Hello, thank you for standing by for JD.com's second quarter 2017 earnings conference call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to hand the meeting over to your host for today's conference, Ruiyu Li.
Thank you, operator, welcome to our second quarter 2017 earnings call. Joining me today on the call are Richard Liu, CEO, and Sidney Huang, our CFO. For today's agenda, Mr. Huang will discuss highlights for the second quarter 2017. Following the prepared remarks, Mr. Liu and Mr. Huang will answer your questions. Before we continue, I refer you to our safe harbor statement in the earnings press release, which applies to this call, as we will make forward-looking statements. Also, this call including discussions for certain non-GAAP financial measures, please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Finally, please notice that unless otherwise stated, all the figures mentioned during this conference call are in CNY. Now I would like to turn the call over to our CFO, Sidney.
Thank you, Ruiyu. Hello, everyone. Thank you for joining us today. We are reporting another quarter of strong top-line growth, solid profitability, and remarkable free cash flow. Before I get into the financial highlights, let me first give you a quick update on JD Finance. We are pleased to announce the deconsolidation of JD Finance as a result of the legal ownership transfer of the business on June 30th, 2017. All of our financial metrics in the earnings release have been revised to exclude P&L impact of JD Finance, which is now reflected in a single line item for the discontinued operations. The financial highlights that I'm about to discuss are results from continuing operations, unless otherwise noted. As this is also the first quarter of the adjustments, I will also highlight a few metrics, assuming JD Finance is still consolidated, so you can have an apples-to-apples comparison.
During the second quarter 2017, our net revenue from continuing operations grew 43.6%, well above the 33%-37% company guidance excluding JD Finance. This represents an accelerated growth rate from both our Q1 and 2016 Q2 year-over-year growth rates. If we add back the impact from JD Finance, our revenue would have grown 45%. This strong growth was achieved through our highly successful June 18th anniversary sales season, supported by robust growth momentum across our full category retail platform. Our direct sales revenues grew nearly 43% in the second quarter, led by home appliance, food and beverage, cosmetics, home furnishing, and baby products. Our revenues from services and others increased 52% year-over-year, the fastest growth rate in the past four quarters, supported by higher advertising and marketplace commission revenues.
If we add back the revenues from JD Finance, our total revenues from services and others would have grown 68%. Our GMV grew 46% year-over-year in the second quarter. Growth from JD Mall was 45%, the highest growth rate in GMV over the past four quarters. Food and beverage, home furnishing, cosmetics, and baby products were the fastest-growing general merchandise categories, while key accounts from the top apparel and footwear merchants grew over 80%. As disclosed in the earnings release, during the second quarter, we reclassified fulfillment expenses related to third-party logistics services into cost of revenues to better match such costs with the associated revenue. As a result, both growth margin and the fulfillment expense ratio are retroactively adjusted and equally reduced by approximately 0.9%-1.1% over the past six quarters.
Reflecting the effect from JD Finance deconsolidation and the third-party logistics service cost reclassification, non-GAAP gross profit increased 44% in the second quarter, slightly higher than our revenue growth as we reinvested part of our gross margin back to our consumers during the June 18th sales season. Non-GAAP gross margin was 13.4%, up from 13.3% in the second quarter of 2016. Without the JD Finance spinoff and the logistics service cost reclassification, non-GAAP gross margin would have been over 15% compared to 14.6% in the same quarter last year.
Non-GAAP fulfillment expense ratio was 6.7% in Q2, which improved 26 basis points from 6.9% in the second quarter last year, as we continued to benefit from the operating leverage in our established logistics infrastructure, which was partially offset by our new investment in such areas as warehouse capacity for external customers and cold chain logistics network. Our warehouse space increased over 22% in the past three months from 5.8 million square meters in Q1 to 7.1 million square meters in Q2. Non-GAAP marketing expense ratio was 4.0% in Q2, higher than the 3.3% in the same quarter last year. In line with the level in the fourth quarter last year, when we ran our November 11th sales event with similar promotion intensity.
