Earnings Call Transcript - BABA Q2 2023

Operator, Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group's September Quarter 2022 Results Conference Call. At this time, all participants are in listen-only mode. 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.

Rob Lin, Head of Investor Relations

Thank you and good day, everyone. Welcome to Alibaba Group's September quarter 2022 results conference call. With us are Daniel Zhang, Chairman and CEO; Joe Tsai, Executive Vice Chairman; Toby Xu, Chief Financial Officer. This call is also being webcasted from the IR section of our corporate website. A replay of the call will be available on our website later today. Now, let me quickly cover the Safe Harbor. 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 the risks and uncertainties, please refer to our latest annual report on Form 20-F and other documents filed with the US 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 obligations 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, adjusted EBITA, adjusted EBITA 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 reconciliations of GAAP to non-GAAP measures can be found on our earnings press release. Unless otherwise stated, growth rate of all the metrics stated 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 the third-party translator will provide consecutive translation. All translations are for convenience purposes only. In the case of any discrepancy, management statements in the original language will prevail. With that, I will now turn the call to Daniel.

Daniel Zhang, Chairman and CEO

Thanks Rob. Hello everyone. Thank you for joining our earnings call today. We delivered a solid quarter in a macro environment full of uncertainty. The ongoing resurgence of COVID-19, geopolitical tension, inflation, and currency depreciation, the convergence of all these forces has created considerable difficulties for business operations. Despite these challenges, Alibaba's non-GAAP EBITA increased 29% year-over-year as we continue to enhance our operational efficiencies. This is the result of our pursuit of high-quality development and more importantly, demonstrates the resilience of the Alibaba business ecosystem. In the China domestic consumer market, Taobao and Tmall GMV saw a low single-digit year-on-year decline this quarter, but user traffic remains stable. However, consumption appetite was weak and we saw a drop in purchasing frequency. The resurgence of COVID has affected one area after another, resulting in abnormal or suspended logistics service in different places. This hurt merchant operations and consumer logistics experience. In terms of demand, the decline in categories such as apparel and consumer electronics slowed quarter-over-quarter. Interests-based categories such as outdoor recreation, pet care, and health-related categories recognized positive growth. In this challenging environment, we have achieved relatively positive results showing our commitment to the following strategies. Number one, we work to ensure our user traffic population remains stable. DAU or MAU by continuing to strengthen our user engagement. After many years of operation, Taobao and Tmall are now deeply entrenched in our users' minds as the shopping destination. We are focused on user engagement by enhancing the customer journey across search, algorithm-driven discovery recommendations, live streaming, and other engagement features. We stimulated consumption interest and drove conversion by highlighting factors that influence purchase decisions through short-form video, photos, texts, and other means of communication. Number two, we further consolidate the scale and stickiness of our most valuable consumer group. For the 12 months ended December 30, 2022, the number of consumers who each spent over RMB 10,000 on Taobao and Tmall remained around 124 million with a retention rate of 98%. The 88VIP membership population held steady at 25 million this quarter, with solid membership retention and growth in GMV contribution. Number three, we improved consumer satisfaction by continually investing in customer service and logistics service experiences, such as doorstep delivery of orders as required. Our latest consumer satisfaction survey showed improvements in NPS scores relating to logistics and post-sales. During our recent 11.11 Global Shopping Festival, Taobao and Tmall's total GMV was in line with last year's performance during the same period. Initial fruits of the operational strategies outlined just now were seen during November 11. More than 600 million users engaged with our November 11-related content, a single-digit growth year-on-year. Although, the total number of buyers declined compared to the same period last year, the average GMV per person increased. As for our consumer profile, more than 98% of our 88VIP members bought something during the November 11 season. Moreover, the contribution by 88VIP members to total GMV continued to grow. Regarding product categories, consistent with what we observed during the rest of the quarter, interest-based categories such as outdoor recreation and pets, and health-related categories saw positive growth. Consumer electronics also enjoyed positive growth during the November 11 season. However, a few factors negatively impacted our 11.11 performance: Number one, the average temperature across China was much warmer than usual for that time of year and the delay in seasonal change weakened the consumption appetite for apparel even further in an environment impacted by COVID, thus the apparel category suffered. Number two, starting in October through the 11.11 campaign period, nearly 15% of delivery areas across China experienced abnormal or suspended logistic services. This significantly impacted merchants' ability to fulfill orders on time and delivery companies' ability to make regular deliveries. But recently, we are seeing improvements. Number three, 11.11 has become an event embraced by the entire society. Merchants were especially keen to take advantage of this opportunity to capture as much growth as possible across every available channel. Objectively speaking, they offer the consumer more choices, both online and offline. This quarter, the decline in consumer management revenue was larger than the decline in overall GMV. I would like to share some reasons: The first is the higher rate of order return due to, first, COVID-related impact on fulfillment and delivery; second, a higher order return rate accommodating live streaming-driven sales; third, the increasing convenience of making returns and improvements in user experience in returns handling on our platform. These three reasons collectively contributed to the rise in order return rate across the platform. Take rate calculation does not account for order returns. If it was accounted