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Edited Transcript of BABA earnings conference call or presentation 30-Jan-19 12:30pm GMT

Q3 2019 Alibaba Group Holding Ltd Earnings Call

Hangzhou Feb 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Alibaba Group Holding Ltd earnings conference call or presentation Wednesday, January 30, 2019 at 12:30:00pm 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

Alibaba Group Holding Limited - IR

* 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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* 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

* Eddie Leung

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

* H. Chen

Morgan Stanley, Research Division - Equity Analyst

* Han Joon Kim

Deutsche Bank AG, Research Division - VP and Research Analyst

* Piyush Mubayi

Goldman Sachs Group Inc., Research Division - MD

* Thomas Chong

Crédit Suisse AG, Research Division - Regional Head of Internet

* Wai Yan Wong

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

* Xiaoguang Zhao

Barclays Bank PLC, Research Division - VP

* Youssef Houssaini Squali

SunTrust Robinson Humphrey, Inc., Research Division - MD & Senior Analyst

* Yuan Liu

UBS Investment Bank, Research Division - Co Head of HK and China Internet Research

* Zachary Aaron Schwartzman

RBC Capital Markets, LLC, Research Division - Associate

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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, and welcome to Alibaba Group December Quarter 2018 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, Alibaba Group Holding Limited - IR [2]

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Good day, and good evening, everyone, and welcome to the Alibaba Group December Quarter 2018 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 the corporate website. A replay of the call will be available on our 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. SEC. 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, marketplace core commerce adjusted EBITA, non-GAAP net income, non-GAAP diluted EPS and free cash flow are expressed on a non-GAAP basis. Our GAAP results and reconciliations of GAAP to non-GAAP measures can be found in our earnings press release. Unless otherwise stated, growth rate of all stated metrics mentioned during this call refer to year-on-year growth versus the same quarter last year.

With that, I will 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.

We had another good quarter with excellent business performance and sound execution against our overall strategy. But we live in an environment where external factors seem to drag investor sentiment regarding Alibaba's business.

I would like to address 3 macro issues that may be on your minds. First is how to look at Alibaba in the context of the Chinese economy. Daniel later will offer his insights on the current state of the Chinese economy from the vantage point of Alibaba's business.

I want to refresh your memory about 3 secular developments that I referred to in the last earnings call. One, consumption upgrade by China's 300 million middle-class consumers continues its course. By OECD's projection, the Chinese middle class will grow to 850 million people by 2030. Two, the healthy balance sheet of Chinese households and the increasing availability of credit will fuel consumption. Three, Alibaba's active role in digitizing the retail sector expands our total addressable market to the entire USD 5 trillion retail economy in China.

The size of the Chinese economy is USD 13 trillion. In the future, obsessing on the rate of growth is not meaningful because of the law of large numbers. The reality is the absolute dollar amount of new wealth creation in the Chinese economy will be well over USD 800 billion each year. We have conviction that e-commerce and digitization of retail will continue to grow at a faster rate than the overall economy. While the overall economy grew in single digits, e-commerce sector GMV grew at 20% to 30% over the last several years. That is because technology innovation and improved productivity are driving sustained growth over a long period of time.

The second issue I want to address is the trade war. Concerns about trade tensions might affect sentiment, but Alibaba's exposure to the tangible effects of trade tariffs is small. For our businesses in e-commerce, consumer services, entertainment and cloud computing, the primary growth driver is not exports but domestic consumption and corporate transformation.

Digitization of retail sector and the resulting productivity and efficiency gains will accrue to Alibaba with or without a trade war. Alibaba is well-positioned to help solve the structural trade deficit issue vis-à-vis the United States. With nearly 700 million Chinese consumers shopping on Taobao and Tmall, we are the platform of choice for American companies and farmers to gain access to the Chinese market.

The third issue is regulation. Recently, investors have asked us about perceived regulatory tightening of Internet businesses. Of all the economies in the world, China is at the forefront when it comes to the confluence of rapid technology development and large-scale wealth creation. Our perspective is that China's regulatory landscape should be expected to evolve along with the rapidly changing developments in the new economy. We have witnessed the government becoming more adept at calibrating the interplay between regulation and economic growth.

I would like to point to several policy directions that provide assurance to businesses operating in China. First, the government has implemented fiscal policy initiatives that are business friendly. VAT rates were lowered in 2018 and are expected to be cut further in 2019. The government also introduced lower social security contributions which especially benefited small businesses.

Second, the government raised the threshold for personal income tax exemption, giving lower-income groups more to spend. This is expected to provide a broad-based spending stimulus as lower-income groups devote a higher percentage of their disposable income to consumption.

