Alibaba Group
June Quarter 2024 Results
Conference Call
Transcript

Thursday, 15 August 2024

Alibaba Group June Quarter 2024 Results Conference Call

Thursday, 15 August 2024

Introduction
Rob LinHead of Investor Relations, Alibaba Group(Original)
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 webcast from the IR section of ourcorporate website. A replay of this 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, aswell as our beliefs, expectations and guidance about our business prospects, such as the future
growth of our business, revenue, take rate, profitability and return on investment and share
repurchases. Forward-looking statements involve inherent risks and uncertainties that may
cause actual results to differ materially from our current expectations. For detailed discussionsof these risks and uncertainties, please refer to our latest annual report on Form 20-F and otherdocuments filed with the U.S. Securities and Exchange Commission or announced on thewebsite of the Hong Kong Stock Exchange. Any forward-looking statements that we make on
this call are based on assumptions as of today and we do not undertake any obligation to updatethese statements, except as required under applicable law.
Please note that certain financial measures that we use on this call, such as adjusted EBITDA,
adjusted EBITDA margin, adjusted EBITA, adjusted EBITA margin, non-GAAP net income, nonGAAP diluted earnings per share or ADS and free cash flow, are expressed on a non-GAAP basis.
Our GAAP results and reconciliations of GAAP to non-GAAP measures can be found in ourearnings press release.
Unless otherwise stated, growth rate of all stated metrics mentioned during this call refers toyear-over-year growth versus the same quarter last year.
With that, I will turn the call over to Eddie.

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Group Business Update
Eddie Wu
CEO, Alibaba Group(Translation)
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’s revenue maintained strong growth. Alibaba Cloud’s revenue
excluding Alibaba-consolidated subsidiaries returned to positive growth, notably driven by corepublic cloud and AI products. And across other segments, we achieved better operational
efficiency and monetization capabilities to varying degrees. This drove significant improvement
in loss-making businesses.
In line with our “user-first” strategy, Taobao and Tmall Group 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,
notably driven by increased purchase frequency. Internal and external data on e-commercemarket share dynamics indicates a trend of gradual stabilization in our market share, further
validating the effectiveness of our investments in user experience. 88VIP members reached 42
million by quarter-end. We will continue to explore and improve program benefits, productofferings, and service experiences for this expanding premium member base.
In TTG's operational strategy, we place great importance on Taobao’s rich and diverse productofferings, while investing in consumer experience enhancement. We continuously improve theefficiency of matching user traffic with products to ensure stable and sustainable growth. Asorders and GMV continue to grow, we are advancing monetization step by step, including withthe roll-out of our new marketing tool, “Quanzhantui”. Through algorithm improvements, we
aim to optimize merchants’ monetization efficiency while also enhancing platform traffic
utilization and conversion of user traffic to purchases. We expect CMR growth to gradually alignwith GMV growth over the coming quarters.
In our cloud segment, we continue to pursue high-quality revenue and effectively execute our
integrated “Cloud + AI” development strategy. This quarter, Alibaba Cloud’s overall revenue
from external customers grew 6%, with public cloud revenue maintaining double-digit growth.
Notably, revenue from AI-related products sustained triple-digit growth, continuing to increase
its share of public cloud revenue. We're seeing more and more major customers choosing
Alibaba Cloud as their computing infrastructure for AI development. At the same time, Alibaba's
proprietary large language model Qwen is gaining wider adoption.
This year, Alibaba Cloud served as a major technology service provider for the Olympic Games,
providing cloud computing and AI services to Olympic Broadcasting Services, OBS. At the Paris
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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 billionsof 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 tothe audience.
Our long-term strategy for integrated Cloud + AI development focuses on three key elements.
First, we'll continue to optimize our cloud product portfolio, concentrating on public cloud
products that are competitive, have sustainable gross margins, and generate replicable revenue.
This forms the foundation for Alibaba Cloud's healthy, high-quality growth. Second, we'll
strengthen synergies between cloud and AI products in the AI era, not only supporting existingcustomers in implementing new AI capabilities on Alibaba Cloud, but also enabling AI-native
enterprises to succeed on our platform. We're committed to capitalizing on both opportunities.
Third, to ensure the growth of our AI-driven cloud business, we'll continue to make ongoinginvestments in product R&D and AI CapEx.
Looking to the medium and long term, we are confident that Alibaba Cloud's overall revenue
from external customers will return to double-digit growth in the second half of the fiscal year,with gradual acceleration thereafter. While maintaining intensive R&D investment, we aim tosustain profitable growth, establishing ourself as an AI and cloud service provider with healthy
profitability and market share leadership.
In international e-commerce, AIDC achieved 32% revenue growth this quarter. Ourinternational business segment comprises a diverse business matrix that integrates both crossborder and local operations, as well as B2B and B2C formats. This presents numerous
opportunities, in terms of both operational models and market expansion potential. Jiang Fan
will share more details with you shortly.
Beyond e-commerce and cloud, we've implemented strategic realignments across our key
internet technology businesses following a thorough evaluation of their product capabilities andmarket competition dynamics. While maintaining product competitiveness, most of thesebusinesses will now place higher priority on enhancing their monetization capabilities. Thesebusinesses have already shown significant improvement in their capabilities this quarter, andwe expect this trend to continue in the coming quarters. We anticipate most of these businesses
will achieve breakeven within one to two years and gradually begin to contribute profitability at
scale.
This new fiscal year marks a critical stage for Alibaba as we solidify our strategic direction andrealize the successes of our transformation. We are fully confident in Alibaba's sustained,
healthy development into the future.