for, our take rate would remain consistent. Secondly, page views from algorithm-driven discovery recommendations grew, but our monetization of traffic was less efficient, resulting in a lower take rate in the short term. Looking forward, we will adapt to the change in our user traffic composition and introduce better monetization products to ensure the long-term stability of our platform's take rate. In our local consumer services segment, Ele.me and Amap proactively adjusted their business operations strategy to focus on user growth and retention on their mobile apps and continued to grow their market presence in key cities. At the same time, they enhanced operational efficiency, and unit economics continued to improve. This is primarily due to the rise in average order value, leading to an increase in revenue and a reduction in logistics costs for order fulfillment. Amap launched a new version of its map this quarter, together with a series of new features, including a 3D city map, car lane level growth navigation, forecasting of traffic light signals, and road navigation to stay shaded. User population and stickiness continue to strengthen in Amap, which registered a new historical record of 220 million DAU during the week of the National Day holidays. On top of its map navigation, the services offered by Amap related to getting to destinations, which include road failing, hotel booking, gas station, and EV charging stations, are all experiencing rapid development, with both service users and order volume enjoying faster growth. Cainiao's various business saw robust growth this quarter, along with clear improvements in cost efficiency. The Cainiao Post network grew by 20% year-on-year and now has more than 170,000 locations. It has comprehensive coverage in residential communities, school campuses, and rural villages across China. Cainiao Post has become an important touchpoint for serving consumers. For overseas markets, Cainiao continued to actively build logistic hubs and nodes to further enhance its global logistics network service capability and efficiencies. In overseas markets, the rise in logistics costs due to inflation and currency deterioration against the US dollar has contributed to order volume declines of 12% year-on-year in our cross-border export business, AliExpress. In Southeast Asia, order volume also declined 6% year-on-year as COVID-related restrictions were lifted and offline shopping resumed. Trendyol’s order volume grew over 65% year-on-year, on the strength of its e-commerce business and a fast-growing local consumer service. For AliExpress and Lazada, we are taking steps to adjust our business model and invest in creating user value rather than just scaling. We are also continuing to strengthen our capabilities in logistics and supply chain. We believe that developing and investing in these capabilities will be meaningful to ensure the sustainable long-term development of our abilities to serve the overseas consumer market. In our Cloud segment, Alibaba Cloud's revenue growth was 4% year-on-year this year. Through structural adjustments over the past few quarters, Alibaba Cloud's revenue structure is now healthier and more sustainable. Public cloud revenue grew double digits year-on-year this quarter, while hybrid cloud declined. In the interest of pursuing high-quality growth, we proactively control the development of our business to focus on only resale hosting infrastructure that has been commoditized in the market. Looking at our revenue by industry, non-internet industry revenue grew 28% year-over-year, increasing its contribution to total revenue from 53% to 58% quarter-over-quarter. The fastest-growing sectors include financial services, automotive, telecom, and public services. Looking ahead, Alibaba Cloud will leverage its proprietary cloud computing and big data processing capabilities to launch a range of industry solutions with relevant partners to advance China's industrial digitization. At the Apsara Conference in early November, we unveiled many important technological achievements, including our cloud infrastructure processing unit, i.e., CIPU, and an open-source platform named ModelScope under Model-as-a-Service. These will serve important purposes in Alibaba's future cloud development. In this environment full of uncertainty, our wide-ranging efforts in cost reduction and efficiency improvement measures are beginning to bear fruit. Businesses such as Taobao Deal, Taocaicai, Ele.me, Amap, Lazada, and Youku have significantly reduced their losses. We will continue to focus on the steady improvement of business quality and invest in building capabilities to provide customer core value rather than pursuing short-term business growth or user scale. As China enters an area of high-quality development, we will also enter a stage of high-quality business operations. During the eight years from Alibaba's IPO in September 2014, the quality and scale of our business has improved significantly. Alibaba's revenue today is 12 times what it was in 2014. Adjusted EBITA is 4.5 times what it was in 2014. Free cash flow is 4 times that of what it was in 2014. Over the past eight years, China's GDP has almost doubled from RMB 59 trillion in 2013 to RMB 114 trillion in 2021. We are confident about the future, and we will continue to execute our share buyback program. As of November 16, we have utilized approximately US$18 billion to date towards share repurchase under our existing US$25 billion program, with US$7 billion more to go. In addition, our Board has authorized us to upsize our existing share repurchase program by another US$15 billion as a tangible action towards enhancing shareholder return. We remain confident about our sales and even more about the future, no matter the ups and downs. We believe in the prospects of China's economic and social development and that Alibaba's development goals are highly aligned with China's long-term goals. We believe Alibaba can play an important role in the digitalization process in China and around the world. We have taken note of the latest adjustment in China's COVID-related policies and proactive commentary from relevant government regulators about promoting the digital economy and high-quality development of platform businesses. We believe that COVID will ultimately pass, and our society, our economy, and our lives will eventually return to normal. The massive potential of China, as the world's second-largest economy, will be further unleashed. Last but not least, we believe that the platform economy, of which Alibaba is part, can make unique and valuable contributions towards serving small and medium businesses, creating employment, and pursuing better lives. Thank you, everyone. Let me pass the microphone to Toby, who will share the financial results with you.

