Earnings Call Transcript - BABA Q4 2022

Operator, Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group's March Quarter 2022 and Full Fiscal Year 2022 Results Conference Call. At this time all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. I would now like to turn the call over to Rob Lin, Head of Investor Relations of Alibaba Group. Please go ahead.

Rob Lin, Head of Investor Relations

Good day, everyone, and welcome to Alibaba Group's March quarter 2022 and full fiscal year 2022 results conference call. With us today are Daniel Zhang, Chairman and CEO; Joe Tsai, Executive Vice Chairman; Toby Xu, Chief Financial Officer. 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 detailed discussions of the risks and uncertainties, please refer to our latest annual report on Form 20-F and other documents filed with the U.S. SEC or 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 are using on this call, such as adjusted EBITDA, adjusted EBITDA margin, adjusted EBITA, adjusted EBITA margin, non-GAAP net income, non-GAAP diluted earnings per share, 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 our earnings press release. Unless otherwise stated, growth rate of all stated metrics mentioned during this call refer to year-over-year growth versus the same quarter last year. In addition, during today's call, management will give their prepared remarks in English. A third-party translator will provide simultaneous Chinese translation on another conference line. Please refer to our press release for details. During the Q&A session, we will take questions in both English and Chinese, and a third-party translator will provide consecutive translation. All translations are for convenience purposes only. In the case of any discrepancy, management's statement in the original language will prevail. With that, I will now turn to Daniel.

