Earnings Call Transcript - BABA Q4 2023

Operator, Operator

Good day, everyone. Thank you for joining us. Welcome to Alibaba Group's conference call for the results of the March Quarter 2023 and the Full Fiscal Year 2023. I will now hand the call over to Robert Lin, Head of Investor Relations at Alibaba Group. Please continue.

Robert Lin, Head of Investor Relations

Thank you. Mr. Zhang, Chairman and CEO; Joe Tai, Executive Vice Chairman; Toby Xu, Chief Financial Officer; we have also invited Trudy Dai, the CEO of Taobao and Tmall Group; and Jiang Fan, the CEO of Alibaba International Digital Commerce Group. This call is also being webcast from the IR section of our corporate website. A replay of the call will be available later today. Now let me quickly cover the safe harbor. Today's discussion may contain forward-looking statements, which involve inherent risks and uncertainties that may cause actual results to differ materially from current expectations. For a detailed discussion of these risks and uncertainties, please refer to our latest annual report on Form 20-F and other documents filed with the U.S. SEC, as announced on the website of the Hong Kong Stock Exchange. Any forward-looking statements made on this call are based on assumptions as of today, and we do not take any obligation to update these statements, except as required under applicable law. Please note that certain financial measures used on this call, such as adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income, non-GAAP diluted earnings per share or ADS, and free cash flow are expressed on a non-GAAP basis. Our GAAP results and reconciliation of GAAP to non-GAAP measures can be found in the earnings press release. Unless otherwise stated, the growth rate of all metrics discussed during the call refers to year-over-year growth compared to the same quarter last year. 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 closed the March quarter and fiscal year 2023 in a changing macro environment. As COVID-19 cases waned after the Chinese New Year, business and social activities gradually recovered in China. This change has impacted some of our businesses to various degrees. During the past quarter, our revenue reached RMB 208.2 billion, representing a year-over-year growth of 2%. Our adjusted EBITDA was approximately RMB 25.3 billion, representing a year-over-year growth of 60% as a result of our continued efforts to enhance operating efficiency and optimize costs. Looking at the macro environment in China and globally, we see both challenges and opportunities amid uncertainties for economic recovery. The international macro environment is highly uncertain. At the same time, we see market opportunities in China's consumption recovery post-pandemic and the rapid development of artificial intelligence. We will continue to execute our three core strategies in consumption, cloud computing, and globalization to respond to these opportunities. In the past few months, we have noticed a gradual recovery in consumption in China, but consumer confidence and spending power still need further momentum. At the same time, competition among multiple consumption platforms is still fierce, and everyone is trying to capture the incremental demand with more value-for-money products and services. We will focus on the following areas in such a competitive market: First, acquisition and retention of high-quality users; second, maintaining our platforms' competitive consumer mindset; and third, most importantly, creation of new demand through supply-side innovations. In international commerce, we will focus on building core capabilities to support the sustainable development of our international commerce business, as well as leveraging the unique advantage of China's supply chain to serve global consumers. In cloud computing, progress in industrial digitization and the emergence of AI have created a higher demand for computing power, and the foundational models have expanded AI's application in all aspects of life. Alibaba Cloud will focus on seizing these historical opportunities to maximize its market potential. In March, we announced a major organizational transformation, restructuring Alibaba Group into six business groups and other investments. As a result, we are transforming from operating multiple group businesses into a holding company focused on capital management. Each business group will operate with a high degree of independence led by its own CEO, who assumes full responsibility for company performance under the supervision of its own board. Today, in our press release, we also announced the list of the Board of Directors and CEOs of these six business groups, which was recommended by the Alibaba partnership and approved by our Board of Directors. We believe this transformation will empower all our businesses to become more agile, enhance decision-making, enable faster responses to market changes, and promote innovation to capture opportunities, thereby unlocking shareholder value. Starting from today, we will invite the business group CEOs to join the earnings call in turn and share their business strategies and the thinking behind. At today's call, we have Trudy Dai and Jiang Fan, who will later discuss the business performance and the strategies of Taobao Tmall Commerce Group and International Digital Commerce group, respectively. I will also share my thoughts on Cloud Intelligence Group's business review and outlook. As an important step in our reorganization, we are in the process of establishing a new governance framework under the 1 plus, 6 plus structure. Under the new governance framework, the CEO of the Business Group takes overall responsibility for the operating results and compliance under the leadership of the Business Group's Board. A list of reserved matters will be specified to require approvals from Alibaba Group's Board of Directors. These reserved matters include annual business plans and budgets, Business Group CEO appointments and evaluations, major capital transactions, business cooperation, and a data-sharing mechanism within Alibaba Group, compliance oversight, etc. To ensure the implementation of risk management and compliance requirements under the new governance structure, we have obtained board approval to establish a new compliance and risk committee, which will be responsible for overseeing the Group's compliance and risk management in areas other than financial reporting. In addition, in order to adapt to our new role as a holding company, we have also established a Capital Management Committee under Alibaba Group's Board of Directors. With the goal of enhancing shareholder return of the group, the committee oversees major capital management matters across our business groups. With the further progress of the restructuring plan, we have formulated different capital management plans based on the various stages of development, business needs, market environment, and risks that each business group faces. We are announcing several updates today. Firstly, we plan to fully spin off our Cloud Intelligence Group and complete its public listing in the next 12 months as an independent company. Cloud Intelligence's business model, customer profile, and stage of development are fundamentally different from the other consumer-focused businesses in the Alibaba ecosystem. Full independence will allow Cloud Intelligence to further sharpen its business strategy and optimize its operations and organization. Secondly, Freshippo and Cainiao have over the years established differentiated customer value propositions, stable and well-defined business models, and a clear path to profitability. We believe these two companies are ready to go public. Our Board has approved Freshippo’s plan to kick off the IPO process, and Cainiao is exploring an IPO in the next 12 to 18 months. Thirdly, Alibaba International Digital Commerce Group will explore raising external capital to support business expansion in the global market. The successful execution of the above transactions is subject to various factors, such as market environment and regulatory approvals. Next, I will turn over to Toby to discuss the financial performance of the past quarter and the entire fiscal year, as well as our capital allocation strategy.

