Earnings Call Transcript - BABA Q3 2023

Operator, Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group's December Quarter 2022 Results Conference Call. After management's prepared remarks, there will be a Q&A session. I would now like to turn the call over to Rob Lin, Head of Investor Relations of Alibaba Group. Please go ahead.

Robert Lin, Head of Investor Relations

Thank you. Good day, everyone, and welcome to Alibaba Group's December Quarter 2022 Results Conference Call. With us today are Daniel Zhang, Chairman and CEO; Joe Tai, Executive Vice Chairman; Toby Xu, CFO. This call is also being webcast from the IR section of our corporate website. A replay of the call will be available on our website later today. Now, let me quickly cover the safe harbor. Today's discussion may contain forward-looking statements. Forward-looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations. For a detailed discussion of these risks and uncertainties, please refer to our latest annual report on Form 20-F and other documents filed with the U.S. SEC, which are announced on the website of the Hong Kong Stock Exchange. Any forward-looking statements that we make on this call are based on assumptions as of today, and we do not undertake any obligation to update these statements, except as required under applicable law. Please note that certain financial measures that we use on this call, such as 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, the growth rate of all metrics mentioned on this call refers to year-over-year growth versus the same quarter last year. With that, I will now turn to Daniel.

Daniel Zhang, Chairman and CEO

Thanks, Rob. Hello, everyone. Thank you for joining our earnings call today. This past quarter, our business and operations experienced significant challenges due to the rapid change in the COVID situation during December. Despite these challenges, we delivered double-digit year-on-year growth in our adjusted EBITDA and free cash flow through effective business management, cost optimization, and operating efficiency. With the lifting of COVID-related measures at the end of the peak wave, everything is now quickly getting back on track. In general, consumer confidence and business confidence are rising. Logistics has resumed normal operations with the entire supply and manufacturing chains becoming active. Digital transformation across different industries and sectors has accelerated significantly. Against this backdrop, our various businesses are showing positive trends. Recently, the IMF raised the estimated GDP growth for China to 5.2% this year. Given the expectation for economic recovery, following the lifting of COVID-related measures and China's reopening, I have chosen 'progress' as a keyword internally to set the tone for Alibaba's development this year. We need to respond quickly to the change in the macro environment and the major cycles. The theme of progress represents the need to adapt to the trends in the macro environment and for Alibaba's own development. In China's post-COVID economic development, although different businesses across our complex ecosystem face their own unique circumstances, we remain confident in our streamlined strategic pillars of consumption, cloud computing, and globalization. Now I will share how our business performed this past quarter in a difficult COVID environment, together with some color on the situation in January and February and how we plan to capture opportunities across our businesses. During the December quarter, the China consumer market was highly impacted by COVID cases. Tmall GMV dropped mid-single digit year-on-year, and consumption demand was quickly suppressed. In terms of category, apparel and other discretionary goods were weak, while healthcare and wellness-related goods grew strongly. This is consistent with the better trend released by the National Bureau of Statistics of China. From January to early February of this year, overall sales of online physical goods remained weak, and our China commerce continues to be highly impacted due to COVID cases as well as people traveling home or to other places during the spring festival holidays. But as the influence of COVID cases at spring festival travel subsided in February, especially recovery in categories such as apparel and sports and outdoors as work and life return to normal, all of our merchants have also expressed their strong desire to get back to business. We expect this recovery will continue. In our operations, we are strengthening the user experience and customer value proposition on Tmall to reinforce our market leadership with the following measures. First, enhanced user stickiness and time spent. Tmall is home to China's most comprehensive population of online shoppers and is the most efficient consumer transaction platform. We are building on our competitive advantage by continuing to introduce a variety of consumption-related content in the form of short-form video, live streaming, and other formats to strengthen consumer stickiness, product discovery, influence, and user engagement. Second, enhance value for money proposition. Price is always a key factor in consumer purchasing decisions. We will continue to improve competitive pricing on products through the design of marketplace mechanisms, promotional marketing features, and retail model innovations such as direct-from-factory goods and farm-to-table offerings. Third, labor for digital retail. We will capture consumers' sensitivity for highly frequent everyday necessities through our neighborhood digital retail business that fulfills orders from local supply chains using local deliveries. In local consumer services, order volume growth rate picked up towards the end of this quarter due to increased home-based consumption from COVID cases. Notably, non-restaurant order volume growth rate was far higher than what it was for restaurants. The business saw an increase in revenue due to higher average order value. Ongoing