Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba's June Quarter of 2019 Results Conference Call. [Operator Instructions] I would now like to turn the call over to Rob Lin, Head of Investor Relations of Alibaba Group. And we apologize for any static or any disturbances. Please go ahead.

Okay. Good day, everyone, and welcome to Alibaba Group's June Quarter 2019 Results Conference Call. Before I get started, I just want to see if people on the line can listen well. Maybe you could take 1 question, operator, to make sure that someone on the line can answer, that they can hear well, because there are some technical issue here on this side. Okay. I think we'll proceed. Okay. Well, sorry about that. So with us today are Joe Tsai, our Executive Vice Chairman; Daniel Zhang, Chief Executive Officer; Maggie Wu, Chief Financial Officer. This call is 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 current expectations. For detailed discussions of these risks and uncertainties, please refer to our latest annual results on Form 20-F and other documents filed with U.S. SEC. Any forward-looking statements that we make on this call are based on presumptions as of today, and we do not undertake any obligation to update these statements, except as required under applicable law. Please note that certain financial measures that we use on this call, such as adjusted EBITDA, adjusted EBITDA margin, adjusted EBITA, adjusted EBITA margin, marketplace-based core commerce adjusted EBITA, non-GAAP net income, non-GAAP diluted earnings per share, or ADS; 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 metrics mentioned during this call refers to year-on-year growth versus the same quarter last year. With that, I will now turn the call to Joe.

Thank you, Rob. Thank you all for joining us. Alibaba's business continues to do well in an uncertain economic environment, characterized by slower global growth and the trade war. In last quarter, I explained why Alibaba is on the right side of all the solutions that could help us address issues in the trade war. If you haven't, please go back and read my speech from the last quarter. In this quarter, our core commerce business, comprised of China retail, wholesale, international commerce, logistics and local consumer services performed exceptionally well, with overall year-on-year revenue growth of 44% in this segment. The question that is invariably asked is how does Alibaba's business, which is consumption-driven, continue to deliver robust growth despite challenges in the broader economy? I want to offer 2 reasons. Both are big secular trends happening in China that we have taken advantage of. First is demographics, and the second is the rapid pace of digitization. On demographics. China's USD 5.5 trillion domestic consumption market is driven by 2 massive demographic forces. First is the emergence of a middle class of over 300 million people living in large cities. This affluent middle-class population is almost as large as the entire U.S. population, and their consumption needs and wants are approaching developed market levels. We have talked about the desire by these consumers to upgrade the quality of products they buy, especially the pursuit of brands and imported products. Alibaba's Tmall platform benefits tremendously from this ongoing trend, and we believe it will continue to be the leading choice for consumers looking for quality and consumption upgrade. The second massive demographic trend is the rise of urbanization, affecting third, fourth and fifth tier cities. Other than the major metropolitan areas like Shanghai, Beijing and Shenzhen, China has more than…

Thanks, Joe. Hello, everyone, and thank you for joining our earnings call today. With an outstanding quarter, with excellent business performance and a sound execution against our overall strategy, we enjoy exceptional revenue growth of 42% year-on-year, outpacing industry peers, even though we adopt a conservative approach in monetization to support SMEs in this uncertain macroeconomic environment. We also delivered solid profit growth, benefiting from measures to improve operating efficiency. During the quarter, we saw solid execution and operational improvement in multiple areas that I will address, including: number one, successful penetration into less-developed areas; number two, positive momentum in adopting our New Retail technology among consumers and the retail partners; number three, efficient and innovative last-mile solutions offered by Cainiao; number four, sustained improvement of our Lazada business in Southeast Asia; number five, robust revenue growth of our cloud computing business; and number six, repositioning our digital entertainment segment that ensures healthy, long-term growth. For our China retail marketplace, we continue to demonstrate the ability to grow our customer base at scale. In June 2019, our China retail marketplaces had 755 million mobile MAUs, a quarterly net increase of 34 million. Annual active consumers grew 20 million to 674 million, reflecting strong user acquisition programs and another record-breaking June 18 shopping festival. During the quarter, over 70% of the increase in annual active consumers was from less-developed areas which demonstrated the success of our initiatives to touch a broader base of users. In our core commerce business, Tmall continued to strengthen its market leadership in the B2C market, growing faster than the sector average. Tmall physical goods paid GMV grew 34% in this quarter, mainly driven by increases in the number of users and average spending. In June, we achieved the largest ever June 18 shopping festival in business…

