Alibaba Group Q1 2027 Earnings Call Transcript

Quartr
Provided by Quartr
August 20, 2026

Key Takeaways

  • Positive Sentiment: Alibaba’s AI and cloud momentum accelerated, with external cloud revenue rising 45% year over year, AI-related products reaching a RMB49.5 billion annualized run rate, and cloud EBITDA margin expanding to 11.6%.
  • Positive Sentiment: Management expects cloud growth and profitability to continue improving, supported by strong demand for AI compute and MaaS, which surpassed RMB16 billion in ARR in August and remains on track to exceed RMB30 billion by year-end.
  • Negative Sentiment: Aggressive AI infrastructure investment weighed on cash generation: quarterly CapEx reached RMB67.7 billion, free cash flow was a RMB44.7 billion outflow, adjusted EBITDA fell 30%, and GAAP net income declined 75% year over year.
  • Positive Sentiment: E-commerce remained relatively resilient, with China quick-commerce revenue up 45% and unit economics improving; management expects non-food quick commerce to surpass food next fiscal year and the business to become profitable in FY29.
  • Negative Sentiment: The AI Labs and Applications segment posted a RMB13.9 billion adjusted EBITDA loss due to continued AI investment and Qwen inference costs, although management expects losses to narrow as training and marketing efficiency improve.
AI Generated. May Contain Errors.
Earnings Conference Call
Alibaba Group Q1 2027
00:00 / 00:00

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Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group's June quarter 2026 results conference call. At this time, all participants are on listen-only mode. After management's prepared remarks, there will be a Q&A session. I would now like to turn the call over to Lydia Liu, Head of Investor Relations of Alibaba Group. Please go ahead.

Lydia Liu
Lydia Liu
Head of Investor Relations at Alibaba Group

Thank you. Good day, everyone, and welcome to Alibaba Group's June quarter 2026 earnings conference call. Joining the call today are Joe Tsai, Chairman, Eddie Wu, Chief Executive Officer, Toby Xu, Chief Financial Officer, Jiang Fan, Chief Executive Officer of Alibaba E-commerce Business Group. Before we get started, I would like to remind you that today's discussion may contain forward-looking statements based on management's current expectations that are subject to risks and uncertainties. We also make reference to non-GAAP financial measures. Reconciliations between GAAP and non-GAAP measures are included in today's earnings press release and investor presentation. Our comments will be on year-over-year comparisons unless we state otherwise. A replay of the call will be available on our website later today. With that, I would like to turn the call over to Eddie.

Eddie Wu
Eddie Wu
CEO at Alibaba Group

Good evening, good morning, and welcome to Alibaba Group's earnings call for the first quarter of fiscal year 2027. Over the past quarter, Alibaba's strategic AI investments have translated into robust results, with a total group revenue growing 9% year over year. AI commercialization has also accelerated across the board. Alibaba Cloud's external revenue grew 45%, and EBITDA increased 133% year over year, continuing to deliver on our commitment to accelerate growth. Revenue from AI-related products has maintained triple-digit growth for the 12th consecutive quarter, with annual revenue run rate surpassing CNY 49.5 billion, around $7.3 billion. It is the core engine of Alibaba Cloud's growth acceleration. I will now walk you through four key areas: AI and cloud commercialization, full-stack AI capabilities, AI application ecosystem, and consumption business. First, AI and cloud commercialization accelerated across the board and is expected to sustain high growth going forward.

Eddie Wu
Eddie Wu
CEO at Alibaba Group

This quarter, Alibaba Cloud's external revenue growth accelerated to 45%, a 22-quarter high, while Adjusted EBITDA margin reached 11.6%. Notably, this 45% growth was broad-based, driven by compute storage Model as a Service, MaaS, and AI applications. We proactively scaled back low-margin business, continuing to improve the quality of our growth. This quarter, annual revenue run rate from AI-related products exceeded CNY 49.5 billion, and its share of Alibaba Cloud's external revenue rose to 35%. AI-related products generate significantly higher gross margins than the average cloud portfolio. Our recurring AI-related product revenue spans multiple layers: AI compute, MaaS, and AI applications. This multilayered mix of AI revenue sources and monetization models means growing customer demand at any layer converts directly into commercial opportunity for us. This structural advantage will underpin sustained rapid growth in recurring AI-related product revenue going forward.

Eddie Wu
Eddie Wu
CEO at Alibaba Group

The surge in AI agents directly drives demand for tokens and GPU compute, while also significantly boosting demand for our traditional cloud products across CPU compute, storage databases, and networking. Alibaba Cloud is undergoing a comprehensive upgrade to an agentic cloud. Based on the latest data, the ARR of our model and application services, including MaaS, has surpassed CNY 16 billion. Based on current market feedback and our contract pipelines, compute demand will continue to outstrip supply. As we continue to ramp up our supply, our AI and cloud revenue growth will accelerate further in the coming quarters, alongside continued improvement in profitability. Second, our full-stack AI capabilities continue to strengthen, marked by the scaled commercialization of proprietary chips, faster model iteration, and a thriving open-source ecosystem. This quarter, deepening synergy between proprietary T-Head chips and proprietary foundation models further improved our AI commercialization efficiency.