Toby Xu, Chief Financial Officer

Thank you, Daniel. As announced, our Alibaba Group’s Board has formed the Capital Management Committee to undertake a comprehensive capital management plan to enhance shareholder value. During the reorganization process, we will work closely with this newly formed committee to explore and execute all options that could unlock value for Alibaba Group. Under the leadership of the Capital Management Committee, we are committed to improving shareholders' returns and executing a robust capital allocation framework as a holding company focused on three priorities. First, the strength of our balance sheet and our cash position is a competitive advantage in an uncertain environment. While we maintain a prudent approach to our capital structure, we will focus on improving the return on invested capital in managing the assets of the company. Second, we would design, review, and implement EPS accretive activities, including constant share buybacks to reduce our outstanding share count while maintaining discipline in managing our ESOP program. Third, we will explore all options to enhance shareholders' returns by achieving more transparency in the value of our assets and returning capital to shareholders, including subsidiary fundraising, IPOs, and spin-offs. Let me share with you in detail the actions we will take following today's announcement. Going forward, our main source of funds will be from Taobao and Tmall Business Group, which will continue to be our core holding and 100% owned. The Taobao and Tmall Business Group generates substantial annual free cash flow, which will be made available to Alibaba Group. In fiscal year 2023, we generated US $25 billion in free cash flow that was mainly contributed by this business, and we believe it will continue to generate strong free cash flow in the future. In the future, as a result of the reorganization, our additional source of funds will come from the monetization of our consolidated businesses. As Daniel mentioned, our Board has approved the following transactions as part of the initial phase of our capital management planning. First, for Alibaba International Digital Commerce Business Group or AIDC, we are confident in its opportunities and growth prospects, and we plan to start its external financing process. The capital raise will assist the business group to expand into new geographic markets, invest in new technologies, grow its consumer and supplier base, strengthen its management team and develop and enhance its products and services for its customers globally. Second, we are starting a process to explore an IPO of Cainiao Smart Logistics Group. The group provides supply chain, logistics, and delivery services to customers and merchants that are customers of Taobao and Tmall Business Group and AIDC, as well as third-party customers. Alibaba Group holds a 67% equity interest in the company. We target to complete the IPO in the next 12 to 18 months. Third, we are starting a process to execute an IPO for Freshippo, our new retail business, and we expect the IPO will be completed in the next 6 to 12 months. Importantly, except for Taobao and Tmall Business Group, these businesses and other subsidiaries are given a limited time period to assess Alibaba Group's capital, including equity injections and our credit facilities lending based on market terms, after which each business should have its own stand-alone financing capability that may include raising private equity, issuing debt, and becoming publicly listed. We believe the successful completion of these transactions will further optimize our capital structure and strengthen our cash position, which can be used for shareholder returns. Second, we are committed to executing EPS accretive activities that improve shareholders' returns. During fiscal year 2023, we repurchased RMB 129.9 million of our ADS for approximately US $10.9 billion in our share repurchase program, which represented approximately 44% of our free cash flow. From April 1 to May 17, we repurchased another US $2.3 billion in ADSs. Currently, we still have an unutilized amount of approximately US $17.1 billion under the share repurchase program that we'll continue to execute. Under reorganization, each business group will have its own ESOP program that aligns the interests of their management and employees to their business performance and equity value creation. This, in turn, means less ESOP in issuance at the holding company level in the future. Additionally, as long as the business groups remain majority owned by Alibaba Group, the Capital Management Committee will review their proposed annual ESOP plans with the objective of balancing the potential dilution to Alibaba Group's shareholders and providing an attractive level of incentives for business groups to attract and retain talent. Lastly, as announced, our Board of Directors approved a full spin-off of the Cloud Intelligence Group via stock dividend distribution to our shareholders. Prior to the spin-off, we plan to include external strategic investors in Cloud Intelligence Group through private financing in connection with the spin-off. Cloud Intelligence Group intends to become an independent publicly listed company. The spin-off will be subject to restructuring of certain assets, liabilities, and contracts, implementation of employee equity incentive plans, market conditions, as well as regulatory reviews and approvals in relevant jurisdictions. We intend to structure the spin-off in the most tax-efficient way for our shareholders. Subject to the transaction conditions and approvals described above, we target to complete the spin-off in the next 12 months. We believe the successful execution of this plan will further unlock value for Alibaba's shareholders in the future. Now let me provide a brief review of our financials during the March 2023 quarter. For the quarter ended March 31, 2023, total revenue was RMB 208.2 billion, an increase of 2%, which