Hello, thank you for standing by for JD.com's first quarter 2017 earnings conference call. At this time, all participants are in listen only mode. After management's prepared remarks, there will be a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would like to turn the meeting over to your host for today's conference, Ruiyu Li.
Thank you, operator, welcome to our first quarter 2017 earnings call. Joining me today on the call are Richard Liu, CEO, and Sidney Huang, CFO. For today's agenda, Mr. Huang will discuss highlights for the first 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. This call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most direct comparable GAAP measures. Please note that unless otherwise stated, all the figures mentioned during this conference call are in RMB. I would like to turn the call over to our CFO, Sidney.
Thank you, Ruiyu, hello everyone. We are very pleased to report a milestone quarter with not only solid revenue growth but also record GAAP and non-GAAP profitability. Our net revenue grew 41.2% in Q1 2017, supported by better-than-expected growth momentum across all of our key categories. Our direct sales revenues grew nearly 40% in the first quarter, led by food and beverage, cosmetics, home appliance, and baby products. Our revenues from services and others increased 62% year-over-year, supported by higher advertising revenue as well as income from financial services. Excluding the impact from JD Finance, assuming the spin-off had taken place, our net revenue would have grown 39.8% on a year-over-year basis. We disclosed this pro forma revenue growth rate in the earnings release as it is relevant to our investors as we anticipate the completion of the JD Finance reorganization.
If the spin-off is completed in the second quarter, we will begin to deconsolidate the JD Finance financial results in the second quarter and move it into a single line item called income or loss from discontinued operations on our income statements. In that case, JD Finance revenues will no longer be included in our consolidated revenues, while certain marketing services provided by JD.com to JD Finance would be recognized as part of our consolidated service revenues. Investors should use the pro forma revenue growth when modeling your 2017 growth projections. Our GMV grew 42% year-over-year in the first quarter as we continue to focus on the quality rather than quantity of our marketplace operations. GMV from general merchandise categories grew 48% during the quarter.
Food and beverage, home furnishing, cosmetics, and baby products were the fastest-growing general merchandise categories, while our top brands from apparel and the footwear categories grew over 70% as we improved traffic towards high-quality merchants. GMV from electronics and home appliance products grew 37% during the quarter, led by the home appliance category. Gross profit increased to 58% in the first quarter, which continued to reflect the healthy monetization of both our 1P and 3P businesses. Gross margin for our direct sales revenue improved over 100 basis points from a year ago as a result of increased economies of scale across all key categories, which was the biggest catalyst of the gross margin expansion. JD Finance was the second-largest contributor to the improved gross margin, followed by our advertising business.
The JD Finance gross margin was somewhat overstated because part of the interest cost was due to the JD parent company, which is eliminated in our consolidated financial results. Excluding JD Finance, our gross margin would be lowered by 68 basis points in the first quarter. Non-GAAP fulfillment expense ratio was 7.5% in Q1 compared to 8.2% in the same quarter last year. The lower fulfillment expense ratio was attributable to the operating leverage in our nationwide install base in the logistics infrastructure, the improved average ticket size in our first-party business in the first quarter, and the higher base last year before merging JD Daojia into Dada. The non-GAAP operating margin improved to 2.2% in the first quarter compared to a non-GAAP operating loss in the same quarter last year.
Of the 270 basis point margin improvement, roughly 160 basis points are attributable to JD margin improvement, while the remaining from reduced losses of JD Finance and impact of the Dada merger with JD Daojia. Our GAAP operating margin also had a 270 basis point improvement on a year-over-year basis and has turned a positive to 1.1%. The difference between our GAAP and the non-GAAP operating income was RMB 823 million, or 1.1% of our net revenues. Our non-GAAP net income attributable to ordinary shareholders also reached a new record of RMB 1.5 billion, with a net margin of 1.9% in the first quarter. Our GAAP net income was RMB 239 million with a net margin improvement of 200 basis points. The non-GAAP EBITDA reached RMB 2.2 billion with an EBITDA margin of 2.9%. Our free cash flow remained strong.
