Alibaba Group Holding Limited

Good day, everyone, and welcome to Alibaba Group's September 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 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. As usual, we would like to remind everyone that today's discussions may contain forward-looking statements that are subject to risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the Safe Harbor statements that appear in our press release and investor presentation provided today. Please note that certain financial measures that we use on this call are expressed on a non-GAAP basis. Our GAAP results and reconciliations 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 refers to year-over-year growth versus the same quarter last year. With that, I will now turn to Eddie.

Greetings and welcome to our quarterly earnings call. This quarter, our core business segments maintain steady growth guided by our user-first, AI-driven strategy. Purchase frequency continued to drive GMV growth on our platform with interoperability initiatives, adding new growth impetus. Recently, Monthly active consumers on Taobao and Tmall reached a new all-time high. Alibaba international digital commerce revenue growth remained strong. Cloud revenue, excluding Alibaba consolidated subsidiaries, grew steadily with AI products contributing an increasing share. Across segments, we progressively enhanced operational efficiency and monetization capabilities and further improved the performance of loss-making businesses. For Taobao and Tmall Group, we stick to our user-first strategy. During this quarter, purchase frequency continued to drive GMV growth with continued improvement in overall user experience. Our loyal customers represented by 88 VIP members continued to increase, reaching 46 million by quarter end. In terms of monetization progress, we implemented an industry standard 0.6% software service fee this quarter while providing certain rebates to SME merchants. Merchant adoption of Alimama's Chuanjia and Tui marketing tool continued to rise contributing to marketing revenue growth. We concluded a successful Double 11 Global Shopping Festival during which Taobao and Tmall achieved robust growth in GMV with the number of monthly active consumers back to growth and achieving a record high. We believe that the growth of purchasers will continue and user growth and retention will subsequently bring more consumption upside in the future. We're optimistic about the government's macro stimulus policies and are confident in their positive long-term economic impact. While e-commerce competition remains intense, we'll continue to invest in core user groups and product categories, increase investment in new users and improve user retention. Implementation of these initiatives will drive sustainable growth of our platform. In our cloud segment, we continue to optimize revenue mix while advancing our integrated cloud plus AI development strategy. Alibaba cloud revenue, excluding Alibaba consolidated subsidiaries, grew 7% this quarter, a steady improvement from the June quarter. The revenue growth was driven by double-digit public cloud growth, and in particular, revenue from AI-related products maintained triple-digit growth for the fifth consecutive quarter, increasing its share in public cloud revenue. During this quarter, Alibaba Cloud held the 16th Apsara Conference and launched a suite of competitive technologies and products. We believe the AI era is just beginning, and we're just still in the early stage of HEI transformation. Looking ahead, AI's potential extends beyond mobile screens. It's poised to reshape the digital world and ultimately transform all industries in the physical world. As a leading cloud service provider for AI in China, We will continue to invest in advanced technology and AI infrastructure while optimizing operational efficiency. This will enable us to deliver more reliable and cost-effective AI technologies and products across industries. We believe that as AI penetration grows, Alibaba Cloud's cloud computing and AI-related products will become the foundational infrastructure that supports development across industries. In international e-commerce, AIDC achieved 29% revenue growth this quarter, maintaining strong growth momentum, and Cheng Fan will be sharing more details shortly. This quarter, Zainiao further strengthened synergies with other businesses in our group and significantly advanced its highly digitalized global logistics network. We'll continue to invest in core capabilities and promote front and back-end synergies. This quarter, we also narrowed losses in both local services and digital media entertainment, demonstrating steady and progressive improvement in operational efficiency. Despite intensifying e-commerce competition in recent months, Tableau and team all achieved breakthroughs in core user retention and in new user growth. Our cloud business maintained rapid growth in AI-related products. Other businesses continued to improve their operating efficiency as planned while achieving business growth. We'll continue investing in core businesses and improve quality of operations, and we are fully confident in the future. I will now hand over to Jiang Fang. Hi, everybody. Over this past quarter, AIBC's overall revenue grew by 29% year-over-year, primarily driven by cross-border business. In terms of our three areas of consistent focus, first, AE choice orders maintained strong year-over-year growth Its relatively high share of total orders further solidified the certainty and consistency of user experience. Average delivery time continued to shorten. During this quarter, we focused on optimizing the mix and operational efficiency of our marketplace and consignment models, improving user experience and product selection with steady improvement in AE Choices unit economics. We also launched the AliExpress Direct model, leveraging merchants' local inventories and overseas markets to expand product selection and optimize fulfillment experiences. Second, we continue to explore the application of AI across our businesses, launched and updated multiple AI tools. We released our AI-powered B2B search engine in November. This new product reimagines international procurement through conversational search, making global sourcing easier for SMEs while improving overall platform transaction efficiency. Third, we continue deepening our presence in key markets. Trendyall's international business maintains strong momentum in multiple adjacent markets with improving product selection and user experience, We will leverage the traditional peak season in November and December to increase investments and expand user base in an effective and efficient manner in key markets while balancing and enhancing user acquisition and operating efficiency. AIDC will remain focused on enhancing operational efficiency while strategically investing in key markets to pursue our strategic goal of profitability at scale. Thank you.