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AIDC Business Update
Jiang Fan
Co-Chairman & CEO, AIDC Group(Translation)
Hello everyone! I’m delighted to share with you the latest progress of AIDC.
Over the past quarter, AIDC maintained its rapid growth momentum, with overall revenue
increasing by 32% year-over-year, primarily driven by our cross-border business.
In terms of the three drivers we consistently focus on:
First, the ongoing upgrading of our business model and supply chain services. AliExpress
maintained rapid year-over-year order growth, with the percentage of AE Choice orders
continuing to be high and gradually stabilizing, which enhanced the certainty and consistencyof user experience. AliExpress and Cainiao continued to jointly optimize the logistics experience,
significantly reducing our average delivery time quarter-over-quarter. We further optimized thebalance between user experience, richness of merchandise assortment, and efficiency acrossour marketplace and consignment models. The unit economics of AE Choice improved
significantly this quarter.
Second, product and technology innovation. We advanced our AI and intelligent technologies
across scenarios like AI customer service, cross-platform product placement, product detailpage optimization, multilingual search, and precise recommendations. These innovations
enhanced efficiency and user experience. They have been deployed across our platforms,
serving approximately 500,000 merchants and covering 100 million SKUs.
Third, sustained growth in key markets. Continuous improvement in user experience bolsters
AE's confidence to step up its investments in key markets to expand our user base and maintainmarket leadership. As the exclusive e-commerce partner for UEFA Euro 2024, we effectively
enhanced brand awareness for AE and Trendyol. In Türkiye, Trendyol improved its monetization
rate and profitability, further consolidating its leading position in e-commerce. In the Gulf region,
Trendyol also broadened its merchandise selection and improved operational efficiency, while
continuing to invest in user growth. In Southeast Asia, Lazada achieved single-month adjusted
EBITDA profitability for the first time in July. This milestone reinforces our confidence tocontinue investing efficiently in the Southeast Asia market to consolidate our market share.
In conclusion, our strategic focus is twofold: First, enhancing operational efficiency across all
our business lines, while further enhancing profitability in certain businesses and regions,aiming to turn loss-making operations profitable as quickly as possible. Second, actively
investing in key markets to drive quality growth, with the goal of attaining more scalable
profitability in the future.
Thank you, everyone.
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Financial Highlights
Toby Xu
CFO, Alibaba Group(Original)
Thank you, Jiang Fan. This past quarter's financial performance continues to demonstrate ourstrategy 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 growthand profitability.
Taobao and Tmall Group is winning the mindshare of our consumers. This past quarter, weachieved high single-digit online GMV growth and double-digit order growth. AIDC continues toachieve robust revenue growth, driven by rapid order growth in cross-border businesses,
especially from AliExpress’ Choice. Ali Cloud's revenue quality is improving and back to growth.
Overall revenue, excluding Alibaba-consolidated subsidiaries, grew over 6%, driven by doubledigit public cloud growth and increasing adoption of AI-related products. Our loss-making
businesses are improving their monetization and 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$5.8 billion. This includes the concurrent buyback of approximately 14.8 million
ADSs for US$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 ADSs
outstanding. Compared to March 31, 2024, there was a 2.3% net reduction in our outstanding
shares after accounting for shares issued under 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 metrics, including segment
EBITA. While this change in compensation structure will lower adjusted EBITA, it will also resultin less ESOP dilution in the future.
On a consolidated basis, total revenue was RMB243.2 billion, an increase of 4%. Adjusted EBITA
decreased 1% year-over-year to RMB45 billion. Excluding the effects of long-term cash
incentive, adjusted EBITA growth would have turned positive on a like-for-like basis.

