Alibaba Group - Q1 2025

Transcript

Operator (participant)

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group's June quarter 2024 results conference call. At this time, all participants are on 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 (Head of Investor Relations)

Good day, everyone, and welcome to Alibaba Group's June quarter 2024 results conference call. With us are Joe Tsai, Chairman, Eddie Wu, Chief Executive Officer, Toby Xu, Chief Financial Officer. We have also invited Jiang Fan, Co-Chairman and CEO of Alibaba International Digital Commerce Group, to join the call. This call is also being webcasted from the investor relations 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, including, without limitation, statements about our strategies and business plans, as well as our belief, expectation, and guidance about our business prospects, such as the future growth of our business, revenue, take rate, profitability, and return on investments and share repurchases.

Forward-looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our expected expectations. For detailed discussion of these risks and uncertainties, please refer to our latest annual report on Form 20-F and other documents filed with the SEC or announced on the website of 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 obligation to update these statements except as required under applicable law. Please note that certain financial measures that we use on the call, such as Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBITDA, Adjusted EBITDA margin, non-GAAP net income, non-GAAP diluted earnings per share or ADS and free cash flow, are expressed on a non-GAAP basis.

Our GAAP results and reconciliation of GAAP to non-GAAP measures can be found in our earnings press release. Unless otherwise stated, growth rates of all stated metrics mentioned during this call refers to year-over-year growth versus the same quarter last year. With that, I will turn over to Eddie.

Eddie Wu (CEO)

Hello, everyone. In the new fiscal year, our strategies of user-first and AI-driven are starting to bear fruit. This quarter's results reflect continued steady growth momentum. Taobao and Tmall Group achieved steady year-over-year growth in orders and in GMV. Alibaba International Digital Commerce, AIDC, revenue maintained strong growth. Alibaba Cloud's revenue, excluding Alibaba consolidated subsidiaries, returned to positive growth, notably driven by core public cloud and AI products. Across other segments, we achieved better operational efficiency and monetization capabilities to varying degrees. This drove significant improvement in some loss-making businesses. Taobao and Tmall Group maintained its user-first strategy and continued to invest in key capabilities, aiming to deliver quality products and services at attractive prices across diverse shopping needs of consumers. This quarter saw steady growth in GMV and order volume, driven by a notable increase in purchase frequency.

Internal and external data about e-commerce players' market share dynamics indicates a positive trend in our gradual market share stabilization, further validating the effectiveness of our investments in user experience. 88VIP members reached 42 million by quarter end. We will continue to explore and improve program benefits, product offerings, and service experiences for this expanding premium member base. In TTG's operational strategy, we attach great importance to rich and diverse product offerings while focusing on investing and enhancing shopping experiences. We continuously improve the efficiency and matching of products with user traffic and ensure stable and sustainable growth. As orders and GMV continue to grow, we're advancing monetization step by step, including the launch of our new marketing tool, Quanzhantui.

Through algorithm upgrades, we aim to enhance the efficiency of merchants' monetization, while also improving the efficiency of traffic utilization and conversion of user traffic to purchases on our platform. We expect CMR growth to gradually align with GMV growth over the coming quarters. In our cloud segment, we continue to pursue high-quality revenue and effectively execute our integrated cloud plus AI development strategy. This quarter, Alibaba's overall revenue, excluding Alibaba consolidated subsidiaries, grew 6%, with public cloud revenue maintaining double-digit growth. AI-related product revenue sustained triple-digit growth, continuing to increase its share of public cloud revenue. We're seeing more major customers choosing Alibaba Cloud as their compute infrastructure for AI development. At the same time, Alibaba's proprietary large language models are gaining wider adoption.

This year, Alibaba Cloud served as a major cloud service provider for the Olympic Games, providing cloud computing and AI services to Olympic Broadcasting Services, OBS. At the Paris Olympics, cloud-based live broadcast, powered by Alibaba Cloud, overtook satellite signals as the primary means of broadcast for the first time in Olympic history. Two-thirds of broadcasters used live signals transmitted by Alibaba Cloud in real time around the world, reaching billions of viewers. Additionally, Alibaba Cloud's AI technology saw its first widespread application at the Paris Olympics, including 360-degree replays in real time, bringing pleasant surprises to the audience. Our long-term strategy for integrated cloud plus AI development comprises three key elements. One, we'll continue to optimize our cloud product offerings, focusing on competitive, sustainable growth margin and scalable public cloud products. This forms the foundation for Alibaba Cloud's sustainable, high-quality growth.

2, we'll strengthen synergies between cloud and AI products, not only supporting existing customers and implementing new AI capabilities on Alibaba Cloud, but also enabling AI native enterprises to scale and succeed on our platform. We're committed to capitalizing on both opportunities. 3, we'll continue to invest in R&D and AI CapEx to ensure the growth of our AI-driven cloud business. Looking to the medium and long term, we're confident that Alibaba Cloud's overall revenue, excluding Alibaba consolidated subsidiaries, will return to double-digit growth in the second half of the fiscal year, with gradual acceleration thereafter. Through intensive R&D investment, we aim to sustain profitable growth while establishing ourselves as a leading cloud service provider for AI, with healthy profitability and market share leadership. In international e-commerce, AIDC delivered 32% revenue growth this quarter.

Our international business segment comprises a diverse business matrix, integrating both cross-border and local operations, as well as B2B and B2C formats. This presents numerous opportunities in terms of both operational models and market expansion potential, and Jiang Fan will provide a more detailed update momentarily. Beyond e-commerce and cloud, we've implemented strategic realignments across our key internet technology businesses through a thorough evaluation of their product capabilities and market competitiveness. While maintaining product competitiveness, most of these businesses will now place a higher priority on monetization. This quarter, we've already seen these businesses significantly improving profitability, and we expect this trend to continue in the coming quarters. We expect most of these businesses to break even within one to two years and gradually contribute to profitability at scale.

This new fiscal year is a pivotal one for Alibaba as we set our strategic direction and realize the successes of our transformation. We are fully confident in Alibaba's sustained, healthy development into the future. Hi, everybody. It's my pleasure to share with you AIDC's latest business progress. Over the past quarter, AIDC maintained its rapid growth momentum, with overall revenue increasing 32% year-on-year, primarily driven by our cross-border business. In terms of the three drivers we consistently focus on, first, ongoing business model and supply chain upgrades. AliExpress maintained rapid year-on-year order growth, with a percentage of AE Choice orders continuing to be high and gradually stabilizing, and enhancing the certainty and consistency of user experience. AliExpress and Cainiao continue to jointly optimize logistics experience and significantly reduced average delivery time quarter-over-quarter.

We further optimized the organic balance of user experience, product richness, and efficiency across our marketplace, semi-consignment and full-consignment

models. The unit economics of the choice business improved by nearly 20% quarter-over-quarter. Second, product and technology innovation. We advanced our AI and intelligent technologies across scenarios like AI customer service, cross-platform product placement, product description optimization, multilingual search, and precise recommendations, which boosted efficiency and user experience. These innovations were deployed across our platforms and have served around 500,000 merchants and covered 100 million SKUs. Third, sustained growth in key markets. Ongoing improvement in user experience bolsters AE's confidence to step up investments in key markets, to expand user base and maintain leadership. As the exclusive e-commerce partner of the European Cup 2024, we effectively boosted AE and Trendyol's brand awareness. We're also exploring diverse localized business models.