Toby Xu, Chief Financial Officer

Thank you, Daniel. Let me start with financial highlights for the quarter. This quarter, our total revenue was RMB 207 billion, an increase of 3% year-over-year. Income from operations for the quarter was RMB 25.1 billion, an increase of 68% or RMB 10.1 billion year-over-year mainly driven by an increase in adjusted EBITA of RMB 8.1 billion and a decrease in share-based compensation expense of RMB 2.3 billion. During the September quarter, we have continued to improve the operating performance of our loss-making businesses by enhancing operating efficiency and optimizing costs, resulting in a 29% year-over-year increase in adjusted EBITA to RMB 36.2 billion. Overall, adjusted EBITA margin improved by three percentage points to 17%. Now let's look at the cost trends as a percentage of revenue, excluding SBC. Cost of revenue ratio remained stable at 63% in the September quarter. Our direct sales businesses and logistics services contributed to growth, driving up our cost of inventory and logistics, but we were able to keep our cost of revenue ratio stable primarily through optimizing traffic acquisition and improving subsidy efficiency. Product development expenses ratio remained stable during the quarter. Sales and marketing expenses ratio decreased two percentage points year-over-year to 11%, reflecting our continued efforts in optimizing user acquisition and user retention spending across our businesses. General and administrative expenses ratio remained stable at 4% in the September quarter. Non-GAAP net income was RMB 33.8 billion, an increase of RMB 5.3 billion year-over-year, mainly due to an increase in adjusted EBITA, partly offset by a decrease in equity pickup of our equity method investees' results. Our GAAP net loss was RMB 22.5 billion, a decline of RMB 25.8 billion year-over-year, primarily due to the increase in net loss arising from changes in fair value of our equity investments, partly offset by an increase in non-GAAP net income. As of September 30, 2022, we continue to maintain a strong net cash position of RMB 323 billion or $45 billion. Our strong net cash position is supported by healthy cash flow generation. In the September 2022 quarter, cash from operating activities was RMB 47 billion, and free cash flow was RMB 36 billion, respectively, which were up by RMB 11 billion and RMB 13 billion versus a year ago. The majority of the difference between operating cash flow and free cash flow is operating CapEx at RMB 11 billion, down by RMB 1.7 billion versus a year ago. Net cash outflow for investments and acquisition activities, net of inflow from disposals, significantly reduced to RMB 2.4 billion compared to RMB 21.5 billion in the same period last year. Importantly, on the current market conditions and given the confidence we have in the long-term sustainability of our business, we have been repurchasing our shares aggressively. For fiscal first half ended September 30, 2022, we repurchased approximately 62.9 million of our ADS for approximately $5.6 billion, which is equivalent to about 70% of our free cash flow during the period. From October 1 to November 16, we have repurchased another $2.6 billion in ADS under our share repurchase program. Our strong balance sheet and free cash flow give us the flexibility to execute this share repurchase program with confidence. Now let's look at our second results. Revenue from the China commerce segment in the September quarter was RMB 135 billion, a decrease of 1% year-over-year. Customer management revenue decreased by 7% year-over-year to RMB 66.5 billion. Taobao and Tmall physical goods paid GMV declined by low single-digits. Customer management revenue is composed of advertising and commission revenue. Within advertising, search advertising revenue continued to observe positive growth as it provides a consistent return for merchants, while non-search advertising is negatively impacted by overall macro conditions and other factors. Commission revenue also declined more than Taobao and Tmall paid GMV due to higher order cancellations. Direct sales and other revenues grew 6% to RMB 65 billion, primarily driven by the strong growth of our Freshippo and Alibaba Health’s direct sales businesses. China Commerce segment adjusted EBITA increased by RMB 2.6 billion to RMB 44 billion in the quarter. The improvement reflected a significant loss reduction from Taobao Deals, Taocaicai, and Freshippo, which, on a combined basis, reached RMB 4.9 billion in the September quarter. Segment EBITA margin improved by 2 percentage points year-over-year to 32% during this quarter. Secondly, EBITA margin can be further segregated into three types of businesses. First, our existing marketplace business, including Taobao and Tmall, continued to exhibit stable EBITA margin year-over-year. Second, combined EBITA margin of our direct sales businesses continues to improve, which was primarily driven by Freshippo during the quarter. The vast majority of Freshippo's existing stores have achieved cash flow positive status. Lastly, new businesses, including Taobao Deals and Taocaicai, have significantly reduced losses year-over-year, as previously mentioned. Our International Commerce segment revenue in September quarter was RMB 15.7 billion, an increase of 4% year-over-year. Revenue from International Commerce retail business increased by 3% to RMB 10.7 billion. The increase was primarily driven by Trendyol as a result of its strong order growth of over 65%, partly offset by a decrease in AliExpress order due to challenges faced in cross-border e-commerce demand in Europe due to the depreciating Euro and increasing logistics costs. Revenue from our Alibaba.com wholesale business grew 6% to RMB 5 billion. This increase was primarily due to resilient 8% growth in the value of transactions completed on Alibaba.com that led to an increase in revenue generated by cross-border related value-added services. International Commerce segment adjusted EBITA