Alibaba Q2 conference call: Continuing to invest in e-commerce AI computing power, with significant new user growth potential in collaboration with WeChat Pay

On November 15, Alibaba Group released its Q2 financial report for the fiscal year 2025, showing quarterly revenue of 236.503 billion yuan, a year-on-year increase of 5%, in line with market expectations. Benefiting from changes in the valuation of equity investments, a reduction in investment impairments, and an increase in operating profit, the net profit attributable to ordinary shareholders grew by 63% year-on-year.

Since September 1 of this year, Alibaba has begun charging a basic software service fee based on confirmed GMV for transactions on its platform, which is consistent with industry practices in e-commerce. At the same time, Alibaba has eliminated the annual service fee for Tmall merchants and provided software service fee refunds to specific small and medium-sized merchants.

During the analyst conference call, Alibaba Group CEO Eddie Wu stated, "The 2024 Double 11 has just concluded, and GMV on Taobao and Tmall has seen strong growth. Recently, the monthly active trading users on Taobao and Tmall reached a historical high." This reflects Alibaba's commitment to a "user-first" approach and the positive cycle formed by investing in merchant ecosystem development, marking a new starting point for the industry to return to a value-oriented focus.

From July to September, the order volume on Taobao and Tmall grew by double digits year-on-year, driving online GMV growth, while the number of 88VIP members continued to grow by double digits to 46 million. During this year's Double 11, GMV on Taobao and Tmall achieved strong growth, with the number of buyers reaching a historical high, and 589 brands achieving sales exceeding 100 million yuan throughout the period, setting a new record.

In terms of Alibaba Cloud, overall revenue (excluding revenue from Alibaba's consolidated businesses) grew by over 7% year-on-year, driven by double-digit growth in public cloud services, including an increase in the adoption of AI-related products. Revenue from AI-related products has achieved triple-digit year-on-year growth for five consecutive quarters.

Eddie Wu stated, "We will continue to invest in customer growth and technology, especially in AI infrastructure, to seize the trend of increasing cloud adoption in the AI field and maintain our market leadership."

The following is a transcript of the analyst Q&A session:

Q1: This year's promotional activities exceeded expectations, with most discounts provided by the platform rather than shared with merchants. Can management share feedback from merchants and brands regarding this year's Double 11 promotional activities? What impact do high discounts and return rates have on short-term finances? Will these short-term negative factors offset the long-term positive effects brought by the platform, such as encouraging merchants to increase advertising budgets and improve CMR revenue in the future? What is management's preliminary view on the macro outlook and consumer trends for 2025?

This year's Double 11 activities on Taobao and Tmall started in October, so the entire promotional period was relatively long. Other platforms also began their Double 11 activities early. Communication with merchants shows that we achieved quite strong GMV growth throughout the event. Merchant performance exceeded our previous expectations, and the overall results also surpassed our expectations.

As for coupons, the strategies across platforms are generally similar. Coupons are mainly divided into two categories: platform coupons and category coupons. The platform coupons on Taobao and Tmall are primarily issued to 88VIP members, while category coupons are jointly issued by the platform and merchants. These strategies have overall achieved positive results.

The investment in coupons provided to our members is planned, and this long-term investment will help brand merchants achieve better sales growth on the platform during major promotional periods and bring positive business expectations Therefore, we believe that investment in members can promote sales for brand merchants, which will lead them to increase their advertising budgets on the platform, thereby benefiting the platform's long-term revenue growth (CMR).

Since the end of September, the country has implemented a series of monetary and fiscal stimulus policies, including subsidies for replacing old consumer goods in various regions, as well as subsidies for the home appliance and automotive industries. These policies have driven growth in social retail data and related categories. These replacement subsidies are just part of the national consumption stimulus policies, and we expect more policies to be introduced in the future. The continued rollout of these policies will help shorten the inventory destocking cycle for businesses and enhance the consumption trend of branded goods in the medium to long term.

As these subsidies are mainly aimed at large brand merchants and factories, their inventory improvements will promote the research and development of new products. In the long run, platforms primarily based on Tmall brand flagship stores will benefit from the continuous improvement in brand consumption.

Q2: With the launch of "site-wide promotion" and software services, I noticed in this quarter's financial report that management mentioned the commercialization rate (take rate) of CMR has gradually stabilized. Could management share with us the progress of related businesses? Additionally, does this mean that the gap between CMR growth and commission rates has disappeared? How should we view the outlook for the future?

