Earnings Call: Q1 2019

May 23, 2019

Earnings release

Good day, and welcome to the Meituan-Dianping first quarter 2019 earnings conference call and webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Scarlett Xu, Vice President of Capital Markets. Please go ahead. Thank you, operator. Good evening and good morning, everyone. Welcome to our first quarter 2019 earnings conference call. Joining us today are Mr. Xing Wang, Chairman and CEO, and Mr. Shaohui Chen, Senior Vice President and CFO of Meituan-Dianping. For today's call, management will first provide a review of the first quarter 2019 results and then conduct a Q&A session. Before we start, we would like to remind you that our presentation contains forward-looking statements, which include a number of risks and uncertainties, and it may differ from the actual results in the future. This presentation is based on our management accounts, which have not been audited or reviewed by our auditor. This presentation also contains some unaudited non-IFRS financial measures that should be considered in addition to, and not as a substitute for, measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of risk factors and non-IFRS measures, please refer to our disclosure documents in the IR section of our website. Now I will turn the call over to Mr. Xing Wang. Please go ahead, Xing. Thank you, Scarlett. Hello, everyone. Welcome to Meituan-Dianping's first quarter 2019 earnings call. We continued to deliver a strong business performance this quarter. Our GTV increased by 27.9% year-over-year to RMB 138.4 billion. Total revenue increased by 70.1% year-over-year to RMB 19.2 billion. For the 12 months ended March 31, 2019, annual transacting users on our platform grew by 26.4% year-over-year to 411.8 million, and annual active merchants on our platform grew by 27.3% year-over-year to 5.8 million. In addition, on average, the annual number of transactions each transacting user made on our platform increased to 24.8 in the 12 months ended March 31, 2019, from 20.1 times in the prior year period. In this quarter, we continued to fortify our overall market leadership as an integrated e-commerce platform for services in China. We have continuously exercised our Food Plus platform strategy to offer one-stop services for local consumers and merchants. We further fortified our thriving and self-reinforcing ecosystem by increasing penetration on both the demand side and the supply side with stronger brand recognition. Now, I would like to highlight the performance of each segment in the first quarter of 2019. I will start with the first one, our food delivery segment. In the first quarter, the number of food delivery transactions increased by 35.8% to 1.7 billion, and the GTV increased by 38.6% to RMB 75.6 billion. In China, food delivery has become an increasingly essential part of urban consumers' daily lives while penetrating into more and more consumption scenarios. For example, during the Spring Festival period, food delivery transactions on our platform reached 150 million, up 40% year-over-year. On Chinese New Year's Eve, the number of food delivery transacting users increased more than 50% year-over-year, and the proportion of premium dish orders, such as seafood, increased meaningfully. Consumption categories increasingly broadened while the average spending per order increased. This example showcased that food delivery is not only a necessity during people's regular working hours, but also an effective way for people to enjoy food at family gatherings during important holidays like the Spring Festival. In the first quarter, we demonstrated that we have the capability and flexibility to both strengthen our market position and improve our financial performance. Our market share continued to increase while operating results continued to improve on both a year-over-year and quarter-over-quarter basis. We owe this success to our clear structural and scale advantages in user base, merchant base, and delivery network through long-term investment. First, we have built a healthier user matrix. Our early investment to build an on-demand delivery network and AI-powered intelligent dispatching system helped us to better satisfy consumers' needs and capture the affluent white-collar consumer base. Importantly, this type of consumers has more purchasing power. During the Spring Festival period, they were more willing to pay for our food delivery services due to a desire for convenience and a wider selection of food. As a result, the demand from our users were higher than that of our competitor during the holiday season. Secondly, we are the preferred partners deemed by restaurants. In both higher-tier and lower-tier cities, most restaurant capacity decreased during the Spring Festival due to staff taking time off. In this traditionally low period, many of these restaurants prefer to work with us due to our larger users' business scale, which means better delivery services and sufficient orders to fully utilize their capacity in this special period. Thirdly, we have nationwide operations and leadership across cities of all tiers. During the Spring Festival, millions of users living in top-tier cities migrated back to their hometowns in lower-tier cities for family gatherings. Because of clear dominant scale of merchant base and delivery network in lower-tier cities, additional food delivery demands from these migrated users were mainly fulfilled by us. Finally, our ability to better organize merchants and mobilize delivery riders enabled us to better cope with the food delivery orders during the special holiday season. We launched a campaign to encourage more merchants, especially the top merchants, to continue their operation during the Spring Festival. Compared to the same period in the previous year, the number of merchants open on our platform during Spring Festival increased meaningfully. We were also able to better manage and incentivize our delivery riders to accommodate temporary order peaks and ensure delivery capacity throughout the holiday season. While