Alibaba Group Holding Limited (BABA) CEO Daniel Zhang on Q2 2022 Results – Earnings Call Transcript

Alibaba Group Holding Limited Q2 2022 Earnings Conference Call August 4, 2022 7:30 AM ET

Company Participants

Rob Lin – Head of Investor Relations

  • Daniel Zhang – Chairman and Chief Executive Officer
  • Joe Tsai – Executive Vice Chairman
  • Toby Xu – Chief Financial Officer

Conference Call Participants

  • Ronald Keung – Goldman Sachs
  • Thomas Chong – Jefferies
  • Alex Yao – JPMorgan
  • John Choi – Daiwa
  • Yang Bai – CICC
  • Alicia Yap – Citi Group

Operator

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

Rob Lin

Good day, everyone, and welcome to Alibaba Group’s June quarter 2022 results conference call. With us are Daniel Zhang, Chairman and CEO; Joe Tsai, Executive Vice Chairman; Toby Xu, Chief Financial Officer. This call is also being webcasted from the IR section of our corporate website. A replay of the call will be available on our website later today.

Now let me quickly cover the safe harbor. Today’s discussion may contain forward-looking statements. Forward-looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations. For a detailed discussion of the risks and uncertainties, please refer to our latest annual report on Form 20-F and other documents filed with the U.S. SEC are announced on the website of the Hong Kong Stock Exchange.

Any forward-looking statements that we make on this call are based on assumptions as of today, and we do not undertake any obligations to update these statements, except as required under applicable law. Please note that certain financial measures that we use on this call such as adjusted EBITDA, adjusted EBITDA margin, adjusted EBITA, adjusted EBITA margin, non-GAAP net income, non-GAAP diluted earnings per share, ADS, and free cash flow are expressed on a non-GAAP basis.

Our GAAP results and reconciliations of GAAP to non-GAAP measures can be found on our earnings press release. Unless otherwise stated, growth rate of our all the metrics stated during this call refers to year-over-year growth versus the same quarter last year. In addition, during today’s call, management will give their prepared remarks in English. A third-party translator will provide simultaneous Chinese translation on another conference line. Please refer to our press release for details.

During the Q&A session, you will — we will take questions in both English and Chinese, and the third-party translator will provide consecutive translation. All translations are for convenience purpose only. In the case of any discrepancy, management statements in the original language will prevail. With that, I will now turn the call to Daniel.

Daniel Zhang

Thanks, Rob. Hello, everyone. Thank you for joining our earnings call today. We have delivered stable results after overcoming challenges in an extraordinary quarter. According to data released by the National Bureau of Statistics, China’s GDP grow by 0.4% in the last quarter, lowest since the outbreak of the pandemic. Retail sales decreased year-over-year in April and May due to the resurgence of COVID-19 in Shanghai and other major cities and has slowly recovered in June.

Despite the soft economic conditions, we managed to deliver stable revenues and have narrowed losses in our several strategic businesses by improving operating efficiency. In response to these external macro uncertainties, our guiding principles have been as I wrote in my annual letter to shareholders, be confident, be flexible and be ourselves. We are confident about the future of the digital economy. We are confident that digitalization as a universal trend across industries and the market and this will constitute an increasing percentage of the total economy.

Be flexible means actively adapting to the external challenge and finding our own path through the social and economic development cycles. Be ourselves means focusing on our three core strategies, namely consumption, cloud and globalization and delivering high quality growth with ESG as a foundation for reaching our vision of becoming a good company the last 102 years. More specifically, we’re executing our three core strategies and delivering high quality growth in the highly uncertain environment today in the following ways.

On consumption, we are leveraging our strengths, which is our digital commerce infrastructure built on comprehensive fulfillment capabilities to serve diverse consumer segments, and focus on consumption categories with higher certainty of demand. We already achieved the target of 1 billion annual active consumers in China during the last fiscal year. Going forward, we will focus on growing our wallet share in different consumer segments instead of pursuing further absolute increase in our user base in China.

On Cloud, we will focus on enhancing our competitive advantage, which is our proprietary technologies, and as serving the sectors and customers that represent the future in social and industrial development. On globalization, we will focus on the markets with favorable economic development prospects in the next five to 10 years, investing in localized capabilities, and the building infrastructure in logistics and cloud. During the past quarter, Taobao and Tmall GMV experienced a mid-single-digit percentage decline on a year-over-year basis.

We saw signs of recovery since June, as logistics and the supply chain situation gradually improved after COVID, restrictions eased. Over the past few months, daily active users and consumption related page views of our Taobao app remained relatively stable despite the market volatility.

Consumers with the highest spending power demonstrated strong loyalty to our platforms. In the 12 months ended June 30 2022 more than 123 million annual active consumers each spent over RMB 10,000 on Taobao and Tmall, representing a retention rate of approximately 98% compared to the prior 12 month period which was on par with the data as of the end of March. 88VIP members, our most important premium users continue to grow at a healthy rate to 25 million by quarter end, with average, with annual average spending of over RMB 57,000 per month per member.