Regarding the commercialization rate for this quarter, it has remained relatively stable. This stability is the result of multiple factors working together. Specifically, we have started charging a 0.6% fee for software services, and the penetration of site-wide promotion has further increased, both of which have a positive impact on the commercialization rate. At the same time, we are also promoting some new business models and products, which currently have a relatively low commercialization rate and will require some time to improve.

Therefore, the overall commercialization rate for this quarter remains stable. Looking ahead, we will continue to charge a 0.6% software service fee and continue to promote the penetration of site-wide promotion. However, we also have some products with lower commercialization rates that need to grow. It is expected that these positive and negative factors will continue to offset each other, keeping the commercialization rate stable in the future.

As for the future commercialization rate (take rate), we believe that from a market perspective, we still have some room for improvement. However, we will also pay close attention to the operational health of merchants on the platform, so we will balance these two factors to ensure that while improving the commission rate, we maintain the sustainability of merchant operations.

Q3. Can management share the investment strategy for Taobao and Tmall in the coming quarters? On one hand, the group's "site-wide promotion" is still in the process of penetration, and on the other hand, the group is continuously investing to enhance user experience. How will these two factors affect the group's EBITDA? With the integration of the "WeChat Pay" function into the Taobao and Tmall platforms, could management share how this will impact user base growth and drive incremental GMV for the platform in the coming years?

The current strategy for Taobao and Tmall is to enhance profitability while increasing investment in user experience and merchant services. These investments will take various forms. First, we will broaden supply advantages, including enhancing price competitiveness and introducing new products and competitively advantageous brands. At the same time, we will improve user service experiences, enhancing after-sales service, logistics, and investments in the front-end user interface In addition, the platform will continue to invest in technology, especially in e-commerce AI computing power. We are developing multiple AI-related products that require strong AI computing support. These are all long-term investments we are making to enhance the user experience on the platform and the services for merchants.

Regarding the integration of WeChat Pay, management is optimistic about new user growth and plans to invest in the growth and retention of these users in the medium to long term. This is seen by Alibaba as an important investment direction for the future. Therefore, Taobao and Tmall are currently still in the investment phase, focusing on investment efficiency and making more investments by improving CMR. It is expected that during this phase, EBITA may fluctuate, but overall, the platform will continue to focus on investment to achieve long-term growth.

In summary, Taobao and Tmall are still in the investment phase. During this period, management will continue to focus on investment efficiency and achieve larger-scale investments by enhancing CMR. It is expected that EBITA may fluctuate during this phase, but overall, the platform will still focus on investment to drive long-term growth.

After the cooperation between Taobao, Tmall, and WeChat Pay, we expect a significant potential user growth space, which will greatly increase our monthly transaction user count. To achieve this goal, we need to make medium to long-term investments and implement corresponding user growth strategies to ensure that these new users can remain on our platform for the long term. Our goal is to achieve GMV growth that matches our existing market share as user retention improves.

Q4. Regarding supply chain issues, first, given the significant slowdown in the live e-commerce industry's growth this year, have we observed that brand merchants have become more positive towards our platform, or conversely, will we be more proactive in seeking online marketing and operational resources from brand merchants? Secondly, what is our strategy in areas where competitors have advantages, such as private label products and agricultural products in these two segments?

Overall, the development of live e-commerce is closely related to the strategies of various platforms and the penetration rate of e-commerce. Although the growth rate of live e-commerce in the entire industry has slowed down, for Taobao and Tmall, especially during this year's Double Eleven, our live e-commerce growth rate has actually increased significantly. This indicates that different platforms are at different stages of e-commerce development and penetration rates, leading to differences in live e-commerce growth.

This year, we have observed a significant trend where live e-commerce is closely integrated with the supply of quality products. We call this "Quality Live Streaming," which refers to the combination of product supply mainly from brand flagship stores on Taobao and Tmall with live streaming platforms, creating a strong synergy, especially during the Double Eleven period, where the growth rate is very significant.

Regarding brand merchants' investments, each brand merchant is seeking growth. We believe this year may be a turning point, as the e-commerce growth rates of major platforms begin to converge. In this case, brand merchants are more inclined to choose platforms that can deliver actual sales rather than just pursuing superficial growth numbers. Therefore, we believe that Taobao and Tmall's advantages in attracting brand merchants' budgets will expand.

