Alibaba Group Holding Limited (BABA) Q3 2017 Earnings Report, Transcript and Summary

Good day ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group December Quarter 2016 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.

Good day, everyone and welcome to Alibaba Group's December Quarter 2016 Earnings 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 on 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. To also understand 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, segment 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 and non-GAAP measures can be found in our earnings press release. With that, I will turn the call over to Joe.

Thanks, Rob. Thank you all for joining us. With 54% year-on-year revenue growth and $4.9 billion in free cash flow, our numbers speak for themselves. As Maggie will go through with you, we're increasing our revenue growth guidance for the full fiscal year from 48% to 53%. To put this in perspective, fiscal year 2016 revenues grew by 33% versus the prior year; this means a revenue growth in fiscal 2017 is expected to accelerate by 20 percentage points to 53%. Let me provide a qualitative perspective on our organic value creation which is allowing us to accelerate growth on an even bigger base. There are two primary reasons; first, as we have said, our market faces a much more than distribution channels with brands and merchants. As we transform to a high value marketing platform, we are increasingly capturing more merchants spend on both distribution and marketing services. The shift to mobile has also created new ways to engage with users, which generate significant additional value not only on the existing platform, but also new opportunities by integrating mobile internet with physical retail outlets. Second, Alibaba is a data company; we leverage data to better engage consumers personalize their experiences and create value for brands and merchants doing business on our platform, few companies have the rich dataset we have because of the diversity of our businesses. Moreover, we benefit from synergies between business units because of common data structures. For example, our core commerce and digital media and entertainment units work together to leverage comprehensive consumer profiles to deliver a differentiated experience for our users and enhance customer loyalty. Higher personalization of content and more engaged users translate into incremental monetizable value to produce us good services and content who wish to access these users within our ecosystem. I also think our mentality plays a role. We're constantly looking for the next technology breakthroughs that could disrupt our business and we embrace them rather than shy away from them. Our mindset is constantly paranoid, which we believe is the hallmark of a great technology company. Now, I will like to turn it over to Daniel. Thank you.

