Alibaba Group Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 15, 2024

There are 12 speakers on the call.

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group's June Quarter 20 24 Results Conference Call. At this time, all participants are in listen only mode. After management's prepared remarks, there will be a Q and A session.

Operator

I would now like to turn the call over to Rob Lin, Head of Investor Relations of Alibaba Group. Please go ahead.

Speaker 1

Good day, everyone, and welcome to Alibaba Group's June quarter 2024 results conference call. With us are Zhou Cai, 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.

Speaker 1

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 share repurchases. Forward looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our expectations. For detailed discussion of these risks and uncertainties, please refer to our latest annual report on Form 20 F and other documents filed in the U. S.

Speaker 1

SEC 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 earnings 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.

Speaker 1

With that, I will turn over to Eddie.

Speaker 2

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 TMOL Group achieved steady year over year growth in orders and in GMV. Alibaba International Digital Commerce, AIDC, revenue maintained strong growth.

Speaker 2

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.

Speaker 2

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 42,000,000 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 our products with user traffic and ensure stable and sustainable growth.

Speaker 2

As orders and GMV continue to grow, we're advancing monetization step by step, including the launch of our new marketing tool, Quanjian 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 platform. 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.

Speaker 2

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.

Speaker 2

2 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 Paris Olympics, including 3 60 degree replays in real time, bringing pleasant surprises to the audience. Our long term strategy for integrated cloud plus AI development comprises 3 key elements. 1, 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.

Speaker 2

2, 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. 3, we'll continue to invest in R and 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 and 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.

Speaker 2

In International E Commerce, AIBC 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 Xiaofan 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.

Speaker 2

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 breakeven within 1 to 2 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.

Speaker 2

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 3 drivers we consistently focus on, 1st, ongoing business model and supply chain upgrades, AliExpress maintained rapid year on year order growth with the percentage of AE Choice orders continuing to be high and gradually stabilizing and enhancing the certainty and consistency of user experience. AliExpress and Cainiao continue to jointly optimize logistics experience and significantly reduced 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.

Speaker 2

The unit economics of the Choice business improved by nearly 20% quarter over quarter. 2nd, 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 100,000,000 SKUs. 3rd, sustained growth in key markets.

Speaker 2

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 Trendyol'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.

Speaker 2

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. So in conclusion, our strategic focus is 2 fold 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.

Speaker 3

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 mind share 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.

Speaker 3

Ali Cloud'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 613,000,000 ordinary shares or 77,000,000 ADSs for a total of US5.8 billion dollars This includes the concurrent buyback of approximately 14,800,000 ADSs for US1.2 billion dollars that was associated with our new CV issuance.

Speaker 3

As of June 30, 2024, we had 19,000,000,000 ordinary shares or approximately 2,400,000,000 ADSs 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 US26.1 billion dollars 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 metrics, including segment EBITDA.

Speaker 3

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 RMB243.2 billion, an increase of 4%. Adjusted EBITDA decreased 1% year over year to RMB45 1,000,000,000. 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 RMB40.7 billion, a decrease of RMB4.2 billion or 9%.

Speaker 3

Our GAAP net income was RMB24 1,000,000,000, a decline of RMB9 1,000,000,000 or 27 percent, primarily due to a decrease in income from operations and the increase in impairment of some investments, partly offset by the mark to market 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 US55.8 billion dollars Free cash flow decreased by RMB21.7 billion to RMB17.4 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.

Speaker 3

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 and A expenses ratio increased 1.4 percentage points, excluding the provision of RMB3.1 billion from a one time shareholder class action lawsuit, our G and 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 RMB113.4 billion, a decrease of 1%.

Speaker 3

Revenue from our China commerce retail businesses was RMB107.4 billion, a decrease of 2% compared to RMB109.8 billion in the same quarter of 2023. Customer management revenue increased by 1% year over year, primarily due to a high single digit year over year growth in online GMV, partly offset by a 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 under China Commerce Retail business was RMB27.3 billion, a decrease of 9%. As mentioned, we are proactively scaling down certain direct sales businesses, including those in Taobao and Timor Group.

Speaker 3

China Commerce Wholesale Business revenue increased 16% to RMB6 1,000,000,000 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 RMB48.8 billion, primarily due to the increase in investments in user experience and technology infrastructure, partly offset by the narrowing losses in certain businesses. This increase in investment led to better consumer retention, increased purchase frequency and positive feedback regarding the overall shopping experience. Revenue from Cloud Intelligence Group was RMB26 point 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.