improvements in operating efficiencies resulted in lower expense ratios in marketing and logistics. The business continued to demonstrate positive unit economics and it will continue to improve. During COVID, our operating strategies safeguarded our delivery capabilities and supported supply recovery. During peak COVID cases, user scale and scale of services used were briefly affected. As cases eased, usage of Amap quickly recovered. Ride-hailing and hotel room booking volume growth were rapid. Amap has become a new platform, providing various destination-based consumer services. Fliggy's domestic and outbound travel activity also quickly grew during the Spring Festival holidays. As a result of our ongoing developments of the supply chain and service capability over the past two years, recovery of Fliggy's domestic airplane ticket and hotel booking was significantly faster than the overall domestic travel performance reported by the China National Tourism Administration, and noticeably better in comparison to 2019 before the outbreak. In international commerce, our various businesses made steady progress. Trendyol continued to deliver strong growth as overall order volume grew over 50% year-on-year with local consumer services growing even faster. When Turkey was suddenly hit by earthquakes in early February, we actively organized and delivered support for emergency relief. So far, all our employees in Turkey are safe. Trendyol’s business operations remain stable, and they have mobilized resources to aid disaster relief. As for Lazada, the business continued to optimize for order volume growth while reducing loss per order by more than 30% year-on-year. We remain firmly committed to investing in Lazada's region of Southeast Asia. Through close collaboration with our logistics partners, AliExpress greatly optimized order deliveries on key routes as service quality continued to improve, and the impact of VAT and foreign exchange rates in Spain and France continued to ease. AliExpress order volume is starting to show positive growth. Our globalization strategy will continue to be firmly focused on Southeast Asia and Europe through a mix of localized retail and cross-border commerce. We will continue to make sustainable long-term investments and build businesses that can withstand economic cycles. Trendyol is celebrating its tenth anniversary this year. It has built a robust comprehensive business covering logistics and technology and continues to make progress in green logistics and emergency response logistics. In China, Trendyol continues to expand its doorstep delivery services for our customers. During the most recent November 11, more than 18 million orders from Tmall were delivered to customers' doorsteps at its peak. Trendyol has also built its own international logistics network over the past few years. As of this past quarter, it had more than 15 international sorting centers in operation. Our cloud business overall revenue growth rate this quarter was 3% year-on-year. The growth rate for public cloud was double-digit year-on-year, which was partially offset by a decline in hybrid cloud revenue from project delays due to COVID. In terms of revenue by industry, financial services, education, and automobiles are among the growth drivers. We also announced an important organizational change towards the end of last year. I took on the role of Acting President of Alibaba Cloud, in addition to my current role as Chairman and CEO of Alibaba Group. This decision was based on a few considerations. First, cloud computing is one of Alibaba's core strategies for the future. Innovation and other technologies will have an impact not just on Alibaba Cloud, but for the entire Alibaba Group. Second, Alibaba Cloud is also the foundation through which Alibaba serves the real economy and will continue to drive physical-digital integration. Third, we believe this is a critical period for technological breakthroughs and development in the nexus of cloud computing and AI. As one of the leading cloud computing service providers globally, we strongly believe in the vast potential of industrial digitalization and the role of cloud computing as infrastructure for the digital economy. Going forward, we will focus on a few areas to reinforce and strengthen our market leadership position as we look at the opportunities ahead. First, enhance the stability and security of our cloud computing services while continuing to optimize performance and manage costs through technology investments. Second, continue to build a dynamic developers' and industry ecosystem for cloud computing. Third, collaborate with partners to provide intelligence-based industry solutions to our customers in different industries and sectors. Fourth, continue to push forward a holistic cloud-based service product that integrates DingTalk, our intelligent online workplace collaboration platform, and application development platform. Lastly, in this exciting era of disruptive breakthroughs initiated by generative AI, computing power is essential. On one hand, we will continue building our own large-scale pretraining model. We are also ready to capture the market opportunities to provide the computing power for various generative AI models and applications. This year marks Alibaba Group's 24th year, and in Chinese traditional culture, this means we have gone through two complete calendar cycles. We have captured two historical opportunities of e-commerce in China for the consumer Internet and the rise of cloud computing in China for the industrial Internet. We will continue to capture the vast opportunities ahead through the impact of technology, both on commerce and other aspects of our society and environment. Although there are many uncertainties in the journey ahead that are very difficult to evaluate, we remain highly confident in the future of Alibaba and China's development. Thank you, everyone. Let me pass the microphone to Toby, who will share our financial results.