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Our non-GAAP net income was RMB40.7 billion, a decrease of RMB4.2 billion or 9%. Our GAAP
net income was RMB24 billion, a decline of RMB9 billion or 27%, primarily due to a decrease inincome from operations and 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 RMB405.7 billion or
US$55.8 billion. Free cash flow decreased by RMB21.7 billion to RMB17.4 billion. This yearover-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 ourplanned 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 RMB3.1 billion froma 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 RMB113.4 billion, a decrease of 1%. 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 highsingle-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, adecrease 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 RMB6 billion, primarily due toan increase in revenue from value-added services provided to paying members.
Taobao and Tmall Group adjusted EBITA decreased by 1% to RMB48.8 billion, primarily due tothe 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 RMB26.5 billion, an increase of 6%. Overall
revenue, excluding Alibaba-consolidated subsidiaries, grew over 6% year over year, driven by
double-digit public cloud revenue growth and increasing adoption of AI-related products. AIrelated product revenue continued to grow at triple digits year over year.
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Cloud's adjusted EBITA increased by 155% 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 are observing strong and sustained demand for AI products and solutions from ourcustomers 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.
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 inmonetization. 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 EBITA was a loss of RMB3.7 billion, an increase of RMB3.3 billion, compared toa loss of RMB420 million in the same quarter last year, primarily due to the increase ininvestments 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.
Cainiao's EBITA decreased by 30% to RMB618 million, 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 theorder growth of both Amap and Ele.me, as well as revenue growth from marketing services.
Adjusted EBITA was a loss of RMB386 million, compared to a loss of RMB2 billion in the samequarter 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%. Adjusted EBITA was a loss of RMB103 million compared to a profit of RMB63 million samequarter last year.
Revenue from All others segment increased 3% to RMB47 billion, 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 Sun Art. Adjusted EBITA from All others
segment was a loss of RMB1.3 billion, compared to a loss of RMB1.7 billion in the same quarterof 2023, primarily due to improved operating results from Sun Art, Freshippo, Alibaba Health,and 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.
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For Alibaba Cloud, we are pursuing high-quality revenue and effectively executing our
integrated cloud plus AI development strategy. We are confident that revenue from externalcustomers will return to double-digit growth in the second half of the fiscal year, with gradualacceleration 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 contributeto the profitability at scale.
Thank you. That's the end of our prepared remarks. We can open up for Q&A.

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Q&A

Rob Lin:(Original)
Hi, everyone. For today's call, you are welcome to ask questions in Chinese or English. A thirdparty translator will provide consecutive interpretation for the Q&A session. Please note thatthe translation is for convenience purpose only. In the case of any discrepancy, ourmanagement 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.

Ronald Keung (Goldman Sachs):(Original)
Thank you, Joe, Eddie, Toby, Jiang Fan, and Rob. I want to ask a question about our take ratethat with the high single-digit GMV growth and 1% CMR growth, it does imply a wider gap thisquarter. 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 CMR to align with
GMV? And could you talk a bit on what are the actual measures that we're doing? Is it software
service fee or marketing tech upgrades? How would these new products translate to Taobao
and Tmall respective take rates into the next few quarters?
Thank you.