Our non-GAAP R&D and G&A expense ratios decreased 5 basis points and 12 basis points respectively compared to the same quarter last year, which reflect the operating leverage in spite of our heavy investments in logistic technologies and R&D talent. The non-GAAP operating margin decreased 18 basis points to 0.6% in the second quarter compared to a non-GAAP operating margin of 0.8% in the same quarter last year. If we compare our JD Mall non-GAAP operating margin with Q4 last year, excluding the effect from new businesses, we actually did slightly better in Q2 on the core operating margin. Our non-GAAP net income from continuing operations attributable to ordinary shareholders was CNY 977 million, with an increase of 59% on a year-over-year basis, despite our heavy investment this year.
Our free cash flow was exceptionally strong during the quarter, mainly benefiting from our non-GAAP earnings and our ability to improve our working capital on both inventory turnover and payable turnover days, the latter of which benefited from our annual supplier contract negotiation, which completed and took effect in the second quarter. We are pleased to see some solid improvement in the payment terms due to our scale economies. Yet our payable days continue to remain meaningfully shorter than our key domestic and international retail peers. For the trailing 12 months ended June 30th, 2017, free cash flow totaled CNY 29 billion or $4.3 billion, up 214% from the previous trailing 12 months. Many of you may not realize, this is roughly $3 per ADS.
We continue to expect our CapEx to significantly increase in the second half, given the remarkable free cash flow in the first six months, we are confident that our free cash flow for the full year 2017 will remain strong, which is at least another key metric, if not the more relevant one, to demonstrate the value of our business model. I would also like to mention that June 30th's cash balance on our balance sheet has not included the majority of the proceeds from JD Finance reorganization, as most of the proceeds are deposited in an escrow account as disclosed in the earnings release. Once we complete the standard SAFE procedures , the cash proceeds will be reflected in the investing activities on the cash flow statement in the future quarter.
I encourage our investors to read this earnings release carefully to capture the various changes in our financial statement presentation and the details of our spin-off transaction. We've tried our best to disclose as much information as possible. Let's discuss our financial outlook. We expect Q3 net revenue growth to be between 36%-40% on a year-over-year basis, excluding any impact from JD Finance for both current and prior year periods. This is a strong growth rate for a seasonally slow quarter, especially in light of the increased seasonality patterns that we have observed in Q2 and Q4 sales seasons. I'm pleased to raise our 2017 full-year non-GAAP net margin by 50 basis points to between 0.5%-1.5% to reflect the underlying strength of our core brick-and-mortar earnings, while still maintaining the full flexibility to reinvest.
We remain committed to investing heavily in our digital infrastructure and R&D talent, expanding our leadership as the largest retailer in China and creating the best experience for our customers, which in turn will create long-term value for our shareholders. This concludes my prepared remarks, and we can now move to the Q&A session.
The question and answer session of this conference will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed. The first question comes from Eddie Leung of Merrill Lynch. Please ask your question.
Hi. Good evening. Thank you for taking my question. I noticed that the GMV per order continuing to improve. Just wondering if you could share a little bit more on the underlying drivers of this trend. Did the trend applies to both 1P business and 3P business as well as to both electronics and general merchandise? Thanks.
Sure. Eddie. Yes, you are right. The average order size as well as average purchase size per customer has been steadily increasing. This is actually by no surprise as we continue to grow our user base, and at the same time, more and more of our existing customers are buying more. In the time of faster new user acquisition, the average or ARPU will remain relatively stable. As you continue to grow with the new customer adds becoming a smaller portion of your overall customer base, your average revenue per customer will naturally increase. This increase applies to all categories and both for 1P and 3P.
Your next questions comes from Alicia Yap of Citigroup. Please ask your question.