As for private label products and agricultural products, this is a topic frequently discussed internally, and there may sometimes be differing opinions. But our strategy is very clear: each platform has its characteristics and strong categories, as well as core user groups Therefore, our choice is based on our core user group, namely the 88VIP members, to determine their preferences across different categories.

For our core user group, they tend to choose branded products in most categories. However, in certain specific categories, these users also have a demand for private label products, so we will offer private label products in those categories. At the same time, as we expand our payment channels, we have attracted many new users whose category consumption preferences differ from those of existing users. To meet the needs of these new users, we may offer private label products in more categories.

Overall, we will adjust category supply based on the needs and consumption preferences of different user groups to enhance user experience in a personalized way and provide better business opportunities for merchants. This is to ensure that the platform can better serve consumers and merchants.

Q5. Regarding the cloud business, we have noticed that the revenue growth of the cloud business is accelerating. The company has stated that it hopes to achieve double-digit growth in the second half of the year, and profit margins are also continuously improving. Considering the recent decline in prices of our cloud service products and the price competition in the industry, how should we expect future profit margins? At the same time, how should we assess the impact of this change on resource utilization?

The cloud business is a field that emphasizes both technology and scale effects. Our years of investment have created strong scale effects, allowing our cloud services to see profit margin improvements while maintaining growth.

Regarding the future profit margins of the cloud business, we need to consider AI as a long-term variable. Whether it is AI software or computing power services, we have taken a long-term perspective. Therefore, we expect to continue implementing price reduction strategies on our AI model APIs and platform inference services to attract more users and drive the use of computing power services. This means we will offer more discounts on these services to promote user growth and market expansion.

The demand for AI in the AI industry is still in its early stages. Therefore, the company will continue to formulate product pricing strategies with the primary goal of expanding the user base. We foresee that by lowering the prices of API services, we will attract more new users to use our AI models. These users, when using the models, are likely to deploy applications on our cloud platform, thereby naturally using our other cloud services, such as computing, storage, or database products.

Thus, the price reduction of the AI model API can be seen as a means of user growth and acquisition. Since we offer a comprehensive range of products and services, customers will naturally use our various cloud products. Once they start using our cloud platform, they will tend to use multiple cloud services.

Q6. Our take rate has room for improvement, but the company is also concerned about the operational burden and costs for merchants on the platform. In recent months, we have noticed that some competitors have actively reduced merchant fees and introduced measures to alleviate the burden on merchants. Will these measures make competitors more attractive in attracting merchants? If so, is it possible that this could lead to the loss of our 88VIP merchants? First of all, Taobao and Tmall have always paid great attention to the rights and interests of merchants. From the perspective of the healthy development and operation of the platform, we believe that our commercialization rate and friendliness towards merchants are among the best across all platforms. This is also the reason why we believe there is still room for improvement in the commercialization rate, but we will balance the relationship between platform health, merchant operational health, and commercialization rate.

Secondly, we have implemented many measures to alleviate the burden on merchants. For example, while charging technology service fees, we have also implemented relief plans for small and medium-sized merchants and eliminated the annual fee for Tmall merchants. In addition, we have launched products like "Return Treasure," which significantly reduces merchants' costs and protects their reasonable rights and interests in areas such as refund optimization.

In fact, we have been continuously investing in user growth and experience in both the past and future stages, including enhancing membership benefits. These initiatives will increase users' willingness to purchase on our platform, thereby helping merchants improve their transaction rates and making their businesses more prosperous on the platform. I believe these investments will greatly benefit merchants.

Q7. Regarding the old-for-new subsidy policy that started in September, I would like to understand what contribution or proportion this policy has made to the entire 88 e-commerce platform ecosystem or GMV. You just mentioned that the replacement subsidy in September is just the beginning of the national consumption stimulus policy, and there may be more similar subsidies in the future. How do you view the future strength of subsidies and the consumer areas that may be 重点补贴 or supported?

The old-for-new subsidy measures have significantly contributed to the growth of related industries on our platform in recent months, with a noticeable increase in growth rates since September. As for the subsidy policy, although the specific measures vary by region, we have observed a trend: in addition to major appliances, many regions have also increased subsidy measures for small appliances, home decor, household goods, and even digital products.