Eddie Wu:
(Translation)
Currently, Taobao and Tmall’s priority is enhancing the user shopping experience to driveincreased purchase frequency and GMV growth. With initial market share stabilization thisquarter, we’re now accelerating efforts to increase take rate and monetization.
In this regard, there are several key factors to consider:First, many of our new product formats, such as live streaming and the 10 billion yuan subsidy
program, as well as the various new product formats that we’ve invested in heavily this year,
have resulted in high user retention and repurchase rates. However, these new products andtheir monetization for merchants, as well as related revenue-generating features, need sometime to be fully implemented. That's what we're looking to do over the coming few quarters.
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Second, an important new development is that we are accelerating our new marketing tool,“Quanzhantui”. For this to achieve solid performance, you need more than just the product inplace. You need three different things to come together effectively:
1. Effective integration with all user traffic channels within Taobao;
2. On the advertiser side, sufficient adoption across diverse sectors, with enough products
supporting the system to generate adequate marketing volume;
3. Optimization of marketing algorithms and user data, which will take about six months
or more.
We expect to see significant results and progress within 6-12 months from Quanzhantui’s April
launch. However, it will likely take 12 months from that initial launch date for those threeelements to gradually come together seamlessly into a fully optimized system.
Now, I'll hand over to Toby to say a few words about the technology service fee.

Toby Xu:(Translation)
Let me briefly introduce the technology service fee. As you may have seen, we plan toimplement a 0.6% technology/software service fee for merchants on Taobao and Xianyu (Idle
Fish) starting in September. This fee will be calculated based on merchants' actually received
GMV.
This fee level is based on our comprehensive assessment of standard industry practice andmerchant feedback. We expect to implement this in September.
In rolling out this fee, we're fully considering the situation of small and medium-sized merchants.
For those with annual GMV below a certain threshold, we'll fully refund their annual service fee,or give them a certain allowance, to help them expand their customer base and increase their
GMV on the Taobao platform.
We anticipate that this service fee will gradually start contributing to our revenue over theremaining seven months of this fiscal year, following its September implementation.
That covers the introduction to the service fee.

Alicia Yap (Citigroup):(Original)
Hi. Good evening, management. Thanks for taking my question. I have a question on your AIDC
business.
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How does management think about the overall competitive landscape now? And how will thatevolve over time? What are the competitive advantages of AliExpress for both merchants andconsumer that will help you defend your market position in some of the important countries?
And then, as a follow-up, with Lazada seems to be turning profitable starting in July. Is there atimeframe that you target to achieve profitability for AliExpress as well?
Thank you.

Jiang Fan:
(Translation)
In answer to your question, the first thing I would say is that AIDC comprises multiple businesslines with different business models. That is different from many other companies that have asingle business model. We have different brands in different markets, and we have many
experienced, highly local teams operating these platforms. And our business is a combinationof cross-border and local operations.
In that context, with local brands in different markets, operated by experienced local teams,
we’re working on sharpening our supply advantage by better integrating supply from the entire
Alibaba Group, especially from China, including supply from Taobao and platforms like1688.com.
On the consumer side, we have very strong consumer brands and widespread market
recognition in many markets.
We’re currently upgrading and transforming our business model. For example, AliExpress in thepast may have been a relatively low-efficiency model with weaker user experience and service.
We’re now in the process of transforming this business model.
As for Lazada, yes, in July we achieved adjusted EBITDA profitability for the first time. Moving
forward, we will continue to make adjustments based on market conditions, aiming to maintainmarket share while continuously optimizing our profitability level.
AliExpress is still at a relatively early stage, as it’s still transitioning from a platform model to aconsignment + platform model and is still in the investment stage. We’re continuously
optimizing its operations, as evidenced by the improvements in AE Choice’s UE (Unit Economics)
over the past quarter. In the coming quarters, we’ll continue to optimize our efficiency whilepursuing healthier growth.

Thomas Chong (Jefferies):(Original)
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Hi. Good evening. Thanks, management, for taking my question.
My first question is about Stock Connect. Can management comment on our thoughts about
the status of a dual primary listing and the chance of going into Stock Connect?
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 thegoal that we are looking for in the long run coming from AI?
Thank you.