Hi. Good evening, Richard and Sidney. Thanks for taking my questions and congratulations on another solid quarter. My questions is related to your international partnership. For example, on Walmart, with your expanded cooperations with Walmart, can you share with us what kind of likely GMV or revenue upside that we could see, for example, from the inventory integrations and also the availability of the Walmart SKU selections now on the JD platform? Separately on these, for Walmart, any potential conflicts between the JD Walmart versus the Walmart and the Daojia O2O offering? Thank you.
Sure. For Walmart, we conducted a very successful August 8th joint promotion. We achieved remarkable sales results. I think it was more than 10 times of their average volume in the latest month. More importantly, also the order size increased more than 100% on that day. Walmart's collaboration with Dada also increased more than 200% during that day. We had a lot of great results coming out of the latest promotion, which is just one example of our enhanced collaboration. Because the new Walmart flagship store was just launched during the second quarter, the actual contribution to our overall GMV or revenue is still very, very small. The growth rate has been very, very encouraging. Also your question on Dada, there is no conflict at all.
In fact, we have seen very robust growth, not only on the number of stores connected to our JD Daojia mobile app, but also the average store sales through Dada has been growing at a really, really fast pace. We're very, very pleased to see the development on both JD side and also Dada side.
Next questions comes from Alan Hellawell of Deutsche Bank. Please ask your question.
Great. Thank you very much. Just with regard to the gross margin, we are obviously internalizing the reclassification of fulfillment expenses and then understanding the JD Finance deconsolidation. I think we flagged that 1P gross margins due to potentially particularly intensive promotions and rebating in the second quarter may not continuously trend upward. That, however, linked with what is the very encouraging lift in net margin guidance just leads me to wonder, how should we think about gross margins as we kind of move our way through these reclassifications as we move into the third and fourth quarters of the year? Thank you.
Sure, Alan. We mentioned on the last earnings call and also previous earnings calls that we do expect our overall core operating margin continue to improve on an annual basis from now on. You will see meaningful improvement on an annual basis for sure. This is why we are raising our guidance this quarter. Coming back to Q2, you mentioned about first-party gross margin. We had mentioned also in the previous quarter was that Q1 overall margin has exceeded our expectations, and we had a full intention to reinvest that excess margin back to our consumers through more promotions and return value to our customers. We did exactly that in the second quarter. You saw from our results that our top-line growth was very robust and that is exactly what we had hoped.
With our preset of internal budget for our bottom-line improvement, we will reinvest excess to maximize top-line growth. That has been our strategy, and that has not changed.
Next question comes from Eric Sheridan of UBS. Please ask your question.
Thanks for taking the question. Would love to get a little more detail about the partnership with Baidu on artificial intelligence, what you think might do for the platform medium to long term with respect to the deployment of big data and how that might inform the shopping experience. Thanks, Sidney.
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Yes. Mr. Liu was saying that after we had the partnership with Tencent, called Jing-Teng Plan, we had partnered with Toutiao, which has tremendous traffic on mobile internet, as we announced before. We also just partnered with Baidu. We in fact expecting another major collaboration in the near future. With the four strategic collaboration with probably the four most, the highest traffic entry points on mobile internet, we expect 100% penetration to Chinese consumers, or 100% reach to all the consumers in China. Having said that, these collaborations are still, especially with Baidu and Toutiao, are still in the early stage. We do have a lot to work with together with our partners. In the near term, you may not see very meaningful GMV contributions, but we are very confident with the broader reach to the Chinese consumers. We will have very meaningful results.
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Every quarter, for example, even with Tencent, we have continued to improve the quality of our data collaboration through both a lot of closer partnership and also artificial intelligence technologies. In that process, improve the ROI, the quality of our advertising results. We are also expecting to launch our Jing-Teng Plan 2.0, part of the Jing-Teng Plan. We can expect even better results for both data analytics and advertising results for both our brands and also for our companies to achieve better ROI.
Next question comes from Grace Chen of Morgan Stanley. Please ask your question.