Third, in early January, the state council announced new initiatives to support small enterprises by reducing corporate income tax rates and raising the monthly sales threshold for VAT exemption. With these policies, it's clear to us that the government intends to ignite business confidence and encourage business investment as well as consumer spending. It is also clear to us that the government recognizes the importance of small businesses as the backbone of the economy and job creation. We believe that anything that's good for business confidence and in particular good for consumers and SMEs will be good for Alibaba.

Now I turn to Daniel for his remarks.

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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. During this call today, I will share our observation of the Chinese economy and how our investments in new businesses will support our long-term growth.

Based on data from the National Bureau of Statistics, China's GDP growth rate was 6.4% year-on-year in the fourth quarter of 2018 and the full year growth rate was 6.6%.

China's overall retail consumption grew around 8% year-on-year in the fourth quarter. The slowdown of macro might cause concerns in the market. However, what we see from Alibaba's platforms is that Chinese consumption growth is still strong driven by a growing base of increasingly affluent young consumers.

We saw aspirational Chinese consumers look for a rich shopping experience and high-quality products and services on our platforms. Our Tmall physical goods per GMV grew 29% year-on-year this quarter. While China's overall online physical goods grew 21%. The robust growth was driven by strength in the FMCG, apparel and home furnishing categories, reflecting strong secular consumption trends.

Our Singles Day Shopping Festival generated USD 30.8 billion in GMV, representing a growth rate of 27% year-on-year. During the event, among the hundreds of millions of consumers that made purchases, 46% were born after 1990 and over 40% made purchases from international brands. This young generation of consumers continued to be the main power of consumption growth in China.

In addition, we saw the ongoing urbanization continue to be the engine of China's economic growth. Over 70% of the increase in our earning attributed in this quarter was from Tier 3 and below cities.

From a category perspective, due to cooling off of the real estate market, large-ticket categories like white appliances have experienced a slower growth. And due to lack of technology innovation, mobile phones showed softened growth near term. While categories in consumer staples, apparel and home furnishing exhibited resilient growth in this quarter. We also observed subcategories like electronic toothbrush and beauty electronic devices grow fast in our platform, representing Chinese consumers continue to upgrade their lifestyle.

We believe as China seeks to generate sustainable high-quality growth, it has to transform from an export- and investment-oriented economy to a consumption-driven economy. And it may result in softer near-term economic performance. But we believe the consumption power of 1.4 billion Chinese population is the growth engine of the Chinese economy in the future.

Now let's talk about Alibaba. Our core business has been exhibiting robust and sustainable growth. In December 2018, our China retail marketplaces had 699 million mobile MAUs, representing a quarterly net increase of 33 million. Annual active consumers were 636 million, reflecting successful user acquisition programs such as referrals through the Alipay app, an early indicator of transaction activity on our platforms.

In October, we fully rolled out the new Taobao interface, which drove effective user engagement and improved traffic operating efficiencies in Mobile Taobao. We are also proactively working on improving recommendation algorithms and are making preparation for future monetization.

We have exhibited robust marketplace core commerce profitability as measured by adjusted EBITA of USD 7.9 billion, growing 31% year-on-year. This allows us to invest in the strategic areas for the long-term prospects -- for the long-term prosperity of Alibaba digital economy. These areas include cloud, logistics, New Retail, digital entertainment, local consumer services and globalization. We started our cloud business 9 years ago. And over the last few years, our cloud business delivered solid top line growth and established a leading position in China's nascent cloud market.

In November, we made an organizational change to appointed Jeff Zhang as President of Alibaba Cloud, adding to his responsibility on top of his role as our Chief Technology Officer. We believe under this framework we can make available much of our data technology using our own businesses for our enterprise customers to accelerate their digital transformation.

We continue to invest in Cainiao to build a logistic infrastructure of commerce. Through digitizing the entire fulfillment and delivery process, Cainiao continues to improve consumer experience and lower industry costs.

Our New Retail business consists of 2 major directions: reforming old and creating new, both of which enlarge the addressable market. On the one hand, we continue to make good progress in digitalizing partner retailers and enable their New Retail transformations. On the other hand, Herma, our proprietary grocery retail chain, continued to expand its footprint, optimize its existing stores and introduced new initiatives that improved consumer experience.

We continue to expand consumption use cases within Alibaba digital economy through the investments in digital media and the local consumer services. These businesses are critical to providing future customer acquisitions and their retention with our ecosystem.

We will be competitive and at the same time continue to improve our operating efficiency.

We are committed to globalize our business. One of the key regions we will stay focused on in the near term is Southeast Asia, which is the fourth largest region by GDP after the U.S., Europe and China. It has over 650 million in population that are relatively young. Online shopping penetration is still at low single digits. Leveraging our unrivaled technology and the strengthening management, we believe Lazada is well-positioned to continue to capture shares in this growing market.