Thanks, Joe. Hello, everyone, and thank you for joining our earnings call today. We enjoy another quarter of robust growth. This is in result of our focus on long term forward-looking strategies, combined with strong execution capability. Our results also demonstrate the continuing prosperity and expansion of the Alibaba ecosystem. Our core commerce business continues to maintain substantial growth with the total revenue increasing 45% year-over-year. Sophisticated personalization based on our data analytics, as well as content-driven and impacted social engagement have strengthened user acquisition and the strictness on our China retail marketplaces. Mobile MAUs this quarter grew by $43 million to reach a total of $493 million. Our cloud business makes significant gains in customers and market penetration. The cloud computing unit added 114,000 paying customers during the quarter to a total of 755,000 customers. At the same time, we expanded our global footprint by launching data centers internationally, following our Chinese customers to new markets as well as acquiring new customers outside China. Our digital media and entertainment business, the strategic big picture is taking shape as we integrate Youku and other investments in film, music and sports. We are excited by the possibilities of an integrated approach between entertainment and commerce as we enhance customers' experiences and royalties through offering, making shopping fun and entertainment affordable. This past quarter, we hosted the world's biggest shopping day; in November 11, Global Shopping Festival where for eight years in a row, we continued our tradition of delivering new highs. Behind the $17.4 billion of GMV is a massive mobilization of infrastructure and resources across our ecosystem with our network of partners working together in a highly collaborative profession to provide consumers around the world a highly unique shopping experience. 11-11 showcased the extraordinary competitive advantage of our platform model as well as important emerging trends in the digital economy, which I will highlight below. First, entertainment and inherent engagement are part of the consumer commerce experience. During November 11, we saw plenty of examples of impacted features and entertainment competence in driving user engagement and ultimate sporting purchases. Programs such as Tmall [ph] Collection Fashion Show, live streaming, impacted they are and the location-based games and the countdown galor [ph] in aggregate provided approximately 20 billion consumer impacted engagements with one another and with our platform. Consumers discovered that through our innovative products and technology, the mobile interface is not just a digital show for inventories, but rather an access point to a fun and entertaining shopping experience. Through this, we are seeing new ways in which this generation of young consumers making their buying decisions. Second, data-driven personalization is an immense competitive advantage. Following on our tremendous volume of consumer data, we are providing each user with a highly-personalized shopping environment and a product recommendation. Meanwhile, availability of customer data enables merchant to increment the customization tools to manage their forefronts [ph] to effectively segment their customers and display more relevant products on the individualized-basis. During November 11, more than 400,000 merchants include our technology to customize their soft display for different consumer demographics. Third, a combination of China's emerging middle class and enabling technologies are making the world smaller. This demand for high quality imported products for Chinese consumers has accelerated with ongoing evolution in consumer taste and lifestyle. What has made this consumption-driven growth possible in years of real wage increases and a high level of savings in recent years? During this 11-11, more than 47 million consumers on our platform bought goods from coastal 15,000 international brands. Looking ahead, as we enter a new year, I want to share with you my observations about change in the retail sector, as well as outlook on our cloud and the digital media and entertainment business. We have coined the term 'new retail' to describe a world where the distinction between online and offline commerce becomes obsolete. This is possible because of internet user behavior is changing from desktop computers to mobile. New retail will result in new value creation from the integration of traditional retail with mobile internet innovation. Relationships among the consumer merchandize and the retail space will be restructured to offer a better value proposition to consumers as well as enhanced operating efficiencies for merchants. This is a trend that will be editable and we will turn theory into action along these lines. Recently, we complete an investment in the regional supermarket chain, Ningbo Sanjiang, and make an offer to acquire the departmental store group in retail. Those transactions are highly strategic in purpose and we look forward to updating you in the future regarding our execution of the new retail strategy. Our cloud business is in a unique position to leverage the foundation of technology developed for our ecommerce platforms to serve new non-ecommerce clients; these sophisticated proprietary technologies include the security, middleware and content delivery network. We are also optimizing the enormous server capacity created for ecommerce and to serve third party clients through a load balancing system. We will continue to grow our cloud ecosystem by working closely with independent software vendors, developers and other technology and the service providers in our past and the past players. Looking forward, we will continue to invest in our cloud business to enhance market leadership and scale. We will continue to invest in our digital media entertainment business. We believe digital confidence will make up an increasingly large proportion of total consumption volume by young consumers, enabling hundreds of millions of consumers through simultaneously shop on our commerce platforms and consume digital confidence on our digital media and streaming platforms, enhances, those our user value proposition and the user thickness. Through the support of Big Data, our ecommerce merchants will be able to target and engage consumers seamlessly across our digital media and entertainment platforms and vice versa, resulting in the perfect unification of brand building, marketing and sales. Now, I turn the call over to Maggie, who will walk you through the details of our financial results.