Toby Xu, CFO

Thank you, Daniel. Let me start with financial highlights for the quarter. This quarter, our total revenue was RMB 248 billion, an increase of 2% year-over-year. Income from operations was RMB 35 billion, an increase of RMB 28 billion year-over-year, mainly driven by a RMB 22.4 billion decrease in impairment of goodwill in relation to the digital media and entertainment segment, adding RMB 7.2 billion increase in adjusted EBITDA. During the December quarter, we have continued to improve operating performance of our loss-making businesses by enhancing operating efficiency and optimizing costs that resulted in a 16% year-over-year increase in adjusted EBITDA to RMB 52 billion. Overall adjusted EBITDA margin improved by 3 percentage points to 21%. Now let's look at cost trends as a percentage of revenue, excluding SBC. The cost of revenue ratio remained stable year-over-year at 60% in the December quarter. Our direct sales businesses and logistics services continue to grow, driving up our cost of inventory and logistics, but we were able to keep our cost of revenue ratio stable, primarily through optimizing content costs, traffic acquisition, and improving operating efficiency. Product development expenses ratio remained stable during the quarter. Sales and marketing expenses ratio decreased by 3 percentage points year-over-year to 12% in the December quarter, reflecting our continued effort in optimizing user acquisition and user retention spending across businesses. General and administrative expenses ratio remained stable at 3% in the December quarter. Non-GAAP net income was RMB 49.9 billion, an increase of RMB 5.3 billion or 12% year-over-year, mainly due to an increase in adjusted EBITDA, partly offset by a decrease in equity pickup of our equity method investees' results. Our GAAP net income was RMB 45.7 billion, an increase of RMB 26.5 billion year-over-year, primarily due to the increase in non-GAAP net income and RMB 22.4 billion decrease in goodwill impairment mentioned earlier. As of December 31, 2022, we continue to maintain a strong net cash position of RMB 379 billion or USD 55 billion. Our strong net cash position is supported by healthy cash flow generation. In the December 2022 quarter, cash from operating activities was RMB 87 billion, and free cash flow was RMB 82 billion, respectively, which were up by RMB 7 billion and RMB 10 billion versus one year ago. The majority of the difference between operating cash flow and free cash flow was operating CapEx at RMB 5.8 billion, down by RMB 3.5 billion versus one year ago. Net cash inflow from investment and acquisition activities, including disposals, was RMB 1.9 billion, compared to an outflow of RMB 4.7 billion in the same period last year. Importantly, we have continued to enhance returns to shareholders through share repurchases given our strong balance sheet and free cash flow generation capability. During the quarter, we repurchased approximately RMB 45.4 million of our ADS for approximately USD 3.3 billion through our share repurchase program. Now let's look at our segment results. Revenue from the China commerce segment in the December quarter was RMB 170 billion, a decrease of 1% year-over-year. Customer management revenue decreased by 9% year-over-year to RMB 91.3 billion. Taobao and Tmall online physical goods paid GMV declined by mid-single digits. Customer management revenue declined a few percentage points further versus paid GMV, mainly due to higher order cancellation rates as a result of supply chain and logistics disruption caused by COVID-related impacts. Direct sales and other revenue grew 10% to RMB 74 billion, primarily driven by strong growth of our Freshippo and Alibaba Health's direct sales businesses. The China commerce segment adjusted EBITDA increased by RMB 749 million to RMB 58.6 billion in the December quarter. Segment EBITDA margin remained stable at 34%. This reflected significant loss reductions from Taobao, Freshhippo, and Paltai, partly offset by a decrease in profit from customer management services. Our international commerce segment revenue in the December quarter was RMB 19.5 billion, an increase of 18% year-over-year. Revenue from the international commerce retail business increased by 26% to RMB 14.6 billion. The increase was primarily driven by accelerated revenue growth from Trendyol as a result of its strong order growth and more efficient use of subsidies. Lazada and AliExpress also saw recovered revenue growth this quarter. Revenue from our Alibaba.com wholesale business remained stable year-over-year. The international commerce segment adjusted EBITDA loss narrowed by RMB 2.2 billion to RMB 