Speaker 3

AI related product revenue continued to grow at triple digits year over year. Cloud's adjusted EBITDA increased by 155 percent to RMB2.3 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 investment to address this demand effectively. We believe our investments in AI capabilities and infrastructure will help strengthen our market leadership.

Speaker 3

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 RMB23.7 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 RMB5.6 billion, primarily due to an increase in revenue generated by cross border related value added services. AIDC's adjusted EBITDA was a loss of RMB3.7 billion, an increase of RMB3.3 billion, compared to a loss of RMB420 1,000,000 in the same quarter last year, primarily due to the increase in investments in AliExpress and Trendyol's cross border businesses, partly offset by Lazada's significant reduction in operating loss from the improvements in its monetization and operating efficiency. Revenue from Cainiao Smart Logistics Network Limited was RMB26.8 billion, an increase of 16%, primarily driven by the increase in revenue from cross border fulfillment solutions.

Speaker 3

Cainiao's EBITDA decreased by 30% to RMB618 1,000,000, primarily due to increased investments in cross border fulfillment solutions, partly offset by improved operating efficiency. Revenue from local service group was RMB16.2 billion, an increase of 12%, driven by the order growth of both AMAP and Ele. Me as well as revenue growth from marketing services. Adjusted EBITDA was a loss of RMB386 1,000,000 compared to a loss of RMB2 1,000,000,000 in the same quarter last year, primarily due to improving operating efficiency and increasing scale. Revenue from our Digital Media and Entertainment Group was RMB5.6 billion, an increase of 4%.

Speaker 3

Adjusted EBITDA was a loss of RMB103 1,000,000 compared to a profit of RMB63 1,000,000 same quarter last year. Revenue from all other segments increased 3% to RMB47 1,000,000,000, primarily due to the increase in revenue from Freshippo, Alibaba Health and Intelligent Information Platform, partly offset by the decrease in revenue from Lingxi Games and Sunnat. Adjusted EBITDA from all other segments was a loss of RMB1.3 billion compared to a loss of RMB1.7 billion in the same quarter of 2023, primarily due to improved operating results from Sunnat, Fresh Hippo, Alibaba Health and the Lingxi Games, partly offset by the increased investment in technology businesses. To wrap up, as Eddie and Jiang Fan 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 GMV growth over the coming quarters.

Speaker 3

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 breakeven within 1 to 2 years and gradually contribute to the profitability at scale.

Speaker 3

Thank you. That's the end of our prepared remarks. We can open up for Q and A.

Speaker 1

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 and A session. Please note that the translation is for convenience purpose only. In this case of any discrepancy, our management statement in the original language will prevail.

Speaker 1

If you are unable to hear the Chinese translation, bilingual transcripts of this call will be available on our website within 1 week after the meeting. Operator, we can now please connect to the speaker and the SI conference lines and then start the Q and A session. Thank you.

Operator

Thank you. We will now begin the question and answer session. Your first question is from Ronald Keung from Goldman Sachs. Please go ahead.

Speaker 4

Thank you, Joe, Eddie, Hopi, Jianfan and Rob. And I want to ask a question about our take rates that with the high single digit GMV growth and 1% CMR growth, it does imply a wider gap this quarter. But management, you just mentioned about the narrowing gap that should come. So how should we think about the take rate trajectory, the time needed for CMRs aligning with GMV? And can you talk a bit on what are the actual measures that we're doing?

Speaker 4

Is it software service fee or ad tech upgrades? How would these new products translate to Taobao and Tmall respective take rates into the next few quarters? Thank you.

Speaker 2

Thank you. This is Eddie, and I'll take that first before handing over to Toby. In the Tabo 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.

Speaker 2

First of all, the various new products we've launched, including live streaming and including the KRW10 billion 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, that we're introducing. Of course, in order for this to achieve solid performance, you need more than just that product in place.

Speaker 2

You need effective coordination and synergy across 3 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 6 or more months to fully optimize the algorithms and also to optimize the user data. So starting from the rollout of Chenjangtui back in April, it's likely to take something like 6 to 12 months of work to bring all of those different things together to achieve really solid progress and sizable growth.

Speaker 2

So in short, for those 3 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 charge. 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 idle fish at a rate of 0.6%. And that is to be calculated on the basis of actually received GMV, actually received by the merchants.

Speaker 2

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 7 months of this present fiscal year.

Speaker 1

Next question, please.

Operator

Thank you. The next question is from Alicia Yap from Citigroup. Please go ahead.

Speaker 5

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?

Speaker 5

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 there a time frame that you target to achieve profitability for AliExpress as well? Thank you.

Speaker 2

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.

Speaker 2

And overall, AIDC is really a combination of both cross border 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 are relatively poor user experience, but we've been working very hard on improving that.