For the trailing 12 months ended March 31st, 2017, free cash flow totaled RMB 16.8 billion, up 120% from the previous trading 12 months. As previously emphasized, there is a delay in our logistic-related CapEx plan due to the lengthy process of acquiring land in China. We expect our CapEx to significantly increase, and as a result, our free cash flow will likely decline in the remainder of 2017. Before I discuss our financial outlook, let me give you a quick update on the JD Finance reorganization. Based on the current progress, we expect the deal to likely close within the second quarter, so our Q2 results from continued operations will likely exclude JD Finance. As mentioned last time, we expect to receive RMB 14.3 billion in cash as part of the transaction.
While the gain from this transaction will be booked directly in the equity section without any P&L impact, it is a real financial gain to our shareholders. Let's discuss our financial outlook. We expect Q2 net revenue growth to be between 35% and 39% on a year-over-year basis. Excluding JD Finance, the revenue growth would be expected to be between 33% and 37%. This guidance reflects our solid growth momentum from a seasonally strong quarter last year. Finally, I would like to say a few words on our profitability. We are obviously pleased with the healthy profit achieved in the first quarter. However, we would like to caution our investors that the Q1 results are not necessarily an indication of our run rate earnings in the remainder of 2017. First, we have various new business initiatives in our aggressive expansion plan, which will drive long-term growth and shareholder value.
Second, the Chinese e-commerce market remains highly competitive. We remain committed to returning a meaningful portion of our incremental gain from the scale economies back to our customers. Therefore, our quarterly earnings will likely be lower in one or more of the next few quarters. Nevertheless, our Q1 profitability does confirm and reinforce our conviction that our business model is stronger than ever. Our unwavering focus on superior customer experience will pay off for our long-term shareholders. This concludes my prepared remarks. We can now move to the Q&A session.
The question and answer session of this conference call will start in a moment. In order to be fair for all callers who wish to ask questions, we will take one question at a time from each other. If you have more than one question, please request to join the question queue again by pressing star one after your first question has been addressed. Your first question comes from Eddie Leung of Merrill Lynch. Please ask your question.
Hi. Good evening. Thank you for taking my questions. I would like to have two very quick questions. The first one is, we noticed that the GMV per all our fulfilled orders is kind of going up year-on-year. Just wondering why the ticket size can improve in this quarter. Is it more a mix shift kind of thing? Any color would be helpful. Secondly, Sidney, you mentioned that we need to be a bit cautious on the upcoming quarterly earnings for the rest of the year. Just wondering if you could give us a bit more color on what cost items might increase relatively to the first quarter in a bigger magnitude. Thanks.
Okay. On the ticket size, we did notice a year-over-year improvement actually since the Q4 last year. Partly it is because our electronics categories are also growing at a very fast pace. The previous mix shift towards general merchandise at least the impact is becoming smaller. Secondly, our general merchandise categories, namely FMCG products, we do see ticket size improving meaningfully as well. This is definitely driving, at least in part, to our improving fulfillment expense ratio. As we mentioned in the past, the objective for us to invest in FMCG and our conviction in this category is partly dependent on our ability to drive the ticket size up as consumers form their habit of buying groceries online. The recent trend is definitely very encouraging as we see consumers buying more and more in each order. We do see the improving ticket size across all categories.
Despite of the mix continue to shift towards general merchandise categories, our overall first-party ticket size on average has also been improving over the last two quarters. On the cautionary note on P&L, I think it is really more of a general note. I think we do have a very good first quarter. Keep in mind, first quarter has generally less promotional activities. Second quarter, for example, when we invest in our annual sales event on June 18th, we will return a lot of value back to our consumers. As I mentioned earlier, there are also a number of new strategic initiatives that we have planned for this year, and some of them have not started or are only starting. The full cost of those initiatives have not been reflected in our first quarter results.
I think this is more of a general note rather than a very specific forecast for the next few quarters.
Your next question comes from Alicia Yap of Citigroup. Please ask your question.
Hi. Good evening, Richard, Sidney, Ruiy u. Congratulations on the strong set of results, thanks for taking my questions. My question is actually related to your disclosed new business line, excluding JD Finance on that revenue line. It seems like this quarter, there is about 900 million RMB or so in this line. Is that mainly related to your revenues from your Indonesia subsidiary? Can you remind us, is this Indonesia subsidiary mainly is a 1P business? Also kind of related to that, what is management view on the potential for Indonesia market going forward and overall plans and strategy there? Any comments on the recent reported news about JD potential investment into Tokopedia? Thank you.
