Alibaba: When will Taobao's situation improve, and when will the younger brother become profitable

The following is the summary of Alibaba's first quarter financial report for 2025. For financial report analysis, please refer to " Big Brother Taobao Drops the Chain, Little Brother Supports Half of Alibaba 》

I. Review of Core Financial Information:

II. Detailed Content of the Financial Report Conference Call

2.1. Key Points from Executive Statements:

1) Business Progress

① Taotian Group

a. Orders and GMV have shown steady year-on-year growth, with a significant increase in user purchase frequency. Market share has stabilized, validating the effectiveness of user experience investment.

b. The number of VIP members has reached 42 million, continuously optimizing member benefits, product supply, and service experience, with the goal of enhancing the satisfaction and stickiness of high-quality members.

c. Introducing a new marketing tool "Full-Site Promotion," through algorithm upgrades, to improve merchant monetization efficiency and traffic utilization. It is expected that CMR growth in the coming quarters will be consistent with GMV growth.

② Alibaba International Digital Commerce (AIDC)

a. Revenue increased by 32% year-on-year, with a rapid growth in AliExpress orders. Logistics efficiency has significantly improved, and the economic benefits of selected business units have increased by nearly 20%.

b. AliExpress continues to optimize logistics efficiency in cooperation with domestic partners, significantly reducing average delivery time between quarters, further enhancing user experience.

c. Lazada achieved EBITDA profitability for the first time in July, demonstrating its efficient operations and market share consolidation in the Southeast Asian market.

d. Trendyol has consolidated its e-commerce leadership position in the Turkish market and improved monetization capabilities, while expanding product supply and marketing efficiency in the Gulf region.

③ Alibaba Cloud

a. Alibaba Cloud revenue (excluding subsidiaries merged by Alibaba) has resumed positive growth, with public cloud revenue maintaining double-digit growth. AI-related product revenue continues to grow at a triple-digit rate, gradually becoming an important driver of company revenue.

b. As the main cloud service provider for the Paris Olympics, it provided cloud computing and related services to Olympic Broadcasting Services (OBS), achieving real-time signal transmission for two-thirds of global broadcasting companies, covering billions of viewers, and achieving cloud-based live broadcasting for the first time at the Olympics.

c. AI technology was widely used at the Olympics, including 360-degree real-time playback, bringing a new viewing experience to global audiences.

④ AI and Technology Investments

a. Promoting the development strategy of integrated cloud + AI, with three key elements: optimizing cloud product supply, focusing on public cloud products with sustainable profit growth and scalability; strengthening the synergy between cloud and AI products to help existing customers and AI-native enterprises achieve scalable success on the platform; Continued investment in research and development and AI capital expenditure to ensure the long-term healthy growth of cloud business.

b. The company's proprietary large language models are being more widely used, with an increasing number of major customers choosing Alibaba Cloud as their AI development computing infrastructure, driving the company's leading position in the AI field.

⑤ Other Business Segments

a. The improvement in operational efficiency and monetization capabilities has significantly improved some loss-making businesses, especially after the strategic restructuring, with some businesses already showing profitability. It is expected that most businesses will achieve a balance between profit and loss within 1 to 2 years and gradually contribute to profits in scale.

⑥ Future Outlook

Overall revenue in the second half of the year is expected to return to double-digit growth.

⑦ Expenses and Expenditures

a. The year-on-year increase in sales and marketing expense ratio by 1.7 percentage points is mainly due to increased investment in e-commerce business.

b. The G&A expense ratio increased by 1.4 percentage points, and excluding the one-time provision of RMB 3.1 billion, the expense ratio remained relatively stable.

⑧ Cash Flow and Capital Expenditure

a. Free cash flow decreased by RMB 21.7 billion to RMB 17.4 billion, mainly due to increased investment in Alibaba Cloud infrastructure and changes in operating funds related to the reduction of direct sales business.

b. As of June 30, 2024, the net cash position was RMB 405.7 billion.

⑨ Shareholder Returns

a. Repurchased a total of 630 million ordinary shares this quarter, equivalent to approximately 77 million ADS, totaling USD 5.8 billion, with a net decrease of 2.3% in outstanding shares.

b. There is still USD 26.1 billion remaining in the stock repurchase plan, and long-term cash incentives will gradually replace some employee stock ownership plans (ESOP) to reduce future dilution.

2.2 Analyst Q&A

Q: GMV growth in this quarter is in the high single digits, while CMR growth is only 1%, and the gap between the two is widening. Management mentioned that the gap will narrow in the future. How should we view the trend of commission rates and the time needed to align CMR with GMV? What are the specific measures?

A: Currently, the top priority for Taobao and Tmall Group is to enhance the shopping experience for users, thereby driving higher purchase frequency and GMV growth. Market share has stabilized, and the company plans to gradually accelerate monetization. The current launch of live streaming and the billion RMB subsidy plan are increasing user retention and repurchase rates, but the market acceptance of these new products still needs time to improve.

