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spk05: Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group's June quarter 2024 results conference call. At this time, all participants are on listen-only mode. After management's prepared remarks, there will be a Q&A session. I would now like to turn the call over to Rob Lin, Head of Investor Relations of Alibaba Group. Please go ahead.
spk10: Good day, everyone, and welcome to Alibaba Group's June quarter 2024 results conference call. With us are Joe Tsai, Chairman, Eddie Wu, Chief Executive Officer, Toby Xu, Chief Financial Officer. We have also invited Jiang Fan, Co-Chairman and CEO of Alibaba International Digital Commerce Group, to join the call. This call is also being webcasted from the investor relations 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. including without limitation statements about our strategies and business plans, as well as our belief, expectation, and guidance about our business prospects, such as the future growth of our business, revenue, take rate, profitability, and return on investments and shared purchases. Forward-looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our expected expectations. For detailed discussion of these risks and uncertainties, please refer to our latest annual report on Form 20F and other documents filed at USSEC or announced on the website of 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 use on the call, such as adjusted EBITDA, adjusted EBITDA margin, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income, non-GAAP diluted earnings per share or 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 learnings press release. Unless otherwise stated, growth rates of all stated metrics mentioned during this call refers to year-over-year growth versus the same quarter last year. With that, I will turn over to Eddie.
spk01: Hello, everyone. In the new fiscal year, Our strategies of user-first and AI-driven are starting to bear fruit. This quarter's results reflect continued steady growth momentum. Taobao and Tmall Group achieved steady year-over-year growth in orders and in GMV. Alibaba International Digital Commerce revenue maintained strong growth. Alibaba Cloud's revenue excluding Alibaba consolidated subsidiaries, returned to positive growth, notably driven by core public cloud and AI products. And across other segments, we achieved better operational efficiency and monetization capabilities to varying degrees. This drove significant improvement in some loss-making businesses, Taobao and Tmall Group maintained its user-first strategy and continued to invest in key capabilities, aiming to deliver quality products and services at attractive prices across diverse shopping needs of consumers. This quarter saw steady growth in GMV and order volume, driven by a notable increase in purchase frequency. Internal and external data about e-commerce players' market share dynamics indicates a positive trend in our gradual market share stabilization. further validating the effectiveness of our investments in user experience. 88 VIP members reached 42 million by quarter end. We will continue to explore and improve program benefits, product offerings, and service experiences for this expanding premium member base. In TTG's operational strategy, we attach great importance to rich and diverse product offerings while focusing on investing and enhancing shopping experiences. We continuously improve the efficiency and matching of products with user traffic and ensure stable and sustainable growth. As orders and GMV continue to grow, we're advancing monetization step-by-step, including the launch of our new marketing tool, Xuan Zhan Tui. Through algorithm upgrades, we aim to enhance the efficiency of merchants' monetization while also improving the efficiency of traffic utilization and conversion of user traffic to purchases on our platforms. we expect CMR growth to gradually align with GMV growth over the coming quarters. In our cloud segment, we continue to pursue high-quality revenue and effectively execute our integrated cloud plus AI development strategy. This quarter, Alibaba's overall revenue, excluding Alibaba Consolidated subsidiaries, grew 6%, with public cloud revenue maintaining double-digit growth. AI-related product revenue sustained a triple-digit growth, continuing to increase its share of public cloud revenue. We're seeing more major customers choosing Alibaba Cloud as their compute infrastructure for AI development. At the same time, Alibaba's proprietary large language models are gaining wider adoption. This year, Alibaba Cloud served as a major cloud service provider for the Olympic Games, providing cloud computing and AI services to Olympic Broadcasting Services, OBS, At the Paris Olympics, cloud-based live broadcast powered by Alibaba Cloud overtook satellite signals as the primary means of broadcast for the first time in Olympic history. Two-thirds of broadcasters used live signals transmitted by Alibaba Cloud in real-time around the world, reaching billions of viewers. Additionally, Alibaba Cloud's AI technology saw its first widespread application at the Paris Olympics, including 360-degree replays in real-time, bringing pleasant surprises to the audiences. Our long-term strategy for integrated cloud plus AI development comprises three key elements. One, we'll continue to optimize our cloud product offerings, focusing on competitive, sustainable gross margin and scalable public cloud products. This forms the foundation for Alibaba Cloud's sustainable high-quality growth. Two, we'll strengthen synergies between cloud and AI products, not only supporting existing customers and implementing new AI capabilities on Alibaba Cloud, but also enabling AI native enterprises to scale and succeed on our platform. We're committed to capitalizing on both opportunities. Three, we'll continue to invest in R&D and AI CapEx to ensure the growth of our AI-driven cloud business. Looking to the medium and long-term, we're confident that Alibaba Cloud's overall revenue, excluding Alibaba Consolidated subsidiaries, will return to double-digit growth in the second half of the fiscal year with gradual acceleration thereafter. Through intensive R&D investment, We aim to sustain profitable growth while establishing ourselves as a leading cloud service provider for AI with healthy profitability and market share leadership. In international e-commerce, AIDC delivered 32% revenue growth this quarter. Our international business segment comprises a diverse business matrix integrating both cross-border and local operations as well as B2B and B2C formats. This presents numerous opportunities in terms of both operational models and market expansion potential, and Xiangfan will provide a more detailed update momentarily. Beyond e-commerce and cloud, we've implemented strategic realignments across our key internet technology businesses through a thorough evaluation of their product capabilities and market competitiveness. While maintaining product competitiveness, most of these businesses will now place a higher priority on monetization. This quarter, we've already seen these businesses significantly improving profitability, And we expect this trend to continue in the coming quarters. We expect most of these businesses to break even within one to two years and gradually contribute to profitability at scale. This new fiscal year is a pivotal one for Alibaba as we set our strategic direction and realize the successes of our transformation. We are fully confident in Alibaba's sustained healthy development into the future. Hi, everybody. It's my pleasure to share with you AIDC's latest business progress. Over the past quarter, AIDC maintained its rapid growth momentum with overall revenue increasing 32% year-on-year, primarily driven by our cross-border business. In terms of the three drivers we consistently focus on, first, ongoing business model and supply chain upgrades, AliExpress maintained rapid year-on-year order growth with a percentage of AE Choice orders continuing to be high and gradually stabilizing. and enhancing the certainty and consistency of user experience. AliExpress and Zainal continue to jointly optimize logistics experience and significantly reduce the average delivery time quarter over quarter. We further optimized the organic balance of user experience, product richness and efficiency across our marketplace, semi-consignment and full-consignment models. The unit economics of the choice business improved by nearly 20% quarter over quarter. Second, product and technology innovation We advanced our AI and intelligent technologies across scenarios like AI customer service, cross-platform product placement, product description optimization, multilingual search, and precise recommendations, which boosted efficiency and user experience. These innovations were deployed across our platforms and have served around 500,000 merchants and covered 100 million SKUs. Third, sustained growth in key markets. Ongoing improvement in user experience bolsters AE's confidence to step up investments in key markets to expand user base and maintain leadership. As the exclusive e-commerce partner of the European Cup 2024, we effectively boosted AE and Trendyall's brand awareness. We're also exploring diverse localized business models. In Turkey, Trendyol increased monetization and profitability, solidifying its e-commerce leadership. It also enriched product offerings and marketing efficiency in the Gulf region while continuing end-user growth. In Southeast Asia, Lazada achieved single-month EBITDA profitability for the first time in July. This milestone reinforces our confidence to efficiently invest in the Southeast Asia market to consolidate our market share. In conclusion, our strategic focus is twofold, enhancing operational efficiency across all business segments, while, on the other hand, actively investing in key markets to drive quality growth and scale with the goal of achieving more substantial profitability at scale in the future. Thank you.