Turning to that, we are seeing gradual recovery of business performance compared to June especially in a relatively more impacted category in the past few months, such as fashion and electronics. As we continue to grow our location based digital commerce infrastructure in recent years, our diversified business models are showing complementary benefits. For example, certain discretionary categories on Taobao Tmall were negatively impacted by the pandemic. Our Freshippo and Ele.me business captured growth opportunities in food and groceries, fulfilling family needs for daily necessities.

In the past quarter, Freshippo’s GMV grow over 30% year-over-year and Ele.me’s GMV of non-restaurant deliveries increased by over 50% year-over-year. We are aware that the overall growth of Taobao and Tmall GMV was below China’s retail sales growth in the past quarter as we experienced increasing fierce competition among various formats of e-commerce. From Alibaba perspective, I want to be clear about our competitive strategy.

On the consumer side, we will continue to strengthen Taobao apps consumer mindset share as the main shopping destination with diversified experience of digital commerce formats. In a highly uncertain market environment, we will focus on serving the consumer groups with higher spending power, while providing a matrix of consumer offerings with diversified value proposition for different user segments such as Taobao Deals, Idle Fish and Freshippo et cetera. On the merchant side, we will continue to enhance our tools and services to strengthen our marketplaces position as a main platform for sustainable business operations.

In addition, we will also take advantage of our quality of operations in China commerce. Our current scale is much bigger than our peers and more importantly, our advantage in profitability is even larger. Therefore, we will make the best use of our capital reserves by increasing in building consumer mindshare, user experience and the core capability in key areas such as logistics, and aftersales services and execute on these as our long-term strategy.

During the COVID resurgence in major cities such as Shanghai and Beijing in April and May, the digitalized network integrating interested e-commerce and fulfillment has become a new infrastructure in modern urban life.

During the quarter, Ele.me’s restaurant delivery volumes were negatively impacted by COVID restrictions. However, Ele.me’s GMV during the quarter was less impacted as order volume for non-restaurant deliveries such as food, grocery, and medicine increases rapidly, which also contributed much higher basket size non-restaurant deliveries.

As COVID impact eased, Ele.me’s operation has been recovering and its GMV receiving positive growth year-over-year in June. At the same time, while Freshippo and Sun Art experienced negative impacts in offline sales during the pandemic this quarter. They play an important role in providing essential supply support for local communities, leveraging their digital sales and intracity fulfillment capabilities. The percentage of online sales for Freshippo and Sun Art during the quarter reached 58% and 36%, respectively.

Ele.me’s unit economics turned positive this quarter, mainly due to increased average order value, as well as its ongoing focus in optimizing user acquisitions spending and reducing delivery costs per order. Looking forward, Ele.me will continue to focus on its city strategies and strengthen its customer mindset from restaurant delivery to everything delivery, while improving its operating efficiency. We are confident about narrow Ele.me’s operating losses during the fiscal year.

Amap, another important business in our local consumer service segment continue to grow towards a destination around service, discover and a transaction platform. In June, the number of average daily active users of Amap reached a new high of over 120 million driven by eased COVID impacts and ongoing enrichment of local contents and the services on the platform. Our international commerce retail businesses in Southeast Asia and Europe experienced a decline due to change in European Union’s VAT rules, depreciation of local currencies, Russia and Ukraine conflict and normalizing offline activities after COVID restrictions lifted in the regions.

In spite of these challenges, we still see great opportunities in the international market under the general trend of digitalization. Today, we have already established certain foothold in the international market. On a combined basis, our international commerce retail business has an annualized GMV of over $50 billion. Going forward, we will continue to focus on growing both the crossborder model and the local commerce model and are building logistics as a core capability. Despite the near-term sales fluctuations, we will continue to focus on building the cross border logistic network from China to Europe and the local logistic network in Southeast Asia.

We believe if the establishment of these infrastructure will bring long-term value. Our cloud revenues delivered 10% growth year-over-year during the quarter. The slowdown in revenue growth was a result of multiple factors, including slowing macro economic activities, declining in revenue from top Internet customer, softening demand from China Internet customers, and a delay in parts of our hybrid cloud projects due to the impact of the COVID resilience. Looking forward, amidst of uncertainties in economic outlook, and the Internet industry deceleration, our cloud business will continue to focus on the following areas.

Number one, building proprietary technology capabilities in key areas, such as computing, Big Data and Artificial Intelligence. Number two, capturing the growth opportunity in Industrial Internet by identifying the rise industries and customers.

And number three, strengthening our cloud data security capabilities and defending our bottom line. We have been seeing some progresses in these strategies. Contribution of cloud revenue from non-internet industries was 53% in this quarter, up more than five percentage points compared to the same quarter last year.

During the same period, more and more enterprise customers are adopting DingTalk to work or study as COVID restrictions increased across the country. DingTalk will continue to strengthen its position as a digital work place collaboration platform by further improving the capabilities and increasing user penetration of its core office products, such as document collaboration, and virtual conferencing.

