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On August 15, Alibaba (BABA.NYSE/09988.HK) released its first quarter financial report for fiscal year 2025 (three months ending June 30, 2024). The financial report showed that Alibaba's revenue for the quarter was 243.24 billion yuan, compared with 234.156 billion yuan in the same period last year, a year-on-year increase of 4%. Operating profit was 35.989 billion yuan, a year-on-year decrease of 15% or 6.501 billion yuan. Adjusted EBITA (a non-GAAP financial indicator) fell 1% year-on-year to 45.035 billion yuan.

Alibaba said in its financial report that the decline in operating profit was mainly due to the reversal of 6.901 billion yuan in equity incentive-related expenses in the same period last year. In the same period last year, Alibaba adjusted the equity incentives granted to employees by Ant Group based on market value. The decline in adjusted EBITA was mainly due to increased investment in e-commerce business. The financial report also showed that Alibaba's net profit attributable to ordinary shareholders fell 29% year-on-year this quarter, and non-GAAP diluted earnings per American depositary share were 16.44 yuan, a year-on-year decrease of 5%.

Overall, the revenue and profit growth of Alibaba's domestic e-commerce Taobao Group continued to be under pressure. Taobao and Tmall stabilized their market share in the just-concluded 618, but the cost of improving consumer experience is also increasing. The revenue of Alibaba International Digital Business Group and Cainiao continued to grow, but they are still in a "burning money" mode overseas. Alibaba Cloud achieved revenue and profit growth, with adjusted EBITA profit increasing by 155% year-on-year. Ele.me's operating efficiency improved and its business scale increased, and the loss of the local life group narrowed.

E-commerce investment increases, profits are under pressure

The financial report mentioned that in the just-concluded 618, Taotian achieved strong growth in GMV and maintained a stable market share. However, Taotian Group's revenue declined during the reporting period.

The financial report shows that Taotian Group achieved double growth in the number of buyers and purchase frequency in the quarter, and the order volume achieved double-digit growth year-on-year. The number of 88VIP members continued to grow by double digits year-on-year, exceeding 42 million. However, behind the growth in orders, Alibaba's investment costs in e-commerce are also increasing.

Data shows that Alibaba China's retail business revenue fell 2% this quarter, and the financial report said that this was mainly due to a 9% drop in direct sales and other revenue. Thanks to GMV growth, Taotian customer management revenue increased by 1% year-on-year, but adjusted EBITA fell by 1%, mainly due to increased investment in user experience (thereby improving consumer retention and purchase frequency) and technology infrastructure, which was partially offset by narrowing losses in several businesses.

In the future, Taotian Group may increase revenue by adjusting the business rules for merchants. Starting from September 1 this year, Alibaba will charge all merchants including Taobao and Tmall a "basic software service fee" of 0.6% of the order turnover, and cancel the annual fee of 30,000 and 60,000 yuan charged only to Tmall merchants. At the same time, Xianyu also announced that it will charge all sellers a basic software service fee of 0.6% from September 1, with a maximum charge of 60 yuan per transaction.

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In terms of overseas e-commerce business, the cross-border fulfillment services of the International Digital Business Group and Cainiao continued to develop in a coordinated manner, and both achieved rapid revenue growth, but at the same time, the International Digital Business Group's losses widened and Cainiao's profits declined. On the road to overseas expansion, Alibaba is still in the investment stage.

According to the financial report, this quarter, Alibaba International Digital Business Group's revenue increased by 32% year-on-year, and Cainiao's revenue increased by 16% year-on-year to 26.811 billion yuan. At the same time, due to the increase in investment in AliExpress and Trendyol's cross-border business, Alibaba International Digital Business Group's adjusted EBITA loss in the reporting period was 3.706 billion, compared with a loss of 420 million in the same period last year. Due to the increase in investment in cross-border logistics fulfillment solutions, Cainiao's adjusted EBITA fell by 30% this quarter.

Recently, Lazada announced that it achieved positive adjusted EBITDA in July and turned losses into profits. In the fierce competition among overseas cross-border e-commerce platforms, how to improve operating efficiency and achieve profitability of more businesses while maintaining market scale is becoming an important issue for Alibaba.

AI drives Alibaba Cloud back to growth

In addition to e-commerce, Alibaba Cloud is regarded as another core business of Alibaba.

According to the financial report, Alibaba Cloud's revenue increased by 6% to 26.549 billion yuan this quarter, of which AI-related product revenue achieved triple-digit growth, public cloud business achieved double-digit growth, and adjusted EBITA profit increased by 155% year-on-year, reaching 2.337 billion yuan in the quarter. Alibaba stated in the financial report that Alibaba Cloud's substantial profit growth was mainly due to its focus on public cloud strategy and improved operational efficiency. Previously, Alibaba Cloud determined the "AI-driven, public cloud first" strategy to reduce low-profit project-based orders.

AI has driven the growth of Alibaba Cloud's revenue. The financial report shows that Alibaba Cloud's external revenue (excluding cloud revenue from Alibaba's affiliated companies) increased by 6% year-on-year in the quarter, and the number of paying users of Alibaba Cloud's AI platform Bailian increased by more than 200% from the previous quarter.

"We are confident that Alibaba Cloud's revenue from customers outside the Alibaba Group will resume double-digit growth in the second half of the fiscal year and gradually accelerate. With high-intensity R&D investment, we will maintain sustained profitable growth. Alibaba CEO Wu Yongming said in the earnings call that in the future, Alibaba Cloud will continue to optimize its cloud product structure, focus on competitive, sustainable gross profit, and replicable public cloud products, and strengthen the synergy of cloud products in the AI ​​era, helping old customers to implement new AI needs on Alibaba Cloud, and enabling AI-native companies to grow and succeed on Alibaba Cloud.

It is worth mentioning that this quarter, Alibaba's free cash flow (a non-GAAP financial liquidity indicator) fell 56% year-on-year. Alibaba stated in its financial report that the year-on-year decline mainly reflected Alibaba's increased spending related to Alibaba Cloud infrastructure and other changes in working capital due to factors such as Alibaba's plan to reduce direct sales.

In addition, the financial report shows that driven by the improvement of Ele.me's unit economic benefits and the expansion of transaction scale, the losses of the home delivery business continued to narrow. Alibaba Local Life Group's quarterly adjusted EBITA (operating profit and loss) loss narrowed to 386 million yuan from 1.982 billion yuan in the same period last year, exceeding market expectations.

Alibaba management said in a financial report conference call that in addition to core businesses such as Taobao Tmall and Alibaba International Digital Commerce, loss-making businesses such as local life are improving their monetization capabilities and operating efficiency. "We expect that most businesses will gradually achieve break-even within 1 to 2 years and gradually begin to contribute to scale profitability."

After the financial report was released, Alibaba's US stock price fell nearly 4% in pre-market trading. The stock price rose after the opening. As of press time, Alibaba's US stock price was quoted at US$80.97 per share, up 1.89%.