China's economy is facing some uncertainty but we do see opportunities. The opportunities: rising strong consumption power, emerging disruptive technologies and innovative business models that drive the next growth phase of digital China. Over the last 20 years, Alibaba has built a full range of platform businesses including retail, marketing, financial, logistics and cloud computing services enabled by our advanced data technology. These form the core of the Alibaba business operating system which are important to the digital transformation of our enterprise customers and allow us to become the leading partner of businesses within China and around the world.

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.

In the December 2018 quarter, our major financial metrics continued to record strong results. Our total revenue grew 41% to RMB 117 billion. This is actually the first quarter our quarterly revenue surpassed RMB 100 billion. The increase was mainly driven by the robust revenue growth of our China commerce retail business, the consolidation of Ele.me as well as strong revenue growth of Alibaba Cloud.

Even stripping out acquired businesses, our revenue growth during the quarter continued to outperform that of almost all global technology peers.

As a percentage of revenue, without the effect of our SBC expenses, all our operating expenses, including product development, sales and marketing and general and administrative expenses remained stable year-on-year during the quarter. Excluding the effect of SBC, cost of revenue as a percentage of total revenue increased by 10 percentage points to 50% this quarter. The increase was primarily due to, first, the consolidation of Ele.me; second, the increase of the cost of inventory and logistics from our self-operated New Retail and direct import businesses; third, an increase in content spending by Youku on original content as well as an impairment charge on licensed copyrights.

Now let's turn to the segments. Core commerce. Our core commerce segment had another strong quarter with revenue growth of 40% year-over-year. When you look at China commerce retail, the fundamentals of our retail business continued to be solid. The combined customer management revenue and the commission revenue exhibited healthy growth of 27% year-over-year for the quarter.

Customer management revenue grew 28% in the quarter. The growth was primarily the result of increases in volume of paid clicks driven by higher click-through rates. Of course, these are all backed by the increased user base and enhanced user engagement.

We continuously expand this user base and continuously improve our user experience.

Commission revenue grew 24% in the quarter. The growth of commission revenue was primarily due to strong growth in Tmall's paid physical goods GMV of 29%. The discrepancy of the growth rates between the commission revenue and the Tmall physical goods GMV is primarily due to our adoption of the new accounting requirement, which has the effect of spreading out recognition of revenue from annual service fees received from Tmall merchants, whereas we previously recognized these fees at the end of each calendar year.

Others from China commerce retail was up 122% to RMB 11 billion. The rapid growth was primarily driven by contributions from Freshippo, also known as Herma, Tmall Direct Import and other direct sales businesses. As of the quarter end, there were 109 Herma stores in China and the retail chain continued to achieve robust same-store sales growth.

Revenue from local customer services was RMB 5.2 billion. The growth of daily on-demand orders continued to be strong during the quarter. In December 2018, we combined our on-demand food delivery platform, Ele.me, with our service platform, Koubei, to create a local consumer service business segment. Koubei had a very limited impact to our local consumer services revenue this quarter.

We believe we have a strong management team in our local consumer services to execute our strategy to gain market share.

Revenue from our international commerce retail business in the quarter was up 23% year-over-year to RMB 5.8 billion. The increase was primarily due to the consolidation of Trendyol, Turkey's leading e-commerce platform.

During the quarter, Lazada strengthened its core marketplace businesses and it reduced exposure to direct sales in merchandise categories. This business model shift resulted in accelerating marketplace GMV growth with direct sales revenue decline during the same period. As a result, the revenue growth of Lazada was slower than prior quarters due to a decrease in revenue generated from our direct sales business, where revenue is recorded on a gross basis including cost of inventory. We believe the shift in model towards capital-light marketplace business will solidify a healthier foundation for sustainable growth in the future.

Now let's look at the drivers of core commerce profitability. We continue to generate solid marketplace core commerce EBITA that grew 31% to RMB 54 billion during the quarter. This core, core profit growth was the main driver of our free cash flow for the quarter which came in at RMB 51.4 billion, which is USD 7.5 billion.

Because of the strong profit and cash flow generated, we're able to invest in 4 strategic areas, including: number one, local consumer service; number two, Lazada; three, New Retail and Tmall Direct Import; and number four, Cainiao. The losses generated from these investments was RMB 8.2 billion.

We have already started to see efficiency gains and greater synergies from these businesses inside the Alibaba digital economy. We will continue to invest and work towards delivering enhanced financial return from these businesses in the long term.

After incorporating the losses from these investments, our core commerce EBITA grew 20% to RMB 46 billion during the quarter.

Cloud computing revenue grew 84% year-over-year to RMB 6.6 billion, primarily driven by increased spending from enterprise customers. Adjusted EBITA for cloud computing segment was a loss of RMB 274 million, reflecting a negative 4% EBITA margin, improving from negative 5% from the same quarter last year.

