Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group's September quarter 2018 results conference call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question-and-answer session. I'd 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 September quarter 2018 results conference call. With us 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 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 instructions of these risks and uncertainties, please refer to our latest Annual Report on Form 20-F and other documents filed with the 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 know that certain financial measures that we use on this call such as adjusted EBITDA, adjusted EBITA, adjusted EBITDA margin, 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 reconciliation 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 refers to a year-on-year growth rate versus the same quarter last year. With that, I will now turn the call to Joe.

Thanks, Rob. Thank you all for joining us. Just in the past month, global macroeconomic conditions have become more uncertain. People wonder about potential reverberations from the global economic slowdown, the threat of rising interest rates and political and debt turmoil in Europe. In the case of China, we see reports of decelerating GDP growth, weak Purchasing Managers' Index, and stressed equity markets. I know that Alibaba investors have many questions about the operating environment in China, so I want to give you a straightforward assessment from our vantage point. On China macro, retail sales growth was 9% according to the latest July and August data from the National Bureau of Statistics. The NBS data shows weakness in large-ticket items, such as home appliances and autos, which is consistent with the view that consumers see uncertainty in the future and are cutting back on durable goods purchases. However, on Alibaba's China retail marketplaces, we see continued robust growth in consumer staples, cosmetics, and apparels. In consumer electronics, growth decelerated especially in cell phones due to the lack of major technology upgrades and new product offerings. While NBS data shows 24% growth in online goods sales in this quarter, overall growth of physical goods GMV on Tmall, excluding unpaid orders, was 30% year on year. Accordingly, we believe that Tmall made further gains in market share. While in the short term, people may be concerned about cyclical factors, I would like to point out three long-term secular developments in Alibaba's favor. In fact, Alibaba is proactively contributing to the acceleration of all three of these developments. First is the phenomenon of middle class consumption upgrade. China's 300 million middle class consumers have experienced significant real wage growth over the past decade, and they are looking for high-quality products to satisfy their…

Thanks, Joe. Hello, everyone, and thank you for joining our earnings call today. We delivered another strong quarter with 54% total revenue growth. The robust growth of our business speaks to the unique value proposition that we offer to customers through strong execution and commitment to innovation, demonstrating the power and the synergies of the Alibaba digital economy. Today, Taobao is a large-scale, fast-growing consumer community that is the starting point of any retail journey for Chinese consumers. Over 45% of Chinese population discover and purchase products and content through Taobao mobile app. We are successful in acquiring and enticing even more new users onto our platform. Our unique value of highly relevant personalized content with a community-driven experience continues to attract new users while keeping existing users deeply engaged on a daily basis. Annual active consumers increased 25 million to 601 million for the 12 months ended September 30, 2018. Around 75% of the increase in annual active consumers came from less developed areas. Growth of our monthly mobile app users accelerated this quarter. 666 million users are accessing our China retail marketplaces via mobile app monthly, an increase of 32 million users over the prior quarter. Today's Taobao users are more diverse than ever with different demographics and consumption habits. To fulfill their diverse needs, we rolled out the new Taobao interface that presents unique user experience to different types of consumers. The secret sauce driving the success of this upgrade is our consumer insights, driven by AI. We have the world's largest e-commerce knowledge graph for products, content, and consumer insights, which can be used to active purchases and retain consumers. We have one of the leading proprietary technology infrastructures in the world that can handle hyperscale real-time computing and sophisticated algorithms. For example, in this quarter,…