Hello. Hi. Thank you for taking my question. My first question is about the Q3 guidance. We noticed that on a year-over-year basis, the Q3 sales guidance still represents very strong growth. The sequential basis Q3 sales guidance implies it is down probably around 10%-12% QOQ. This compares with 4%-6% sequential decline in the past two quarters. I am wondering whether this represents a new norm in the future given the more aggressive promotion in the second quarter. My second question is about the marketing dollars that we saw that the marketing expenses potential revenue increased a bit. Can you tell us what are the key product categories that we are focusing on in the past quarter? Thank you.
Sure. Yes. On Q3 sequential, it is actually the flip side of the Q2 sequential growth. I did mention on my remarks earlier that we have observed increased seasonality patterns over the past couple of years, where Q2 and Q4 will grow faster on top of a very strong previous sales season. As a result, the sequential movement will also see a slightly larger kind of hold back. It is becoming a new normal for sure. On the marketing dollars, I mentioned that even though it is 0.7% higher than previous Q2, in fact, if we use the same intensity, we will probably have been GAAP profitable. It is consistent with our Q4 last year's intensity of promotion. That marketing dollar is mostly actually spent on incentives to our customers, mainly for the marketplace business, because there is no direct sales revenue against the marketplace sales volume.
Any promotion incentives will go into the marketing dollars, and obviously other marketing activities during the sales season. It is actually quite consistent. We see a lot of similarities with the fourth quarter last year, both in terms of gross margin, operating margin, and also all the expense lines, if you take a closer look.
Your next question comes from Ronald Kwok of Goldman Sachs. Please ask your question.
Thanks. Hi, Richard, Sidney, and Ruiyu. I just want to ask about your apparel strategies. Could you share some of the initial, I think it's targets or some targets that you've set with Farfetch through your investment, and whether you would focus more on growing the apparel segment through organic or are open to any acquisitions to grow the apparel segment further? Thank you.
Yes. Our investment in Farfetch is really part of our effort to fulfill the demand of Chinese consumers for luxury products. In fact, we are also preparing for our own luxury platform to be launched later this year.
You may wonder, we have two platforms, would they be competitive or have any conflict? We believe there won't be, because the specialty for Farfetch is they have collected a huge number of boutique stores around the world. The product selections on the Farfetch merchants are quite unique. We have observed that vast majority of those selections are not available in China. For JD, our own planned luxury platform will be focused on luxury products available through the official channels in China. Of those, basically the Chinese subsidiaries of the global luxury brands. We believe you will require both approaches, both means, or both types of selections to meet the rising demand of Chinese consumers for luxury brands. If we see more similar opportunities, high-quality platforms like Farfetch, we clearly don't rule out the possibility of other investments.
Obviously, we will continue to pay more attention to our own apparel and footwear business. This is one area, as we mentioned previously, we were trying to make some adjustments since last year to eliminate the brushing activities. This happened to be the area. The category where brushing activities are more prevalent throughout China. We continue to enhance our technologies to detect these kind of activities. At the same time, our focus this year is to the key accounts, as I mentioned earlier, and make sure that they are successful on JD's platform, and using those key accounts to facilitate the growth for medium and smaller merchants on our platform. If we don't focus on the key accounts, we think the current traffic may not support the entire merchant base, especially for this particular category.
This is our strategy. We have seen very, very positive results out of our key accounts growth rate, which in turn is bringing more traffic to us for the mid-sized merchants as well. Right. One side benefit of anti-brushing effort is actually benefiting the key accounts and major brands. Major brands do not conduct those activities. As the smaller merchants traffic and the activities reduce, the major accounts will actually benefit from enhanced exposure. Yeah. In sum, our apparel category has now reached a very healthy state, which is what we had hoped and worked for. We are expecting a very healthy growth trajectory from now on.
The next question comes from Chi Tsang of HSBC. Please ask your question.
Hi, this is Chi Tsang. Thank you very much for taking my question. I was wondering if you could comment on what type of data you might share with your 3P merchants to enable them to drive higher conversion on your marketplace. In particular, what type of customer segmentation and targeting can you offer? Thank you.