was primarily driven by the revenue growth of the International Commerce segment by 29% to RMB 18.5 billion, the Cainiao segment by 18% to RMB 13.6 billion, and the Local Consumer Services segment by 17% to RMB 12.5 billion. Adjusted EBITDA increased by RMB 9.5 billion to RMB 25.3 billion year-over-year in the quarter. The increase was primarily due to an increase in China commerce adjusted EBITDA as well as narrowed adjusted EBITDA losses of local consumer services and digital media and entertainment. Overall, adjusted EBITDA margin improved by 4 percentage points year-over-year to 12%. Now let's look at cost trends as a percentage of revenue, excluding SBC. Cost of revenue ratio excluding SBC decreased 2 percentage points to 66% in the quarter ended March 31, primarily due to a decrease in cost of revenue from direct sales. Product development expenses ratio decreased 1 percentage point during the quarter. Sales and marketing expenses ratio decreased 1 percentage point year-over-year to 12% in March quarter, reflecting our continued efforts in optimizing user acquisition and user retention spending across businesses. General and administrative expenses ratio remained stable at 5% in March quarter. Our GAAP net income was RMB 22 billion, an increase compared to RMB 44.4 billion year-over-year, primarily due to net gains arising from increases in the market prices of our equity investments in publicly traded companies compared to net losses from these investments in the same quarter last year, partly offset by the decrease in share of profit of equity method investees, the increase in impairment of investments, and the decrease in income from operations. As of March 31, 2023, we continue to maintain a strong net cash position of RMB 399 billion or US $58 billion. As mentioned, during fiscal year 2023, our strong net cash position was supported by healthy free cash flow generation of RMB 172 billion or US $25 billion. In addition, we have been disciplined in investments; for the fiscal year ended March 31, 2023, our net cash used in investment and acquisition activities was RMB 840 million compared to RMB 37 billion in the same quarter last year. Now let's look at segment results. Revenue from our China commerce segment in March quarter was RMB 136 billion, a decrease of 3% year-over-year. For the quarter ended March 31, 2023, online physical goods GMV on Taobao and Tmall, excluding unpaid orders, declined mid-single digits year-over-year. Customer management revenue decreased by 5% year-over-year to RMB 60.3 billion. The gap between CMR and GMV on Taobao and Tmall has been narrowing. Direct sales and others revenue declined 1% to RMB 71.8 billion, mainly due to a decrease in offline store sales. China Commerce segment adjusted EBITDA increased by RMB 6.3 billion to RMB 38.5 billion in March quarter. Segment EBITDA margin increased from 23% in the March 2022 quarter to 28%. This reflected significant loss reductions from Taobao deals and Taocaicai and Freshippo, partly offset by a decrease in profit from customer management revenues. Our International Commerce segment revenue in March quarter was RMB 18.5 billion, an increase of 29% year-over-year. Revenue from the International Commerce retail business increased by 41% to RMB 14 billion. The increase was primarily driven by business growth in all our major businesses, including AliExpress, Lazada, and Trendyol. The International Commerce segment adjusted EBITDA loss narrowed by RMB 233 million to RMB 2.3 billion in March quarter. The loss reduction year-over-year was primarily contributed by the reduced losses from Trendyol, partly offset by the increased losses from Lazada. The increased losses from Lazada were primarily due to a one-off early termination expense in connection with renegotiating new service contracts to reduce future operating costs. Excluding this one-off effect, the adjusted EBITDA loss of the international commerce segment will be less than RMB 1.5 billion. Our Local Consumer Service segment revenue in March quarter grew 17% to RMB 12.5 billion, primarily due to positive GMV growth of Ele.me driven by order growth and higher average order value. Local consumer service adjusted EBITDA loss reduced by RMB 1.4 billion year-over-year to RMB 4.2 billion. Most of the loss reduction was driven by the Ele.me business, while other major businesses within the segment also recorded losses. Ele.me continued to improve its unit economics per order by increasing average order value and reducing the delivery cost per order. Its user experience continued to improve year-over-year and remained positive this quarter. Revenue from Cainiao, after intersegment elimination, grew 18% year-over-year to RMB 13.6 billion, primarily contributed by the increase in revenue per order from international fulfillment solution services, as well as increasing demand for customer logistics. In March quarter, 72% of Cainiao's total revenue was generated from external customers. Cainiao recorded adjusted EBITDA loss of RMB 319 million in March quarter, loss reduced by RMB 593 million year-over-year. Revenue from our cloud segment after intersegment elimination was RMB 18.6 billion in the March quarter, a decline of 2%. The year-over-year decrease in revenue of our cloud segment reflected delays in the delivery of hybrid cloud projects given COVID-19 resurgence in January and normalization of CDN demand compared to the same period last year. Adjusted EBITDA of cloud segment was a profit of RMB 385 million in March quarter, increased by RMB 109 million year-over-year. Revenue from our digital media and entertainment segment in the March quarter was RMB 8.3 billion, an increase of 3%. Adjusted EBITDA was a loss of RMB 1.1 billion, reduced by RMB 864 million year-over-year, primarily due to the narrowing of losses from Youku driven by disciplined investment in content and production capabilities. Now let me pass to Trudy, who will speak about Taobao and Tmall Business Group.

