Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group’s June Quarter 2017 Results Conference Call. At this time, all participants are on listen-only mode. After managements prepared remarks, there will be a question-and-answer session. 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 June quarter 2017 results conference call. With us today are Joe Tsai, Executive Vice Chairman; Daniel Zhang, Chief Executive Officer; Maggie Wu, Chief Financial Officer. This call is also being webcast on our IR section of our corporate website. A replay of the call will be available on the website later today. Now, let me quickly cover the Safe Harbor. Today’s discussion will contain forward-looking statements. These forward-looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations. For detailed discussions of these risks and uncertainties, please refer to our latest annual report and Form 20-F and other documents filed with the U.S. Securities and Exchange Commission. Any forward-looking statements that we make on this call are based on assumptions as of today and we do not undertake any obligation to update these statements except as required under applicable law. Please note that certain financial measures that we use on this call, such as adjusted EBITDA, adjusted EBITDA margin, adjusted EBITA, adjusted EBITA margin, non-GAAP net income, non-GAAP diluted EPS and free cash flow are expressed on a non-GAAP basis. Our GAAP results and reconciliations of GAAP to non-GAAP measures can be found in our earnings press release. With that, I will now turn over to Joe.

Thank you, Rob. Thank you all for joining us. I was wondering what I would say on this quarter’s earnings call. The first word that jumped to my mind was that the numbers speak for themselves. In short, we had a great quarter. However, I want you to know that these exceptional results did not come from anything specific we did during the quarter. The reason we are able to deliver these results is that we sow the seeds years ago by investing in technology, by investing in innovation, by investing in people and by being bold with vision that nobody thought was possible. Today, the Alibaba economy is self-reinforcing and it is as strong as ever. It is in this spirit of vision that I want to share with you a couple of things to look forward to in the future. First, let’s talk about new retail. The macro way of looking at the landscape is e-commerce accounts for 15% of total retail in China. The retail segment in China is about $5 trillion economy in value. 15% of e-commerce still leads, 85% of retail that is offline. Whether this is just something to look at or presents tremendous opportunities for us, depends on our ability to innovate. Our goal is not to simply ride a wave of converting purchases from offline to online. Our new retail strategy is an invention that anticipates and catalyzes changes in consumer behavior where time, place and method of purchase and consumption will be different from what we were used to before. In this new world of consumption expectations, the distinction between online and offline would disappear. I’ll give you a couple of examples. In traditional retail, the shopper goes into a store and buys what’s only available on the shelf and they…

Thanks, Joe. Hello, everyone, and thank you for joining our earnings call today. We delivered another set of exceptional results this quarter which we believe is a clear reflection of the tremendous appeal and the potential of Alibaba’s platform economy. The robust revenue growth in our core commerce business is driven by our continuous innovation in data technology, improvements in [indiscernible] and widespread application of big data. It is also propelled by our customers’ increasing appreciation and validation for Taobao and Tmall’s unique value proposition as consumer media and customer management platforms. Mobile Taobao is the Chinese consumers’ leading destination for online shopping and the total MAU for mobile apps with access to our China retail marketplaces has grown to 529 million. No other commerce app in the world compares to mobile Taobao’s consumer engagement and user stickiness. Our user stickiness measured by the DAU divided by MAU ratio continues to remain above 40% due to our relentless focus on more content and community-driven engagement on the approximately, allowing consumers to enjoy the fun of discovery and exploration. We not only satisfy existing user needs but more importantly we’re able to stimulate new demand as user experiences have become more content-driven by community of consumption-related content generators, such as influencers and key opinion leaders have emerged alongside buyers and sellers in the ecosystem. So, personalized data-driven user content features, such as Taobao Headlines, live stream and short form videos, consumers are exposed to a wide range of content and are inspired by product recommendations during the course of content engagement. As such, we started our journey in fulfilling the existing need of users that have since developed the ability to stimulate new consumption demand. Tmall enjoyed rapid growth this quarter and gained market share in B2C market with 49% year-on-year…