Sure. Yes, you noted this detail. It is really the remaining new businesses outside of JD Finance. It includes our overseas businesses including Indonesia and also some other new business initiatives. We didn't break out in details, but the Indonesia operation is part of that. We are actively looking at various opportunities in the Southeast Asia region, but we don't comment on any market rumors on any particular transaction.
Let me elaborate a bit on our Southeast Asia strategy. For Indonesia, we expect for the next five years, we will be focusing on building out the basic infrastructure, including warehouses and the last-mile delivery network. In those five years, we are not really focused on building up the GMV or number of orders. The key is to build a very solid infrastructure, both logistically and on the fulfillment and procurement. Everything very crucial to build a superior customer experience.
If we can replicate our superior customer experience in China, I'm sure we will achieve similar success in Indonesia.
Your next question comes from Alex Yao of JPMorgan. Please ask your question.
Hi. Good evening, everyone. Thank you for taking my question. I have a question on 1P margin. If my math is correct, 1P margin improved by 80 basis points this quarter. To what degree is this margin improvement driven by category mix change, and to what degree is it driven by same-category margin expansion? How sustainable is this 80 basis points margin improvements on a year-on-year basis for the rest of 2017? Thank you.
Right. I mentioned earlier, actually, our first-party gross margin improved over 100 basis points, and we have seen over 100 basis point improvement at least for the last four quarters, if I remember correctly. This is definitely a quite sustainable and consistent improvement. Now, maybe after the four quarters, we reach some sort of anniversary. I cannot guarantee you on a forward basis. As I mentioned, because we are still building out our scale and a number of categories we are not the biggest in the country. Even with the categories that we are already the market leader, we can continue to improve our gross margin by working with our partners to come up with special promotion programs or exclusive launch of new products, for example. These are all creative approach and opportunities to continue to improve our gross margin.
As Richard actually commented a few quarters ago, when we reach a market leadership position, not only we can grow our margin because of scale economies, but we can also grow even stronger on the volume. I think in the last two, three quarters after his comment, we actually saw great validation on that point. Again, the growth came from across the categories, and the margin improvement also came from all the key categories.
Your next question comes from Alan Hellawell from Deutsche Bank. Please ask your question.
Thank you very much. Congrats on the quarter again. In FMCG, where has subsidy intensity trended as a % in GMV? Where might we expect it to go for the balance of the year? Could you also give us an updated sense of what we should assume the new Dada equity loss pickup should be for 2017? Finally, what % of 1P GMV might now be apparel? What is our longer-term target? Thank you.
On FMCG, it's actually one of those categories we are still a few spots away from number one. As I mentioned again earlier, when we grow in a very meaningful way, we see tremendous incremental rebates from our suppliers. We don't have to cut back on our promotions. We don't have to sacrifice our everyday low price, but our margin will improve naturally as we grow our scale. We have also implemented some policies to encourage consumers buying bigger basket, which also improve the overall economics of the FMCG category. It is still burning money, burning very significant money, and we are committed to continue to invest in this category. Nevertheless the profitability from our other categories will be more than sufficient to support us to combat whatever the battle is required to win this category.
On the Dada pickup, as I mentioned earlier. Obviously, we don't control the business. We don't try to influence its operations. Management has full discretion on carrying out its own strategy. Just for your own purpose of modeling, you could assume roughly RMB 100 million on a non-GAAP loss on a monthly basis, which has not changed for the last few quarters when I guide this. For the first party GMV from apparel, I can tell you it's growing very fast, but it's off a very small base. We are very optimistic about this category because, in fact, senior management, including Richard, has personally visiting many of the top brands around the world, and we have seen great interest from these top brands eager to work with JD.com as we present probably the most credible And most quality-focused platform in China for e-commerce.
Your next question comes from Evan Zhou of Credit Suisse. Please ask your question.
Hi. Good evening, Richard, Sidney. Really, thanks for taking my questions. Congrats on very strong set of quarters. My question is regarding our operating expense leverages. Starting specifically on fulfillment, I think we've seen pretty disciplined extraction of leverages for this quarter. Just wondering, can we kind of assume this to continue or any further investment into, like Sidney mentioned, the CapEx investment may have some impact onto this cost items down the road? Also on technology and content, I think Richard has been pretty vocal about we're going to invest pretty actively in technology in the following years. This quarter also seems to be I think this cost center seems to be pretty high.
Just wondering, regarding your comment on further investment initiatives, especially on the technology side, what should we kind of expect for the major items, and how should we kind of quantify the impact on this line down the road? Thank you.