In particular, the new advertising product "Global Promotion" requires effective integration of platform traffic, advertiser participation, and algorithm optimization. Since its launch in April, it is expected to take 6 to 12 months to integrate these different elements to achieve significant effects and growth. Therefore, it is expected that it will take about 12 months from the launch of the product for CMR growth to truly align with GMV growth.

Q: Do we have new fee measures to further impact the commission rate, such as software service fees or advertising technology upgrades?

A: Starting from September, Taobao and Xianyu will introduce a new fee measure, which is to charge a 0.6% technology service fee on the actual GMV received by merchants. This decision was made based on market practices and merchant feedback At the same time, in order to take care of SME merchants with annual GMV below a certain threshold, the company will take special measures, such as providing refunds or other methods, to help these merchants expand their customer base and increase GMV to that threshold. It is expected that this measure will have a substantial impact on finances in the next 7 months, further optimizing the commission rate.

Q: How do you view the overall competitive landscape of the current AIDC business? How will it evolve in the future? What are the competitive advantages of AliExpress among merchants and consumers, and how will it help maintain market position in key countries?

A: The AIDC business is different from other businesses of the Alibaba Group, covering multiple different types of businesses and operating in many different local markets managed by local brands and teams. AIDC is actually a combination of cross-border and local businesses, so we are working on integrating the supply chain in these markets, especially the product supply chain in China, to strengthen our competitive advantage.

On the consumer side, AliExpress (AE) has good brand awareness, but we also recognize that the efficiency of the AE platform has been relatively low in the past, and the user experience is relatively poor. We have been working to improve this, enhance the user experience of AE, and thus maintain a competitive advantage in the market.

Q: Lazada became profitable in July, does AliExpress have a specific profitability timeline?

A: In July this year, Lazada achieved EBITDA profitability for the first time in a single month. While maintaining market share, we will continue to optimize operations, improve efficiency, and profitability. As for AliExpress (AE), we have been investing in and optimizing the AE Select model, which has shown some results. In the coming quarters, we will continue to strive for efficiency improvement, drive high-quality growth, and aim to achieve profitability as soon as possible.

Q: Can you provide some insights on the current status of the main listing and the arrangement to enter the Hong Kong Stock Connect?

A: We are actively promoting the conversion of the main listing in Hong Kong. On August 22, we will hold the annual general meeting, and relevant proposals will be submitted for shareholder approval. If approved by shareholders, we plan to complete this conversion process by the end of August. In addition to the main listing conversion, joining the Hong Kong Stock Connect also requires procedures through different exchanges. Currently, we are progressing with these matters as planned.

Q: Considering the expected recovery of double-digit growth in external cloud revenue in the second half of the fiscal year and accelerated growth, can you discuss the prospects of AI revenue contribution? What is our long-term revenue target for AI?

A: We see a strong demand from customers for AI and related products, and this demand is far from being met. From the order situation, the trend of achieving double-digit growth in external customer revenue in the second half of the fiscal year is very clear. Specifically for AI product revenue contribution, most of the growth is expected to be driven by AI products. Currently, traditional CPU-based cloud computing demand is relatively limited, while GPU-based AI product development is rapidly growing. Therefore, more than half of the future revenue growth may come from the drive of AI products

Q: What impact will cloud business face in the next few quarters against the backdrop of the current macroeconomic situation and slowing corporate demand?

A: Although the macroeconomic conditions may lead to a slowdown in corporate demand in some industries, we have not seen this situation in our cloud business. On the contrary, our cloud customers, especially those reliant on digitalization, have significantly increased their AI budgets this year. For these companies, investing in AI is crucial to maintaining competitiveness and improving efficiency. Therefore, the trend we observe is that companies relying on digitalization will not cut back on AI investments as it directly impacts their competitiveness. Overall, we have not seen any signs of slowdown, and demand remains strong.

Q: What are the main driving factors behind the accelerated growth of GMV on Taobao and Tmall? How is the return rate situation across the entire ecosystem?

A: The accelerated growth of GMV on Taobao and Tmall is mainly attributed to the successful implementation of our overall strategy, especially continuous investments in foundational capabilities. This enables us to offer high-quality products and services at attractive prices, which are the foundation of the e-commerce user experience. We also focus on providing personalized product and service experiences for a diverse user base, supported by continuous optimization of the supply chain.

Regarding return rates, although the industry's return rates are increasing, our platform's return rate is slightly lower than the industry average. We also place great importance on the return experience as a good return experience helps improve customer retention and purchase frequency. Particularly among mid-to-high-end consumers, our platform's Net Promoter Score (NPS) has significantly increased, indicating enhanced customer experience and that return rates have not hindered businesses from investing and operating on our platform.

Q: Management mentioned that some businesses are expected to break even in the next 1 to 2 years. Can you share more details about each segment, including local services, AIDC, and retail business under other segments? How should we view the timeline for these segments to break even in the next 1 to 2 years?

A: In the next 1 to 2 years, apart from the core businesses of Taobao and Tmall, we expect other currently loss-making business segments to gradually reduce losses and achieve break-even by improving efficiency and monetization capabilities, ultimately moving towards profitable scalability. Specifically, we will take the following measures:

First, improve investment efficiency and monetization capabilities: These businesses need to focus on investment efficiency, balancing scale and efficiency. Simultaneously, monetization must be strengthened by optimizing the business model to increase monetization rates. This will help the businesses gradually achieve break-even by increasing revenue and optimizing expenditure efficiency.