In addition, DingTalk will enhance its local application development platform to encourage the development and usage of more diversified digital business applications on DingTalk. As part of our ESG strategy, we are committed to corporate governance excellence and diversify as a board level and diversity at the board level. Earlier today, we announced two new independent Director’s appointments, Ms. Irene Lee, and Mr. Albert Ng are both respected business leaders with invaluable global insights as well as China experience.

I believe their participation will add great value to our board. In addition, Mr. [indiscernible] one of our Independent Directors will not seek re-election after his current term expiring in September. I would like to express our most sincere gratitude to Mr. Tong for his invaluable contribution to Alibaba over the years. Finally, I would like to talk about our thoughts on the path forward in the current macro environment. The external uncertainties, including but not limited to international geopolitical dynamics, COVID resurgence, and the China’s macro economic policies and social trends are beyond what we as a company can influence.

The only things we can do at this moment is to focus on improving ourselves. For example, as I mentioned early, we have made meaningful progress during the quarter in narrowing operating losses for several business units such as Taobao Deal, Taocaicai, Freshippo, Ele.me, Lazada and Youku. Through operating efficiency enhancement and cost optimization, we are still in the process of improving the quality of operations across the organization.

We are confident this is a result that we can deliver with certainty through our own efforts in a highly uncertain environment. Despite the challenges we are facing, our overall financial position remains healthy with strong free cash flow and net cash reserves which is our biggest advantage.

During uncertain times, we believe the best investment is to invest in ourselves to build our core capabilities, and to continue self-improvement. We will continue to focus on serving our high quality customers, building high quality infrastructure for digital commerce, and driving high quality technology innovations. We believe these will lay the foundation for our healthy and sustainable development over the long-term.

Thank you everyone for your time. I now will turn the mic over to Toby, who will walk you through the details of our financial statements.

Toby Xu

Thank you, Daniel. Let me start with financial highlights for the quarter. This quarter, our total revenue was RMB206 billion stable year-over-year. China commerce segment revenue slightly declined by 1% year-over-year to RMB142 billion, while cloud segment revenue grew by 10% year-over-year to RMB18 billion. Income from operations for the quarter was on RMB24.9 billion, a decrease of 19% year-over-year, primarily due to decreases in adjusted EBITDA. Adjusted EBITDA decreased by RMB7.3 billion to RMB34.4 billion. The decrease was primarily due to RMB7.2 billion decrease in China commerce segment EBITDA partly offset by loss reduction of RMB1.7 billion, or 36% in local consumer service segments.

Now let’s look at cost trends for the quarter, excluding SPC as a percentage of revenue. Cost of revenue ratio increased to 62% in June quarter, primarily due to firstly, higher proportion of our direct sales business, such as Freshippo and Tmall Supermarket, as well as growth in Alibaba Health direct sales businesses that resulted in increased the cost of inventory as a percentage of revenue.

And secondly, growth of Cainiao businesses, which led to increase in logistic costs as a percentage of revenue, which is partly offset by the reduction in delivery cost per order of Ele.me. Product development expenses ratio remained stable at 5% in June quarter, compared to the same quarter last year.

Sales and marketing expenses ratio decreased to 12% in June quarter, reflecting our efforts in optimizing user acquisition and retention spending across businesses. General and administrative expenses ratio increased slightly to 4% in June quarter. Non-GAAP net income was RMB30.3 billion, a decline of RMB13.2 billion year-over-year, mainly due to decrease in adjusted EBITDA and share of results of equity method investees. GAAP net income was RMB20.3 billion, a decline of RMB22.5 billion year-over-year, mainly due to decline in non-GAAP net income and decrease in net gains arising from change in market prices of our equity investments in publicly traded companies.

Cash flow and balance sheet as of June 30, 2022 we continue to maintain a strong net cash position of RMB340 billion or U.S. $51 billion. Our strong net cash position is supported by robust cash flow generation. In June quarter 2022, net cash from operation and free cash flow were RMB34 billion and RMB22 billion respectively. Majority of the difference is operating CapEx spending at RMB11 billion reflecting our investment in cloud businesses and logistics fulfillment infrastructure. During the quarter, we repurchased approximately RMB38.6 million of our ADS for approximately U.S. $3.5 billion under our share repurchase program.

Now, let’s look at our segment results. Revenue from our China commerce segment in June quarter was RMB142 billion, a decrease of 1% year-over-year. Customer management revenue decreased by 10% year-over-year to RMB72 billion. Taobao and Tmall physicals goods paid GMV decreased by mid single-digit. CMR growth lagged GMV growth this quarter, mainly due to higher order cancellations as a result of logistics bottleneck from COVID-19 resurgence, and restrictions that resulted in supply chain and logistics disruption in April and most of May.

In later May, as logistics capacity normalized. We saw recovering GMV driven by a successful June 18 Shopping Festival that was strongly supported by merchants and loyal consumers. If we further break down customer manual revenue growth into advertising and commission revenue, commission revenue recorded mid-teens declined due to higher order cancellations. Total advertising revenue declined slightly faster than that of paid GMV decline.