we have made significant improvements in the financial performance of food delivery business, profitability is still not our near-term priority. We have built this business up to a remarkable scale. We still believe this industry is at a very early stage and will continue to evolve. With a strengthened leading position and improved operating efficiency, we currently have more flexibility to make long-term investment in improving our supply structure for the dispatching technology and delivery network management system. We believe such investment and others will strengthen our foundation for long-term growth. Now, let's turn to our in-store, hotel, and travel segment. During the first quarter, we continued to solidify our leading position as a unique platform that provides a comprehensive suite of transaction-based services and marketing tools to addressing merchants' different needs. Our platform has become the preferred location for consumers to search for lifestyle services, as well as for merchants to market services offerings and attract new users. For traditional and relatively mature lifestyle services categories on our platform, we continued to make product innovation and operational improvement to drive sustainable growth. Take our beauty category, for example, which include skincare, nail, hair salon, and other services. In the first quarter, we cooperated with around 160,000 beauty merchants with improved product offerings on our platform. We also further expanded the usage of multi-session cards for hair salons to skincare and nail services in this quarter. In March, the total number of beauty merchants selling multi-session cards on our platform exceeded 48,000. We also hosted theme-based promotions for beauty merchants to help them increase brand exposure and acquire online traffic. In a four-day promotion hosted for beauty merchants in honor of International Women's Day, transacting user for beauty categories on our platform increased by over 30% year-over-year, while GTV increased by over 45% year-over-year. As a result, total revenue from our beauty category increased by more than 40% year-over-year in the first quarter, of which advertising revenue accounted for more than 80%. For our hotel booking business, domestic room nights increased by 29.8% to 78.6 million rooms from 60.6 million in the prior year period. Strong demands for leisure and travel around Spring Festival boosted the recovery of growth rate in Q1. We also continued to help hotels further expand and increase their revenue streams in non-lodging services by cross-selling reservations for restaurants, wedding venues, spas, and others. I will now discuss the development of our third segment, new initiatives and others. In alignment with our overall strategy, we are actively exploring additional opportunities in grocery retailing, testing both the self-operating model and platform model. We have launched a pilot program for small grocery stores in residential communities in Beijing and Shanghai. We have also continued to explore our non-food delivery business model to connect local retailers and consumers, which is known as Meituan Shangou or Meituan Instashopping. Importantly, we are disciplined when allocating capital for our new initiatives. In the first quarter, we shut down our Ella supermarkets in lower tier cities based on ROI review, and we are focused on improving the shopping experience and operational efficiency in our remaining two Ella supermarkets in Beijing. Meanwhile, we continue to make efforts to narrow losses in our bike-sharing services, as well as iterate our car-hailing services business model. In the first quarter, the restructuring of Mobike in multiple overseas markets proceeds on schedule. We expect to complete the restructuring during the rest of the year. Our car-hailing service is an essential high-frequency local consumer service category for the mass market. To better satisfy the demand of our existing users for this service, we announced the launch of the aggregated model for our car-hailing business in Shanghai and Nanjing in late April. This decision was made after analyzing current market dynamics and financial performance. The new model, the aggregated model, will open up our platform and serve as an end-to-end marketplace to connect third-party car-hailing service providers with the Meituan app users. We will provide our users with better and more comprehensive selection of pricing, car models, services, and other features. We believe this high-frequency service will further increase our users' transaction frequency, enhance user stickiness, and provide more opportunities for the cross-selling of other services categories. We have already expanded our car-hailing business using this new model in another 15 cities, such as Shenzhen, Guangzhou, Hangzhou, Chengdu, and Wuhan. We expect to continue rolling out this business in more cities within 2019. The mission of Meituan is to help people eat better, live better. Looking ahead, we are firmly committed to carrying this out, and as we pursue this goal, we will always remember the importance of developing services and products that meet the growing demands of both consumer and merchants. Moving forward, we will continue to provide more convenient lifestyle services for consumers and better marketing and operational tools for merchants. I believe we are on the right track. With that, let me turn the call over to Shaohui for financial updates. Shaohui, please. Okay. Thank you, Xing. Hello, everyone. Let me go through our first quarter financial results. For the first quarter, total revenue reached RMB 19.2 billion, up 70% year-over-year. The growth was mainly driven by the increase in GTV and overall monetization rate. The GTV in the first quarter increased to RMB 138.4 billion, up 27.9% year-over-year, as a result of our expanding transacting user base and users increasing purchase frequency. Our monetization rate for the first quarter reached 13.9%, up from 10.4% in the same period of 2018, driven by the increase of monetization