763 million in the December quarter. The loss reduction year-over-year was primarily contributed by the reduced losses from Trendyol and Lazada. Chandi continues to generate strong revenue growth and enhanced operating efficiency continues to narrow losses from Lazada was a result of ongoing improvement in the monetization rate by offering more value-added services as well as enhanced operating efficiency. Our local consumer services segment revenue in the December quarter grew 6% to RMB 13 billion, primarily due to positive GMV growth of the home business, driven by higher average order value of Ele.me. Local consumer services adjusted EBITDA loss reduced by RMB 1.9 billion year-over-year to RMB 3.1 billion. Most of the loss reduction was driven by the Ele.me business, while other major businesses within this segment also saw reduced losses. Ele.me continued to improve its unit economics per order by increasing the average order value, reducing delivery costs per order. Its unit economics continued to improve year-over-year and remained positive this quarter. Revenue from Cainiao, after intersegment elimination, grew 27% year-over-year to RMB 16.6 billion, primarily contributed by the increase in revenue from domestic customer logistics services as a result of service model upgrades. In the December quarter, 72% of Cainiao's total revenue was generated from external customers. Cainiao recorded an adjusted EBITDA loss of RMB 12 million in the December quarter, loss reduced by RMB 80 million year-over-year. Revenue from the cloud segment after intersegment elimination was RMB 20.2 billion in the December quarter, an increase of 3%, mainly driven by healthy double-digit public cloud growth, partially offset by declining hybrid cloud revenue as we continue to drive high-quality recurring revenue growth. Revenue growth from non-Internet industries was 9% and contributed 53% of overall cloud revenue. The non-Internet revenue growth was mainly driven by solid growth in the financial services, education, and automobile industries, which was partially offset by a decline in the public services industry. Revenue from customers in the Internet industry declined by 4%, mainly driven by declining revenue from the top Internet customer that has gradually stopped using our overseas cloud services for its international business. On the other hand, we saw improving demand from Internet customers in the December quarter. The adjusted EBITDA of the cloud segment, which comprises Alibaba Cloud and DingTalk, was a profit of RMB 356 million in the December quarter, increased by RMB 222 million year-over-year. Revenue from our Digital Media & Entertainment segment in the December quarter was RMB 7.6 billion, a decrease of 6%, primarily due to the decrease in revenue from Alibaba Pictures. Adjusted EBITDA was a loss of RMB 25 million, reduced by RMB 1.3 billion year-over-year, primarily due to the narrowing of loss from Youku driven by disciplined investment in content and production capability. Let me wrap up with some final thoughts. Our December earnings results continue to demonstrate our ability to execute and achieve the key operating and financial objectives we have set since the beginning of the fiscal year. Despite another quarter of global macro and core uncertainties that weighed on our revenue growth, we have continued to focus on higher quality growth supported by consumer and customer-centric initiatives, improved operating efficiency, and cost structure throughout the organization, enhanced shareholders' return through ongoing share repurchases. Consistency and persistence were key factors to our success in delivering these results in a challenging 2022. As Daniel mentioned, we believe 2023 will be a year of progress for Alibaba. It is expected that China's economic activity will recover in 2023, which would capitalize and stimulate a gradual consumption recovery. In 2022, we have strengthened our operational and financial capabilities. We are confident that those enhancements will position us well to benefit from China's recovery. We exited 2022 with a strong financial position of USD 55 billion in net cash, allowing us the financial flexibility to grow our businesses and improve returns for key stakeholders, including shareholders. In 2023, we intend to increase investments in major businesses that improve their competitive position and growth prospects while maintaining our mindset of enhanced operating efficiency. Thank you. Now let's turn to Q&A.

Robert Lin, Head of Investor Relations

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

Operator, Operator

Your first question comes from Alex Yao from JPMorgan.