Daniel Zhang, Chairman and CEO

Thank you, Rob. Hello everyone. Thank you for joining our earnings call today. We completed a solid fiscal year amidst the macroeconomic challenges in China due to the resurgence of COVID and tremendous uncertainties in the global geopolitical landscape. During the fiscal year, we achieved the target of 1 billion AACs in China with an annual net increase of 113 million. Globally, we reached 1.31 billion AACs with an annual net increase of 177 million and we achieved a total GMV of RMB8.3 trillion with close to RMB8 trillion in China and RMB3.41 billion outside of China. Our cloud computing business completed its first profitable fiscal year while maintaining market leadership in China. Now I would like to share a bit more about the latest situation in China with the recent resurgence of COVID. As you all know, Omicron started to spread in China in March and has impacted several major consumption and manufacturing centers such as the Pearl River Delta including Shenzhen, the Yangtze River Delta, including Shanghai and Beijing. During the second half of April, over 80 cities in China reported confirmed COVID cases and most are national economic centers. Such widespread impact has brought significant uncertainties to the China economy. We saw the national retail sales reporting negative year-over-year growth in March and April and online sales of physical goods also reported a historical decline year-over-year. The resurgence of COVID has also impacted our business to varying degrees. Overall speaking, we saw a low single-digit decline in revenue growth in April compared to the same period last year. Online physical goods GMV of our China retail marketplaces, excluding unpaid orders, saw a year-over-year decline in the low-teens percentage in April. To give you a sense of the scope of impact, based on our consumer address, cities with new COVID cases in April represented more than half of our China retail marketplaces GMV. These cities also included major merchant hubs such as Shanghai, Shenzhen, and their nearby cities, where supply chain and logistic disruptions have resulted in widespread impacts. During the same period while our user traffic and engagement have remained resilient, patterns of consumption across categories on our platforms have shifted. Fashion and electronics consumption decreased. Demand for essential supplies such as food and FMCG products increased significantly with more consumers staying at home. Emerging categories such as healthcare, activewear, and outdoor products also grew rapidly. We have seen a major recovery in local logistic capacity compared to April. We believe operating stability and sustainability during this period is the primary concern of all businesses, ensuring stability of supply chain and logistics amid uncertainties is the best way to improve consumption sentiment and foster a more positive environment for business operations. We are also facing uncertainties in the macro environment outside of China. During the quarter, the largest order growth slowed down to 32% year-over-year as offline consumption gradually recovered post-pandemic in Southeast Asia with Malaysia, Vietnam, and Thailand achieving higher than regional average growth rates. Trendyol continued its market leadership in Turkey with quarterly order volume growing by 48% year-over-year. The order volume of AliExpress decreased year-over-year this quarter, mainly due to the impact of the European Union's policy change in VAT exemption, recovery of local supply chains and offline consumption post-pandemic, as well as international logistic disruptions due to regional conflict. Despite geopolitical conflicts and uncertainties, we will continue efforts to develop our globalization strategy in consumption. We will serve international consumers through a combination of cross-border and local commerce models and proactively invest in our global logistic networks as part of our overseas digital commerce infrastructure buildup. Facing the challenges of geopolitical and macroeconomic uncertainties, many companies started to focus on high-quality growth with cost control and loss cutting. For Alibaba, high-quality growth has been a principle for years, especially during the pandemic. We see the benefits of the solid foundation that we have built over time carrying out this principle. Number one, the high-quality consumers that we serve; number two, the high-quality infrastructure we are building for digital commerce; and number three, the high-quality technology innovations that drive the vast potential of our cloud computing business. I will elaborate more in the following sections. First of all, the high-quality consumer base, we serve the largest and the highest quality consumer base in China by Taobao and Tmall. Among our 1 billion AACs in China, 124 million consumers spend more than RMB10,000 annually on Taobao and Tmall and 98% of those consumers continue to stay active in the following years. Looking ahead, we will continue to strengthen our comprehensive consumer application portfolio with clearly articulated user value propositions and address the diversified needs of different consumer segments in accordance with their consumption power and mindsets, especially those of our core customers. What does it mean? In the pre-purchase stage, it means establishing a clear consumer mindset, stimulating consumer interest through increasing user engagement and time spent on consumption-related content, and influencing consumer decisions. In the post-purchase stage, it means an enhanced fulfillment and customer service experience. I believe this is a winning formula for earning consumer mindshare and wallet share in a highly competitive landscape. Secondly, the high-quality infrastructure for digital commerce. Over the years, Alibaba has established a comprehensive infrastructure for digital commerce based on a hybrid model, combining intercity and intracity fulfillment. Through digital user outreach, effective organization of product and service supply, as well as fulfillment service capabilities covering cities and communities, our infrastructure has become an important way for consumers to obtain daily necessities during the pandemic. In particular, over the last few years, we have created our location-based commerce business by building core capabilities in supply chain and fulfillment and online/offline integrated distribution networks on top of a pre-existing marketplace model. Based on our data in March and April, the average order value of customers in our location-based commerce