Alibaba Group Holding Limited (BABA) Q1 2020 Earnings Report, Transcript and Summary

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 150 cities with a population of at least 1 million people. In aggregate, these lower-tier cities and the surrounding townships have more than 500 million people with a consumption economy of USD 2.3 trillion. What is happening is the lower-tier cities are urbanizing very fast, with a projected 300 million people that will move from rural areas into these cities in the next 10 years. The economy of these smaller cities will grow faster than the major metropolitan areas. We've seen projections that retail consumption from the lower-tier cities and townships will triple from $2.3 trillion today to nearly USD 7 trillion by the year 2030. That is a compounded annual growth of more than 10% over a long period of time. In the current quarter, we grew annual active consumers of our China retail marketplaces to 674 million, of which more than 70% come from lower-tier cities. Alibaba's China retail platforms, especially Taobao marketplace, is very well positioned to capture the consumption demand from the lower-tier cities. Alibaba's unique -- Alibaba is uniquely positioned with a capability to capture opportunities of both the growing middle class in metropolitan areas and urbanization of lower-tier cities. This unrivaled capability is enabled by our multiple retail platforms that are highly trusted by consumers, extensive ecosystem of brands, merchants and manufacturers and AI-driven personalization technology. The second big secular trend I want to talk about is the rapid pace of digitization. Over the past 10 years, digitization of the Chinese economy has been driven by smartphones. Because of the convenient and always-connected nature of mobile devices, more and more users are spending more and more time connected to the Internet. This is giving the digital service providers like ourselves a great feedback loop to understand user trends so that they can rapidly and continuously improve their services. Under our all-in mobile strategy, Alibaba has become the leading player in digitizing commerce. We have developed the most sophisticated AI algorithms to serve consumers on our platform, which results in ever-improving user experience as well as increasing monetization opportunities. In the next 10 years, digitization of the economy will be further accelerated by the advent of 5G connection and proliferation of IoT devices. This will have far-reaching implications for all industries and processes, including public services, manufacturing, supply chain distribution, product development and marketing. By developing these essential technologies of a more digitalized -- digitized world, such as data technology, cloud infrastructure and machine intelligence, Alibaba is very well positioned to help businesses succeed through our new infrastructure for commerce. Now I turn to Daniel for his remarks.

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 scale and customer reach. The promotional event saw robust consumption demand that supported solid sales and a greater penetration into less-developed areas for brands and merchants. And over 120 brands generated more than RMB 100 million a day in this -- in GMV. During the 18-day promotion period, Tmall physical goods paid GMV was up 38%, driven by increases in consumers and a higher average spending. Mobile Taobao App DAUs was up close to 30%, reflecting successful promotional strategy, and about 65% of the buyers were from less-developed areas. The success of the event was mainly due to successful promotional strategy that kept consumers engaged and willing to spend. More effective user acquisition programs penalized by better reactivation of dormant users leveraging on our data technology, a diversified selection of value-for-money products to attractive -- to attract more users -- more buyers in less-developed areas, continuing efforts to address growing demand from our middle-class consumers. For local consumer services, we achieved strong growth in daily on-demand GMV, driven by robust order growth and increasing average order size during the quarter. We have also extended the coverage of products and services in targeted low-tier cities where we saw improved market share. We will continue to focus on delivering value to restaurants and other local service merchants through our data technology. Our New Retail business consists of 2 major directions, reforming old and creating new, both of which enlarge the addressable market. We are making good progress in digitalizing partners -- retail partners and enable their New Retail transformation. We offer multiple New Retail solutions for traditional supermarket chains that include the Taoxianda and the digital POS machines. Taoxianda allows consumers to place orders in a nearby supermarket through Taobao app and a secure delivery through our on-demand delivery network. Digital POS machines capture the insights from local consumers' in-store purchases. These New Retail technologies have started to deliver positive impacts to our retail partners like Sun Art. Freshippo, also known as Hema in Chinese, has achieved robust same-store sales growth. It will continue to expand its footprint, optimizing its stores and introduce [ new initiatives on ] product selections. Hema is consolidating the supply chain to bring the products directly from the farm to table to improve customer experience. Cainiao Network has developed a robust import procurement solutions utilizing a combination of bonded warehouses in China and the direct shipment from overseas. The founded warehouse network operated by Cainiao covers all the major ports in