Alex Yao, Analyst

I'd like to start by asking a question that addresses the long term. And after that, I'll come back to some shorter-term questions. But starting with the long term, as you said in your speech, Daniel, Alibaba has now been around for 24 years, marking the completion of two complete cycles in Chinese culture. And through these two cycles over the past 20-plus years, Alibaba has captured digitalization enabled opportunities around commerce, logistics, and cloud. So looking forward, what do you think will be the next big area or areas where Alibaba can achieve significant growth? As you yourself said, there have been two major opportunities that Alibaba has seized in the first 24 years—e-commerce and cloud. But see, in the next three to five years, what will be the big opportunities where you think Alibaba can achieve huge growth? And then coming back to the short term, looking at this year, some of the major developments we've seen are the very rapid success of ChatGPT as well as some important changes in the competitive environment with opportunities and challenges. How do you see Alibaba better marshaling its core competitiveness in the short term, and will part of that involve further optimization of costs and driving operational efficiencies?

Toby Xu, CFO

Thank you, Alex, and I will take those questions one by one. First, indeed, over the past 20-plus years, the major opportunities for us have been around applying digital technology to commerce, logistics, and cloud computing. And this is indeed the long-term strategy of Alibaba. We remain firmly committed, as always, to our three core strategies around consumption, cloud, and globalization. And when we talk about globalization, it is indeed globalization of our consumption and cloud-based offerings. So we remain firmly committed to those core strategies and not seek out new arenas in which to compete. It's because we think that in those areas, what we're doing is high enough and the market is big enough. It's more than enough for us to accomplish there, especially as we continue to evolve our technology. We're confident that we can continue to find huge opportunities in those three core areas, and we can look at them one by one. Beginning with consumption. If you look at the size of consumption in China today as a percentage of GDP, and if you think about the latest forecast from the International Monetary Fund, the IMF of 5% economic growth in China, imagine what China's GDP numbers will look like if that can be maintained—5% per annum growth for a period of 10 years. And if China's economy does grow by 5% a year for 10 years, you can certainly imagine that the proportion or the size of the contribution of consumption in China within GDP. So we're talking about 40 trillion today against 110 trillion. That proportion will certainly be even higher two years down the road. Turning to technology, we can look back at the trajectory that we've already traveled through 20 years ago, 10 years ago; e-commerce has taken off to look completely different. It's continued to evolve. And we've said in the past that we would digitalize commerce in China. Well, that's not been completely accomplished. But looking to the future, we now have these exciting new technologies coming to the fore, including generative AI, which you mentioned. I think that certainly will also be transformative and create new experiences and new formats of consumption. But this digitalization, when it comes to consumption, is not just having an impact on the consumer side; it's also having an impact on supply chains and the way they're organized. And I think that really is just getting started. This is an industry where China is just getting started, and you can look at a few figures to support that. First of all, if you look at the proportion of IT spending within total GDP in China, it's only 1%. In the U.S., it's as high as 5%. If you look at the proportion of cloud within IT spending numbers, it's 15% in China today, 21% in the United States. These figures represent huge opportunities for us in China. As technology continues to develop, new cutting-edge technologies like generative AI come to the fore, but also virtual reality, which we've discussed before. All of these technologies, as they're deployed, will require massive compute power to support them. We expect to see exponential growth in demand for compute power. So for us, as a cloud vendor, I think that story is purely just getting started. Of course, these are not just trends in China but for the world, and we intend to take our offering to the global market. We're already the leader in China when it comes to consumption and cloud computing and one of the leaders in the world, and we will continue unshakably to be committed to and pursue those three core strategies we adopted while continuing to embrace new technologies and make technological breakthroughs in order to create new and more exciting prospects for Alibaba as a company. And then moving on to your second question about new technologies and developments in the market. And of course, there are always new market developments on a daily basis. But as I said, Alibaba has identified progress as our keyword as our overarching theme for 2023. We'll be seeking progress in technology, in our business, and also in the ways that we create user value. We will be investing, therefore, to drive progress in new technology and to integrate new technology with business to create new value and new kinds of business with tremendous prospects going into the future. In fact, that's what Alibaba has always done over the past 20 years. We haven't been a low-price competitor; we haven't been relying on heavy subsidies; we haven't been engaged in low-quality low-level competition. Rather, we've always invested in technology in the belief that technology can make the impossible possible, and that could also make a business that had been impossible also become possible. So we will continue to seek and drive new technology breakthroughs to open up new frontiers in commerce and in business.