loss narrowed by RMB 1.5 billion to RMB 960 million in the September quarter. The significant loss reduction year-over-year was primarily due to the reduced losses from Lazada and Trendyol. Lazada has continued to improve its monetization rate while enhancing operating efficiency. During the quarter, loss per order for Lazada narrowed by over 25% compared to the same period last year. Trendyol's improvement is a combination of strong revenue growth, despite forex headwinds, as well as enhanced operating efficiency. Our Local Consumer Service segment revenue in September quarter grew 21% to RMB 13 billion, primarily driven by strong revenue growth of Amap, as well as higher average order value and more efficient use of subsidies that were contra-revenue of Ele.me. Local consumer service adjusted EBITA loss reduced by RMB 3 billion year-over-year to RMB 3.5 billion. Most of the loss reduction was driven by Ele.me and Amap business, while the rest of the other businesses also recorded reduced losses. Ele.me and Amap continued to improve their unit economics per order by increasing average order value, reducing delivery costs per order, and optimizing user acquisition spending. Their user experience continued to improve year-over-year and remained positive this quarter. Revenue from Cainiao, after inter-segment elimination, grew 36% year-over-year to RMB 13.4 billion, primarily contributed by the increase in revenue from domestic consumer logistics services as a result of service model upgrades since late 2021 to enhance customer experience and the international fulfillment solution services revenue increased. In the September quarter, 73% of Cainiao’s total revenue was generated from external customers. Cainiao recorded adjusted EBITA profit of RMB 125 million in the September quarter, an increase of RMB 440 million year-over-year. Revenue from our Cloud segment, after inter-segment elimination, was RMB 20.8 billion in the September quarter, an increase of 4%, mainly driven by healthy public cloud growth, partially offset by declining hybrid cloud revenue, as we continue to drive high-quality recurring revenue growth. Revenue growth for non-Internet industries continues to accelerate, growing 28% and contributing 58% of overall cloud revenue. Strong revenue growth in the Internet industries was driven by financial services, telecommunication, and public services industries. Revenue from customers in the Internet industry declined about 18%, which was mainly driven by declining revenue from top Internet customers that have gradually stopped using our overseas cloud service for their international business. Online education customers as well as softening demand from other customers in the China Internet industry adjusted EBITA of the cloud segment, which comprised of Alibaba Cloud and DingTalk, was a profit of RMB 434 million in the September quarter, increased by RMB 38 million year-over-year. Revenue from our digital media entertainment segment in September quarter was RMB 8.4 billion, an increase of 4%, primarily due to the increase in revenue from Alibaba Pictures and Youku, which was partly offset by a decrease in online games business revenue. Adjusted EBITA was a loss of RMB 117 million reduced by RMB 814 million year-over-year, primarily driven by narrowing of losses from Youku and improved profitability of Alibaba Pictures. Youku continues to improve operational efficiency through disciplined investment in content and production capability. Over the past several months, we have been preparing for a primary listing in Hong Kong. During this process, we are closely monitoring and taking into account various factors, including changing market and other external conditions. Before our conversion to a primary listing in Hong Kong, we also need to formulate and submit a new employee stock ownership program to our shareholders for approval to comply with the newly amended rules in Hong Kong. The new ESOP program will continue to align the development of our company with the interests of our long-term shareholders. Accordingly, we will not complete the primary conversion before the end of 2022 as initially planned. We will continue to evaluate various factors during this process and update our investors in due course. To wrap up, since I've taken up the CFO role earlier this year, I've met many shareholders, and I really appreciate all of your feedback. As I have communicated to many of you, we will proactively execute our capital allocation strategy to create and unlock our company's intrinsic value. We consider three important factors. Firstly, we will be focused. We will not only continue to execute our three growth pillar strategy, but we will also prioritize growing businesses that improve our medium to long-term revenue growth and profitability profile. We remain confident in the growth prospects of our businesses, many of which are leading players in their respective markets. Second, in order to optimize our capital resources, we will continue to be more selective in M&A activities, monetize less strategic investments, and unlock the value of selected subsidiaries. Lastly, we want to better align our business performance with the interests of our long-term shareholders. During each of fiscal year 2022 and fiscal first half 2023 period, we have deployed around 70% of free cash flow to share buyback. As of November 16, 2022, we had repurchased approximately US$18 billion of our shares under our existing US$25 billion share repurchase program. In addition, our Board of Directors has approved an increase in our existing share repurchase program by another US$15 billion and extended the program through the end of March 2025. Currently, we have an unutilized amount of USD 22 billion in our upsized and extended share repurchase program. We hope our ongoing consistent repurchase program will deliver attractive, consistent return to our long-term shareholders, especially during this period of extreme market volatility.