Digital media and entertainment revenue grew 20% year-over-year to RMB 6.5 billion. The increase is primarily due to an increase in revenue from mobile value-added service provided by UCWeb, such as mobile search and game publishing, and an increase in subscription revenue from Youku.

Adjusted EBITA was a loss of RMB 6 billion. This loss figure included impairment charges taken on licensed copyrights that did not generate the expected return following a regular evaluation of programming. The evaluation resulted in RMB 2.8 billion impairment charges during the quarter.

During the quarter, we made the necessary changes to management who we expect to drive more efficient content strategies and synergies with the rest of our business.

Revenue from innovation initiatives and others grew 73% year-over-year to RMB 1.3 billion mainly due to an increase in revenue from Tmall Genie and Amap. Adjusted EBITA was a loss of RMB 1.6 billion.

Now let me highlight a few financial metrics that impact net income during the quarter. Other income was RMB 387 million compared to a loss of RMB 348 million in the same quarter last year. The increase in other income was primarily due to a decrease in exchange loss incurred during the quarter. We did not recognize any profit-sharing from Ant Financial during the quarter. Ant Financial continued its strategic investment to acquire new users and capture growth opportunities in the off-line payment market. Currently, Alipay and its affiliates have over 1 billion annual active users globally.

As of December 31, 2018, cash, cash equivalent and short-term investments were RMB 192 billion, USD 28 billion. The increase in cash was primarily due to free cash flow generated from operations, partially offset by cash used in investments and acquisition activities and share repurchase.

We generated robust operating cash flow of RMB 65 billion and free cash flow of RMB 51 billion. Please note that we have deducted content spending when managing FCS, even if such content spend was capitalized.

We're committed to enhance value for our shareholders through share repurchases. Since September 2018, we have repurchased approximately 10.86 million of our ADS for a total of approximately USD 1.57 billion as of yesterday.

Looking ahead, as Daniel discussed, the demand of products and services on China marketplace continue to be solid. Our new Taobao interface is driving effective user engagement and improving traffic operational efficiencies. We're testing the potential monetization of recommendation feeds. We need to ensure improved merchants' ROI as well as a better user experience. We will update the market of our progress to monetize recommendation feeds in due course.

We remain confident about our value proposition to consumers and merchants and we'll be focused on solid execution. We expect our core, core profits growth to remain healthy. At the same time, we will continue to invest in strategically important areas to increase our addressable markets and capture long-term growth opportunities.

Let's now turn to the Q&A. Thank you.

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Robert Lin, Alibaba Group Holding Limited - IR [6]

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Operator, we're ready for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Grace Chen from Morgan Stanley.

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H. Chen, Morgan Stanley, Research Division - Equity Analyst [2]

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My question is about investments in various new ventures. I'm wondering as we get into the new fiscal year, how do we rank these initiatives in terms of priorities? These investments, including New Retail, local consumer services, digital media and entertainment and Lazada, should we expect the loss from these ventures to be narrow in the new fiscal year, especially digital media and entertainment, in which we see investment widened substantially in the December quarter. Also, will there be any strategic -- potential strategic changes or adjustments, for example, are we investing more aggressively into the industrial Internet segment?

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Yong Zhang, Alibaba Group Holding Limited - CEO & Director [3]

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Thank you. This is Daniel. Let me answer your question. I think as I said in my script, I think we are -- because based on the very solid, I mean -- core, core, I mean, businesses, we have the flexibility to invest for the future. And I think in the new year, we will -- I mean, focus on how to -- I mean generate these synergies of the new areas we invest, I mean, to build a strong connection and synergies with the core business of Alibaba ecosystem. I think for the digital content for the local consumer services, we view these 2 areas as an expansion of categories of our consumer needs to leverage the 700 million consumer base we have. And we believe that we need to provide with them a very comprehensive, I mean, supplies ranging from digital to content and to local services. We think this is very important for the prosperity of our ecosystem. And actually, when we're doing this investment, we are -- on one hand, we try to make ourselves in order to be competitive in the market. And in each of the areas of these new business, we can -- you can see that in the market, there are a couple of players. So we have to make ourselves competent -- competitive. But on the other hand, we will continue to improve our operating efficiency and we set a lot of disciplines to improve our -- to make sure we can deliver solid results in each of these areas.

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Operator [4]

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Next question comes from the line of Alicia Yap from Citigroup.

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Alicia Yap, Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research [5]

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I have a question regarding your commission revenue. So regarding the adoptions of the new accounting treatment, could you elaborate a bit, what would be the commission revenue growth rate be this quarter if there were no change of the accounting adoption? And should that translate to higher commission revenue growth than the GMV growth in the next 3 quarters? Lastly, any update on the timing of the rollout for the new recommended feed monetization?