Thank you, Daniel. Hello, everyone. We delivered another quarter of excellent results. Here are some financial highlights. In June quarter, major operating and financial metrics recorded strong performances. Mobile MAUs on our China retail marketplace reached 529 million, representing net add of 22 million over March quarter. Our core marketplace revenue grew 58% year-over-year. Number of paying customers of our cloud business surpassed 1 million; this is a very important milestone. Cloud computing revenue grew 96% year-on-year and the segment adjusted EBITA margin narrowed to negative 4%. Our non-GAAP free cash flow was $3.3 billion for the quarter, demonstrating the strong cash generation capability of our business. Look at the quarterly revenue. For the quarter, total revenue grew 56% year-on-year, this was led by robust growth in our core commerce business and Alibaba cloud. The primarily contributors to the core commerce revenue growth were new users, increased traffic and the effects of personalization, which we discussed with you at the Investor Day. We will come back to the underlying growth drivers for each business in more detail in the segment discussion. We continue to deepen our user engagement, and this is demonstrated in our monetization growth. Our mobile commerce platform has become the destination for social commerce, consumption of content and brand engagement. Look at the quarterly cost trends. Cost of revenue excluding stock-based compensation was RMB 16.3 billion. Gross margins improved year-on-year due to operating leverage, despite our investment in Lazada inventory costs, significant investment in digital media content and increase in Tmall Supermarket logistics related costs. These are areas where we will continue to invest, and the cost from time-to-time may outpace operating leverage. As a percentage of revenue, all major expenses decreased year-on-year, reflecting operating leverage of our business. Non-GAAP net income in the quarter was RMB…

Thank you. [Operator Instructions] Your first question comes from Piyush Mubayi of Goldman Sachs. Please ask your question.

On customer management revenue, that’s a huge number you’ve gotten for the quarter. How much of it has been contributed by the new Uni Marketing products, how much of it is because of the complete change, and how brands are perceiving the value you’re providing, and how much of this is still dependent on paid click that we used to think about in the past? That will be greatly appreciated.

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

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

Actually prior year quarters, we also see quite strong growth; but to talk about the current quarter, main reason is that more merchants were paying more. So, what are they paying for that is the growth of new user and also the technology dividend we get from the personalization enhancement we launched last September.

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

Thank you. Moving onto the next question, it’s from Eddie Leung of Merrill Lynch. Please ask your question.

Good evening. Thank you for taking my questions. I have a follow-up question on a topic, the management team addressed it in the last quarterly earnings call. I remember, the management discussed a bit on how to help the small and medium-sized merchants, especially those started their online shops perhaps early on, on Taobao, to handle these changes in the new retail era. So, I was just wondering if the management could give us some update on some of the initiatives you guys have been implementing and are thinking about. And along the same lines, I think Joe, you mentioned about the new retail strategy. Is it fair to assume that at the beginning, we would be looking at the benefits mainly going to the large merchants, which have their offline as well as online presence rather than the -- again SMEs? And if so, how should we think about the long-term benefits, not only limited to the large merchants but also to the SMEs? Thanks.

Okay. Thanks, Eddie. This is Daniel and let me answer your question. I think the first one, actually Taobao is a community, not only for the -- is a marketplace not only for the big customers, actually focuses on small business. And this is our mission to help small traders to do business easier. And what we do to help the small business is they are probably driven by product innovation and all we do to innovate in product tools and service tools to empower the small business to do business easier. Today, what we do is that we develop very successful user interfaces in content, in data-driven. And I think today, for small business, if they have unique products, they can create a unique content, they can enough exposures to acquire new customers. Let me take example of our Taobao Maker Festival. We hold this event -- actually this is second year we hold the event. And this is very successful event. We have a lot of small business, young start-ups, and they created business in Taobao and they produce very, very unique products. And because of the technology innovation, because of product innovation, now they get the tool to display their unique product to their target audiences rather than they buy traffic and to the general audience. So, I think that’ s our big try, and we will continue to work on this to make sure, and in Taobao we’re not only to make people to win but also to help small business to have their start-ups successful. And for new retail, I think this is also relevant to the first question. I think we never, we always believe, new retail is not only about omni-channel, new retail is not only relevant to online, offline integration, new retail is about how to play the new business in a new way and for example, how took design according to the intensive consumer insights, how to make a valid, very flexible soft supply chain and the product manufacturing process. So, today, in our platform, we have -- we identified a lot of new business. They create -- they design the product based on very prompt feedback from the market, from their customers. And they tailor-made the products maybe not in the large scale but very small scale but very, very efficient supply. And they follow the fashion, and actually they create the fashion, they lead the trend of the session. So, I think new retail is the broad concept and also help us to identify -- under this concept, we also try to identify more and more unique, small business and help them to grow on our platform.

Thank you. Moving on to the next question, we have Grace Chen from Morgan Stanley. Please ask your question.