Direct sales and others revenue grew 8% to RMB65 billion, primarily driven by strong growth of online purchases of food, grocery, and FMCG goods that benefited Freshippo, Tmall Supermarket and Sun Art. Partly offset by softening offline sales due to COVID-19 impacts. The percentage of online sales of Freshhippo and Sun Art reached 68% and 36% respectively during the quarter. By leveraging our multiple direct sales businesses, and on demand delivery infrastructure. We believe we’re well positioned to better serve consumers increasing demand for on demand delivery of food, grocery, and daily necessities in the future.

China commerce segment adjusted EBITDA decreased by RMB7.2 billion to RMB43.6 billion in the quarter, which is mainly due to RMB8 billion decline in CMR revenue. We are making progress to improve efficiency of loss making businesses. The combined losses for Taobao Deals and Freshhippo narrowed by RMB1.5 billion year-over-year. Taocaicai losses increased moderately year-over-year and still delivered a robust GMV growth of more than 200% year-over-year. Its losses reduced significantly quarter-over-quarter driven by optimized pricing strategy, better sourcing capability and lowered operating costs.

Our international commerce segment revenue in June quarter was RMB15.5 billion, an increase of 2% year-over-year. Revenue from international commerce retail business declined by 3% to RMB10.5 billion reflecting declining revenue of AliExpress and Trendyol offset by positive revenue growth of Lazada. Revenue from our alibaba.com wholesale business grew 12% to RMB4.9 billion. The increase was primarily due to healthy 16% growth in value of transactions completed on alibaba.com. That led to an increase in revenue generated by cross border related value-added services.

Lazada delivered healthy positive revenue growth as a result of GMV growth and active increase in monetization initiatives that resulted in higher monetization rate. Trendyol revenue slightly declined due to ongoing depreciation of lira despite robust order growth of 46% year-over-year. AliExpress experienced that declining orders due to change in the EU’s VAT rules, depreciation of euro against U.S. dollar as well as ongoing supply chain and logistics disruptions due to the Russia-Ukraine conflict.

International commerce segment adjusted EBITDA loss widened by RMB537 million to RMB1.6 billion in June quarter. This was primarily due to increased investment in Trendyol as they invest and expand into local consumer services and international B2C businesses. Partly offset by reduced the losses of Lazada as a result of revenue growth and enhanced operating efficiency.

Revenue from local consumer services segment grew 5% to RMB10.6 billion, primarily due to more efficient use of subsidies, there were contra revenue of Ele.me. Local consumer services adjusted EBITDA loss reduced by RMB1.7 billion year-over-year to RMB3 billion primarily due to narrow losses of our To-Home business. Ele.me’s unit economics per order turned positive for the quarter, driven by increased average order value year-over-year, as well as its ongoing focus on optimizing user acquisition spending and reducing delivery cost per order.

Revenue from Cainiao after intersegment elimination was RMB12.1 billion in June quarter, an increase of 5% year-over-year, primarily contributed by increase in revenue from consumer logistics service as a result of service upgrades to enhance consumer experience, partly offset by the decrease in international orders for AliExpress. In June quarter 70% of Cainiao’s total revenue was generated from external customers. Cainiao adjusted EBITDA losses were RMB185 million, up by RMB39 million. The increase was primarily due to our investment in expanding the global smart logistic infrastructure, as well as reduce the profit of AliExpress fulfillment.

We will continue our efforts in building comprehensive logistic and fulfillment infrastructure in China and internationally, laying the foundation for sustainable long-term growth for our digital commerce businesses. Revenue from our cloud segment of intersegment elimination was RMB18 billion in June quarter, an increase of 10% year-over-year. Year-over-year revenue growth of our cloud segment reflected recovering growth of overall non-internet industries driven by financial services, public services, and telecommunication industries, partly offset by a decline in revenue from the top internet customer and online education customer, as well as softening demand from other customers in the China’s internet industry.

For a quarter ended June 30, 2022 contribution of cloud revenue after inter-segment elimination from non-Internet industries was 53% up by more than five percentage points, compared to the same quarter last year. Adjusted EBITDA of cloud segment, which comprised of Alibaba Cloud and DingTalk was a profit of RMB247 million in June quarter decreased by RMB93 million year-over-year. This is primarily due to our investments in technology and increase in colocation and bandwidth costs as a result of increased usage of DingTalk’s products and services from enterprises, schools, and organizations due to greater hybrid work adoption driven by COVID-19 resurgence since March 2022 in China.

Revenue from our digital medium and entertainment segment in June quarter was RMB7.2 billion, a decrease of 10% year-over-year, primarily due to decrease in revenues from Alibaba pictures, Youku and other entertainment businesses. Adjusted EBITDA was a loss of RMB630 million, up by RMB211 million year-over-year. Youku continued to narrow losses year-over-year, but was offset by increased the losses of other entertainment businesses due to COVID impact.