Thank you, Daniel. Hello, everyone. In September quarter, major financial metrics continued to record strong results. Overall, as mentioned by Daniel, our strong core starts with our vast, high-quality and fast-growing user base. We delivered another quarter of strong user growth in both MAUs and annual active consumers, facilitated by our effort to target new consumer groups and penetrate into less developed areas in China. Roughly 75% of the 25 million newly-added consumers are from less developed areas during the quarter. We also see enhanced consumer engagement from our existing users that resulted in robust GMV results in which Tmall continues to expand market leadership in B2C e-commerce and Taobao recorded its third consecutive quarter of strong GMV growth. We have a large and actively engaged user base that continues to exhibit a strong growth. Consumers are attracted to the platform because it offers the best user experience. As I will address later in my remarks, we believe that this strong and active user base combined with the changes we're making on our platform, provides the foundation to expand our revenue generation in the future. Total revenue for this quarter grew 54%. The increase was mainly driven by the robust revenue growth of our China commerce retail business, the consolidation of Ele.me and the Cainiao Network as well as strong revenue growth of Alibaba Cloud. Our revenue growth during the quarter continues to outperform that of all global technology peers. Cost of the revenue in the quarter was RMB 46.8 billion, up from RMB 22 billion in the same quarter last year. Excluding the effect of SBC, cost of revenue as a percentage of total revenue increased by 15 percentage points to 53% this quarter. The increase is mainly due to three reasons: number one, our consolidation of Ele.me and…

Operator. We're ready to take questions and answers.

Thank you. Ladies and gentlemen, we'll now begin the question-and-answer session. Our first question comes from the line of Eddie Leung of Merrill Lynch. Please ask your question.

Good evening. Thank you for taking my question. I think, Joe, you talked about the macro headwinds for the domestic e-commerce business. Could you also comment on the trends you see on the local service sector and travel as well as your overseas operation? Have we seen a similar trend affecting these other businesses? And then perhaps quickly, could you also remind us the potential impact of the new e-commerce laws? Thank you.

So the area where we see the most impact are in the consumer durables, large ticket items, consumer electronics. In the area of local services, because these are basically staples, you order meals, you go to restaurants, they are largely not affected. As you know that we've combined the management team of Ele.me and Koubei under one team, and they have already made quite a bit of adjustments in terms of the operating structure in the local markets and are prepared to execute the strategy. So we're very happy with the progress there. In terms of the international markets, the dynamic in countries, for example, in Southeast Asia, vary country-by-country. As you know, Indonesia is a very, very competitive market. We have doubled down in our commitment to Lazada to continue to grow that business. We do not see a huge economic or macroeconomic effect coming from those markets, but I think we remain cautiously optimistic. Maggie, you want to comment on the e-commerce laws?

Right. For impacts from e-commerce law, note the law is out there but no detailed implementation rules. However, we believe that the government will have an overall consideration on all of these supports and positives that the goods e-commerce platform has brought about to support SMEs. For example, like stimulating the domestic markets and people ask questions about the tax impact, whether their eventual tax by the merchants on the platform. I think this is a topic we have been working with tax authorities for a long time, and we believe they have done detailed review work and the incremental tax brought by our platform, which if you look at whatever (38:07), actually, they are upper-stream, right, the manufacturers. The tax coming from that area would be lot bigger than whatever we're talking about on the retail platform. So, we will closely monitor and follow-up in the implementation rules, and, yeah, we'll update you if there is any news. Thanks.

Thank you. That's very helpful.

Operator, next question.

Thank you. Our next question comes from the line of Piyush Mubayi of Goldman Sachs. Please ask your question. Hello, Mr. Mubayi. Your line is open now. Please go ahead with your question. Piyush Mubayi - Goldman Sachs (Asia) LLC: Thank you. Looking through your revenue guidance, you wrote that you recently decided not to monetize in the near term the incremental inventory that's getting created. Could you take us through the rationale there and also help us understand the short term that you referred to? That's my first question. A very simple second question, if I might slip that in. Would you agree with our assessment that you're in a similar position with feeds monetization as you were with mobile monetization three years ago? Thank you.