China. As part of Cainiao's comprehensive last-mile solutions, Cainiao's global app offers an on-demand pickup at the delivery services that allows consumers to send package from their homes, thereby facilitating returns. As of June 2019, Cainiao global -- speedy on-demand pickup service within 2 hours has covered substantially all of the districts and the country -- and the counties in China. In general, 1 out of every 3 returning package generated on our platform was handled through Cainiao global platform. On the globalization front, Lazada shows solid operational improvement after strengthening its third-party marketplace business, management team and technology infrastructure. For the third consecutive quarter, Lazada achieved over 100% year-on-year growth -- year-on-year order growth, reflecting strong consumption demand. During the quarter, it has executed effective user acquisition programs, with mobile DAUs doubling year-over-year. Lazada key priority is to maintain strong user growth and user engagement in the coming years. Our cloud computing business continues to execute and exhibit strong growth. Revenue grew 66% year-over-year to RMB 7.8 billion, primarily driven by an increase in average revenue per customer. We are focusing on delivering high value-added services while rationalizing our offerings of commodity products and services. We will continue to execute our strategy of expanding our market leadership, increasing investment in talent and technology infrastructure and the developing new value-added products. On top of robust growth in public cloud, we are capturing strong secular demand for private cloud, primarily driven by digital transformation of big enterprise clients in various industries. During the quarter, our private cloud revenue grew over 250% year-over-year. Digital media and entertainment segment continues to be impacted by tighter content regulation and industry rationalization. Youku will continue to focus on investing in original content, delivering superior user experience and driving increasing paying subscription. During the quarter, Youku's average daily subscribers increased 40% year-over-year. While we continue to invest in original content production capabilities, we are also taking consistent measures to ensure content cost efficiencies and the return on investment. These measures have been reflected in reduced losses during the quarter. Alibaba digital economy continues to show resilient growth in the face of complex geopolitical and economic conditions. Recent geopolitical uncertainties have placed additional pressure to global growth. Looking into the future, we believe this is both a challenge and opportunity for the Chinese economy. Consumption and the service sectors will become the new engine for China growth. The consumption power in Alibaba digital economy is strong, coming from 2 types of consumers, those from less-developed areas and the affluent middle-class. We estimate over half of the total addressable population in less development areas are already consumers in Alibaba digital economy. We continue to acquire new customers in a holistic approach in less-developed areas. With such a large existing consumer base, we see great cross-sell opportunity within the Alibaba ecosystem that will drive up their purchase frequency and the category expansion. For affluent middle-class, Alibaba is also well positioned to meet their consumption upgrading demands. We are well penetrated in top tier cities and able to continuously grow the consumers' mindshare and wallet share in various areas of their lives. Today's Alibaba digital economy is self-reinforcing and it is as strong as ever. Fueled by consistent relative revenue growth and healthy financial performance, we are able to continue our investment in strategic areas such as local consumer services, globalization, logistic, cloud computing and the digital contents, which we believe will drive future sustainable growth for Alibaba digital economy. Now I turn the call over to Maggie, who will walk you through the details of our financial results.

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 our business segments. Core commerce. Our core commerce segment had a strong quarter with revenue growth of 44% to approximately RMB 100 billion this quarter. The fundamentals are our China retail business continue to be strong. The combined customer management revenue and commission revenue exhibited healthy growth of 26% for the quarter. Customer management revenue increased 27% in the quarter. The growth of customer management revenue was primarily the result of increase in the volume in paid clicks due to user growth and more relevant listings driven by better algorithms, which resulted in better consumer experience. Merchant confidence remains healthy reflected by strong growth in merchant spending and increases in the number of paying merchants. Commission revenue increased 23%, primarily due to strong 34% year-over-year growth of Tmall paid physical goods GMV. The primary reason of the gap between the commission revenue growth and the Tmall physical goods GMV growth is shift of Tmall Supermarket revenue mix from commission to direct sales. So revenue from Tmall Supermarket that used to be all in the commission, now the revenue coming from the direct sales is reflected under Others within China commerce retail business. Contributions from direct sales business, including Tmall Supermarket and Hema, resulted in other revenues growth, which is 134% to RMB 16.7 billion. Local consumer services. Revenue from local consumer services was RMB 6.2 billion, primarily reflecting the strength of our food delivery platform, Ele.me. During the quarter, our food