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Wei Wu, Alibaba Group Holding Limited - CFO [6]

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Sure, Alicia. This is Maggie. So your first question regarding commission revenue growth, if we exclude the impact of that, just the accounting treatment, the growth would have been just consistent with the growth of the GMV. So basically, this commission rate has not really changed that much. And for the recommendation feeds monetization, as Daniel already mentioned during the call, we're testing and just have been working on this, but there is no exact timetable. We're going to update you in due course. One thing for sure is that by the time we roll out this monetization, we would have a very good balance of the merchants' ROI as well as the user experience.

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Operator [7]

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Our next question comes from the line of Piyush Mubayi from Goldman Sachs.

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Piyush Mubayi, Goldman Sachs Group Inc., Research Division - MD [8]

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During third quarter, what drove the higher click-through rates which led to the higher paid clicks and the acceleration in customer management revenue that we saw? Was this on the search side and a function of the evolution of the algorithm or was it the new Taobao app design that made the difference? And if I can sneak a question on feed, I understand that it's an update we can receive from you in due course. But is it going to be linked in any way to the -- a quarter ago you talked about the fluid macroeconomic conditions. Is it, in any way, going to be linked to a recovery in the economy? That's my question.

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Wei Wu, Alibaba Group Holding Limited - CFO [9]

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Right, Piyush. When you look at customer management revenue growth, we said that the growth is mainly coming from the growth of the paid clicks, which is driven by the click-through rate growth. So it's coming from actually several things: one, you look at the active user base being expanded and the engagement being enhanced; at the same time, we're optimizing our search, and all of these contribute to the growth of the CTR. For your second question -- so what was...

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Robert Lin, Alibaba Group Holding Limited - IR [10]

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So the second question is, is the potential monetization or recommendation linked to a recovery of the economy?

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Yong Zhang, Alibaba Group Holding Limited - CEO & Director [11]

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Actually, we don't tie this, I mean, monetization process with the economic condition. I think we do have to take it off the merchants' ROI. But I think if we give them more flexible, I mean, marketing tools and it's also good for them to do more business and acquire new customers for each of the merchants. So -- but today, as we said, we are actually making preparation from a tech perspective to make sure we can have the right algorithm and right, I mean, technology and to make sure we have this native app recommendation to ensure the user experiences, but at the same time we can ensure a good earning return -- recoup ROI for the advertisers.

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Operator [12]

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Next question comes from the line of Eddie Leung from Merrill Lynch.

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Eddie Leung, BofA Merrill Lynch, Research Division - MD in Equity Research and Analyst [13]

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I have a question on the smaller merchants. Have we seen any differentiation in the business activities between the small sellers and large merchants recently, given the external change in economic conditions? And similar to that, could you share more color with us on the potential impact of e-commerce laws on the smaller merchants?

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Yong Zhang, Alibaba Group Holding Limited - CEO & Director [14]

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So Eddie, I think that is a very good question. I think that the very beautiful effect in Taobao marketplaces is like every year, we generate a lot of more -- new merchants. But actually, today, when you look at the -- our ecosystem in recent years, we do have a lot of new merchants. They are not like the traditional reseller on the platform. And I don't think they are the traditional small merchants just in terms of the size. Actually, a lot of merchants today, they are doing the live streaming on the platform, they are the key opinion leaders but at the same time, they are good sellers. So I think we do encourage the selections of the merchant types. And we also try very hard to provide them with technology and tools to help them to show their uniqueness to the customers. So I think that that's the long-term growth driver and that's the long-term guarantee of the prosperity of Taobao marketplaces.

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Chung Tsai, Alibaba Group Holding Limited - Executive Vice Chairman [15]

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Eddie, I wanted to address the potential e-commerce law. In fact, the -- I referred to this in my opening script. There is a -- the state council just announced a tax relief for small businesses. So the e-commerce law, the fundamental point there is that the SAIC require registration of all the merchants. So the merchants -- they created a lot of uncertainty among the merchants about what the effect of registration is because the concern is that the tax enforcement will be tightened. Now on the other hand, with this tax relief for SMEs, this basically offsets that concern. Specifically, the tax relief involved 2 aspects. Number one, the tax exemption threshold for VAT tax has been raised from RMB 30,000 per month to RMB 100,000 per month. In other words, if you're a small business that's doing less than RMB 100,000 per month in sales, you would be exempt from the VAT regime. And the second aspect of the tax relief is as corporate tax rate has come down from 25%, that's the normal corporate tax rate in China. But for small businesses, it has come down to 5% for the first RMB 1 million in profits and then 10% for the next -- from RMB 1 million to RMB 3 million. So effectively, you're lowering corporate tax rates by a lot. So the combination of these 2 tax relief measures have basically offset the concern about the e-commerce law relating to registering small businesses.