Okay. First on the fulfillment. It depends. The trend will depend on our ability to continue to drive efficiency. We have built out our nationwide logistic infrastructure over the past three, four years, to the lower tier cities. In that process, we have invested basically in low order density areas. Once we have the installed base, as we grow our volume, the average efficiency ratio or for example, for delivery, average orders per delivery man will naturally improve. That's one driver for additional fulfillment efficiency. Then two is, as I mentioned, on ticket size. There are various ways to encourage consumers to buy more. Those will be the two key drivers for further fulfillment leverage. Having said that, we are also investing in this area.
For example, cold chain is one of the major areas for us to invest aggressively this year, which will be a slight negative to the fulfillment expense ratio. On the R&D, the key investment will be talent. This is actually one of the areas that I mentioned earlier that we are starting, but it is far from finishing. We will continue to hire many, many more senior talent from around the world, in areas that are critical for our long-term growth. We are expanding our Silicon Valley office, for example. We are also hiring senior talents from other parts of the world. On that part, you will probably see even higher growth in the R&D expense line.
Your next question comes from Grace Chen of Morgan Stanley. Please ask your question.
Hi. Thank you for taking my question. My question is about your margin trends. Can you share with us your non-GAAP operating margin in the mid to long term? I can understand that there will be quarterly fluctuations over time due to seasonality or investments for the future, but I am wondering what will be your margin target in the mid to long term. For example, in the next two to three years, what will be the key drivers to achieve your margin target? For example, like 1P margin expansion on back of scale or category mix change or like 3P take rate increase. Can you help us rank these drivers in terms of impact? Also, if you can walk us through your thoughts about the logistics spending required in order to support the scale and margin targets, that would be great. Thank you.
On the margin trend, I think we do not comment on the short term, but I think medium to long term, we have spoken in the past. If you look at our first-party business, we like to compare our current gross margin for the direct sales business versus the top offline retailers. Our gross margin today is still lagging behind, on average, roughly 10+%. This presents great opportunities for us to continue to improve the gross margin, not at the expense of customers, but really from continue to scale economies, volume-based rebates, and also creative joint programs helping our top partners. This is on the gross margin. Then on the expense line, you probably saw our investor slide where we compare our JD mall expense ratio with the top offline retailers in China.
We still enjoy a five to six percentage point advantage on overall expense ratio. This is really the key drivers for our long-term profitability, because we can operate more efficiently than our key competitors, we can afford to offer everyday low price to our consumers while we can still earn a decent profit. Coupling with those two metrics, you can comfortably project our first-party net margin should be at least similar to the best offline retailers, which traditionally ranging from, I guess, 3%-5%. If you consider the more competitive environment, you take a haircut, you still get 2%-4%. On top of that, you will have the marketplace business, which has a good benchmark in China and in the U.S. If you take the net margin of GMV, you get somewhere around 1%-2% as the net earnings.
You can translate that into a margin based on revenue. You add those two together, you can come up with the long-term margin target for our business. That's before we consider any other new business lines. Yeah. In the long term, our net profit margin will clearly be higher than any of the offline retail players.
Your next question comes from Jin Yoon, Mizuho Securities. Please ask your question.
Hi. Good evening, guys. In recent past, I think you guys mentioned that GMV and revenue growth gap should close, which it has. With incremental contributions from FMCG and groceries, and coupled with low base on the 3P side from last year, should we expect the GMV side of the equation to grow meaningfully faster than revenues going forward? Perhaps you could give us some color on this relationship in the near term as well as the long term. Thanks.
I think the near-term GMV growth rate slowed down, because we have been focusing more on the quality rather than quantity of the numbers. This has been consistent over the past three, four quarters. We do foresee this will still continue to some extent, given that a lot of the activities, again, as we mentioned earlier, you develop your system to catch some of the brushing activities, because it has become a sophisticated industry, the brushing agents will continue to come up with new tactics. We want to maintain the integrity of our platform, so we'll keep new technologies to continue to crack down. Having said that, you should expect GMV on a medium to long-term basis, growing faster than our revenue, given the long tail categories do present a better opportunity for longer term growth.
Your next question comes from Ronald Keung, Goldman Sachs. Please ask your question.