business has increased significantly as consumers in COVID-affected areas rush to stock up. As a result, while our order volumes were negatively impacted by the fulfillment capacity constraint during the pandemic, the GMV of these location-based commerce businesses have shown robust year-on-year growth. Taking Shanghai as an example, while Ele.me food delivery business has been significantly impacted, deliveries of retail categories have grown rapidly, in particular, demands for groceries and pharmaceuticals are extremely strong with year-on-year growth above 100%. As Ele.me continues to enhance its operations and reduce unique logistic costs, its unique economics also improved significantly to almost breakeven during the quarter. Our infrastructure is playing an important role during the pandemic. For example, our different businesses, including Freshippo, Taoxianda, Tmall Supermarket, Ele.me, etc., are providing essential supplies in cities impacted by COVID in China. Through these efforts, we hope to integrate business capabilities with social responsibility, leveraging the power of digital commerce and technology in the fight against COVID and providing essential supply support for local communities. Let me name a few examples: Sun Art, Freshippo, and other business units supported the supply and delivery of essentials to the residents by dispatching thousands of workers from various regions in China to Shanghai. Ele.me delivered more than 2.5 million pharmaceutical orders to homes in Shanghai in April 2022. It also launched emergency delivery services for vulnerable groups in the city and addressed nearly 70,000 emergency requests during the month. Cainiao logistics built an emergency logistic system that encompassed disaster preparedness management, emergency transportation, transit, and distribution to deal with contingencies. Amap, our map navigation tool, launched the Map of PCR Test Sites, which covered more than 350 cities in China by mid-May, allowing users to easily search for locations and opening hours of nearby test sites. Taobao and Tmall have launched a series of targeted relief measures that would help merchants in Shanghai and those participating in our June 18 shopping festival, to ease their cash flow pressure, reduce operating costs, and speed up the resumption of work and production to the largest extent possible. Thirdly, the high-quality technology innovations that drive the vast potential of our cloud computing business. Alibaba Cloud's competitive advantage is its world-class perpetual technology and products that support the highly demanding and complex business across Alibaba Group while serving customers across a wide variety of verticals globally. In fiscal year 2022, Alibaba Cloud continues to be the leader in terms of market share in China and achieved full-year profitability for the first time. GAAP revenue reached RMB 74.6 billion during the year with 23% year-on-year growth. Before inter-segment elimination, cloud revenue for the fiscal year has exceeded RMB 100 billion. During the past quarter, Alibaba Cloud’s revenue increased by 12% year-on-year. The growth deceleration was a result of several factors, including the decline in corporate activities, delays in project delivery due to the impact of COVID restrictions, slowdown in the growth of internet industry customers, and the gradual termination of contracts by a top customer for our public cloud services outside of China. We believe these impacts are temporary. While China's Internet industry customers show a deceleration in cloud service demand as the entire sector faced challenges of growth ceding in user traffic and time spent, digitalization of other industries is just starting and we see plenty of opportunities. Cloud computing and data intelligence services are fundamental to every business in every sector undergoing digital transformation. According to industry estimates, China's cloud market size will reach RMB 1 trillion by 2025. Alibaba Cloud will continue to elevate its core technology and products to maintain its leadership in this highly potential market. The cumulative results of Alibaba’s strong management and operations over the years has produced a high-quality customer base, a sophisticated digital commerce infrastructure, and world-class technology innovation. We also have a multi-engine growth strategy, robust financial conditions, and a profitable business, and a strong cash flow. These provide important assurance in the face of macro uncertainty and, more importantly, a source of confidence as we continue to pursue healthy and sustainable development for the future. In the new fiscal year, we will focus even more on cost control and continue to improve our operating efficiency. This includes streamlining unprofitable businesses, improving cash cycles, and enhancing investment efficiency in personnel, fixed assets, and other areas to maintain financial flexibility amidst uncertainties. Recently, the Chinese government has released important policy signals on its commitment to stabilize the economy and the job market in response to COVID impacts. They have also issued clear statements on promoting the development of the internet platform economy through a healthy regulatory environment. Yesterday, the State Council held a national meeting to mobilize the implementation of several economic policies. As one of the representative companies of China's internet platform economy, Alibaba is committed to supporting China's development through the combination of technological and commercial innovations. We aim to serve Chinese consumers’ pursuit for a better life, as well as the digital transformation needs of different industries. We will also be on the front lines in the fight against COVID and ensuring the availability of food and other essential supplies to communities in need. We look forward to the introduction and implementation of policies that will enable internet platform companies to contribute more towards stabilizing the market, creating jobs, and further enhancing the high-quality development of the Chinese economy. The history of economic development has always been filled with twists and turns. In the long run, we strongly believe in the resilience and potential of the Chinese economy. We will strengthen our fundamentals during this unique period, focus on innovation and customer value creation, and continue investing and planning for Alibaba's long-term growth. Thank you everyone for your time. I will now turn the mic over to Toby, who will walk you through the details of our financial results.