Toby Xu:(Original)
OK. 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 primaryconversion 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 proposals that are subject to shareholders’ approval, and then weare 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 will still be subject to different exchanges sort of like process.
So that’s, what we understand, is there is a procedure to go through.
So that's the update on the status.

Eddie Wu:
(Translation)
Let me take the second question about cloud.
We are indeed seeing very strong demand from our cloud customers for AI-related products.
From our perspective on the customer pipeline, we're still far from meeting their demands. So,
we expect that revenue from external customers will reach double-digit growth in the second
half of the fiscal year. That’s a pretty clear-cut projection.
Regarding the revenue contribution from AI-related products, from the data we're seeing, mostof the growth - the larger part of the growth rate - is AI-related product growth. This is partly
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because, across the industry as a whole, the growth of the traditional cloud computing market
centered on CPUs is now quite limited. The bulk of new IT demand from customers is primarily
focused on GPU-based AI-related products.
So, more than half of our growth momentum is driven by the revenue growth of our AI-related
products.

Ellie Jiang (Macquarie):(Original)
Thank you 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 momentum, and the management shared about the strong
demand on AI. Given the current macro conditions and softened enterprise demand into thesecond half, can you comment on kind of the mix impact, especially in the next several quarters?
And then also, the second question is on the Taobao and Tmall GMV reacceleration. So we're
encouraged to see our overall GMV momentum catching up. And actually, for the second quarter,
we already caught up to industry pace reported by NBS.
Wondering, can management comment on the key drivers behind the GMV reacceleration? Andanything you can talk on the return rate that we've seen across the ecosystem?
Thank you.

Eddie Wu:
(Translation)
Let me first address the question about cloud.
Your question referred to a slowdown in enterprise demand under current macroeconomic
conditions. However, what we're actually observing is that most enterprises, especially ourcloud customers, have significantly increased their AI investment budgets this year compared
to last year. For most digitally-driven enterprises, AI investment is crucial. This is because
industries across the board are leveraging AI to enhance their product capabilities and improve
operational efficiency.
We believe that, in our observation, industries and enterprises that rely heavily on digitalization
are unlikely to reduce their investments in this area. The reason is simple: falling behind in AI
investments could lead to a competitive disadvantage in terms of product capabilities within
the industry. Consequently, we're seeing robust demand in this sector, with no signs of adownward trend. We believe this represents an important new industry trend.
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Regarding your second question about the recovery in Taobao and Tmall’s GMV growth rate,
this fundamentally comes down to our business strategy for these platforms. As we’ve sharedpreviously, our most crucial investments are in creating a user experience centered on “quality
products and services, at attractive prices”. These are the core elements of user experience in
e-commerce.
What's unique about the Taobao and Tmall platform is our extremely rich and diverse productassortment, and our highly diverse consumer base. Consequently, our proposition of “quality
products and services, at attractive prices” needs to be tailored to different tiers of consumer
demand. So we segment consumer demand into various levels, catering to each with different
product supplies, service experiences, and product formats or capabilities, ensuring all
consumer segments are well served.
So, in essence, while it all fundamentally revolves around “quality goods and services, atattractive prices”, Taobao and Tmall provide differentiated experiences across these three
dimensions for different consumer segments. Underpinning these differentiated experiences is
our continuous optimization of supply chains to enhance product quality, price competitiveness,and service levels.

Toby Xu:(Translation)
Let me address your second question regarding return rates.
Firstly, return rates are increasing across the entire Chinese e-commerce industry, including for
us and all other e-commerce platforms. Currently, our return rate is slightly lower than theindustry average. That is our first observation.
Secondly, we believe that the return experience is a crucial part of the overall consumer
experience and an important factor in retaining customers. Therefore, when we see
improvements in consumer retention rates, purchase frequency, and shopping experience
feedback alongside enhancements in the return experience, we consider this to be healthy.
In particular, we’ve observed continuous improvement this year in our Net Promoter Scores(NPS), especially among mid- to high-end users. This reflects increased satisfaction with aftersales service, including the convenience of returns.
Given that our return rate is slightly below the industry average, we're not particularly
concerned that the increase in return rates will negatively affect merchants' willingness to dobusiness on our platform.