spk16: This past quarter's financial performance continues to demonstrate our strategy to revitalize growth in our domestic commerce and cloud segments. while reinforcing our leadership position. At the same time, we are improving the monetization and operating efficiency of our loss-making businesses with the goal of achieving sustainable business growth and profitability. Taobao and Tmall Group is winning the mindshare of our consumers. This past quarter, we achieved high single-digit online GMV growth and double-digit order growth. AIDC continues to achieve robust revenue growth driven by rapid order growth in cross-border businesses, especially from AliExpress Choice. AliCloud's revenue quality is improving at back-to-growth. Overall revenue excluding Alibaba consolidated subsidiaries grew over 6% driven by double-digit public cloud growth and increasing adoption of AI-related products. Our loss-making businesses are improving their monetization operating efficiency significantly. For example, local service group and Lazada significantly narrowed their losses during the quarter. During this quarter, we repurchased a total of 613 million ordinary shares or 77 million ADSS for a total of US dollar 5.8 billion. This includes the concurrent buyback of approximately 14.8 million ADSSs for US dollar 1.2 billion that was associated with our new CB issuance. As of June 30, 2024, we had 19 billion ordinary shares or approximately 2.4 billion ADSSs outstanding. Compared to March 31, 2024, there was a 2.3% net reduction in our outstanding shares after accounting for shares issued on our ESOP. As of June 30, 2024, we still have US$26.1 billion remaining in our share repurchase program. Additionally, as part of our plan to minimize annual ESOP dilution and better utilize the cash generated by our domestic businesses, we have started to replace a portion of Alibaba Group's ESOP incentives with long-term cash incentives for our employees starting last quarter. These cash incentives will be reflected as costs in our adjusted financial matrix, including segment EBITDA. While this change in compensation structure will lower adjusted EBITDA, it will also result in less ESOP dilution in the future. Total revenue, on a consolidated basis, total revenue was RMB 243.2 billion, an increase of 4%. Adjusted EBITDA decreased 1% year-over-year to RMB 45 billion. Excluding the effects of long-term cash incentive, adjusted EBITDA growth would have turned positive on a like-for-like basis. Our non-GAAP net income was RMB 40.7 billion, a decrease of 4.2 billion, or 9%. Our gap net income was RMB 24 billion, a decline of 9 billion, or 27%, primarily due to a decrease in income from operations and the increase in impairment of some investments, partly offset by the mark-to-mark changes from our equity investments. As of June 30, 2024, we continue to maintain a strong net cash position of RMB 405.7 billion, or US dollars, 55.8 billion. Free cash flow decreased by RMB 21.7 billion to RMB 17.4 billion. This year-over-year decrease mainly reflected the increase in expenditure related to our investments in Alibaba cloud infrastructure and other working capital changes related to factors including our planned reduction of direct sales businesses. Now let's look at cost trends as a percentage of revenue, excluding SBC during this quarter. Cost of revenue ratio decreased 1.1 percentage points. Product development expenses ratio remained relatively stable. Sales and marketing expenses ratio increased 1.7 percentage points year over year, primarily due to our increased investments in e-commerce businesses. G&A expenses ratio increased 1.4 percentage points. Excluding the provision of RMB 3.1 billion from a one-time shareholder class action lawsuit, our G&A expenses ratio would have remained relatively stable. Now let's look at the segment results, starting with Taobao and Tmall Group. Revenue from Taobao and Tmall Group was RMB 113.4 billion, a decrease of 1%. Revenue from our China commerce retail businesses was RMB 107.4 billion, a decrease of 2% compared to 109.8 billion in the same quarter of 2023. Custom manual revenue increased by 1% year-over-year, primarily due to a high single-digit year-over-year growth in online GMV, partly offset by decline in take rate. The year-over-year take rate decrease was primarily due to increasing proportion of GMV generated from new models that currently have lower monetization rates. Direct sales and others revenue in the China commerce retail business was RMB 27.3 billion, a decrease of 9%. As mentioned, we are proactively scaling down certain direct sales businesses, including those in Taobao and Tmall Group. China commerce wholesale business revenue increased 16% to RMB 6 billion, primarily due to an increase in revenue from value-added services provided to paying members. Taobao and Tmall Group adjusted EBITDA decreased by 1% to RMB 48.8 billion, primarily due to the increase in investments in user experience and technology infrastructure, partly offset by the narrowing losses in certain businesses. This increasing investment led to better consumer retention, increased the purchase frequency, and positive feedback regarding the overall shopping experience. Revenue from cloud intelligence group was RMB 26.5 billion, an increase of 6%. Overall revenue, excluding Alibaba consolidated subsidiaries, grew over 6% year over year, driven by double-digit public cloud growth and increasing adoption of AI-related products. AI-related product revenue continued to grow at triple digits year over year. Clouds adjusted beta increased by 155% to RMB 2.3 billion. The increase was primarily due to improving product mix through our focus on public cloud adoption and operating efficiency, partly offset by the increasing investments in customers and technology. We're observing strong and sustained demand for AI product and solutions from our customers, and are making significant investments to address this demand effectively. We believe our investments in AI capabilities and infrastructure will help strengthen our market leadership. We are confident in our ability to balance these investments with steady profitability