Thank you, Daniel. Hello, everyone. We delivered another set of excellent result this quarter. Total revenue grew 54% year-on-year to $53.2 billion R&D with revenue from the core commerce segment growing 45% year-over-year. Our core commerce segment EBITA margin was 64%. Mobile contribution continues to climb, reaching 80% of the total China commerce retail revenue as we added 43 million mobile MAUs to total of 493 million MAUs in December. Cloud computing revenue grew 115% year-over-year and the segment adjusted EBITA margin was -5%. This quarter, we've generated $4.9 billion in free cash flow on non-GAAP basis. Total revenue grew 54% year-on-year mainly driven by the robust revenue growth of our China commerce retail businesses, AliCloud, as well as the consultation of newly acquired businesses, mainly included on the Lazada. The biggest component of the core commerce segment is the China commerce retail business and its revenue growth was primarily driven by online marketing service revenue, which increased to 47% year-over-year and China commerce retail also recorded accelerating commission revenue growth of 32% year-over-year, which is mainly driven by strong Tmall GMV growth. Talk about monetization, our ability to monetize the users on our platforms continues to improve. Revenue per annual active buyer has continually increased, reaching $35 in December quarter. On the mobile front, mobile revenue per mobile user has also been increasing for several quarters, reaching $24 in December quarter. Our mobile commerce platforms have become the destiny for social commerce and brand engagements. We have accumulated a wealth of user behaviors beyond conducting transactions and demonstrated the substantial marketing value of the platform to brands and to merchants. Quarterly cost trends; cost of revenue excluding stock-based compensation was RMB 18.5 billion, as a percentage of revenue increased year-over-year, primarily due to the increase in content acquisition cost of Youku Tudou, cost of inventory of Lazada and the logistic cost associated with Tmall supermarket. Other cost items excluding SBC as the percentage revenue all decreased slightly year-over-year including product development, sales and marketing expense and G&A. The percentage of the revenue decreases reflect operating leverage in the seasonally strong quarter and solid revenue growth. Non-GAAP net income in the quarter was RMB 22.5 billion, an increase of 36% year-over-year. Free cash flow, capital expenditures and the cash; we continue to generate significant free cash flow. In the December quarter, we generated RMB 34 billion or about $4.9 billion in free cash flow. Our cash flow allows us strategic and operational flexibility to invest in technology and acquired us resources to accomplish our strategic objectives. Total capital expenditures in December quarter were RMB 7.3 billion in which RMB 4.1 billion is related from the acquisition of land use right and the construction in progress, this mainly our campus in the cities other than Hangzhou. As of December 31, 2016, our cash, cash equivalent and short-term investments were RMB 138.5 billion or $20 billion. This is an increase of RMB 31 billion from the end of September quarter, primarily because of free cash flow generation from our operations. Segment reporting; core commerce revenue increased to 45% year-over-year. China commerce retail revenue grew 42% primarily due to strong growth of 47% year-over-year in online marketing services revenue. The growth of online marketing service revenue was driven by increases in volume of clicks from strong traffic growth and better click-through rate. This is a reflection of our ability to deliver more relevant content to consumers through our improved data technology. This growth resulted in higher average spending on our online marketing services by an increasing number of brands and merchants. Commission revenue representing 30% of our China commerce retail revenue in the quarter grew by 32% year-over-year, reflecting strong Tmall GMV growth. International commerce retail revenue increased 288% year-over-year, mainly due to the consolidation of Lazada, starting in mid-April and the re-acceleration of the revenue growth from AliExpress. The adjusted EBITA margin of the segment was 64% this quarter, a slight decline from the same quarter last year. This was as conveyed [ph] early, this is primarily due to the consolidation of Lazada and our investment in Tmall supermarket. Mobile MAU growth was again very robust this quarter. Our China retail marketplaces added 43 million MAUs. We are encouraged by the level of user growth, as well as engagement on our mobile platforms as our marketplaces have become the destination for social commerce and brand engagement. The average annual spend per active buyer for 12-months ended December continue to increase both year-over-year and quarter-over-quarter. Our consumers purchase more and more frequently across more categories on our platforms. Cloud computing revenue grew 115% year-on-year. The growth was primarily due to an increase in the number of paying customers, which have doubled since the year-ago quarter, to 765,000 and also to an increase in their usage of more complex offerings. We announced a number of price cuts on our cloud computing products. This was at the beginning of the quarter that has some impact to the top line growth. But overall, the top line are still growing strongly. We're committed to pass to our customers the benefits from cost saving achieved through improved technology and scale. Our cloud computing paying customers across a variety of industries and our businesses ranging from startups to larger corps. Cloud revenue from ATH [ph] related parties only contributed a single digit percentage of our total cloud computing revenue. Adjusted EBITA margin of the cloud computing segment significantly improved from negative 41% in the prior year's quarter to negative 5% this quarter. Our cloud computing businesses' top-priority remains the expanding market leadership. We will continue to invest in customers through a more cost efficient effective solutions for standard products as well as developing and deploying more sophisticated value-added products and services. Digital media and entertainment; digital media and entertainment segment revenue increased 273% year-over-year, primarily due to the full effect of consolidating Youku and also to an increase in revenue for mobile value-added services provided by UCWeb. Adjusted EBITA margin of the segment was negative 60%, primarily due to aggressive content acquisition and development cost of the Youku partially offset by improvement in UCWeb's margin. We will continue to invest in content, user acquisitions and infrastructure for the segment. Going forward on full-year basis, we expect the segment revenue would continue to fast grow and we expect the negative EBITA margin for the digital media and entertainment segments to narrow. Innovation initiatives and others. Revenue from innovation initiative and other segment increased 51% year-over-year. Adjusted EBITA margin of the segment was negative 93%, reflecting our continued investment in AutoNavi, YunOS and DingTalk. As said earlier, our different businesses are in different development stages. The core commerce segment has delivered another quarter of strong revenue growth with a strong EBITA margin. The substantial profits of free cash flow generated from the core commerce segment has been and will be reinvested back into new growth drivers such as cloud computing, digital media, entertainment and new businesses of the core commerce segment. Our cloud computing business will continue to focus on talents, technology investment to further strengthen our leading industry position in China. Our digital media entertainment business will continue to invest in a combination of content and original progress to drive user growth and increased market share. So overall, we will continue to make investment in these strategic businesses and the investments made from time-to-time operating leverage. Guidance change; with revenue coming ahead of expectations in the first three quarters of the fiscal year and the good revenue visibility of the March quarter, we are adjusting up our full fiscal year revenue guidance from 48% to 53% growth year-over-year. That concludes our prepared remarks. Operator, we're ready to begin the Q&A session. Thank you.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator instructions] Your first question comes from the line of Alan Hellawell of Deutsche Bank. Please ask your question.