Gary Yu (Morgan Stanley):15

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(Original)
Hi. Good evening. Thank you for the opportunity to ask questions.
My question is regarding management comment about some of these loss-making businesses
aiming to reach breakeven 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 businesses under the All others segment? How should welook at the timing of kind of breakeven target in the next one to two years individually?
Thank you.

Toby Xu:(Original)
Thank you, Gary. I'll take that question.
I think what Eddie and I was explaining is that, except for the core businesses we mentioned
previously, including Taobao Tmall, Cloud and AIDC, all the other businesses, some of thosebusinesses are still loss-making at this stage and they will be ramping up their efficiency andmonetization and reduce their losses significantly in the next year or so, one or two years, andto reach breakeven. And then afterwards, they will sort of like start to deliver a scalable
profitability going forward.
How we are going to achieve that, as I was explaining, what we want those businesses do, theyneed to, on one hand, care about the efficiency of the investment they are making, balance thescale and efficiency, which is very important. Secondly, on one hand that they are making
investment, they also need to care more about monetization. So it's critical the enhanced
monetization rate, using their business model.
So with both more income and higher efficiency in the spending, they are moving toward
breakeven and profitability.
We can clearly see, during my prepared remarks, I used two examples. One is Local Services,and the other one is Lazada. I think Jiang Fan explained about Lazada.
For Local Services, I think it's all about, on one hand, you need to increase the scale, i.e., youneed to increase the orders. On the other hand, you need to improve unit economics. For
example, in Ele.me’s case, it's all about delivery business and 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.
So with both scale and efficiency improve, we are able to reducing the losses very significantly
and moving toward the profitability.
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So I think this is pretty much how these businesses will execute and move towards profitability.

Jiong Shao (Barclays)(Original)
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 water mark going forward? Especially you recently launched the “Quanzhantui”
and especially when you start to charge a technology service fee starting in September? Anycomments would be great.
And related to that, I think Toby talked about 0.6% of GMV for the technology fees, but someof the smaller merchants, you are going to waive that. I was wondering, is that a net numberin terms of percentage of GMV you think the technology service fees will bring to CMR? Anyclarification would be great.
Thank you.

Toby Xu:(Original)
Thank you for the question. I'll take that.
I think as previously said by Eddie, also in my prepared remarks, I think the gap between online
GMV and CMR reflect the drop of the take rate.
Why the take rate dropped? Because currently, some of the new models with a very high growthin GMV currently still have relatively low monetization, which will be ramping up in the next few
quarters. So that's why there's still a gap.
As we also said, in the next few quarters, CMR growth will be at the same pace with GMV, whichmeans take rate will start to get relatively stabilized. So that's what we're expecting.
And Eddie explained why GMV was currently growing faster than the take rate. The reason is
because by executing our strategy, we first need to invest in the consumers, get higher
purchase frequency from the consumers, then get the GMV growth. And as soon as we start toobserve the GMV back to growth and then the market share stabilizing, we will gradually ramp
up the monetization pace.

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A few things we're doing. Eddie explained “Quanzhantui”, which is currently being rolled out.
The penetration into traffic will take a number of quarters. So that will certainly improve thetake rate, which means we will accelerate CMR growth. And secondly, with this software service
fee charge will also help on the take rate. A few other measures as well.
So these are all the things currently we are doing. Why we started to do it? Because we see thegrowth back on the GMV, and we see the sign of stabilizing market share.
And then your question about how it is calculated for this 0.6% charge. So it's charged on thecompleted GMV. However, we will refund back to some of the small and medium merchants if
their annual GMV is below certain threshold.

Kenneth Fong (UBS):(Original)
Good evening, management. Thanks for taking my question.
I have one question maybe on the financial figures.
One is on the tax rate. I noticed that the taxrate 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 decline in our free cash flow. I understand that it is related toour investment on AI / Cloud, as well as some one-off expenses with free cash flow on theplanned 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.