rates across all major business segments. The sequential decrease in our overall monetization rate was because online marketing revenue for the second segment decreased due to seasonality and the change of mix in our new initiatives. Our total gross profit for the first quarter increased to RMB 5.1 billion, up 57.8% year-over-year. Gross profit margin was 26.4%, compared to 22.6% in last quarter and 28.5% in Q1 of 2018. The year-over-year decrease was mainly due to the change of business segment mix, as new initiatives with low gross margin contributed higher revenue than Q1 last year. However, the gross margin of our core businesses increased steadily year-over-year. We have also seen a healthy quarter-over-quarter increase for gross margin across all three segments, which demonstrate our continuous optimization of our operation. In the first quarter, our total selling and marketing expenses as a percentage of revenue further decreased to 19.3% from 25.2% of Q1 2018, mainly attributable to the improvements in economies of scale and our healthy operating leverage in the single brand. R&D expenses as a percentage of revenue decreased to 10.6% from 12.3% in the same period of 2018. G&A expenses as a percentage of revenue decreased to 5.6% from 5.9% in the same period of last year. In this quarter, our adjusted EBITDA was RMB 458.9 million, turned from negative to positive for the first time. Adjusted net loss continued to narrow from last quarter and reduced to RMB 1 billion in Q1. Adjusted net loss as a percentage of revenue was -5.4%, compared to -8.7% in the first quarter of 2018 and -9.4% in the fourth quarter of 2018. The improvement in adjusted net loss and adjusted EBITDA was due to the continuous improvement in the operating margin of our core businesses, as well as our ongoing efforts to streamline the operation losses of our new initiatives. Now, let's turn to the segment reporting. Our first segment is food delivery. In this quarter, we further grew our food delivery transacting user base and their purchase frequency on a year-over-year basis. In the first quarter, the number of food delivery transactions increased by 35.8% year-over-year to 1.7 billion. Food delivery GTV increased by 38.6% year-over-year to RMB 75.6 billion. Food delivery revenue increased by 51.7% year-over-year to RMB 10.7 billion. Q1 is normally a low season for food delivery. This is the main reason for the sequential decline for the food delivery transactions and revenue. Users' demand for the service during Spring Festival tends to be lower than in normal seasons, and most restaurants suspend operations during this holiday season. However, as Xing mentioned, during this Spring Festival, we witnessed very strong year-over-year growth for food delivery. We leveraged our competitive advantages and launched special operating campaigns during the period to further solidify our market-leading position. A higher portion of food delivery orders for family gatherings were premium dishes, and as a result, the average value per order for our food delivery business further increased both quarter-over-quarter and year-over-year. In Q1, the profitability of our food delivery segment has further improved both quarter-over-quarter and year-over-year. The monetization rate for food delivery increased from 12.9% to 14.2% year-over-year and from 13.7% to 14.2% quarter-over-quarter. Gross profit of food delivery business for the fourth quarter increased to RMB 1.5 billion, up 187.9% year-over-year. Gross margin further expanded to 14.4% from 7.6% in the same period last year. As capacity of delivery network is more limited during Spring Festival, we charge a higher delivery fee to cover higher delivery costs. These factors help to improve monetization rate and gross margin quarter-over-quarter. Compared to last year, we further expanded our service categories, including online marketing services to food delivery merchants. This helped improve both the monetization rate and gross margin year-over-year. For our second segment, revenue from in-store, Hotel and Travel increased to RMB 4.5 billion, up 43.2% year-over-year. Gross profit increased by 44% to RMB 4 billion. Gross margin expanded to 88.3% from 87.8% in the same period last year. The period around Spring Festival is also low season for our in-store business. As the majority of their lifestyle service merchants temporarily close their operation during the holiday season, this affects both transaction volumes as well as online advertising demand. Therefore, the decline of revenue in this segment on a quarter-over-quarter basis was mainly due to seasonality. However, revenue from this segment continued to grow robustly on a year-over-year basis, primarily due to the strong growth of online marketing service revenue. As the go-to platform to search and discover lifestyle services, more and more merchants have realized the value of marketing and promotion on our platform. Both the number of active online marketing merchants and average revenue per active merchant continued to grow rapidly in the first quarter on a year-over-year basis. Advertising revenue generated from our in-store business grew 70% on a year-over-year basis. We have seen more and more new category merchants embrace our platform. For example, the online marketing revenue from our medical and aesthetic category increased by around 250% year-over-year. At the same time, our domestic hotel room nights maintained healthy growth year-over-year, and the contributions from high-end hotel bookings continued to increase in the fourth quarter due to growing demand during the Spring Festival. Now let's move to the third segment, new initiatives and others. In this quarter, revenue increased to RMB 4 billion, up 267.8% year-over-year. Our new initiatives and other business recorded a gross loss of RMB 439.8 million this quarter. Gross loss as a percentage of revenue continued to narrow to negative 11.1%. This was an improvement of 12.2 points in gross margin on a quarter-over-quarter basis, mainly because our limiting subsidy