Alibaba (Minutes): Pulling 10cm! What explosive information was released during the conference call?

The following are the minutes of the $Alibaba(BABA.US) FY26Q1 earnings call organized by Dolphin Research. For earnings interpretation, please refer to "Wolf Spirit Returns! 'Lost' Alibaba, Starting Over"

I. Review of Core Financial Information

1. Cash Flow: Operating cash flow of RMB 20.7 billion. Free cash flow outflow of RMB 18.8 billion. Capital expenditure (Capex) increased to approximately RMB 39 billion to accelerate the investment pace in "AI+Cloud" infrastructure.

2. Financial Position and Shareholder Returns: Holding nearly USD 50 billion in cash and equivalents, with a healthy balance sheet. Repurchased approximately USD 815 million in shares this quarter. Will continue to return value to shareholders through buybacks, dividends, and business investments.

3. Management emphasized that the company is clearly and firmly investing in the two historic opportunities of AI and domestic demand.

a. In AI: A commitment of RMB 380 billion in technology investment reflects the company's determination to build the core capabilities needed for AI proliferation. The accelerated growth of the cloud business demonstrates strong AI demand.

b. In Consumption: The focus on instant retail is to stimulate new consumer demand and unlock the long-term potential of the Chinese market. The integrated large consumption platform will better serve consumers.

c. Key Developments:

- 88VIP Members: The number of the most powerful consumer group continues to grow in double digits, exceeding 53 million.

- Taobao Big Membership System: Officially launched in August, it connects membership benefits across China's e-commerce, instant retail, and travel (Fliggy) platforms, with synergies implemented as planned.

4. International Digital Commerce Group (AIDC): Adjusted EBITA: Losses significantly narrowed, nearing breakeven. With improved operational efficiency, the UE of Choice and Trendyol international businesses has significantly improved.

5. Cloud Intelligence Group:

1. Revenue: Accelerated growth of 26% year-on-year, mainly driven by public cloud revenue growth.
2. AI Business Performance: AI-related revenue continues to maintain triple-digit growth, accounting for 20% of external revenue, and driving demand for traditional computing, storage, and other products.
3. Adjusted EBITA Margin: Remained relatively stable at 8.8%.

6. All Other Segments (reclassified to include Cainiao, AutoNavi, Big Entertainment, etc.):

1. Revenue: Decreased by 28% year-on-year, mainly due to the disposal of Sun Art Retail and Intime.
2. Adjusted EBITA: Loss of RMB 1.4 billion, mainly due to increased investment in technology businesses, partially offset by performance improvements in businesses like Freshippo.
3. Strategic Focus: While driving efficiency improvements across businesses, increase investment in AI to maintain competitive advantage.

II. Detailed Content of the Earnings Call

2.1 Key Information from Executive Statements

1. Significant Results in Instant Retail: In August, the number of monthly active buyers in instant retail reached 300 million, contributing to a 25% increase in monthly active buyers for the Taobao App. The daily order volume of the China e-commerce group continues to hit new highs.

2. Core Strategy One: AI + Cloud

a. AI-related revenue now accounts for over 20% of Alibaba Cloud's external commercialization revenue, achieving triple-digit growth for eight consecutive quarters. The development of AI applications has also driven rapid growth in traditional computing and storage products.

This quarter's capital expenditure (Capex) on "AI+Cloud" reached RMB 38.6 billion. Over the past four quarters, more than RMB 100 billion has been invested in AI infrastructure and product development. In the next three years, plans to invest RMB 380 billion in building cloud and AI hardware infrastructure.

b. Continued Leadership in Technology and Ecosystem:

- Enhanced large model capabilities, continuously releasing and open-sourcing new versions of the "Tongyi Qianwen" series models, achieving world-leading performance and successfully expanding overseas market share. Also open-sourced models for video generation, text-to-image, etc.

- Reached a strategic cooperation with global enterprise software service provider SAP, allowing SAP customers to deploy core systems on Alibaba Cloud and integrate the "Tongyi Qianwen" model, marking international enterprises' recognition of Alibaba Cloud's technical capabilities.

c. Comprehensive Upgrade of AI Native Applications:

- AutoNavi Map: Launched the world's first map-based AI native application "AutoNavi Map 2025," aiming to become a new entry point for future life services.

- DingTalk: Completed AI upgrade, creating the world's first Agent-driven work information flow.