Eddie Wu
Eddie Wu
CEO at Alibaba Group

T-Head has established a full-stack proprietary silicon portfolio spanning GPU, CPU, and networking chips. As of early August, Zhenwu chips have served more than 650 customers on Alibaba Cloud. The SuperNode instance, powered by T-Head's next-generation Zhenwu M890 AI processor, recently launched on Alibaba Cloud at commercial scale. We expect supply to continue ramping up in the second half of the year to meet strong customer demand. Alibaba Cloud's Zhenwu M890 SuperNode can efficiently run inference workload for foundation models with more than 2 trillion parameters. Both Kimi K3 and Qwen 3.8 Max are already using it to provide MaaS services to external customers. At the data center layer, Alibaba Cloud has cut the delivery time for hyperscale AI data centers to 100 days, a world-leading pace that will significantly speed up our global compute infrastructure buildup.

Eddie Wu
Eddie Wu
CEO at Alibaba Group

At the model layer, our model release cadence has intensified over the past month with major iterations across our large language, image, audio, video, and music models, all ranking among the world's top tier. Last week, we opened the model weights of Qwen 3.8 Max with 2.4 trillion parameters and the Qwen3.8-27B model series. To date, the Qwen model series has been downloaded more than 3 billion times globally, with more than 300,000 derivative models built on it. We believe a thriving open source model ecosystem drives greater demand for our cloud computing services, creating a virtual cycle. Third, our AI native applications span both enterprise and consumer use cases, driving rapid growth in token consumption. On the enterprise side, we launched QwenWork, a new AI productivity product built for enterprise workforce scenarios, delivering agentic capabilities at scale.

Eddie Wu
Eddie Wu
CEO at Alibaba Group

We expect productivity agents to become another engine of ARR growth. On the consumer side, the Qwen app continued to steadily grow its user base and is expanding the range of its value-added offerings. Through close coordination between Alibaba Token Hub and Alibaba Cloud, we're running a highly efficient commercial flywheel across compute models, tokens, applications, and monetization. Fourth, our e-commerce businesses remained solid this quarter. In quick commerce, we continued to narrow losses substantially while growing business scale by 45%, with unit economics improving quarter-over-quarter. Having crossed the AI commercialization inflection point last quarter, we're now seeing growth accelerate and margins expand this quarter. Our AI business' own capacity to self-fund and sustain itself is strengthening, giving us greater confidence to keep investing. Looking ahead, AI has become Alibaba's most certain growth engine.

Eddie Wu
Eddie Wu
CEO at Alibaba Group

We will stay strategically disciplined and drive long-term growth through our full stack AI capabilities. I will now hand over to Toby to walk you through our financial results. Thank you.

Toby Xu
Toby Xu
CFO at Alibaba Group

Thank you, Eddie. Our strategic priorities in AI plus cloud and consumption businesses, backed by disciplined investments, delivered strong results this quarter. Cloud segment revenue growth further accelerated to 45%, with its EBITDA margin sequentially rising to 12%. AI-related product revenue continued to drive this momentum, marking the 12th consecutive quarter of triple-digit growth and accounting for 35% of external cloud revenue. The strong performance demonstrates growing customer adoption of our full stack AI capabilities, spanning AI agents, models, cloud infrastructure, and proprietary chips, as well as our enhanced scale efficiencies and the robust pricing power in a supply-constrained market. On consumption, Taobao Instant Commerce continued to improve its unit economics while maintaining market share. Overall, e-commerce EBITDA remained relatively stable year-over-year. To realize synergies across our commerce platforms and strengthen our full stack AI capabilities, we have implemented strategic realignment of certain businesses in our financial reporting.

Toby Xu
Toby Xu
CFO at Alibaba Group

Starting from this quarter, our segment reporting will present the following. First, Alibaba E-commerce Group. Second, AI Cloud and Compute Services. Third, AI Labs and Applications. And number four, All others. Now let's look at the financial results for this quarter. Total revenue increased 9% year-over-year to CNY 269 billion, driven by the strong momentum in cloud business and quick commerce. Total Adjusted EBITDA decreased 30% to CNY 27.3 billion, primarily attributable to the investment in technology, partly offset by the improved operating results in our cloud business, as well as enhanced operating efficiencies across various businesses. Our GAAP net income was CNY 10.4 billion, a decrease of 75%, primarily due to the decrease in income from operations and decrease in net gains from disposal of investments and mark-to-market changes of our equity investments.

Toby Xu
Toby Xu
CFO at Alibaba Group

Operating cash flow this quarter increased by 11% to CNY 22.9 billion, compared to CNY 20.7 billion in the same quarter last year. Free cash flow was an outflow of CNY 44.7 billion, compared to an outflow of CNY 18.8 billion in the same quarter last year. The decrease was mainly attributed to the investment in cloud infrastructure. CapEx was CNY 67.7 billion this quarter, reflecting our continued investments in AI infrastructure to meet strong and growing customer demand. The significant year-over-year increase is due to several reasons, including fluctuations in procurement cycles, increasing in CPU compute capacity driven by anticipated growing customer adoption of AI agents in higher pricing of a broad range of chip components. As of June 30, 2026, we held approximately $30.7 billion in net cash. Excluding debt with maturities beyond five years, our net cash position stands at approximately $46.5 billion.

