Alibaba: Business continues to slim down and squeeze profits, looking forward to AI’s opportunity for cloud computing business

On the evening of February 23, Beijing time, Alibaba announced its results for the third quarter of FY2023 as of the end of 2022: Ali’s revenue was RMB 247.8 billion, a year-over-year increase of 2%, slightly exceeding market expectations of RMB 245.9 billion. The profit after excluding equity and amortization expenses reached 52 billion, which clearly exceeded the market expectation of 47 billion.

The overall financial performance of this quarter exceeded expectations, continuing the trend of squeezing profits in the past few quarters.

In terms of business, due to the epidemic and competition, the performance of domestic e-commerce was lower than the overall e-commerce market and market expectations; international retail e-commerce rebounded significantly, and Turkey’s Trendyol performed outstandingly; cloud computing business fell more than expected, the growth rate of non-Internet customers has slowed down sharply due to the impact of the epidemic in this quarter; the domestic retail self-operated business has grown faster than expected, and the business of Hema and Maochao has benefited from the increase in delivery demand under the epidemic. In the local life, Ele.me’s business efficiency is optimized, and the business of amap and other stores is severely limited;

Profit was significantly higher than expected, R&D expenses fell for the first time, sales expenses continued to fall, and management expenses increased by more than 20% (more than 4,000 people were laid off in this quarter, and the increase in layoffs compared with the previous quarter led to an increase in administrative expenses such as layoff subsidies)

Ali’s financial report for this quarter has no significant surprises. It continues the story of the shrinkage of various business segments and the reduction of expenses in the previous quarters. Due to the epidemic's impact, the poor revenue growth in the fourth quarter has been within the market’s expectations; Showing signs of recovery in optional consumption, it is highly probable that Ali’s dominant beauty and apparel categories will rebound in the next few quarters. However, in the face of the low-price competition strategy of Pinduoduo and JD.com’s substantial subsidies, the growth rate is expected to not return to pre-epidemic. Pay attention to the opportunities and changes of cloud computing in the context of generative AI. As the leading enterprise of cloud computing in China, the surge in demand for computing power from new technologies is an important opportunity for Alibaba Cloud. It has layouts in both Iaas and Paas. Other businesses continue to pay attention to the degree of loss reduction

Alibaba's business lines are relatively complex. From the perspective of revenue, the core e-commerce business accounts for more than 80%, including domestic e-commerce, international e-commerce, local life and Cainiao; cloud computing has always been regarded as a new growth point and the direction of development, occupying a leading position in the domestic cloud computing market; digital entertainment continues to slim down, and is committed to reducing losses

Customer management revenue (Taobao Tmall advertising revenue, commission) fell by 9% year-on-year, while Taobao Tmall's online physical product GMV fell in the mid-single digits year-on-year. Compared with -6.5% in the previous quarter, the decline is still widening.

Compared with the domestic online retail sales of physical goods in the fourth quarter, which increased by more than 10% year-on-year, the GMV growth of Taobao and Tmall was significantly weaker than that of the broader market. The main reason is that the fourth quarter was affected by the epidemic in October-November and the large-scale infection after the liberalization led to logistics shortages. Ali's most important optional consumption, such as clothing and beauty makeup is relatively weak in the context of weak consumer demand, continued competition, interference from the epidemic, and a downward macroeconomic environment. At the same time, logistics performance is restricted, resulting in a high return rate.

In terms of categories, the growth rate of consumption of non-necessities such as clothing has declined, and the growth rate of health care products has increased. However, the fourth quarter is already the bottom of Ali’s e-commerce revenue. With the normal recovery of business activities in the first quarter, there are signs of recovery in the second half of February. The recovery of optional consumption is a high probability event. In the future, the difference between the growth rate of CMR and GMV growth will be reduce

The domestic asset-heavy retail business mainly includes Hema, Sun Art Retail, Intime, Maochao self-operated, Tmall self-operated, Kaola, and Ali Health’s self-operated business. Retail revenue in this quarter was RMB 74.4 billion, a year-on-year increase of more than 10%, exceeding market expectations of RMB 73 billion. Mainly due to the contribution of Hema Xiansheng and Ali Health, especially during the epidemic situation, people's demand for fresh food and drug delivery has increased significantly.

International e-commerce companies (AliExpress, Lazada, Trendyol, Alibaba), the overall order volume of international retail in this quarter increased by 3% year-on-year, and the order volume of Trendyol increased strongly. Lazada's orders in Southeast Asia rebounded slightly year-on-year, and the average loss per order continued to improve. Retail revenue increased by more than 25%, and the loss further narrowed to 760 million. International wholesale revenue was flat in the quarter.

Alibaba Cloud and DingTalk's cloud computing revenue was 20.2 billion, an increase of only 3% year-on-year, and the growth rate slowed down rapidly, lower than the expected RMB 21.3 billion, and the growth rate further declined from the previous quarter's 4%. The revenue contraction slowed down from 18% in the previous quarter to 4%, and the impact of TikTok’s abandonment of Alibaba Cloud has gradually weakened. Non-Internet businesses fell sharply from 28% year-on-year growth in the previous quarter to 9%, and its contribution dropped from 58% to 53%. The reduction in Internet customer investment and the impact of the epidemic on project delivery progress has led to a slowdown in the growth of cloud business revenue.

Pay attention to the opportunities and changes of cloud computing under the background of generative AI. As the leading enterprise of cloud computing in China, the surge in demand for computing power from new technologies is an important opportunity for Alibaba Cloud, which has layouts in both Iaas and Paas.

Revenue from local life services (home business: Ele.me; In-store business: Amap, Fliggy) was 13.2 billion, a year-on-year increase of 6%. It is mainly due to the increase in the unit price of Ele.me customers and the increase in demand under the epidemic. The in-store business of Amap and Fliggy has been severely affected by the epidemic. Ele.me’s digital revenue growth may slow down in the coming quarters, mainly because the subsidy base period has passed (user subsidies during the subsidy period lead to a lower revenue base, resulting in a higher year-on-year growth rate), which will return to the increase in order volume and customer unit price.

Ali Entertainment’s revenue this quarter was 7.6 billion, a year-on-year decrease of 6%. The main reason is that the box office revenue of offline cinemas has shrunk due to the epidemic, and Youku’s lack of popular works in the fourth quarter, but the loss continued to narrow.

Gross profit margin: The gross profit margin of this quarter is 40%, which is basically the same as the same period last year. The revenue of 3P e-commerce business with higher gross profit has declined, and various businesses have reduced losses.

Sales expense ratio: Sales and marketing expenses were 29.5 billion, a year-on-year decrease of 17%, and the rate of decline was basically the same as that of the previous quarter. Sales expenses were reduced in the fourth quarter under the epidemic.

R&D expense ratio: R&D expenses are 9.8 billion, a decline of up to 15%.

Management expense ratio: a year-on-year increase of 26%. Ali laid off nearly 10,000 employees in the June quarter, nearly 2,000 at the end of September, and nearly 4,200 at the end of December (nearly 240,000 employees at the end of the month).

Adjusted EBITDA: The adjusted EBITA profit reached 52 billion, far exceeding the market expectation of 47 billion. The loss reduction of various businesses and the contraction of the expense ratio have brought about an improvement in profits