in the car-hailing business and the improvement operating leverage of our several new initiatives, such as food distribution business and non-food delivery business. As Xing mentioned, we are at an early stage of building the one-stop platform for service e-commerce. While we have achieved this financial improvement over time, the management team will continue to maintain a proactive and a disciplined approach to explore new opportunities. Overall profitability is not our near-term target. We are very excited for the possibility to continue expanding our offerings to both consumers and merchants through our ongoing new initiatives. We also regularly evaluate the performance and ROI of all new initiatives. For new initiatives that we believe are progressing well, we may invest and expand further. For new initiatives that do not meet our investment criteria, we will adjust our strategy or close it down. For our bike-sharing business, we continue to refine our pricing strategy on both the pay-per-ride and the monthly subscription fee. We also made progress on improving operating efficiency. As a result, revenue from our bike-sharing business continued to increase year-over-year, and operating loss continued to narrow. For our car-hailing business, we have significantly reduced subsidy and losses for our operation in Nanjing and Shanghai under the original self-operating model. At the same time, we are rolling out the new aggregated model this year to leverage our platform advantage with third-party industry partners. This is a more scalable approach for us to cover more cities and to serve more consumers. This is also able to help us improve the cross-selling and realize the synergy between our transportation services and our other food-related sectors. We do not expect significant subsidy or marketing expenses. For our merchant side services and grocery retailing business, we still believe in the industry trend and the overall value proposition. We are carefully evaluating and testing different models. We will continue to make investments in these areas. Now moving on to our cash position. As of March 31, 2019, our cash equivalents, and short-term investments total RMB 54 billion. Net cash used in operating activities was RMB 3.3 billion, mainly consisting of the adjusted EBITDA and the changes in working capital. This concludes our prepared remarks. Operator, please open up the call for questions. Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time during your question has been addressed and you would like to withdraw your question, please press star then two. The first question today comes from Ronald Keung with Goldman Sachs. Please go ahead. Thank you. Thank you, Wang Xing, Shaohui, and Scarlett. Congratulations on the solid beat. My first question, kicking off on food delivery. With the solid market share increase and improved unit profitability that we saw in the first quarter, would just like to hear how you think about how the rest of the year may pan out in terms of competition and our strategy, mostly in response as Alibaba has stressed the focus on market share gains in lower-tier cities. Would love to hear your thoughts for the strategy and for the rest of the year. Thank you. Thank you, Ronald. Q1 result has demonstrated that we have capability to compete effectively and efficiently. We gained market share with a much smaller investment than peers and improved our financial results at the same time. This is mainly because our better user metrics, nationwide leading position in terms of operating scale and targeted operational campaigns. At the same time, we optimized our marketing expenditure to further narrow the operating loss of this business. The performance in this quarter further proved that our clear advantage is in all three pillars of this business, namely user base, merchant base, and delivery network, and our strong nationwide network effect. To some extent, they amplify the scale and structural advantage during Spring Festival, contributed meaningfully to our good results in Q1. Of course, we expect the competition in food delivery business will continue to be very intense in 2019, but we feel more and more comfortable in the competition dynamics. For competition in lower-tier cities, we have a very clear leadership in both top-tier and lower-tier cities. What is more important, our user and merchant quality is much better than peers, demonstrated by our higher revenue and gross margin. We are not that concerned when other players use heavy subsidy for price-sensitive users. It is not going to be sustainable. When a subsidy campaign stops, these orders will vanish, and the price-sensitive users in lower-tier cities typically have sufficient time for home cooking. People in lower-tier cities have a very different lifestyle than people in Beijing and Shanghai. We believe that services quality to both consumers or merchants and operating efficiency are key to long-term market leadership. With our clear scale and structural advantage, we have the flexibility and can take initiative in the intensified competition. We will continue to focus on solidifying our long-term leadership and stick to ROI-oriented subsidy strategy. We do use subsidy. We do very careful ROI review. For the full year of 2019, we are confident to maintain our nationwide market leadership at significantly less burn than our competitors. Thank you. Thank you. The next question comes from Grace Chen with Morgan Stanley. Please go ahead. Thank you. Thank you very much for taking my call, and also congratulations on the strong results. My question is also about the food delivery segment. It would be great if the management can share with us more color about the cohort behavior and how the cohort behavior has been changing over time. Lastly, how is Meituan's user metrics better than peers? Thank you very much. Thank you, Grace. We have seen the retention and purchase frequency growth pattern across all different cohorts being very consistent. The longer a customer stays on our platform, the more