Toby Xu, Chief Financial Officer

Thank you, Daniel. Hello everyone, let me walk you through the details of our financial results. For the quarter ended March 31, 2022, total revenue was RMB 204 billion, an increase of 9% that was primarily driven by the revenue growth of China commerce segment by 8% to RMB 140 million; local consumer services segment by 29% to RMB 10 billion; and cloud segment by 12% to RMB 19 billion. Income from operations for the quarter was RMB 16.7 billion compared to a loss from operations of RMB 7.7 billion in the same quarter of last year. The year-over-year change of RMB 24.4 billion was primarily due to the RMB 18 billion anti-monopoly fine levied in the March 2021 quarter and a mark-to-market adjustment of SBC expenses of RMB 13 billion in the March 2022 quarter. Excluding these impacts, income from operations would have decreased by RMB 7 billion, primarily due to changes in adjusted EBITDA. Adjusted EBITDA decreased by RMB 6.8 billion to RMB 15.8 billion year-over-year in the quarter. The decrease was primarily due to a RMB 7.4 billion decrease in the China commerce segment EBITDA, which are mainly reflected investments in Taocaicai and Taobao Deals, impacts from COVID, as well as losses incurred by Sun Art. However, it's important to note that the combined losses of Taobao Deals and Taocaicai declined quarter-over-quarter, as we focused on driving high-quality growth for our China commerce segment. Importantly, during the March 2022 quarter, we are also making progress in improving operating efficiency and instilling cost discipline throughout the company. This has resulted in narrowing losses year-over-year of RMB 1.2 billion for local consumer services, narrowing losses of RMB 732 million for DME segment, and improving profitability of RMB 618 million for the Cloud segment. The cost of revenue ratio excluding SBC increased to 68% in the quarter ended March 31, 2022. The increase was primarily due to, firstly, the higher proportion of direct sales businesses, such as Freshippo and Tmall Supermarket, that increased the cost of inventory as a percentage of revenue. And secondly, growth of Taocaicai and Cainiao businesses that led to an increase in logistics costs as a percentage of revenue. Excluding SBC, product development expenses as a percentage of revenue slightly increased to 6% in the quarter ended March 31, 2022, reflecting our continued investments in talent to drive technology and product innovation. Sales and marketing expenses, excluding SBC as a percentage of revenue, remain stable at 13% in the March quarter compared to the same quarter of last year. Excluding SBC and the impact from the anti-monopoly fine, general and administrative expenses as a percentage of revenue will be flat in the quarter. Non-GAAP net income attributable to ordinary shareholders in the quarter was RMB 21.5 billion, a decline of RMB 6.9 billion, primarily due to the decrease in adjusted EBITDA. GAAP net losses attributed to ordinary shares was RMB 16.2 billion. The difference between GAAP net losses and non-GAAP net income was primarily due to a decrease in the market prices of our equity investments in publicly traded companies. As of March 31, 2022, we continue to maintain a strong net cash position of RMB 343 billion or US$54 billion. Our strong net cash position is supported by robust cash flow generation. In fiscal year 2022, net cash flow from operations and free cash flow were RMB 142.8 billion and RMB 98.9 billion respectively. The majority of the difference is operating CapEx spending at RMB 42 billion reflecting our investment in Cloud business and logistic fulfillment infrastructure. Free cash flow in March quarter 2022 was an outflow of RMB 15 billion, mainly due to the payment of the final installment in the amount of RMB 9.1 billion of the RMB 18.2 billion anti-monopoly fine and decreasing profits. Importantly, we have continued to enhance returns to shareholders through share repurchases, given our strong balance sheet and free cash flow generation capability. In fiscal year 2022, we repurchased approximately 60 million of our ADS for approximately US$9.6 billion under our share repurchase program. On March 2022, our company's board authorized an increase of our share repurchase program from US$15 billion to US$25 billion. Since April 1 to May 25, we have repurchased another US$3.4 billion in ADS. As of May 25, we still have an unused amount of US$12 billion under the share repurchase program. Before I start with our segment results, I’d like to highlight something in the December 2021 quarter financial results. In the December quarter, the net income attributable to ordinary shareholders was understated by RMB 7.3 billion. This was caused by a goodwill impairment charge that should have been partially attributed to non-controlling interests but was fully recorded in net income attributable to ordinary shareholders. This does not impact our non-GAAP measures and does not impact revenue, income from operations or total net income for the December quarter. The attribution has been rectified and primarily reflected in the full year consolidated financial information for the fiscal year 2022. This attribution has no impact on the consolidated financial information for the March 2022 quarter. Now, let’s look at our segment results. Revenue from our China commerce segment in the March quarter was RMB 140 billion, an increase of 8% year-over-year. Customer management revenue remained stable year-over-year at RMB 63 billion, despite a low single-digit decline in Taobao and Tmall online physical goods GMV, excluding unpaid orders. For the March quarter, the combined GMV growth of January and February was flat, but was offset by a decline in GMV in March driven by COVID-19 impacts. If we further breakdown customer management revenue growth into advertising and commission revenue, total advertising revenue delivered positive growth during the quarter, while commission revenue recorded a high single-digit decline due to GMV decline in a higher order cancellation and delays as a result of logistic bottlenecks from COVID-19 resurgence in March. Direct sales and others revenue in the March quarter was RMB 73 billion, an increase of 14% year-over-year, primarily driven by robust revenue growth of Freshippo and Tmall Supermarket. China commerce segment adjusted EBITA decreased by RMB 7.4 billion year-over-year to RMB 32.1 billion in the March quarter. The decline reflected investments in Taocaicai and Taobao Deals, as well as over RMB 1 billion losses incurred by Sun Art, primarily due to one-off asset impairments and special provisions. We are making progress in our commitment to improve efficiency and narrow losses for Taobao Deals and Taocaicai that have been successful in acquiring new consumers in less developed areas. During the quarter, Taobao Deals had over 300 million annual active consumers, more than 20% of these AAC of Taobao Deals were consumers that did not shop on Taobao or Tmall in fiscal year 2022. And Taocaicai had over 90 million AAC, of which more than 50% were first-time fresh produce buyers on our various platforms. At the same time, the combined losses of Taobao Deals and Taocaicai declined quarter-over-quarter. We expect the combined Taobao Deals and Taocaicai losses to continue to narrow as we focus on driving high-quality growth for our China commerce segment. On to our major direct sales businesses, except for Sun Art as mentioned, losses have narrowed year-over-year for Freshippo, Tmall Global, and Tmall Supermarket. We have continued to expand our direct sales business to enrich product supply for our marketplaces, strengthen supply chain capabilities for various verticals, and offer comprehensive high-frequency human services that seamlessly integrate with physical stores and pickup stations. These businesses delivered solid top-line growth during the quarter, and we expect them to contribute more to the overall segment revenue mix, which will continue to affect China commerce EBITDA margin. Our International commerce segment revenue in the March quarter was RMB 14.3 billion, an increase of 7% year-over-year. The increase was primarily driven by Lazada and Alibaba.com. Our International wholesale business, Lazada delivered solid order growth of 32%, while Alibaba.com grew transaction value completed on the platform by 22%. The slower year-over-year growth rate compared to previous quarters was mainly due