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Operator [16]

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Next question comes from the line of Binnie Wong from HSBC.

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Wai Yan Wong, HSBC, Research Division - Head of Internet Research of Asia Pacific & Analyst [17]

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I have a question on the improvement in margins and also the investment cycle. So we see an improvement on the margin side especially in your marketplace core commerce, which clearly shows strong operating leverage efficiency. So how should we think about this stage of company's investment cycle, especially in terms of can management elaborate more on, is the efficiency coming more on like the local customer services or New Retail? And also, can you comment on the competitive landscape in our local services and how our strategy has evolved in response to competition, say, in terms of take rates or promotions? And just very lastly is that if we look at our longer term, as our ecosystem has been expanding and we are penetrating into different business segments, how have we been seeing the cross-selling, right, across the different products within our ecosystem to go deeper into customers' pockets?

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Wei Wu, Alibaba Group Holding Limited - CFO [18]

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Several questions from Binnie. Let me answer the margin and profitability investment first and then Daniel could answer you on the local service progress and cross-selling question. So when you talk about margin, as we talked throughout all of these quarters, we encourage people to look at the profitability while we're growing into such a big-sized business, right, the absolute dollar profit is meaningful to the EPS and possibly your return on capital. Okay, so that question -- basically, the substance of that question is how much more are we going to invest and our profit growth. I understand that investors have questions, concerns or even worried about how much are you guys going to invest in those strategic initiatives and how much more you're going to spend. I want to talk about 2 things. Number one, we invest in these strategically important areas by spending money that's generated from our core business. While our other competitors just spend money from what they raised from the investors, from the market. And how strong is our core, core? When you look at our customer management revenue and commission revenue, if you add them together, it gives you like CNY 70 billion in a quarter's time. And then when you look at the core, core profit, which we reported CNY 54 billion, right, so mostly are coming from China retail. You can tell the margin, if you will, and you can tell the powerfulness of our core, core. So this provides a strong support for us to invest in those strategic areas. Number two, when we look at the investment, we emphasize a lot on the operating efficiency, investment efficiency. So we do have internal measures on these -- each of these investments. All of these investments are still in the stage of that which is early to talk about financial returns, right, profit. However, there are business progress which we are very well on track.

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Yong Zhang, Alibaba Group Holding Limited - CEO & Director [19]

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In terms of the local services business, late last year as we said, we merged the Koubei and Ele.me business and formed a new, I mean, local consumer service company. And we strongly believe that by doing this, we can reduce the overlap of the spending in customer -- in client acquisition and client services. And today, if you look at this food business -- actually for each of the restaurants and the in-store business and the food delivery business are equally important to every single restaurant. So today, by combining these 2 business, we see -- we anticipate a lot of synergies in the newco. And I think back to your last question about the cross-selling opportunity, I think this is really our advantage of Alibaba ecosystem. And we try very hard, try to build synergies across the business and bringing new customers to each of the business within the Alibaba ecosystem. Take for example, in November 11, not only our China retail platform is the main driver. Actually, all the user interface, I mean, of Alibaba big family participate. There are around 20, I mean, business participate. And we do a lot of customer engagements through different mobile, I mean, interface and which also bring a lot of new customer not only to our retail business but also to other business like Youku, like a mobile browser, like travel, so on and so forth. And we will continue to do that. And the 700 million active customers is our -- the most important asset in Alibaba ecosystem, and we will try to leverage this power and unlock the potential of the consumption.

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Robert Lin, Alibaba Group Holding Limited - IR [20]

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(Operator Instructions)

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Operator [21]

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Next question comes from the line of Mark Mahaney from RBC Capital.

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Zachary Aaron Schwartzman, RBC Capital Markets, LLC, Research Division - Associate [22]

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It's Zachary Schwartzman on for Mark. Outside of your market-based core commerce segment, are any of your newer investments in core commerce, between local consumer services, international, New Retail, direct import and logistics, growing more quickly from a profitability perspective than you were initially expecting? And can you please provide a ranking here in terms of profitability or loss contribution? And any recent learnings from this quarter from these consolidations?

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Wei Wu, Alibaba Group Holding Limited - CFO [23]

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Sure, Mark. We mentioned in our earnings that the investment we made within the core is mainly in these 4 areas: Ele.me, right, Lazada, New Retail and Cainiao. So we make this in the order of spending from high to low or the loss level from high to low.

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Operator [24]

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Next question comes from the line of Gregory Zhao from Barclays.

