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Edited Transcript of BABA earnings conference call or presentation 17-Aug-17 11:30am GMT

Thomson Reuters StreetEvents

Q1 2018 Alibaba Group Holding Ltd Earnings Call

Hangzhou Aug 19, 2017 (Thomson StreetEvents) -- Edited Transcript of Alibaba Group Holding Ltd earnings conference call or presentation Thursday, August 17, 2017 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Chung Tsai

Alibaba Group Holding Limited - Executive Vice Chairman

* Robert Lin

* Wei Wu

Alibaba Group Holding Limited - CFO

* Yong Zhang

Alibaba Group Holding Limited - CEO & Director

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Conference Call Participants

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* Alan Hellawell

Deutsche Bank AG, Research Division - MD and Head of Asian Telecommunications, Media and Technology Equity Research

* Alex C. Yao

JP Morgan Chase & Co, Research Division - Head of Asia Internet and New Media Research

* Alicia Yap

Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research

* Chi Tsang

HSBC, Research Division - Head of Internet Research of Asia Pacific

* Eddie Leung

BofA Merrill Lynch, Research Division - MD in Equity Research and Analyst

* H. Chen

Morgan Stanley, Research Division - Equity Analyst

* Jin Kyu Yoon

Mizuho Securities Asia Limited, Research Division - Research Analyst

* Piyush Mubayi

Goldman Sachs Group Inc., Research Division - MD

* Xiaoguang Zhao

Barclays PLC, Research Division - Assistant VP

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group's June Quarter 2017 Results Conference Call. (Operator Instructions) .

I would now like to turn the call over to Rob Lin, Head of Investor Relations of Alibaba Group. Please go ahead.

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Robert Lin, [2]

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Good day, everyone, and welcome to Alibaba Group's June Quarter 2017 Results Conference Call. With us today are Joe Tsai, Executive Vice Chairman; Daniel Zhang, Chief Executive Officer; Maggie Wu, Chief Financial Officer.

This call is also being webcast from our IR section of our corporate website. A replay of the call will be available on the website later today.

Now let me quickly cover the safe harbor. Today's discussion will contain forward-looking statements. These forward-looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations. For detailed discussions of these risks and uncertainties, please refer to our latest annual report on Form 20-F and other documents filed with the U.S. Securities and Exchange Commission.

Any forward-looking statements that we make on this call are based on assumptions as of today, and we do not undertake any obligation to update these statements except as required under applicable law.

Please note that certain financial measures that we use on this call, such as adjusted EBITDA, adjusted EBITDA margin, adjusted EBITA, adjusted EBITA margin, non-GAAP net income, non-GAAP diluted EPS and free cash flow are expressed on a non-GAAP basis. Our GAAP results and reconciliation of GAAP to non-GAAP measures can be found in our earnings press release.

With that, I would now turn over to Joe.

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Chung Tsai, Alibaba Group Holding Limited - Executive Vice Chairman [3]

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Thank you, Rob. Thank you all for joining us. I was wondering what I would say on this quarter's earnings call. The first words that jumped to my mind was that the numbers speak for themselves. In short, we had a great quarter. However, I wanted you to know that these exceptional results did not come from anything specific we did during the quarter. The reason we were able to deliver these results is that we sowed the seeds years ago by investing in technology, by investing in innovation, by investing in people and by being bold with a vision that nobody thought was possible.

Today, the Alibaba economy is self-reinforcing and it is as strong as ever. It is in this spirit of vision that I want to share with you a couple of things to look forward to in the future.

First, let's talk about new retail. The macro way of looking at the landscape is e-commerce accounts for 15% of total retail in China. The retail segment in China is about a USD 5 trillion economy in value. 15% of e-commerce still leaves 85% of retail that is off-line. Whether this is just something to look at or presents tremendous opportunities for us depends on our ability to innovate. Our goal is not to simply ride the wave of converting purchases from off-line to online. Our new retail strategy is an invention that anticipates and catalyzes changes in consumer behavior where time, place and method of purchase and consumption will be different from what we were used to before.

In this new world of consumption expectations, the distinction between online and off-line would disappear. I'll give you a couple of examples. In traditional retail, the shopper goes into a store and buys what's only available on the shelf, and they come away with bags of stuff that they have to carry home. Imagine a store where you can pick items from the shelf and then at the same time purchase other items not from the shelf, but from your mobile phone, and then you tell the store to send everything you just bought to your home because you need to go to catch a movie.

Another example. You buy groceries from your nearby supermarket. You only shop for what you need for dinner that night because you have no idea what you want to eat for the rest of the week. The next day you remember seeing something from the same store, but you have no time to go because you had to rush home, so you order on your mobile phone on the way home. The same store, that is the one that you visited yesterday, is the same store that handles your online order today and delivers the item to your home.