Thank you, Jiangfan. The financial performance of the past quarter further confirms that our execution of the growth strategy in our core businesses remains on track. On top of Tmall business, we've made steady progress in our monetization strategy this quarter with accelerated CMR growth contributing to a solid trend in our domestic e-commerce business. We implemented the software service fee based on a percentage of completed GNV starting from September the 1st. Our AI-powered platform-wide marketing tool saw an increase in merchant adoption from the prior quarter. Merchants benefit through improved marketing efficiency, which we expect will lead to increased spending on our platform. We adopted a more open approach for payment and logistics services on our platforms to make shopping our platforms more convenient to a larger base of consumers and improve merchants operating efficiency. We expect this will translate into user growth and more transactions in the future for our cloud business. Momentum remains strong as revenue growth accelerated from the prior quarter to 7%. This growth is driven by the increasing demand for AI, which triggers more demand for our public cloud products. Revenue from our public cloud products grew at double digits while AI-related product revenue achieved triple digits year-over-year growth for the fifth consecutive quarter. This quarter, AIBC maintained its rapid growth with strong momentum from cross-border business expansion, especially through our choice business. Both AliExpress and Trendio continued investing to grow users in Europe and the Gulf region. Beyond e-commerce and cloud, we are improving the operating efficiency of our other businesses with the goal of sustainable business growth and returning to profitability. Some of the businesses are achieving profitability even sooner, while the majority will achieve breakeven within one to two years and gradually begin to contribute profitability at scale. For the September quarter, we repurchased Shear's for a total of U.S. dollar 4.1 billion. Combined with the U.S. dollar 5.8 billion repurchased during the June quarter, we spent a total of approximately U.S. dollar 10 billion and achieved a 4.4 net reduction in share count for the first half of the fiscal year. Even after factoring in ESOP issuances, we have been ABLE TO ACHIEVE THIS SIGNIFICANT LEVEL OF CREATION JUST SIX MONTHS INTO FISCAL 2025 COMPARED TO A 5.1% NET REDUCTION IN SHARE COUNT FOR THE ENTIRE FISCAL YEAR 2024. AS OF SEPTEMBER 30, 2024, WE STILL HAVE U.S. DOLLAR 22 BILLION IN AUTHORIZATION FOR FURTHER SHARE REPURCHASE PROGRAM. The pace of our share buybacks will be a function of share price as our strategy is to optimize share count reduction against the cash cost of an aggressive share repurchase program. Beyond our share repurchase program, we also proactively manage dilution from our ESOP program by replacing a portion of the ESOP with long-term cash incentives starting this fiscal year this shift allows us to limit sheer dilution in the future as well as better utilizing our cash generated from domestic businesses in august we completed our primary listing in hong kong followed by inclusion in the southbound stock connect in september by september 30 2024 Net inflows into our Hong Kong listed shares reached Hong Kong dollar 46 billion, representing approximately 515 million Hong Kong shares, which is equivalent to US 64 million ADSs in just 12 trading days. This accounts for approximately 3% of our outstanding shares. We are pleased that the Southbound Stock Connect has enabled a broader access and engagement for investors from mainland China. On a consolidated basis, total consolidated revenue was RMB 236.5 billion, an increase of 5%. Consolidated adjusted guitar decreased 5% to RMB 40.6 billion, primarily attributable to the increase in investment in our e-commerce businesses. Excluding the effect of long-term cash incentive plan, our adjusted EBITDA growth would have been a decrease of 4% on a life-for-life basis compared to same quarter last year. Our non-GAAP net income was $36.5 billion, a decrease of 9%. Our gap net income was RMB 43.5 billion, an increase of 63%, primarily attributable to the market-to-market changes from our equity investments, decrease in investment impairment, and increase in income from operations. As of September 30, 2024, we continued to maintain a strong net cash position of RMB 352.1 billion or US dollar 50.2 billion. Free cash flow this quarter was RMB 13.7 billion, a decrease of 70% compared to RMB 45.2 billion in the same quarter last year. This was mainly attributed to our investments in Alibaba cloud infrastructure. In addition, there's a refund to Tmall merchants after we canceled the annual service fee and some other working capital changes related to factors, including scale down of certain direct sales businesses. Given the sustained and strong demand for AI, we will continue to invest in AI infrastructure as we anticipate