- Taobao: Actively exploring AI search, AI advertising platform, and other consumer-facing AI application opportunities.

3. Core Strategy Two: Large Consumption Platform

a. Strategic Integration to Build a Unified Platform: Completed the strategic integration of Taotian Group, Ele.me, and Fliggy, forming Alibaba China E-commerce Group. Launched the Taobao Big Membership System, connecting membership benefits across Ele.me, Fliggy, AutoNavi, etc., covering all scenarios of "clothing, food, housing, and transportation," enhancing the comprehensive consumer experience.

b. Focus on Instant Retail to Meet One-stop Needs: Not focusing on single-category competition, but aiming to meet the one-stop needs of 1 billion consumers, shaping a new business form in the AI era. Believing that the integration of "near-field consumption" (instant retail) and "far-field e-commerce" can enhance business circulation efficiency and lay the foundation for the birth of a future "one-stop consumption assistant." Announced a new investment of RMB 50 billion in the consumption field.

c. Long-term Goal: Committed to building a large consumption platform with the best experience, the largest number of consumers, and the highest consumption frequency, leading the future RMB 30 trillion scale Chinese large consumption market.

2.2 Q&A Session

Q: How does management view the growth vision and opportunities of the Chinese instant retail market? What are the specific investment plans, and how long is the heavy investment phase expected to last? How will this investment create long-term value for Taobao and the entire Chinese e-commerce platform, and what synergies have been achieved so far (can you share the latest progress of "Taobao Flash Sale")? Finally, how should we expect this investment to impact the platform's GMV and customer management revenue (CMR) growth in the coming quarters?

A: We have achieved better-than-expected progress in the "Taobao Flash Sale" business. In the four months since its launch, especially since July, order scale, users, merchant supply, and logistics capacity have all exceeded expectations. Just looking at the share of takeaway orders delivered to homes, we are already leading the industry. Specifically, the peak daily order volume reached 120 million, with an average of 80 million orders on Sundays in August; monthly transaction users reached 300 million, a 200% increase from before April; the average daily active riders reached 2 million, a threefold increase from April, creating over a million new jobs. We have exceeded our first-phase goal of "user scale and mindshare." This business has also significantly driven the growth of the main Taobao App, in August, driving a 20% increase in daily active users on Taobao, and the increase in traffic and activity has brought growth in advertising and CMR, while reducing market expenses.

Regarding operational efficiency, we believe that scale is the premise of efficiency. In the past, it was meaningless to talk about efficiency when there was a huge gap in market share. Previously, our order scale was only 1/3 of our peers, with shares in many provinces and cities below 20%.

Now that we have achieved scale leadership, we will quickly improve efficiency to narrow the gap with our peers. In the short term, we will reduce losses by optimizing user structure (good retention of new users, increasing proportion of old customers), optimizing order structure (increasing the proportion of high-value orders such as main meals and retail), and optimizing fulfillment costs (once orders stabilize, the additional logistics costs invested to ensure experience in the early stage will significantly decrease), expecting that under the current level of discounts, unit economic loss (UE) can be halved. In the long term, as order density increases and refined operations are implemented, we are confident in achieving industry-leading efficiency. At the same time, we will not view the profitability of the takeaway business in isolation, but will consider its comprehensive benefits to e-commerce, believing that under the premise of maintaining price competitiveness, flash sales can bring positive economic returns to the overall platform.

In the non-meal retail category, we are developing through two models: "near-field native" and "far and near-field combination." On one hand, relying on Alibaba's ecosystem supply chain, our "lightning warehouses" have exceeded 50,000, with orders growing over 360% year-on-year; and relying on Freshippo to develop fresh pre-positioned warehouses, driving a 70% year-on-year increase in Freshippo's online orders. On the other hand, Tmall Supermarket will be fully upgraded to a near-field flash sale model, and millions of offline stores of Tmall brands will also be connected to Taobao Flash Sale, achieving online and offline integration.

We expect that in the next three years, instant retail will bring an additional RMB 1 trillion in transaction volume to the platform. We believe that moving from a single dominant player to multi-platform participation is beneficial to the industry, merchants, and consumers, and our investment is driving industry transformation while also promoting consumption and economic development.

Q: This quarter, cloud business revenue accelerated to 26% year-on-year growth. How should we view this acceleration trend? Is this momentum sustainable in the coming quarters and throughout fiscal year 2026? Compared to overseas markets, how should we view the monetization pace of Alibaba Cloud's AI business? This quarter, cloud business profit margin reached 8.8%. What is the future profit margin outlook? Given the outstanding growth, can you specifically talk about which different industry customer demands are driving this growth this quarter? How should we expect capital expenditure for the cloud business in the future?