That's the kind of spontaneity, convenience and speed that modern-day consumers are going to expect and Alibaba is setting the standard for fulfilling this high expectation. What makes new retail possible are Alibaba's scale, technology, consumer insights and ability to innovate. With new retail, satisfying every increasing consumer expectations is no longer an incremental gain. It is a disruptive gain in the sense that you will have to disrupt e-commerce first and embrace the physical world.

Next, I have a few words about the Alibaba economy. Alibaba has a number of businesses, from commerce to cloud computing to digital entertainment. As a financial reporting matter, we break out our business into segments for transparency and ease of investor understanding. In addition, we have affiliate companies and investees in financial services, logistics and local services. And I have no doubt that you're interested in the P&L of those businesses, so we show that to you very clearly in our reporting. As an investor, your perspective is how you put a value on each piece of the business in order to understand the value of the entire company. But that's not how our customers look at us. As a platform, the question we need to focus on is how do our businesses work together to create more value for consumers and enterprises than if these units were just stand-alone entities. Synergy creation is easier said than done, and our management needs to have both strategic vision and execution discipline in order to achieve synergies. What unifies the businesses in the Alibaba economy is our mission: to make it easy to do business anywhere. We believe the path to value creation becomes extremely clear when we focus on a single mission.

In the next 5, 10, 15 years, you will see an unfolding of how we execute the new retail strategy as it becomes an integral part of the Alibaba economy. Shareholder value will follow when we create value for our customers.

So understanding this is important to understanding a long view of Alibaba.

Now I will turn it over to Daniel for his comments.

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Yong Zhang, Alibaba Group Holding Limited - CEO & Director [4]

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Thanks, Joe. Hello, everyone, and thank you for joining our earnings call today. We delivered another set of exceptional results this quarter, which we believe is a clear reflection of the tremendous appeal and potential of Alibaba's platform economy. The robust revenue growth in our core commerce business is driven by our continuous innovation in data technology, improvements in algorithm and widespread application of big data. It is also propelled by our customers' increasing appreciation and a validation for Taobao and Tmall's unique [value] proposition as consumer media and customer management platforms.

Mobile Taobao is the Chinese consumer's leading destination for online shopping. And the total MAU for mobile apps with access to our China retail marketplaces has grown to 529 million. No other commerce app in the world compares to mobile Taobao's consumer engagement and user stickiness. Our user stickiness measured by the DAU divided by MAU ratio continues to remain above 40% due to our relentless focus on more content and community-driven engagement on the app, allowing consumers to enjoy the fun of discovery and exploration. We not only satisfy existing user needs but, more importantly, we are able to stimulate new demand as the user experiences has become more content-driven. A community of consumption-related content generators such as influencers and the key opinion leaders have merged alongside buyers and sellers in the ecosystem.

So personalized data-driven user content features such as Taobao Headlines, live stream and cellphone videos, consumers are exposed to a wide range of content and are inspired by product recommendations during the course of content engagement. As such, we started our journey in fulfilling the existing need of users that has since developed the ability to stimulate new consumption demand.

Tmall enjoyed rapid growth this quarter and gained market share in B2C market with 49% year-on-year gross GMV growth for fiscal goods. We continue to solidify market leadership in fashion and accessories and also saw year-over-year growth of 50% and 57% in home electronics including mobile phones and FMCG categories, respectively. We are very pleased by the overwhelming positive response from consumers to our proactive marketing and user engagement strategy.

Moving forward, we will continue to prioritize market leadership and share gaining for Tmall. We intend to fully leverage the competitive advantage of our marketplace platform being a profitable business and reinvest these profits into new user acquisition and customer satisfaction including exceeding customer's expectation in delivery and after-sales services.

As our B2C business expands market leadership, we are pursuing a wide range of retail innovations and the transformations in our new retail initiatives. The successful privatization of Yintai Group is part of our strategy for transforming the department store shopping mall retail experiences. At the same time, we have created new retail models like the incredibly popular (inaudible) supermarket by redefining the key components of traditional retail, customer flow, merchandise space, which attracted much attention throughout the industry.

We made solid progress in our globalization strategy. Our international commerce retail business reached meaningful scale and revenue grow 136% year-on-year on the strength of AliExpress and Lazada. We continue to be confident in the potential and growth of the Southeast Asia market, increasing our ownership in Lazada to 83%.

We also led the latest round of investment in Tokopedia, one of the leading C2C marketplace platforms in Indonesia.

Our cloud computing business continues to enjoy high growth at scale with annualized revenue well exceeding USD 1 billion while paying customers surpassed 1 million, an important milestone. In a landscape where every industry is seeking to migrate to the cloud, we believe 1 million customers is merely its starting point.