Yes. We've mentioned before that we have been improving the data analytic tools for our merchants. In this area, because we are relatively younger in the marketplace business. Over the years, we have collected and developed many very useful tools for our merchants. This year, you will see more and more of those products being introduced to our merchants, especially key accounts. We're making very good progress.
Next questions comes from Jing Yuan of Mizuho Securities. Please ask your question.
Thanks, guys. Sidney, did I hear you correctly? The JD Finance impact was about 200 basis points, where gross margin would've been over 15% if it was included. Should that be the same impact in the second half of the year, or is there a certain seasonality regarding the impact of JD Finance? Thanks, guys.
Yeah, no problem. The impact is from two elements. One is JD Finance, and the other is the reclassification of third-party logistics service cost which was grouped in fulfilling expenses. For that line item, it's roughly 1%, as we actually previously always mentioned. This time, we actually did a lot of detail work to allocate in a more methodical way so that we can reclass them back into the cost. That has roughly more or less 1 percentage point impact. Then the remaining is from JD Finance, which should be around 60, 70 basis points.
Next question is from Zorita of Credit Suisse. Please ask your question.
Thanks, management, for taking my question. We've seen very strong cashflow this quarter. Since we still carry Buy Now Pay Later receivables and the related non-recourse securitization debt on your balance sheet, could you elaborate the cashflow impact in this quarter from the deconsolidation from JD Finance? Thanks.
Sure. Yeah. The deconsolidation itself doesn't result in any operating cashflow for continuing operations, nor any impact on free cashflow. All the free cashflow we discussed are from continuing operations. The JD balance remaining on balance sheet, we actually had a footnote underneath the balance sheet explaining there are really two very technical elements that prevented us from deconsolidating JD. One is essentially the legal permit. Right now, the JD Mall has the permit. Two is, there's some technical aspect for securitization, which actually could potentially be resolved in the future quarters. In any event, as JD Finance is positioned as a finance technology company, so we expect future additional volume will more and more actually coming from our banking partners, rather than from our own balance sheet. Also, this has been true even before spin off.
All the economics, basically all the rewards and the risks, have been passed to JD Finance. Even though we continue to carry JD Baitiao and the securitization on our balance sheet, all the economic benefit and the cost will no longer and has not been part of the JD P&L.
Next questions comes from John Choi of Daiwa. Please ask your question.
Good evening, guys. Thanks for taking my question. I have a question, your free cash flow right now, because if you look at your free cash flow for the past trailing 12 months, it's been very strong. It seems to me, as you've mentioned in your earlier remarks, that the CapEx should be more or less towards the second half this year. At the same time, Sidney, you mentioned that your free cash flow should remain pretty strong. Can you elaborate a bit more about how should we think about the CapEx and also the overall operating cash flow towards the second half this year? Also, just quickly on the key categories. I've noticed that apparel cosmetics have done extremely well the past couple of quarters. What could the management do further in order to further enhance these categories?
Do you have to invest more or do you have to also think about strategic investments in other companies? Thank you.
Sure. On free cash flow, as I mentioned, it's also partly because we had our annual contract renewal in the second quarter, so much of the new payment terms became effective in the second quarter, which benefited our payment turnover days. Also our inventory turnover days was well under control. Again, in fact, with our increasing scale, the average payment, even on a trailing four-quarter basis, you saw a decline in inventory turnover days. If you look at it just one quarter, the improvement was even more notable. It's really a very remarkable quarter. When I said earlier about full year 2017, as I commented before, when you look at a cash flow, you should look at on a trailing 12 months or trailing four-quarter basis because there will be volatilities between and among the quarters.
I was referring to full year 2017, obviously, which will benefit from our Q2 free cash flow. CapEx, as we mentioned before, we will see more spending in the second half. Once again, when we actually incur those, we believe investors should be thankful because normally we will get very good deals from the government because we are creating jobs for this local municipality when we acquire land in their jurisdiction. Normally come with those land acquisition, we'll get a lot of benefit, not only very cheap land price, but also a lot of other government support locally. One example for our logistics headquarters in Xi'an, the government actually gave us one office building. It's just one example where when we actually start securing those local partnership, you will see a lot of benefit to our shareholders.