A: Regarding growth expectations, we observe that AI-driven customer demand is very strong, reflected in two aspects: first, enterprises are using stronger large model capabilities to develop new applications; second, using large models to replace traditional CPU computing functions. In terms of AI training and inference demand, in addition to foundational large model companies continuously iterating, we also see growing demand from automakers, education, multimedia, and other enterprises using their proprietary data to train exclusive models. Additionally, many enterprises are conducting post-training based on our open-source Tongyi models, bringing new commercialization opportunities. Therefore, combined with the rapid growth of inference demand, we expect Alibaba Cloud to maintain a continuous upward growth trend in the coming quarters.

Regarding the commercialization pace compared to overseas markets and our gross margin, we judge that AI will significantly increase the concentration of the cloud computing market because developers tend to choose vendors with comprehensive technical product portfolios. Alibaba Cloud has leading advantages in traditional computing, databases, and new AI technology stacks (computing power, model capabilities), and has a developer-friendly open-source ecosystem. Therefore, our current strategic focus is to leverage AI opportunities to grow at a speed exceeding the market average and continue to expand market share, so acquiring more users and application scenarios takes precedence over improving gross margin.

Regarding capital expenditure (Capex), we will adhere to the plan to invest RMB 380 billion over the next three years, but each quarter may fluctuate due to supply chain conditions. At the same time, to cope with global AI chip supply and policy changes, we have prepared diversified supply chain reserve plans with partners and are confident in completing the investment plan as expected.

Q: Given that the takeaway business has shown good cross-selling results, does the company plan to increase investment in the "in-store" business (such as dining, travel, entertainment, etc.) within local life services? We noticed that "Ele.me Koubei" is strengthening consumer voucher promotions in some regions. Does this indicate new investment or expansion plans for the in-store business in the coming months? How should we view its development strategy?

A: Due to the rapid development of the flash sale business, this business channel already has a large active user base of 150 million daily. We observe that among these users, there is a demand for "in-store pickup" and "in-store group buying." Therefore, from the perspective of meeting users' diverse needs and to create better synergy with our "to-home" business, we are conducting related tests and explorations in some cities, considering providing users with more diverse in-store services.

Q: Management mentioned persisting in investing in the two historic opportunities of AI and domestic demand. For domestic demand, besides the already discussed instant retail (takeaway), what are the specific investment plans? Will the investment cover other areas such as the supply chain or consumer side? What is the investment pace and scale in the coming years?

A: Regarding investment in the domestic consumption field, we want to emphasize that this is not a new initiative but a continuous strategy. In the past, we have been investing on both the user side and the supply chain side through different businesses such as Taobao, Tmall, and Freshippo. Recently, we announced an additional RMB 50 billion investment because we see a major historic opportunity in the huge potential of combining "far-field" e-commerce with "near-field" instant consumption.

In specific execution, we will control the pace of investment based on actual market conditions and decide the final investment amount based on market development. Our continuous investment in the past, combined with this new investment, together build our strong capabilities in the consumption market, enabling us to integrate resources and seize this historic opportunity. This is our overall consideration for investment in the consumption field.

Q: This quarter, CMR achieved a strong 10% year-on-year growth. However, starting in September, the high base effect brought by last year's increase in basic service fees will become apparent, posing growth challenges. How does management view the growth drivers of CMR in the coming quarters? How much take rate growth is expected from the increased penetration of full-site promotion (full-site push)? Can the increase in traffic and consumption frequency brought by instant retail (takeaway) effectively accelerate the growth of the main site's GMV and further support the growth rate of CMR?

A: Regarding the growth of CMR (Customer Management Revenue), its core driver is indeed the significant improvement in the Take Rate (monetization rate). This quarter's growth is mainly attributed to two factors: first, the basic service fee of six per thousand introduced last year, and second, the continuous increase in the penetration rate of AI-driven full-site promotion commercialization products. We expect these two factors to continue to have a positive impact on the Take Rate in the coming quarters. At the same time, the flash sale business has shown very positive momentum in user growth and purchase frequency, which will also contribute positively to the Take Rate and overall CMR. Therefore, we expect CMR to continue to maintain high growth like the past two quarters in the coming quarters.