frequently they will transact and the higher up value they will spend on our platform. Let's take the cohort of 2015, for example. After four years, the retention rate for cohorts from 2015 is still above 60%, and the average frequency was around 45 times a year. The pattern is very consistent regardless of city tiers or regardless of their different years. We have seen that most of cohort still relatively young, and we have seen their trend that follow a similar trend of their relative material cohort. We expect overall purchase frequency to naturally grow as younger cohorts catch up with more material cohorts. As to your questions of comparing with our peers, we are very confident that both the consumer cohort and the merchant cohort demonstrate that we have better quality, and this is demonstrating by higher average order volume, and much less subsidy to order, so result in a much better unit economics. This is demonstrating that we have better user metrics and user quality. The reason, the rationale behind that is, we believe we understand the business better, and we have invest earlier and more aggressive in the key infrastructure that we believe are important for this business. For example, we made strategic decisions to build our self-operating delivery network in 2015 and continue to optimize our intelligent order dispatching system since then. This helped us serve more merchants and more consumers, and also can push back our continued improvement in this system. As a result, we have built a much more healthy virtuous cycle that we are able to attract less price-sensitive consumers because we have better experience, and we are also able to continue making investments and upgrade our management systems in the delivery rider system. We believe our early investments and our continued optimization will pay off to further solidify our advantages in the food delivery business. Thank you. Very helpful. The next question comes from Eddie Leung with Merrill Lynch. Please go ahead. Hi, good evening. Thank you for taking my question. Congratulations on a good quarter. Just wonder if you have any update on your software and POS system basis. Any financial and operating metrics would be helpful. Specifically, could you also talk a little bit about how your software POS business are different than some of your competitors? Thank you. Thank you for the question. The software that you mentioned, it is called restaurant management system internally, in our internal review. We believe the restaurant business in China is in the process of faster digitization, and we have seen a growing demand by our merchants in upgrade their existing system, or for those that have never used a software system before, wanted to embrace this SaaS-based model and to improve their overall operating efficiency. Currently, for this RMS business, we sell both the hardware and software together as an overall solution provider. We sell hardware with a markup and charges one-time installation fees. In order to encourage the adoption rate, right now, we have most merchants waivered for their annual subscription fee. In the future, we plan to further monetize this business by gradually charging their annual service fees when we think our product value is increasingly recognized by the merchants. Overall, we think this is still early stage in the industry, that merchants are still being educated to understand how to use this system. We have invest and develop different types of products to satisfy the needs of different types of merchants. For example, we have the beginner version target on smaller individual restaurants, professional version target to larger individual restaurants or chains restaurants. We also have some vertical versions, such as beverage version targeted to beverage and bakery verticals. We focus more on penetrating into the high-quality merchants with high-quality turnover to ensure sufficient monetization potential and also to have a more healthy retention rate from these merchants. We are also working very hard to continuously upgrade our products and introduce more product features in this space. We believe we are a very competitive player in this space. First, on product innovation. Our RMS product team has been working in the space for more than 3 years. They are working very closely with our product team, our consumer services. These RMS designers understand better the consumer needs and understand better how to integrate the RMS product to our online platforms, which is very important for these restaurants' needs right now. Secondly, we have a clear advantage in our merchant relationships. We have built operation expertise in managing large on-the-ground sales team for restaurant industry for decades. Leverage our existing relationship from our in-store dining business, marketing business, and the food delivery business. We are able to provide comprehensive services to restaurants and to increasing stickiness in their lifetime value on our platform. We maintain very close, most of the time, daily dialogue with these merchants, which help accelerate merchants' adoption of our products and also to further understand their needs, which is important to continue upgrade our product. Thank you. Thank you. The next question comes from Jerry Liu with UBS. Please go ahead. Hi. Thank you very much. My question is also on food delivery competition. You mentioned that Q1 is low season and we saw food delivery revenues decline sequentially. Ali actually saw the local services segment revenue increase slightly sequentially. Can you help us understand the gap? What kind of metrics can we look at where it suggests that Meituan is gaining share, and actually, what are they doing over Spring Festival in terms of their strategy? Thank you very much. Hi, Jerry. I would like to clarify. For our food delivery business segment, it only represents the revenue coming from the delivery service of meals prepared by the restaurants. However, in Q1, the revenue of the local consumer services of Alibaba comes from three business lines. The