Photo credit: Alibaba Group

Alibaba Group today announced financial results for the quarter ended Sept. 30, 2022. Shortly after, Alibaba Chairman and CEO Daniel Zhang addressed investors on a conference call. Below are his comments:

Hello everyone. Thank you for joining our earnings call today.

We delivered a solid quarter in a macro environment full of uncertainty. The ongoing resurgence of COVID-19, geopolitical tension, inflation, and currency depreciation – the convergence of all these forces has created considerable difficulties for business operations.

Despite these challenges, Alibaba‘s non-GAAP EBITA increased 29% year-over-year as we continued to enhance our operational efficiencies. This is the result of our pursuit of high-quality development and, more importantly, demonstrates the resilience of the Alibaba business ecosystem.

In the China domestic consumer market, Taobao–Tmall GMV saw a low single-digit year-on-year decline this quarter, but user traffic remained stable.

However, consumption appetite was weak and we saw a drop in purchasing frequency. The resurgence of COVID has affected one area after another, resulting in abnormal or suspended logistics service in different places. This hurt merchant operations and consumer logistics experience.

In terms of demand, the decline in categories such as apparel and consumer electronics slowed quarter-over-quarter. Interest-based categories, such as outdoor recreation and pet care, and health and wellness-related categories, realized positive growth.

Navigating Challenging Conditions

In this challenging environment, we have achieved relatively positive results through a committed execution of the following strategy.

First, we worked to ensure our user traffic population remained stable (DAU or MAU) by continuing to strengthen user engagement. After many years of operation, Taobao-Tmall is now deeply entrenched in our users’ minds as the shopping destination.

We are focused on user engagement on our platform by enhancing the customer journey across search, algorithm-driven discovery recommendations, livestreaming, and other engagement features. We stimulated consumption interest and drove conversion by highlighting the factors that influence purchase decisions through short videos, photos, text, and other means of communication.

Second, we further consolidated the scale and stickiness of our most valuable consumer group.

For the twelve months ended September 30, 2022, the number of consumers who each spent over RMB10,000 on Taobao and Tmall remained around 124 million with a retention rate of 98%. 88VIP membership population held steady at 25 million this quarter, with solid membership retention and growth in GMV contribution.

Third, we improved consumer satisfaction by continually investing in customer service during and after sales, and logistics service experiences such as doorstep delivery of orders as required. Our latest consumer satisfaction survey showed improvements in NPS scores related to logistics and post-sale.

Staying Engaged During 11.11

During our recent 11.11 Global Shopping Festival, Taobao-Tmall’s total GMV was in line with the performance last year during the same period. Initial fruits of the operations strategy outlined just now were seen during 11.11.

More than 600 million users engaged with our 11.11-related content, a single-digit growth year-over-year. Although the total number of buyers declined compared to the same period last year, the average GMV per person increased.

As for our consumer profile, more than 98% of 88VIP members bought something during 11.11. Moreover, the contribution by 88VIP members to the total GMV continued to grow.

Regarding product categories, consistent with what we observed during the rest of the quarter, interest-based categories such as outdoor recreation and pet care and health and wellness-related categories saw positive growth. Consumer electronics also enjoyed positive growth during 11.11.

However, there were a few factors that negatively impacted our 11.11 performance.

First, average temperature across China was much warmer than usual for that time of year, and the delay in seasonal change weakened consumption appetite for apparel even more in an environment impacted by COVID, thus the apparel category suffered.

Second, starting in October and through the 11.11 campaign period, nearly 15% of delivery areas across China experienced abnormal or suspended logistics service. This had a significant impact on the merchant’s ability to fulfill orders on time and the delivery company’s ability to make regular deliveries. But recently we are seeing improvements.

Third, 11.11 has become an event celebrated and embraced by the entire society. Given the uncertainties related to Covid-19, merchants were especially keen to take advantage of this opportunity to capture as much growth as possible across every available channel. Objectively speaking, they offered consumers more choices, both online and offline.

This quarter, the decline in Customer Management Revenue was higher than the decline in overall GMV. I would like to share the reasons.

The first is a higher rate of order return because of order returns due to Covid-related impact on fulfillment or delivery, a higher order return rate that accompanies livestream-driven sales, and the increasing convenience of making returns and improvements in user experience in returns handling on our platform.

These three reasons collectively contributed to the rise in order return across the platform. CMR take-rate calculation does not account for order returns. If it was accounted for, our take rate actually remained consistent.

Additionally, page views from algorithm-driven discovery recommendations grew, but our monetization of traffic was less efficient, resulting in a lower take rate in the short term. Looking forward, we will adapt to the changes in our user traffic composition and introduce better monetization products to ensure the long-term stability of our platform take rate.

In our local consumer services segment, Ele.me proactively adjusted its business operations strategy to focus on user growth and retention on its mobile app. And it continued to grow its market presence in key cities. At the same time, it continued to enhance operational efficiency and unit economics continued to see improvement. This is primarily due to the rise in average order value, leading to an increase in revenue and a reduction in logistics costs for order fulfillment.