Thank you very much, tremendous results and congratulations. The look to those core ecommerce is clearly going from strength at strength. I was just interested in the media and entertainment arm. Maggie, you just mentioned expectations that negative margins might narrow, I think going through the end of the fiscal year. Does that speak more to accelerating revenue growth or moderating increases in content pricing? And also if you don't mind, do we think that that margin trend will continue throughout calendar year 2017? Thank you.

Hey, Alan. Yes, I said that just now that we expect the revenue for the digital media entertainment segment will continue to grow fast and we do expect 90 days EBITA margin would narrow for the following years on a full-year basis. Of course there are some seasonality, there are some flashes in quarter-by-quarter, so we're talking about the full-year comparison. The reason we have that expectation, one thing is that we do expect after integration of that sector, especially Youku, we're going to see some synergy and we're going to see the powerful – the growth of that sector. So the revenue of that sector will continue with fast growth. That's the reason why. At the same time, we're going to continue to invest in the content, on the user acquisitions technology into that sector. Investment won't be hold back. So we still see great potential as where I've seen the management to grow.

Fantastic. Sorry. My second question is we've often given some very useful insights on the marketing services side around the interplay between paid clicks and CPC. Can you just give us an update – and forgive me, maybe you mentioned this in the prepared remarks – if we think about the growth in marketing services revenues? To what extent would it take clicks and what might have CPC inflation been? Thank you very much.

Sure. Alan, the increase in the online marketing revenue if we look at the reason from the technical point of view is due to the increase in the number of the clicks and also higher conversions. But there is another angle to look at, which is the strategic angle, that we have more users spend more time and more merchants with higher spending on our platform. This is what we see the power of the digital technology we have been talking and working on that start to deliver results. When you look at the direct driver, number of merchants and average spending of the merchants that are growing, from the consumer side, number of the clicks which is traffic and the conversions are grown.

Okay, thanks so much.

Operator, next question?

Thank you. Your next question comes from the line of Eddie Leung of Merrill Lynch. Please ask your question.

Hi. Good morning and good evening. Let me congratulate you on a very strong quarter. As we've got into 2017, could you talk about your main objectives for this year? What are some of the things that you would like to shift in 2017? And then separately, could you also give us an update on your product mix? I understand that you won't disclose GMV anymore, but just I want to get a sense on some of the faster growing product categories and some of the underlying trends. Thank you.