Our digital media and entertainment metrics has made significant progress in improving operational efficiency and user experience by leveraging Alibaba's proprietary technology platform. Investments in content acquisition and production following our acquisition of Youku are starting to bear fruit. Exclusive content and variety shows have been very effective in attracting new paying customers to Youku in addition to providing new opportunities for advertising and other commercial innovations.

In closing, a few thoughts. Over the past few quarters, we have constantly delivered superb results and the market has gradually recognized the significant value created by Alibaba economy. This is a result of our unwavering focus on the long-term strategy and the persistent innovation, coupled by -- coupled with a capability to consistently translate ideas into reality through strong execution and create real value for our customers.

Alibaba will soon be celebrating our 18th anniversary. We will continue to invest and plan for the future, and we are committed more than ever to build a data-driven infrastructure for commerce in the area of the digital economy.

Now I turn the call over to Maggie, who will walk you through the details of our financial results.

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Wei Wu, Alibaba Group Holding Limited - CFO [5]

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Thank you, Daniel. Hello, everyone.

We delivered another quarter of excellent results. Here are some financial highlights. In June quarter, major operating and financial metrics reported strong performances. Mobile MAUs, our China retail marketplace, reached 529 million and -- representing as of 22 million over March quarter. Our core marketplace revenue grew 58% year-over-year. Number of paying customers of our cloud business surpassed the 1 million. This is a very important milestone. Cloud computing revenue grew 96% year-on-year and the segment adjusted EBITA margin narrowed to negative 4%. Our non-GAAP free cash flow was USD 3.3 billion for the quarter, demonstrating the strong cash generation capability of our business.

Look at the quarterly revenue. For the quarter, total revenue grew 56% year-on-year. This is led by robust growth in our core commerce business and Alibaba Cloud. The primary contributors to the core commerce revenue growth were new users, increased traffic and the effects of personalization, which we discussed with you at the Investor Day.

We will come back to the underlying growth drivers for each business in more detail in the segment discussion.

We continue to deepen our user engagement, and this is demonstrated in our monetization growth. Our mobile commerce platforms have become the destination for social commerce, consumption of content and brand engagement.

Look at the quarterly cost trend. Cost of revenue excluding stock-based compensation was RMB 16.3 billion. Gross margins improved year-on-year due to operating leverage, despite our investment in Lazada inventory costs, significant investment in digital media content and increase in Tmall supermarket logistics-related costs. These are areas where we will continue to invest, and the cost from time to time may outpace operating leverage.

As a percentage of revenue, all major expenses decreased year-on-year, reflecting operating leverage of our business.

Non-GAAP net income in the quarter was RMB 20 billion, an increase of 67% year-on-year.

We continued to generate significant free cash flow. In the June quarter, we generated RMB 22.1 billion or about USD 3.3 billion in free cash flow. Our free cash flow allows us strategic and operational flexibility to invest in technology and acquire the resources to accomplish our goals.

At the end of the quarter, our cash, cash equivalents and short-term investments were RMB 148 billion or close to USD 22 billion, slightly increased from the end of March quarter. This is primarily because of our strong free cash flow generation from operations, offset by InTime privatization, acquisitions of additional shares of Lazada and investment in Ele.me and Linhua Supermarket.

Capital expenditure in June quarter were RMB 3.6 billion, in which RMB 3.2 billion related to the non-real estate CapEx and intangible assets.

Look at the segment reporting. For core commerce, our core commerce segment had an outstanding quarter with revenue growth of 58% year-on-year. This was led by China retail marketplace growth that accounted for -- the China retail marketplace revenue accounted for around 85% of the segment revenue. As I said, the primary contributors were new users, increased traffic and the effects of personalization, which is the digital technology we talk about all the time. So more specifically, these factors contributed to an increase in conversion rate and the volume of clicks.

Commission revenue grew by 28% percent year-over-year while Tmall recorded 49% year-over-year growth for physical goods GMV for the same period. The relatively lower growth rate of reported commission revenue was primarily due to the netting off of expenditures against commissions paid by merchants as a result of new promotion initiatives for customer acquisition and retention.

Our China retail marketplace had 466 million new active consumers at the end of the quarter, representing a net addition of 12 million from prior quarter. Average annual spend per active consumer increased from prior quarters. We continue to see that the longer consumers have been with our platform, the more they spend and more orders placing across more product categories.

Our cross-border and international consumer businesses continued to exhibit robust growth during the quarter. During the quarter, we increased our ownership in Lazada to 83%, reflecting confidence and our commitment in the long-term potential of this business and the Southeast Asian markets.

