On August 15, Alibaba Group Holding Limited (BABA.NYSE/09988.HK) released its financial report for the first quarter of the fiscal year 2025 (for the three months ended June 30, 2024). The report indicates that Alibaba's revenue for the quarter was 243.24 billion yuan, compared to 234.156 billion yuan in the same period of the previous year, representing a year-on-year increase of 4%. Operating profit was 35.989 billion yuan, a decrease of 15% or 6.501 billion yuan from the previous year. Adjusted EBITA (a non-GAAP financial measure) decreased by 1% year-on-year to 45.035 billion yuan.

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

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Overall, Alibaba's domestic e-commerce Tmall Group continued to face pressure in terms of revenue and profit growth. Tmall and Taobao managed to stabilize their market share during the just-concluded 618 shopping festival, but the costs incurred to enhance consumer experience also increased. The revenue of Alibaba's International Digital Business Group and Cainiao continued to grow, but the overseas operations are still in a "cash-burning" mode. Alibaba Cloud achieved growth in both revenue and profit, with adjusted EBITA profit increasing by 155% year-on-year. Ele.me improved operational efficiency and increased business scale, leading to a reduction in losses for the local life group.

Increased e-commerce investment, profit under pressure

The financial report mentioned that during the just-passed 618, Tmall achieved strong growth in GMV and maintained a stable market share. However, the revenue of the Tmall Group decreased during the reporting period.

The report shows that the Tmall Group achieved double growth in the number of buyers and purchase frequency in the quarter, with a double-digit year-on-year increase in order volume. The number of 88VIP members continued to grow at a double-digit rate year-on-year, exceeding 42 million. However, behind the growth in orders, Alibaba's investment costs in e-commerce also increased.

Data shows that Alibaba's revenue from China's retail business decreased by 2% in the quarter, mainly due to a 9% decrease in direct sales and other income. Thanks to the growth in GMV, Tmall's customer management revenue increased by 1% year-on-year, but adjusted EBITA decreased by 1%, mainly due to increased investment in user experience (thereby increasing consumer retention and purchase frequency) and technological infrastructure, partly offset by the reduction in losses from certain businesses.

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

In terms of overseas e-commerce operations, the International Digital Business Group and Cainiao's cross-border fulfillment services continue to develop in synergy, both achieving high-speed revenue growth. However, at the same time, the International Digital Business Group's losses have expanded, and Cainiao's profits have declined. On the road to expanding overseas, Alibaba is still in the investment phase.

Financial report data shows that in this quarter, Alibaba's 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 increased investment in AliExpress and Trendyol's cross-border businesses, the International Digital Business Group reported an adjusted EBITA loss of 3.706 billion during the reporting period, compared to a loss of 420 million in the same period last year. Due to increased investment in cross-border logistics fulfillment solutions, Cainiao's adjusted EBITA decreased by 30% in this quarter.Recently, Lazada announced that it achieved positive adjusted EBITDA in July, turning losses into profits. Amid fierce competition in the overseas cross-border e-commerce platform market, how to maintain market size while improving operational efficiency and achieving profitability in more businesses is becoming an important issue for Alibaba.

AI Drives Alibaba Cloud Back to Growth

Apart from e-commerce, Alibaba Cloud is considered another core business of Alibaba.

Financial report data shows that Alibaba Cloud's revenue grew by 6% to 26.549 billion yuan this quarter, with AI-related product revenue achieving triple-digit growth, public cloud business achieving double-digit growth, adjusted EBITA profit increasing by 155% year-on-year, and the single-quarter EBITA profit reaching 2.337 billion yuan. Alibaba stated in the financial report that the significant increase in Alibaba Cloud's profits was mainly due to focusing on the public cloud strategy and improving operational efficiency. Previously, Alibaba Cloud established the "AI-driven, public cloud first" strategy, reducing low-margin 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-related companies) grew by 6% year-on-year in this quarter, and the number of paying users on Alibaba Cloud's AI platform, Bailian, increased by more than 200% compared to the previous quarter.

"We are confident that Alibaba Cloud's customer revenue from 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 a continuous and profitable growth." Alibaba CEO Wu Yongming said in the financial report conference call that in the future, Alibaba Cloud will continue to optimize the cloud product structure, focus on competitive, sustainable gross margin, and replicable public cloud products, and enhance the synergy of cloud products in the AI era. It will help old customers to practice new AI needs on Alibaba Cloud and also enable AI-native enterprises 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) decreased by 56% year-on-year. Alibaba stated in the financial report that the year-on-year decline mainly reflected the increase in spending related to Alibaba Cloud infrastructure investment and other changes in working capital caused by Alibaba's plan to reduce direct business operations.

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

Alibaba's management stated in the financial report conference call that in addition to core businesses such as Taobao Tmall and Alibaba International Digital Business, loss-making businesses such as local life are improving monetization capabilities and operational efficiency. "We expect most businesses to achieve break-even and gradually start to contribute to scaled profitability within 1 to 2 years."

After the release of the financial report, Alibaba's US stock price fell nearly 4% before the market opened, and the stock price rose after the opening. As of the time of writing, Alibaba's US stock is quoted at $80.97 per share, up 1.89%.