Middle-aged Alibaba, the value lies in hard work

This article mainly analyzes Alibaba's first quarter performance report in 2024, the efforts and changes made by the company in the face of pressure and challenges, and its expectations and plans for future development.

Jack Ma's words "Ali will change" are being turned into "Ali will change dramatically" by Wu Yongming.

On May 14, Alibaba released its performance announcement for the quarter ending March 31, 2024 and the fiscal year 2024. According to the announcement, Alibaba's revenue for the fiscal year ending March 31, 2024 was RMB 941.168 billion, an increase of 8% year-on-year; adjusted EBITA was RMB 165.028 billion, an increase of 12% year-on-year. In the quarter ending March 31, 2024, Alibaba's quarterly revenue was RMB 221.874 billion, an increase of 7% year-on-year.

Not only did the group's performance pick up, but almost all of Alibaba's six subsidiaries resumed their growth.

During the quarter, Taotian Group grew by 4% year-on-year, Cloud Intelligence Group grew by 3% year-on-year, Alibaba International Digital Business Group grew by 45%, Cainiao Group grew by 30%, Local Life Group grew by 19%, and Big Entertainment Group grew by -1%... Compared with the previous one-to-N model, the Alibaba giant wheel is now turning again.

The optimization of various financial indicators means that continuous "explosive reforms" are bringing positive impacts to Alibaba.

The performance released this time is also the first quarterly financial report after Wu Yongming, one of the Eighteen Arhats, took on three CEO positions: Alibaba Group, Taotian Group, and Alibaba Cloud Intelligence Group. It is of great significance for us to gain insight into the direction of Alibaba under Wu Yongming's leadership.

Although the financial report performed well, it will take time for public confidence to recover. After the financial report was released, Alibaba's pre-market share price fell by about 5%. This time, even though Alibaba once again issued a dividend, the market was not satisfied.

Judging from the market, part of the reason is profitability concerns caused by declining profits. The operating profit for the quarter was 14.765 billion yuan, a year-on-year decrease of 3%, and the adjusted EBITA was 23.969 billion yuan, a year-on-year decrease of 5%. Secondly, in this context, the e-commerce and cloud business industries are extremely involuted, and Alibaba is still facing huge pressure. In particular, AI, which Alibaba has invested heavily in, is still a long way from being able to stand alone.

Since the Alibaba Group was split into six parts, all the key figures, from Zhang Yong, Dai Shan, Feng Qingyang to Cai Chongxin and Wu Yongming, have emphasized that "Ali will change."

Today, the dawn of hope has not yet fully appeared, and Alibaba still needs to continue to prove that it is "good at reform."

1. Taobao offers discounts and pursues GMV

The good news is that Taotian’s GMV achieved double-digit growth, the bad news is that it was at the expense of profits.

According to the financial report, as of the quarter ended March 31, 2024, Taotian Group's revenue increased by 4% year-on-year to 93.216 billion yuan; Taotian Group's total merchandise transaction volume (GMV) and number of orders both achieved double-digit year-on-year growth, mainly driven by the increase in the number of purchasing users and transaction frequency.

"For us this year, our top priority is to improve consumer experience and the growth in GMV brought about by the improved consumer experience," said Alibaba Group CEO Wu Yongming in a conference call.

Over the past year, Taotian’s emphasis has shifted from price power to content warfare and then to “user first,” going deeper and deeper into the fundamentals.

Since the beginning of this year, Taotian has been working doubly to make up for its shortcomings in user experience, including but not limited to the launch of pay-later and refund-only functions, a new store label system, free shipping and village delivery in Xinjiang, 88VIP membership rights upgrade, the cancellation of pre-sales on June 18, the restart of the Taobao web version and Taojianghu forum... and continuous changes have been made in multiple dimensions including logistics, after-sales, and promotional activities.

This is because Taotian's main income comes from customer management income, and it makes money by serving merchants. As e-commerce enters the inventory stage, under Taotian's B2B2C model, the investment of B-end merchants in the platform is determined by the business growth space, and the premise of business growth is the growth of the user market or maintaining activeness. Users are the basic base that determines the life and death of a brand.

In particular, Taobao’s “free order activity” recently started off low-key but has spread wildly on social platforms: users are randomly drawn to qualify for a free order after placing an order; many users place repeated orders, and then get a refund when they don’t win. Its attitude of pampering users without any bottom line is comparable to that of Pinduoduo.

On the evening of November 16 last year, Wu Yongming said, "Purchase frequency most directly reflects users' recognition of the consumption platform."

With the help of the increase in consumption frequency, Taotian has caught up with the growth rate of GMV, and the reason behind this is that Taotian is constantly making concessions.

After all, if you want to attract consumers, price power is the most direct weapon. Taotian is ceding profits to merchants and reducing their operating costs through AI delivery and other means, thereby guiding merchants to lower product prices and attract consumers.

According to the financial report, Taotian Group's adjusted EBITA was 38.501 billion yuan in the quarter, down 1% year-on-year, mainly due to increased investment in improving consumer retention rate, increasing purchase frequency, and technological infrastructure, which was partially offset by an increase in customer management service revenue (CMR).