improvements, ensuring sustainable growth and value creation. Revenue from international commerce retail business increased by 38% to RMB 23.7 billion, primarily driven by order growth from AliExpress' choice, as well as improvements in monetization. Revenue from our international commerce wholesale business increased by 12% to RMB 5.6 billion, primarily due to an increase in revenue generated by cross-border related value-added services. AIDC's adjusted EBITDA was a loss of RMB 3.7 billion, an increase of RMB 3.3 billion compared to a loss of 420 million in the same quarter last year, primarily due to the increasing investments in AliExpress and TrendU's cross-border businesses, partly offset by Lazada's significant reduction in operating loss from the improvements in its monetization and operating efficiencies. Revenue from Cai Niao Smart Logistics Network Limited was RMB 26.8 billion, an increase of 16%, primarily driven by the increase in revenue from cross-border fulfillment solutions. Cai Niao decreased by 30% to RMB 618 million, primarily due to increased investments in cross-border fulfillment solutions, partly offset by improved operating efficiencies. Revenue from local service group was RMB 16.2 billion, an increase of 12% driven by the order growth of both AMAP and Ulema, as well as revenue growth from marketing services. Adjusted EBITDA was a loss of RMB 386 million compared to a loss of RMB 2 billion in the same quarter last year, primarily due to improving operating efficiency and increasing scale. Revenue from our digital media and entertainment group was RMB 5.6 billion, an increase of 4%. Adjusted guitar was a loss of 103 million compared to a profit of RMB 63 million same quarter last year. Revenue from all other segments increased 3% to RMB 47 billion, primarily due to the increase in revenue from Fresh Apple, Alibaba Health, and Intelligent Information Platform, partly offset by the decrease in revenue from Lingxi Games and Sunnut. Adjusted EBITDA from all other segments was a loss of RMB 1.3 billion compared to a loss of RMB 1.7 billion in the same quarter of 2023, primarily due to improved operating results from Sunnut, Fresh Apple, Alibaba Health, and the Lingxi Games, partly offset by the increased investment in technology businesses. To wrap up, as Eddie and Jiangfan mentioned, for our Taobao and Tmall group, as order and GMV grow, we are advancing monetization efforts step by step. we expect CMR growth to gradually align with GNV growth over the coming quarters. For Alibaba Cloud, we are pursuing high-quality revenue and effectively execute our integrated Cloud plus AI development strategy. We are confident that revenue from external customers will return to double-digit growth in the second half of the fiscal year with gradual acceleration thereafter. For AIDC, we focus on proactive investment to drive high-quality growth, enhancing operating efficiency across all business lines. Our loss-making businesses are improving their monetization and operating efficiency. We expect most of these businesses to break even within one to two years and gradually contribute to the profitability at scale. Thank you. That's the end of our prepared remarks. We can open up for Q&A.
spk10: Hi, everyone. For today's call, you are welcome to ask questions in Chinese or English. A third-party translator will provide consecutive interpretation for the Q&A session. Please know that the translation is for convenience purpose only. In this 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, we can now connect to the speaker and SI conference lines and then start the Q&A session. Thank you.
spk05: Thank you. We will now begin the question and answer session. If you wish to ask a question, please press the star key followed by the number one on your telephone keypad. To give more people the opportunity to ask questions, please keep yourself to know more than one question at a time. Your first question is from Ronald Kung from Goldman Sachs. Please go ahead.
spk11: Thank you, Jo, Eddie, Hilby, Jonathan and Rob. And I want to ask a question about our tick rates. that uh with the high single digit gmv growth and one percent uh cmr growth it does imply a wider gap this quarter but management you just mentioned about the narrowing gap that that should come so how should we think about the take rate trajectory the time needed for cmr to align with gmv and can you talk a bit on what are the actual measures that we're doing is it software service fee or ad tech upgrades how would these uh new products translate to Taobao and Tmall respective take rates into the next few quarters. Thank you.
spk01: 感谢管理层接受我的提问。 我这个提问是关于take rate这一方面。 因为这一季度我们看到其实是GMV的增速与CMR的增速这个差距还是进一步的扩大了。 But you just mentioned that in the next few seasons, this gap should be reduced, and the two can be better unified. Can you introduce what kind of difference will the new software products introduced in the current and future seasons bring, so that the gap between the two can be further reduced? Let me answer this question. I think Taobao Tmall, our current priority is placed in
spk02: to enhance the user's purchase experience, thereby promoting the user's purchase frequency, and promoting the growth of GMV. We see that after the initial market share has stabilized, it is indeed at this stage that we will begin to accelerate the progress of some of the original projects aimed at improving take rate and commercialization. In fact, there are several main factors in this. The first factor is that in many new product models, One of the major changes is that our advertising products' full-time promotion is gradually accelerating. Full-time promotion actually requires good operation. It is not just a simple product. It requires three-way coordination. In other words, we carry out a relatively effective After 6 to 12 months of launch, we can see some obvious effects and progress. But we predict that this set of three measures that I just mentioned need to be perfectly combined together, such an advertising system, we think it may be after 12 months of launch of this product, it will gradually be a system that is more perfectly coordinated overall. Thank you.