Operator, Operator

The next question is from Ronald Keung from Goldman Sachs.

Ronald Keung, Analyst

We know that in 2022, a major theme for Alibaba was optimizing the cost structure and driving operational efficiencies. Going into 2023, as we've talked about, we can expect to see a pickup in the macroeconomic situation, hopefully leading to GMV turning positive again. I'm wondering when you expect to see that happening and at what point can we expect to see positive growth returning in the GDP GMV numbers? And also, how are we going to achieve balance between growth and investment in this new year because we know there are people who are engaging in a lot of subsidization behavior? So how are we going to achieve that balance between growth and investment?

Toby Xu, CFO

Well, starting with the part of your question that had to do with the pickup in consumption that we've seen following the end of COVID measures in China. Obviously, we're following that situation very closely, just like all of you, just like everybody else. But in my script earlier, I did lay out a detailed and comprehensive picture as I could. January certainly was still a challenging time through the Spring Festival, especially with people traveling widely in large numbers across the country. Life and work, however, began to normalize around the time of the Lantern Festival and thereafter with improvement in consumption sentiment, indeed, as expressed in consumption behavior. And I also shared with you the impact that had on different categories, including apparel, sports, outdoors, and health. Certainly, what we see across all merchants is a strong desire to get back to business. They want to have a bumper year in 2023 to make up for everything they lost over the past three years. That's certainly a shared hope across the board for all the merchants. Of course, since the resumption of normalcy, it’s only been a short time—it's just been about half a month. So we do need to keep our eyes on how the ongoing picture continues to develop. But certainly, we are optimistic about continued improvement in the situation. The other part of your question had to do with market competition and price. Price subsidies are nothing new. Every couple of days, somebody will come up with a bright idea to engage in heavy price subsidies to win more opportunities and turn around their business. But I think if you take a clear-eyed look at history, no player has ever managed to achieve that kind of turnaround by relying solely on price subsidies. What it really takes is technological innovation, which in turn empowers business model innovation. At the end of the day, it's really about merchants being able to provide consumers with the best products at the best prices in a way that is sustainable in the long term so that the merchant can make a return and continue to invest in a sustainable cycle. So Alibaba has a lot of experience in empowering merchants to do that. We also have experience in utilizing platform mechanisms to enable sustainable growth. And as Toby said in his script, we have deep pockets with USD 55 billion in cash. So we can continue to leverage these approaches to create value for users and maintain our leadership in the market.

Operator, Operator

The next question is from Eddie Leung from Bank of America Merrill Lynch.

Eddie Leung, Analyst

Yes. My question has to do with local services. We understand that there's been a turnaround in unit economics and positive unit economics continuing to improve. But at the same time, we understand that there are various short-form video platforms that are also now investing heavily in local services, and this could lead to further changes in the competitive landscape. So I'm wondering if you could talk to us, please, about your strategy for local services going forward to continue to maintain and strengthen that leadership position.

Toby Xu, CFO

Well, when it comes to local services, as you know, there are really two different kinds of services—to home and to store, or to destinations because the store is one kind of positive destination. So starting with the destination, any media platform, be it short-form video or other kind of media, can find ways to develop a to-destination business in the context of local services. They can promote a local destination, be it a store or something else through their media offering. They can allow consumers to place an order. But when it comes to fulfillment, you still have to physically go to the store to fulfill your order. So certainly, any media that has any kind of influence with an audience can find opportunities to do that to drive traffic to a physical location like a store. But Alibaba has opened up a whole new paradigm for the to-destination front with the important transformation and transformation of Amap that we've achieved over the past few years, taking it from a simple map tool to Amap—a location-enabled offering that spans search, discovery, and fulfillment. Today, Amap has achieved very high penetration in a wide range of categories, including ride-hailing, hotel reservations, gas stations, and finding electric charging facilities for new energy vehicles. I don't think that's something that any other kind of media platform could achieve. Now the other piece, when we talk about local services, is to home, and Ele.me is part of that section of local services. Indeed, following several years of hard work, I believe Ele.me is very much on the right track. Unit economics are positive and continue to improve. Things continue to move in the right direction in terms of the number of orders, the number of users, and unit economics. So when we talk about to home, this is local or neighborhood e-commerce. Deliveries from restaurants to homes are one example of that, but it's not just restaurant food orders. It could also include things like medicine, groceries, or other kinds of daily essentials. But to succeed in this space, you need to be able to successfully integrate local neighborhood supply, neighborhood demand, and neighborhood-level fulfillment—all in one place at the same time. Again, this is something that no media outlet could ever hope to achieve. This is where Ele.me has been a great success because you need to be able to integrate real-time local supply, local demand, and local fulfillment capabilities, and they only need to intersect in the space-time continuum in a single coordinate in a way that achieves chemical synergies. We're continuing to successfully grow our local services business in the priority cities we've identified. Your business will look very different if you're going after 50 cities versus 100 cities. We continue to focus on the key cities that we've identified, continuing to improve the service to win and build confidence with consumers and drive long-term growth.