Let me wrap up with some final thoughts. Last quarter, we’ve share with you some of our key operating principles and financial objectives that include focus on high quality growth, improve operating efficiency, and optimize cost structure and maintain strong cash flow and net cash position. During the quarter, we have made progress in executing these objectives. We saw losses narrowed year-over-year for a number of our businesses. We generate the U.S. $3.3 billion in free cash flow and currently has about U.S. $50.8 billion in net cash position, which gives us the financial flexibility to grow the business and improve returns for shareholders.

Even though we are seeing a gradual demand recovery for China consumption businesses in the month of July. We believe there are still a lot of risks and uncertainties from slowing macro activities. Facing these challenges, we will focus on delivering high quality growth of our three core strategies in this highly uncertain environment as Daniel mentioned previously. Additionally, we will continue to focus on improving operating efficiency, optimizing costs, and invest in building long-term capabilities for our major businesses. Thank you. Now let’s turn to Q&A.

Rob Lin

Hi, everyone, for today’s call, you’re welcome to ask questions in Chinese or English. A third party translator will provide consecutive interpretation for the Q&A session. And our management will address your question in the language you ask. Please note that the translation is for convinced purpose only in the case of any discrepancy our management statement in the original language will prevail. If you are unable to hear the Chinese translation bilingual transcripts of this call will be available on our website within one week after the meeting. [Foreign Language].

Operator, please connect speaker and SI conference line now. Please start QA session already. Thank you.

Question-and-Answer Session

Operator

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

Ronald Keung

Thank you. [Foreign Language]. Thank you, Daniel and Toby for your earlier presentations. I note that you spoke to signs of recovery that you’ve seen from June onwards. I’m wondering if you could tell us more about the signs of recovery you’re seeing in terms of GMV and CMR. What the outlook looks like for the coming half year and how you see consumption recovering and developing in the medium to long-term?

Daniel Zhang

[Foreign Language] Thank you. Well, as regards the recovery that we’re seeing in consumption trends, certainly on our platforms, we saw that following the period of April, May going into June, signs of recovery certainly appeared in particularly with the recovery of delivery and logistics capabilities, the normalization of logistics. And certainly in this year’s 618 Shopping Festival, we saw very good performance with positive growth achieved for the quarter and we continue to see this positive trend of recovery continuing through July and we expect that July will be even better than June.

[Foreign Language] Another important piece in this recovery relates to consumer psychology and consumers expectations for the future, we can look at publicly available data. Of course, we look at GDP figures, figures on a nationwide retail sales. But one data point that we pay a lot of attention to is consumer spending as a proportion of disposable income.

The figures from the National Bureau of Statistics show that that figure consumer spending as a percentage of disposable income in the first half of the year was 64% as compared against 69% in the previous year in 2021. So that proportion has been down in the first half of the year, and even more so in urban areas than in rural areas. And I think that’s an entirely normal reaction on behalf of consumers in terms of consumer sentiment in the context of the pandemic. So certainly although we are seeing signs of steady recovery, in consumption, I think it will take more time for that to fully play out and for consumer confidence and sentiment to fully recover.

[Foreign Language] In terms of merchants, certainly what we see in our China retail marketplaces is the overall strong positive sentiment from merchants to take full advantage of our marketplaces and the digital tools available there to drive their business growth. The strong enthusiasm on the part of merchants to drive their sales. All merchants have their own challenges, especially during this period, and merchants continue to want to take advantage of what we have to offer to overcome challenges and drive their sales.

Ronald Keung

Thank you.

Rob Lin

Next question.

Operator

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

Thomas Chong

[Foreign Language] Thanks management for taking my questions. I have two questions. The first question is about the EBITDA, we have seen the EBITDA improvement is much better than market expectations. Just wonder how should we think about the China commerce EBITDA as well as overall the EBITDA in terms of main issues expecting it to turn, reaching the inflection point positive year-on-year growth in coming quarters. And on the other hand, we are also noticing that the one piece and reason that is also doing well as well, just want to ask about our thoughts about the strategies as well as the revenue contribution and margin profile in the long run. Thank you.

Toby Xu

[Foreign Language]. Thank you. I will take the first part of the question relating to our cost control. As you’ll recall, during last quarter’s earnings call we indicated that we would be prioritizing cost structure optimization and cost control. On this front, we’ve implemented a whole range of different strategies across our different businesses. And I think certainly what you’re seeing this quarter is that this overall cost control strategy has been paying off with good results.

[Foreign Language]. In the coming quarters and the remainder of this fiscal year, we will continue to pursue the strategy of cost optimization and cost control. We’ll continue to implement the policies that we’ve defined to optimize our cost structure to further drive efficiencies. And of course, the key to all of this really is execution. We will continue to execute on these policies for the coming few quarters.

[Foreign Language]. As Daniel mentioned, and as I also mentioned in my script, we’re in a financial position that allows us to have considerable flexibility in terms of our approach. Therefore, we will be seeking a balance between cost optimization and control on the one hand, while also continuing to make important investments, investing in technology, and investing in other core areas to build our capacities to better position ourselves for sustainable and long-term growth.