Trudy Dai, CEO of Taobao and Tmall Group

Thank you, Toby. This is Trudy, and it's a great pleasure for me to have the opportunity to speak with you all today. In this New Year, we've all seen positive momentum in China's economy with 4.5% year-on-year growth recorded in first quarter GDP and a moderate recovery in consumption. From our perspective, what we saw following the recurrence in COVID in January and the spring festival travel season, following that, was that from February through to April, we achieved year-on-year positive growth in users and GMV on the Taobao app, and EBITDA has been good as well. Apart from those macro factors, an important part of that has been the payoff from our efforts around cost optimization and efficiency improvement, as well as the five battles that we're fighting. Also, we see many positive factors going forward. Although in the e-commerce sector, the demographic dividend is waning in this intensified competition, nonetheless, many new opportunities are being created by growing consumer demand for more diversified offerings and also by technological advances. So accordingly, in this new fiscal year, we've adjusted our strategy and mapped out new development plans, which we're currently implementing. I'm confident that these initiatives will enable us to capitalize on the recovery and consumption to seize the opportunities created by market developments and technological advances to further consolidate our leading market position with both consumers and merchants and to make exciting new breakthroughs in user experience. First, based on our trialing of new interactive formats and content over the past two years, we're even more certain that beyond shopping, consumers want to find a broader range of more diverse content on Taobao, including shopping-related encyclopedic knowledge, lifestyle recommendations, and even interactive entertainment. This is corroborated by the hundreds of millions of long-tail keyword searches made by users every day. So over the coming few years, Taobao will be making large and sustained investments to satisfy users' diverse needs around all aspects of life. This will include investments to further enrich and diversify merchandise assortment, create richer and more differentiated content, and introduce new interactive entertainment scenarios, while accelerating growth in user scale and user time spent and consolidating its position as China's most widely used online marketplace. Taobao will be progressively upgraded into a one-stop consumption and lifestyle platform. Second, we will build a prosperous ecosystem by making the supply side more open and inclusive. With organizational upgrades that we've made, for example, we've established an SME development center that's devoted to supporting startups and small and medium-sized merchants and helping them contribute more diversified suppliers on the platform. Our grocery store business development center works to enable users to buy fresh foods on Taobao faster and with greater savings. Our live streaming and content teams will provide strong support to content creators. Additionally, we will be leveraging technological advancements to lower operating costs for merchants. Third, leveraging advances in AI and other technologies, the Taobao app will be upgraded to meet a much broader range of user needs. So going forward, we'll be more focused on investing in technology for Taobao, building on the whole group's technology and data capabilities. We will upgrade existing merchant tools and create new tools for merchants, as well as new lifestyle scenarios for users, ushering in the next-generation paradigm end-user experience. So in summary, our strategy is putting users first, building a prosperous ecosystem, and realizing technology-driven innovation. Our goal is for Taobao to continue to be the number one consumption platform serving the largest number of users while upgrading the platform to serve a broader range of needs. Undoubtedly, this means that over the coming 1 to 2 years, we'll be reducing merchants' operating costs and increasing our investments in users, merchants, technology, providing good merchandise, good content, good experiences, and good services to our users. I trust that with our strong momentum of growth, as well as the network and scale effects that we bring, coupled with our new approaches, we will certainly maximize value for merchants. That means that we'll continue to lead in terms of merchant scale as the number one place to do business. On that basis, we clearly foresee platform ROI growth in the mid- to long term, and I am fully confident. So over a 3-year horizon, I will be making resolute, sustained, and major investments to realize the above three strategies and achieve sustained growth in users. Thank you very much. At this point, I'll hand over to Jiang Fan.