first one, the food delivery service, is comparable to our first segment. They also have the second and the third one. The second one, the grocery delivery business through marketplace model, that is comparable to our Meituan Instashopping, which is included in our new initiative segment. The third one on Alibaba side, Koubei, are also included from December 2018, which is comparable to our in-store business, but excluding hotel booking. Therefore, the direct comparison is not apple to apple. Sorry, it is kind of complicated. For food delivery business, we further gained market share in Q1, and our average order value is higher, especially during Spring Festival, because we have a better user metrics. Also, subsidy spending for food delivery business was also very well controlled in the first quarter. We think consolidating Koubei for full quarter primary contributed to the growth of Alibaba's local consumer service on quarter-over-quarter basis. In addition, our competitor also subsidized aggressively for the grocery business, which led to a higher growth of non-food delivery orders as compared to us. I would like to say, the non-food delivery is quite different from food delivery. If you are willing to subsidize heavily, it is much easier to get strong growth, at least in GTV, in non-food deliveries. For example, you can buy those packaged food or beers or even just bottled waters. That is very price sensitive. We do not do that. I hope this can help you better understand the gap. We will continue to focus on fortifying our competitive advantages and be the absolute market leader in both food delivery and in-store business in the long term. Thank you. Very interesting. Thank you. The next question comes from Ella Xu with China Renaissance. Please go ahead. Thank you for taking my question. My question is also about the food delivery business. You just talked a lot about some special cases or situations during the Chinese New Year. Going forward, can you help us better understand the food business' seasonality? Thank you. Sure. Thanks. We talked a little bit about this in previous calls, but I think because food delivery is still a relatively young business, we would like to further clarify how we understand about the seasonality for food delivery. Overall, in terms of the order volume, Q2 and Q3 are usually a better season for food delivery. Q4 and Q1 are usually softer in terms of order volume. In Q1, because of the Spring Festival, usually it's a low season for most merchants, especially local merchants. On the demand side, a significant portion of users migrated back to their hometown and spend time with their family. In addition, Spring Festival is also the most important holiday for delivery riders, so the capacity of our delivery network usually are negatively impacted. In Q2, because of the improved weather and people coming back from holidays, demand, supply, and delivery capacity will usually recover. In Q3, hot weather and summer holidays provide more food delivery scenarios. We have seen that in the past few years when the school summer season starts, students, they go back home, and there are very fast-growing food delivery demand when they stay at home. This usually contributes a high order volume. In Q4, there are some differences in the seasons in different areas in China. In North China, the weather gets cold, which favors the demand growth of food delivery business. At the same time, in most South China places in Q4, it is still not as cold. So food delivery order overall, the order volume will usually fall in Q4 compared to Q3. Due to this seasonality, we suggest investors to focus on year-over-year comparison to better understand the progress of our food delivery business. Thank you. The next question comes from Alicia Yap with Citigroup. Please go ahead. Hi. Good evening, management. Thanks for taking my questions and also congrats on the solid results. I have some follow-up questions on the cohort, but I wanted to understand the cohort of user adoption rate across the multiple service offered on the platform. For example, during a specific period, say, for example, in the first quarter, what is the percentage of the user transact more than 2 services on Meituan platform? Percentage of user use more than 3 services, 4 or 5 services? What are the most popular combinations of this service among the user? Is that the food delivery plus hotel, or the food delivery plus in-store, like dining, or even food delivery plus bike ride. Any colors or detail you could share would be appreciated. Thanks. Our overall strategy is Food Plus platform. We leverage the capability building from food to expand to platform category and platform businesses. The users, the traffic that we build from food is one of the core capability, and we have. The strategy is to acquire user from high-frequency, mass-demand category from food and cross-sell them to other lifestyle services. There are lots of long-tail categories, but if we rank by the number of transactions, the top 5 categories on our platform is food delivery, in-store dining, hotel booking, leisure and entertainment, and beauty category. In our user cohort, we have seen that most users place their first orders in food-related sectors, either food delivery or in-store dining. In Q1, over 85% of new customers for all the other categories were converted from the existing users of either food delivery or in-store dining. We have also seen that the longer the users stay on our platform, the more categories they will buy. The higher possibility to cross-sell them. Cohorts older than 3 years will buy over categories on average, and over 50% of them buy 5 categories or more. The younger cohorts have also seen a similar growing trend than the mature cohort. The pattern has been quite consistent across different cohorts. Overall, we believed we have built a go-to platform for daily life services, and this is a very unique advantage. It enable us to grow new categories to a large-scale user base, which much better ROI than single-category player. We