to achieve healthy and standardized development. As a platform economy, Aliexpress is also dedicated to carrying out our responsibilities, especially in the core area, which is to let consumers live a better life, help businesses, and promote technological innovation. These are all our promises. We will continue to work hard to promote these aspects of progress. At the same time, Alibaba has been closely monitoring the latest development of policy, ensuring that the company must comply with all these rules and regulations.

Let's invite the last question.

And our next question comes from the line of Alisa Yap with Citigroup.

Hello, thank you. Taiwan Taiwan Taiwan Taiwan Taiwan

Thank you, management. My question has to do with the cloud segment and the short-term and long-term prospects for the cloud business. Starting with the short-term, I'd like to know, apart from the recent impact of the pandemic and the slowdown of the Internet sector as a whole, what other factors are there that may be impacting the cloud business? And then in the longer term, when the Chinese economy has returned to normalcy, What's your view about how the cloud business will develop? What kind of growth do you expect Alibaba Cloud to achieve? And then finally, recently we've heard some news about some restructuring and some personnel changes in the cloud space. Could you tell us please about the impact that those are likely to have in the short and longer term? Thank you.

Okay, let me answer this. In terms of cloud business, the recent challenges, including the slowdown in income growth in this quarter, have been explained. I will not repeat them. I think from the perspective of the future economic development, the role of cloud computing, I think it is still a very important part of a big data company that turns every industry into a digitized business. So from this point of view, every industry has this cloud as an opportunity to serve them. So this is the first point. So from the perspective of the industry, we think it is a very broad perspective. In my script, I also mentioned that in 2025, the market has estimated that China's cloud computing will reach 10 billion RMB. Thank you.

Talking about the performance of the cloud business in the short term, I've already spoken about the factors that led to the slowdown in revenue growth in Alibaba Cloud recently, so I won't repeat here what I already said earlier. But I think when it comes to economic development and the important role that the cloud can play there, the key thing is that all industries are digitalizing and need to digitalize The cloud and big data are an important kind of infrastructure driving that upgrading of industry, and therefore all industries present important opportunities for us at Alibaba to serve, and that really represents a huge market opportunity. In fact, as I mentioned in my script earlier, the forecast is for the cloud market in China to reach one trillion RMB by 2025. So that potentially means that over the next few years, we have the potential to grow at two times or three times kind of multiple. So it's going to be a very big and exciting opportunity.

Now, the audience from your job, which I'm the chief way of what this is. And then the things are非常关键的一点就是如何跟这个产业去结合其实 big data platforms and AI, including the digitalization of the entire enterprise, can be realized through the cloud. I think this needs to be implemented in every industry, especially in the main industry, to form a solution, to form a product that the industry needs. I think this is very important for the development of the cloud business. From this point of view, Ali must Secondly, in order to be able to fully

capitalize on that opportunity, you need to take an industry-specific approach because, you know, when we talk about cloud, there are many different definitions out there. The only part of that definition that everybody will agree on is the IaaS layer, which seeks to replace traditional IT infrastructure. But to me, the more important opportunity is beyond that, It's when you start bringing in the big data, AI, as well as the ability to digitalize the overall operations of different enterprises and enable all of that through the cloud. And to do that, this requires an industry or vertical specific approach with products that are custom tailored for different applications in different vertical segments. And I think this is very important for the cloud business. And it's imperative that Alibaba be working with these different industries, different verticals, especially the major ones, in-depth with SaaS and with our ecosystem partners in order to be able to deliver that value and capitalize on all of those opportunities going forward.

Thirdly, I think in addition to this vertical industry opportunity, it is very important to take advantage of our current leading position in the market, including our core PaaS products, can continue to use technology to innovate, to break through technology, to bring about a better value for technology, to achieve a better scale economy. As we all know, in the 20th century, cloud computing itself is a business with a scale economy. So, how can we increase the scale and reduce the cost by upgrading the technology? I think this is very important for us as market leaders

Thirdly, apart from that vertical-oriented approach, it's also incumbent upon us, given our market leadership position, to continue to innovate also in the IaaS layer and also the core PaaS layer so that we can continue to reap the dividends of technological innovation through economies of scale. In particular, the IaaS layer is all about economies of scale. So if we can continue to improve the technology and lower the costs, there's a huge advantage that can be reaped there.

Finally, I'd like to talk about the question you asked earlier. And then finally, to address your question about the team upgrade that has been implemented

As you saw last year and in the previous fiscal year, the revenues of Alibaba Cloud, if you include services provided within the group to Alibaba, has already exceeded $100 billion. So it's a very complex system. So looking for ways to make the operations of the cloud business more efficient and very much in line with what Toby was describing earlier, looking for ways to drive more cost efficiency and achieve more cost optimization, as well as to position ourselves to better provide the next generation of enterprise services to get us from the scale we're at today of $100 billion to a future of $300 billion or even $500 billion. That was the thinking underlying the way we've gone about reorganizing the team.

Okay. Thank you, everyone, for participating today. If you have any questions, please reach out to the IR team and myself. And thank you, and we'll see you next quarter. Thanks.

Ladies and gentlemen, this concludes today's conference call.