Thank you, Daniel. Thank you all for joining us. We had another strong quarter. For today's call, I will begin with a review of the key financials and with how we view the coming quarters. So in June quarter, as Daniel mentioned, we delivered another quarter of strong user growth, with 755 million MAUs and 674 million of annual active consumers, which means approximately 1 out of 2 Chinese are buying from our platform. We also continued to be successful in penetrating into less-developed areas in China. Over 70% of the increase in annual active consumers during the quarter were from less-developed areas. Our large and active user base is a solid foundation for us to not only expand the market leadership of our China retail marketplaces but also grow other consumer businesses within the Alibaba digital economy. Our total revenue grew 42% to RMB 114.9 billion in this quarter. Excluding the effect of consolidating acquired businesses, there is a much smaller impact starting from this year. The revenue would have increased by 38% year-over-year. So these businesses include Ele.me, which we started consolidation from May last year, Ele.me and Alipay check. The increase of our total revenue was mainly driven by the robust growth of our China commerce retail business and Ele.me, strong revenue growth of Alibaba Cloud as well as an increase in volume of orders fulfilled by Cainiao. This quarter's cost and expenses, excluding SEC, have been tightly managed, leading to greater efficiency, especially in those businesses in the investment stage. So the increase for cost of revenue was primarily due to increased inventory cost of our direct sales and New Retail business, increased logistic cost of Ele.me driven by increased order volumes and partially offset by a decrease in content spend by Youku. Let's turn to…

[Operator Instructions] Our first question comes from the line of Eddie Leung of Bank of America Merrill Lynch.

Congratulations on a good quarter. I have a question about the less developed area stretch. Could you elaborate how you plan to differentiate from your competitors in the lower-tier cities? And then just a follow-up, do you have a feel that there is a high degree of overlapping of your new customers from the less-developed areas with your other e-commerce companies? Or do you think you are addressing a different user segment in those areas?

This is Daniel. Thanks for the question. I -- as we said in our script, we are making good progress in -- with user engagement and with customer acquisition. And during this quarter, we add 20 million annual active consumers, and over 70% of them are from less-developed areas. And today, when we look at the consumer base we have, basically, we are -- actually, we have 2 types of consumers. One is in top-tier cities and driven by their consumption upgrading and power and the driven -- the growing demand from the middle-class families. The other is from the less-developed areas. And what we see is that, because of the penetration of the mobile Internet, we see the city in the lower-tier cities, they become Internet users -- phone Internet users and then they are trying various new business applications. Obviously, shopping and consumption is one of these very important areas. And we will -- actually, still want to try. So that's why we are -- we make a lot of, I mean, efforts in acquiring these new customers. And today, we are very happy to see that over half of the populations are in less-developed areas already the customers in Alibaba ecosystem. So we'll continue our efforts to acquire more customers from these areas. But at the same time, as I've said before, we will do everything we can to cross-sell -- cross over those services in various categories and to fully leverage the existing user base we have on our platform. And one more important point is that today, on our platform, we have very dynamic supplies from branded products and the products from the manufacturers. So the power of the platform is to enable the new customers we acquired in the low-tier cities to access the various dynamic product supplies which also are not only meet their existing demands but also create new demand from them. So I think that, that is a very, very important strategy for us to continue.

Sorry, I just want to supplement Daniel's point on the differentiated strategy in the less-developed areas. It's just didn't -- we talked about the shopping context. We have broad product selection, just much broader platform and also access to direct factories. But also if you look at the Alibaba ecosystem, there are -- beyond e-commerce, we have local services that we serve the lesser developed cities. We also have our sister company, Alipay, that provides a payment service as well as a bunch of daily sort of services on their platform. So this ecosystem is bringing in lots of synergies that enable us to capture more loyalty for -- from each of the users in those lesser developed areas.

Next question is from the line of Piyush Mubayi of Goldman Sachs.

If we think of the overall China commerce retail business as one, what percent of the GMV is moving from 3P to 1P? And how should we think of this transformation in the business in terms of the impact on margins? It's a question to you, Maggie. And Joe, if I could ask you to elaborate on how you think IoT and 5G could prove to be transformative to Ali.

Sorry, Piyush. You may want to repeat the second question.

A question for Joe. Could you elaborate briefly on how IoT and 5G could prove to be transformative?

Thank you, Piyush. So regarding to your first question, 1P versus 3P, if you take a look at GMV, we reported RMB 5.7 trillion to RMB 5.8 trillion GMV for the last fiscal year, and we are tipping towards USD 1 trillion. So the first few business accounts for a very small portion in that total GMV. When you look at Hema, Tmall Supermarket, this business accounts for only less than RMB 100 billion GMV. So just to give you a sense, it is not a big portion. In terms of -- people talk about margin impact, et cetera, like we said many times, rather than looking at the margin, we look at deposit growth. So actually, this business contributes to revenue growth and also eventually going to contribute to our profit growth. So if you look at this quarter's revenue, that's very strong growth. That's 42% year-on-year. There is some contribution come from [ commerce retail ] business. Even if you take that portion out, the revenue will still be the highest among the global peers. But to us, we see this as one piece of the business, and we should really be looking at -- together. In that way, when you look at the revenue growth, the profit is also showing very strong growth. So the core, core providing strong cash flow at the same time, all these investment areas, including the New Retail, are actually -- are not only there -- not only this planning, but also showing the growth in revenue as well as the improvement in profitability.