plan to continue add new service category on our platform and to further unleash the cross-selling capability. Thank you. Thank you. Next question comes from Binnie Wong with HSBC. Please go ahead. Hi, good evening, management. Thank you for taking my question and congrats on the set of update results. First question is that, management mentioned quite a bit in your opening remark about the various new initiatives that Meituan will be more competitive against our peer to enhance the comprehensiveness of the offerings. How will you rank the priority of your investments, and which initiative do you see more room to reduce the losses? Second question is on your online marketing. Any update on your strategies, and what is the current and low trending? How do you see our performance, like advertisement, especially given weak advertising outlook in second quarter? Longer term, how do you balance with the relevancy of search results and the level of advertisement? Thank you. Thanks. The first question on new initiatives. Our overall strategy is platform, and our new initiative strategy follows our overall strategy, in which the priority is still focused on all the food-related new initiatives and at the same time explore the possibility to leverage the food capability for building the platform. On food-related new initiatives, we are continually exploring the opportunity in the merchant side services, as we mentioned in earlier questions. We have seen a good trend in the adoption of the restaurant management system and the food distribution system. For these two business, we understand it's very different from our existing consumer-facing business and require us to build new capability and require us to build in-depth understanding of the merchants' demand. So we will focus on the efficiency and the model optimization rather than the scale. We will focus on evaluate the healthy performance in terms of the retention rate up value of our merchants. For other food-related new initiatives, we focus on the local retailing sector, especially the grocery-related sectors. We have piloted our Ella supermarket business for a year, and we have decided to shut down five stores in lower-tier cities because the ROI are below our expectations. Going forward, we are focusing on improving the opportunities in community small store retailing, which you call Meituan Maicai business. We think this is potentially a better model and address the need for a consumer's grocery delivery services. Again, it's still very early, and we're focused on refining the business models. At the same time, we are also continue operating our platform models to connect the local demand with the local retailers, including the supermarket and local convenience stores. For the non-food related new initiatives, we focus on continuing to improve the operating efficiency and reduce the over losses. As we mentioned, both the car-hailing business and the bike-sharing business have seen a clear improvement in the operating efficiency. We will also actively explore the potential synergy between these local transportation services with our existing business. For your second questions on advertisement, I think we have talked quite a lot in the earlier remarks. So overall, we are seeing very clear and healthy trend in growing our advertisement merchants. We have seen the advertisement revenue grow over 70% in our in-store segment, and we are also seeing a growing portion of our revenue from food delivery coming from advertisement-related revenue. We think we have the ability to continue the progress in this advertisement-related space. Thank you. Thank you. May I just have a quick follow here? How will you balance between the relevancy of the results and also the level of advertisements that we will be giving on? We will be adding to the platform on the page. Thank you. Sorry, can you repeat your question? Yes. Sorry. My question is that just on your search results, how you balance the relevancy of your search result to the user and also the level of advertisements that we will be adding in? Yeah, I think our last quarter's earnings call, we share with investors the uniqueness of our platform in that we provide a very comprehensive offerings to merchants in different needs. So we offer not just CPC types of advertisement in our search or ranking results. We also provide branded related marketing or subscription-based promotion. So we think we have lots of flexibility in provide different services, and we think our ad inventory still has big room to further penetrate. So we have not seen the real pressure you mentioned about the balance. But more important, we want to work closely with our merchants to help them understand how to use our platform making targeted promotion. Because different from other internet platforms, we are LBS business, location-based service, which our advantage lies in that the merchants can always find their targeting consumers and audience, rather than bidding for a broader range of ad inventory. Thank you. That's very helpful. The next question comes from Kenneth Fong of Credit Suisse. Please go ahead. Hi, management. Thank you for taking my questions and congratulations on the very strong quarter. My question is for the in-store business. I noticed that revenue for in-store business has declined on a quarter-over-quarter basis. As you mentioned, is seasonality the only reason for this decline? And how do we think about the growth outlook on this very profitable in-store business, and what are the key drivers behind it? Thank you. Yeah. So actually, we explained that seasonality is the key reason for the quarter-over-quarter slightly decrease. But overall, we believe that you have seen the overall revenue growth and the margin profile for this business. It continues to be a very healthy and very strong segment. Going forward, we are confident the growth momentum will continue in the in-store business, particularly the advertisement marketing related revenues. We have seen this growth driver coming both from the mature category