Amap launched a new version of its map this quarter, together with a series of new features, including a 3D city map, car lane-level road navigation, forecasting of traffic light signals, and road navigation for staying in the shade out of the sun.

User population and stickiness continued to strengthen, and a new historical record of 220 million DAU was registered during the week of the National Day holidays.

On top of its map navigation, the services offered by Amap related to getting “to destination” – which includes ride-hailing, hotel booking, gas stations, and EV recharging stations – are all experiencing rapid development, with both service users and order volume enjoying fast growth.

Strengthening Logistics

Cainiao’s various businesses saw robust growth this quarter and there were clear improvements in cost efficiency.

The Cainiao Post network grew by 20% year-on-year and now has more than 170,000 locations. It has comprehensive coverage in residential communities, school campuses, and rural villages across China.

Cainiao Post has become an important touch point for serving consumers. For overseas markets, Cainiao continued to actively build logistics hubs and nodes to further enhance its global logistics network’s service capabilities and efficiencies.

In overseas markets, the rise in logistics costs due to inflation and currency depreciation against the US dollar has contributed to order volume decline of 12% year-on-year in our cross-border export business AliExpress.

In Southeast Asia, Lazada order volume declined 6% year-on-year as Covid-related restrictions were lifted and offline shopping resumed. Trendyol’s order volume grew over 65% year-on-year on the strength of its e-commerce business and fast-growing local consumer services.

For AliExpress and Lazada, we are taking steps to adjust our business model and investing in creating user value rather than just scaling. We are also continuing to strengthen our capabilities in logistics and supply chain.

We believe that developing and investing in these capabilities will be meaningful to ensuring the sustainable long-term development of our abilities to serve the overseas consumer market.

Growth on the Cloud

In our cloud segment, Alibaba Cloud’s revenue growth was 4% year-on-year this quarter. Through structural adjustments over the past few quarters, Alibaba Cloud’s revenue structure is now healthier and more sustainable. Public cloud revenue grew double-digit year-on-year this quarter, while hybrid cloud declined.

In the interest of pursuing higher quality growth, we proactively controlled the development of our business that only resells hosting infrastructure that has been commoditized in the market.

Looking at our revenue by industry, non-Internet industry revenue grew 28% year-on-year. Its contribution to total revenue increased from 53% to 58% quarter-on-quarter. The fastest-growing sectors include financial services, automotive, telecom and public services.

Looking ahead, Alibaba Cloud will leverage its proprietary cloud computing and big data processing capabilities to launch a range of industry solutions with relevant partners for advancing China’s industrial digitalization.

At the Apsara conference in early November, we unveiled many important technological achievements. It included our Cloud Infrastructure Processing Unit (CIPU) and an open-source platform under the Model-as-a-Service named Model Scope. These will serve important purposes in Alibaba Cloud’s future development.

A Path Forward

In this environment full of uncertainty, our wide-ranging efforts in cost reduction and efficiency improvement measures are beginning to bear fruit.

Businesses such as Taobao Deal, Taocaicai, Ele.me, Amap, Lazada and Youku have significantly reduced their losses. We will continue to focus on the steady improvement of business quality and on investing in building capability to provide customers core value rather than pursuing short-term business growth or user scale.

As China enters an era of high-quality development, we will also enter a stage of high-quality business operations.

During the eight years from Alibaba’s IPO in 2014, the quality and scale of our business has improved significantly. Alibaba’s revenue today is 12 times what it was during the same period in 2014. Adjusted EBITA is 4.5 times what it was during the same period in 2014. Free cash flow is four times that of what it was in 2014.

Over the past eight years, China’s GDP has almost doubled, from RMB59 trillion in 2013 to RMB114 trillion in 2021. We are confident about the future and we will continue to execute our share repurchase program.

As of Nov. 16, we have utilized approximately $18 billion to date towards share repurchase under our existing $25 billion program, with $7 billion more to go. In addition, our board has authorized us to upsize our existing share repurchase program by another $15 billion as a tangible action toward enhancing shareholder return.

We remain confident about ourselves and even more about the future, no matter the ups and downs. We believe in the prospects of China’s economic and social development. We believe Alibaba’s development goals are highly aligned with China’s long-term goals.

We believe Alibaba can play an important role in the digitalization process in China and around the world. We have taken note of the latest adjustments in China’s COVID-related policies and the proactive commentary from relevant government regulators about promoting the digital economy and high-quality development of platform businesses.

We believe that COVID will ultimately pass, that our society, our economy, and our lives will eventually return to normal, and that the massive potential of China as the world’s second-largest economy will be further unleashed.

Last but not least, we believe that the platform economy that Alibaba is part of can make unique and valuable contributions toward serving small and medium businesses, creating employment, and pursuit of better lives.

Thank you, everyone.