Rob Lin, Head of Investor Relations

Hi, everyone. For today's call, you can ask questions in either Chinese or English. A third-party translator will be available to facilitate the Q&A session, and our management will respond to your questions in the language you choose. Please keep in mind that the translation is for convenience only. In case of any discrepancies, the management's statements in the original language will take precedence. If you cannot hear the Chinese translation, a written transcript of the call will be posted on our website within one week after the meeting. Operator, please connect the speaker and SI conference lines now and start the Q&A session when ready. Thank you.

Operator, Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. To give more people the opportunity to ask questions, please limit yourself to no more than one question at a time. Your first question comes from Ronald Keung from Goldman Sachs. Please, go ahead.

Ronald Keung, Analyst

Thank you, Daniel, Toby, Joe, and Rob. My question concerns customer management revenues and GMV. In your comments, you mentioned that GMV during Double 11 this year was on par with last year's figures. This shows improvement from the single-digit decline seen in the September quarter. As we look ahead to the next few quarters, expecting more stability in the macro environment, could you share your insights on how GMV might increase and the outlook for CMR revenue?

Toby Xu, Chief Financial Officer

Thank you. In my prepared remarks, I provided a detailed analysis of the CMR issue, which I know is of interest to investors. When discussing GMV, we must consider the ongoing effects of the pandemic and the shifts in how goods are marketed and sold, particularly the increasing significance of live streaming. This has impacted the returns on purchases made on our platform. Typically, CMR is discussed alongside returns, though there are distinct differences. CMR relates to post-return GMV, meaning that returns strongly influence this figure. Additionally, there's advertising revenue, which in the current economic climate shows reduced willingness from merchants to invest, affecting their businesses as well. Our efforts to increase CMR revenue should stem from assisting merchants in better engaging consumers and boosting their sales. This includes paid search, smart recommendations, and the rapidly growing live streaming, all of which aim to enhance merchant-consumer interactions and drive sales. The success of merchants should ultimately be reflected in our CMR revenues.