Speaker 2

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. 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.

Speaker 1

Next question?

Operator

The next question is from Thomas Chong from Jefferies.

Speaker 6

My first question is about Stock Connect. Can management comments about our thoughts about the status of dual primary listing and the challenges of going into Stock Connect? And my second question is about our cloud business. Given that we are expecting the cloud and external cloud revenue to 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?

Speaker 6

Thank you.

Speaker 3

Okay, Thomas. Thank you for your question. I will take the first one and then Eddie will answer the second question. 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.

Speaker 3

We will have an AGM on the 22nd August. So we have a proposal that's subject to the shareholders' approval. And then we are aiming to complete the conversion process after we obtain approval from the shareholders and get it completed before the end of August. Then join the Stock Connect, it was still subject to different exchanges sort of like process. So that's what we understand is procedure, just a procedure to go through.

Speaker 3

So that's the update on the status.

Speaker 2

Thank you. This is Eddie. I'll take your second question about cloud. 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.

Speaker 2

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.

Speaker 1

Next question please.

Operator

Thank you. The next question is from Ellie Jiang from Macquarie. Please go ahead.

Speaker 7

Thanks so much, management, for taking my question. Just first of all, a quick follow-up on the prior cloud question. Obviously, we are already showing some early indicators of the positive positive momentum and the management shared about the strong demand on AI. Given the current kind of macro conditions and often enterprise demand into the second half, Just can you comment on kind of the mix impact, especially in the next several quarters? And then also the second question is on the Tableau GMV reacceleration.

Speaker 7

So we're encouraged to see our overall GMV momentum catching up. And actually for the Q2, we're already caught up to the industry pace reported by NBS. Wondering, can management comment on the key drivers behind the GMV reacceleration? And anything you can really talk on the return rate that we've been seeing across the ecosystem? Thank you.

Speaker 2

Thanks. This is Eddie. I'll take the first question that had to do with cloud. I think your question had to do with how macroeconomic conditions are resulting in softening enterprise demand. But that's not at all what we're seeing.

Speaker 2

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.

Speaker 2

So that's a clear trend that we're seeing and we're not seeing any kind of slowdown or softening. 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.

Speaker 2

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 efficiency in order to be able to ensure we have quality products and quality services at attractive prices for those different consumer tiers. Thanks. This is Toby and I'll take that other question about return rates.

Speaker 2

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.

Speaker 2

So again, 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.

Speaker 1

Next question.

Operator

Thank you. The next question is from Gary Yu from Morgan Stanley. Please go ahead.

Speaker 8

Hi, good evening. Thank you for the opportunity to ask questions. My question is regarding management comment about some of these loss making business aiming to reach breakeven in the next 1 to 2 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 segment? How should we look at the timing of kind of breakeven target in the next 1 to 2 years individually?

Speaker 8

Thank you.

Speaker 3

Okay. Thank you, Gary. I'll take that question. I think what I Eddie and I was explaining is, except for Taobao and Tmall that's sort of like the core businesses we mentioned previously, including Taobao, Tmall 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 sort of enhance reduce their losses significantly in the next year or so, 1 or 2 years and to reach breakeven.

Speaker 3

And then afterwards, they will sort of like start to deliver a scalable sort of profitability going forward. How we are going to achieve that? It's quite as I was explaining, what we want those businesses 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, they are making investment. They also need to care more about monetization.

Speaker 3

So it's critical to enhance the monetization rate using their business model. So with both more income and the sort of higher efficiency in the spending, they are moving towards the breakeven and profitability. We can clearly see as I during my prepared remarks, I explained I used 2 examples. 1 is local service and the other one is Lazada. I think, you know, Jiang Fang explained the Lazada.

Speaker 3

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. For example, in Elemer's case, it's about all about it's sort of like meal delivery business, improve the unit economics continuously. And then in AMAP, I think it's all about, for example, the ride hailing businesses, per order unit economics need to improve.

Speaker 3

So with both scale and efficiency improve, we are sort of 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.

Speaker 1

Next question please.

Operator

Thank you. The next question is from Jiang Xiao from Barclays. Please go ahead.

Speaker 9

Thank you very much for taking my question. 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 launched recently launched the Transantone and especially when you start to charge a technology service fee starting in September?

Speaker 9

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.

Speaker 3

Okay. Thank you for the question. I'll take that. I think as previously, Eddie, also in my prepared remarks, I think the gap between the GMV, the online GMV and CMR reflect actually the job of the take rate. Why the take rate job?