In Turkey, Trendyol increased monetization and profitability, solidifying its e-commerce leadership. It also enriched product offerings and marketing efficiency in the Gulf region, while continuing end user growth. In Southeast Asia, Lazada achieved single-month EBITDA profitability for the first time in July. This milestone reinforces our confidence to efficiently invest in the Southeast Asia market to consolidate our market share. In conclusion, our strategic focus is twofold: enhancing operational efficiency across all business segments, while on the other hand, actively investing in key markets to drive quality growth and scale, with the goal of achieving more substantial profitability at scale in the future. Thank you.

This past quarter's financial performance continues to demonstrate our strategy to revitalize growth in our domestic commerce and cloud segments, while reinforcing our leadership position. At the same time, we are improving the monetization and operating efficiency of our loss-making businesses, with the goal of achieving sustainable business growth and profitability. Taobao and Tmall Group is winning the mind share of our consumers. This past quarter, we achieved high single-digit online GMV growth and double-digit order growth. AIDC continues to achieve robust revenue growth, driven by rapid order growth in cross-border businesses, especially from AliExpress Choice. Alibaba Cloud's revenue quality is improving and back to growth. Overall revenue, excluding Alibaba consolidated subsidiaries, grew over 6%, driven by double-digit public cloud growth and increasing adoption of AI-related products. Our loss-making businesses are improving their monetization operating efficiency significantly.

For example, Local Services Group and Lazada significantly narrowed their losses during the quarter. During this quarter, we repurchased a total of 613 million ordinary shares, or 77 million ADSs, for a total of $5.8 billion. This includes the concurrent buyback of approximately 14.8 million ADSs for $1.2 billion that was associated with our new CB issuance. As of June 30, 2024, we had 19 billion ordinary shares, or approximately 2.4 billion ADSs outstanding. Compared to March 31, 2024, there was a 2.3% net reduction in our outstanding shares, after accounting for shares issued on our ESOP. As of June 30, 2024, we still have $26.1 billion remaining in our share repurchase program.

Additionally, as part of our plan to minimize annual ESOP dilution and better utilize the cash generated by our domestic businesses, we have started to replace a portion of Alibaba Group's ESOP incentives with long-term cash incentives for our employees, starting last quarter. These cash incentives will be reflected as costs in our adjusted financial metrics, including segment EBITDA. While this change in compensation structure will lower Adjusted EBITDA, it will also result in less ESOP dilution in the future. Total revenue on a consolidated basis, total revenue was RMB 243.2 billion, an increase of 4%. Adjusted EBITDA decreased 1% year-over-year to RMB 45 billion. Excluding the effects of long-term cash incentive, adjusted EBITDA growth would have turned positive on a like-for-like basis.

Our non-GAAP net income was RMB 40.7 billion, a decrease of RMB 4.2 billion, or 9%. Our GAAP net income was RMB 24 billion, a decline of RMB 9 billion, or 27%, primarily due to a decrease in income from operations and increase in impairment of some investments, partly offset by the mark-to-market changes from our equity investments. As of June 30, 2024, we continued to maintain a strong net cash position of RMB 405.7 billion, or $55.8 billion. Free cash flow decreased by RMB 21.7 billion to RMB 17.4 billion. This year-over-year decrease mainly reflected the increase in expenditure related to our investments in Alibaba Cloud infrastructure and other working capital changes related to factors, including our planned reduction of direct sales businesses.

Now, let's look at cost trends as a percentage of revenue, excluding SBC, during this quarter. Cost of revenue ratio decreased 1.1 percentage points. Product development expenses ratio remained relatively stable. Sales and marketing expenses ratio increased 1.7 percentage points year-over-year, primarily due to our increased investments in e-commerce businesses. G&A expenses ratio increased 1.4 percentage points. Excluding the provision of RMB 3.1 billion from a one-time shareholder class action lawsuit, our G&A expenses ratio would have remained relatively stable. Now, let's look at the segment results, starting with Taobao and Tmall Group. Revenue from Taobao and Tmall Group was RMB 113.4 billion, a decrease of 1%.

Revenue from our China commerce retail businesses was CNY 107.4 billion, a decrease of 2% compared to 109.8 billion in the same quarter of 2023. Customer management revenue increased by 1% year-over-year, primarily due to a high single digit year-over-year growth in online GMV, partly offset by a decline in take rate. The year-over-year take rate decrease was primarily due to increasing proportion of GMV generated from new models that currently have lower monetization rates. Direct sales and others revenue under China commerce retail business was CNY 27.3 billion, a decrease of 9%. As mentioned, we are proactively scaling down certain direct sales businesses, including those in Taobao and Tmall Group.

China commerce wholesale business revenue increased 16% to RMB 6 billion, primarily due to an increase in revenue from value-added services provided to paying members. Taobao and Tmall Group adjusted EBITDA decreased by 1% to RMB 48.8 billion, primarily due to the increase in investments in user experience and technology infrastructure, partly offset by the narrowing losses in certain businesses. This increasing investment led to better consumer retention, increased the purchase frequency, and positive feedback regarding the overall shopping experience. Revenue from Cloud Intelligence Group was RMB 26.5 billion, an increase of 6%. Overall revenue, excluding Alibaba consolidated subsidiaries, grew over 6% year-over-year, driven by double-digit public cloud growth and increasing adoption of AI-related products. AI-related product revenue continued to grow at triple-digit year-over-year.

Cloud's adjusted EBITDA increased by 155% to RMB 2.3 billion. The increase was primarily due to improving product mix through our focus on public cloud adoption and operating efficiency, partly offset by the increasing investments in customers and technology. We are observing strong and sustained demand for AI products and solutions from our customers and are making significant investment to address this demand effectively. We believe our investments in AI capabilities and infrastructure will help strengthen our market leadership. We are confident in our ability to balance these investments with steady profitability improvements, ensuring sustainable growth and value creation. Revenue from international commerce retail business increased by 38% to RMB 23.7 billion, primarily driven by order growth from AliExpress's Choice, as well as improvements in monetization.

Revenue from our international commerce wholesale business increased by 12% to RMB 5.6 billion, primarily due to an increase in revenue generated by cross-border related value-added services. AIDC's adjusted EBITDA was a loss of RMB 3.7 billion, an increase of RMB 3.3 billion, compared to a loss of RMB 420 million in the same quarter last year, primarily due to the increasing investments in AliExpress and Trendyol cross-border businesses, partly offset by Lazada's significant reduction in operating loss from the improvements in its monetization and operating efficiency. Revenue from Cainiao Smart Logistics Network Limited was RMB 26.8 billion, an increase of 16%, primarily driven by the increase in revenue from cross-border fulfillment solutions.

Cainiao's EBITDA decreased by 30% to RMB 618 million, primarily due to increased investments in cross-border fulfillment solutions, partly offset by improved operating efficiency. Revenue from Local Services Group was RMB 16.2 billion, an increase of 12%, driven by the order growth of both Amap and Ele.me, as well as revenue growth from marketing services. Adjusted EBITDA was a loss of RMB 386 million, compared to a loss of RMB 2 billion in the same quarter last year, primarily due to improving operating efficiency and increasing scale. Revenue from our Digital Media and Entertainment Group was RMB 5.6 billion, an increase of 4%. Adjusted EBITDA was a loss of RMB 103 million, compared to a profit of RMB 63 million, same quarter last year.