Jiang Fan, CEO of Alibaba International Digital Commerce Group

Thank you very much. This is Jiang Fan, and it's a great pleasure to be able to speak with you during this earnings call. As part of the recent restructuring, we've established the Alibaba International Digital Commerce (AIDC) Group, which includes various business models and operates in different countries. In the B2C retail sector, we have a portfolio of digital retail platforms with a local commerce model, including Trendyol, Daraz, and Lazada. Additionally, we operate several cross-border B2C platforms, including AliExpress and Tmall, as well as Alibaba.com, which is a global B2B trade platform serving the wholesale sector. This past quarter, the International Commerce segment has shown rapid growth momentum. AliExpress officially launched a new service called Choice. It's based on the fulfilled by AliExpress model. It provides consumers with value-for-money product choices and better services, further enhancing the consumer experience. AliExpress has maintained rapid overall growth. Following the earthquake in Turkey in early February 2023, Trendyol and Alibaba Group actively provided relief support. Although our business in Turkey was affected in the short term, it quickly recovered and achieved strong growth with a number of orders increasing by over 27% year-over-year. In Southeast Asia, Lazada's monetization rate continues to improve, achieving a good balance between business scale growth and operational efficiency improvement. Overall, after a challenging year, our international commerce business has recovered and is back on a growth track. Looking ahead, we'll continue to invest in the cross-border plus local commerce model in our B2C retail sector. There's still significant potential to grow our cross-border business. With the launch of the Choice service, AliExpress's user experience has significantly improved, and we expect that the business will continue to grow rapidly. In the local commerce business, we'll continue to invest in the Southeast Asian market while actively seeking opportunities in other new regional markets. In the B2B wholesale sector, we've made many upgrades to our existing models, expanding from transaction services to other value-added services such as finance, logistics, and digital SaaS services. We believe this will enable our wholesale business to maintain healthy growth in the coming years. Additionally, we will actively expand our B2B business model into other markets, and next, I will hand over to Daniel to present on the Cloud business.

Daniel Zhang, Chairman and CEO

Thank you very much. Some updates about our Cloud Computing business. In the last - in the past quarter, our Cloud revenue increased by 2% year-over-year. This is partially due to our proactive move to adjust our revenue structure and focus on high-quality growth, also a result of external changes in market environment and customer composition. The external factors include the impact from a top customer using our Cloud service and switching to self-built infrastructure for its international business. Both revenue contributions to Alibaba Cloud decreased 41% year-over-year. In addition, the resurgence of the pandemic in China in January also impacted public cloud consumption and the delay in the delivery of certain hybrid cloud projects during the quarter. As the pandemic eased off and remote working and school activities decreased in February and March, demand for services such as CDN also decreased quite significantly. If we zoom out from the short-term fluctuations in Cloud revenues and look back at Ali Cloud's development over the past 14 years and the cloud's vast future with the rapid development of AI, we see massive market potential and remain confident in Cloud's future. We got to where we are today because Ali Cloud sees two historical opportunities: First, the rapid development of China's mobile Internet; and second, the digital transformation of traditional industries. With its industry-leading technology and products, Ali Cloud established its market leadership in China and globally by supporting the growth of many digital native enterprises and the digitization of many industry customers. Today, the age of AI brings two new historic opportunities to Ali Cloud. Firstly, the emergence and the broad application of artificial intelligence, large models, and various vertical models have raised new requirements for computing power. This is a huge first-mover advantage for Ali Cloud as we have established sizable capacity and a path to provide stable, secure, high-performance, and cost-efficient computing services. We hope that Ali Cloud services can not only support our self-developed foundational model but also support the training and services of other large models and vertical models in the market. Today, we are the leading provider of large-scale, high-performance computing services based on public cloud. Leveraging this technology advantage, we are working with enterprise customers and entrepreneurs to support their demand for model training and services. The second opportunity lies in building model as a service (MaaS) on top of our foundational models. We hope to offer our proprietary foundational model to the general public while supporting our customers, partners, and developers to produce vertical models and services they need based on our foundational model. In April, we released a large language pre-trained model, Tongyi Qianwen. Currently, more than 200,000 customers have applied for trial access, and we have started to work with several industry partners to develop vertical models based on Tongyi Qianwen. We also plan to launch cloud products and enterprise solutions based on the Tongyi model. At the same time, the emergence of large models also brings new opportunities to integrate AI with the various businesses within Alibaba Group. Starting from DingTalk, we believe that all of our customer-facing businesses can be enhanced with a large model to offer new AI-based service experiences for our users. Qianwen is just one member of the family of our Tongyi series of pre-trained models. We plan to release some of the other large models in the Tongyi series in the near future. As a cloud computing product company, Ali Cloud is committed to investing in core technology development in cloud computing, big data, and AI to make computing more inclusive and AI more accessible. Recently, we have introduced a series of new products and pricing policies. We believe these measures can further expand the customer base and cloud consumption of our public cloud services and drive the usage of high-performance computing power required for AI model training and related services. This will provide a healthier and more sustainable growth driver for Ali Cloud's long-term development. Before ending my sharing today, I would like to say a few more words. Looking back at the recent events in the past few months, Alibaba, like the world we are in, is at the beginning of a new era of transformation. The world is standing at a new starting point in the age of AI. The breakthroughs in artificial intelligence will reshape every aspect of our society, how we work, and how we live, creating opportunities for disruptive innovations while bringing new problems for mankind to solve together. For Alibaba's own transformation, we expect the progress to improve reorganization and capital management efforts to further unlock Alibaba's own productivity and foster more innovation, such as new products and services and new experiences focused on creating value for our customers. Through these efforts, we hope to bring greater and long-term returns to our employees and shareholders. Thank you.