[Foreign Language]. The other part of your question had to do with our EBITDA margin. And certainly, as we continue to optimize our cost structure and drive further efficiencies, the improvements will be reflected in our EBITDA margin. And we expect that as we further pursue high quality growth and high efficiency growth, we’ll continue to achieve that kind of improvement in our EBITDA margins.

Daniel Zhang

[Foreign Language]. Thank you. This is Daniel. But before I take the other part of the question about the 1P model, I’d like to add a few more comments on that previous piece to do with cost structure optimization and efficiency. And what I’d like to highlight is that for Alibaba, pursuing cost optimization and driving efficiency is not a decision that’s primarily driven by financial considerations rather it’s very much informed by our strategic choice and our judgment of the overall macro environment we find ourselves in.

[Foreign Language]. As I said in my prepared remarks both last quarter and this quarter, it is Alibaba’s consistent strategy to pursue high quality development. That means focusing on serving high quality users, it means investing in high quality technology, innovation, and providing high quality digital infrastructure for commerce.

All of this allows us to support business development and achieve sustainable and healthy financial results and we will very much continue to do so.

[Foreign Language]. Going into this new fiscal year, now in the first quarter on the consumer side, I’m looking at the changes in the macro environment overall. And given that we have already achieved the important milestone of having 1 billion AACs. Our future strategy going forward will shift from a focus on new user acquisition, because we already have within that 1 billion AAC user base essentially all of the active consumers in China. So instead going forward, we’ll focus on building our relationship deepening our relationship with our existing user base better segmenting that user base and ensuring that we have compelling propositions for all tiers and cohorts within that user base to continually grow our share of wallet with the existing consumers that we have. And all of this will, we believe be conducive to serving higher efficiency and improving margins.

[Foreign Language]. To elaborate further on our consumer segmentation strategy, because Thomas noted the improvement that we’ve made in the performance of core commerce segment. And I think a lot of that has to do with the investments that we’ve made over the past two years to build differentiated matrix of offerings for these different consumers within our user base, providing differentiated demand two different cohorts of consumers through this matrix. So the investments that we’ve made over the past couple of years in that matrix are very much starting to pay off and have put us in a very solid position to continue to grow our share of wallet with all of those consumers and of course as a result to further improve our financial performance figures.

[Foreign Language]. And this, of course is also highly relevant to your other question about the 1P model. For Alibaba when it comes to the 1P model and the 3P model, it really comes down to whichever model is best able to satisfy the demands of our consumers. That’s what we want to give the consumers.

[Foreign Language]. However, in developing our 1P strategy, we have very much redefined what 1P is all about and how it works, because we don’t want to become a traditional e-tailor that erect a wall between brands on the one hand and consumers on the other. Very much to the contrary, within our 1P model we’re buying from the brands and selling to consumers. But we’re giving brands visibility and giving them the ability to engage with their consumers to achieve insight into what’s happening with their consumers. And also of course to drive further efficiency around their supply chains and their logistics operations.

[Foreign Language]. And certainly we will not take advantage of the 1P model to engage in price competition.

Rob Lin

Next question please.

Operator

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

Alex Yao

[Foreign Language]. Thank you, I have some follow-up questions regarding the efforts the group is making to optimize costs and drive efficiencies. In particular, regarding the underlying commercial logic you talked about as a matter of group strategy, better segmenting consumers and driving growth of wallet share. But are you seeing the pace of digitalization playing out more slowly in some segments than others? And how are these efficiency and cost optimization strategies playing out in the different segments? Also in relation to the early stage businesses, I’m talking about the newer businesses that are still loss making, how are you balancing the need to control costs and drive efficiency on the one hand against the need for long-term investment and growth?

Daniel Zhang

[Foreign Language]. Thank you. Well, in terms of strategy, something very important we’ve been doing is building a complete consumer matrix, with Taobao as our flagship app, Taobao deals to serve consumers who are more price sensitive, and making forays into consumer group buying which has become very hot with Taocaicai. We also have Freshhippo and Idle Fish, all of these pieces with their respective very clear value propositions and target use cases and consumer groups.

And what’s extremely important for us is that we have consumer mindshare. This is the underlying commercial logic. And this is in fact, the most valuable asset that Alibaba has as a company is that consumer mindshare. We don’t need to be paying money to induce the consumers to come back. We have that mindshare of the consumers. And that’s what’s capable of driving a lot of organic traffic, that we get consumers coming back even when their willingness to consume may have weakened during the pandemic period coming to us. And as I shared with you, our DIU figures and pageviews have remained relatively stable throughout that period.

So, we have the 1 billion consumers within our AAC user base and a strong differentiated matrix of different apps. And this positions us to further improve that mindshare and capture the opportunities.