Revenue from all other segments increased 3% to RMB 47 billion, primarily due to the increase in revenue from Freshippo, Alibaba Health, and Intelligent Information Platform, partly offset by the decrease in revenue from Lingxi Games and Sun Art. Adjusted EBITDA from all other segments was a loss of RMB 1.3 billion, compared to a loss of RMB 1.7 billion in the same quarter of 2023, primarily due to improved operating results from Sun Art, Freshippo, Alibaba Health, and the Lingxi Games, partly offset by the increased investment in technology businesses. To wrap up, as Eddie and Jiang Fan mentioned, for our Taobao Tmall group, as order and GMV grow, we are advancing monetization efforts step by step. We expect CMR growth to gradually align with GMV growth over the coming quarters.

For Alibaba Cloud, we are pursuing high-quality revenue and effectively execute our integrated cloud plus AI development strategy. We are confident that revenue from external customers will return to double-digit growth in the second half of the fiscal year, with gradual acceleration thereafter. For AIDC, we focus on proactive investment to drive high-quality growth, enhancing operating efficiency across all business lines. Our loss-making businesses are improving their monetization and operating efficiency. We expect most of these businesses to break even within one to two years and gradually contribute to the profitability at scale. Thank you. That's the end of our prepared remarks. We can open up for Q&A.

Rob Lin (Head of Investor Relations)

Hi, everyone. For today's call, you are welcome to ask questions in Chinese or English. A third party translator will provide consecutive interpretation for the Q&A session. Please note that the translation is for convenience 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.

Speaker 14

大家好，今天的电话会议欢迎您用中文或英文提问，我们会有第三方工作人员提供实时的交替传译。翻译的目的 是 为 大家 理解，如果 有 任何 疑 义，请 以 我们 管理层 原始 语言 所 做 的 陈述 为准。如您 无法 听到 中文 翻译，本次 电话 会议 的 双 语 记录 将 会 在 会议 结束 后 的 一 周 内，在 我们 的 官网 上 提供。

Rob Lin (Head of Investor Relations)

Operator, we can now please connect to the speaker and the SI conference lines, and then start a Q&A session. Thank you.

Operator (participant)

Thank you. We will now begin the question and answer session. If you wish to ask a question, please press the star key, followed by the number 1 on your telephone keypad. To give more people the opportunity to ask questions, please keep yourself to no more than one question at a time. Your first question is from Ronald Keung, from Goldman Sachs. Please go ahead.

Ronald Keung (Managing Director)

Thank you, Joe, Eddie, Toby, Jiang Fan and Rob. And want to ask a question about our take rates, that with the high single digit GMV growth and 1% CMR growth, it does imply a wider gap this quarter. But the management you just mentioned about the narrowing gap that, that should come. So how should we think about the take rate trajectory, the time needed for CMR to align with GMV? And can you talk a bit on what are the actual measures that we're doing? Is it software service fee or ad tech upgrades? How would these new products translate to Taobao and Tmall respective take rates into the next few quarters? Thank you.

Speaker 14

Thank you, management, for accepting my question. My question is about take rate, this aspect. Because this quarter we see that actually the growth of GMV and the growth of CMR, this gap has further widened. But just now you mentioned that in the future few quarters, this gap should be able to shrink, the two can better synchronize. So can you introduce now and in the future few quarters some new software products that will be launched, what kind of differences they will bring, that can further shrink the gap between these two?

这个问题我来回答一下吧。我觉得淘宝天猫我们现在的优先级是放在，提升用户的购买体验，从而推动用户的购买频次，推动GMV的增长的这个过程中。那我们看到初步的市场份额稳定之后，确实在这个季度开始，我们针对提高take rate和商业化措施的一些原来的项目的进展会开始加速。那其实这里面有几个主要的因素：第一个因素是我们 在很多新的产品形态，比如说直播，比如说我们的百亿补贴，像各类我们今年重点投入的新的产品形态上，带来了很高的用户流程以及用户的复购。但这些新的产品和商家的变现以及商业化的这些产品，是需要一定的时间去推动的，那这也是我们后面这个季度会去逐渐推动的这个过程。那第二个点，我们觉得还有一个重要的变化是我们的广告产品全站推广的逐渐开始加速。那全站推广其实是它要运行良好，它是需要一个...

不是一个只是一个简单的产品，它需要3方面的配合，也就是我们在所有的淘宝端内的所有流量，用户端的流量渠道上进行一个比较有效的一个对接和接入。第二点是需要在广告主这一侧，需要有足够的行业覆盖，以及支持全站推的商品，需要有足够的广告数量，然后再结合可能需要是6个月以上的广告算法的优化和用户数据的优化。所以我们认为全站推的这级产品在我们4月份推出之后，会在推出之后的6到12个月内看到一些明显的效果和这个进展。但我们预测这一套刚才我提到的3个措施，需要完美结合在一起的这样一个广告的一个系统，我们觉得可能是在14，这个产品推出的12个月之后，会逐渐是一个整体的商量方面都会是配合得比较完美的 一个系统。那另外一个变化，我们可能那个Toby可以提一下，关于我们的那个技术服务费。好，那-

Rob Lin (Head of Investor Relations)

Thank you. This is-

Eddie Wu (CEO)

Oh，sorry。

Rob Lin (Head of Investor Relations)

Eddie, and I'll take that first before handing over to Toby. In the Taobao and Tmall Group, the priority at present very much has been on enhancing the user shopping experience so as to drive heightened purchase frequency and GMV. Now, as market share stabilizes, which is what we've certainly seen this quarter, we can start to accelerate the pace of our monetization efforts. But there are a few factors that you have to look at. First of all, the various new products we've launched, including live streaming, and including the

... 10 billion CNY subsidy program have resulted in a high user return and repurchase, return to platform use, and high user repurchase rates. But it's going to take a bit of time to roll out the new monetization approaches and products for them to gain traction. But that's certainly what we're looking at doing over the coming few quarters. The second thing to look at is our new advertising product, Quanzhantui, that we're introducing. Of course, in order for this to achieve solid performance, you need more than just that product in place, you need effective coordination and synergy across three different pieces.

The first being user traffic on the Taobao platform, the second being having sufficient number of advertisers taking part across a sufficient number of different sectors, with sufficient coverage of different kinds of products. And then beyond that, it'll take say, 6 or more months to fully optimize the algorithms and also to optimize the user data. So starting from the rollout of Quanzhantui back in April, it's likely to take something like 6-12 months of work to bring all of those different things together to achieve really solid progress and sizable growth. So in short, for those three different things to come together, and for this all to really be working well, likely looking at something like 12 months from the initial launch date. And then to that, I'll hand over to Toby to also say a few words about technology service charge.