Robert Lin, Head of Investor Relations

Thank you, Daniel, and hello to everyone. For today's call, you can ask questions in either Chinese or English. A third-party translator will be available to provide interpretation during the Q&A session. Operator, please connect the speaker and the SI conference line now and start the Q&A session when you are ready. Thank you.

Operator, Operator

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

Ronald Keung, Analyst

Hey, Daniel, Toby, Trudy, and Jiang Fan. Thank you to management for those excellent earlier presentations. Both Trudy and Daniel discussed the reorganization of the group, after which the Taobao and Tmall Group will no longer have their profits used to support the other spun-off subsidiaries. So I'm curious about what that will look like going forward with Taocaicai and Taobao deals, as they work on narrowing losses and improving profitability. Will that be reinvested into CMR? What will be the primary goal moving forward? Will it focus on maximizing GMV, or will there be a more balanced strategy? How will you maintain leadership in the future? Is the key focus still on GMV?

Trudy Dai, CEO of Taobao and Tmall Group

Thank you. Alibaba, we always believe that we should start with the end goal in mind, and therefore, in making any investments, we always look at what the end objective is in planning that out. Today's environment globally is still highly uncertain. At the same time, there's the rapid development of science and technology. So that needs to be factored into our long-term plan. In the next, say, 3 to 5 years on Taobao, we'll have a very clear focus on putting users first on building up a prosperous ecosystem and driving technology-driven innovation, and pursuing our transformation from transaction to consumption and on to life, of course, pursuing all of this in a very competitive environment but using all of this to meet broader and more diverse user demand and to optimize user experience. As I mentioned before, we will focus on increasing user growth and developing a thriving ecosystem. In my view, take-rate serves primarily as a measure of platform health and reflects the confidence and recognition that merchants, both those selling goods and those creating content, have in the platform. As for CMR, this is driven by an interaction of the scale of the platform, user activities, including merchants and their confidence in the platform, and we'll continue to grow the scale of the business, driving it, as I said, with technological innovation and progress.

Robert Lin, Head of Investor Relations

Thank you. Next question?

Operator, Operator

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

Gary Yu, Analyst

As for CMR, this is driven by an interaction of the scale of the platform, user activities, including merchants and their confidence in the platform. We'll continue to grow the scale of the business, driving it with technological innovation and progress.

Robert Lin, Head of Investor Relations

We can't hear your question very well. Next question, please.

Operator, Operator

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

Alicia Yap, Analyst

Hi. Good evening. Thank you. My question is about the cloud business. First, how have the results been and what customer feedback have you received regarding your price reduction strategy? Additionally, in the long term, do you expect Alibaba Cloud to maintain its number one market share in the IaaS space in China, or should we anticipate changes with more competitors entering the IaaS market? More generally, do you believe Alibaba Cloud can continue to be the largest player in the IaaS, PaaS, SaaS, and AI sectors moving forward? Lastly, what are your long-term expectations for the level of profitability in the cloud sector, and where do you see it stabilizing? Thank you.