Thanks. This is Daniel. I will try to answer your first question. Yes, actually 2017 is coming. I would say in this new year, we will continue to execute our strategy and we have three very clear strategies – first is globalization, second is rural China [ph], third one is Big Data. I think the strategy is very clear as it actually give us a very clear guidance for the future growth. So we will continue to execute and we have already demonstrated executing capability and we'll continue to do so. And also actually, I think in the coming year, we'll try our best to realize the synergy of the investment we made and the new business we invested. For example in cloud computing, as I've said in my remarks, we want to generate enough synergy from technologies and infrastructures and the capacities we build up and in ecommerce on leverage in cloud computing. In digital entertainment, what we want to build out is to leverage the user base. We have the ecommerce platform and to convert to the digital confident [ph] consumers in digital marketing platform. And also from a merchant perspective, now today, all the merchants who want to spend marketing dollars smartly across platforms, so our digital media entertainment platform will leverage the Big Data or consumer data we have and to provide the solutions as Big Data solutions, marketing solutions to help them to build brand, to engage customer and to make sales in one total solution.

Right. Regarding to your second question, even, first of all, I want to clarify that it's not correct to say that we stopped reporting GMV. We'll continue to report GMV on annual basis. The only reason that we don't report on quarterly basis is that our value equation already go beyond GMV in transaction and we don't manage that on quarterly basis. And then come back to your question on the product mix going forward. Obviously the forward segment, business segments we have, the new business initiatives – the cloud computing, digital media entertainment – will grow fast. Cloud computing shows much faster growth than the core business. So this business show, demonstrating increasing importance in terms of their contribution to whole revenue. But our core business is going to still show strong growth.

And within the ecommerce segment, the product mix, the big product categories of soft goods, apparel, electronics, FMCG, those category mix have not changed over time.

Got that. Thank you very much.

Your next question comes from the line of Alicia Yap of Citigroup. Please ask your question.

My first question is related to your approach on Copay [ph]. With the latest rounds of the equity financing and the industry landscape getting more subtle, will Copay become more aggressive in gaining market share given the competition scaling back a little bit? Any update on that strategy will be appreciated and I have a second question. Thanks.

Yes. Actually, Copay is our joint venture within finance and we're very happy to see the many very good progress in the business expansion and in terms of payment volume and the value created for the offline retailers and the restaurants. Today I think they are in a very good position and getting access to the merchants and to the offline merchants by payments with the service. But looking ahead, I will say actually, by the big data we have and data share between AGH [ph] and finance, I think Copay can leverage the data we have to create a lot of marketing service and value-added services to the offline merchants. I think that's what will give more value to the merchants.

Okay. So my second question is actually related to your China retails revenue growth. If we remember correctly, I think the management did highlight during the last earnings call that given the lapse after outlook benefit, we'll start to see some tough comp in December quarter, but yes, today you report a very strong growth in marketing service revenue. Obviously that's reflecting the merchants and brands recognitions and also the increased clicks and all that, and also the strong seasonality. So I just wanted to get a sense, would there still any benefit from the outlook and how should we look at the services line – marketing line all for the March quarter and also fiscal 2018? It does look like our monetization ability could actually sustain at a very strong growth. Thank you.

Okay. First of all we are very happy to see the strong growth of the marketing service revenue in this quarter and actually this quarter, we have not had any lows in this quarter. The main driver of the strong growth is from two things – first is from the growth in the traffic, which actually you can see as of the mobile MAU this quarter and also people spend more time on our mobile app because of the impactive engagement; and the second driver of the revenue growth is from the technical improvement which drive higher click-through rate. I think these two are the main drivers of the marketing so there's revenue growth. I think this is also very good for the future.

Okay, great. Thank you.

Operator, next question.

Thank you. Your next question comes from the line of Ken Sena of Evercore ISI. Please ask your question.

Hi, thank you. Just on the video content spend in digital media and entertainment. Can you maybe just walk us through how you're thinking about the ramp there and also anything you can say on your approach to amortizations as far as how we might want to think about facing this more into our model as this kind of steps up? And then maybe also just on the new retail comments. Can you speak to maybe how in time bits into that? And also you mentioned the 2.8 billion in maximum cash. Just how that's being determined and over what period? Thank you.