Rob Lin, Head of Investor Relations

Operator, next question.

Operator, Operator

Thank you. The next question comes from Thomas Chong from Jefferies. Please go ahead.

Thomas Chong, Analyst

Thank you, management. Daniel mentioned several factors that influenced performance during Double 11. We observed significant disruptions in logistics across various regions in China. As we approach the December quarter, how would you categorize the impact of these factors in order of significance? Specifically, I’m interested in order cancellations linked to live streaming, consumer sentiment, and the ongoing effects of the pandemic. If you were to prioritize these factors, what would that ranking look like? Additionally, we noted strong results on the China commerce side with a 6% increase in EBITA. In the short term, could you discuss whether CMR is being affected by these macro factors and the extent of that impact? Thank you.

Daniel Zhang, Chairman and CEO

Thank you. Regarding the three factors you mentioned, all of them have an impact, but the extent of that impact is continually changing. If I had to rank them, I would say the macro environment is the most significant factor, influencing consumer confidence, demand, and spending. This macro situation affects not only Alibaba but also all players in the consumption sector, both online and offline. Following that, the introduction of the 20 measures from state authorities is likely to have a positive effect. We still see some ongoing logistics disruptions in certain regions, but we expect overall improvements. Additionally, as live streaming becomes a more important engagement method, it has affected returns. However, I believe that Alibaba's impact is comparatively smaller than that of competitors who rely primarily on live streaming. During the 11.11 period, live streaming was more crucial for us, especially for presales, but it's just one of many engagement formats we offer. Alibaba is committed to balancing these different formats to help merchants connect with their consumers effectively. We are open to new technologies and approaches, but we must ensure a good consumer experience and manage costs for merchants. Thus, finding the right balance is essential.

Toby Xu, Chief Financial Officer

This is Toby. I'd like to add to that with regards to your second question, which had to do with the impact of the reduction in CMR revenue potentially on China commerce profit going forward. Look, a reduction in any revenue stream would, of course, have an impact on profit at the end of the day. However, if you look at China commerce EBITA in this quarter, it was up. There was a positive increase year-on-year compared to the same quarter last year. And we achieved that by being very disciplined in our spending and investment and also in driving higher levels of efficiency. So this increase in Core Commerce EBITDA has been driven by an increase in profit in the profitable parts of the business, as well as by achieving narrowing of losses in the parts where we were making losses. So that's why you see that increase of around 6%.

Rob Lin, Head of Investor Relations

Next question?

Operator, Operator

Thank you. The next question is from Eddie Leung from Bank of America Merrill Lynch. Please go ahead.

Eddie Leung, Analyst

Thank you. Good evening. I'd like to ask you a hypothetical question. I'm wondering if, going forward, there is a relatively large adjustment in pandemic control measures in China, how would that kind of adjustment impact different businesses or different product types? And would the impact be positive or negative? And then related to that, I'm wondering if there are any preparations that Alibaba might be making or could be making as a company to better position itself for the future prospect of a major change in pandemic control restrictions? Thank you.

Daniel Zhang, Chairman and CEO

Well, thank you for your excellent question. We all hope for an end to the pandemic and a return to normal life for society, the economy, and our daily routines. Everyone is eager to return to normal, which would benefit Alibaba and the broader community. Alibaba's diverse businesses will be affected in various ways. Regarding consumption, if the pandemic ends and normal life resumes, it would largely boost consumer confidence, which would be positive for the Chinese economy and companies like Alibaba. Consumption plays a crucial role in economic growth, and consumer spending relies on confidence and stable expectations about their future income. If pandemic restrictions are lifted, we would likely see increased confidence, leading to higher consumer spending and further economic stimulation. Additionally, we have observed a shift in consumption patterns due to the pandemic, with a greater emphasis on essential daily needs such as food and groceries. This has resulted in a high demand for stocking up as people worry about potential supply disruptions. If the situation improves, we could expect to see an increase in discretionary spending. Looking at our B2B businesses, such as cloud computing, companies recognize that digitalization is essential for the future. However, their investment levels depend on their current performance and future expectations. Companies will be cautious about their investments and need to operate within their financial means. Once the pandemic is over and normalcy returns, we anticipate that businesses will gain confidence in their growth outlook, enabling them to allocate more resources to digitalization, which would be beneficial for our cloud services. At Alibaba, it's crucial for us to keep an eye on the future and remain optimistic. We are well-established in consumer-oriented categories and will continue to develop new categories and offerings after the pandemic, including goods and services like travel and tourism. Moreover, we must actively pursue the development of new digital solutions and cloud-based services to help customers generate, leverage, and extract value from their data. I believe this will yield positive outcomes moving forward.