spk01: This is Eddie, and I'll take that first before handing over to Toby. In the Taobao and Tmall group, the priority at present very much has been on enhancing the user shopping experience so as to drive heightened purchase frequency and GMV. Now, as market share stabilizes, which is what we've certainly seen this quarter, we can start to accelerate the pace of our monetization efforts. But there are a few factors that you have to look at. First of all, the various new products we've launched, including live streaming and including the 10 billion yuan subsidy program have resulted in high user return to platform and high user repurchase rates. But it's going to take a bit of time to roll out the new monetization approaches and products for them to gain traction. But that's certainly what we're looking at doing over the coming few quarters. The second thing to look at is our new advertising product, Chiantui, that we're introducing. Of course, in order for this to achieve solid performance, you need more than just that product in place. You need effective coordination and synergy across three different pieces. The first being user traffic on the Taobao platform. The second being having sufficient number of advertisers taking part across a sufficient number of different sectors with sufficient coverage of different kinds of products. And then beyond that, it'll take, say, six or more months to fully optimize the algorithms and also to optimize the user data. So starting from the rollout of Chen Zhan Tui, Back in April, it's likely to take something like six to 12 months of work to bring all of those different things together to achieve really solid progress and sizable growth. So in short, for those three different things to come together and for this all to really be working well, likely looking at something like 12 months from the initial launch date. And then to that, I'll hand over to Toby to also say a few words about technology service charging.
spk16: 我们也同时会充分考量中小商家的情况 所以对于年度GNV低于一定金额的中小商家 我们会全额退还他们的年度服务费 或者提供一定额注 帮他们在淘宝平台上拓展客户群 增加他们的GNV Yes, this is Toby. Just to add regarding the technology service charge that we started talking about charging as of September on Taobao and on Idlefish at a rate of 0.1%.
spk01: 6%. And that is to be calculated on the basis of actually received GMV, actually received by the merchants. And we've come to this decision in consideration of both prevailing market practice as well as opinion of our merchants, feedback from our merchants. Of course, we will have special measures to take good care of our SME merchants in particular, those whose actual annual GMV is below a certain threshold can either have that refunded or will find other ways to provide assistance to them to expand their customer base and grow their GMV to that threshold. So I would expect that with this starting as of September you can expect to see this making a difference in the financials over say the next seven months of this present fiscal year.
spk10: Next question please.
spk05: The next question is from Alicia Yap from Citigroup. Please go ahead.
spk04: Hi. Good evening, management. Thanks for taking my questions. I have a question on your AIDC business. How does management think about the overall competitive landscape now and how will that evolve over time? What are the competitive advantage of AliExpress for both the merchants and consumer that will help you defend your market position in some of the important countries? And then a follow-up on that is with Lazada seems to be turning profitable starting in July. Is that a timeframe that you target to achieve profitability for AliExpress as well? Thank you.
spk01: Good evening, Mr. Guan. Thank you for accepting my question. My question is about AIDC. I want to know how you think about the current competitive environment and the evolution of the competitive environment. What advantages do we have on the business and consumer sides? What benefits do we have to maintain our competitive advantage First, I think
spk14: Alibaba's overseas business is made up of multiple business units. We may have some differences from other companies in this single business model. We have different brands in different markets. We also have a lot of local teams operating these platforms. Our business is also a combination of cross-border and local. I think, on the one hand, I just mentioned that our business We have a local brand in different markets, and we also have some experienced local teams operating it. We also hope to integrate the supply of the ARI Group as soon as possible, especially the supply from China, including the supply from Taobao, and the supply from 1688 and other platforms. On the consumer side, I think we still have a very good brand in many markets. and a very widespread market awareness. What we are mainly doing now is upgrading and transforming business models. For example, Ice Price. In the past, it was a relatively low-efficiency and relatively weak-experience business model. We are now also in the process of transforming the business model. You just mentioned Lada's profit. I think July was the first time we implemented EBITDA. I think we will adjust it according to the market situation in the future. We hope to maintain this market format and continuously optimize our profit and loss level. Alipay is still in a relatively early stage. Because its business model is transitioning from a platform model to a platform model. It is still in a process of transformation. We are also continuously optimizing. For example, we just talked about our last quarter. We also found that we also saw an optimization of our entire AHOIS. In the next few quarters, we will continue to optimize our efficiency and at the same time pursue a healthier growth.
spk01: Thank you. This is Jiang Fan. Well, the first thing I would say is that AIDC, unlike some of the other businesses within the Alibaba group, comprises a number of different types of businesses. It's not a single business. We're present in many different local markets with local brands in those markets, with local teams operating them. And overall, AIDC is really a combination of both cross-border and and local business so something that we're working on in that broader context of being in different markets with different local brands local experience local teams operating them is we're working on integrating and sharpening our integrating supply especially supply from china and sharpening our advantage around supply product supply out of china On the consumer side, I think certainly one advantage we have is very good consumer brands with high brand recognition and certainly also working very hard to enhance the user experience on AE. In the past, AE was perhaps a low-efficiency kind of platform that too often offered consumers a relatively poor user experience, but we've been working very hard on improving that. As for Lazada, yes, as you noted, as I said earlier, we were EBITDA positive for the first time for a single month in July of this year. And we'll continue to make adjustments as we have there while preserving our market share, finding ways to enhance efficiency and increase our profitability there. AE Choice is an important model that we've been investing in, and it's taken time to get to where it is. UE continues to optimize in respect of AE Choice, and over the next few quarters to come, we'll continue to make those efforts to drive higher efficiency and achieve high-quality growth.
spk10: Next question.
spk05: Thank you. The next question is from Thomas Chong from Jefferies. Please go ahead.
spk12: Hi, good evening. Thanks, management, for taking my question. My first question is about StockConnect. Can management comment about our thoughts about the status of dual primary listing and the chance of going into StockConnect? And my second question is about our cloud business. Given that we are expecting the external cloud revenue back to double-digit growth in the second half of fiscal year and accelerate going forward. I just want to get some color with regard to our AI revenue contribution. What's the goal that we are looking for in the long run coming from AI? Thank you.
spk01: Uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, Okay, Thomas, thank you for your question. I will take the first one and then Eddie will answer the second question.
spk16: And regarding your question about the Stock Connect, I guess your question is about the primary conversion at our end. Currently, we are actively pursuing Hong Kong primary listing. We will have an AGM on the 22nd of August. So we have a proposal that's subject to the shareholders' approval. And then we are aiming to complete the conversion process you know, after we obtain approval from the shareholders and get it completed before the end of August. Then, you know, join the Stock Connect, it was due subject to, you know, different exchanges sort of like, you know, process. So that's, you know, that's what we understand is procedure, just a procedure to go through. So that's the update on the status.