Toby Xu:(Original)
Thank you, Kenneth. I'll take this question.
Your first question is about tax rate. Because if you're using our P&L's tax divided by profit, younormally cannot reach the real effective tax rate because we do have a lot of permanentdifference, one-off items, which does not have tax implication there.
We are monitoring on an adjusted basis on the tax rate, which is relatively stable in this quartercompared with last quarter.
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So in terms of your model, I guess, probably our team can look into your model andcommunicate offline. So this is your first question.
Your second question is about free cash flow. As I explained, there is quite a big significant
drop of free cash flow. One of the reason is the significant increase in expenditure on the AI
infrastructure investments,. And the other reason, as I said, is because of the working capitalchanges in relation to some of the business scale drops.
For these business scale drops, a majority of them are from those planned scale down. 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 that we believe in some of these business or categories, 1P format
probably is not a more efficient format. So that's the practice.
But you will also have some of the businesses, scale drop was not because we proactively did
that. Some of it was just the overall market situation. For example, as I said, the revenue
dropped from, for example, like Sun Art, like Intime, all those businesses are in 1P. And thedrop of their scale actually impacts the working capital.
Probably I can give a little bit more color. Because for doing 1P business, on one hand, you arebuying inventory from vendor. On the other hand, you sell it and that the vendors normallygive you a credit term like 60 days or 90 days. If you can make your inventory turnover, i.e.,sell inventory within a short period of time, shorter than the credit term you've 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're reducing the scale, it will have outflow on the working capital. But is this a permanent
impact? To me, I think that 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 these types of outflows.

James Lee (Mizuho):(Original)
Great. Thanks for taking my question here.
My question is related to AI, more big-picture question for you guys. Can you 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.

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Eddie Wu:
(Translation)
That's an excellent question. Let me address it.
On your first point about open-source vs. closed-source in generative AI, different companies
have been taking different approaches. At Alibaba Cloud, given our focus on providing cloudinfrastructure, offering a world-class open-source model makes a lot of sense. It's highly
beneficial for developers both in China and globally, as most of them want greater control overthe model and more room for fine-tuning.
So to an extent, we believe that open-source models have a distinct advantage when it comesto widespread adoption by developers. This aligns well with our business model as an AI
infrastructure provider. When developers use our open-source model, they're more likely tochoose Alibaba Cloud's AI products when launching their applications. So this is in line with ourbusiness strategy.
We're seeing a clear trend of companies and developers prioritizing open-source models,
especially in China where applications often require stronger controllability. While I can't provide
hard data on how many developers have chosen our AI services because of our open-source
model, we believe we're uniquely positioned in the Chinese market as the only vendor offeringboth open-source models and AI cloud services. These two strategies complement each otherperfectly.
Your second question is more complex and forward-looking, given its broad scope.
Looking ahead, we expect large language models to become increasingly powerful. They'll use
more diverse, multimodal data and grow in parameter scale, expanding their capabilities.
However, for solving complex problems, we're seeing a trend towards using agents, particularly
for intricate reasoning tasks. These agents might call upon different models to work throughcomplex reasoning processes. This trend is quite evident.
While many developers are currently working on such agents, I personally believe that in the
future, sufficiently advanced large models may be able to generate these agents more
automatically.

Youssef Squali (Truist Securities):(Original)
Thank you. It's Youssef 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 for the rest of the year?

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And number two, as you look at the return on those investments, can you help us justunderstand your framework of reference. One of the key questions we often get here, at leastin the U.S., is the ROI associated with the AI and kind of the timeline or the time or frameworkaround which you expect these investments to start bearing fruit, and maybe give us examplesof where you're seeing early green shoots.
Thank you.

Toby Xu:(Original)
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 thebacklog. 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.

Eddie Wu:
(Translation)
Let me address the latter part of your question.
As Toby mentioned, we will maintain our current pace of AI CapEx investment over the next
few quarters. This is because we’re seeing very strong customer demand, and our customer
pipeline is far from being satisfied. We're experiencing rapid growth in demand for our AI
offerings, including training, inference, and API calls for Qwen.
What we are seeing internally is that once we deploy these CapEx investments in the form of
new servers, they are almost immediately fully utilized by our customers. We expect verysignificant returns on these investments in the coming quarters. The amount of idle capacity is
minimal. Most of our computing power starts generating revenue as soon as it's deployed andtypically operates at near-full capacity.

Robert Lin:
(Original)
Thank you everyone for joining. We’ll see you next quarter.
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[END OF TRANSCRIPT]

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