However, customer management revenue grew by 5% year-on-year, mainly driven by revenue growth from search and recommendations, which was less than the double-digit growth in GMV, and Taobao's overall monetization rate declined.

This reduction in profits and decline in monetization rates means that Taobao is actually shifting from a merchant-first to a user-first approach.

However, Taobao's e-commerce is still a traffic business, and the essence of user return is to get traffic back. In the short term, Taobao needs to rely on user experience to get traffic back, but in the long term, Alibaba needs to continue to find new sources of traffic and better traffic monetization efficiency.

From the perspective of traffic acquisition and monetization, internally, Taobao is increasing its investment in content-based businesses such as Taobao Live and Taobao Shopping; externally, Alibaba first connected with Tencent Advertising last year, and recently connected with Douyin to improve the conversion data of grass-planting, promote the improvement of the chain of full-site promotion, and launched new delivery strategies around small and medium-sized businesses and combined with AI.

Since most of Taobao's revenue comes from customer management, Alimama becomes the next highlight.

As the builder of Alimama from 0 to 1, Wu Yongming played a crucial role. Regarding the current short-term decrease in monetization rate, Wu Yongming seemed confident, "How to further improve CMR through advertising products in the future is a deterministic process, but we are now controlling this process to give consumers a better experience."

During the conference call, he also mentioned that the company will gradually launch commercial products to increase return on investment and merchant penetration, especially among small and medium-sized enterprises. By then, the growth of CMR will gradually catch up with and eventually reach the same level as GMV.

Among them, the highly anticipated full-site promotion mainly focuses on how to simplify the delivery process for small and medium-sized advertisers to promote their business growth. It is still in the small-scale customer testing stage to adjust the algorithm model.

However, it is estimated that after the official launch of the full-site promotion, it is expected to take some time to increase customers and truly show growth benefits, which will take about 12 months, which is still a considerable amount of time.

2. Spending money to grab market share, overseas business surges

Taobao Group may be able to wait for the long supply-side reform represented by Alimama, but Alibaba Group can’t.

As the domestic e-commerce industry has already reached its peak, the international market is Alibaba's next imagination.

In the past year, with Douyin sending out TT stores to stir up the situation in Southeast Asia and Pinduoduo mobilizing Temu to plunder the North American market, Chinese e-commerce has been rolling up overseas, and the entire Alibaba International Digital Commerce Group (AIDC) has been expanding more and more fiercely, trying to "copy" Taobao overseas.

At present, AIDC's growth rate is very impressive. As of the quarter ending March 31, 2024, AIDC's revenue increased by 45% year-on-year to 27.448 billion yuan, and the overall orders of AIDC's retail platform increased by 20% year-on-year, due to the growth of AIDC's cross-border business, especially the growth of AliExpress Choice business.

AliExpress’ Choice business was officially launched in March 2023, which was a watershed moment for the development of AliExpress.

Combining Cainiao's logistics capabilities, Choice provides sellers with a selected seller plan based on fully managed and semi-managed services. Since its launch, the Choice channel has driven a 50% increase in orders on the AliExpress platform. In April 2024, Choice accounted for about 70% of AliExpress's overall orders, becoming the main driving force for AliExpress's order growth.

In addition to AliExpress, Trendyol continued to record double-digit order growth this quarter. While maintaining its leading e-commerce position in Turkey, Trendyol further expanded its cross-border business in the Gulf region; while Lazada continued to focus on improving operational efficiency. With further improvement in monetization rate and optimization of operations, Lazada's loss per order narrowed significantly year-on-year this quarter.

In general, unlike the domestic e-commerce business where every inch is fought for, overseas business is almost a drastic spending spree and a frantic grab for market share.

For four consecutive quarters, AIDC has maintained a growth rate of more than 40%, but its losses have also been expanding. This quarter, AIDC's adjusted EBITA loss reached 4.085 billion yuan, an increase of 88% year-on-year.

In the conference call, Jiang Fan mentioned that there were two main reasons for the loss in the previous quarter: "First, we made more aggressive investments in some emerging markets last quarter; second, the proportion of the Choice business model is increasing, but its profitability still needs time to improve."

Compared with other cross-border platforms, AIDC has been working overseas for many years. It has both AliExpress, which has cross-border attributes, and Lazada and Trendyol, which have stronger local attributes. It also has Cainiao as the underlying support. It has more and more advantages in the most complex cross-border fulfillment link, and has derived a variety of cross-border models.

This also means that AIDC can match its operating efficiency according to local characteristics in the process of market expansion. For example, some categories may be more suitable for cross-border sales due to their characteristics, and develop under semi-managed, fully managed and third-party models; and for categories that are more suitable for local delivery, merchants can also stock many products overseas and develop in a "book-to-book" model.

It is worth noting that the advantages of the collaboration between AliExpress and Cainiao in cross-border logistics operations are becoming more prominent.

This quarter, AliExpress's year-on-year order growth came from the highly competitive prices and high delivery speeds that Choice provided to consumers. The 5-day and 10-day delivery rates both doubled year-on-year; and the rapid growth of AIDC also contributed to Cainiao's performance.