Speaker 14

好的，那我很快介绍一下关于这个技术服务费啊，因为之前大家可能也看到了我们这个计划在九月份开始，对在淘宝跟闲鱼的商家征收一个技术服务费，0.6%的这样一个基础的软件服务费，那这部分的征收是按照一个这个商家的实收GMV来征收的，那这个收费比例呢，我们会在全面考虑行业惯例，并采纳商家的一些反馈后开始实施，那目前的预计是九月份。那么这个征收的，我们也会同时充分考虑中小商家的状况，所以对于年度GMV低于一定这个金额的中小商家，我们会全额退还他们的年度服务费，或者提供一定额度，帮他们在淘宝平台上拓展客户群，增加他们的GMV。我们预计这个服务费的收取将会在这个财年的剩下，就九月之后的这个七个月内逐步地，开始贡献收入。啊，这是一个对这个服务费的一个介绍。

Rob Lin (Head of Investor Relations)

Yes, this is Toby. Just to add regarding the technology service charge that we started talking about charging as of September on Taobao and on Idle Fish at a rate of 0.6%, and that is to be calculated on the basis of actually received GMV, actually received by the merchants. And we've come to this decision in consideration of both prevailing market practice as well as opinion of our merchants, feedback from our merchants. Of course, we will have special measures to take good care of our SME merchants in particular, those whose actual annual GMV is below a certain threshold, can either have that refunded or will find other ways to provide assistance to them to expand their customer base and grow their GMV to that threshold. So I would expect that with this starting as of September, you can expect to see this making a difference in the financials over, say, the next seven months of this present fiscal year. Next question.

Operator (participant)

Now, the next question is from Alicia Yap from Citigroup. Please go ahead.

Alicia Yap (Equity Research Analyst)

Hi, good evening, management. Thanks for taking my questions. I have a questions on your AIDC business. How does management think about the overall competitive landscape now? And how will that evolve over time? What are the competitive advantage of AliExpress for both the merchants and consumer that will help you defend your market position in some of the important countries? And then a follow up on that is, with Lazada seems to be turning profitable starting in July. Is that a time frame that you target to achieve profitability for AliExpress as well? Thank you.

Jiang Fan (Co-Chairman and CEO)

好，管理层晚上好，感谢接受我的提问。我的问题呢，是关于AIDC这边，想要知道你们当前是如何思考现在的一个竞争的环境，以及竞争环境的一个演化。我们在商家端和消费者端有什么样的一些优势，有利于我们维护好我们在重要市场的市场地位。那么后续再提问一下，我们就是注意到七月份开始，Lazada已经开始是有正盈利的，那么AE整体AE，是不是也差不多从这个时候可以开始，也是有的正盈利的？

对，回答您的问题。首先我觉得，阿里巴巴的海外业务我们是由多个业务板块组成的，我们可能跟很多其他公司，这种单一的业务模式会有一些差异。那我们 在不同的市场有不同的品牌，然后我们也有很多比较，非常 local 的本地的团队在运营这些......

平台，那我们的业务也是由跨境跟本地这样的一个组合。对，那我觉得，一方面，刚才我也说到，就是我们的业务，我们有这个在不同的市场，然后有本地的这样的一个品牌，然后我们也有一 些非常有经验的本地团队在运营。那另外就是说我们也是希望能够尽快更好的可以整合整个阿里集团的供给，特别是来自中国的供给，那也包括来自于淘宝的供给，那也包括来自于1688等平台的供给，对。那消费者侧，我觉得我们在很多的市场还是有一个非常好消费者的品牌，跟一个非常广泛的一个市场知名度。那我们现在主要做的还是在做一些业务模式的升级跟转型，比如说 AE Choice，那过去它可能是一个相对效率较低，然后体验服务相对较弱的这样的一个商业模式呢，我们现在也在这个业务模式转型的一个过程中。那刚刚你也提到 Lazada 的盈利，对，那我觉得，七月份我们是第一次实现了这个 EBITDA 的一个盈利，那我觉得后面我们还是会根据市场的状况去调整。在这个我们希望能够保持这个市场份额的同时，然后持续地优化我们的这个盈利的水平。那 AE Choice 还处于一个相对早期的，那因为它的业务模式在从一个平台的 一个模式，向一个托管加平台模式的一个转型的过程中，那它还处于一个投资期，那我们也在持续地在优化。那比如说刚刚讲到我们的上个季度，我们也发现，我也看到了我们整个这个 AE Choice 的这个优势的一个优化，那我们接下来的几个季度还是会持续去优化我们的效率，然后同时也追求一个更健康的一个增长。

Rob Lin (Head of Investor Relations)

Thank you. This is Jiang Fan. Well, the first thing I would say is that AIDC unlike some of the other businesses within the Alibaba Group comprises of a number of different types of businesses. It's not a single business. We're present in many different local markets, with local brands in those markets, with local teams operating them. And overall, AIDC is really a combination of both cross-border and local business. So, something that we're working on, in that broader context of being in different markets with different local brands, local experienced, local teams operating them, is we're working on integrating and sharpening our...

integrating supply, especially supply from China, and sharpening our advantage around supply, product supply out of China. On the consumer side, I think certainly one advantage we have is very good consumer brands with high brand recognition. And you know, certainly also working very hard to enhance the user experience on AE. You know, in the past, AE was perhaps a low efficiency kind of platform that too often offered consumers a relatively poor user experience, but we've been working very hard on improving that. As for Lazada, yes, as you noted, as I said earlier, we were EBITDA positive for the first time for a single month in July of this year.

You know, we'll continue to make adjustments as we have there, while preserving our market share, finding ways to enhance efficiency and increase our profitability. AE Choice is an important model that we've been investing in, and it's taken time to get to where it is. UE continues to optimize in respect of AE Choice, and over the next few quarters to come, we'll continue to make those efforts to drive higher efficiency and achieve high quality growth.

Next question.

Operator (participant)

You, the next question is from Thomas Chong from Jefferies. Please go ahead.

Thomas Chong (Analyst)

Hi, good evening. Thanks, management, for taking my question. My first question is about Stock Connect. Can management comments about our thoughts about the status of dual primary listing and the trends of going into Stock Connect? My second question is about our cloud business. Given that we are expecting the cloud as external cloud revenue go back to double-digit growth in the second half of fiscal year and accelerate going forward. I just want to get some color with regard to our AI revenue contribution, what's the goal that we are looking for in the long run coming from AI? Thank you.

Jiang Fan (Co-Chairman and CEO)

好，分析师晚上好，感谢接受我的提问。我第一个问题呢，是关于咱们，是不是可以呢，接入到港股通这个项目，这是在完成这个两地主要上市地位的这个转变之后，是不是可以接入到港股通？第二个问题是关于云，这一方 面，那么刚才讲到我们预计在本财年的下半年呢，我们来自外部客户的收入可以继续维持在两位数的这样的收入增长，那么其中这个AI这 一部分的贡献率如何？然后接下来我们对AI收入的贡献率有什么样的目标呢？

Toby Xu (CFO)

Okay, Tom, thank you for your question. I will take the first one, and then Eddie will answer the second question. Regarding your question about the Stock Connect, I guess your question is about, you know, the primary conversion at our end. You know, currently we are actively pursuing Hong Kong primary listing. You know, we will have an AGM on the 22nd of August. So we have a proposal that's subject to the shareholders approve. And then, you know, we are aiming to complete the conversion process, you know, after we obtain approval from the shareholders and get it completed before the end of August.