Rob Lin, Head of Investor Relations

Thank you. Next question?

Operator, Operator

Thank you. The next question is from Alex Yao from JPMorgan. Please go ahead.

Alex Yao, Analyst

Thank you. Daniel, in your prepared remarks, you mentioned how closely Alibaba's long-term development aligns with China's overall long-term development strategy and direction, particularly regarding digitalization. In light of the current global regulatory landscape, how do you envision digitalization evolving in China over the next five years in terms of its direction and pace? What role can Alibaba play in this process, and what kind of financial returns can the company expect to achieve? Thank you.

Daniel Zhang, Chairman and CEO

Well, regarding Alibaba's outlook, we are strongly dedicated to our three main strategies: cloud computing, consumption, and globalization. We recognize the significance of the recent 20th Party Congress, which aims to strengthen China's role in the internet industry and build a robust digital economy. Alibaba is well positioned to support these objectives. Historically, we began with retail commerce, facilitating digital goods flow to consumers and enhancing their experience through digitalization. Next, we focused on logistics, achieving high efficiency in shipping across the nation. China is now a leader in express delivery services, both in volume and service quality. Over the past five to ten years, we've invested significantly in cloud computing, assisting various sectors, including public services and industry, in their digital transformation through our cloud offerings. Going forward, we align closely with China's direction to promote digitalization and leverage its benefits for long-term development. Alibaba is confident in our capability to provide the technology needed to empower the real economy and generate additional value through digitalization. We are optimistic about this policy direction and encouraged by positive remarks from state authorities about the high-quality advancement of platform economies. Alibaba anticipates playing a vital role in these developments moving ahead and believes in our capacity to succeed.

Rob Lin, Head of Investor Relations

Okay. Next question.

Operator, Operator

Thank you. The next question is from Jerry Liu from UBS. Please go ahead.

Jerry Liu, Analyst

Thank you, management, and good evening. I would like to revisit a topic we discussed earlier regarding the take rate and the company's ability to monetize traffic. Could you share your perspective on the company's capacity to monetize this traffic over the next few quarters or the upcoming year? Thank you.

Unidentified Company Representative, Company Representative

The topic of monetizing traffic is an ongoing area of interest for investors, and we've addressed numerous questions on this subject over the years. However, we don’t view it in isolation. It is fundamentally about how we support merchants and create value for them, enabling them to achieve return on investment, from which we can share part of that ROI. This is our primary focus and objective. Additionally, if we consider our Taobao Mobile app, there is now greater diversity in how consumers engage with it through various purchasing routes. As I mentioned earlier, we have search capabilities, and our recommendation feeds are becoming increasingly sophisticated, alongside other discovery features such as live streaming and short-form videos. These innovations represent new formats and scenarios for consumption. We are observing the structural changes in terms of frequency, concentration, and traffic regarding these different interactions in consumer commerce. Ultimately, our goal is still to create value for merchants by helping them connect with consumers, whether through search, recommendations, videos, or other formats. We are monitoring behaviors related to these discovery formats, analyzing consumer behaviors like page views, and we will consider adjusting the monetization model in response to these developments. Ultimately, the focus remains on providing a reliable and effective service to merchants that benefits consumers.

Rob Lin, Head of Investor Relations

Next question?

Operator, Operator

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

Alicia Yap, Analyst

Thank you. Good morning, management. I would like to hear your thoughts on the allocation of the advertising and marketing budget and any changes you've observed over the past few months, especially in comparison to the period before the pandemic. Can you provide details on how big brands and smaller merchants are distributing their marketing budgets across different formats, such as paid search versus recommendations? Additionally, I would like to know if Daniel could explain the take rate for live streaming compared to search and recommendations. Specifically, is the take rate for live streaming lower than those other formats, considering you mentioned that live streaming can offer more convenience to merchants? Thank you.