Q8. For the businesses of Taobao and Tmall, we started charging technology service fees from September. The next quarter will be the first full quarter of our comprehensive implementation of this fee. If our revenue conversion rate (take rate) has remained stable in the last quarter, is it possible that our CMR (commission revenue) growth will exceed GMV (total merchandise volume) growth in the future? In other words, will the revenue conversion rate not only remain stable but also show growth? Regarding capital expenditure (CAPEX), I noticed that our capital expenditure has increased this quarter, mainly for investments in Alibaba Cloud and AI. I would like to understand how management views the returns on these investments? In particular, how do we assess the returns on these investments in terms of application and our infrastructure construction in cloud computing?

Our revenue conversion rate is influenced by several positive factors, mainly the introduction of software service fees and the increased penetration of site-wide promotions. However, we are also investing in some new models that grow rapidly in the early stages but have relatively low commercialization rates. Therefore, these rapidly growing categories may dilute the overall revenue conversion rate, creating a kind of trade-off relationship We will comprehensively consider the overall revenue conversion rates of Taobao and Tmall, and seek a balance on the merchant side to provide a more favorable operating environment and a more balanced business atmosphere. Therefore, we will focus on the overall revenue conversion rate levels and consider the interactions of these factors.

In the long run, we are optimistic about the company's development. Currently, our market positioning is relatively low, so we have significant room for growth. Our substantial capital expenditures are concentrated in the cloud computing field, especially in AI infrastructure. These investments are based on our in-depth understanding and judgment of short-term and long-term market demand.

Currently, customer demand for AI computing power and AI model API services is rapidly growing, and this demand has not yet been fully met. Therefore, our investment in the AI field is quite proactive.

We believe that the current development of the AI industry, especially the rise of generative AI, is a rare historical opportunity, possibly a technological innovation that occurs once every twenty years. Whether from the capabilities of existing models or their applications across various industries, demand is steadily increasing, and this demand is very clear.

We have also observed that new models from OpenAI have a significant increase in the demand for reasoning computing power based on Chain of Thought (COT) technology. Based on these technological trends, we are proactively investing in AI computing power infrastructure. Therefore, we are optimistic about both short-term and long-term demand in the AI field, which is the fundamental reason for our active investment in AI infrastructure.

Q9. Regarding shareholder returns, first of all, congratulations to Alibaba for successfully repurchasing $10 billion in stock over the past six months. My question is, when executing the repurchase, do you differentiate between ADRs and the stocks listed in Hong Kong (code 9988)? Secondly, the People's Bank of China recently launched a swap program allowing companies to borrow to repurchase their own shares. Since Alibaba has joined the southbound Hong Kong Stock Connect program, can this tool be utilized to increase share repurchases?

Our share repurchases are mainly conducted in the U.S. market, where liquidity is stronger. Although we also repurchase in the Hong Kong market, it is currently mainly focused on the U.S. market. We have been exploring different repurchase opportunities and actively raising funds to support repurchase activities.

Regarding the swap program from the People's Bank of China, we have not yet utilized this channel, as it is primarily aimed at A-share listed companies. For example, we issued $5 billion in convertible bonds in May and used these funds for an $5.8 billion stock repurchase in June. This indicates that we will explore various avenues to increase repurchases.

Additionally, our company holds a substantial amount of RMB cash in mainland China, so we are not very interested in repurchases with RMB funds. However, if it involves offshore RMB or USD funds, we may be more interested.

Q10. Regarding opportunities in the AI field, currently in cloud computing, is the main driver of AI revenue model training or inference services? In the U.S., discussions around AI agents are very heated; will this drive the growth of related workloads? Currently, the demand for cloud services driven by generative AI is primarily propelled by model training in the early stages. However, we have observed that the demand for inference services and computing power is continuously growing. In the future, the demand for model training may concentrate on a few companies, especially in the area of foundational large models. At the same time, we also notice that various industries, such as autonomous driving and finance, have their own vertical model training demands.

Overall, the demand for both model training and inference services is increasing, but in the future, the demand for AI inference may occupy a larger proportion of computing power demand, leading to more significant growth.

The application of AI across various industries that you mentioned is indeed widespread, with different companies and enterprises developing new AI capabilities or utilizing AI to automate workflows, and even reconstructing previously CPU-dependent models with AI. These changes are actively occurring around us, including within our company.

In general, the technological development trends we observe are similar to those in the United States, with a significant shift of computing demands originally using CPUs turning towards GPU reconstruction. This is a notable trend, and the foundation of this shift is the widespread application of AI models