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Alibaba executives expect most businesses to break even within one to two years and to complete the conversion to a major listing in Hong Kong by the end of August.

On August 15, Alibaba (NYSE: BABA, 09988.HK) released its first quarter financial report for fiscal year 2025 ending June 30, 2024. In the quarter, Alibaba's revenue was 243.24 billion yuan, a year-on-year increase of 4%, and the estimated revenue was 249.85 billion yuan; adjusted EBITA (a non-GAAP financial indicator) fell 1% year-on-year to 45.035 billion yuan, in line with expectations.

Overall, Alibaba Cloud's adjusted EBITA profit increased by 155% year-on-year, Taotian Group stabilized its market share, and overseas e-commerce losses widened due to continued investment. Alibaba's local life business, big entertainment, and "other businesses" including Hema are still losing money, among which local life and "other businesses" have narrowed losses.

Alibaba also announced that due to the announcement of the 2024 dividend, in accordance with the terms and conditions of the notes, effective June 13, 2024, the initial conversion rate of the notes will be adjusted from 9.52 ADSs per $1,000 principal amount of notes to 9.73 ADSs per $1,000 principal amount of notes; and the maximum conversion rate of the notes will be adjusted from 12.38 ADSs per $1,000 principal amount of notes to 12.65 ADSs per $1,000 principal amount of notes. After the adjustment, the total number of common shares that can be issued after the notes are fully converted increased from 495 million shares to 506 million shares.

As of the close of the U.S. stock market on the 15th, Alibaba rose 0.09% to US$79.540 per share.

Taotian's revenue fell by 1%, and it will charge merchants technical service fees in September

"For Taobao and Tmall businesses, the company's current priority is to improve the user's purchasing experience, thereby driving user purchase frequency and GMV growth. After the initial market share stabilizes, starting from this quarter,We will begin to accelerate progress on some of our projects aimed at improving monetization rates and commercialization measures." said Wu Yongming, Chief Executive Officer (CEO) of Alibaba Group.

The financial report shows that Taotian Group's revenue was 113.337 billion yuan, down 1% year-on-year; adjusted EBITA also fell 1% year-on-year to 48.810 billion yuan. Alibaba said that this was mainly due to increased investment in user experience (thereby improving consumer retention and purchase frequency) and technological infrastructure, which was partially offset by narrowing losses in several businesses.

Among them, the revenue from China's retail business was 107.421 billion yuan, a year-on-year decrease of 2%, due to a 9% decrease in direct sales and other income. The decline in direct sales was due to the decline in sales of consumer electronics and electrical appliances caused by Alibaba's active reduction of several direct sales businesses, which was partially offset by the increase in sales of groceries. Customer management revenue increased by 1% year-on-year, mainly due to the high single-digit growth of online GMV, which was partially offset by the decline in Take rate (monetization rate). The year-on-year decline in Take rate was mainly due to the increasing proportion of GMV generated by emerging models with lower current monetization rates within Taotian Group.

The wholesale business revenue of domestic e-commerce increased by 16% year-on-year to 5.952 billion yuan, mainly due to the increase in revenue from value-added services provided to paid members.

Overall, although both revenue and net profit decreased by 1% year-on-year, Taotian Group's total merchandise volume (GMV) increased by high single digits year-on-year, the number of buyers and purchase frequency continued to grow, and the order volume achieved double-digit growth year-on-year.

Wu Yongming stated at the earnings conference that Taotian has achieved high user repurchase rates in many new product forms, such as live streaming, "10 billion subsidies" and other new product forms that have been invested in, but the monetization and commercialization of these new products and merchants require a certain amount of time to promote; the advertising product "full site promotion" was launched in April and has gradually begun to accelerate, and it is expected to see obvious results and progress within 6 to 12 months after its launch.

In addition, at the earnings conference, Alibaba Group Chief Financial Officer Xu Hong mentioned that Alibaba plans to charge Taobao and Xianyu merchants a technical service fee in September, which is about 0.6% of the basic software service fee. "This part of the collection is based on the merchant's confirmed receipt GMV. The charging ratio will be implemented after fully considering industry practices and adopting merchant feedback. We will also fully consider the situation of small and medium-sized merchants. For small and medium-sized merchants whose annual GMV is lower than a certain amount, their annual service fees will be fully refunded, or a certain amount will be provided."

Xu Hong predictsThe service fee collection will gradually start to contribute to revenue in the remaining quarters of this fiscal year, that is, within 7 months after September.。

In terms of overseas e-commerce, Alibaba International Digital Business Group (AIDC), managed by Jiang Fan, saw revenue increase by 32% year-on-year to RMB 29.293 billion. The strong performance was driven by the growth of cross-border business, especially the AliExpress Choice business. Adjusted EBITA was a loss of RMB 3.706 billion, a year-on-year increase of 782%, mainly due to increased investment in AliExpress and Trendyol cross-border businesses, partially offset by a significant reduction in operating losses due to improved monetization rates and operating efficiency of Lazada.

Jiang Fan revealed that Lazada achieved EBITDA (earnings before interest, taxes, depreciation and amortization) profit for the first time in July, and hopes to continue to optimize profitability while maintaining market share. "In the next few quarters, we will continue to optimize efficiency while pursuing healthier growth."