Toby Xu
Toby Xu
CFO at Alibaba Group

This balance sheet strength gives us confidence to invest for robust growth. Our AI plus cloud investment has a clear path to attractive ROIC. Our servers equipped with chips typically reach break even within three years. With a five-year useful life, we expect them to generate positive free cash flow, at least in the two years following breakeven. For the quarter ended June 30, 2026, we repurchased shares of an aggregate consideration of $162 billion. We remain committed to maximizing long-term shareholder returns through disciplining the capital allocation across investments for AI plus cloud business growth, share buybacks, and dividends. We will adjust our priorities as market conditions and the strategic needs evolve. Now let's first look at our e-commerce businesses. The new Alibaba E-commerce Group reflects our strategic focus on unlocking significant synergies across our domestic and cross-border e-commerce businesses.

Toby Xu
Toby Xu
CFO at Alibaba Group

Starting from this quarter, we will present Alibaba E-commerce Group's revenue as the following. First, China eCommerce. Second, China Quick Commerce. Third, International eCommerce, and fourth, Global Wholesale. Revenue for Alibaba E-commerce Group was CNY 205.9 billion, an increase of 4%. Customer managing revenue decreased by 7%, excluding the contrary revenue impact from the new business development program, customer management revenue would have grown by 1% year-over-year. Revenue from China Quick Commerce business was CNY 53.3 billion, an increase of 45%, driven by Freshippo and Taobao Instant Commerce. Alibaba E-commerce Group's Adjusted EBITDA remained relatively stable year-over-year at CNY 39.7 billion, underscoring our cost discipline against the backdrop of increased investments in user experiences and technology. Taobao Instant Commerce continued to improve its unit economics quarter-over-quarter while maintaining market share, driven by higher average order value and enhanced fulfillment logistics efficiency.

Toby Xu
Toby Xu
CFO at Alibaba Group

In addition, AliExpress achieved operating profit this quarter. We aim to maintain steady profit in our conventional e-commerce business while continuing to drive profitability improvement in our quick commerce business. Now let's review the business updates and results of AI Cloud and Compute Services, which comprises the Cloud Intelligence Group and T-Head. The year-over-year growth of total revenue and revenue from external customers both accelerated to 45%. Revenue from Alibaba Cloud also accelerated, growing 45% year-over-year. We are confident the growth rate will further accelerate in the coming quarters. This quarter's AI-related product revenue was CNY 12.4 billion, implying a revenue run rate of CNY 49.5 billion. It delivered a 12th consecutive quarter of triple-digit growth and accounted for 35% of external cloud revenue.

Toby Xu
Toby Xu
CFO at Alibaba Group

The Adjusted EBITDA margin expanded to 12%, driven by improved economies of scale and a stronger pricing power of AI-related products amid tight market supply. We expect EBITDA margin to further expand steadily in the coming quarters. By improving resource utilization, optimizing model portfolio, and innovating new scenarios, we are accelerating the growth of AI plus cloud business and driving greater benefits of scale. AI Labs and Applications comprises AI Model Labs, Qwen Consumer Business Group, and QwenWork. Its Adjusted EBITDA was a loss of CNY 13.9 billion, primarily due to our increased investment in AI capabilities and higher inference costs related to Qwen app. The loss significantly narrowed quarter-over-quarter due to the reduction in marketing expenses for Qwen app. We expect the segment loss to narrow over the coming quarters, driven by improving efficiency in both model training and marketing spend on Qwen app.

Toby Xu
Toby Xu
CFO at Alibaba Group

We have launched our frontier language coding, video, audio, image, and music models, all delivering top-tier performance. 250 million users have had their first AI-driven shopping experience through Qwen app's agentic features across an expanding range of e-commerce and other services since the launch of Qwen app. All other segment revenue remained stable at CNY 28.8 billion. All other's Adjusted EBITDA was a loss of CNY 3.3 billion, primarily due to our increased investment in technology. AI has progressed from incubation to commercialization at scale. As we expand our market share, strengthen AI leadership, and improving operating efficiency, we are gaining greater strategic and financial flexibility to make disciplined and sustained investments in both full stack AI capabilities and consumption opportunities, driving secular growth and greater value for our shareholders. Thank you. That's the end of our prepared remarks. We can open up for Q&A.

Lydia Liu
Lydia Liu
Head of Investor Relations at Alibaba Group

Thank you, Toby. We will now begin the Q&A session. You are welcome to ask questions in Chinese or English. A third-party translator will provide consecutive interpretation. In the case of any discrepancy, our management statements in the original language will prevail. Operator, please start Q&A session. Thank you.

Operator

Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press two. If you are on a speakerphone, please pick up the handset to ask a question. To give more people the opportunity to ask questions, please keep yourself to no more than one question at a time. Your first question comes from Alicia Yap with Citigroup. Please go ahead.