to, firstly, revenue decline of Trendyol that was negatively impacted by the ongoing depreciation of the Turkish lira against RMB; and secondly, orders decline for AliExpress, which was mainly driven by the ongoing impacts from VAT rules, as well as supply chain and logistics disruptions for parcels entering the Eurozone due to the Russia and Ukraine conflict, and then slowing China export growth and supply chain disruptions from COVID-19 impacts. The International commerce segment adjusted EBITA loss was RMB 2.6 billion in the March quarter, losses slightly increased year-over-year, mainly driven by Trendyol’s investments in new businesses such as international businesses and local consumer services in Turkey, partly offset by continued profit growth of Alibaba.com, narrowed losses of AliExpress, and narrowed losses of Lazada through optimization of operating expenses and logistics costs. Revenue from Local consumer services was RMB 10.4 billion in the March quarter, an increase of 29% year-over-year driven by more efficient use of subsidies and higher average order value driven resilient GMV growth for Ele.me. Local consumer service adjusted EBITA losses reduced by RMB 1.2 billion year-over-year to RMB 5.5 billion, primarily due to the narrowed losses of our two home businesses driven by optimized user acquisition and reduced delivery costs. Revenue from Cainiao, after inter-segment elimination, was RMB 11.6 billion in the March quarter, an increase of 16% year-over-year, primarily contributed by the increase in revenue from consumer logistics services as a result of service upgrades enhancing consumer experience, partly offset by the decrease in international orders that was mainly impacted by supply chain and logistics disruptions for parcels entering the Eurozone due to the Russia and Ukraine conflict. During fiscal year 2022, 69% of China’s total revenue was generated from external customers. Cainiao's adjusted EBITA loss was RMB 912 million, having widened by RMB 327 million year-over-year, primarily due to an increase in operating costs from the expansion of our global smart logistics infrastructure, as well as the impact from the COVID-19 resurgence in China and the Russia and Ukraine conflict. Going forward, we will continue our efforts in building comprehensive logistic and fulfillment infrastructure in China and internationally, laying the foundation for sustainable long-term growth for our digital commerce businesses. Revenue from our Cloud segment after inter-segment elimination was RMB 19 billion in the March quarter, an increase of 12% year-over-year. Revenue growth was slower in the March quarter compared to prior quarters, reflecting slowing economic activities, softening demand from customers in China’s internet industry, and delays in completing hybrid cloud projects due to COVID-19 impacts. Excluding revenue generated from a top customer in the internet industry that is gradually phasing out using our cloud services for its international business, our Cloud segment revenue after inter-segment elimination would have grown 15% year-over-year during the March quarter and 29% for fiscal year 2022. Excluding this customer, our customer base and industry coverage continue to diversify. The next top 10 non-affiliated customers contribute to less than 10% of AliCloud’s revenue in fiscal year 2022. Importantly, revenue contribution from non-internet industries continues to increase as well. During the March quarter, revenue growth was strong in telecommunications, financial services, and retail industries, but declined in selected internet verticals including online education and entertainment. Adjusted EBITA of the Cloud segment, which comprises Alibaba Cloud and DingTalk, was a profit of RMB 278 million in the March quarter, which improved by RMB 618 million year-over-year. This is primarily attributable to ongoing improvement in cloud profitability, partly offset by increasing losses from DingTalk. In the new fiscal year, our Cloud segment will focus on high-quality revenue growth, invest in and improve operating efficiency, and expand internationally. Revenue from our Digital Media and Entertainment segment in the March quarter was RMB 8 billion, a decrease of 1% year-over-year. Adjusted EBITA losses narrowed to RMB 2 billion, improving by RMB 0.7 billion year-over-year. Let me close with a short recap of the last fiscal year, and then our outlook. In fiscal year 2022, we faced significant challenges from many fronts. These have been brought about by slowing macro activities, increased competition, and COVID resurgence domestically, as well as changes in geopolitical conditions internationally, but they also bring into focus the fact that there’s much we can do to create value for our customers and key stakeholders. During this past year, we have made a number of achievements that position us well for the future. First, we have reached a historical milestone of over 1 billion annual active consumers for all our consumer-facing businesses in China. This was made possible through the strong execution and growth of businesses such as Taobao Deals and Taocaicai. Our unique value proposition of having both eCommerce and location-based commerce businesses at scale positions us well to serve these 1 billion consumers in China. Second, we are seeing increasing benefits from our development of an integrated intercity and intracity logistic network that allows us multiple delivery and fulfillment options for our consumers. This network also allows us to further increase penetration in categories such as grocery, FMCG, and consumer electronics in the future. Lastly, in fiscal 2022, we spent over RMB 120 billion in technology-related costs and expenses that continue to strengthen our leading position in China’s cloud market, support the sophisticated technological demands of our consumer-facing businesses, and advance our research and development in the next generation of technologies. Now, in terms of guidance, since mid-March 2022, we have seen significant impacts on our domestic businesses from COVID-19 restrictions in China, particularly in Shanghai. Considering the risks and uncertainty arising from COVID-19, which we are unable to control and are difficult for us to predict, we believe it’s prudent at this time not to give financial guidance that is typically provided at the start of the fiscal year. Looking forward in fiscal year 2023, emphasizing what Daniel has mentioned, we will focus and execute several key operational principles and financial objectives, including first, generating sustainable, high-quality revenue that reflects our ongoing commitments to developing high-quality consumers, high-quality digital commerce infrastructure, and high-quality technology innovations. We believe these efforts will continue to build strong and durable relationships with our consumers and customers. Second, we will focus on optimizing our overall cost structure. We will control costs and improve returns for our major businesses that are already at significant scale compared to peers. For growth businesses, we will also optimize spending and, at the same time, identify increasing monetization opportunities that use sustainable high-quality revenue. The incremental revenue generated will be invested back to the respective businesses and create value for their customers, thereby creating a virtuous growth loop to achieve long-term profitability. At a high level, we will seek to improve the gross margin of our direct sales businesses, optimize logistics and fulfillment costs for consumer-facing businesses, and control our overall sales and marketing spend. Third, continue to build an energy-efficient cloud infrastructure and a global warehouse in the logistics network that enhances our competitiveness in China and in international markets. At the same time, we expect ongoing improvement in efficiency and utilization of these infrastructures to benefit both our customers in our own self-operated businesses. Lastly, we seek to maintain strong operating cash flow generation and a strong net cash position that gives us the financial flexibility to invest in businesses and capabilities that expand the pie and benefit all of our key stakeholders. We have a lot of work ahead of us, but by being steadfast and executing the key strategic and financial objectives that we have set out, we believe Alibaba will emerge stronger in the future. Thank you. Now let's turn to Q&A.