Piyush. Yes. To answer the question on IoT and 5G, look, we're in the very early innings of this really transformational technology overhaul, with 5G potentially coming online in the next year or 2 years. What that means is faster connections will enable more and more devices to be connected to each other and also to the cloud. So you can imagine, in a world where faster connection enables millions and millions of devices and what are these devices doing? There are sensors, there are other devices that could be collecting lots of data. So service providers that are using kind of an IoT strategy to provide services to consumers as well as to enterprises and manufacturing and supply chain, what the end result of faster connection and millions of millions of devices is that need to manage large, huge amounts of data, massive amounts of data, that will need to be collected, stored, cleansed, managed. And I think if you look at our Alibaba Cloud business, our expertise is rooted in data management and data technology. Our style or operating system is distributed data computing platform that will -- it sits at the core of our cloud computing technology, and we're providing that service for our customers. So it will ultimately benefit our cloud business. That's just an example. But as I said, we're in the very early innings and there could be endless possibilities that's beyond my own imagination.

Next question is from Alicia Yap of Citigroup.

Congratulations on the strong quarter. I have a question related to your recent Tmall flagship store 2.0 upgrade. In addition to potentially driving higher conversions and better user experience, could you help us understand what could be the additional outcome for monetization opportunity we could get from the storefront upgrade? Would that be any incremental service fee or take rate opportunity? And on a broader scope, how should we relay and compare the personalization upgrade on the storefront versus the recommended fee features on the main Taobao app?

I think it is a very good question in operating strategy. I think -- we recently launched our Tmall flagship store 2.0 version. The purpose of this new version is to upgrade the storefront to enable our brand partners who operate on Tmall not only to sell their products to many of their customers, but also give them a vehicle to manage their fan base they have across platforms. And also this fan base management, customer management, does not isolate our customer management efforts and even marketing efforts. We want to provide them a vehicle to land in all the marketing campaigns the brand have to promote their brands across channels. But finally, all the amount in campaign data and the fans can be accumulated and landed in the flagship store then which create a very unique end-to-end customer management journey. And in terms of the -- in terms of monetization, we don't want -- we do intend to charge additional fee based on the software upgrading. But obviously, if more and more brands are using this, I mean Tmall, I mean flagship 2.0 framework, they will have more marketing campaign integrated into our platform, which obviously will lead to more marketing spending on Alibaba ecosystem.

Next question is from Grace Chen of Morgan Stanley.

In this call, it's very encouraging to see Alibaba's strong margin performance. It would be great if the management can elaborate a bit more about what efforts have the management done to help improve the margin performance, especially in core commerce and digital media, entertainment, and whether we're going to see the strong margin performance will continue in the following quarters. Congratulations.

Thank you, Grace, for your question. Let me elaborate on what we have done to bring out the operating efficiency. I think -- first of all, the revenue growth is very strong, right? So that's always coming from -- driven by the user growth and also all of our efforts on user experience enhancements that paid off. And then when you look at the costs and the expenditures, we have started later last year emphasizing on all of this efficiency of this spending, not only on the marketing, but also the headcount but also on the spending on the content, et cetera. So we do have specific measures to see and to review and measure the ROI of this spending. And this is number one. Number two is that we have seen so much synergy coming out of not only Alibaba Group but also synergy with our sister company. So since like marketing spending, we're targeting another 200 million, 300 million potential users -- consumers coming to our platform. So this is also a target of Ant Financial. And this is where that we can work together, that they are good at acquiring consumers in the lower-tier cities, and Taobao is good at retaining these consumers so that we don't have to spend it twice. It's a very effective way of assuming the market and the core users. I hope that helps. The Ele.me. The Ele.me, you see the magazine's margin get narrowed. So 55% negative margin from last year and 35%. Actually, there was a one-off last year, which is the World Cup spending. So if you take that out, last year's net EBITDA margin would have been like somewhere around 42%, but still down by a lot. I think the GMV negative margin narrowing is mainly coming from the -- our discipline on the spending, particularly on the content spending.