Our core marketplace adjusted EBITA margin of the segment slightly improved to 63% this quarter, reflecting operating leverage achieved, offset by the acquisition of InTime in May and an increase in cost of inventory of Lazada. As I said earlier, we will reinvest these profits back to continue to provide competitive offerings to consumers and to maximize consumer satisfaction.

Alibaba Cloud reached a key milestone of exceeding 1 million paying customers, and revenue grew 96% year-on-year. This is driven by robust paying customer growth and also improving revenue mix of higher value-added services. Adjusted EBITA margin for cloud computing segment improved from negative 13% to negative 4% this quarter.

Our digital media and entertainment segment revenue in the June quarter was RMB 4.1 billion, an increase of 30% year-on-year. You see we have maintained a robust growth, driven by its value-added service, such as news feeds and mobile search. The slower year-over-year growth of digital media and entertainment revenue in this quarter reflected the full effect of Youku Tudou consolidation in May 2016, so we come to the anniversary. We are focused on investing in both contents and products in Youku video business to improve user experience and drive subscription business -- subscription growth. The investment resulted in strong daily average subscriber growth that increased over 100% year-over-year during the quarter. We believe subscribers' growth will continue at a relatively fast pace.

Adjusted EBITA margin of the segment was negative 43% this quarter. And compared to prior year's quarter, there was a increase in an active margin, primarily due to increase in content costs of Youku Tudou since second half of fiscal 2017. We will continue to increase our competitive position in digital entertainment through a combination of licensed premium content as well as self-produced and jointly produced programming.

Revenue from innovation initiatives and other segment increased 21% year-on-year. Adjusted EBITA margin of the segment was negative 98%, reflecting ongoing investments in our new business initiatives.

Now looking ahead. We remain optimistic about the growth prospectives of fiscal year 2018, driven primarily by robust growth of core business and cloud computing. Based on our solid performance so far this fiscal year, we reiterate our fiscal year 2018 revenue growth guidance range of 45% to 49%, which we provided during our Investor Day in June.

We will continue to invest incremental profits to improve user experience and expand consumer base. We expect to step up investments in the second half of this fiscal year to further gain B2C market share as well as developing our new businesses.

Our cloud computing business enjoys first-mover advantage, and we'll keep expanding our market leadership by continuously providing value-added services. Our technology advantage and the team's strong execution have strengthened our market position as reflected in expanding customer reach spanning many industries, deepening existing customer relationships and increasing adoption of innovative and value-added products by customers.

In the future, we will see more and more synergies between digital media and entertainment and our core commerce business that complement each other in terms of consumers, content and commercialization. We have seen early success and we'll continue to leverage the cross-selling opportunities between the 2 businesses presented by the vast consumer base of our ecosystem to drive long-term value.

I would like to reiterate that Alibaba is a company that always invests for the long term and invests for future. We will continue to provide value to our customers through technology innovation and consumer insights to ensure healthy and sustainable growth of the Alibaba economy.

That concludes our prepared remarks. Operator, we are ready to begin the Q&A. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Piyush Mubayi of Goldman Sachs.

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Piyush Mubayi, Goldman Sachs Group Inc., Research Division - MD [2]

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On customer management revenue, that's a huge number you've gotten for the quarter. How much of it is being contributed by the new Uni Marketing product? How much of it is because of the complete change in how brands are perceiving the value you're providing? And how much of this is still dependent on pay click that we -- I used to think about in the past? That'd be greatly appreciated.

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Wei Wu, Alibaba Group Holding Limited - CFO [3]

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Thanks for your question, Piyush. So for growth in our customer management revenue, the Uni Marketing efforts actually right now is still in the initial stage, so we don't see significant contribution from Uni Marketing right now. I think that, as I said, the growth driver actually are mainly coming from the new users and increased traffic and the effect of personalization. So this is not just one quarter's effort, it's over time. I would like to mention about that a year ago in September, we made a technology change to enhance personalization. And then when we get to anniversary of that change later of this year, things will be more normalized and overall revenue will be in line with our revenue guidance. I hope that answers your question.

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Piyush Mubayi, Goldman Sachs Group Inc., Research Division - MD [4]

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Okay. Was there any other reason why you saw such a sharp acceleration in the quarter versus the prior quarter?

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Wei Wu, Alibaba Group Holding Limited - CFO [5]

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Yes. Actually, prior year quarters, we also see quite strong growth. But to talk about the current quarter, main reason is that more merchants were paying more, right? So why -- what are they paying for? That is the growth of the new user. And also the technology dividend we get from the personalization enhancement we launched last September.