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Xiaoguang Zhao, Barclays Bank PLC, Research Division - VP [25]

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So based on the guidance you updated the last quarter, last earnings conference call and your first 3 quarters earnings result, so this implies an accelerated total revenue growth in your fiscal 4Q. So would you please help us understand the key for acceleration drivers behind. And also do we have any updates to the full year guidance? And also a very quick follow-up. We noticed you already launched some promotions and activities, such as that red envelope during the Chinese New Year celebration. So would you please help us to understand how the promotions are compared to last year and what the implication to our user growth and the margin?

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Wei Wu, Alibaba Group Holding Limited - CFO [26]

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Right. So when we look at the revenue growth for the quarter, which is 41% year-on-year, it's a big quarter and we think this 41% is very strong. And the way to look at the customer management revenue, which shows acceleration in the growth rate, that's mainly because of the increase in the volume paid clicks driven by higher click-through rates. If you look at the driver for that, that basically continues the expanded user base, increased engagement and also the optimized search. So...

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Yong Zhang, Alibaba Group Holding Limited - CEO & Director [27]

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Yes, I think today from a business perspective, we continue to enhance our -- I mean, we try to continue to enhance our leadership position in the market. So that's why the new customer acquisition to us is very strategic. So that's why so far, we focused a lot on this new customer acquisition and retention. And as we said in the script and we have done a lot, together with Ant Financial -- Alipay, to acquire new customers. And in terms of the Chinese New Year promotion, I think we are still on the way and Alipay just launched their Wufu and New Year's Eve campaign. And this become a new IP, super IP in China and we anticipate a lot of consumers will participate. And from AGH perspective, we view this as another volume opportunity to acquire new customers. So that's the synergies we have validated, and we will continue to do so.

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Wei Wu, Alibaba Group Holding Limited - CFO [28]

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You also asked about the guidance. We don't have any update on guidance.

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Operator [29]

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Next question comes from the line of Youssef Squali from SunTrust.

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Youssef Houssaini Squali, SunTrust Robinson Humphrey, Inc., Research Division - MD & Senior Analyst [30]

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Quick question for Joe, if I could. Talking about the government stimulus, I was just wondering if you can point to or share any proof points in the recent past that some of these stimulus work that the government has done so far has actually had a positive impact or the desired impact, how quickly it may have taken shape. One example recently is that in cars and household appliances, it looks like the National Development and Reform Commission told the state broadcaster, CCTV, that the government will be rolling out some measures to boost that. I was just wondering if you can provide any kind of color you may have on that since you guys have talked about how household appliances saw some slowdown.

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Chung Tsai, Alibaba Group Holding Limited - Executive Vice Chairman [31]

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Okay. I think the most recent tax relief for small businesses had just been announced very recently just a few days ago. So the effect of that, obviously we anticipate that to work through but we haven't seen any actual effect yet at this point. But over the course of the last year, there's also some discussion on the lowering of the VAT rate itself as well as raising the tax exemption level for personal income tax, which improved the disposable income level, especially the lower-income groups. We think that those will all work through. But the bigger point here is that the Chinese government is now getting quite sophisticated in terms of targeting the government measures more towards fiscal policy. We've seen in previous cycles that there's an overall sort of pumping of more liquidity into the system using monetary policy. But in the previous cycles, that might have worked at previous sort of debt levels. But currently, we have debt levels in the economy that's not extremely high but it's sort of at a fairly high point. So the government is turning in -- to fiscal policy to stimulate the economy. We think it's the right thing to do. We think tax cuts will be -- is right on point. And so we anticipate that these various cuts on both individual spending -- cuts that encourage both individual spending and also small businesses will work through the economy over time.

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Operator [32]

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Next question comes from the line of Alex Yao from JPMorgan.

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Alex C. Yao, JP Morgan Chase & Co, Research Division - Head of Asia Internet and New Media Research [33]

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Can you give us an update on your video content strategy into 2019? And how should we think about the P&L impact upon the recent Fan Bingbing scandal and the celebrity tax situation?

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Robert Lin, Alibaba Group Holding Limited - IR [34]

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I'll repeat. So the question is our content strategies -- content spending strategy this year. And then how do we view the, I guess, those various scandals among the celebrities, how do we view that in terms of our -- for this business?

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Yong Zhang, Alibaba Group Holding Limited - CEO & Director [35]

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We have made consistent content strategies and we will closely monitor the effectiveness of these content strategies. And so far, as you said, I think the bulk is quite -- is cooling down. And I think that this is good for the market and for the whole, I mean, content market. And the cost of the production, the cost of the actors and actresses actually has been reducing. I think this is good for the healthy growth in the future. And we will continue to monitor, closely monitor the operating efficiency of the content production and the content distribution. And the key thing is like we want to leverage the user base, several hundred million I mean consumer base we have, in the digital media and digital content area.

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Operator [36]

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Next question comes from the line of Han Joon Kim from Deutsche Bank.