Hi. Thank you. Thank you, Joe, Daniel, Maggie, and congratulations on the outstanding results. My question is about your cloud business. I remember, the management previously set a target to achieve 1 million paying customers, and this target has been achieved in the current quarter. So, I’m wondering what is your next target and what implication on margins after achieving 1 million paying customers. And in addition, on Investor Day, we talked about expansion into the SaaS market, Software-as-a-Service market. Can you share with us the competitive landscape in China of SaaS market and how Alibaba Cloud is positioned in this market? Thank you.

Yes. This quarter, we hit the milestone of 1 million paying customers in our cloud business. We’re very happy with that. But, we believe this is a starting point. Cloud actually has huge potential in China and in the world. And every single business is going to the cloud. So, we -- actually we’re trying -- our focus still is the market expansion, still trying to leverage our first mover advantage to have a big scale business in cloud. So, we will continue to invest very heavily in cloud business and try to sign up more paying customers in the future. And also, I think relative to your second question, yes, actually the cloud -- actually we view cloud business not only a infrastructure service provider, we work very closely with SaaS service providers in different industries in different segments, try to help them to develop their applications, tailor-made applications for their clients on our cloud. And these include CRM, include ERP and include even customer service software. So actually, this covers a wide range of industries. And I do believe now it’s just early stage of cloud business. We look forward to a robust future in cloud.

Thank you. And moving on, the next question is from Alex Yao of JP Morgan. Please ask your question.

Thank you, management for taking my question and congrats on the good quarter. Two questions, one is a follow-up Joe’s comment, the development of new retail will be a disruptive game in the economy and you disrupted the e-commerce first. Can you elaborate some more about how do you think about the new retail will interplay with the current e-commerce consumer behavior? And then, how should we think about your ability to monetize and generate profit during this disruptive period and after? And then secondly, I think Maggie, you mentioned that reason for commission revenue underperformed GMV of Tmall, because you guys are basically rebating the commission back to merchant for adoption. Can you elaborate a little more and help us understand how to think about the future trend for commission revenue? Thank you.

This is Daniel. Let me answer your first question. In terms of new retail, I think first, as Joe said, we have to think out of box to disrupt the existing offline retail model and even to disrupt the existing e-commerce model. But I would say, actually our e-commerce -- our existing e-commerce platform, our core commerce platform actually generates tones of consumer data, which is incredibly valuable for us to get insight of customers. And we know -- for these over 500 million customers, we know who they are and we know where they live, we know their preference in consumption pattern, and their favorite brands. So, we have enough consumer insight. But today, these 500 million customers, actually they are not only online, they are everywhere. But anytime, anywhere, they are always online at the same time. So, today, actually, this online vantage gives us a very good chance to understand more about customers, then give us a chance to innovate in the retail format. And we do believe that innovative retail model and retail format is a necessity for the new retail. And this is not only to drive traffic from online to offline or drive traffic from offline to online; this is trying to create the incremental value for the customers, as well as to the business. So, actually we have recently people discuss a lot about our innovative Hema model. And we started to incubate this Hema two years ago and then we made a lot of efforts to make these thing as a unique one. Because this is not a supermarket, this is not food mart; this is a brand new model. So, actually -- but, this model can bring people the value which they cannot get in the traditional retail business. For example they can get order -- they can place order online and get 30 minutes on demand delivery and they can enjoy the food on the spot and the next time they can buy at home. So, going forward, I would say actually, this just is a -- the Hema is just as a example, new example to get people know how we can innovate, how we can operate existing offline business, and the potential to address the 85% of offline retail. And we will continue to work on this and leverage what we have, most important assets we have data to do the new business.

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

Right. Alex, regarding your question on the commission revenue, this quarter our commission revenue shows slower growth, which is 28%; this is because our commission revenues were netted off by expenses, the subsidies we paid during the quarter. We see this is as investment. So, basically we recognize less commission revenue to improve consumer acquisition, retention and also consumer experience in turn resulted in strong transaction growth in Tmall GMV. So, you’ve seen we reported 49% year-on-year growth on Tmall physical goods GMV. So, going forward how we look at it? We’re going to continue to invest. So, the investment may not necessarily all on this top line but also on the cost and the expenditures, the marketing, spending and other expenses that could -- enhancing the consumer experience. So, by the way, the commission revenue accounted for around 18% of total revenue, so just for your reference.

Thank you. Moving onto next question, we have from Alan Hellawell of Deutsche Bank. Please ask your question.

I believe that profit sharing from Ant was up more than 140% quarter-on-quarter. I was hoping you could give us a sense as to the factors behind that sharp increase, and what we might expect for the rest of the financial year. And then just going back to video, subscribers are up a 100% year on year but revenues from the group were up only 30%. I was just wondering how many of these subscribers are indeed paying subs and how many of them might be bundled at this point in time, and how does that ratio evolve going forward? Thank you.