Yeah, Piyush, I'll talk about the considerations behind. So, about 45 days ago, we had our Investor Day Conference in Hangzhou and I said that we had no update on the revenue guidance by then. So, this is a recent decision made. You probably have all seen and experienced the economic conditions in the past, particularly the past month. The condition is very uncertain and merchants are facing challenging times, so it does not make sense for us to maintain very high revenue growth. So, under these conditions, after we reviewed, we decided to not monetize for near term of the incremental inventory. So, we talked about the Recommendation Feeds growth, user growth, our engagement growth all very well, so this is the part of the rationale to factor the economic condition uncertainties. The other thing is that, looking ahead one side is helping the merchants. The other thing is not monetized right away. That also give us time to take this period of time to refine our monetization products, our new value provided. So, we believe this is a transitional period. The Recommendation Feeds shows very encouraging trend of the growth not only in traffic but also in conversions. However, we don't believe that the value we created to the merchants is just exactly the same as we created in the past 10, 15 years. So, as I mentioned, it's not only transaction value but also the consumer engagement value, which provides the tools and possibility for merchants to operate and manage their consumer base. So, they're not only paid for – and eventually not only paid for the near-term GMV, but also paid for the possibility of the future GMVs. So, once they could manage their consumer base, compared with other merchants, their peers, competitors, whoever, that will not get the tools, they have advantages. So, that's basically macro and also internally we feel that this is good for us to take more time to refine the monetization products.

I guess the second question was – it is similar to the PC-to-mobile transition. I think, Maggie, you already answered that. Thank you.

Right. Okay.

Next question?

Thank you. Our next question comes from the line of Grace Chen of Morgan Stanley. Please ask your question.

Thank you. Thank you for taking my questions and also the presentation. My question is to follow up about the local services. Can you share with us the latest development of Ele.me and Koubei after the integration? What are the new business initiatives, and what's your business and financial targets achieved through this combined entity? Thank you.

Actually, we just announced that we combined the two businesses, and we will have one management team to run this in the future combined local service business. And especially you can see from this decision, like we still observe a lot of synergies between these two businesses because our one Koubei business is relevant to the in-store, in-restaurant dining services, while food delivery is also from the restaurant to home. So basically, Koubei and Ele.me, they are serving the same group of clients, which are restaurants, who both serve, in-store clients, in-store customers, also serve customer at homes. So we do see a lot of synergies, and not only on the business side but also in the operating and also to improve our operating efficiency. And after the NewCo is established, we are actually prepared to go further to penetrate more cities in more areas and to give people our multiple services.

Okay. Next question?

Thank you. Just a follow-up...

Thank you. Our next question comes from the line of Alicia Yap of Citigroup. Please ask your question.

Hi. Good evening, management. Thanks for taking my questions. I have some follow-up questions regarding just the overall advertising side. How long do you think the temporary hold-off on these monetizations will last? In addition to you not wanting to monetize, I wonder if any change of the budget spend adjustment from the big and global brands on the upcoming single-phase promotional activity. And then will BABA actually also take one step further to subsidize some of this commission rebate to help out the smaller merchants' promotional discount during Singles' Day in light of the tough macro? Thank you.

Right. So the first question is about when we decide to manage, how long we'll hold on this monetization. I think whenever – two things are ready. One is product, the other is merchants, whether the merchants are ready and whether their products are. So in terms of product readiness, I mentioned that we have started to explore the new monetization format to better reflect the new value created, so that takes a little bit of time. And the other thing, merchant readiness is also something to do with the macro environment. Once they're not pressurized by the macro uncertainty and also once they learn and understand the new product format and really find the true value of the new ad format, we are confident on this value we provide. Compared to all of the peers around, nobody else actually can have such a comprehension value provision to the merchants. So it's just a matter of the readiness of the two.

But in terms of the existing supply of the ad services, I don't think this will impact existing demand. I think we have huge existing inventories monetized, actually which are monetized through our various commercial products to different types of advertisers, including the big brands and SMEs. So actually all of them are now well-prepared for the coming November 11. And we do believe that all the people will participate in this big event, also take this opportunity not only to get the sales on that day, but also to engage many new customers, and with the smart spending.

Daniel, I think there's a question on commission rebates, whether that's going to come.

Actually, so far we don't have a plan to give a commission rebate to the merchants in the event.

Okay, thank you.

Okay, thank you. Next question.

Thank you. Our next question is from the line of Mark Mahaney of RBC Capital Markets. Please go ahead.