Next questions comes from Alex Yao of J.P. Morgan. Please ask your question.
Hey, thank you management for taking my question, and congrats on a strong quarter. I have two quick ones. One is on the revenue side. You guys have been showing a lot of the strength in the past few quarters and the revenue accelerated in this quarter. Can you help us to understand what are the key drivers for the strength of the revenue growth? How sustainable can we think of the top line strength? Apparently, there are a number of things you guys are benefiting from, such as the structural migration from offline transaction to online, expansion of core category into FMCG and low base last year, et cetera. In terms of the importance to the top line, what are the key drivers among the underlying reason? Secondly, can you give us updated thoughts in terms of how are you approaching the offline opportunities?
Apparently, you guys are doing a number of new initiatives this year, including building the convenience store network nationally. I think there are also a number of other things you guys are currently exploring. Can you give us updated thoughts in terms of how you approach this offline opportunity? Thank you.
Sure. Based on the first question, I think sales growth has always driven fundamentally by better customer experience. Over the years, we continue to improve that. The growth is really an outcome. I think in the end, it's all about continuously improving customer experience. Part of that is benefiting from our scale economies. As we mentioned in the past that, with the scale economies, we can continue to be able to offer every day low price, and very attractive promotions and incentives to continue to attract new customers and also reward our existing customers. There's really no other metrics because sales growth are coming from all categories. It's not about any particular category, not about any kind of unique events impacting any of the particular categories. That's why we continue to be quite optimistic for our future growth.
For the offline opportunities, I think we talked about, we are in fact the pioneer in our O2O initiative in China, starting from our Jingdong Daojia initiative, by connecting offline supermarkets to a location-based mobile app. We have seen very encouraging growth. In fact, we start to see some deflection points in that business as volume continue to improve in a very dramatic way. The same-store sales for Walmart and Yonghui, for example, on Dada, has been growing at an exponential kind of way. That's the first initiative and continue to gain traction. The other areas, as Richard mentioned on the last earnings call, we essentially leverage our existing capabilities, whether it's from our supply chain or from our user reach, to create really more customer interface.
In addition to Jinguanbang, for example, we had in the past, we are introducing JD Home concept stores, which specialize in selling electronic products. Comparing to, for example, Apple Store, which is a single brand concept store, we have the benefit of having multiple brands, having their best products in those very chic showrooms. We see some very good initial success in those initiatives. All of those initiatives are franchise based. They are asset light. It will not cost a lot of heavy investments.
Next question comes from Natalie Wu of CICC. Please ask your question.
Hi. Good evening. Management, thanks for taking my question. For the payment-related costs, given that JD Finance already deconsolidated, so just wondering which line will the settlement-related fee go, costs or expenses? If Sidney Huang could share with us the gross profit margin for direct sales in the second quarter of 2017, annual to annual basis, that would be great. Thank you.
Yeah. On the payment-related cost, part of the fulfillment expenses. They have always been in that line. With the deconsolidation, you're right. Whatever we pay to JD Finance, will be reflected in the fulfillment expenses, while historically, that amount will be eliminated at consolidation. For the gross margin, as I mentioned, we don't necessarily look at quarter by quarter, especially given that Q1, we well exceeded our internal budget. We had mentioned, and we in fact reinvested during the second quarter. I think, it may be better to look at a trailing 12-month basis, just like cash flow, going forward. We are committed to steadily improving all of our core margins on an annual basis or on a trailing 12-month basis.
Next question comes from Jialong Shi of Nomura. Please ask your question.