Alicia Yap
Alicia Yap
Analyst at Citigroup

Thank you. Good evening, management. Thanks for taking my questions and also congrats on your solid cloud performance. Could management please comment on the reasons and the drivers for the significant increase in the CapEx this quarter? What is the expected CapEx trend for the coming quarters? Are there any updates to the existing three-year CapEx budget that you have of this CNY 380 billion that you mentioned before? We would appreciate if management can also provide a breakdown of the CapEx allocation across the different services, like the training part and all that. What is management expected return on the invested capital for this investment? Thank you.

Eddie Wu
Eddie Wu
CEO at Alibaba Group

[Non-English content]

Translator

Thank you very much for the question. It's an important question, and I'd like to take the opportunity perhaps to explain generally what our business model is for AI and our expectations around CapEx going forward. Indeed, last February we announced a three-year capital investment plan with total investment of CNY 380 billion. As of the end of the June quarter this year, we had already spent CNY 190 billion with progress broadly in line with our expectations. While this quarter spending of CNY 67.1 billion is somewhat higher, hardware deliveries follow different procurement cycles. There can be fluctuations in the cadence and pace of hardware deliveries. It's not evenly distributed across different quarters. The increase primarily reflects volatility in those equipment delivery schedules.

Translator

At the same time, we increased procurement of CPUs this quarter as we are witnessing a substantial surge in demand driven by the agent-centric era. Of course, rising prices for semiconductor components have also contributed to this trend. I don't think we should take the spending for this quarter and multiply it by four to come up with an annualized figure for the year or to expect that there'll be a steady linear progression. The build-out has been progressing at a steady pace. That is the overall situation.

Eddie Wu
Eddie Wu
CEO at Alibaba Group

[Non-English content]

Translator

Next, let me expand on our full stack AI business model. This is an asset heavy business model. If you think about all of the different ways that AI is monetized and can be monetized, be it through software subscriptions, be it through API calls, through models as a service, through training, inference, in all of these different respects, you need compute centers to run and to monetize. It's only possible to monetize when you have that compute capacity in place. What that means is that we need to be investing upfront in order to be able to grow this business model and monetize across all of those different areas. That's why beginning in 2025, we began a heavy investment cycle in hardware. This is really a function of that asset heavy business model, as I explained.

Translator

In order to be able to capture that future growth, we first need to make these CapEx investments to build out the necessary compute capacity.

Eddie Wu
Eddie Wu
CEO at Alibaba Group

[Non-English content]

Translator

Next, let me explain why we see return on invested capital in AI related CapEx as highly certain. There is a consensus across the industry that the current shortage in AI compute will not be resolved until at least 2030. Industry wide, it makes sense that there should be high certainty in our investments in AI compute. Based on average gross margins today, roughly, we can break even on AI related CapEx in three years. Of course, average gross margin continues to rise, and we expect to be able to shorten that payback period, say, to 2.5 years.

Eddie Wu
Eddie Wu
CEO at Alibaba Group

[Non-English content]

Translator

Following that three-year payback period, these AI assets that we have invested in can achieve very positive and robust cash flow. To give you some direct examples, a V100 purchased in 2018, even today are still running at full capacity.

Eddie Wu
Eddie Wu
CEO at Alibaba Group

[Non-English content]

Translator

Additionally, we have three means that we can leverage to further enhance gross margin and return on invested capital. First is we can continue to develop state of the art models, enhance growth margin on AI products themselves, and continue to expand a higher margin Model-as-a-Service MaaS businesses. We can adapt our product mix across IaaS and across software to achieve higher gross margin on the portfolio as a whole. As a result of improving gross margin, you have already seen an overall increase of 4.4 percentage points in Alibaba Cloud's overall segment profitability, bringing it this quarter to 11.6%. That represents initial validation of that thesis.

Eddie Wu
Eddie Wu
CEO at Alibaba Group

[Non-English content]

Translator

A very important piece of this is our ability to deploy our own proprietary chips. As you know, our own T-Head proprietary chips span GPUs, CPUs, and networking chips, which are the critical chipsets for AI. In AI data centers, the most expensive components are of course chips and storage. We have a very significant advantage in being able to deploy our own proprietary chips. As we ramp up deployment of our own proprietary chips in our data centers, as they account for an increasing proportion of total chips and replace commercially procured chips, we can expect to see substantially higher gross margin as well as profitability.

Eddie Wu
Eddie Wu
CEO at Alibaba Group

[Non-English content]

Translator

Third, also very importantly, we have means to monetize and get better efficiency of utilization of our own cash flow. These include, for example, co-building data centers with partners, as well as pre-charging and receiving prepayments for compute-based services. These are important ways in which we can further enhance ROIC.

Eddie Wu
Eddie Wu
CEO at Alibaba Group

[Non-English content]

Translator

Through these three different methods, we can shorten the payback period for AI CapEx, for example, to 2.5 years or even two years. We can apply a simple framework to understand this. At our current level of gross margin for AI products, under the assumption of a three-year payback period on CapEx, theoretically, keeping our growth rate below 33% would already enable positive cash flow. However, that is not our strategic choice at this time. Given that AI remains in a very early stage, we are committed to aggressively investing in CapEx and proactively scaling up to drive our rapid business expansion. As our product gross margin improves and our proprietary chip substitution rate increases, our payback period will shorten to 2.5 years or even less.

Translator

Under those circumstances, while pursuing growth of over 40%, we will also be able to maintain positive cash flow. That is our long-term strategic direction.