Daniel Zhang, Chairman and CEO

Thank you, Alicia. This is Daniel. I'll take that question. Our pricing strategy in the cloud sector has generated significant interest and has been positively received by the market. A primary goal of this strategy is to make computing power more accessible to small and medium-sized companies as well as developers. This approach not only aims to serve large industry players but also focuses on helping smaller startups and students. By expanding our service offerings to these groups, we are also cultivating future demand as they grow. The second thing I would add regarding our pricing policy is that Alibaba is the leader and innovator in China’s public cloud sector, a business where we can realize strong economies of scale. As the market leader, we can utilize that scale to share the benefits of our technological advantages with our customers. Essentially, our business strategy revolves around transferring those economies of scale to create genuine value for our customers. In response to your second question, Alibaba Cloud is currently a leader in China for IaaS and PaaS. We have seen various reports with differing statistics, and there are indeed new players entering the market. However, Alibaba Cloud remains highly focused on the public cloud sector. The revenue share from public cloud services is considerably higher compared to our competitors. We have invested significantly in increasing high-quality revenue from our core offerings in IaaS and SaaS, utilizing the economies of scale we have achieved to provide benefits to our customers. The development of AI technology presents a significant new opportunity for our cloud business. Artificial intelligence applications will lead to a substantial increase in demand for computing power, which needs to be offered as a public service or infrastructure. This represents a major opportunity for us moving forward. With the advancement of AI models, including both foundational and industry-specific models, there are numerous opportunities to create and launch new products tailored for various use cases across different sectors. The progress in AI offers two key opportunities: first, the increasing demand for computing power; and second, the chance to innovate with new products. Finally, regarding profitability, I believe we are still in the early stages of cloud development, particularly in relation to total IT spending. Currently, there exists a significant gap in our profitability compared to other leading global cloud companies. However, I view this gap as an opportunity as we continue to grow, scale, and achieve greater efficiencies. Specifically, as we enhance our core technologies, we see a clear opportunity and are confident in our ability to boost profitability.

Robert 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. To introduce my question, I noticed in your earlier release regarding the spin-off of the cloud business that it will be a full spin-off through dividend distribution. Can you clarify if this means that all the equity the group holds in the cloud business will be returned to existing shareholders as a dividend? Additionally, regarding other assets in the group that will be spun off and taken public, what mid-to-long term factors will you consider when deciding which assets to retain majority control of—over 50% equity—which assets you might keep at a 30% to 50% holding, and which assets you could reduce to 10% or even sell completely? What will guide that decision-making process?

Toby Xu, Chief Financial Officer

Thank you, Alex. This is Toby. I'll take the first part of your question. Yes, your understanding is correct. We're discussing a full spin-off, as mentioned in Daniel's and my remarks. We have established a new committee at the Board level, the Capital Management Committee, which is tasked with finding ways to enhance shareholder returns. This decision has been proposed by that committee and approved by the Board. As Daniel highlighted, we began with the cloud business because it operates independently and has different characteristics compared to our consumer-facing businesses. That's why we chose to proceed with a full spin-off. Now, I'll turn it over to Daniel for the rest of your question.

Daniel Zhang, Chairman and CEO

Yes, this is Daniel. I'll share a few additional thoughts on that. Starting with the first question, the decision to pursue a full spin-off is partly based on the significant differences in business characteristics between our cloud operations and Alibaba's other consumer-oriented businesses. Additionally, we see this as an opportunity to adjust the shareholder structure and bring in strategic investors who can support the business's growth in the market. This consideration was also crucial. Naturally, we are committed to ensuring that the interests of existing shareholders are safeguarded and will take into account various factors, including tax implications, as we move forward with the spin-off. And then Alex, regarding your second question about which assets will remain as majority controlling shareholders and which may see reduced shareholding or potential disposal, the answer hinges on our three core strategies: consumption, cloud, and globalization. Globalization encompasses our digital commerce, logistics, and cloud efforts, representing our strategic business focus. In terms of financing and capital markets engagement, various strategies can be pursued. We might retain a majority controlling interest in some companies while reducing our stake in others. The choice ultimately rests on what benefits each particular business in terms of growth and success. Businesses that can thrive independently should be encouraged to operate in the market on their own. We would be excited to witness one of these smaller entities evolving from Alibaba into a major player, comparable to our current size. It's important to assess each business based on whether it has a well-defined target market, identifiable customers, a solid business model, and a strong core competence. The cloud certainly fits this criteria, and I believe it can thrive independently in the marketplace. Moving forward, we anticipate Alibaba Cloud could develop into an independent entity as large as, or even larger than, the Alibaba Group today. The significant change after our March restructuring is our shift from a highly diversified group to more focused individual companies, each dedicated to its business, strategy, and core competencies. This focus will ultimately benefit customers and employees, maximizing shareholder value.

Robert Lin, Head of Investor Relations

Thank you. Next question.