Then, you know, join the Stock Connect, it was still subject to, you know, the different exchanges, sort of like, you know, process. So that's the, you know, what we understand is procedure, just a procedure to go through. So that's the update on the status.

Eddie Wu (CEO)

Thank you. This is Eddie. I'll take your second question about cloud. There's a very, very robust demand among our customers for AI and AI-relevant products. If you look at the pipeline, you can see that that demand is still far from being satisfied. So we think it's a very clear-cut trend that revenue from external customers will achieve double-digit growth in the second half of the fiscal year. In terms of the breakdown of that AI product revenue, in terms of the revenue, pardon me, probably most of that growth will be driven by AI products.

You know, if you look at the industry as a whole, demand for CPU-based traditional cloud computing is relatively limited where most of the growth is now focused on GPU-based AI product development. So I would say something like more than half of that expected growth will be driven by AI products.

Toby Xu (CFO)

Next question, please.

Operator (participant)

Thank you. The next question is from Ellie Jiang from Macquarie. Please go ahead.

Ellie Jiang (Associate Director)

Thanks so much, management, for taking my question. Just first of all, a quick follow-up on the prior cloud question. Obviously we are already showing some early indicators of the positive momentum, and the management shared about, you know, the strong demand on AI. Given the current kind of macro conditions and often enterprise demand into the second half, just can you comment on kind of the mixed impact, especially in the next several quarters? And then also, the second question is on the top of Tmall GMV re-acceleration. So, we're encouraged to see, you know, our overall GMV momentum catching up. And actually for the second quarter, we already caught up to the industry pace reported by NBS.

Wondering, you know, can management comment on the key drivers behind the, the GMV re-acceleration? And, anything you can really talk on the, the return rate that we've been seeing across the ecosystem. Thank you.

Jiang Fan (Co-Chairman and CEO)

...

管理层晚上好，我提两个问题。第一个问题是，就我刚才讲的云这一板块，我们确实看到初步的一些迹象，表明，这一方 面有非常积极正向的发展势头，有很强劲的需求。但是我想就结合宏观面，我们看到宏观经济数据以及可能企业需求疲软，这些会给云带来什么样的影响？第二个问题呢，是关于淘天集团，这一方 面。那么我们注意到，现在GMV的这个增速呢，已经是迎头赶上了，与这个国家统计局公布的大盘的，这个增速是重新匹配起来了。那么想要知道，在这一方 面，有什么样的这个因素在起作用？

好，关于云的问题，我先，我先来回答吧。我们现在看到的就是您想问的是关于现在的宏观经济条件下，企业的需求放缓是吧？对，但是我们实际看到的大部分的企业的在于，特别是我们云上的，云上的客户而言，他们在今年在新的AI方面的需求的预算，其实在今年其实比去年扩大了，扩大了不少。因为对于这个，对于大部分的，大部分基于数字化的企业来说，这个需求是必须投入的需求...

对，对AI的需求是必须投入的需求，也就是这一方面不——因为所有的行业都在用AI来提升本身行业的产品能力或者产品效率的过程中，我们看到数字化的，对数字化非常依赖的行业和企业，对这方面的投入基本上是不 会，总體上是不 会降低的，因为你在这方面的投入落后，有可能会在产品上，产品上的能力上也会相对行业会变得落后。所以我们看到这方面的需求还是非常的明显，而且也没有，没有下降的趋势，因为这个是一个全新的一个，我们觉得是一个非常新的行业，新的行业趋势吧。Thanks. This is Eddie, I'll take the first question that had to do with cloud.

Eddie Wu (CEO)

Look, I think your question had to do with how macroeconomic conditions are resulting in softening enterprise demand. But that's not at all what we're seeing. What we see certainly among our own cloud customers is that their AI budgets for this year are higher, significantly higher than what they were last year. You know, any enterprise that is digitalized and relies on digitalization must be investing. It simply has to be investing in AI. All the industries now that are using AI are leveraging it to enhance their competitiveness and efficiency. So any enterprise that's in any way digitally reliant will certainly not scale down its investment in AI because to do so would impair their own competitiveness and efficiency.

So that's, that's a clear trend that we're seeing, and we're not seeing any kind of slowdown or softening.

Jiang Fan (Co-Chairman and CEO)

好，您说的那个关于第二个问题，就淘宝天猫的GMV的这个增速的回升的势头，这个问题其实是一个我们整体来说最核心的还是回到我们总体的一个淘宝天猫的一个业务战略上。那业务战略上我们，最主要的，最主要的就像我们之前所说的，我们最重要的投资是投资在好商品和好价格好服务的体验建设上。那这个是一个我觉得是在我们电商里面最，最基本的一些，最基本的一些用户体验上的投资。那对我们来说，对淘宝天猫这个平台而言，特殊之处的话，我们觉得可能因为淘宝天猫的商品供给非常丰富，而服务的消费者人群也非常复杂。所以对我们来说是这个好货、好价和好，好服务是分成不同的，我们对于消费者会分成不同的需求层次，通过对于消费者需求的 分层的需 求，去切分不同的商品供给，切分不同的服务体验，以及不同的商品供给下，我们要用不同的产品形态或者不同的，不同的那个产品能力，去让他们能够在服务我们不同的消，消费者。所以总体来说，你可以理解为最根本的还是好商品、好价格、好服务。但是对淘宝来说，我们要针对不同的人，人提供在这个三个维度不同的体验，以及在这个三个维度不同的体验背后，我们要通过供应链的优化，怎么样去持续地提升这个好货、好价、好，好服务的这个持续的，持续的优化吧。好。

Eddie Wu (CEO)

As to your second question on the recovery in GMV growth momentum, growth rate at TTG.

I think really, this comes down to our overall strategy for the Taobao and Tmall Group, where the most important thing we're investing in is the underlying capabilities that allow us to deliver quality products and quality services at-

... attractive prices. And those really are the most basic parts of the user experience when it comes to e-commerce. Now, if you look at TTG, we have an extremely rich and diverse product assortment and also a very complex, multifaceted user base. So it's important for us to segment those consumers and to make available to them different kinds of product supply and different kinds of service experience to cater to that diverse range of needs of those different segments. And so that requires us to develop different kinds of supply capabilities for those different consumer segments.

Underlying all of that is our ongoing investment in optimizing supply chains and supply chain efficiency in order to be able to ensure we have quality products and quality services at attractive prices for those different consumer tiers.

Jiang Fan (Co-Chairman and CEO)

Uh,

Eddie Wu (CEO)

Thanks. This is Toby, and I'll take that other question about return rates. You know, purchase return rates are increasing across the industry as a general trend. But in the case of Alibaba, our return rate is slightly lower than the industry average. The second thing I would say is that the return experience is a very important part of customer experience overall. And when the consumer has a good experience around returns, that's going to be favorable for increasing retention and purchase frequency. And I think it's important to note that on our platform, this year, if you look at Net Promoter Score, NPS, especially among mid and high-tier consumers, our NPS has improved considerably.

So, again, you know, our return rate is slightly lower than the overall market average, and I certainly don't think that that's going to discourage merchants from investing and doing business on our platform. Next question.

Operator (participant)

Thank you. The next question is from Gary Yu from Morgan Stanley. Please go ahead.