spk01: Thank you for your question. I am Toby. I will answer the first part of the question first. Then the second question will be answered by Eddie later. You mentioned whether to join Hong Kong Stock Exchange. I think your question is about our position in Hong Kong as the main listing place. This is a change that we are looking for. In fact, on August 22, we are about to open our shareholders' meeting. Now, there is such a proposal at the shareholders' meeting, so it still needs a large number of shareholders to approve it. If the shareholders' meeting can be approved this time, we expect to be able to complete the transformation of the main listed place by the end of August. As for how to join Hong Kong Stock Exchange in the future, this still has to be done. Okay, let me answer the second question about cloud.
spk02: We can see that our cloud customers are very interested in AI-related products. And from the perspective of the pipeline of our customers, we are still far from meeting their needs. So our current forecast is that our external customers' income will go back to two-digit growth in the second half of last year. The forecast is still relatively clear. AI product-related contribution income, in fact, from the data point of view, we will see that most of the growth, most of the gain, actually comes from AI product-related gain. Because we now, on the one hand, the industry also sees that the entire industry, with CPU as the core, the traditional cloud computing market gain is still relatively limited. The new IT needs of a large number of customers are basically concentrated in Thank you. This is Eddie. I'll take your second question about cloud.
spk01: There's very, very robust demand among our customers for AI and AI-relevant products. And if you look at the pipeline, you can see that that demand is still far from being satisfied. So we think it's a very clear-cut trend that revenue from external customers will achieve double-digit growth in the second half of the fiscal year. In terms of the breakdown of that AI product revenue, in terms of the revenue, pardon me, probably most of that growth will be driven by AI products. If you look at the industry as a whole, Demand for CPU-based traditional cloud computing is relatively limited, where most of the growth is now focused on GPU-based AI product development. So I would say something like more than half of that expected growth will be driven by AI products.
spk10: Next question, please.
spk05: Thank you. The next question is from Ellie Jiang from Macquarie. Please go ahead.
spk03: Thanks so much, management, for taking my question. First of all, a quick follow-up on the prior cloud question. Obviously, we are already showing some early indicators of the positive momentum, and the management shared about the strong demand on AI. Given the current kind of macro conditions and softened enterprise demand into the second half, just can you comment on kind of the mixed impact, especially in the next several quarters? And then also the second question is on the table of GMV reacceleration. So we're encouraged to see, you know, our overall GMV momentum catching up. And actually for the second quarter, we already caught up to the industry pace reported by NBS. I'm wondering, you know, can management comment on the key drivers behind the GMB re-acceleration and anything you can really talk on the return rate that we've been seeing across the ecosystem? Thank you.
spk01: Good evening, Mr. Guan. I have two questions. The first question is about the cloud. We have seen some initial signs that there is a very positive development trend in this area. There is a very strong demand. But I want to combine the macro aspect. We see macro economic data and possible corporate demand softening. What kind of impact will these have on the cloud? The second question is about Taotian Group. We have noticed that the GMV increase has already reached the top. The increase of the big plate announced by the National Bureau of Statistics has been re-matched. What kind of factors play an important role in this?
spk02: I'll answer the question about the cloud. What we see now is that you want to ask about the need for companies to slow down under the current macroeconomic conditions, right? But what we actually see is that most of the companies, especially in terms of our cloud customers, they are in this year's new the budget for AI needs has actually expanded a lot this year than it did last year. Because for most digitalized enterprises, the demand for AI is a demand that must be invested. In other words, because all industries are using AI to improve the product capabilities or product efficiency of their own industries, we see that digitalized industries The industries and enterprises that are very dependent on digitalization will not be invested in this area in general. Because if you are behind in this area, the ability of the product will also become behind in the industry. So we see that the demand for this area is still very obvious and there is no downward trend. Because this is a brand new trend.
spk01: Thanks. This is Eddie. I'll take the first question that had to do with cloud. Look, I think your question had to do with how macro economic conditions are resulting in softening enterprise demand. But that's not at all what we're seeing. What we see certainly among our own cloud customers is that their AI budgets for this year are higher, significantly higher than what they were last year. Any enterprise that is digitalized and relies on digitalization must be investing. It simply has to be investing in AI. All the industries now that are using AI are leveraging it to enhance their competitiveness and efficiency. So any enterprise that's in any way digitally reliant will certainly not scale down its investment in AI because to do so would impair their own competitiveness and efficiency. So that's a clear trend that we're seeing, and we're not seeing any kind of slowdown or softening.
spk02: The second question you asked is about Taobao Tianmao's GMV's real-time return. This question is actually one of the most core questions for us in terms of our overall business strategy for Taobao Tianmao. In terms of our business strategy, As I said before, our most important investment is to invest in the construction of good products, good prices, and good service experiences. I think this is the most basic investment in our e-commerce experience. For us, for Taobao Tianmao as a platform, we think that because Taobao Tianmao has a very rich supply of products, and the consumer population of the service is also very complex. So for us, good goods, good prices and good services are divided into different... We will divide consumers into different needs. By dividing consumers' needs into different needs, we can separate the supply and demand of different products, and the experience of different services. And under different supply and demand of different products, we have to use different product forms or different... to make them able to serve our different consumers. So in general, you can understand that the most fundamental thing is good products, good prices, and good services. But for Taobao, we have to provide different people with different experiences in these three dimensions. And behind these three different experiences, we have to use the optimization of supply chain to continue to improve this good goods, good prices, and good services.
spk01: As to your second question on the recovery in GMV growth rate at TTG, I think really this comes down to our overall strategy for the Taobao and Tmall group, where the most important thing we're investing in is the underlying capabilities that allow us to deliver quality products and quality services at attractive prices. And those really are the most basic parts of the user experience when it comes to e-commerce. Now, if you look at TTG, we have an extremely rich and diverse product assortment and also a very complex, multifaceted user base. So it's important for us to segment those consumers and to make available to them different kinds of product supply and different kinds of service experience to cater to that diverse range of needs of those different segments. And so that requires us to develop different kinds of supply capabilities for those different consumer segments. And underlying all of that is our ongoing investment in optimizing supply chains and supply chain In order to be able to ensure we have quality products and quality services at attractive prices for those different consumer tiers.