Speaker 3

Because currently the 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 few quarters, if you like. So that's why there's still gap. As we also said, in the next few quarters, CMR growth will be in at the same pace with GMV, which means take rate will start to get relatively stabilized. So that's what sort of we're expecting. And Eddie explained why GMV is currently grow faster than the take rate.

Speaker 3

The reason is because by executing our strategy, we first need to invest in the consumers, get the more sort of purchase frequency from the consumers, then get the GMV growth. And as soon as we start to observe the GMV 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, Eddie explained, which is currently be rolling out, the penetration into traffic will take a number of quarters. So that will certainly improve the take rate, which means we accelerated the CMR growth. And secondly, with this software service fee charge, we'll also help on the sort of like the take rate.

Speaker 3

A few other sort of like measures as well. So these are all the things currently we are doing. Why we started to do it because we see the growth are back on the GMV 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 transaction completed GMV. So it's charged on the completed GMV.

Speaker 3

However, we will refund back to some of the small and medium merchants if their annual GMV is below certain threshold.

Speaker 1

Next question?

Operator

Thank you. The next question is from Kenneth Fong from UBS. Please go ahead.

Speaker 10

Hi, good evening management. Thanks for taking my question. I have one question, mainly on the financial number. One is on the tax rate. I noticed that the tax effective tax rate is quite high for the current quarter.

Speaker 10

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 decline, 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 with cash flow on the planned reduction on direct sales business. Should we expect that to gradually normalize in the next like 1 or 2 quarters, especially for the direct sales business part? Thank you.

Speaker 3

Thank you, Kenneth. I'll take this question. Your first question is about tax rate, because if you're using our P and L's tax divided by profit, you normally cannot reach a sort of like reach sort of like the real effective tax rate because we do have a lot of, if you like, permanent differences or number of items, which does not have tax implication 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 in terms of your model, I guess, probably, we can our team can sort of like look into your model and sort of communicate offline.

Speaker 3

So this is your first question. Okay. Your second question is about free cash flow. As I explained, there is quite big significant drop of free cash flow. One of the reason is the significant increase in expenditure on the AI infrastructure investments, if you like.

Speaker 3

So, I think and the other reason, as I said, is because of the sort of because of the working capital changes in relation to some of the slides like some of the business scale jobs. For these business scale jobs, many of them, if you like, a majority of them are from those planned scale down, if you like. As I was explaining, why our direct sales business within Taobao and Tmall dropped quite significantly. The reason is we proactively scaled down some of these 1P businesses in Taobao and Tmall. The reason is we believe in some of these business or categories, 1P format probably is not a more efficient format.

Speaker 3

So that's sort of proactive. But you will also have some of the businesses scale job was not because proactively did that. Some of these just like the overall market situation, for example, as I said, the revenue dropped from, for example, like Sena, like InTime, all those business are in 1P and the drop off their scale actually impacts the working capital. I don't know, probably I can give a little bit more color on because for doing 1P business, on one hand, you are buying inventory from vendor, on the other hand, you sell it and that the vendor normally give you a credit term like in 60 days or 90 days. If you can make your inventory turnover, I.

Speaker 3

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, you are it will have outflow on the working capital. But is there is this a permanent impact?

Speaker 3

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.

Speaker 1

Next question?

Operator

Thank you. The next question is from James Lee from Mizuho. Please go ahead.

Speaker 9

Great. Thanks for taking my question here. My question is related to AI, more bigger question for you guys. Can you guys talk about maybe implication of open source large language model or how that impacted adoption of AI in China? And also how should we think about large language model as that transition into agents?

Speaker 9

And how do we think the use cases may change for your merchants and customers? Thank you.

Speaker 2

Thank you. Well, on your first question, 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 large language models. That's very helpful, of course, for developers.

Speaker 2

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.

Speaker 2

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 large models. I know lots of developers are working on it.

Speaker 2

But I think going into the future, this kind of development will become more automated.

Speaker 1

Let's open to the last question.

Operator

Thank you. The last question is from Youssef Squali from Trust. Please go ahead.

Speaker 11

Thank you very much. It's Youssef Squali from Truist. So just on the follow-up on the AI question. 1, if I look at your CapEx, it's more than doubled year on year in Q1. Number 1, is that a good run rate to work off of for the rest of the year?

Speaker 11

And number 2, 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 these 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.

Speaker 3

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.

Speaker 3

We would expect in the next few quarters, we would expect similar level of investments in CapEx going forward.

Speaker 2

Thanks. This is Eddie. So to continue with the second part of this answer, 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.

Speaker 2

There's that kind of demand. So 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 1.

Speaker 1

Well, thank you everyone for joining. We will see you next quarter.

Operator

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Alibaba Group Q1 2025
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