future demand for AI-driven cloud services. Now let's look at the segment results, starting with Taobao and Tmall Group. Revenue for Taobao and Tmall was RMB 99 billion, an increase of 1%. Revenue from our China commerce retail business was RMB 93 billion, compared to RMB 92.6 billion in the same quarter last year. Customer management revenue increased by 2%, primarily due to online GMV growth, while take rate remained stable year over year. We have made steady progress in our monetization strategy this quarter with accelerated CMR growth driven by the implementation of the software service fee on completed GNV and a wider adoption of Transanti. Direct sales and other revenue decreased by 5% to RMB 22.6 billion, primarily attributable to the decrease in sales of appliances. China Commerce wholesale business revenue increased 18% to RMB 6 billion, primarily due to the increase in revenue from value-added services provided to paying members. Powerbond Teamwork Group adjusted the guitar, decreased by 5% to RMB 44.6 billion, primarily due to the increase in investment in user experience, partly offset by the increase in revenue from customer management service. Revenue from cloud intelligence group was RMB 29.6 billion in this quarter, an increase of 7%. Overall revenue, including Alibaba consolidated subsidiaries, increased by 7%, mainly driven by double-digit public cloud revenue growth, including AI-related product. AI-related product revenue grew at triple digits year over year for the fifth consecutive quarter. Cloud-adjusted IPATAR increased by 89% to RMB 2.7 billion, while our adjusted IPATAR margin increased 4 percentage points to 9% year-over-year, primarily due to shift in product mix toward high-margin public cloud products, including AI-related products, and improving operating efficiency. partly offset by the increasing investments in customer growth and technology. We will continue to invest in anticipation of customer growth and in technology, particularly in AI-related cloud infrastructure to capture the increasing trend of cloud adoption for AI and maintain our market leadership. Revenue from AIDC grew 29% this quarter. The strong performance continued to be driven by growth of cross-border businesses, in particular, the AliExpress Choice business. Revenue from international commerce retail business increased by 35% to only 25.6 billion, primarily driven by the increasing revenue contributed by AliExpress Choice and Trendio. Revenue from our international commerce wholesale business increased by 9% to RMB 6.1 billion, primarily due to the increase in revenue generated by cross-border-related value-added services. AIDC's adjusted EBITDA was a loss of RMB 2.9 billion, compared to a loss of RMB 384 million in the same quarter last year, primarily due to the increase in investments in AliExpress and TrendView's cross-border businesses. partly offset by Lazada's significant reduction in operating loss from improvements in its monetization and operating efficiency. As Xiangfan mentioned, going forward, AIDC will continue to invest in key growth markets we have identified for strategic expansion while enhancing operational efficiency in markets we see line of sight to profitability. Revenue from China grew 8% to RMB 24.6 billion, primarily driven by the increase in revenue from cross-border fulfillment solutions. We will continue to invest in China's core capabilities to ensure it delivers unique value to our e-commerce businesses. To defend, China will prioritize investing in building its core capabilities to ensure the synergies with our e-commerce businesses. China's adjusted EBITDA decreased by 94% to RMB 55 million compared to RMB 906 million in the same quarter last year, primarily due to the increased investment in cross-border fulfillment solutions. Revenue from local service group grew by 14%, driven by the order growth of both AMAP and Erlema, as well as revenue growth from marketing services. while losses narrowed significantly, primarily driven by improving operating efficiency and increasing in scale. Revenue of Digital Media and Entertainment Group was RMB 5.7 billion while losses narrowed. Youku progressively reduced its operating loss due to increased advertising revenue as well as improved content investment efficiency. Revenue from all other segments increased by 9%, mainly due to the increase in revenue from retail businesses, including Fresh Apple and Alibaba Health, while adjusted guitar was a loss of RMB 1.6 billion. In closing, we are making solid progress in strengthening the competitiveness of our core businesses of domestic e-commerce and cloud computing, both of which have proven to show sustainable profitability. We have the confidence to invest in our AIDC business because we see high growth potential and we continue to find ways to make our loss-making segments more efficient, put them on a clear path to profitability. Thank you. That's the end of our prepared remarks. We can open up for Q&A.