Rob Lin, Head of Investor Relations

Hi everyone for today's call, you are welcome to ask questions in Chinese or English. A third-party translator will provide consecutive interpretation of the Q&A session. And our management will address your questions in the language you asked. Please know that the translation is for convenience only. In the 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 the website within one week after the meeting. Operator, please connect speaker and SI conference lines now, and start the Q&A session. Thank you.

Operator, Operator

Thank you. Our first question comes from the line of Ronald Keung with Goldman Sachs.

Ronald Keung, Analyst

Thank you, Daniel, Toby, and Rob, and congratulations on the resilience that we see in the results that you've just released. We did see that CMR revenues were flat, but there was nonetheless low single-digit growth in GMV. And Daniel also spoke about how advertising was performing well. Certainly from April onwards with the impact of COVID, there's been an impact there, including on CMR revenue, but I'm wondering what we're seeing in May, in terms of the performance of the parcel network and if things are picking up and what we're seeing currently in terms of GMV and orders in May? Thank you.

Toby Xu, Chief Financial Officer

Well, thanks for your question. In Daniel's speech earlier, he did give you a presentation on the situation in April. Overall, as Daniel said, GMV was down by around 10%. Typically, CMR does tend to move in-line with GMV, but there can be a lag and it's the case that many merchants may need to invest in order to grow their revenues. Thank you. Well, talking about the situation in May, the situation in May over the past couple of weeks, with the resumption of express deliveries and with the beginning of the normalization of the situation in Shanghai, certainly we see things improving, but it will take time for all the outstanding parcels to be delivered and also for merchants to make their preparations for the upcoming 6/18. In fact, preparations will be beginning tonight, but we certainly are seeing signs of improvement going into the month of May.

Operator, Operator

Our next question comes from the line of Eddie Leung with Bank of America.

Eddie Leung, Analyst

Good evening guys. Thank you for taking my question. I think you guys started to mention about some of the longer-term initiatives because of the COVID lockdowns. So just looking ahead, assuming a reopening, do you see any long-term structural change in your operation, customer demand, and product mix after these lockdowns, and what type of investment do you need to make to handle the potential changes? Thank you.

Daniel Zhang, Chairman and CEO

Thank you for the question. I think during this widespread COVID situation in March and April, we did see shifts in consumption patterns. And I think after this wave, what we see is that consumers in China will tend to have some stocks at their homes to prepare for uncertain situations. So how to grow, for example, supply by bulk and how to give them on-demand, but not necessarily speedy delivery, but it's on-demand and on-time delivery, I think is very important. And for us, I think we are actually in a good position, which is that we have both our nationwide platform as well as leverage with major delivery partners. But at the same time, we have our intra-city and instant delivery forces on the ground in all these major cities. So how to leverage this infrastructure and enhance these capabilities and capacities is our priority in the future to support the various needs of the product. So product-wise, I think it's more diversified to the bulk sales for preparation for the future and for maybe for the small package, just for the instant delivery and for the instant needs. So it's about needing diversified retail formats, as well as the delivery and fulfillment networks to support both of those. Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Thomas Chong with Jefferies.

Rob Lin, Head of Investor Relations

Operator, hold on a sec. The translator still needs to translate.

Unidentified Company Representative, Unknown

Rob Lin, Head of Investor Relations

Operator, next question?

Operator, Operator

Our next question comes from the line of Thomas Chong with Jefferies.

Thomas Chong, Analyst

Thank you, and good evening management. My question has to do with consumer spending. I’m wondering what changes you’ve seen in consumer spending within different segments of consumers, high income, middle income, and low income consumers. Are low-income consumers, perhaps tending to be more cautious during this recent period? Also, I’d like to know what KPIs you set for this year’s 618 and how you see recovery in the second half of the year. Do you think that once logistics capabilities have recovered, that will set the stage for recovery, or will we have to wait a bit longer perhaps to see consumer sentiment also recover? Thank you.