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Chung Tsai, Alibaba Group Holding Limited - Executive Vice Chairman [6]

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Yes. Piyush, maybe let me add to that. If you see that our monthly active users have grown by 22 million sequentially to 529 million, so that means the number of people coming to our platform in the e-commerce context to look for things, to also consume content as we become more of a content-rich app, the people are becoming more engaged. So you now have the effect of more users that are more engaged on a daily basis, which has the effect of, obviously, increasing the clicks. The other effect of increasing clicks is what Maggie discusses: The personalization where we use AI technology to improve the content that people see so that they are more personalized to you, the shopper, and that also increases the clicks. So those are the effects.

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Operator [7]

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Moving on to the next question is from Eddie Leung of Merrill Lynch.

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Eddie Leung, BofA Merrill Lynch, Research Division - MD in Equity Research and Analyst [8]

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I have a follow-up question on a topic. The management team addressed it in the last quarterly result call. I remembered the managements discussed it. It's on how to help the small- and medium-sized merchants, especially those started their online shops perhaps early on, on Taobao to handle these changes in the new retail era. So just wondering if the management could give us some update on some of the initiatives you guys have been implementing and thinking about.

And along the same lines, I think, Joe, you mentioned about the new retail strategy. Is it fair to assume that, at the beginning, we would be looking at the benefits mainly are going to the large merchants, which have their off-line as well as online presence rather than, again, the SMEs? And if so, how should we think about the long-term benefits, not only limited to the large merchants, but also to the SMEs?

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Yong Zhang, Alibaba Group Holding Limited - CEO & Director [9]

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Okay. Thanks, Eddie. This is Daniel. Let me answer your question. I think for the first one, actually, Taobao is a community not only for the -- is a marketplace not only for the big customers. Actually, Taobao focus on small business. And this is our mission: to help small business to do business easier. And what we do to help the small business is probably driven by product innovation. And all we do is to innovate in product tools and service tools to empower the small business to do this easier. Today, what we do is that we developed a very successful user interfaces in content and data driven. And I think, today, for small business, if they have unique products, they can create unique contents. They can have enough exposures to acquire new customers.

Let me take example of our Taobao (foreign language) Taobao Maker Festival. We hold this event -- actually, this the second year we hold the event and this is a very successful event. We have a lot of small business, young startups and they create a business in Taobao. And they produce very, very unique products. And because of the data -- because of the technology innovation, because of product innovation, now they get a tool to display their unique product to their target audiences rather than they buy traffic and -- to the general audience. So I think that's our good try and we will continue to work on this to make sure. And in Taobao we are not only to make people to win, but also to help small business to have their startups successful.

And for new retail, I think this is also relevant to the first question. I think we never -- we always believe new retail is not only about omnichannel. New retail is not only relevant to online, off-line integration. New retail is about how to create a new business in a new way and how to -- for example, how to design product according to the intensive consumer insights, how to make a very, very flexible soft supply chain and product manufacturing process. So today, in our platform, we have -- we identified a lot of new business. They create -- they design the product based on very prompt feedback from the market, from their customers. And they tailor-made the products, maybe not in the large scale, but very small scale, but very, very efficient supply. And then they follow the fashion and -- actually, they create the fashion. They lead the trend of the fashion. So I think new retail is a broad concept and also help us to identify -- under this concept, we also try to identify more and more unique small business and help them to grow on our platform.

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Operator [10]

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Moving on to the next question, we have Grace Chen from Morgan Stanley.

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H. Chen, Morgan Stanley, Research Division - Equity Analyst [11]

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My question is about your cloud business. I remember the management previously set a target to achieve 1 million paying customers, and this target has been achieved in the current quarter. So I'm wondering what's your next target and what implication on margins after achieving 1 million paying customers?

And in addition, in the Investor Day, we talked about expansion into the SaaS market, Software-as-a-Service market. Can you share with us the competitive landscape in China SaaS market and how Alibaba Cloud is positioned in this market?

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Yong Zhang, Alibaba Group Holding Limited - CEO & Director [12]

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Yes. This quarter, we hit the milestone of 1 million paying customers in our cloud business. We are very happy with that, but we believe this is a starting point. Cloud actually has a huge potential in China and in the world, and every single business is going to the cloud. So we -- actually, we are trying our focus still the market expansion, still trying to leverage our first-move advantage to have a big-scale business in cloud. So we will continue to invest very heavily in cloud business and try to sign up more paying customers in the future.

And also I think relative to your second question, yes, actually the cloud -- actually, we view cloud business not only a infrastructure service provider. We work very closely with SaaS service provider in different industries, in different segments, try to help them to develop their application, tailor-made applications, for their clients on our cloud. And this include the CRM, include the ERP and include even a customer service software. So actually, this did cover a wide range of industries. And I do believe now is just early stage of cloud business. We look forward to a very bright future in cloud.