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Han Joon Kim, Deutsche Bank AG, Research Division - VP and Research Analyst [37]

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I wanted to follow up on the digital media business. And I think, Daniel, you just mentioned that we have a fairly consistent strategy. But as we integrate this with Ali Pictures as well, how do we think about the KPIs for this business and should we be anticipating that the current level of loss is going to continue or perhaps widen or perhaps narrow? Just kind of framing what are the key KPIs that you generally care about for...

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Robert Lin, Alibaba Group Holding Limited - IR [38]

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Sorry, Han Joon, you were breaking off. So maybe you can -- I believe the KPI that you're looking for, for the business, right?

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Han Joon Kim, Deutsche Bank AG, Research Division - VP and Research Analyst [39]

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Yes, the key focus or the KPI as the business gets restructured or merged with Ali Pictures.

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Yong Zhang, Alibaba Group Holding Limited - CEO & Director [40]

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Well, I think we focus on the user growth in our digital content business. So especially, we see quite robust growth of the number of subscribers this quarter in our content -- in our D&E business. And I think that's very important that we can distribute the content to the broad-based consumers we have, i.e. Alibaba family. And also we are trying to enhance our user, I mean, experiences also to give them multiple I mean consumption categories in both physical goods -- in order of the physical goods, local services as well as digital content.

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Chung Tsai, Alibaba Group Holding Limited - Executive Vice Chairman [41]

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Yes. So I think just to supplement Daniel, I think because we are -- we have a broad ecosystem of -- including commerce and also local services, so the entertainment business -- we don't look at the entertainment business as a stand-alone business in terms of KPIs because if you are offering good content and that increases retention for our e-commerce business and also increased per user spend in e-commerce or local services, that is cross-selling and that improves the KPIs in our other segments. So we need to look at those KPIs as a whole. So thanks.

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Operator [42]

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Next question comes from the line of Thomas Chong from Crédit Suisse.

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Thomas Chong, Crédit Suisse AG, Research Division - Regional Head of Internet [43]

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I have a question about our cloud computing business. Given that we have already achieved 50% in terms of the market share, what's our next milestone? And is there any timeline that we can think about the breakeven timing?

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Yong Zhang, Alibaba Group Holding Limited - CEO & Director [44]

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Actually, we have a very clear cloud strategy and we are very happy to see the progress we've made. And today, we are obviously the market leader in cloud business in China. But if you look at the cloud marketing in China today, we still believe today it's in the very early stage. In the digital era, every single business need to go to cloud. And also, I think we have -- when people have a defined -- have a definition of cloud and people have various -- I mean talk about various services. So actually, in Alibaba ecosystem, we have already built a very strong cloud infra in terms of IaaS, as a service. But in terms of the PaaS and in terms of the SaaS, we also have a lot of, I mean, expertise. And for example, our middleware and database services are very, very important, very critical in PaaS. And our retail technologies, actually our marketing technologies, our technologies in the -- in Ant Finance and our technologies in Cainiao are also relevant to all the financial institutions and the logistic companies. So we try -- we are trying to share this SaaS-based technology, through our Alibaba Cloud, into the market. And so that's why in our recent organization upgrading and we even renamed the BU of cloud into cloud and intelligence. So we believe cloud is not only about our infrastructure. Cloud is all about -- is about data technology and data intelligence capability. So we want to share this data technology and data intelligence capability into the whole market.

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Operator [45]

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Next question comes from the line of Jerry Liu from UBS.

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Yuan Liu, UBS Investment Bank, Research Division - Co Head of HK and China Internet Research [46]

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Appreciate the earlier comments on macro and regulation. I wanted to see if we can get some similar comments on the outlook for the advertising market this year, especially as some of the larger advertisers reset budgets at the beginning of the year.

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Yong Zhang, Alibaba Group Holding Limited - CEO & Director [47]

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Well, actually, when we look at the advertisement market, actually we don't view this as a separate market. We view this as a part of our core commerce ecosystem. So today, most of the merchants, most of the brand partners have a presence on our platform. They don't view us as only a sales platform and neither only a marketing platform. Actually, we are the only platform in the world which people can tie marketing, tie branding into the end sales. So how to make this end-to-end value chain from brand building, from awareness into attention, into purchase and into loyalty customer. This AIPL is the customer life cycle management opportunities we want to offer to our -- both merchants, brand partners and advertisers. So we continue to strengthen our unique role in this advertisement world. But again, we are not trying to be one of the advertisement platforms to our advertisers. We try to give them all-in-1 ecosystem to help them to generate sustainable growth in the new digital era.

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Robert Lin, Alibaba Group Holding Limited - IR [48]

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Okay. Thank you, everyone, for joining. And if you have any questions, please contact the IR team of Alibaba. Thank you.

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Operator [49]

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Thank you. This concludes our conference for today. Thank you all for participating. You may all disconnect.