spk16: Let me answer your second question about the return rate. First of all, the return rate of the entire Chinese e-commerce industry is rising. including us and all the e-commerce platforms, our return rate is still slightly lower than the average level of the entire industry. This is the first point. The second point is that we think 退货体验是消费者体验当中十分重要的一部分,是流入消费者的一个重要环节。所以当我们看到消费者的留存率,购买评次,购物体验的反馈,其实随着一些 退货体验的提升都达到了改善的时候,我们相对来说,我们觉得这是一个健康的。那么我们也特别观察到在NPS,就是净推荐指数里面, In our platform, especially for medium and high-end users, this year is still going well. This also reflects the convenience and satisfaction of retail services, including refunds. Because of our refund rate, now, in terms of the entire market, in terms of the entire industry, we are still slightly below the average level of the industry. So we are not particularly worried about the increase in refund rate, which will affect the willingness of merchants to invest in our platform.
spk01: Thanks. This is Toby, and I'll take that other question about return rates. You know, purchase return rates are increasing across the industry as a general trend. But in the case of Alibaba, our return rate is slightly lower than the industry average. The second thing I would say is that the return experience is a very important part of customer experience overall. And when the consumer has a good experience around returns, that's going to be favorable for increasing retention and purchase frequency. And I think it's important to note that on our platform this year, if you look at net promoter score, NPS, especially among mid and high tier consumers, our NPS has improved considerably. So again, you know, our return rate is slightly lower than the overall market average, and I certainly don't think that that's going to discourage merchants from investing and doing business on our platform.
spk00: Next question.
spk05: Thank you. The next question is from Gary Yu from Morgan Stanley. Please go ahead.
spk06: Hi, good evening. Thank you for the opportunity to ask questions. My question is regarding a management comment about some of these loss-making business aiming to reach a break-even in the next one to two years. Could management share more detail in terms of individual segments, including local services, AIDC, as well as most of the retail business under the all other segments? How should we look at the timing? of kind of break-even target in the next one to two years individually. Thank you.
spk01: Okay, thank you, Gary. I'll take that question. I think, you know, what Eddie and I was explaining is, you know, except for Taobao and Tmall,
spk16: sort of like the core businesses we mentioned previously, including Taobao, Timo, Cloud, and the AIDC, all the other businesses, some of those businesses are still loss-making at this stage, and they will be ramping up their efficiency and monetization and reduce their losses significantly in the next year or so, one or two years, and to reach a break-even. And then afterwards, they will start to deliver a scalable profitability going forward. How are we going to achieve that? As I was explaining, what we want those businesses to do, they need to, on one hand, care about the efficiency of the investment they are making, balance the scale and efficiency, which is very important. Secondly, They on one hand that they are making investment. They also need to care more about monetization. So it's critical to enhance the monetization rate, you know, using their business model. So with both more income and the sort of higher efficiency in the spending, they are moving towards the, you know, break even and profitability. You know, we can clearly see, as I, during my prepared remarks, I explained, I used two examples. One is local service, and the other one is Lazada. I think, you know, Jiang Fan explained the Lazada. For local service, I think it's all about, on one hand, you need to increase the scale, i.e., you need to increase the order. On the other hand, you need to improve the unit economics. In, for example, Erma's case, you know, it's about all about it's sort of like a meal delivery business, you know, improve the unit economics continuously. And then in AMAP, I think it's all about, you know, for example, the ride hailing businesses per all the unit economics need to improve. So with the both scale and efficiency improve, we are able to reducing the losses very significantly and moving towards the profitability. So I think this is pretty much how this business will execute and move towards profitability.
spk01: Hello, I'm Toby. 我想前面我和Eddie讲的意思就是除了淘宝天猫云AIDC这些核心的业务之外 你综合其他的业务那么有一部分还是在亏损之中 那么接下来他们会大幅提升他们的效率大力推动商业化 In this way, we can reduce the loss by about one or two years. It is expected to achieve a balance of profit and loss. After the balance of profit and loss, they can gradually contribute to the group in terms of scale. How to achieve this? First of all, these businesses need to invest further to improve efficiency. It is very important to balance scale and efficiency. Secondly, they need to pay more attention to the problem of commercialization. That is to say, they invest and spend money to improve their efficiency. At the same time, we need to improve its commercialization rate so that it can move towards balance and ultimately earn profit. So in my speech just now, I just mentioned two examples. One is local life, and the other is Lazada. So Jiang Fan also explained these plans of Lazada. In terms of local life, we need to increase the size and increase the order volume, and at the same time, we need to improve the UE. For example, ELE is a typical example. It is a new business model, and now it needs to gradually improve its UE. The car service in Gaode also needs to improve its UE. Next question, please. Thank you. The next question is from Jiang Xiao from Barclays. Please go ahead. Thank you very much for taking my question.
spk15: My question is about the gap between CMR and GMV. It's great you achieved high single-digit for GMV growth this quarter. The gap between the two appears to be high single-digit as well. Is that a high watermark going forward, especially you recently launched Transantone, and especially when you start to charge a technology service fee starting in September? Any comments would be great. And related to that, I think Toby talked about 0.6% of GMV for the technology fees. But some of the smaller merchants, you're going to waive that. I was wondering, is that sort of a net number in terms of percentage of GMV you think the technology service fees will bring to CMR? Any clarification would be great. Thank you.
spk01: 好的,我提的问题还是关于CMR和GMV两者之间的差距。 那么非常好,本季度GMV的增速是达到了高的单位数。 但是看来CMR与GMV之间的差额也是在高的单位数这样一个水平。 那么请问这是不是一个可能是以后我们会看到的一个最高的这样一个水位。 接下来我们推出。 uh uh Is it that the total GNV will contribute to the future of CMR based on such a 0.6 number? Or how should we think about this issue?