Hi, Richard, Sidney, and Ruiyu. Good evening. Thank you for taking my question. I would like to ask Richard a question. I would like to hear his thoughts on the private brand e-commerce sector, such as NetEase Kaola and NetEase Yanxuan. How does Richard see the market potential and potential of this sub-sector of private brand e-commerce like Yanxuan? In the future, does JD have any plans to develop in this area? In addition, I would like to quickly follow up on a previous question about the cooperation with Baidu. I would like to ask, in this cooperation, how does JD pay Baidu this kind of traffic fee? Is it according to the CPC model of search advertising?
[Non-English content] I would like to ask Richard for his colors on the private label e-commerce like what NetEase Yanxuan is doing. I just wonder how Richard thinks of the outlook and the potential of this private label e-commerce service. Will JD have any plans to enter this niche market in the future? Thanks.
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Richard said the NetEase Yanxuan model is actually quite interesting and it's a good model. For JD, because we are a full category retailer supporting numerous brands, so our priority is continue to support our brand partners and in the foreseeable future. However, we are experimenting in a smaller way for quite a few categories of our own private label products.
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In comparison to a full category retailer like JD.com, despite how successful it could be for private label business, it would as a very small part of overall business volume.
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We will continue to explore private label initiatives. Over a longer term period, we expect it could become a somewhat meaningful part of our business.
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For the strategic collaboration with Baidu, because it's strategic and a comprehensive collaboration, so there will be many areas of collaboration with different types of collaboration models. With those models, they will have different fees or revenue in terms of whether it's a CPS or a CPC. In the end, we believe the collaboration can significantly improve the ROI and also enhance the traffic and our user base.
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We believe it's a win-win partnership for both of us, where Baidu can expect a very meaningful increase in advertising revenue, and we can expect a much higher quality of advertising spending and ROI.
Next question comes from Eric Wen of Blue Lotus. Please ask your question.
Hi. Thanks management for taking my question, and congratulations on the good quarter. Question on the logistics side. I noticed that we had launched a few initiatives on the logistic area, and one of those initiatives is the collaboration with SF Express. Regarding the use of pickup cabinets, I just want to know how the reception of our customers towards picking up their deliveries from the cabinets. Since I noticed that we also have our own pickup station, I want to ask, what is our view towards the pickup and its future in the delivery industry? Lastly, if I can clarify if JD Logistics reduced our margin by 1%, and the fulfillment cost we classified is CNY 2.6 billion, what is the revenue size of JD Logistics under this calculation? Is the loss mainly G&A or marketing? Thanks.
Sure. For our collaboration on the self-pickup cabinets, we actually had our own small network as well. This is nothing new. We actually call our customers before we put any of the packages into those self-pickup cabinets. It's only at the permission of our customers that we'll do that. Increasingly, we see, especially for working professionals, that they may not be at home during the working hours, or they could be stay out fairly late. There is a demand for consumers for those type of drop-off services. This is also very similar for our own self-pickup locations. Again, these are all based on consent from our customers before we will actually put their products, drop off their parcels in those locations. We do think this is potentially one interesting last-mile alternative.
It also helps save cost because it will clearly improve the efficiency of our delivery men. Again, this will be based on the prior consent for our customers on a case-by-case basis. For logistic revenue, we had mentioned in the past, we have been running our third-party logistic services on a more or less breakeven basis. Obviously this is not 100% flat based on the cost. There will be potentially some volatility among different quarters. Altogether, it should be quite close to a breakeven basis.
Next questions comes from Ella Ji of China Renaissance. Please ask your questions.
Sorry, I don't think we can hear you.
Hello?
Hello.
Hello.
Yes, now we can hear.
Can you hear me now? Okay.
Yes.
First I have a quick follow-up regarding the sales and marketing spending. Sidney Huang, you mentioned that the current quarter spending pattern is similar to 4Q last quarter. However, that was comparing to 2Q last year, it was an acceleration. I wonder, looking forward, given that the current market competition is still strong, should we expect that 4Q this year, the sales and marketing spending will likely be even higher than the 2Q level? My second question is, overall this year insofar, the online retail sales, the market has been very strong, especially in certain categories, including home appliances. I wonder if management can share your insights. What do you think are the drivers that help driving up the whole online market acceleration? Thank you.