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

Congrats on the set of very upbeat results. So my question is from local consumer services, on your food delivery business. We see that there is a strong top line growth along with loss margin narrows down from 9% to 5% this quarter and a very strong top line growth. So we want to understand the major driver. Is it the efficiency improvement or [ less subsidy ]? And also can we get a clarity on your priorities going forward? Is it like still gaining market share, especially in lower-tier cities and also synergies within your New Retail system along with Hema and also building the [ B2B ] digitalization transformation, basically tapping into merchants [ IT projects ] as well? And I guess lastly, is that -- along with those...

Yes. There's a lot of noise. Maybe just -- I do want to clarify your question, so you're asking about local consumer service?

Yes, yes. The efficiency improvement. Yes. And also the priorities.

Okay.

This quarter, we make -- we are making good progress in local services, especially in the -- particular low-tier cities, and we are gaining market share in these particular cities. And -- but at the same time, we are very happy to see the operating efficiency has also improved and -- with our continued efforts. And we will continue to work on this and to grow our user base in this local service business by leveraging the synergies in Alibaba ecosystem. As I said, I think we have a unique advantage that we have like 750 million mobile active users in Alibaba consumer by various consumer platforms. So how to cross promote the local services within this existing user base, especially in the low-tier cities, I think is our big advantage. We will continue to work on this. And at the same time, because of these local services, we build a very efficient on-demand delivery network and which also adds our New Retail initiatives. And today, we are -- we -- this on-demand delivery network helps our retail partners -- local retail partners to do the on-demand delivery for the orders away from stores. I think by doing so, we also improve the operating efficiency of the last-mile services. And because all these -- the capacities can be fully utilized on seeing -- serving the various business cases.

Just one follow-up on the priorities going forward within this segment.

Well, as I said, we will continue to invest and grow our local business, especially in the low-tier cities, and the priority is to leverage our user base that we have. And also we are continuing to improve our operating efficiency as well.

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

A very impressive result. So my question is about the recommendation fees. So just wanted to check the recent progress of your monetization on the recommendation fees and what the contribution to your customer management to revenue. And also want to understand if there is any seasonality of the business such as less monetization, maybe during the 6.18 and 11.11 promotion to push your keyword search advertising. And also quick follow-up on lower-tier city expansion. I think you talked a lot about the opportunity in lower-tier city. And we just want -- we also know you prioritize the strategic position of Juhuasuan during the quarter. So just want to understand how will you differentiate your lower-tier city expansion strategy with your peers?

Okay. Talk about customer management and revenue and the recommendation fees monetization. First of all, you've seen that our customer management revenue grew 27% year-on-year. The reason for the growth or the driver is mainly the bigger user base and better user experience, so that the merchants are satisfied and willing to pay more. And we said that for recommendation fees, we do not plan to roll out the monetization, particularly in the current uncertain macro environment. This is one kind of way of helping our SME customers. And so from the competition point of view, we also will be aggressively targeting the revenue growth by rolling out the recommendation fee.

All right. In terms of our strategies in the low-tier cities, as I said before, today, over half of the population in the less developed areas are already our customers. So I think very important, we will continue to leverage this user base we have in our ecosystem to provide them various -- I mean supplies. And as you said, we have various promotional, I mean, initiatives, including Juhuasuan, daily deals, so on and so forth and with these -- I mean very effective and efficient promotion platform. And our new customers from low-tier cities are very easy to find the product's value for money. So with these efforts, we effectively increase the user frequency and buying frequency. And in terms of the new customer acquisition, we still see a big opportunity. And by leveraging the power of Alibaba ecosystem and we, together with Alipay and to -- and local services, to further penetrate these, I mean, the customer base. And the digital, I mean, checkout of the new customers actually also gives us a good opportunity to check in into our shopping and consumption platforms. So we will continue to work on this.

Operator, last question.

Our last question from -- comes from the line of Jerry Liu of UBS.

Yes. My question is about our comments on the call so far about the rationalization and optimization, especially in a lot of our investments that we've done so far this year. If I look at actually EBITDA growth this quarter, the year-over-year growth is actually better than the -- either the revenue or EBITDA growth of the core, core, which is a first time in over a year. So I'm wondering is there more rationalization we can continue to do to continue the strength?

Yes, Jerry. As I said, I think first of all, the revenue growth was very strong, right? So 42%, if you compare with all the other peers where most of them are in 20-ish. And at the same time, we talked about the disciplined cost and operating efficiency and all of these efforts in getting the synergy out of the group and the Alibaba economy. So we're going to continue to do so while we do see great potential in the market. So while we're talking about discipline, we're also -- we're flexible and optimistic in our approach to investing in all of these business initiatives because just like how we did in the past 20 years, investing in these new areas, especially in the innovation, brings growth -- sustainable growth for longer term.

Thank you, everyone, for joining the call today. If you have further questions, please reach out to the Investor Relations team at Alibaba. Thank you.

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