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

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

Thank you. Moving on to the next question, we have from Chi Tsang of HSBC. Please ask your question.

Hi. Good evening, everybody, and thanks for taking my question and congratulations on the very nice set of results. I have two questions. First question, very strong growth in Tmall GMV. I was wondering if you can give us a bit more color, sort of what’s driving that. Obviously you had some promotional activity. Any additional color will be very informative. And secondly, you also had very strong growth in international. I was wondering if you can sort of help us understand and maybe tie together Lazada and RedMart and your recent investment in Tokopedia. How did these businesses evolve over time, and importantly how they might compete with Amazon when they expand into ASEAN? Thank you so much.

Yes. This quarter Timor recorded a 49% year-on-year growth in physical goods. And we, as Maggie said, actually, we invest -- we made a good investment in Tmall and we made great efforts in acquiring new customers and improving the experience of existing customers. And on top of that actually we do a lot of -- teams do a great job in terms of expanding the product selections, especially to have the exclusive selection, product selections on Tmall including to get more import products on our platform and inclusive new product launch on our platform. I think we will continue to work on this, and we will continue to invest and to use experience in acquisition of new customers as well as expanding our footprints in different categories, especially in low penetrated categories like fresh and frozen and imported products. Then for the second question, yes, actually international -- globalization is our long-term strategy. We are very, very committed to the global expansion. And you know that we made investment in Lazada and in Singapore we have another good investment in RedMart which focuses on fresh and frozen and the dry groceries, which we believe these two categories created a very high and very frequent consumption and healthy consumption. So, we think this combination -- actually we view this as part of category expansion of Lazada in Singapore. And we just -- actually I just mentioned in my script that we did investment in Tokopedia in Indonesia because Indonesia is a very, very important market. And we are very happy that Lazada has a very strong performance in Indonesia. In this market, I think not only B2C has opportunity but C2C also has good potential. So that’s the reason why we -- on top of Lazada, we made a very important move in C2C which is Tokopedia. And we anticipate that we can generate a lot of synergies in Indonesian markets in both B2C and C2C.

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

Moving on to next question, it’s from Jin Yoon from Mizuho. Please ask your question.

Couple of questions for me. As you transfer more and more into this social commerce platform, can you give us some color on what kind of incremental conversion of clicks growth you’re seeing from some of the channels such as live broadcasting, news feed, personalization, perhaps what channels more effective than the other? And second one, Maggie, you mentioned the part of your growth is driven by new users. Is it safe to say that -- are you guys seeing newly added users today, initial ramp in spending faster than ever? That would be it for me. Thanks guys.

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

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

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

Thank you. Your next question comes from Gregory Zhao of Barclays. Please ask your question.

Hi. Good morning and good evening. Congratulations on the strong quarter, and thanks for taking my questions. I have two quick questions. So, the first one is actually about our margins and sales and marketing expense. Before the earnings, we heard some concerns about the competition during the “618”event, which was expected to weigh on our margins, but actually we’re seeing some deceleration in our sales and marketing expense. Can you help us understand the reason behind? And it’s also about margins, so this quarter we have quite strong core commerce margin. Shall we expect, we can maintain such trend through the year? Thank you.

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

Last question is from Alicia Yap of Citigroup. Please ask your question.

Hi. Thank you. Good evening, management. Thanks for the questions and also congrats on the strong set of results. I have a follow-up question on the commissions, the Tmall commission revenue line. So, is this the first quarter that we actually start to net off the promotional expense out of the commission revenue? And then, any color you could share on the like-for-like basis for the commission revenue growth, if we did not include the expense in this line? And related to that, given obviously very strong operating leverage on your platform, is that fair to assume that you actually have a very strong ability to continue to help out your merchant with the promotional spend, which indirectly is a way to return to your merchants and help them lower their overall operating costs on the BABA platform? And then just lastly, quickly on the Hema. I wanted to get some color on the traction from user side and also how the accounting treatment, how will we book the revenues or these costs on the P&L? Thank you.

So, the commercial revenue growth is offset by our promotional investment during the quarter. This is actually a trial, it’s a new test of different ways of investing in this business. When you ask about what if not, we exclude that investment from that commission revenue, how would the revenue growth be, it will be higher than previous quarters, so.

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

Sorry, Alicia, maybe you can state the question again.

[Operator Instructions]

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

I see. Okay, great. Thank you.

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

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