Thank you for taking my question. Thank you, Richard, Sidney. It's a very strong set of results. Just want to ask a bit on your offline, online initiatives. We heard about the grant scheme for the 1 million convenience stores over five years. Any updates on the Xintonglu unit? We also read about the 5,000 maternity stores and the 10,000 home appliance stores. Different periods and different targets, and mostly under this franchise model, would love to hear any updates on each of these three initiatives and some of the mid and long-term targets for these in contributing to revenue and profits. Thank you.
We actually started from last year, various initiatives to focus on a bridge between online and offline. In addition to what you have seen, such as 1 million convenience stores and over 2,000 JD Bang home appliance service centers and also hundreds of JD Home, Jingdong Zhijia new stores. We are also working on some other new initiatives that have not been publicly announced. First of all of these offline initiatives, they are on a franchise model, so they are not asset-heavy. It's actually a relative asset-light model.
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There are several characteristics for these initiatives. One is they tend to be in the highly dense population areas, or they are in areas where it's difficult to reach by e-commerce, such as rural areas.
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We will enable these franchisees in several fronts, including our brand, our supply chain, and our procurement, and also our logistic capabilities.
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We believe through these various O2O initiatives, we can bring to different groups of consumers on different types of categories, very unique value proposition in addition to our online e-commerce business.
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Lastly, for all of these models, from day one, we adopt a philosophy, unlike to our e-commerce model, that we burned quite a bit of money in the beginning. We do expect all of these models to be profitable since day one.
Your next question comes from Natalie Wu of CICC. Please ask your question.
Hi, good evening, Richard, Sidney, Ruiyu and Jack. Thanks for taking my question and congratulations on a very solid quarter. My question is regarding fulfillments. Can you give us an update about how much percentage of your POP orders is fulfilled by JD, and how much marketplace merchants adopt JD's warehouse this quarter? Last quarter, you mentioned that the ratio has been increased from low single-digit to high single-digit, but you also said that it was related to the seasonal promotion. That still remains to be seen. Just want to get some kind of feeling about the recent update. Since JD Fulfillment is now established as the new business group, just wondering, will the new group, should we anticipate any kind of the innovation or aggressive expansion regarding this new business group going forward? Thank you.
Sure. In the first quarter, we continued to fulfill on the delivery side, low 20s in terms of number of orders on the marketplace, fulfilled by JD. For warehousing and delivery integrated services, we are quite pleased that after Q4, we saw the volume stayed up pretty high, continued to be in high single-digits in the first quarter. The recent announcement, which is mainly for domestic purpose, to have JD Logistics as a separate business group. The purpose of that is to empower the group to be able to operate on a more autonomous basis with more decision power, also so that they can leverage their capabilities built over the years to serve the third-party business partners. You mentioned about whether there will be more innovation. Innovation has always been one of the key advantages for this group.
Definitely they will continue to build upon those innovative spirit. Now they can be even more dedicated to serving the outside business partners. We do expect this new restructuring will support its objective to better serve the outside parties.
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On the logistic opportunities, I would like to add a few words. We have seen in the recent years that there is tremendous opportunity for logistic services. In the past, we have seen brands mainly relying on self-built logistic capabilities. Now, increasingly, we see brands outsource these logistic functions to more capable third-party service providers.
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For JD Logistics, through intensive investments over the past 10 years, we have built a lot of capabilities, including the large appliance products for both warehousing, installment, and delivery services.
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For the mid to small size parcels, we have a very fully integrated network. By the end of this year, we expect to cover actually all counties and districts across China.
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For our cold chain logistics, we are also forming a decent base for further enhancement.
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Yeah, we have covered over 100 cities.
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We also have the unique system of crowdsourcing delivery network powered by Dada.
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We also have quite a few bonded warehouses serving cross-border logistic purposes.
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Over the years, we have supported purchases by large businesses and also our initiative in the convenience store services. We have now also built a network to serve the businesses.
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JD Logistics is probably the only logistic player in China today that have the capability of basically six logistic networks, have the capability simultaneously across all six.
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This benefit from JD.com already have these various use cases through e-commerce. We have the privilege of building out those capabilities along the way.
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Our objective of forming this new business group is to leverage these capabilities to fully open to our business partners across the country so that others can benefit from these capabilities as well.
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I firmly believe that JD Logistics will transform from a cost center to a profit center over the next few years, so that it can create the shareholder value for our long-term shareholders.