Eddie Wu
Eddie Wu
CEO at Alibaba Group

Ok.

Lydia Liu
Lydia Liu
Head of Investor Relations at Alibaba Group

Next question, please.

Operator

Thank you. Your next question comes from Charlene Liu with HSBC. Please go ahead.

Charlene Liu
Charlene Liu
Analyst at HSBC

I am from HSBC. Thank you very much for this opportunity. Thank you for taking my question. First, can we get an update on the latest developments in quick commerce and under the reclassification of multiple business lines, which are regrouped under the Alibaba E-commerce Group? Can you talk about the future strategic focuses of these lines of businesses? Let me quickly translate the question myself [Non-English content].Thank you。

Jiang Fan
Jiang Fan
CEO of Alibaba E-commerce Business Group at Alibaba Group

[Non-English content]

Translator

Okay, thank you very much for the question as well as for the translation. In the new fiscal year, indeed we have realigned our e-commerce business segments and moving forward, we will be updating progress on four core areas: China e-commerce, quick commerce, international e-commerce and global B2B global wholesale. Let me then briefly share the strategic priorities and key considerations for each of these four segments in the period ahead. Starting with China e-commerce. While the domestic e-commerce landscape faces short-term macroeconomic challenges, our long-term strategy centers on strengthening core supply capabilities, and at the same time, we aim to leverage AI to enhance the overall shopping experience and improve operation efficiency across the board. First, regarding supply, since last year, Taobao and Tmall have focused on supporting original merchants, including branded sellers, while simultaneously unlocking the potential of high quality white label suppliers from key industrial clusters.

Jiang Fan
Jiang Fan
CEO of Alibaba E-commerce Business Group at Alibaba Group

[Non-English content]

Translator

We will continue to strengthen our partnerships with leading brand merchants, helping them achieve stable and sustainable business growth. Tmall remains the most critical operational hub for both major brands and many original merchants. At the same time, we are diving deeper into industrial clusters to source high quality products directly from their origins. We are supporting more manufacturing factories and operating directly on our platform and leveraging our platform AI capabilities to enable white label merchants to adopt a simpler and more efficient managed operation model. The share of transactions being generated through that industrial cluster managed model continues to rise steadily. In the past quarter, during the recent 618 Shopping Festival, despite certain macroeconomic challenges, the outcomes were aligned with our expectations, and notably, core merchants achieved solid growth.

Jiang Fan
Jiang Fan
CEO of Alibaba E-commerce Business Group at Alibaba Group

[Non-English content]

Translator

At the same time, we see significant opportunities for AI across both the supply and demand sides of e-commerce. On the consumer side, we will continue to launch new experiences and scenarios powered by AI, such as multimodal search and virtual try-ons. Our goal is twofold. First, to use AI technology to enhance the experience and efficiency of existing shopping scenarios, and we've already observed that AI has driven significant efficiency gains in our product recommendations. Secondly, to drive new kinds of AI driven interaction. On the merchant side, we observed that merchants are already widely adopting AI in their operations. We're exploring ways to leverage AI across various operational links to boost merchant capabilities, particularly in data analytics, advertising and marketing, and customer service, where merchants can derive clear benefits.

Translator

Going forward, we'll also collaborate with Qwen Office to launch AI agents that are specifically tailored for e-commerce scenarios.

Jiang Fan
Jiang Fan
CEO of Alibaba E-commerce Business Group at Alibaba Group

[Non-English content]

Translator

Next on quick commerce. After more than a year of investment and development, Taobao Instant Commerce has undergone substantial changes in scale and in market share, with significant improvements across user mindshare, supply diversity, logistics experience, and order volume. Last quarter, while maintaining growth in both users and orders, unit economics, UE, substantially improved and losses significantly reduced. On that basis, we will accelerate the integration of businesses such as Freshippo and Tmall Supermarket to develop the non-food categories growth within the quick commerce business. We'll place a particular focus on expanding our front warehouses. Over the past year, Freshippo has accelerated the development of front warehouses, leading to a year-over-year increase in GMV.

Jiang Fan
Jiang Fan
CEO of Alibaba E-commerce Business Group at Alibaba Group

[Non-English content]

Translator

Meanwhile, quick commerce will continue to expand its category coverage and innovate in key areas to enhance the consumer experience. We expect the transaction volume of quick commerce for non-food categories to surpass that of food categories within the next fiscal year, driving growth in many different physical goods categories across the overall e-commerce business. The quick commerce business is expected to achieve overall profitability in FY2029. In the long term, we believe it has the potential to contribute 30% of the platform's total GMV, becoming the second growth curve for our e-commerce business.

Jiang Fan
Jiang Fan
CEO of Alibaba E-commerce Business Group at Alibaba Group

[Non-English content]

Translator

Third is international e-commerce. In the short term, our international e-commerce business has indeed been affected by tariff policies and the geopolitical environment, pressuring growth. That said, despite the complex market environment, our cross-border business has delivered significant improvement in profitability while maintaining growth in transaction volume. In terms of both transaction scale and profitability, we believe the cross-border business holds long-term growth potential. In addition, our local e-commerce platforms in international markets such as Turkey and the Middle East are growing rapidly, and operating efficiency in markets such as Southeast Asia continues to improve.