[Foreign Language]. So this is certainly relevant to what we can call the wide area network, the entire nationwide e-commerce market. But it’s particularly relevant also to what we can call the local area network or local commerce, regional and intracity commerce, where we’ve been focused on different cities and regions, with the businesses including Taocaicai and Freshippo and Ele.me, because you need to achieve economies of scale in a particular city or particular region to drive down your unit costs in that particular locality. So after several years of experience in this space, we’ve come to realize that it’s not really significant to look at the entire nationwide market as a whole, really, you have to look at one city or one region in terms of whether you’re achieving that economy of scale there and take a city by city or region by region approach. So that’s something I would like to share with all of the analysts on the line. That’s how you can develop a truly three dimensional perspective.

And in line with that perspective, we’re deploying our strategy where we select different cities and regions and prioritize resources to develop there on a city by city, region by region basis to achieve those local economies of scale.

[Foreign Language] In the context of the current macroeconomic environment, as I mentioned earlier, our initiatives to drive better cost efficiency are not driven from a financial perspective. And in terms of our strategy, we will continue to make investments where investments are needed and justified, we will continue to strengthen the parts of our matrix that need strengthening, we’ll continue to invest in building our underlying capabilities and improving our relevant services in order to create long-term value.

Rob Lin

Okay, next question.

Operator

Thank you. The next question comes from John Choi from Daiwa. Please go ahead.

John Choi

Thank you for taking my question. My question is on Cloud. I think, Daniel you mentioned on your prepared remarks, [indiscernible] growth has slowed down in 2Q. But as we see economy picking up a bit since 2Q, as you spoken on July, like how should we think about the cloud revenue growth on momentum for the second half of the year? And on top of that, I think management did mentioned previously, that [indiscernible] potential monetization opportunities, where are we right now with these initiatives? And are you seeing the macro uncertainty companies kind of pushing back, deployments or initiatives and if so, how would that impact our strategy going forward? Thank you.

Daniel Zhang

John, your first part of the question was broken up. Can you just quickly summarize what you were asking?

John Choi

Okay, well, my question was on basically on the cloud revenue growth opportunity in the second half, as I think Daniel did mentioned why the 2Q was a little bit softer than usual. So as we look into the second half, how should we think about the growth opportunities on the cloud business?

Daniel Zhang

[Foreign Language]. Let me answer this question, I think we still need to look at the macro landscape. I think if you look at the IT expenditure I mean as a percentage of total GDP, I think China is far below like U.S. and other developed or some developed countries. So I think that’s the biggest landscape. And the second biggest thing is I said the industrial digitalization is a trend. And all the companies, all the sectors, cross industries, cross sectors need digitalized. So I think that’s the second very important thing. So I think, in this regard, I think General, if you look at big picture, this is I think it’s not a — it’s not a cyclical opportunity. It’s like a structural opportunity. I mean for the long-term. And so that’s why I think in China and in the global market, we are actually we position cloud as one of the core strategies.

[Foreign Language]. Well, the next point I want to make is that if we look at the market opportunities, actually, if you if we revisit the fast growth of the cloud business in the previous years, I think that one of the very important driver was the Internet companies because these companies are digital savvy, and they won, they need to, they have big data, and they will make full usage of the Big Data, and they need a computing power. So I think this is also our Alibaba Cloud, a very huge opportunity to transform a cloud computing from a technology to a real business.

And now we are very happy that we are in the leading position in this sector. Well, I think going forward, especially in China, with the slowdown of the Internet sector, and many people talk about the — what’s the next generation after this consumer Internet, actually the consensus is very straightforward, is the industrial digitization. So I think then now we are coming to an era every company become an Internet company, actually not Internet as a digital company. So I think that so that’s why internally we highlight the revenue contribution from non-Internet companies and we’re happy to see the percentage point is increased like as we discussed this quarter, we improve by five percentage point as compared to the same quarter last year.

So I think going forward, we will try to capture the opportunity in vertical industries. And of course I mean our continuous investment and innovation in the proprietary technology.

[Foreign Language]. No, of course when it comes to company’s willingness to spend on cloud and invest in cloud technology, you also need to look at the overall economic growth picture of the market as a whole, when the economy is doing well and companies are growing fast, performing well, they’ll be of course more willing to invest. So there is of course a macro impact there as well. But this is also why in my script, I emphasized why we’re looking closely at Sunrise industries because within any economic context, there will always be some sectors and some companies that are on the rise that can outperform the economy as a whole and we want to prioritize service to them.

Rob Lin

Thank you. The next question?

Operator

Thank you. The next question comes from Yang Bai from CICC. Please go ahead.

Yang Bai

[Foreign Language]. Thank you. My question has to do with changes that we’ve seen in user behavior over the past few years with more and more user time being spent consuming short form video, I’m wondering if you can talk about the impact that that’s having and can be expected to have on e-commerce going forward. Do you expect to continue to see fast growth there? Or do you think that it’s already a matured situation that we’re seeing today and given this trend in order to better serve consumers and merchants, what strategic changes will Alibaba proactively seek to make and what kinds of changes will Alibaba not make?

Daniel Zhang

[Foreign Language]. Well, I would like to begin by clarifying this concept to avoid any confusion. Short form video is a format, a content format that can be used to convey information regarding a product, whereas e-commerce is an industry and within the e-commerce industry, the use of short form video as one of multiple formats is nothing new at this point.