Daniel Zhang, Chairman and CEO

Thank you. Let me break this down into a few parts. Regarding marketing budgets, this applies to all types of merchants, whether large, medium, or small. Due to the pandemic and significant uncertainty, all categories of merchants are being more cautious with their marketing spending. Companies of any size will likely allocate their marketing budgets based on anticipated future revenues, whether for a quarter or a year. Given the pandemic and the increased uncertainty about expected future revenue, marketing budgets across various companies are naturally affected. Additionally, post-pandemic, merchants are demanding a better return on investment, which reflects their cautious spending. They want to ensure that the advertising they pay for is effective and delivers a solid ROI. Consequently, there's a more careful approach, particularly with display advertising, as merchants seek reassurance amidst the pandemic's uncertainties. Alibaba is in a strong position as both a consumer media and a primary platform for merchant operations in China. It allows merchants to maintain sustainable business operations and success by offering a diverse range of tools. That's why Taobao and Tmall remain the main venues for merchants. However, merchants will always seek out new formats, models, and platforms as they look for ways to achieve incremental growth. Ultimately, they will assess the ROI and the sustainability of their investments in acquiring new business.

Rob Lin, Head of Investor Relations

Okay. Thank you. We'll take the last question.

Toby Xu, Chief Financial Officer

Sorry, Rob, just to complete. Yeah. So the second part of your question, Alicia, had to do with the take rate on live streaming. So Alibaba has two different kinds of live streaming. The first kind is merchant live streaming. So this is where you have a merchant store online with an employee or a third-party person engaged by the merchant doing live streaming at the store, and that's something unique to Alibaba. Then secondly, we have live streaming by opinion leaders, also known as KOLs, who are running their own live streams to give visibility to and promote other merchants. We have agreements in place to ensure that we're sharing incremental revenue growth via a take rate. So that is our model.

Rob Lin, Head of Investor Relations

Okay. Last question please.

Operator, Operator

Thank you. The final question comes from Jiong Shao from Barclays. Please go ahead.

Jiong Shao, Analyst

Thank you very much. Good evening, management. My questions are about Cainiao, which has shown impressive growth with over 30% increase in revenue this quarter. I would like you to elaborate on the factors contributing to this growth. Additionally, since more than 70% of Cainiao's total revenue comes from external customers, could you discuss the potential for a spin-off of Cainiao? Thank you.

Toby Xu, Chief Financial Officer

Thank you. This is Toby. I will address the first question and then pass it to Daniel for the second question. In this quarter, Cainiao's revenue saw a year-over-year increase of approximately 36%. I previously mentioned the factors contributing to this growth, focusing on the robust performance of our domestic consumer logistics services, as well as our cross-border services. However, the primary driver of this growth has been in local consumer logistics, where we experienced significant gains due to an improved service model. We transitioned from a more traditional PL model to a 4PL model, allowing us to not only pass on services to our customers but also to book and procure services from various providers, which we then offer to consumers. This shift means we are assuming greater responsibility for service delivery, enabling us to enhance overall service quality. Consequently, this translates into increased revenue for Alibaba and bolsters overall revenue growth in China. With this model upgrade, we are more equipped to serve our customers while also meeting established regulatory requirements in the industry.

Daniel Zhang, Chairman and CEO

Thank you. This is Daniel addressing the second question. Since its establishment in 2013, Cainiao has operated independently within the Alibaba family while offering external services and engaging with outside shareholders. Currently, Alibaba Group owns around 67% of Cainiao, with additional investors involved. Over the years, Cainiao has made significant investments in enhancing its last-mile delivery capabilities, with delivery stations on campuses and in rural areas, as well as developing strong supply chain capabilities for both domestic and cross-border logistics. From Alibaba's perspective, we are eager to see Cainiao continue its robust development, enhancing these capabilities, which will in turn support Alibaba's growth in both our domestic and international commerce sectors, whether B2C or B2B. This synergy across our businesses is vital. Cainiao will maintain its independent market operations while striving for broader success.

Rob Lin, Head of Investor Relations

Okay. Thank you, everyone, for participating in today's earnings call. Today's call, we'll have a transcript available later on our corporate website. Please feel free to reach out to me and the IR team for any follow-ups. We will see you next quarter. Thank you.

Operator, Operator

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