Jiang Fan
Jiang Fan
CEO of Alibaba E-commerce Business Group at Alibaba Group

[Non-English content]

Translator

Fourth is global B2B. Our B2B businesses, including the 1688 and Alibaba.com platforms, have grown consistently over the past two decades. We see that AI technology will bring profound changes to our B2B platforms, and may even fundamentally reshape existing business models. In particular, the agentic model will play an increasingly important role in B2B transactions. We've launched Accio Work, which is an AI agent for cross-border merchants, and it had already attracted over 50,000 paying merchants shortly after its launch. AI is comprehensively transforming the way that B2B merchants do business, especially cross-border merchants. We believe that building on our two decades of know-how in this field, we have the opportunity to create entirely new business models and commercial opportunities in B2B and in cross-border trade in the AI era.

Jiang Fan
Jiang Fan
CEO of Alibaba E-commerce Business Group at Alibaba Group

[Non-English content]

Translator

Overall, over the past few years, we have completed new strategic positioning for our e-commerce businesses across several key areas. Going forward, we aim to continue leveraging our strengths from supply chain synergies to AI technology to unlock greater growth potential for the e-commerce segment in the AI era, while building a more diversified revenue and profit structure to drive steadier development of the overall segment.

Lydia Liu
Lydia Liu
Head of Investor Relations at Alibaba Group

Operator, let's go to the next question.

Operator

Thank you. Your next question comes from Yang Bai with CICC. Please go.

Yang Bai
Yang Bai
Analyst at CICC

[Non-English content]

Translator

Thank you. My question is about the cloud and AI business. We have seen that Alibaba Cloud's revenue growth has been accelerating quarter by quarter, reaching 45% this quarter. We know the company has previously set a long-term goal of exceeding $100 billion in external cloud revenue over the next five years. You have also now indicated that growth will remain on an accelerated trajectory in the quarters ahead. I would like to ask two questions. First, looking ahead to the coming quarters, what do you anticipate being the pace of growth in the cloud business? What are the core drivers underpinning the continued acceleration of cloud computing growth? Secondly, as you have mentioned, the industry is now in a phase of relatively tight capacity in terms of supply of compute. You just mentioned that demand dynamic may shift around 2030.

Translator

I would like to ask from an even longer-term perspective, what are the fundamental growth drivers for the cloud business? Do they differ from those in the short term? Thank you.

Eddie Wu
Eddie Wu
CEO at Alibaba Group

[Non-English content]

Translator

Thank you for the question. I think I can expand on this in three different areas. I can start by looking at our current business and the relevant data. Secondly, I can discuss the drivers for growth. Thirdly, I can share with you our long-term perspective based on that analysis. Let me begin with the first part, covering our current business and the key metrics. As you have seen, external revenue for the AI and cloud segment has been accelerating now for nine consecutive quarters. In this last quarter, growth has already accelerated to 45%. We are seeing very strong customer demand, and our offerings boast a distinct competitive advantage compared to those of other cloud providers. As a result, we expect revenue growth to continue accelerating over the coming quarters. We have observed that AI-related products generated CNY 12.4 billion in revenue this quarter.

Translator

If we convert that into an annualized U.S dollar figure, that works out to $7.3 billion in annual revenue. Looking ahead to the next quarter, our own forecast is that that same annualized revenue for AI quarters next quarter will approach $10 billion. Our growth rate remains exceptionally strong. At the same time, we also expect our EBITDA margin to improve quarter by quarter sequentially over the next few quarters. Additionally, something very important in respect of the cloud business is growth in demand for MaaS. We have seen very significant growth in demand for MaaS this quarter, coupled with ongoing improvement in inference efficiency. The ARR of our MaaS business has now surpassed CNY 16 billion. Actually, let me clarify, that is the latest data as of August. It has already surpassed CNY 16 billion.

Eddie Wu
Eddie Wu
CEO at Alibaba Group

[Non-English content]

Translator

Next, let me expand on the growth drivers within our business model. It is important to understand that Alibaba's investment model for AI is fundamentally different from that of pure-play AI companies. We are pursuing an intensive strategy across the full stack, including chips, including AI cloud infrastructure, and including models. We maintain a leading position in the industry across all three of those most critical domains. Moreover, we believe that the development of AI and technology across the industry is still in its early stages. Looking forward at different stages of technological development, the core commercial value within the AI industry may shift across different layers, including chips, cloud computing models, and applications.

Translator

Our full stack investments ensure that we can deliver optimal service capabilities and the best value for money, positioning us favorably in the industry going forward and ensuring that within each stage of technological development, it is possible for us to maintain competitiveness and sustained growth momentum.

Eddie Wu
Eddie Wu
CEO at Alibaba Group

[Non-English content]

Translator

Next, let me look ahead to what we think is going to be the most important growth driver over the next one to two years in the short term. We have seen exponential demand for commercial inference services as of the end of 2025. This exponential growth in demand for inference has marked a fundamental shift in the model whereby compute has now become the core asset driving AI revenue. Today, all AI related revenue models are centered on AI compute. At the same time, there is a consensus across the industry, as I mentioned, that compute will remain in shortage of supply for some time to come. At the same time, the higher gross margins of mass inference services have also made a major difference.