Sure. I think the first one, we invest and run our business based on our own business fundamentals. If you look at when we continue to improve our underlying strength of the core business, we do have more and more resources to reinvest and give back to our consumers. I mentioned Q4 is obviously, we also had a very robust quarter of growth. The additional investment in sales and marketing provided very good ROI, and similarly for Q2 as well. I think we will also formulate our strategy in the second half, but this is not necessarily in reaction to any competition. I think we first and foremost is to really follow our own business logic in running our business.
On the overall acceleration of online sales, I think it does reflect, again, I think it's similar to my earlier comments about retail business in the end is about customer experience. I think overall the online retail and e-commerce market or players has been obviously providing very good value proposition to our consumers in China. I think this is fundamentally what's driving the accelerated growth. Obviously, the healthy economic environment is also helpful. Overall retail consumption volume has also been quite stable, driven by the fundamentals we had mentioned before about stable employment rate, rising salary, and also the high savings rate among the consumer.
The next question comes from Wendy Huang of Macquarie. Please ask your question.
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The first question is about your logistics business. Can you give us some update about the percentage of your third-party merchants using your warehouse and fulfillment? Also with the reorganization of your logistics business, are you also opening it to any third-party platforms merchants such as Taobao merchants? Second question is about your collaboration with three Internet companies Tencent, Toutiao, and Baidu. Given the high user base of those companies and also the overlap of their user base, are you actually seeing any difference in terms of the users or the shopping behaviors that you can actually acquire through their channels? Thank you.
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Right. The reason we open up our logistics platform of capabilities as a result of seeing tremendous demand from the brands for logistics services. JD happened to have built a very strong logistics network not only on the small-medium sized products, but also big large appliance products, cold chain logistics, and also O2O outsourcing logistics. We are best equipped to fulfill these needs. We have seen, for example, apparel brands requiring services to ship their products to various store locations and also their official stores requiring logistics services to serve their consumers and also O2O initiatives where consumers place orders and their stores can help fulfill. There will be a lot of demand in all channels for our services.
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Yes, in the past, the brands, because of these different requirements, will have to contract very different types of logistics service providers. Because JD has all of these services available or capabilities available, we can offer a one-stop solution to these brands.
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Although we only open our services in two months, we have already seen a lot of big brands approaching us or using our services. We are pretty confident, even just for the first year, we can probably achieve CNY 600 million of revenue.
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We will expect over 100% growth next year, and also decent profitability for this business. More importantly, in addition to the traditional services where we can offer one-stop solution, we can also utilize our big data to help these customers to enhance the efficiency of their supply chain. When that objective is accomplished, there will be huge win-win opportunities for both of us.
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This kind of big data analytic capabilities is not currently available with existing logistics service providers. We are very, very uniquely positioned to take advantage of this demand. For this reason, we believe our business could be very, very profitable over the long term.
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Yes. For the differences between those different platforms with Tencent or Baidu, even though Tencent has this huge amount of customers, because different mobile Internet destinations have different value propositions, customers going to different sites for different purposes and using their different products. For that reason, we continue to see very different insight when working with different partners.
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Yes. We hope in the end, our advertising products can be available in all different channels, not only in WeChat, but also in search engines and in the media and video streaming products and games, yes.
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Yeah. Also, cyber safety products, for example.
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Yeah. We believe with those multiple channels of collaboration, we can optimize our advertising quality and ROI, and creating win-win solutions for everyone.
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Yeah. After we collect the user behavior in all these different channels, we can also better analyze and utilize those data to better target these customers.
Thank you. We are now approaching the end of the conference call. I will now turn the call over to JD.com's Rui for closing remarks.
Thank you, operator. Once again, thank you for joining us today. Please feel free to contact us if you have any further questions. Thank you for your continued support, and we're looking forward to talking with you in the coming months.
Thank you for participating in today's conference. This concludes our presentation. You may now disconnect.