spk16: Okay, thank you for the question. I'll take that. I think, you know, as previously, Eddie, you know, also in my prepared remarks, I think the gap between the GNV, online GNV and CMR you know, reflect actually the job of the takeaway. Why the takeaway job? You know, because currently, you know, some of the new models with a very high growth in GMV currently still have relatively low monetization, which will be ramped up in the next, you know, a few quarters, if you like. So that's why there's still a gap. As we also said, you know, in the next few quarters, CMR growth will be at the same pace with GMV, which means take rate will start to get relatively stabilized. So that's what we're expecting. And Eddie explained why GMVs currently grow faster than the take rate. The reason is because by executing our strategy, we first need to invest in the consumers you know, get the more sort of purchase frequency from the consumers, then get the GNV growth. And as soon as we start to observe the GNV back to growth, and then the market share becomes stabilizing, we will gradually ramp up the monetization sort of like a pace. A few things we're doing, you know, Eddie explained, which is currently be rolling out. the penetration into traffic will take, you know, a number of quarters. So that will certainly improve the take rate, which means, you know, will accelerate the CMR growth. And secondly, with this, you know, software service fee charge will also help on the sort of like the take rate. You know, a few other sort of like measures as well. So these are all the things currently we're doing. We started to do it because we see the growth of back on the GNV and we see the sign of stabilizing the market share. And then your question about how it is calculated for this 0.6 charge, it's on the completed GNV. So it's charged on the completed GNV, however, we will refund back to some of the small and medium merchants if their annual GMV is below certain threshold.
spk01: Actually, Eddie also talked about this problem. I also talked about this problem in my speech. If you look at the gap between GMV and CMR, the response is that our take rate has decreased. So why is that? It's because some of our GMV's fastest businesses are the ones with relatively low commercialization rates. So in the next few weeks, we will gradually But at the moment, there is still such a gap. So just now we also talked about the next few seasons. We think that the increase in CMR will match and synchronize with the increase in GMV. In other words, the take rate will be relatively stable. So just now Eddie explained that We have always invested in the experience of consumers. We increase their purchase frequency, which can lead to the growth of GMB. As our market share stabilizes, we can speed up commercialization. So just now, Eddie also introduced that the promotion and promotion of our full-time push will take several seasons to get in place, which will also accelerate the growth of our CMR. In addition, we talked about starting to collect technical service fees, which will also help to improve our take rate. So why are we starting to do this now? Because we see the signs. That is to say, the increase in GMV has been restored, and the market share has also stabilized. As for how you calculate the technical service fee, this will be calculated according to the GMV size of the transaction completed. However, some small business owners whose GMV has not reached a fixed rate will be refunded.
spk10: Next question.
spk05: Thank you. The next question is from Kenneth Frong from UBS. Please go ahead.
spk08: Hi. Good evening, management. Thanks for taking my question. I have one question, mainly on the financial number. One is on the tax rate. Notice that the tax rate is quite high for the current quarter. Can management explain what's the rationale behind and how should we model the tax expense going forward? And the other thing is about the 56% decline in our free cash flow. Understand that it is related to our investment on AI cloud as well as some one-off expenses or cash flow on the planned reduction on direct sales business. Should we expect that to gradually normalize in the next one or two quarters, especially for the direct sales business part? Thank you.
spk01: Thank you. The first question I mentioned is that this quarter we noticed that our tax rate is relatively high. How do we understand this? And how should we calculate the tax rate when we are doing modeling in the future? Secondly, due to the drop in the free cash flow this quarter, we understand that we are investing in AI and cloud, and we are deliberately reducing some direct business. But how should we consider free cash flow in the future?
spk16: Thank you, Kenneth. I will take this question. Your first question is about tax rate. If you're using our P&L tax divided by profit, you normally cannot reach the real effective tax rate because we do have a lot of, if you like, permanent differences, one-hour items, which does not have tax implications there. We are monitoring more on an adjusted basis on the tax rate, which is relatively stable in this quarter compared with last quarter. So, you know, in terms of your model, I guess probably, you know, we can, our team can sort of like look into your model and sort of communicate offline. So this is your first question.
spk01: The first question is about the tax rate. If you take the loss table, the tax divided by the profit, then usually you can't see the actual tax rate because we have some permanent differences. Then the tax rate, we have been monitoring it all the time. So it should be said that this quarter is relatively stable compared to the previous quarter. But how do you build a model? I think we can also do this after the meeting. We can communicate in private.
spk16: This is the first question. We are using an after-adjustment one to consider the impact of such a tax rate. Your second question is about free cash flow. As I explained, there is quite a big significant job of free cash flow. One of the reasons is the significant increase in expenditure on the AI infrastructure investments, if you like. And the other reason, as I said, is because of the working capital changes in relation to some of the business scale jobs. For these business scale jobs, many of them, if you like, a majority of them are from those, you know, planned scale down, if you like. As I was explaining why our direct sales business within Taobao and Timor dropped quite significantly, the reason is we proactively scaled down some of these 1P businesses in Taobao and Timor. The reason is we believe in some of these business or categories, you know, 1P businesses format probably is not a more efficient format. So that's sort of proactive. But you will also have some of the businesses, you know, scaled job was not because proactively did that. You know, some of these just like the overall market, you know, situation, for example, as I said, you know, the revenue dropped From, for example, like Sunna, like InTime, all those businesses are in 1P. And the job of their scale actually impacts the working capital. I don't know, probably I can give a little bit more color on this. Because for doing 1P business, you know, on one hand, you are buying inventory from vendor. On the other hand, you sell it. And the vendor normally gives you a credit term, like in 60 days or 90 days. If you can make your inventory turnover, i.e. sell the inventory within a short period of time, shorter than the sort of a credit term you are given, actually you are generating cash flow, particularly if the size is going up. You are generating positive cash flow. So on the contrary, if you are reducing the scale, it will have outflow on the working capital. But is this a permanent impact? To me, I think this is a relatively temporary impact. During the process of reducing the scale, we will see this outflow. But when the business size became stable, we will no longer see this type of outflow.
spk08: Thank you very much, Lopi.