Translator

If compute was once a cost center, traditionally, compute has now been transformed into a core productive asset whose value generation is positively correlated with revenue. High priced computing power remains in short supply across the industry, precisely at a time where you have widespread adoption of GPUs across diverse use cases. Pricing models are tending to converge on the most high margin, the most margin generative monetization approaches. This is driving the pricing models for nearly all GPU related products.

Translator

Moreover, Alibaba boasts comprehensive multimodal model capabilities. Our models are at the state-of-the-art level within the industry, giving us a distinct advantage in realizing the value of that compute power and providing a robust anchor for our pricing strategy. When it comes time to price for new customers or to re-sign contracts with existing customers as they renew, we can adopt more healthy pricing models. We expect to see this as a very positive short term driver for improving margin in the coming year plus.

Eddie Wu
Eddie Wu
CEO at Alibaba Group

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Translator

Next, let me talk about the scale effects and networking effects, which are very important long-term growth drivers in AI cloud. For the past couple of years, a lot of people have asked: What is the super app for AI? The answer to that is that the real super application is cloud-based AI compute, because all of these different workloads need to run on a full stack of AI cloud compute, including training, inferencing, AI software, and agents requiring GPUs, CPUs, storage databases, virtualization, as well as Harness tools, among others. AI cloud is like a super city in which workload is the residence and continually iterating full stack AI cloud services are the urban infrastructure, which in turn attracts more new residents and enhances the stickiness of the existing residents. This is where you see an extremely powerful network effect and scale effect.

Eddie Wu
Eddie Wu
CEO at Alibaba Group

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Translator

Given that we operate the largest number of data centers across any Asian cloud provider, we benefit from the strongest economies of scale. At the same time, the large-scale deployment of our proprietary T-Head AI chips allows us to avoid the high price premiums associated with procuring expensive commercial GPUs, thus avoiding erosion of our gross margins. With our state-of-the-art performance in our proprietary models, we possess strong pricing power for our compute resources. Looking ahead from the perspective of industry development trends and our own product strengths, the long-term revenue growth trend and margin expansion trend are exceptionally strong. As a result, we are highly confident in our ability to achieve our goal of CNY 100 billion in external cloud revenue by 2030. We have good visibility into achieving gross margin of 20%.

Eddie Wu
Eddie Wu
CEO at Alibaba Group

[Non-English content]

Lydia Liu
Lydia Liu
Head of Investor Relations at Alibaba Group

Next question, please.

Operator

Thank you. Your next question comes from Yuan Liao with CITIC Securities. Please go ahead.

Yuan Liao
Yuan Liao
Analyst at CITIC Securities

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Translator

Thanks for the opportunity to ask a question and congratulations on the strong quarterly results and especially the progress made in the AI sector. I have a follow-up question on the MaaS business. As Eddie mentioned earlier, ARR as of August has exceeded CNY 16 billion. Last quarter, I believe you stated that the target for year-end is to surpass CNY 30 billion in MaaS ARR. I am wondering, given the progress to date, do you anticipate making any adjustments to that year-end goal? Additionally, within the MaaS business, what are the respective shares of our own proprietary models versus third-party models? As model-related competition intensifies and more open source models emerge, how will these factors possibly affect gross margin and profitability in the MaaS business?

Eddie Wu
Eddie Wu
CEO at Alibaba Group

[Non-English content]

Translator

Thank you for the question. Yes, indeed. Growth in Bailian's MaaS business is very rapid. As of August, we reached CNY 16 billion or surpassed CNY 16 billion in ARR. Given the current growth momentum as well as the pipeline of new models slated for launch, we remain confident that we will achieve our year-end target of CNY 30 billion ARR by the end of the year.

Eddie Wu
Eddie Wu
CEO at Alibaba Group

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Translator

On our MaaS platform, our own proprietary models still account for the majority of the revenue. But having said that, revenue from third-party models is also not small. Having said that, perhaps let me talk a little bit about how we see different model capabilities. A lot of customers tend to need to use or want to use multiple different models in their own AI applications because those different models they can draw on have different characteristics or different capabilities. So having more open source models on platforms like ours, like Bailian, to provide inferencing is a good thing for us and for Bailian. When it comes to gross margin, the level of gross margin that we can achieve on a platform like Bailian from hosting our own proprietary models versus third-party models is actually very similar. It is highly comparable.

Translator

We are really developing those proprietary models on the one hand in order to keep creating higher levels of model intelligence and also as part of our ultimate drive to achieve AGI. But simply from the perspective of the MaaS business, the level of gross margin from those two kinds of models is actually very comparable. But overall, having a prosperous and flourishing open ecosystem with many of these open source models on it is highly favorable for a cloud provider like Alibaba Cloud.

Lydia Liu
Lydia Liu
Head of Investor Relations at Alibaba Group

Let us take the last question.

Operator

Thank you. Your final question comes from Alex Yao with JPMorgan. Please go ahead.