More than half of Alibaba Cloud's revenue growth in the future will be driven by AI products

"We see that customers have very strong demand for AI and related products, and this demand is still far from being met. Judging from the order situation, the trend of external customer revenue achieving double-digit growth in the second half of the fiscal year is very clear. At present, the demand for traditional CPU-based cloud computing is relatively limited, while GPU-based AI product development is growing rapidly. Therefore, more than half of the future revenue growth may come from the promotion of AI products." Wu Yongming said.

Wu Yongming said that although macroeconomic conditions may lead to a slowdown in corporate demand in some industries, Alibaba has not seen this in its cloud business. On the contrary, those companies that rely on digitalization have significantly increased their AI budgets this year.

The financial report shows that Alibaba Cloud's revenue in the quarter increased by 6% year-on-year to 26.549 billion yuan, driven by double-digit growth in public cloud business and increased adoption of AI-related products. Adjusted EBITA profit increased by 155% year-on-year to 2.337 billion yuan.

Wu Yongming also mentioned that 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 chose to develop an open source large language model, which can help developers develop products better and may prompt them to continue to choose Alibaba's services in subsequent large-scale deployments.

Most businesses will break even within 1 to 2 years

In addition to the above businesses, Alibaba Local Life Group's revenue increased by 12% year-on-year to 16.229 billion yuan, mainly driven by the growth of orders from AutoNavi and Ele.me, as well as the growth of marketing service revenue. This quarter, thanks to improved operational efficiency and increased business scale, the adjusted EBITA (operating profit and loss) loss of the Local Life Group continued to narrow from 1.982 billion yuan in the same period last year to 386 million yuan, exceeding market expectations.

The revenue of the Greater Entertainment Group was 5.581 billion yuan, a year-on-year increase of 4%, mainly driven by the GMV and revenue growth of its online ticketing platform for performances and events. In this quarter, Alibaba Greater Entertainment Group turned from profit to loss year-on-year.

Alibaba's other revenue was 47 billion yuan, up 3% year-on-year, mainly due to the growth of revenue from Hema, Ali Health and Smart Information, partially offset by the decline in revenue from Lingxi Interactive Entertainment and Sun Art Retail. Adjusted EBITA was a loss of 1.263 billion yuan, and the narrowing of losses was mainly due to the improved operating performance of Sun Art Retail, Hema, Ali Health and Lingxi Interactive Entertainment, partially offset by the increased investment in technology business.

Wu Yongming said that in addition to the two core businesses of e-commerce and cloud, for the group's important Internet technology business, Alibaba has carefully evaluated and analyzed the product capabilities of each business and the current market competition situation, and readjusted its business strategy. Most businesses will increase the priority of commercialization capabilities while maintaining product competitiveness. This trend has already emerged in this quarter and will continue in the following quarters.

Wu Yongming said that most of Alibaba's businesses will achieve break-even within 1-2 years and gradually begin to contribute to scale profitability.

As for whether there is a timetable and details for each segment to break even, Xu Hong said that in the next one to two years, in addition to Taobao and Tmall, which serve the core businesses, it is expected that other business segments that are still losing money will gradually reduce losses and achieve break-even by improving efficiency and monetization capabilities, and eventually move towards scaled profitability. "We will improve investment efficiency and monetization capabilities. For example, increasing the number of orders for local services is the key. In addition, we need to improve unit economic benefits, and the online car-hailing business also needs to improve unit economic benefits."

Response to the decline in free cash flow: investment in AI and downsizing of some businesses

At the earnings conference, Xu Hong said that Alibaba is seeking a major listing conversion in Hong Kong. The company will hold a shareholders' meeting on August 22. There is such a proposal in the shareholders' meeting. If the shareholders' meeting approves it, it is expected that the major listing conversion in Hong Kong will be completed by the end of August 2024. "As for whether to connect to the Hong Kong Stock Connect in the future, we still have to fulfill some procedures under the different rules of each exchange. We should follow the procedures and it can be achieved."

It is worth noting that the financial report shows that Alibaba's free cash flow (a non-GAAP financial liquidity indicator) was 17.372 billion yuan in the quarter, a decrease of 56% from 39.089 billion yuan in the same period of 2023.

In this regard, Alibaba management said that, first, it is investing in AI, and second, some businesses are shrinking in size, some of which are planned to shrink. "For example, some direct sales businesses of Taobao and Tmall are our active choice, because the model efficiency of these businesses may not be high. Retail businesses purchase from suppliers and have a 60 or 90-day payment period, which can bring positive cash flow. If the scale of such businesses shrinks, it is equivalent to a certain outflow of working capital, but such an impact is temporary. After the business scale stabilizes, there will be no such outflow."

During the quarter ended June 30, 2024, Alibaba repurchased a total of 613 million common shares (equivalent to 77 million American Depositary Shares) at a total price of US$5.8 billion, including approximately US$1.2 billion of American Depositary Shares repurchased through private market transactions concurrently with Alibaba's convertible notes issuance on May 23, 2024.

As of the end of the quarter, Alibaba's outstanding common shares were 19.024 billion shares (equivalent to 2.378 billion American depositary shares). Compared with March 31, 2024, there was a net decrease of 445 million common shares, a net decrease of 2.3% (after taking into account the shares issued by Alibaba under the equity incentive plan).