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Operator [13]

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Moving on, the next question is from Alex Yao of JPMorgan.

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Alex C. Yao, JP Morgan Chase & Co, Research Division - Head of Asia Internet and New Media Research [14]

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Two questions. One is a follow-up on Joe's comment, the development of new retail will be disruptive gain in the economy and it will disrupt the e-commerce first. Can you elaborate more about how do you think about the new retail will interplay with the current e-commerce consumer behavior? And then how should we think about your ability to monetize and generate profit during this disruptive period and after?

And then, secondly, I think, Maggie, you mentioned that the reason for commission revenue underperformed the GMV of Tmall is because you guys are basically rebating the commission back to merchant for adoption. Can you elaborate a little bit more and help us understand how to think about the future trend for commission revenue?

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Yong Zhang, Alibaba Group Holding Limited - CEO & Director [15]

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This is Daniel. Let me answer your first question. In terms of new retail, I think the first -- as Joe said, we have to think -- we have to think out of box to disrupt the existing off-line retail model and even to disrupt the existing e-commerce model. But I would say actually our e-commerce -- our existing e-commerce platform, our core commerce platform actually generate tons of consumer data, which is incredibly valuable for us to get insight of customers. And we know -- for this over 500 million customers, we know who they are and we know where they live. We know their preference in consumption pattern and their favorite brands. So we have enough consumer insight. But today, these 500 million customers, actually they are not only online, they are everywhere. But any time they -- anytime, anywhere, they are always online at the same time. So today, actually, this online advantage give us a very good chance to understand more about customers, then give us the chance to innovate in the retail format. And we do believe the innovative retail model and retail format is the necessity for the new retail. And this is not only to drive traffic from online to off-line or drive traffic from off-line to online, this is trying to create the incremental value for the customers as well as to the business.

So actually, we have -- recently people discuss a lot about our innovative Herma model, and we start to incubate this Herma 2 years ago. And we made a lot of efforts to make this thing as a unique one because this is not a supermarket, this is not a food mart, this is a brand-new model. So actually -- but this model can bring people the value, which they cannot get in the traditional retail business. For example, they can get order -- they can place order online and get 30 minutes on-demand delivery and they can enjoy the food on the spot and no time they can buy at home. So -- but going forward, I would say, actually, this is just is -- Herma just is an example, real example, to get people know and how we can innovate, how we can upgrade the existing off-line business and the potential to address the 55 -- the 85% of off-line retail. And we will continue to work on this and leverage what we have, mostly important assets we have, data, to build a new business.

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Chung Tsai, Alibaba Group Holding Limited - Executive Vice Chairman [16]

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Yes. Just to follow up just quickly on Daniel's comment regarding 30-minute delivery, as an example of where new retail can be very disruptive to existing e-commerce retailers. When your consumer demand is generated from an in-store experience and then that consumer says, well, I'm going to a movie so I don't want to carry a bag with me, so I'm going to have it delivered to my home within a very short period of time, that's where logistics, your traditional e-commerce logistics infrastructure can be disrupted because you will need to fulfill out of that retail location as opposed to out of a warehouse that is not even in the city center. So the expectation becomes 30 minutes and not overnight or 24 hours. So that's going to be very, very disruptive to existing infrastructure and investments that have been made.

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Wei Wu, Alibaba Group Holding Limited - CFO [17]

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Right. Alex, regarding your question on the commission revenue. This quarter, our commission revenue shows slower growth, which is 28%. This is because our commission revenue were netted off by the expenses, the subsidies we paid during the quarter. We see this as an investment. So basically we recognize less commission revenue to improve consumer acquisition retention and also consumer experience, in turn resulted in strong transaction growth in Tmall GMV. So you've seen we reported 49% year-on-year growth on Tmall physical goods GMV.

So going forward, how we look at it, we're going to continue to invest. So the investment may not necessarily all on this top line, but also on the costs and the expenditures, the marketing spending and other expenses that could improve the -- enhancing the consumer experience. So by the way, the commission revenue accounted for around 18% of total revenue, so just for your reference.

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Operator [18]

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Moving on to next question we have from Alan Hellawell of Deutsche Bank.

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Alan Hellawell, Deutsche Bank AG, Research Division - MD and Head of Asian Telecommunications, Media and Technology Equity Research [19]

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I believe that profit sharing from Ant was up more than 140% quarter-on-quarter. I was hoping you could give us a sense as to the factors behind that sharp increase and what we might expect to the rest -- for the rest of the financial year.

And then just going back to video. Subscribers are up 100% year-on-year, but revenues from the group were up only 30%. I was just wondering how many of these subscribers are indeed paying subs? And how many of them might be bundled at this point in time? And how does that ratio evolve going forward?