Alex Yao
Alex Yao
Analyst at JPMorgan

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Translator

Thank you for the opportunity to ask the final question. I would like to come back to Eddie's earlier remarks. He spoke at length about how Alibaba Group is developing a full stack AI ecosystem. My question really is in which layer of that full stack ecosystem do you think value will accrete and monetization will be concentrated? We saw just after it had been released for three months that you open sourced the weight of your flagship model Qwen 3.8 Max. At the same time, your proprietary chips are also proving successful, now serving over 600 external customers. I am wondering if this means that the future value will accrete mainly in the compute layer or perhaps in the orchestration layer and not necessarily in the model layer? Or do you think that value will accrete to different layers in different stages of development of the industry?

Translator

In the long term, if you think that value and monetization will largely be concentrated in the hardware and compute layers, then how should we think about competition going forward given that it will be a government-led process for allocating a lot of that hardware and compute capacity?

Eddie Wu
Eddie Wu
CEO at Alibaba Group

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Translator

Thanks. That is a very professional question and really is a matter of long-term judgment. I think it is inherently associated with a high level of uncertainty. But what I can say is that we are investing in the full stack, and what that means is that whichever layer represents the greatest value, and no matter how that may shift across layers in different periods of time, all of those layers are part of our ecosystem. I guess I can share with you my own short term view. Namely, in the short term perspective, I think that most of the value will be in chips and in AI cloud infrastructure. It is a pattern that we can see not just in China, but globally across a lot of different companies.

Translator

When a technology is in its early stages, and especially when there is a shortage of supply, lots of the value tends to be concentrated in the infrastructure and in the core hardware. In this case, chips and storage. In Alibaba Group's case, we have integrated our compute power, our cloud infrastructure, and our AI inference into one core business segment.

Eddie Wu
Eddie Wu
CEO at Alibaba Group

[Non-English content]

Translator

Let me turn next to where the ultimate commercial value will be realized from these AI models. It's a question around which there's a lot of debate within the industry, and indeed, there are different views even inside our own company. Here I'm just sharing my own personal opinion. In my personal view, I think that the current monetization model for large language models through APIs is just a short-term approach, a short-term transitional approach, and is certainly not the ultimate business model. Our company has invested a tremendous amount of compute across our entire platform, but the objective is not simply to be able to generate that kind of short-term API revenue.

Translator

I think when we get to the stage where we've accomplished AGI or we're close to achieving AGI, at that point, the ultimate business model will be delivering actual products, delivering actual results that clients are looking for. It will be conducting the actual R&D that delivers products and that delivers operations. The reason that all these different AI model companies are investing so heavily in engaging in an arms race today is not simply to be able to compete to provide that API-based service. It's because they have their eyes on that ultimate end game where I think that the monetization level will be significantly higher, will be much higher than what you see today selling the service through API calls.

Eddie Wu
Eddie Wu
CEO at Alibaba Group

[Non-English content]

Translator

In terms of hardware, I'd like to add a few thoughts regarding our T-Head proprietary chips. I know it's a topic about which we haven't communicated a lot with investors in the past, but the last generation of T-Head chips we've already manufactured over 500,000 of them and shipped. The latest generation in August has already been deployed on Alibaba Cloud's AI cloud as super nodes. I think we're one of the only companies that's able to deploy such proprietary chips, domestic chips, at scale. One thing that's really unique about our T-Head chips, domestically manufactured chips, is that they are designed with GPU architecture as their core technical foundation, and they can very well support both training and inference workloads. There are now already several hundreds of companies that are leveraging these chips via Alibaba Cloud for both inference as well as for model training.

Translator

These span companies across Embodied AI, autonomous driving, as well as large model companies. In terms of our generation 2 of chips, we are going to start developing them in the second half of this year. We expect them to boast exceptionally high compute power as well as extremely robust interconnection bandwidth, making them fully capable of serving as a direct replacement for existing chips. I think we're in a really unique position in the chip sector, especially when it comes to large-scale model training. I don't think that there's any government-led compute supply allocation scheme that could produce chips with such truly strong competitiveness. I think that T-Head's future is highly certain as a very key and core component of Alibaba Cloud, and we remain highly confident in our core competitive strengths in this area.

Translator

I've interacted with a lot of different engineers across China, and I can tell you that these chips have a very broad audience with engineers across a wide range of different engineering domains. To sum up, I think that our T-Head chips are definitely the best among domestic Chinese chips for supporting both training and inference across a wide range of different industries. We really are number one in the industry.

Translator

Then I think in terms of future production capacity and deployment, we can confidently claim to be at least one of the top two. But in terms of our ability to actually reach customers with AI chips, Alibaba Cloud is the largest player by market share in China's cloud and AI market. I think we have a very strong edge when it comes to channel distribution. From this perspective, I am highly confident in the long-term commercial value of T-Head chips.

Lydia Liu
Lydia Liu
Head of Investor Relations at Alibaba Group

Thank you very much. We appreciate your support, and we look forward to updating you on our progress next quarter. Thank you.

Operator

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.

Executives
    • Lydia Liu
      Lydia Liu
      Head of Investor Relations
    • Eddie Wu
      Eddie Wu
      CEO
    • Toby Xu
      Toby Xu
      CFO
    • Jiang Fan
      Jiang Fan
      CEO of Alibaba E-commerce Business Group
Analysts
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