Gary Yu (Equity Analyst)

Hi, good evening. Thank you for the opportunity to ask questions. My question is regarding management comment about you know, some of these loss-making business aiming to reach breakeven in the next 1 to 2 years. Could management share more detail in terms of individual segments you know, including local services AIDC, as well as most of the retail business under the all other segment? How should we look at the timing of kind of breakeven target in the next 1 to 2 years individually? Thank you.

Jiang Fan (Co-Chairman and CEO)

Uh,

Toby Xu (CFO)

Okay. Thank you, Gary. I'll take that question. I think, you know, what Eddie and I was explaining is, you know, except for Taobao and Tmall, that's sort of like the core businesses we mentioned previously, including Taobao, Tmall, Cloud and the AIDC, all the other businesses, some of those businesses are still loss-making at this stage, you know, and they will be ramping up their, you know, efficiency and monetization and sort of reduce their losses significantly in the next year or so, or one or two years, and to reach breakeven. And then afterwards, they will sort of like start to deliver a scalable sort of profitability going forward.

You know, how we are going to achieve that, you know, it's quite, you know, as I was explaining, you know, what we want that, those, business are due, you know, they need to on one hand, you know, care about the efficiency of the investment they are making. You know, balance the scale and efficiency, which is very important. Secondly, they on one hand that they are making investment, they also need to care more about and monetization, so it's critical they enhance the monetization rate, you know, using their business model. So with both more income and the sort of higher efficiency in the spending, they are moving towards the, you know, break-even and profitability. You know, we can clearly see as I prepared during my prepared remarks, I explained, I used two examples.

One is a local service and the other one is Lazada. I think, you know, Jiang Fan explained the Lazada. For local service, I think it's all about on one hand you need to increase the scale, i.e., you need to increase the order; on the other hand, you need to improve the unit economics. In, for example, in Ele.me's case, you know, it's about all about it's sort of like a meal delivery business, you know, improve the unit economics continuously, and then in Amap, I think it's all about, you know, for, for example, the ride hailing businesses for all the unit economics need to improve. So with both scale and efficiency improve, we are sort of, we are able to reducing the losses very significantly and moving towards the profitability. So I think this is pretty much, you know, how this business will execute and move towards profitability.

Jiang Fan (Co-Chairman and CEO)

好的，我是Toby。我想，前面我和Eddie讲的意思就是除了淘宝、天猫、云、AIDC这些核心的业务之外，你综合其他的业务，那么有一部分还是在亏损之中，那么接下来，他们会就是大幅提升他们的效率，大力推动商业化。那么以此呢，能够缩小亏损，大概在这个一两年之内，预计可以实现盈亏平衡。盈亏平衡以后呢，他们可以逐步地，来为集团呢，这个带来规模化的盈利贡献。那么如何实现这一点？那么首先就是这些业务，它要进一步地投资于提升经营效率，要平衡呢规模与效率，这种平衡非常的重要。第二点，它要更多的关注商业化率的问题，就是说它投资，它花钱，要提高它的效率，同时要提高它的商业化率，这样可以走向盈亏平衡，最终是正盈利。那么在刚才的发言中，我只是提到两个例子，一个是本地生活，一个是Lazada，那么蒋凡也是解释了Lazada的这些计划。就本地生活而言，需要提高规模，提高订单量，同时要改善UE，像饿了么？这是典型的例子，它是一个全新的这样的一个业务模式，那么现在要逐步地改善它的UE，那么高德里面的这个叫车服务同样也是要提高它的UE。那么当规模与效率两方面都得到改善以后呢，这些公司，这些业务相信它是可以大幅降低它的亏损来走向正盈利。

Rob Lin (Head of Investor Relations)

Next question please.

Operator (participant)

Thank you. The next question is from Jiong Shao from Barclays. Please go ahead.

Jiong Shao (Managing Director and Senior Equity Analyst)

Thank you very much for taking my question. My question is about the gap between CMR and GMV. It's great you achieved high single digit for GMV growth this quarter. The gap between the two appears to be high single digit as well. Is that a high watermark going forward? Especially you launched recently launched the Quanzhantui, and especially when you start to charge a technology service fee starting September. Any comments would be great. And related to that, I think Toby talked about a 0.6% of GMV for the technology fees, but some of the smaller merchants you are going to waive that. I was wondering, is that sort of a net number in terms of percentage of GMV, you think the technology service fees will bring to CMR? Any clarification would be great. Thank you.

Jiang Fan (Co-Chairman and CEO)

好的，我提的问题呢，还是关于CMR和GMV两者之间的差距。那么，非常好，本季度呢，GMV的这个增速呢，是达到了高的单位数。但是呢，看来呢，CMR与GMV之间的差额也是在高的单位数这样的一个水平。那么请问这是不是一个可能，这是以后我们会看到的一个最高这样的一个水位？接下来我们推出全站推，我们还开始收取技术服务费。那么，Toby讲到这个技术服务费的话呢，是按照GMV的0.6%来收的，但是有一些小商家他们可以豁免，那我们应该怎么来理解这个？这是0.6%，是不是说这个总体GMV就会按照这样的一个0.6的数字，来贡献未来的这个CMR呢？还是，应该怎么思考这个问题？

Toby Xu (CFO)

... Okay, thank you for the question. I'll take that. I think, you know, as, as previously, Eddie, you know, also in my prepared remarks, I think the gap between the GMV, the online GMV and CMR, you know, reflect actually, actually, the job of the take rate. Why the take rate drop? You know, because currently, you know, the, some of the new models with a very high growth in GMV, at the currently still have relatively low monetization, which will be ramped up in, in the next, you know, a few quarters, if you like. So that's why there's still a gap.

As we also said, you know, in the next few quarters, CMR growth will be in at the same pace with GMV, which means take rate will start to get relatively stabilized. So that's what sort of we expecting. And Eddie explained why GMV is currently, you know, grow faster than the take rate. The reason is because by executing our strategy, you know, we first need to invest in the consumers, you know, get the more sort of purchase frequency from the consumers, then get the GMV growth. And as soon as we start to observe the GMV back to growth, and then the market share becomes stabilizing, we will gradually ramp up the monetization sort of like a pace.

A few things we're doing, you know, Eddie explained Quanzhantui, which is currently being rolled out. The penetration into traffic will take, you know, a number of quarters. So that will certainly improve the take rate, which means, you know, we'll accelerate the CMR growth. And secondly, with this, you know, the software service fee charge will also help on the sort of like the take rate. You know, a few other sort of like measures as well. So these are all the things currently we are doing. Why we started to do it? Because we see the growth are back on the GMV, and we see the sign of stabilizing, you know, the market share.

Your question about how this is calculated for this 0.6 charge. It's on the completed transaction GMV, so it's charged on the completed GMV. However, we will refund, you know, back to some of the small and medium merchants if their annual GMV is below certain threshold.