For the three months ended March 31, 2024, Cainiao Group's revenue was RMB 24.557 billion, a year-on-year increase of 30%, mainly contributed by the growth in revenue from cross-border logistics fulfillment services.

As the underlying infrastructure, Cainiao is also investing heavily. This quarter, Cainiao launched the "Super Large Items Special Line" for international express delivery, through which merchants can entrust large and overweight goods such as sports equipment, furniture, pet supplies, and musical instruments. At present, this service has been implemented in core markets such as South Korea, the United States, Spain, and France; there is also a "cross-border clothing special line" that focuses on the core clothing industry belt and serves merchants such as AliExpress clothing sellers and factories to go overseas. Through this special line, clothing products shipped to the United Kingdom, Belgium, the Netherlands and other countries can arrive in as fast as 5 days.

However, with the acceleration of global expansion, the window period left for AIDC is also shrinking, and there are still many unknowns for AIDC as its losses continue to expand.

3. The explosive reform cannot stop

From Joseph Tsai, Wu Yongming to Jack Ma, the partners took turns to reflect on Alibaba's corporate problems, and after splitting it into six, almost all of its businesses were vigorously rectified.

The highly anticipated Cloud Intelligence Group has become more focused, reducing its lower-margin project-based contract revenue, and its core cloud public product (including elastic computing, database, AI, etc.) revenue has increased by double digits year-on-year.

During the quarter, the Cloud Intelligence Group's revenue increased by 3% year-on-year to 25.595 billion yuan, and its adjusted EBITA increased by 45% year-on-year to 1.432 billion yuan. Therefore, the Cloud Intelligence Group is the business segment with the largest year-on-year increase in adjusted EBITA in Alibaba during this quarter.

The local life group's revenue increased by 19% year-on-year to 14.628 billion yuan; the adjusted EBITA was a loss of 3.198 billion yuan, narrowing by 21.2% year-on-year. The growth of orders from Ele.me and AutoNavi was the driving force behind the growth of the local life group's revenue, and one of the core reasons for the narrowing of losses was the improvement of the loss situation of Ele.me's home delivery business.

In addition, the revenue of the Greater Entertainment Group in this quarter was 4.945 billion yuan, a year-on-year decrease of 1%, due to a slight decrease in Youku's revenue. However, the revenue of Alibaba Pictures' film business increased, and the revenue of Damai.com, an online ticketing platform for performances and events, increased rapidly year-on-year.

From the current perspective, the results have just begun to emerge, and no one can be sure of the final outcome of this explosive reform, whether it will be a failure or a success.

However, for a company with a huge business and scale like Alibaba, it is already very difficult to unify the pace of change from top to bottom and from left to right.

Explosive changes are not scary, what is scary is the changes without direction and repeated over and over again.

With Hema and Cainiao withdrawing from the stock market, and Cainiao and Alibaba Cloud being split from independent businesses to being integrated with Taobao, Wu Yongming has increasingly overturned Zhang Yong's decisions since taking office. However, since Wu Yongming took office, Alibaba's policy reforms have become more consistent. In other words, Alibaba has become more and more clear about how to change.

On September 12 last year, Alibaba Group’s new CEO Wu Yongming issued a letter to all employees, establishing two major strategic focuses: user first and AI-driven, which have been gradually implemented to this day.

On this basis, Alibaba will increase strategic investment in three types of businesses: technology-driven Internet platform business, AI-driven technology business, and global business network.

In addition to the fact that overseas business may bring Alibaba growth dividends similar to those during the heyday of Taobao, in the long run, Alibaba has high hopes for the AI ​​era.

Looking inward, after the Tongyi big model came out in April last year, it started frantically updating. Recently, Alibaba Cloud has brought out the latest upgraded Tongyi Qianwen 2.5. On the authoritative benchmark OpenCompass, Tongyi Qianwen 2.5 scored the same as GPT-4 Turbo and is known as "the most powerful Chinese big model on the planet."

Externally, Alibaba has also become a major financial backer of AI startups, connecting the five major unicorns in the domestic large-scale model startup field through investment - Dark Side of the Moon, MiniMax, Zhipu AI, Baichuan Intelligence and Zero One Everything.

For Alibaba, investing a lot of resources in researching general artificial intelligence (AGI) and developing large-scale models has three important goals:

1) Exploration of large models of artificial intelligence and in-depth research on AGI.

2) Tongyi Big Model is very compatible with Alibaba Cloud's business model. Alibaba plans to optimize the hardware and software of Tongyi Big Model and Alibaba Cloud's advanced AI infrastructure to provide Chinese developers and enterprises with a large model inference service with powerful AI capabilities and high cost performance.

"Globally, there are not many companies like Alibaba that have both Alibaba Cloud as their main business and big models as their main business. We think this provides a huge opportunity."

3) The large model can provide basic model support for the AI ​​development of other Alibaba businesses. This support will enable other businesses such as DingTalk, Quark, and Taobao to have a more powerful AI underlying development platform, helping their applications to better transform towards AI.

Today, Alibaba stands at the node of the changing times. It only has a clear direction but no clear path. This also means that Alibaba must continue to make explosive changes, and the rest will be left to time.