Daniel Zhang, Chairman and CEO

Thank you. Well, on Alibaba’s retail platforms, we have a consumer base of 1 billion consumers who are highly diverse in their spending across different tiers. And so, yes, we certainly do see different patterns, but what I can tell you is during this special period of time, you really see a divergence between spending on essentials versus non-essentials. In all those different tiers of consumers, demand for essentials has gone up and there's been less price sensitivity. Whereas with respect to non-essential purchases, there has been more price sensitivity. This is also very relevant to the trend for the coming half of the year. Because in my view, for recovery and growth of consumption to occur, two things need to happen: first, as I mentioned in my script, merchants in order to be able to operate need to have sustainable and robust supply chains and logistics in place. And at the same time, consumption demand needs to return. In order for consumer demand to recover, it’s very important that there are strong expectations for the future, because only when people have strong expectations for the future, especially regarding their ongoing ability to grow disposable income, will they be able to grow their consumption. This is vital not only for increasing spending on essentials but also for boosting confidence for non-essentials, which is crucial for GDP growth. In regards to this year’s 618, which is just getting started, this is an important mid-year event and coming out of this recent challenging period, merchants are indeed excited. They’re looking at it as a good opportunity to recover those losses and achieve good sales. For us, we’re making active preparations to do that. We’re seeing a lot of enthusiasm and a strong trend this year compared against last year in terms of merchant enrollment and product offerings. This is leading up to the holiday season. There’s a lot of consumer enthusiasm. As a platform, we intend to be strongly supportive. As was mentioned for 618, we’ve already put in place many policies to support and help our merchants, as well as to ensure that logistics are functioning effectively to help those merchants achieve good sales. These really are joint objectives for merchants and us as a platform. And of course, we do very much hope to see pandemic control measures continue to be effective, which will create the necessary conditions for this to be successful.

Rob Lin, Head of Investor Relations

Thank you. Next question?

Operator, Operator

Our next question comes from the line of Jerry Liu with UBS.

Jerry Liu, Analyst

Thank you, management. My question has to do with cost optimization, cost control, which you mentioned will be implemented across a lot of businesses. Should we understand that as part of this cost optimization strategy that in the coming fiscal year, the objective is to achieve faster profit growth and revenue growth? And we’ve certainly seen a significant improvement in UE. What will be the major focuses and priorities for cost optimization in the coming fiscal year?

Toby Xu, Chief Financial Officer

Thank you. This is Toby. I’ll take that question. I think for the group as a whole, it’s very clear that our strategy in the next few quarters or year as a whole is going to focus on cost optimization and cost control and that will involve a couple of things. First of all, for the parts of the business that aren’t generating long-term value, we’ll find ways to make them more efficient or scale them down with consolidation. Secondly, we do have a lot of different businesses that differ in nature, and therefore we'll be taking different approaches and putting in place different requirements to achieve better cost efficiency. But to give you an example around our direct sales businesses, it’s very clear that on the one hand in terms of gross margin, we're looking to drive higher efficiency, and at the same time, we'll also be looking to achieve more cost control and better efficiency in logistics, and the combination of those two things will drive cost optimization. More broadly at the group-wide level, another example would be marketing costs and here we will be taking a more disciplined approach with specific measures; in many cases, spending will be cut back. So we don't have a specific figure to share with you. On the other part of your question, it's about that ratio, as I mentioned in my script, as CFO for the group, a big priority for us is driving higher operational efficiency, lowering costs, and achieving higher efficiency in order to ensure we have a strong balance sheet and strong cash flow generation capability. Thank you.

Rob Lin, Head of Investor Relations

Operator, next question.

Operator, Operator

And our next question comes from the line of Alex Yao with J.P. Morgan.

Alex Yao, Analyst

Thank you, management. Daniel in your script I believe you talked about incentives or stimuli that may be forthcoming from the government to help support the business of internet platforms and drive consumer spending. I'm wondering if you could tell us what kinds of businesses you think will benefit from these kinds of incentives and what kind of stimulus we can expect to see, and how Alibaba can position itself to capture the benefits of this policy.

Daniel Zhang, Chairman and CEO

Thank you. Well, we've seen that the government has been coming out with various policies lately aimed at stabilizing the economy, stabilizing employment, ensuring the provision of essentials to people, including yesterday a very important national meeting convened by the State Council to implement measures in six different areas, several of which are highly relevant to the business of Alibaba, including stimulating consumption, ensuring the provision of essentials, and achieving supply chain recovery; that’s all highly relevant to us. As a responsible representative of the platform economy and also as a constituent of China's real economy, Alibaba is keen to make our due contribution to driving progress in all of these areas. A very important part of this, of course, is SMEs. These small businesses, because of their scale, have been the most vulnerable to the impacts of the pandemic, and we really want to help them recover. Only when SMEs have recovered can more market-based jobs and employment be generated. For Alibaba, this is where we have a unique role to play, leveraging our resources as a responsible company in society and as the operator of a digital economy. We see this as a basic responsibility. We've been doing everything in our power to provide support and assistance to merchants. As mentioned with the upcoming 618 Festival, we have 20 initiatives in five major categories, and recently during the very difficult period in Shanghai, we had 20 special measures to support merchants during that period. We hope very much to be able to support merchants in these ways to facilitate their recovery and success.