Hey, it's Zachary Schwartzman on for Mark. What are you doing to help merchants learn and adapt to the new mobile marketplace platforms? How much effort are you placing in making sure that merchants understand and can take full advantage of these changes once the macro environment turns positive? And quick on cloud computing, that came in strong this quarter. Can you call out any specific industries that drove the strong performance there? Thank you.

It does take some time for us to educate the merchants to understand the new consumer journey we created in this new mobile interface, which is the recommendation flows. So I think actually today our team are working very hard to train the merchants and also to give them showcases, how to leverage the new mobile interfaces, not only to make the immediate sales, but also to engage and manage the customers and to create that new demand. So I think it takes some time, but I think merchants – based on our experience, actually merchants are very, very sensitive to the new method to grow their business. So they are fast learning, and I have confidence that they will actually understand a whole new methodology in a very short period of time.

Mark, to add on to that, how much effort we have been putting onto this, we've had a special task force headed by Daniel himself to work on this. So this task force included people from different teams, including merchant services, Alimama, Taobao, and technology teams. So the key is that, how we could let the merchants understand this new value, right? This is a value that they don't really get from other service providers. It's a mix value from, I said, the top of the funnel to the bottom funnel is not only transaction but also the engagement, not only today's GMV but also the possible future GMV generation. So, yeah, that's – we're on it.

On your cloud computing question, the sector that sort of stood out in, I guess, this quarter also and the last couple of quarters is the whole media and entertainment segment, including streaming video, short-form video. We just entered into a agreement with the Olympic Broadcasting Services, where we would provide the cloud computing services for production of games for the Tokyo Olympics in 2020.

Thank you, Joe, Daniel, Maggie.

Thank you. Our next question is from the line of Binnie Wong of HSBC. Please ask your question.

Good evening, management. Thank you for taking my questions. My questions is on the Recommendation Feeds in our Taobao upgrade. Can management give us more color in terms of like the timing of the full rollout in terms of our monetization? And also in terms of our pricing strategy, of the recommendation fees and also the margin profile, how does that compare to our core search? And lastly is just on the categories. Do you feel that there are more certain categories that are more fitted with like a Recommendation Fees such as those with like impulse purchase behavior, maybe even like categories that are say, apparel would be more fitted with Recommendation Feeds? How should we think about those? Thank you, management.

Well, as we said in our press release, actually considering today's macroeconomic condition, we decided not yet to monetize the incremental inventories from these, I mean, recommendation flows and other new user engagements and to support our merchants to do a better business in today's condition. And I think we do – but technically we also are working very hard to prepare the right commercial products and the mixture there in place to serve the merchants and to help them to create the incremental value for their business. In terms of categories and the product and which is more fit for the recommendations, I think generally speaking, I think it is – the recommendation is to serve the purpose of the discovery, so we will help to the merchants to acquire new customers and enable the consumers to identify and find the new items and beyond their expectations. I think that's the purpose for both the merchants and for the consumers. And as I said in my script, actually, so far we've built up a very comprehensive product and consumer bio or the graph, a knowledge graph for both products and consumers. I think that is very, very important for the success of the recommendation flows. And also, of course, this is driven by AI and by the technology.

Thank you, Daniel. I guess maybe my question is more on – in terms of what – I guess, the follow up is, what are the economic indicators you see that will signal a turnaround and then will start kick off with our monetization on the incremental inventories, as you have mentioned? What are the signs that you will see there? Thank you.

Well, I think this all depend on the value we create for our merchants. As I said, our purpose to help the merchants to engage the new customers and retarget the existing customers in this recommendation flows. So, I think the economics will form the recognition of this value provided to our customers.

Next question.

Thank you.

Thank you. Our next question comes from the line of Gregory Zhao of Barclays. Please ask your question.

Hi, management. Thanks for taking my question. So in terms of the loss of the categories inside China, e-commerce business you rank the [Chinese language] (55:11). So in the future, how will you rank the loss contribution for, let's say, the next two to three years? And a quick follow-up, so for the Recommendation Feeds, we know you postponed the monetization. So the first thing, will you please give us a update, like with the percentage of users has been upgraded to the new version with Recommendation feeds, and also with the recommendation functions based on my understanding, it may generate very, I mean, little revenue contribution to advertising, but that can help improve your January growth, am I correct? Thank you.