[Foreign Language]. In fact, I can disclose to you that on the Alibaba’ Mobile Taobao App today, more than one half of products are now being displayed to consumers via the short form video modality, so if five years ago it would have all been images and text. Today, it’s already more than half of that content is in video form.

Daniel Zhang

[Foreign Language]. So I believe that your question really isn’t about the relationship between short form video and an e-commerce. It’s really about the relationship between entertainment and e-commerce. And as I said earlier, the most valuable asset that Alibaba owns today that we built up over the years is mindshare. Users come to Alibaba with a consumption mindset.

[Foreign Language]. No, of course, it has often been said that that shopping is fun. Consumption is a kind of entertainment. And to that extent, Alibaba is in the entertainment industry as well. But we’re hyper focused on one subcategory of entertainment, namely shopping, and consumption. It’s a very specialized area that requires a lot of know-how and that is very much our focus. Now, we’ll of course going forward continue to learn about and adopt all kinds of new technologies as we’ve done over the years, going mobile, introducing customization, personalization, adopting short form video.

And I’m certain that short form video is not the last technology that will come along and new technologies will continue to come — the consumer experience both in the consumption context and in the entertainment context. But I think it’s important to understand what is the entree and what is the dessert.

Rob Lin

Next question.

Operator

Thank you. Your next question comes from Alicia Yap from Citi Group. Please go ahead.

Alicia Yap

Hello, thank you. [Foreign Language]. Thank you. My question goes to Daniel. I’d like to ask please what at this stage is the biggest obstacle or challenge faced by Alibaba? What is your talent strategy for talent retention? And also what potential areas of investment is Alibaba interested in? That you’re not yet in, but you might get into for example, new energy? Thank you.

Daniel Zhang

[Foreign Language]. Thank you. Well, you asked about the biggest challenge faced by Alibaba. Alibaba, like any other company, anywhere, is like a micro cell in the social organism. Alibaba is where it is today. And it’s achieved success. Because of the overall economic growth story, the tremendous successful economic growth story of China that has provided the opportunities that have allowed us to succeed over the years and going forward, we would certainly hope to continue to see China continue to get better see social development, continue to make progress. Because the bigger and better the pond, the bigger and healthier the fish in the pond can become.

And we can further help people realize their aspiration for a better life as things get better across the board. So certainly the macro environment is an important underpinning, going forward as it has been in the past. But as a micro cell in that social organism, Alibaba continues to practice social responsibility. We seek to create jobs, to empower SMEs and to better marry technology with commerce for the betterment of society. We’ve always done that and we will continue to do so.

[Foreign Language]. You also asked about talent and talent is, of course absolutely critical for Alibaba, we rely on talent to do everything that we do to serve our customers. Our talent bases are store of extremely invaluable know-how within the company. So of course, we continue to treasure our talent and invest in talent, and to recruit high quality talent. And on that note, I can share with you now that we’re in August, it’s the time of year when university graduates have just left college, and they’re looking for jobs. And despite all of the macro uncertainties that we see out there, I’m pleased to tell you that we’ve hired 6,000 fresh university graduates from across China, most of them have already reported to work and are on the job at Alibaba.

So this, of course, is an important contribution that the company is making to society by providing these jobs. Of course, it’s also something that Alibaba very much needs. We need to continue to stay fresh, we need to take on that fresh blood. If you like. This is refreshing the metabolism of our company, which is indeed a young internet company, but one with some considerable history that needs this kind of ongoing refreshment.

[Foreign Language]. And then Alicia, the other part of your question had to do with new investment opportunities in emerging new growth areas. The fact is that there will always be an infinite number of new technologies and new industries on the rise. But for any company and for Alibaba, we need to view those opportunities through the lens of our core strategy.

[Foreign Language]. New Energy is of course a huge opportunity. And for Alibaba, we seek to leverage that opportunity mainly in the context of our cloud business, because as I’ve talked about, in the sunrise industries, new and emerging industries, it’s possible to leapfrog to a higher level faster. Jumping past the previous development stages, you can quickly adopt these new technologies and fresh approaches. The same is also true of autonomous vehicles and the metaverse as well, linking that to our business consumption and logistics.

So the metaverse in relation to our consumption and autonomous vehicles in relation to our logistics. New energy is very much linked to our cloud business. So we’re finding opportunities to leverage the emergence of these new technologies and these new industries in our existing businesses viewing it through those lenses. The other piece is, of course, globalization. I’ve often talked about our three core strategies of consumption, cloud and globalization, two horizontal and one vertical.

So we’re looking at how we can leverage these technologies in terms of commerce, consumption, and cloud but also looking at whether some kinds of knowhow from China can be taken into global markets, or whether in global markets there, there are opportunities that can be pursued there, but those continue to be our three core strategies.

Rob Lin

Okay. Well thank you everyone for joining our conference call today. If you have any questions, please feel free to reach out to the Alibaba IR team. Thank you.

Operator

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

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