Jiang Fan (Co-Chairman and CEO)

那么其实Eddie也讲过这个问题，我在发言中呢，也是讲到过这个问题。你来看GMV与CMR的增速之差，那么其实反映的呢，是我们的take rate有所下降。那么为什么会这样呢？是因为呢，我们，GMV增速最快的，一些业务，恰恰就是商业化率，比较低的，这些，业务。那么接下来几个季度呢，我们会逐步地来，提昇，但是目前来讲确实还是有这样的一个，差距存在。那么刚才，我们也讲到，就是，接下来几个季度呢，我们认为CMR的增速会和GMV的，这个增速，匹配起来，同步起来，也就是说，take rate会，相对呢，就是趋于稳定。那么刚才Eddie，解释说，我们呢，是一直投资于呢，这个，消费者的体验，我们，提高，他的这个，购买频次，那么从此呢，可以带动GMV的增长。那么随着我们市场份额呢趋于稳定以后，我们可以加快提高，商业化。那么刚才Eddie还介绍说，我们这个全站推的，这个推广与普及会需要几个季度来到位，那么这也会加快我们CMR的一个增长。另外呢，我们说到开始收取呢，技术服务费，这也会有利于呢，提高我们的，take rate。那么为什么，现在开始这样做呢？因为我们看到迹象，就是说我们GMV的增速是，恢复了，那么市场份额呢，也是趋于稳定了。那么至于你说的具体如何计算技术，服务费，这个会根据呢，交易完成的GMV，这个规模来计算。但是有些这个，GMV没有达到既定，额度的这个小商家，我们会给他们，退款。

Rob Lin (Head of Investor Relations)

Next question.

Operator (participant)

Thank you. The next question is from Kenneth Fong from UBS. Please go ahead.

Kenneth Fong (Executive Director, Advisory Specialist)

Hi. Good evening, management. Thanks for taking my question. I have one question, mainly on the financial number. One is on the tax rate. Notice that the tax, the effective tax rate is quite high for the current quarter. Can management explain what's the rationale behind, and how should we model the tax expense going forward? And the other thing is about the decline, 56.6% decline in our Free Cash Flow. Understand that it is related to our investment on AI cloud, as well as some one-off expenses or with cash flow on the planned reduction on direct sales business. Should we expect that to gradually normalize in the next, like, one or two quarters, especially for the direct sales business part? Thank you.

Jiang Fan (Co-Chairman and CEO)

...

好，谢谢。我提的第一个问题呢，是就是说本季度注意到我们的税率，交税的税率比较高，那么这个怎么理解，然后未来我们在做模型的时候，应该怎么来算这个税率的事情。第二，就是本季度自由现金流，这个下降，我们理解是因为我们在投资于AI，投资于云，还有，我们在故意减少一些直营的业务，但是未来我们应该怎么来考虑自由现金流呢？

Toby Xu (CFO)

Thank you, Kenneth. I'll take this question. Your first question is about tax rate, you know, this if you using our PNL tax divided by profit, you know, you normally cannot reach sort of like the real effective tax rate, because we do have a lot of, if you like, permanent differences when our items which does not have, you know, tax implication there. We are monitoring more on, like an adjusted basis on the tax rate, which is relatively stable in this quarter compared with last quarter. So but, you know, in terms of your model, I guess, probably, you know, we can, our team can sort of like, look into your model and sort of communicate offline. So this is your first question?

Jiang Fan (Co-Chairman and CEO)

哦，关于第一个问题，就是关于税率。如果说你是拿这个，损益表，这个税除以利润，那么通常的话呢，这个是，看不出真正实际的这个税率，因为呢，我们有些永久性的，差异。那么税率的话呢，我们是一直在，监测的，那么应该说本季度呢，与上一季度啊相比，还是啊相对稳定的。但是就你们这个怎么建模呢？我想啊，我们也可以，这个，会后私下我们可以啊沟通一下，这是第一个问题。

我们是用一个调整后的这样一个考虑，这样一个税率的影响的，我补充一下。

Toby Xu (CFO)

OK, your second question is about Free Cash Flow, you know, as I explained, there is quite a big significant drop of Free Cash Flow. One of the reason is the significant increase in the expenditure on the AI infrastructure investments, if you like. So, I think...

and the other reason, as I said, is because of the sort of because of the working capital changes in relation to some factors like some of the business scale-downs. For these business scale-downs, many of them, if you like, majority of them are from those, you know, planned scale-down, if you like. As I was explaining why our direct sales business within Taobao, Tmall dropped quite significantly. The reason is we proactively scaled down some of these 1P businesses in Taobao, Tmall. The reason is we believe in some of these business or categories, you know, 1P format probably is not a more efficient format, so that's sort of proactive. But you will also have some of the businesses, you know, scale-down was not because proactively did that. You know, some of these just like the overall market, you know, situation. For example, as I said, you know, the revenue dropped from, for example, like Sun Art, like Intime, all those businesses are in 1P, and the drop of their scale actually impacts the working capital. I don't know, probably I can give a little bit more color on, because for doing 1P business, you know, on one hand, you are buying inventory from vendor, on the other hand, you sell it, and that the vendor normally give you a credit term, like in 60 days or 90 days. If you can make your inventory turnover, i.e.

sell the inventory within a short period of time, you know, shorter than the sort of a credit term you are given, actually you are generating cash flow, particularly if the size is going up, you are generating positive cash flow. So on the contrary, if you are reducing the scale, you are, it will, it will have outflow on the working capital. But is there, is this a permanent impact? To me, I think this is a relatively, you know, temporary impact. You know, as, at, during the process of reducing the scale, we will see this, outflow, but when the business size became stable, we will no longer see this, this type of, you know, outflow.

Kenneth Fong (Executive Director, Advisory Specialist)

Very clear, thank you very much.

Jiang Fan (Co-Chairman and CEO)

对，这是关于这个现金流，自由现金流下降。那么一方面当然了，我们是在AI方面做投资，另一方面呢，就是有营运资金方面的变化，这是由于有些业务的业务规模缩小，那么其中有一些业务规模缩小，这是我们计划中，故意来缩小它的规模。比如说我们在淘宝、天猫上面的有些直营业务，这是我们主动的一个选择。我们为什么选择缩小它的规模呢？是因为我们相信在这些业务当中，EP模式未必是效率更高的。另外有些业务规模缩小并不是我们主动的选择，而是大的，市场的一个表现。比如说Sun Art, Intime，那么这些也会影响到这个营运资金。...

另外，我也可以展开，介绍一下，就是说在这些零售业务当中，往往的话呢，你这个从供应商那里这个，采购买货，你可能有60天或者是90天的这样的一个支付期，那么这个其实可以为你带来呢，正的，一个现金流。那么，如果这样的业务，这个规模缩小的呢，就等于运营资金的某种流出。但是，这种影响是暂时的，那么等到这个业务规模稳定了以后呢，就不再会有这种流出的存在。

Rob Lin (Head of Investor Relations)

Next question.

Operator (participant)

Thank you. The next question is from James Lee from Mizuho. Please go ahead.

James Lee (Managing Director and Senior Equity Analyst)

Great, thanks for taking my question here. My question is related to AI more big picture question for you guys. Can you guys talk about maybe implication of open source large language model or how that impact the adoption of AI in China? And also how should we think about large language model as that transition into agents, and how do we think the use cases may change for your merchants and customers? Thank you.