Right. In terms of first question, the areas we invested within the core commerce are local service, globalization, New Retail and logistics. And right now, we give out the investments' missing orders, so we're seeing that – we're pretty sure that we're going to continue to invest, quite committed to the investment in local service globalization, New Retail and logistics, all of these areas. In terms of order, it might change depending on the time and the market conditions, so yeah, that could be changed.

But we never manage the business by profit and loss. Actually, we look at the strategic value, but we do have the discipline and we have a very clear business plan in terms of how to develop in these new businesses. But, I think, so far, we are all on track.

And, Greg, so your other question is when is the new follow-up, the Taobao app, as well as the GMV growth contribution; is that your third question?

I think as a bit on new function of the recommendation as I think my understanding, is that helpful for both the merchant to promote their products that that may help to drive your Tmall, Taobao, the GMV growth, also the short term, the advertising revenue contribution may be not that meaningful. Yeah. Am I correct?

Well, the new Taobao interface, I think will actually enhance the experience for both merchant and customers. And from customers' perspective, I think actually consumers can enjoy the fun of exploration and discovery through these recommendation flows, and which will enhance their stickiness to our platform, which we always said that we are helping our people to kill their time, even without any specific shopping purpose they will still come back to us to enjoy this recommendations. So I think this is very good for the consumers. And if people spend more time with us and enhance engagement with us, I think GMV is the organic results for this interaction.

Thank you very much.

One last question.

Thank you. Yes. We're taking your next question coming from the line of Youssef Squali of SunTrust. Please ask your question.

Hey, great. Thank you very much for taking my question. I just have one. Maggie, thank you very much for the new revenue guidance. I think you said that the biggest delta there is coming from customer management revenue from within China retail. That's the business that carries higher profit margin. Can you help us just get a sense – or how do you guys look at the bottom-line impacts from the revenue revision? And in other words, would management kind of rethink potentially at least short-term the level of investment that you have going on just to effectively protect the EBITDA or EBITDA expectations that Wall Street is expecting? Thank you.

Right. It's not easy to answer that question, but I can give you directions. So first of all, whatever profitability growth would be, that can be obviously impacted by the customer management revenue growth because that's the revenue that generates high profitability. So you could calculate the range, the base case and the high case based on the revenue guidance I gave. One thing for sure is that, the investment we're making today are those areas we believe has high-potential. So the total addressable market for this business can be substantially enlarged once we get – once we tap into those markets. So we're very firm to continue to invest in those areas, which means that when you look at the revenue and the spending, that could be not closely linked together, right? The revenues generated customer management, and the others are local services, et cetera. So as Daniel mentioned, we're going to be – we have been very disciplined in terms of investment and spending. So the way we look at the returns on those new investment areas are not really financial returns at this stage, particularly as business progresses and the market shares, user base expansion. So if we are feeling comfortable about this growth, we're going to just continue to invest and harvest later on.

Okay.

Yeah, I think just philosophically, I think we don't think about the so-called protection of our existing core business margin when we do make investments. But we do have metrics that are pretty well spelled out for our investments, for example, in local services, in entertainment, in international. Depending on the stage of growth of the business, it could be based on business volume or users or repeated purchase. There are a lot of metrics that we would look at depending on their development. I think it's safe to say that there's a lot of discipline that are applied to measuring those metrics and tracking performance. But one of the most important things about these new investments is that we make sure that they have the right people in place, the right management team. The move that we made to combine the Ele.me and Koubei business under one management is one such move, and we're very confident when we have the right people in place that execution there is going to be very good.

Great. That's helpful. Thanks, Joe. Thanks, Maggie.

Okay. Thank you, everyone, for attending today's conference call. If you have any questions, please feel free to reach out to the Alibaba IR team. Thank you.

Thank you.

Thank you, ladies and gentlemen. This does conclude the conference for today. Thank you for participating. You may now all disconnect.