Operator, Operator

The next question is from Jiong Shao from Barclays.

Jiong Shao, Analyst

Thank you, management. Toby, you said that in the past quarter, free cash flow exceeded USD 11 billion. We know that there are other initiatives underway within Alibaba to monetize certain investments. In the last quarter, you conducted a USD 3.3 billion share buyback under the buyback program. But I'm wondering what other potential methods could be available for Alibaba to increase shareholder value and increase returns to shareholders. Are there any other things you can consider, for example, distributing dividends or further expanding the scale of the share buyback program?

Daniel Zhang, Chairman and CEO

Thank you for your question. You touched on a couple of things. First, as you all will have seen from various media reports, we have been divesting some of our investments. I think that's normal for any corporate company that is making a lot of strategic investments to also, at some point, make a timely exit from those investments, and that's indeed part of the original plan. When you make those current strategic investments, you are planning on exiting at a certain point. You also talked about our share buyback program. In fact, it had already been upsized, as previously announced. It had been a USD 25 billion program. As we spoke about last time, that was increased by USD 15 billion to a total of USD 40 billion. In the December quarter, we bought back another USD 3.3 billion of shares, and we do think pursuing the share buyback program is a good way to return value to our shareholders. Now, under the existing already enlarged share buyback program, we still have a remaining quota of USD 21 billion to be deployed. So, at this point in time, no, we are not considering further expanding that quota; rather, what's on our minds at this point in time is how we can best make use of that remaining quota of USD 21 billion—how to deploy it and when to deploy it in line with the authorization given to us by the Board of Directors in order to further enhance shareholder value.

Operator, Operator

The next question is from Alicia Yap from Citigroup.

Alicia Yap, Analyst

I'd like to follow up on Daniel's earlier remarks about how Alibaba intends to continue to focus on and invest in technological innovation as a means to create new business models and new opportunities for the businesses. I'm just wondering if you could break that down for us a little bit and explain which of the businesses this year we can expect to see adopting new technological innovations that lead to new business models and new opportunities that will, for example, result in accelerated CMR growth or boost cloud revenue or perhaps be in local services, where these breakthroughs will be met. But I appreciate if Daniel could give us some more color on a segment-by-segment basis.

Daniel Zhang, Chairman and CEO

Well, driving business growth with technology has been a constant theme for all of Alibaba throughout its history. But looking to the future, there are certainly several big opportunities for us that we can already see clearly. The first is around AI, and lately, generative AI has become a hot topic around the world. But we're not talking about having a chatbot for the sake of a chatbot. Rather, we're talking about integrating that capability deeply into the business around consumption, user experience for content generation to drive higher advertising effectiveness. AI can play a huge role in all of those different areas, and we have been working on that and continue to do so. Also, when it comes to how to match supply and demand more effectively, how to achieve higher effectiveness in terms of marketing and promotion, and how do we achieve higher efficiency and better user experience around different services—these are all places where we can leverage AI to make huge improvements. So that's the first part of the answer. Beyond that, when we talk about cloud computing and big data, Alibaba has substantial capabilities in providing processing power. We have IaaS and PaaS offerings. We also have, of course, our large pretraining model for AI. What we're seeing today with recent developments is that our view of the future has panned out and proven to be consistent with what's happening in the market. Going forward, there's going to be exponential growth in demand for computing power to support these kinds of AI applications, and Alibaba is ready to provide precisely that kind of computing power. So that is a big opportunity for us as well. And then just to add another word because I think implicit in your question was a concern around advertising revenue. AI can be leveraged in the ways we talked about earlier when we discussed supply chains and local services to better match local demand with fulfillment capabilities and local supply within a certain time window and to make that whole local or neighborhood-based digital commerce scenario run much more efficiently. We will continue to work in those directions to grow our business. These are opportunities.