such as beauty, education, healthcare and also from some new verticals, such as medical aesthetic category that I mentioned earlier. Besides the increase in the number of merchants, we also see a big room to improve in the up-value per merchant. With a more diversified product portfolio, we are able to now address much in-depth demands of the merchants into increasing our volume share. Currently, only 20% of our active merchants of the in-store business are using the CPC product, and only 40% of them are using our subscription-based services. And we both feel those penetration rate have ample room to grow. In addition, we also plan to add more advanced features to our existing products. For example, for transaction-based services, we added a membership discount card for foot massage service category, and added a multi-session package card for our beauty service categories. And for subscription-based services, we add an instant messaging and case showroom for high-ticket-size categories such as home decoration and wedding planning categories. Thank you. Very clear. Thank you, and congrats again. The next question comes from David Dai with Bernstein. Please go ahead. Thank you, Xing, Shaohui, Scarlett. Congratulations on a solid quarter. I just have a question on the new aggregated model of the car-hailing business. What are the goals for the initiative, and could you elaborate on the financial impact on the business model, and what is the progress so far? Thank you. The goal is simple, to continue build our platform, to expand our service offerings to consumers. As we mentioned, we feel our advantage lies in that consumer coming to us more often, purchase more, cross-selling to more scenarios, and the lifetime value increase. We all know that transportation is an important category. The car-hailing business address a decent portion of urban population's daily needs. However, in our earlier experiment in Nanjing and Shanghai, we are testing different ways, and we feel the aggregated model provide a better way for us to faster expand and to cover more cities to serve more consumers in a more cost-efficient way. The goal is to connect third-party car-hailing service providers onto our platform and build this marketplace capability for them to get access to our consumers, and to provide our consumers with a good selection of the car-hailing services. We think the aggregated model is more healthy from platform perspective. In the new business model, we plan to charge take rate from third-party service providers for aggregating demand for them, and we do not need to organize and manage driver supplies in this new model. We do not expect significant subsidy to drivers or significant marketing expenses for this new model. So far, we have already rolled out this model in 17 cities and may expand into more cities in this year. Thank you. Thank you. The next question comes from Alex Yao with J.P. Morgan. Please go ahead. Hi, good evening, management. Thank you for taking the call, and congrats on a strong quarter. I have a question on the cost reduction initiative you guys have achieved in the new initiative segments. Can you share with us a little bit more in terms of how you think about the cost reduction or narrowing the loss of Mobike and the strategic position of this business in your platform, especially given there are still competitors out there in the market which seems to be also doing okay? Thank you. Thank you, Alex. We believe that in the long run, bike-sharing business will help us expand our user base and enhance user stickiness and frequency, and bring cross-selling opportunities to our base on the location data. That is why we acquired Mobike. It takes some time to integrate Mobike with our platform and create more strategic synergies. Now we have already added the bike unlocking feature in the latest version of our Meituan app, our flagship app. In the future, we plan to make Meituan app as the sole entry point to access our bike-sharing service in order to direct more offline traffic to our online platform. In addition, we plan to rebrand Mobike as Meituan Bike so that we can enhance Meituan's brand awareness and traffic acquisitions through millions of bikes on the street. For us, short-term market share is not our priority. We focus more on how to create a strategic value for our entire platform and how to narrow the operating loss as much as possible. We have patience here. We have thoroughly reduced losses from our bike-sharing business in the first quarter. For revenue improvement, we already increased the monthly subscription fee and pay-per-use in some cities in the first quarter. We will continue to do experiment to refine the pricing measures to improve bottom line and reduce the free ride promotion. For cost and expenses optimization, firstly, most of the costs are depreciation of the bikes. We have adopted a 2-year accelerated depreciation policy when the transaction was completed. Although the actual lifespan for our bikes is 3 years or even more, you need to change the parts, but the frame is very durable. Therefore, starting from the second half of 2019, depreciation will significantly go down while we continue to operate at current scale with minimum fleet replacement. Secondly, the restructuring of Mobike in multiple overseas markets proceeded on schedule. Finally, we will also continue to leverage our operational expertise to lower OPEX per bike. We are still very confident that these measures could significantly improve the margin profile of our bike-sharing business, which can be a long-term addition to our platform. Thank you. This concludes our question and answer session. I would now like to turn the conference back over to Scarlett Xu for any closing remarks. Thank you, operator. We are now closing the call, so if you would like to see our press release and other financial information, please visit the IR section of our website. The playback of the webcast will be available shortly. Thank you very much. This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.