Okay, this is Daniel. I will try to answer the new retail question first. Actually, we elaborate our new retail strategies very clearly. We strongly believe that online-offline will be highly integrated and will create a brand new user experience in the future. As part of our efforts to execute the new retail strategy, we are now in the process -- we are making an offer to acquire Yintai [ph] and the purpose of the acquisition is to make a full scale test of the online-offline new retail format. We strongly believe the unique value creation and user experience were from a redefinition of the retail format and this will reposition the people, the merchandisers and the retail space. I think that this will create a lot of new experience. But over the past two years, we have done a lot of exercise to prepare the technology infrastructure. For example, today we have made a technology we can support the sharing of inventory on and offline and we can help the merchants to connect their on and offline royalty and membership program. We can also can connect their on and offline service and make online purchase, enjoy the offline service vice versa. I think that's very important, but basic preparation for the omnichannel, for the integration. But having said that, to create a new experience, it's all about the restructuring of the elements of the retail outlets and that's why we want to privatize Yintai and to do the full scale test.

Right. Regarding your first question on the investment and content, we will continue to invest in a combination of [indiscernible] content and also original programs to drive our user growth to increase the market share for our digital media and to tenant [ph] business. And to talk about amortization schedule, we charged to P&L to come and get broadcasted, normally it's within the year time.

Okay. And then just any color on the maximum cash output in time; as far as how that's being determined or over what period?

You're referring to the $2.6 billion we have announced in terms of the cash outlay. That is our share of the acquisition price to take control of the company. So basically, that cash is going to the existing shareholders in time for us to acquire the company.

Got it. Thank you.

Operator, next question.

Thank you. Your next question comes from the line of Ming Zhao of 86Research. Please ask your question.

Thank you. I have two questions. The first question is can you elaborate a little bit more about your new retail strategy and the potential financial impact in your revenue and margin? So acquisition of Yintai to indicate that you would buy more offline retailers. Is that correct? Online, you are a 3P platform. But the offline, you are 3-1P direct retail, so we want to get more color about that strategy. The second one is can you comment on the margin outlook for the cloud computing business? You have cuts on prices in the fourth quarter, it seems like the break even time is delayed a little bit. So, any color would be helpful.

Thanks, Ming. This is Daniel. I'll answer your first question. I have to say that actually, we operate online business during the platform model, but actually today, take the inside example, this is also a platform, but offline our shopping mall [ph] platform. And the way you look at the merchant, the clients we have in each of our platforms, actually they are large. They overlap right now. So this make it possible for us to do this on and offline integration because we have some merchant base and we have some brand collection. So that's the first point. The second point, I think today when we look at the growth of our online retail business, we strongly believe that our job is to empower the offline retail, to upgrade, to make the total $4.8 trillion addressable market -- retail market to be digital. So that's our mission. So actually we believe this will give us a very big space to grow our current GME of perform current stage to a higher stage and we believe that as a data company, our consumer data, our technology can empower the offline retail to experience a successful digital transformation.

Right. And then talking about the financial impact -- the impact particularly; Yintai is a profit-making business, so it will be to the top-line/bottom-line. There might be slight a dropdown on the margins but not significant at all if you look at the overall business. So to answer the second question about the cloud probability, we do see great potential in this cloud area and we are very confident that with the data, with the technology and the team we have, we're going to quickly spend our market share -- our leadership and extend the customer base. So possibility if not our priority, although it's not a very difficult thing or seeing the possibility will not be in the very far future?

Thank you very much operator, next question?

Thank you. Your next question comes from the line of Erica Werkun of UBS. Please ask the question.

Good evening, management. Congratulations for the strong quarter. This is Ming Xu [ph] asking on behalf of Erica. So I have two questions; the first is on the active buyer growth and engagement. So if the China retail revenue grow by 42% in this quarter, on back of 9% of the annual growth of buyers, I just want to maybe understand more on this side. So what do you see as maybe the feeling for other [indiscernible] for Youka growth? And also on engagement side, I remember in previous quarters you mentioned that every user opened the app seven times a day and spend around 20 minutes on the app. So is it possible for you to maybe give us an update on the quantitative measures of the user engagement? And I have a follow-up. Thanks.