Operator, Operator

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

Gary Yu, Analyst

So the question I wanted to ask earlier has already been partially addressed. As a follow-up, could you explain how the cloud will be fully spun off through a dividend distribution? How will that impact the cloud's pursuit of an IPO, and will it provide liquidity for the Alibaba Group? I also have a couple of questions regarding capital management. I assume the approach of a dividend payout is primarily due to tax reasons. Do you believe that buybacks will be more tax advantageous than dividends? Lastly, there was a question about Freshippo that the interpreter did not capture clearly.

Trudy Dai, CEO of Taobao and Tmall Group

Thank you very much. Those questions were quite detailed, and I may not be able to answer them fully here. Since announcing the restructuring in March, we have been focused on planning and detailing these transactions. Regarding the spin-off of the cloud business, we are exploring options to carry out this transaction in a manner that maximizes shareholder benefits and ensures a strong return. However, I cannot provide specific details on how this will unfold at this time.

Gary Yu, Analyst

Following our announcement of the restructuring back in March, we've been focused on planning and detailing these transactions. Regarding the spin-off of the cloud business, we are exploring ways to execute that transaction to maximize benefits for shareholders and ensure a strong return. However, I cannot provide specific details on how this will unfold at this time.

Trudy Dai, CEO of Taobao and Tmall Group

Your second question had to do with the relative merits of buybacks versus dividends. In the case of the cloud business, we've opted to go with the dividend approach. But if you ask more generally, what's better, buybacks versus dividend distributions, I think there are different opinions, different voices out there in the market. What I can tell you is we have this Capital Management Committee that will surely give full consideration to all of these different factors and make a solid decision at the end of the day as to what makes the most sense that is in the best interest of shareholders and stakeholders to ensure a good return to our shareholders.

Gary Yu, Analyst

If you ask about the comparison between buybacks and dividend distributions, opinions vary in the market. However, our Capital Management Committee will carefully consider all these factors and ultimately make a decision that serves the best interests of both shareholders and stakeholders, ensuring a good return for our shareholders.

Daniel Zhang, Chairman and CEO

This is Daniel, just to add a further point. As we go through these capital raising processes, as the group holding company exits certain of these businesses, it will be recovering investments and gaining liquidity. But we need to ensure that we work through these processes in a way that makes the best sense for each of the businesses concerned, that it instills confidence in the market and that there is sufficient liquidity. Thank you.

Robert Lin, Head of Investor Relations

Thank you. Next question.

Operator, Operator

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

Jerry Liu, Analyst

Thank you. I have a few questions regarding e-commerce, specifically about Taobao and Tmall. We've seen a return to positive growth in the business over the past few months. Could you elaborate on this positive growth trend in GMP? Additionally, this year has seen intense competition in the e-commerce sector, yet profitability in the China Commerce segment is improving. Can you discuss this further and whether you anticipate continued profitability enhancement this year? Furthermore, concerning Alibaba International Digital Commerce AIDC, which is currently unprofitable and requires additional investment moving forward, could you share your plans for this business? Will you focus on driving growth with these investments or seek a balance between growth and profitability? Thank you.

Trudy Dai, CEO of Taobao and Tmall Group

Thank you. So this is Trudy. Regarding your question on Taobao and Tmall. Yes, definitely. We have been seeing some pretty good numbers, good results in March and April, especially in terms of growth in users and growth in orders. I think there are several reasons for that. First, of course, is the overall recovery of moderate or a slow recovery, but in the first quarter, that's been unfolding. And secondly, I think it's the long-term effect of our efforts around cost optimization and efficiency enhancement that are starting to pay off.

Jerry Liu, Analyst

Yes, we have seen encouraging results on Taobao and Tmall in March and April, particularly in user growth and order growth. This can be attributed to a few factors. First, we are experiencing a moderate recovery, which has been evident in the first quarter. Additionally, the long-term benefits of our cost optimization and efficiency enhancement efforts are beginning to show positive results.

Trudy Dai, CEO of Taobao and Tmall Group

And then thirdly, as I shared with you earlier, our core strategies for this year and going forward are putting users first, building a prosperous ecosystem, and driving a technology-driven business. So these investments that we're making now in users, merchants, and technology are really just getting started.

Jiang Fan, CEO of Alibaba International Digital Commerce Group

So thank you. This is Jiang Fan on Alibaba International Digital Commerce. As I said in my earlier remarks, this business comprises many different business models across many regions. Some of those components of the business are profitable and doing well profit-wise, while others are still in the early investment phase. But in general terms, we see great potential in international markets for the business, both on the retail side and on the B2B or wholesale side. So in markets where we see strong potential, we will be investing to develop the business while, at the same time, in respect of our existing or the more established businesses, we will be looking at ways to further enhance operating efficiencies. So we're looking at each market differently and taking a dynamic approach.

Robert Lin, Head of Investor Relations

Well, thank you, everyone, for joining today's call. If you have further questions, feel free to reach out to me and my IR team. We look forward to having you again next quarter. Thank you.

Operator, Operator

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