Q: As AI transitions from an "training-centric" era to an "Agent-centric" era, what additional capabilities, resources, or investments do we need to adapt to this transition? Can you share the latest development progress in Agent products and applications?

A: Regarding your question about AI evolving from simple chatbots to the era of complex Agents, we observe several key trends and opportunities. First, models need to have the ability to handle longer context windows to understand and execute more complex tasks and longer thought chains. Second, models must learn to use a diverse toolchain to access and operate different enterprise internal systems. This evolution presents an important opportunity for us as a cloud computing provider.

Since Agents often need to call a large amount of computing resources (such as virtual machines, browsers, or mobile simulators) when executing tasks, this brings new demands to the underlying infrastructure. To this end, Alibaba Cloud has launched a new product called "Agent Bay," which provides the underlying sandbox environment needed for Agent operation. We believe that the Agent-driven era is a great opportunity for Alibaba because Alibaba Cloud not only hosts numerous enterprise customers across various industries, providing a suitable sandbox environment for Agent operation, but our large models are also continuously iterating and evolving to better adapt to the Agent application model.

We have two important supplements on the Agent issue. First, we believe that in the AI era driven by Agents, the model's coding ability is crucial. A model that excels at writing code can more effectively connect and call a vast array of tools and enterprise internal systems, thereby solving complex tasks faced by enterprises and consumers.

Second, at the Agent product level, we are actively integrating it with Alibaba Group's vast ecosystem. For example, for the customer service needs commonly required by e-commerce enterprises, Alibaba Cloud not only provides the underlying computing power and infrastructure but also collaborates with business units such as Taobao, DingTalk, AutoNavi, and Alipay to jointly create AI tools that can automatically execute tasks at the business level, helping enterprises develop Agents that more efficiently solve their internal specific problems.

Q: Looking back at the acquisition of Ele.me in 2018, we invested a lot of resources but did not achieve the strategic goal of surpassing competitors in the instant retail field. Considering that we are refocusing on the flash sale business this time, the company must have conducted in-depth reviews and reflections. Compared to last time, what are the core strategic and tactical differences this time? What different approaches will we take to ensure success this time?

A: First, regarding Ele.me, although its market share has not grown significantly—this is related to our past investment strategy and resource allocation—it has made great progress over the past few years, especially in building core foundational capabilities. Without the merchant network, mature logistics system, and operational experience accumulated by Ele.me, the Taobao Flash Sale business could not have rapidly grown from zero to 120 million orders in just four months while maintaining a good user experience.

Second, the approach this time is fundamentally different from before. The success of the instant retail business requires the combination of merchants, logistics, and users, and the absence of any link will lead to inefficient investment. Today, we have achieved this ideal combination through integration: we combine Taobao's massive and active user base with Ele.me's existing merchant network and mature instant delivery system. Investing on this solid foundation greatly increases the efficiency and likelihood of success.

Finally, our investment thinking this time is also different from before. We focus on comprehensive returns from short-term, medium-term to long-term, rather than pursuing a single indicator. Of course, there is still a lot of work to be done to fully succeed in this business.

Q: We have invested nearly RMB 50 billion in the instant retail field. How should we view the return on this investment? Considering that the AI and cloud computing fields may have faster growth rates and larger potential market sizes (TAM), how does the company internally balance and allocate capital between the two strategic directions of "retail" and "AI"? What are your thoughts on this?

A: We believe that AI and consumption (especially instant retail) are the two largest historic opportunities at present, so strategic investments in these two areas are necessary. Despite the large investment amounts, with our strong cash reserves, cash flow, and healthy balance sheet, we have sufficient capacity to make "saturated investments" in these two directions.

The core of our investment decision is to balance short-term and long-term returns. In the AI field, our investment has already led to sustained growth in the cloud business, and it is expected to further accelerate in the coming quarters. At this stage, our primary task is to expand investment to capture the market, so short-term focus on profit margins will be relatively less, but this does not mean we do not pay attention.

In the flash sale (instant retail) aspect, although the business itself is not yet profitable, its combination with Taotian Group has already produced significant synergies. It has brought valuable traffic and increased user purchase frequency, which will feed back into Taobao platform's advertising revenue and overall ecosystem, and promote the shift from "far-field" to "near-field" consumption. These are strategic investments that can generate substantial returns in the future. Therefore, we have ample resources for dual-line investment, with the key being to focus on long-term value rather than just short-term returns.

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