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Wei Wu, Alibaba Group Holding Limited - CFO [20]

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Alan, yes, we shared a higher profit from Ant this quarter and business grow very well. Not only they have laid a great consumer foundation and their payment business growing well, but also they have strong growth in other value-added services such as financial services, technology services, in the wealth management, in consumer loan areas. We do expect to see its continued strong growth, but with aggressive investments in the following quarters.

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Yong Zhang, Alibaba Group Holding Limited - CEO & Director [21]

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In our video business, actually, today, actually, most of the subscribers are paying customers and we seldomly do the bundled sales. But actually, that shows a huge potential in the future to leading the development of the contents and -- especially in exclusive contents. We are very confident to attract more paying subscribers on our video business. And we also see a good chemistry between our loyalty customers on our e-commerce platform and to give them access to the video, and this is also the expansion of their consumptions.

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Operator [22]

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Moving on to the next question we have from Chi Tsang of HSBC.

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Chi Tsang, HSBC, Research Division - Head of Internet Research of Asia Pacific [23]

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I have 2 questions. First question, very strong growth in Tmall GMV. I was wondering if you can give us a bit more color sort of what's driving that. Obviously you had some promotional activity. But any additional color will be very informative.

And secondly, you also had very strong growth in international. I was wondering if you can sort of help set us understand and maybe tie together Lazada and Redmart and your recent investment in Tokopedia. How did these businesses evolve over time? And importantly, how they might compete with Amazon when they expand into ASEAN?

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Yong Zhang, Alibaba Group Holding Limited - CEO & Director [24]

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Yes. This quarter Tmall recorded a 49% year-on-year growth in physical goods. And we -- as Maggie said, actually we invest -- we made a good investment in Tmall and we made great efforts in acquiring new consumers and improving the experience of existing customers. And we will -- and on top of that, actually we do a lot of -- teams did a great job in terms of expanding the product selections, especially to have the Uni's exclusive selection, product selections on Tmall including to get more import products on our platform and inclusive new product launch on our platform. I think we will continue to work on this and we will continue to invest in user experience, in acquisition of new customers as well as expanding our footprint in different categories, especially in low categories like fresh and frozen and imported products.

Then for the second question. Yes, actually international globalization is our long-term strategy. We are very committed to the global expansion. And you know that we made investment in Lazada. And in Singapore, we have another investment in Redmart, which is -- which focus on fresh and frozen and dry groceries, which we believe these 2 categories create a very high and very frequent consumption and high-frequency consumption. So we think this is a combination -- actually we view this as part of the category expansion of Lazada in Singapore. And we just -- actually, I just mentioned in my script that we led the investment in Tokopedia in Indonesia because Indonesia is a very, very important, market and we are very happy that Lazada has very strong performance in Indonesia. But in this market, I think not only B2C has opportunity, but C2C also has great potential. So that's the reason why we -- on top of Lazada, we made very important move in C2C, which is Tokopedia. We anticipate that we can generate a lot of synergies and chemistries in Indonesia market in both B2C and C2C.

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Wei Wu, Alibaba Group Holding Limited - CFO [25]

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Yes. Well, we are talking about investment. We also emphasize the efficiency of our investment. So when you take a look at the returns, growth of GMV and the revenue, our investments are drive -- when you talk about investment, look at the sales, marketing expense, other expense, it shows -- when compared to peers, it shows that our investment into the growth, drive the growth is a high efficient investment.

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Operator [26]

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Moving on to next question is from Jin Yoon of Mizuho.

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Jin Kyu Yoon, Mizuho Securities Asia Limited, Research Division - Research Analyst [27]

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Just couple of questions for me. As you transfer more and more into this social commerce platform, can you give us some color on what kind of incremental conversion or clicks growth you're seeing from some of the channels such as live broadcasting, news feed personalization? Perhaps what channel is more effective than the other?

And second of all, Maggie, you mentioned that part of your growth is driven by new users. Is it safe to say that -- are you guys seeing newly added users today initial ramp in spending is faster than ever? That'd be it for me.

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Yong Zhang, Alibaba Group Holding Limited - CEO & Director [28]

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Taobao -- mobile Taobao platform actually transformed from a sales platform to a sales marketplace to a social commerce and content-driven, community-driven platform. Actually, we see a very interesting change of the ecosystem, which is on top of the buyer and seller on our platform. Today, we have a lot of key opinion leader, influencers, which becomes -- actually, they create a lot of tons of contents associated with consumption, associated with products on our platform. So our customers today, when they -- they are on a mobile app, they are not only consuming the goods, but also consuming the contents. By consuming the contents, they are creating new demand from the customers. So actually, today, on our platform, we don't -- actually, we don't have a unified content -- social commerce products. Actually, we have a lot of user interfaces on our mobile app. And for different user products like live streaming, cellphone video and a product recommendation, actually, they have different advantage and disadvantage. And we are working closely with our merchants to get them to understand how to use these different services, these different tools to have higher conversion. Actually, normally speaking, just to give you a real sense, actually we see a lot of makeup categories and kitchen -- kitchen products. Actually, this is very good for the live streaming because people, a young lady just make a -- do live streaming to show people how to makeup and how to cook the meal and then create a lot of curiosity of the food and also for the electronics in the kitchen.