Second, local services and Lazada: For local services, increasing order volume is key, along with improving unit economics. For example, in the food delivery business, improving operational efficiency continuously to enhance economic benefits is crucial. In the case of AMAP (AutoNavi), such as in the ride-hailing business, improving unit economics is also necessary. Through these measures, we expect these businesses to significantly reduce losses in the future and gradually achieve profitability

Q: How does the management view the future development in terms of the gap between CMR and GMV, especially with the recent launch of "Full Site Promotion" and the introduction of technology service fees? Will this gap continue? Additionally, is the 0.6% technology service fee a net amount, and are there different charges for smaller merchants?

A: Currently, the gap between CMR and GMV reflects a temporary decrease in the commission rate, mainly due to the rapid growth of GMV in some new models, but with relatively lower monetization rates. We expect this gap to gradually narrow in the coming quarters, and the commission rate will stabilize. As GMV growth resumes and market share stabilizes, we plan to accelerate monetization gradually.

For example, the launch of "全站推" is aimed at better penetrating traffic, a process that may take several quarters, but we believe it will significantly increase the commission rate and drive CMR growth. Additionally, charging technology service fees is part of our measures to increase the commission rate. Regarding the 0.6% technology service fee standard, it is important to note that it is based on the completed transaction GMV calculation. However, for small and medium-sized merchants with annual GMV below a certain threshold, we will provide refunds to ensure fairness.

Q: The after-tax tax rate for this quarter is quite high, can you explain the reasons behind this? How should we forecast future expenses? Furthermore, the free cash flow has decreased by 56%, is this related to AI cloud investments and one-time expenses? Will this situation return to normal in the next 1 to 2 quarters, especially in the direct sales business segment?

A: Regarding the after-tax tax rate, the tax rate for this quarter appears high, but calculating the tax rate by directly dividing tax expenses by profits from the income statement does not accurately reflect the true effective tax rate. This is because we have many permanent differences and one-time items that do not affect taxation. Therefore, we prefer to focus on the adjusted tax rate, which was relatively stable this quarter compared to the previous quarter. For tax rate issues in the model, our team can conduct further research and communicate with the Tmall team to provide more detailed support.

The decrease in free cash flow is mainly due to two reasons. Firstly, we made significant investments in AI infrastructure, which is a significant expenditure. Secondly, changes in operating working capital related to the scaling down of certain businesses also impacted free cash flow. Specifically, on the Taobao and Tmall platforms, we proactively reduced some 1P businesses (self-operated businesses) as we assessed that 1P was not the most effective model in certain business categories. By reducing the scale of these businesses, it directly led to an outflow of operating working capital.

In 1P businesses, on one hand, we purchase inventory from suppliers, and on the other hand, we sell the inventory. Typically, suppliers provide us with a credit period of 60 or 90 days. If we can quickly sell the inventory within this period, it generates positive cash flow, especially when the business scale expands, bringing in more cash flow. However, when we actively reduce the scale, it puts pressure on operating working capital, leading to an outflow of cash flow However, this situation is not a permanent impact. As the business scale gradually stabilizes, we expect the outflow of operating funds to decrease, and free cash flow will gradually return to normal. Therefore, we anticipate that in the next 1 to 2 quarters, free cash flow will return to a more normal level, especially in the direct sales business segment.

Q: What is the impact of open-source large language models on AI applications in China? How should we view the transition of large language models to intelligent agents? How will this change the usage scenarios for your merchants and customers?

A: In the development of generative AI, different companies have adopted different strategies when developing open-source or closed-source models. As a cloud service provider, Alibaba Cloud chooses to develop open-source large language models, which is very beneficial for developers as they hope to have more control and optimization space. We believe that providing open-source models to developers can help them better develop products and may encourage them to continue choosing Alibaba's services for subsequent large-scale deployments, which aligns perfectly with our strategy.

Regarding intelligent agents, as models become larger and more multimodal with increasing parameters, the functionality of models will become more powerful. Intelligent agents may be needed in the future to handle more complex reasoning needs, especially those that can call upon different underlying large models. We believe that with technological advancements, this process will become more automated, further changing the usage scenarios for merchants and customers.

Q: Capital expenditures in the first quarter increased by more than double year-on-year. Is this a reasonable reference level for annual capital expenditures? What is the return on these investments? When is it expected to take effect?

A: The significant increase in capital expenditures is due to the strong demand and backlog of orders that we have observed, leading us to make more investments. It is expected that capital expenditures will remain at a similar level in the coming quarters.

Regarding the return on investment, as customer demand for AI computing resources is very strong, whether for training, inference, or API calls, new servers are immediately running at full capacity once online. This strong demand ensures that we will see very high returns on investment in the coming quarters, as this new computing capacity is fully utilized from day one. Therefore, we are very confident in the returns on these AI investments.

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