spk01: Yes, this is about the decline of the free cash flow. On the one hand, of course, we are investing in AI. On the other hand, there is a change in operating capital. This is due to the reduction of some business scale. Some of the business scale is reduced. This is what we deliberately reduced in the plan. ah, ah, ah, ah, In addition, I can also introduce that in these retail businesses, you often purchase and buy goods from the supplier. You may have a payment period of 60 days or 90 days, which can actually bring you a positive cash flow. If such a business Next question. Thank you. The next question is from James Lee from Mizuho. Please go ahead.
spk13: Great. Thanks for taking my questions here. My question is related to AI, a more big picture question for you guys. Can you guys talk about maybe implication of open source large language model, how that impact the adoption of AI in China? And also, how should we think about large language model as that transition into agents? And how do we think the use cases may change for your merchants and customers? Thank you.
spk01: 我提的问题是关于AI方面。 想要了解一下开源的大模型可能给你们这个产品在中国采用和普及带来什么影响。 另外想了解当这个大模型转换成为代理,
spk02: What kind of difference will it bring when it comes to agents? Your question is very good. Let me answer it. The first question I think is that in this round of deep AI, it is always the direction that everyone chooses from different companies. But for As for Aliyun, we chose it because our business model is more about providing a cloud-based infrastructure. We provide an open-source model that is first-class in the industry, and it will be very helpful for developers in China and all over the world, because most developers still hope to have more control over this model, to have more will use more of our open source model, it will naturally, because when its application is online, it will naturally prioritize the use of Aria's AI products. So this is a match to our business strategy. And we also see a lot of companies or a lot of developers when they choose, the open source model will become their priority. Especially in China, because China has a lot of environments and applications that require stronger controllability. But at this point, I can't provide a very strong data to show how many developers have chosen our Aria AI service because they have used our open source model. But we think that in the Chinese market, we are the only company that provides open source models AI cloud service manufacturers. I think these two business strategies are a perfect match. And then the other question you mentioned, I think it's more complex and long-term. Because the question you raised is also relatively broad. I think in general, the ability of future big models will actually get stronger and stronger. One model will... The data it uses will be more and more versatile. And then at the same time, the size of the parameters will also get bigger and bigger, so the things it can do will also get stronger and stronger. But now we do see that in solving some complex problems, we will see that many of them will need to solve some complex reasoning problems through agents in this way, and these agents may also use different models to solve this complex reasoning process. So I think this trend is also very obvious, There are a lot of developers working on these agents now. But I have my own judgment. Maybe these agents will have more and more large models that are capable enough to produce these agents in the future. It will be more and more automated.
spk01: Thank you. Well, on your first question, you know, in this recent wave of generative AI development, different companies have made different choices around whether to develop open or closed source models. Alibaba Cloud is itself a cloud service provider. So the clear choice for us has been to develop open source models. large language models. That's very helpful, of course, for developers. Developers want more control. They want more scope to optimize. So we feel that providing open source large language model to developers is advantageous for them. And that, of course, very much fits into our own strategy because we are a cloud service provider. So it's doubly advantageous. they can develop their offerings using our open source models, and then they're very likely to continue to select Alibaba to deploy those offerings at scale. So that's entirely consistent with our strategy. As for the idea of agents, the Models are becoming larger, more and more multimodal, with more and more parameters becoming stronger and more capable. And so there will be a need for agents, I think, to deal with some of the more complex needs around inferencing, especially agents that can call on different underlying factors. large models. I know lots of developers are working on it, but I think going into the future, this kind of development will become more automated.
spk10: Let's open to the last question.
spk05: Thank you. The last question is from Yusuf Squali from Trust. Please go ahead.
spk07: Thank you very much. That's Yusuf Squali from Truist. So, Just on the follow-up on the AI question, one, if I look at your CapEx, it's more than doubled year-on-year in Q1. Number one, is that a good run rate to work off of for the rest of the year? And number two, as you look at the return on those investments, can you help us just understand your framework of reference? One of the key questions we often get here, at least in the U.S., is the ROI associated with the AI and kind of the timeline or the time or framework around which you kind of expect these investments to start bearing fruit and maybe give us examples of where you're seeing early green shoots. Thank you.
spk01: 好,这是最后一个问题。 我的问题还是关于AI这一方面的。 Then we see that your capital spending should be a lot more than before. I want to know if the remaining time of this fiscal year is a reasonable rate of income, and will it continue to go on like this? The second question is that in the United States, we often talk about this kind of investment return rate, this ROI. When do you think these CAPEXs in the AI field will start to bring real investment returns? Or in which areas have we already started to see some blind spots?
spk16: Okay, I will take the first question and Eddie will answer the second question. I think with respect to the CAPEX, just like as you have observed from our reporting, increased very significantly. I think the reason is because we see clearly very strong demand and the backlog. That's why we are investing. We would expect in the next few quarters, we would expect a similar level of investments in CapEx going forward.
spk01: Toby, let me answer the first question first. Yes, as you can see, our capital investment, CapEx, has been greatly improved. Why is that? That is because we clearly see that there are very strong needs in this area, and there are a lot of urgent needs. So we think that in the next few seasons, we will continue to continue to do our investment at such a level.
spk02: Okay, let me answer your question later. I think now we are... Just like what Toby just said, in the following few seasons, our investment in AI CapEx will continue at this pace. Because we now see that the needs of customers are very abundant, including the pipeline of customers, which is still far from being satisfied. From our customer's point of view, our AI products are training, reasoning, and... So in fact, these CapEx investments in the recent few seasons, we will see their investment return rate is Thanks. This is Eddie. So to continue with the second part of this answer,
spk01: Certainly, as Toby said, over the next several quarters, we expect to continue to be investing in AI CapEx at that kind of pace. And it's simply because we see a lot of demand, a lot of unmet demand from many clients. And you look at the pipeline those clients have, you know there's going to be ongoing demand. So whether it's for training or inference or API calls, What we see when we're making these kind of CapEx investments is as soon as we get a server up, that server is essentially instantly running at full capacity. There's that kind of demand. So, you know, we can expect to see a very high ROI over these next quarters because we're building compute power to meet existing demand and that new compute power coming online is getting instantly taken up and running at full capacity from day one.
spk10: Well, thank you everyone for joining. We will see you next quarter.
spk05: Thank you that does conclude our conference for today. Thank you for participating. You may now disconnect.
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