Operator, Operator

The next question is from Jerry Liu from UBS.

Jerry Liu, Analyst

I have a couple of questions. My first has to do with take rates. Looking at GMV and CMR growth on Taobao and Tmall over the past few quarters, we understand that there will be special circumstances that have changed the relationship between the two. But looking forward to this quarter or even the few quarters to follow, do you think we will expect to see any change in the relationship between the growth rate of GMV and CMR, and could CMR grow faster than GMV in the next few quarters? Second question for Daniel has to do with your assuming the position of interim or acting head of Alibaba Cloud Intelligence. I'm wondering since you've taken up that role, what new strategies or new initiatives have you put in place for the cloud business? What changes have you made to the strategies and initiatives of that cloud business?

Daniel Zhang, Chairman and CEO

Well, on your first question regarding the relationship or the ratio between CMR and GMV, we discussed this issue previously. To recap briefly, the issue of late really has been the high rate of order returns due to, among other things, logistics disruptions. When we talk about GMV, we're talking about paid GMV. After the consumer has made payments and after logistics and fulfillment, if the consumer well, logistics don't work out, the consumer will return the good. Overall, what we're seeing now is, of course, recovery in logistics and declining return rates. So I think what we're seeing now, it's fair to say that the ratio or the gap between paid GMV and CMR is narrowing. Secondly, on the question about cloud, we see the development of this industry, not only in China but worldwide, as an absolutely historic opportunity. This is an opportunity of extreme strategic importance to Alibaba. So I'm extremely excited to take up the helm and be personally in charge of Alibaba Cloud at this important juncture. This is something I'm extremely passionate about, and we absolutely must not fail to seize and capitalize on this crucially important historic opportunity. We have an excellent foundation in Alibaba Cloud today, thanks to the hard work of the previous president of that business unit over the past ten years or so. We're already number one in China and one of the top cloud vendors in the world with an excellent market position and a strong foundation to build on. Building on that foundation going forward, I think one of the first things we have to do is get back, if you like, to the essence of the cloud—the fundamentals of the cloud, which is leveraging cloud to make available computing power. We need to ensure that we're doing that with extremely high availability and high security and make sure that we're consistently exceeding customer expectations around stability and security. That's point one. Point two, I think we need to place emphasis on public cloud offerings. When we talk about cloud, it's not often clear that we're talking about the same thing. There are so many different definitions of cloud out there. What is cloud computing? For Alibaba, we need to be firmly rooted in China but also have a global vision and ensure that we're making great fundamental core capabilities around IaaS and PaaS, so that we will not only be a leader in China but also a leader worldwide. Cloud computing is an industry that's built on economies of scale. If you have more scale, then you have economies. We need technological breakthroughs to achieve those economies of scale. We need to enable our users not just to use cloud but to use cloud well and to achieve demonstrable economic benefit from leveraging those cloud offerings. We need to pay a lot of attention to public cloud and further drive scale there. This is a very important part of serving the digitalization of industry and providing cloud-based compute power, especially for data-intensive sectors. I know I've already touched on this quite a few times already, but another very important point is with generative AI and its more broad-based application in the near future. We can expect rapid growth in demand for high-performance computing power. You need infrastructure to be able to power that, and the infrastructure needs to be integrated from chip through network to compute power. All the global vendors are talking about that, but we and Alibaba see this as an extremely important opportunity, and we intend to fully capture it.

Robert Lin, Head of Investor Relations

Okay. Thank you, everyone, for your time and listening today. That concludes our today's earnings call. The replay and transcript will be available on our IR website this week. We look forward to meeting you and engaging with you in the coming months, and look forward to speaking to you next quarter. Thank you.

Operator, Operator

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