delivery business exhibited strong growth in daily on-demand GMV and was driven by robust order growth and increasing average order size. Ongoing operational upgrades, coupled with a more targeted and disciplined approach in expanding market share also improved operating efficiency during the quarter. We remain focused on penetrating into less-developed areas for the food delivery business, which we believe will add long-term value for Alibaba digital economy. We will be flexible and optimistic in our approach to investing in local consumer services business in the later part of the year. Performance of other businesses and their core commerce such as new retail, Cainiao, international retail China, wholesale remain healthy, as noted by Daniel earlier in his remarks. Now let's look at the driver of the core commerce profitability. We continue to generate solid market-based core commerce adjusted EBITDA. This is the core core, we used to call. Compared to a year ago, we have increased the adjusted EBITDA by RMB 9.8 billion, while the combined losses from the 4 strategic investment areas only increased RMB 1.6 billion. So this reflects our disciplined approach when managing this business, which led to strong profit growth. After incorporating the losses, our core commerce adjusted EBITDA grew 25% to RMB 41 billion during the quarter. Cloud computing revenue increased 66% to CNY 7.8 billion, primarily driven by increase in average revenue per customer. We're improving our revenue mix by focusing on delivering high value-added services while rationalizing our offerings of commoditized products and services. Adjusted EBITA was a loss of RMB 358 million. Adjusted EBITA margin improved from negative 10% to negative 5% in the quarter. We will continue to execute the strategy of expanding our market leadership by creating value and flexibility for our customers, increasing investment in talent and technology infrastructure and developing new value-added products and features. Revenue for digital media and entertainment business increased by 6% as the industry undergoes rationalization and tighter regulation on content. Adjusted EBITA was a loss of CNY 2.2 billion. And adjusted EBITA margin improved from negative 52% to negative 35% in the quarter, primarily due to the decrease of content spending and efficiency gains during our operation. Revenue from innovation initiatives and others increased 21% to RMB 1.3 billion mainly due to an increase in revenue from Amap, a modern initiative. Adjusted EBITA for innovation initiatives and others was a loss of CNY 2 billion. The increase in loss is primarily due to investment in technology research and innovation as well as some new business initiatives. Our business has shown strong profitability and cash flow generation capability. For June quarter, we generated CNY 26.4 billion in free cash flow. Compared to a year ago, the free cash flow has shown a slight growth, not as big as the profit growth here. And the reason -- the reasons are mainly 2. Number one, the net cash provided by operating activities includes the annual payment of royalty fees and software technology services from Ant Financial, so that settlement of the cash incurred in the quarter played an impact on the cash flow. The second thing is the payment of USD 250 million cash with the U.S. federal class action lawsuit related with the white paper. As of June -- the end of the quarter, cash, cash equivalent and short-term investments were RMB 212 billion. In May 2019, our Board of Directors authorized to refresh our share repurchase program for an amount of up to USD 6 billion over a period of 2 years. I'll talk -- I'll also talk about Altaba sales of our ADS. As publicly disclosed, Altaba started selling their Alibaba shares on May 20, 2019. And so far, they have already sold 261 million ADS, only have 22 million left. These are obvious on the most recent publicly available information. Looking ahead, the Alibaba digital economy continues to show resilience and steady growth in the face of complex geopolitical and economic conditions. We had a strong quarter to start our fiscal year, with revenue growing faster than our global technology peers. We are pleased to see sustained user engagement and consumer spending across our platforms. We continue to invest for longer-term growth, while at the same time, gaining cost efficiencies in our investment areas. Looking ahead, for the next few quarters, we expect our China retail marketplace to exhibit strong user growth and user engagement enhancement that support healthy monetization and steady profit growth. The sizable profits generated from marketplace-based core commerce allow us to invest in strategic businesses, including local consumer services, digital entertainment, international marketplaces, New Retail and logistics and cloud computing. We will remain proactive in our approach to increase market leadership in strategically important businesses while also improving overall group's operating efficiency. These strategic businesses have already become the clear market leaders in the past quarters. We believe there are still great potential in high-growth areas that will substantially increase our total addressable market. I also want to give a -- some information for our Investor Day this year. We would like to announce that our 2019 Investor Day will be held on September 23 to 24 in Hangzhou, China. We hope to provide an in-depth business update as we did in previous investor days. Details will be posted on the investor relationship section of Alibaba Group's website. That concludes our prepared remarks. Let's open up for questions. Thank you.

[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.