Sure, Ming. To your first question, any active buyer growth, it will continue growth, definitely. What we see as -- I think we should be able to expect to see active buyer base that's definitely over 500 million, maybe 600 million. At this stage, we're very happy to see that active buyers shows increasing engagement and a higher spending level, so that is the quality of buyer and the activeness and the spending power of the buyer getting out from that buyer base.

In terms of the cost of user engagement, you can see that this quarter, we add 43 million mobile MAU and with such a rapid growth of MAU, what I can share with you is that our -- the time people spend on mobile app is not diluted. So I think that is a very good trend and we -- that proves our product experience and the thickness in our mobile app.

Thanks, Maggie and Daniel. So my second question on the content cost of the media entertainment business. I think you recently mentioned that you all spend around RMB50 billion in the next few years on content, so could you maybe elaborate more on the pacing of the spending and also maybe the rough space between different kind of spending, particularly on the video side which I think is particularly competitive, given the landscape? Thanks.

Okay. RMB50 billion commitment actually demonstrate our strong commitment to the entertainment business. Also in this very fast-changing industry landscape and very intense competition, we still believe the content is the key to acquire customer and key customers to stay with us. But obviously, we have to develop our content generation strategies very smartly, and first of all, I think we still have to invest in the [indiscernible] is very, very important to acquire and especially to acquire that, the – offence. And in the past few months, actually, the great [indiscernible] also all prove that and will continue to make good judgment and make good investment in queries. Secondly, we're not going to develop our sale-produced ecosystem together with an internal schedule and with the contrasted -- with the internal schedule and the contracted schedules and to create self-developed or self-produced good contents and this is unique to the customers on our platform. And the last one is to build the ecosystem and to create a lot of EOPGC content and this content will give us a solid base of the selection of the content and can give people a very different experience.

Yes. One clarification to make, Ming, is that when media and entertainment group talk about RMB50 billion investments over the next few years is content investment is a major component, but it's not only about content, but also about user acquisition and also investment in infrastructures.

Great. Thanks, Daniel and Maggie.

Operator, next question?

Yes, thank you. Your next question comes from the line of Evan Zhao [ph] of Credit Suisse. Please ask the question.

Hi, good evening. Management, thank you for taking my questions. Congratulations on very strong third quarter. So questions regarding a quick follow-up on media entertainment as well, I was wondering if we can talk about the subscriptions; paid subscription progress within Youku [ph], I think Youko [ph] have a decent set of paid subscription members and there have been some news around like disclosures of a decent memo, so I think -- I was wondering like if you can provide an update on that and how -- and how do we compare the economics of paid subscription model versus the traditional app model? I mean is this like a main reason why within the profitability for media segment is actually getting better rather than getting worse in the coming quarters, so that's my first question. I have a follow-up.

Subscription model is very important in digital and entertainment business and actually when we look at our opportunity, we will see that definitely our potential to convert our hundreds of millions of consumers in our ecommerce platform to be the subscriber, to be the users of customers in the digital platform so that is the synergies we can see in Alibaba Group. And actually we are very happy to see -- we have made some progress I think in this respect and in the past November rather than digital media business worked closely with Tmall and with ecommerce to develop the paid customers and we also -- for example, we give the royalty buyers in November 11 some award and to test the membership program in Youko [ph], we received very good feedback and we see a very good retention rate after the experiment, after the testing period over. So we will continue to do so to convert our existing buyer group in ecommerce to digital business.

Alright, thanks Daniel. The second question regarding the audit spending; I also wondered like if you can share some source around how we kind of leverage that influential power to our globalization initiative? And also is that characterized into our branding or marketing spend budget or into the more broader speaking kind of content spending budget? Thank you.

Can you repeat the question, you got cut-off under which components and content.