Rob Lin, Head of Investor Relations

Okay. Next question, please.

Operator, Operator

And your next question comes from the line of Jiong Shao with Barclays.

Jiong Shao, Analyst

Thank you very much for taking my questions. You mentioned you just paid the fine for the anti-monopoly regulations last year. Last year was a year where a lot of government regulations were introduced to the internet industry. Lately, as some of the senior leaders from the government made comments about any further regulation; I was just wondering, could you share with us your latest thoughts about government regulation for the industry for this year? Thank you.

Daniel Zhang, Chairman and CEO

Thank you. We all know that recently Chinese government leaders shared a very clear message to the market that they want the platform economy to play an important role in economic development and encourage the healthy development of the platform economy. I think the message is clear, and as part of this platform economy in China, Alibaba is committed to fulfilling our responsibilities in helping the development achieve a better life for consumers as well as assisting merchants, especially in technology innovation in the core areas. So I think this is what we are committed to, and we will work hard to make substantial progress in all these aspects. But at the same time, we are closely watching the policy developments to ensure we are fully compliant with all regulatory requirements. Thank you.

Jiong Shao, Analyst

Thank you.

Daniel Zhang, Chairman and CEO

Rob Lin, Head of Investor Relations

Let's invite the last question.

Operator, Operator

Your next question comes from the line of Alicia Yap with Citi Group.

Alicia Yap, Analyst

Hello. Thank you. Thank you, management. My question has to do with the cloud segment and the short-term and long-term prospects for the cloud business. Starting with the short-term, I'd like to know apart from the recent impacts of the pandemic and the slowdown of the internet sector as a whole, what other factors may be impacting the cloud business? And then in the longer term, when the Chinese economy has returned to normalcy, what's your view about how the cloud business will develop, and what kind of growth do you expect Alibaba Cloud to achieve? Finally, recently we've heard some news about some restructuring and personnel changes in the cloud space. Could you tell us please about the impact that those are likely to have in the short and longer term? Thank you.

Daniel Zhang, Chairman and CEO

Thank you. Well, talking about the performance of the cloud business in the short term, I've already spoken about the factors that have led to the slowdown in revenue growth in Alibaba Cloud recently, so I won't repeat what I already said earlier. But I think when it comes to economic development and the important role that the cloud can play there, the key thing is that all industries are digitalizing and need to digitalize. Cloud and big data are important infrastructures driving the upgrading of industry, and therefore all industries present important opportunities for us at Alibaba to serve, which really represents a huge market opportunity. In fact, as I mentioned in my script earlier, the forecast is for the cloud market in China to reach RMB 1 trillion by 2025, so that potentially means that over the next few years, we have the potential to grow at two times or three times kind of multiples. So, it's going to be a very big and exciting opportunity. Secondly, in order to fully capitalize on that opportunity, you need to take an industry-specific approach because when we talk about cloud, there are many different definitions out there. The only part of that definition that everybody will agree on is the IaaS player, which seeks to replace traditional IT infrastructure. But to me, the more important opportunity is beyond that — it's when you start bringing in big data, AI, as well as the ability to digitalize the overall operations of different enterprises and enable all of that through the cloud. To do that, this requires an industry or vertical-specific approach with products that are custom-tailored for different applications in different vertical segments. I think this is very important for the cloud business, and it's imperative that Alibaba works with these different industries and verticals, especially the major ones, in-depth with SaaS and with our ecosystem partners to deliver that value and capitalize on all these opportunities going forward. Thirdly, apart from that vertical-oriented approach, it's also incumbent upon us, given our market leadership position, to continue to innovate also in the IaaS player and the core PaaS player so that we can continue to reap the dividends of technological innovation through economies of scale. In particular, the IaaS player is all about economies of scale, so if we can continue to improve the technology and lower the costs, there's a huge advantage that can be gained. Finally, regarding your question about the team upgrade, that has been implemented. As you saw last year and in the previous fiscal year, the revenues of Alibaba Cloud, including services provided within the group, have already exceeded RMB 100 billion. So it's a very complex system. We are looking for ways to make the operations of the cloud business more efficient, in line with what Toby described earlier regarding driving higher cost efficiency and achieving more cost optimization, as well as positioning ourselves to provide the next generation of enterprise services to get us from the current scale of RMB 100 billion to the future of RMB 300 billion or even RMB 500 billion. That was the thinking underlying the way we've gone about reorganizing the team.

Rob Lin, Head of Investor Relations

Okay, thank you everyone for participating today. If you have any questions, please reach out to the IR team and myself. Thank you, and we'll see you next quarter. Thanks.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.