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Wei Wu, Alibaba Group Holding Limited - CFO [29]

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Right. So the driver of the growth and how that new user impact our future growth, I think when I look at the direct driver of the growth of our customer management revenue is the number of clicks and also the CPC, both the metrics grow very healthily. And number of clicks comes from both new users and existing users. So basically, why the clicks grow is because we provide more relevant content, and consumer engagement growing. They just stay here, enjoy shopping and window shopping and social commerce in Taobao. So what make up that more relevant content is our data technology. We talked about the personalization, a lot of efforts we made to make the user experience better and better. So that's the real driver behind.

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Chung Tsai, Alibaba Group Holding Limited - Executive Vice Chairman [30]

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And just to supplement that, this is not just clicks, but also actual spend and purchase orders on our platform. We have said in our earnings release -- which I think we've repeated that in the past -- is that the longer a customer stays on our platform, the more they spend per customer in terms of more orders and also across more product categories.

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Operator [31]

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The next question comes from Gregory Zhao of Barclays.

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Xiaoguang Zhao, Barclays PLC, Research Division - Assistant VP [32]

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I have 2 quick questions. So the first one is actually about our margins and sales and marketing expense. Before the earnings, we've heard some concerns about the competition during the 618 event, which was expected to weigh on our margins, but actually we are seeing some deceleration now with sales and marketing expense. And can you help us understand the reason behind? And it's also about margins. So this quarter we have quite strong core commerce margin. Shall we expect we can maintain such trend through the year?

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Wei Wu, Alibaba Group Holding Limited - CFO [33]

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Right. So our spending and investment in marketing and sales. So our investment are not only reflected in the marketing expense, it could also be offsetting some of the commission revenue. But having said that, the investment we're going to make in the following quarters will be increased. So I think, overall, when you talk about the core commerce margins, 63% is a very high margin level. We do have this leverage to reinvest back to the business, expanding the B2C market share and enhancing our leadership. So we'll just -- like we communicated during the Investor Day, we are going to go ahead to invest. This is an investment for future.

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Operator [34]

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Last question is from Alicia Yap of Citigroup.

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Alicia Yap, Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research [35]

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I have a follow-up questions on the commissions, the Tmall commission revenue line. So is this the first quarter that we actually saw to net off the promotion expense out of the commission revenue? And then any color you could share on the like-for-like basis for the commission revenue growth if we did not include the expense in this line.

And related to that, given obviously very strong operating leverage on your platform, is it fair to assume that you actually have a very strong ability to continue to help out your merchant with the promotional spend, which indirectly is a way to return to your merchants and help them lower their overall operating cost on the BABA platform?

And then just, lastly, quickly, on the Herma. Wanted to get some color on the traction from user side and also how's accounting treatment? How will we book the revenues? And are these costs on the P&L?

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Wei Wu, Alibaba Group Holding Limited - CFO [36]

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Right. So the commission revenue growth is offsetted by the promotional investment during the quarter. This is actually a trial. It's a new test of different ways of investing into the business. When you ask about what if not -- we exclude that investment from that commission revenue, how would the revenue growth be, it will be higher than previous quarters. So that's...

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Chung Tsai, Alibaba Group Holding Limited - Executive Vice Chairman [37]

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Yes. I think, also as you've pointed out, it really demonstrates our ability to -- with our operating leverage, to reinvest into not just capturing users, but also to invest in our merchants in terms of their ability to do business on our platform and their loyalty.

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Robert Lin, [38]

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Sorry, Alicia. Maybe you can state the question again on Herma?

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Operator [39]

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(Operator Instructions)

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Wei Wu, Alibaba Group Holding Limited - CFO [40]

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Yes. Alicia, I think you were asking about how we account for Herma revenue. Okay, first of all, we had this statement in the press release that, first of all, in the past, it was included in our innovative and initiatives segment and now reclassified to the core business, because we think after 2 years, that business should come out of that incubator. It becomes into a real business. And then, right now it's still relatively small. So the way we count it is we recorded the gross revenue.

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Robert Lin, [41]

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Okay. Thank you, everyone, for joining the conference call. That will be it for today. Thank you very much.

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Operator [42]

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Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now all disconnect.