Jiang Fan (Co-Chairman and CEO)

好，我提的问题是关于AI方面，想要了解一下，就是开源的，大模型，可能，给你们这个产品在中国的采用啊，和普及带来什么影响？另外想要了解，当这个大模型转换成这个代理agent的时候，又会带来什么样的不同？

您的这个问题，好，很好，我来回答一下吧。就是，第一个问题，我觉得是在这一轮的生成式AI里面，就是开源闭源一直都是大家不同公司选择的方向嘛。但是对于阿里云而言，我们选择的方向——因为我们的业务模式是更多的提供一个云的基础设施，那我们提供一个业界一流的开源模型，对于中国以及整个世界上这些开发者其实都会非常有帮助，因为大部分的开发者还是希望对这个模型更有可控性，能够更具备它，有更多的调优的空间。所以某种程度上，我们觉得开源的模型会在开发者广泛使用上这一点上占据优势。而开发者广泛使用的话，这一点对于阿里云这样提供AI基础设施的公司来说，这个商业模式就特别匹配。因为当更多的开发者会优先，会更多地使用我们的开源模型的时候，他自然也会因为在把它的应用上线的时候，自然会优先选择阿里云的AI，这个，采用AI，采用阿里云的AI产品。所以这个是我们的，和我们的商业策略是匹配的。而且我们现在也看到，非常多的公司或者非常多的开发者在选择的时候，开源模型是会成为他们的一个优先选择的一个方向。那尤其是，在中国吧，因为中国的非常多的环境，它需要非常多的应用，它需要更强的可控性。但是这一点我现在没办法提供一个非常强的一个数据说，有多少开发者使用，因为使用了我们的开源模型，所以来选择我们的阿里云的AI服务。那但是我们觉得这个是在中国市场上，我们是唯一一家提供开源模型且同时提供AI云服务的厂商，我觉得这两个商业策略是完全匹配的。然后另外你提的问题我觉得比较复杂和远期吧，因为这个问题你提得也比较宽泛。我觉得总体来说，未来的大模型的能力其实也会越来越强吧，一个模型会...

它所使用的数�据会越来越，越来越多模态，然后同时这个模型的参数规模也会越来越大，所以它能做的事情也会越来越强。但是现在我们也确实看到，在解决一些复杂性的问题上，我们会看到很多都会需要通过agent这种方式来解决一些复杂的推理问题，而且这些agent还会调用不同的模型来解决这个复杂的推理过程。所以我觉得这个趋势也是一个非常明显，但是现在很多开发者在做这些agent，但是我自己有一个判断，可能这些agent也会越来越多，未来有这些能力足够强的大模型来产生这些agent，能够会更加自动化。

Eddie Wu (CEO)

Thank you. Well, on your first question. You know, in this recent wave of generative AI development, different companies have made different choices around whether to develop open or closed source models. Alibaba Cloud is itself a cloud service provider. So, the clear choice for us has been to develop open source large language models. That's very helpful, of course, for developers. Developers want more control. They want more scope-

... to optimize. So, we feel that providing open source large language model to developers is advantageous for them. And that, of course, very much fits into our own strategy because we are a cloud service provider, so it's doubly advantageous. They can develop their offerings using our open source models, and then they're very likely to continue to select Alibaba to deploy those offerings at scale. So that's entirely consistent with our strategy. As for the idea of agents, you know, models are becoming larger, more and more multimodal, with more and more parameters becoming stronger and more capable.

And so there will be a need for agents, I think, to deal with some of the more complex needs around inferencing, especially agents that can call on different underlying large models. I know lots of developers are working on it, but I think going into the future, this kind of development will become more automated.

Let's open to the last question.

Operator (participant)

Thank you. The last question is from Youssef Squali from Truist. Please go ahead.

Youssef Squali (Head Managing Director of the Internet & Digital Media Research Group)

Thank you very much. It's Youssef Squali from Truist Securities. So, just on the follow-up on the AI question. One, if I look at your CapEx, it's more than doubled year-over-year in Q1. Number one, is that a good run rate to work off of for the rest of the year? And number two, as you look at the return on those investments, can you help us just understand your framework of reference? One of the key questions we often get here, at least in the U.S., is the ROI associated with these AI and kind of the timeline or the time or framework around which you kind of expect these investments to start bearing fruit, and maybe give us examples of where you're seeing early green shoots. Thank you.

Jiang Fan (Co-Chairman and CEO)

这是最后一个问题，我的问題还是关于AI这一方面的，那么就是，我们看到你们的资本开支啊，这个应该是翻了一番还多啊，那么，想要知道今...

这个本财年剩余的时间，这是一个合理的收入运行率，还会继续是这样下去的吗？那么第二个问题就是说，在美国我们经常会谈到这种，投资的一个投资回报率，这个ROI，那么你们认为你们在，AI方面，这些CapEx什么时候会开始带来真正的投资回报？或者说在哪些领域当中我们已经开始看到有所萌芽呢？

Toby Xu (CFO)

Okay. I will take the first question, and Eddie will answer the second question. I think with respect to the CapEx, just like, as you have observed from our reporting, increased very significantly. I think, you know, the reason is because we see clearly very strong demand, you know, and the backlog. That's why, you know, we are investing. You know, we would expect, you know, in the next few quarters, you know, we would expect, you know, similar level of investments in CapEx going forward.

是 Toby，我先回答第一个问题。对，这是我们的这个资本开支 CapEx 方面，如您所观察，我们这是大幅的提高了。为什么会这样？那是因为我们清楚地看到，对这一方面有非常强劲的需求，而且有很多积压着的需要，所以我们认为接下来几个季度，同样我们还是会继续按照，这样子的一个水平继续来做我们的投资。

好，你后面的问题我来回答一下。我觉得现在我们在...

就像Toby刚才所说的，我们在后面几个季度关于AI CapEx投资的话，会延续现在这个节奏，因为我们现在看到客户的需求非常旺盛，包括客户的pipeline，以及现在还是远远没有到满足的阶段。那从我们客户对于，AI的我们的产品在训练、推理，以及像通义千问的这样API调用，这方面的需求都在快速增长。从某种程度上，我们这些CapEx投入，我们现在从我们内部的角度上来看，我们只要我们的服务器上架，基本上这些服务器就会满载地被客户使用。所以实际上这些CapEx投入在最近的，在最近的几个季度之内，我们都会看到他们的投资回报率是非常可观的，而且实际上他们的空置率是非常有限的。他们现在基本上大部分的算力，我们在一开始上架之后，就开始就会，就会产生收入，而且蛮...

基本上比较满负荷地开始产生收入。

Eddie Wu (CEO)

Thanks. This is Eddie. So to continue with the second part of this answer. Certainly, as Toby said, over the next several quarters, we expect to continue to be investing in AI CapEx at that kind of pace. And it's simply because we see a lot of demand, a lot of unmet demand from many clients. And you look at the pipeline those clients have, you know, there's going to be ongoing demand. So whether it's, you know, for training or inference, or API calls, what we see when we're making these kind of CapEx investments is, as soon as we get a server up, that server is essentially instantly running at full capacity. There's that kind of demand.

So, you know, we can expect to see a very high ROI over these next quarters because we're building compute power to meet existing demand, and that new compute power coming online is getting instantly taken up and running at full capacity from day one.

Rob Lin (Head of Investor Relations)

Well, thank you everyone for joining. We will see you next quarter.

Operator (participant)

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