Sorry. So the question is regarding the recently announced Olympic sponsorship. So frankly, how can -- how we can resonate with our globalization strategy when it comes to implementation in the following quarters or the next big years? And also in terms of debt, the announced amount is that -- does that fall into the category of our branding and marching order OpEx or kind of related to the broadly defined content related spending pool? Thank you.

We are very happy and very honored to be panel of IOC and to sponsor the Olympic Games for the next 12 years. As we announced and our sponsorship will cover two categories, first is our ecommerce platform service, second is the cloud computing service; and we believe that Alibaba can bring a lot of innovation technology to empower IOC to have a successful transformation but of course IOC to be the partner of -- of being a partner of Olympic Games, this also can greatly promote Alibaba as a global brand in the global stage. And -- actually over the collaborations with IOC, actually there is one content, one business related to digital entertainment which is Olympic Channel and we also rise to operate the Olympic Channel for Chinese audience and on top of the ecommerce merchandize business and the cloud computing service to IOC. And this is -- people can easily understand that the Olympic Games has a lot of very precious -- very valuable digital contents and in the current and in the previous years; and we are very happy to consolidate and to operate these contents and to make it available to Chinese people and to make more Chinese young generations to be Olympic fans.

On your question of what category will the sponsorship fit into in terms of potentially our costs; one thing I wanted to say is that none of the so called reported numbers are accurate. When you look at it the sponsorship has a cash component but also has a border component when it comes to us providing cloud computing services to the IOC and also all new programs. So in reality, as we assess a 12-year deal with the potential cash cost spread over that period, we find the deal quite attractive to us and quite reasonable.

Got it. Thanks, Joe. Thanks, Daniel.

Operator, the last question please.

Yes, thank you. The last question comes from the line of Piyush Mubayi of Goldman Sachs. Please ask your question.

Thank you, Maggie, Joe, Daniel, Rob. Looking at the tremendous growth in online marketing spend, I wonder if you could talk through what percentage of marketing spend by merchants is on marketing technology, as well as, where do you think this figure could go to? That's my first question.

When you look at our marketing services today and what we -- the value we provide to our merchant, to our partners is different with what it was several years ago. And they went well -- we gave out marketing service as more for the merchants to promote their goods on the platform to making immediate sales but today what we build up together along with our development of the -- our mobile platform, mobile commerce platform as a consumer engagement platform, consumer community; and the merchants discover that this is a good place not only to do the trade marketing, to make the immediate sales but also very good to do the consumer engagement and even brand building. And so that's why which can -- address why people want to -- tend to spend more dollar on a platform and I always actually asked by people that how to look at the P&L of the merchants on the platform and what's the ceding of the marketing services. Is it as the marketing service as a percentage of revenue, is it too high but today actually I will say that sorry, it's not like that; we cannot just compare the marketing dollar spend on a platform with the G&E [ph] generated by this tallfront but instead we have to look at this marketing dollar spend on a platform how to benefit of their incurdness [ph]. So we have to look at the incurred revenue of the client, online/offline. So that's the measurement we look at. In this regard we believe that there are very strong -- various fixed base in the future, especially when we integrate our -- fully integrate our digital media platform within ecommerce platform and we can see quick potential.

Thank you, Daniel. And my second question is on the cloud, after quarter after quarter of growth, as well as an extension of your own services and offerings and finally global branding, what's your updated thinking around the town for this segment?

Piyush, I think we have said on a couple of conference calls before that we think to term it as measure the way -- you know, there is usually not a lot of third-party reliable reports because cloud computing is such a nascent industry in China but total IT spend in China is $200 billion a year; and if you assume let's say a 20% penetration of the traditional IT spend and moving that spend onto the cloud, that is a $40 billion number. And then we have talked about previously that to attract people to the cloud, you obviously have to provide more affordable option that the traditional spend, so take a 25% discount off of that $40 billion, we get to $30 billion, that's the math that we have given you before and we have not changed that thinking at this point. We feel very positive the potential growth of the entire cloud computing sector in China.

Joe, that's just the China market growth?

Correct.

Okay, thank you very much.

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