Your next question comes from John Choi of Daiwa. Please ask your question.
Good evening. Thanks for taking my question. I have a question on your third-party online marketplace. It's been about a year since we see you guys have been taking a more aggressive stance on the brushing activities. Could management share with us about the recent trends and what kind of trends that you guys are seeing? Should we expect more merchants this year as compared to last year in a more aggressive pace? Also, on a quick follow-on on the cold chain investment, just wonder how much investment are we talking about here. I think Richard just mentioned that more than 100 cities covered at the moment. How much has been spent and what level of coverage are we talking about? Is it going to be similar to the last mile? Thank you.
Yes. For the 3P marketplace, the emphasis has been on quality over quantity, as I mentioned earlier. If you look at what we track is the growth rate of our top 20 merchants. You can see that their growth rate has been very healthy. Not that we only focus on the big merchants. I said it's quality merchants. They could be very large, could be very small, but as long as they are high-quality merchants, we will really invest our resources and traffic towards those quality merchants. The trend, I guess the best trend will probably be customer experience. We are closely watching consumer feedback. We actually saw from some third-party survey that consumers are actually appreciating the improved merchant quality. That's probably the most important measure for us at this point.
In terms of number of merchants we release as of April 30th, the number of merchants is similar to the year-end merchants because we did go through the contract resigning, a renewing process. We again, replaced some poor-performing merchants with better ones. On the cold chain, it's a meaningful investment, but given our very large scale today, it's actually not something we would require separate disclosure. It will be absorbed in our total fulfillment expenses. You probably won't feel. In fact, as you see that our fulfillment expense ratio actually improved despite of the investment in cold chain. The investment will continue, but no worry, it's going to be stand out in terms of hurting the profitability.
Your next questions comes from Eric Wen of Blue Lotus. Please ask your question.
Thanks management for taking my questions, congratulations on the spectacular quarter. I have some questions regarding your logistic business. By logistics, I guess it means goods handled outside of our direct and POP businesses. First, how do we account for the GMV and the logistics? What is the GMV contribution this quarter, what growth do we expect in, say, three years? What kind of take rate can we expect for the logistic business? What kind of gross margin should we model for this business? Lastly, how do we plan to allocate warehouse transport and delivery resources between our own business, POP, and the logistic business in terms of capital expenditures? Thanks.
The reason we called JD Logistics instead of JD Delivery is that we wanted to provide integrated warehouse and delivery services. We believe only the integrated warehouse and delivery services will provide superior customer experience. Because we just started to reorganize within the group, so we don't have a separate P&L yet. I can assure you that once it's started to operate on the new structure, it should be profitable from day one. The key measure for this unit's success is the % of revenue from third-party sources. Only when the majority of the revenues and profit are coming from third-party sources, it will be deemed as a success. Just quickly on the one point, when you talk about GMV, there's really no GMV or very limited GMV involved in the logistics services. It will have some revenues, but not GMV.
Keep in mind, it's general merchandise volume, logistics does not have any GMV.
Your next question comes from Jialong Shi, Nomura Securities. Please ask your question.
Hi. Good evening, management. Thank you for taking my question. I have a follow-up on the previous logistics question. I just wonder, as of the Q1, what is the percentage of the JD Logistics revenue from third-party merchants? Also for your 3P business, it is also a follow-up on previous question. It seems Q2 last year was the low base for your 3P business due to the anti-brushing campaign. Is it reasonable to forecast an accelerating GMV growth for your 3P business starting from Q2 this year? Also what is the 3P GMV growth in Q1 if we exclude the virtual goods items? Thank you.
For logistics revenue today, it is very small, given it is a fairly new business. We've said in the past, you can just take 1% as a rough number for now. It is not going to change significantly in the near term. For the third-party marketplace, as I mentioned earlier, it is ongoing effort to continue to improve the quality. On the other hand, we do hope, the better quality merchants will see accelerating growth. In fact, we have seen the better quality merchants growing on an accelerated basis. I cannot assure you, or I cannot guide, we don't guide GMV on a going-forward basis. I can tell you the underlying trend has been very healthy.
Your next question comes from Tian Hou of TH Capital. Please ask your question.
Hi, Ruiyu, Sidney, and Richard. Congratulations on a good quarter. I have a question regarding the user side. As your active user annually already reaching 236.5 million, I wonder, what do you see about the potential of your active user on the platform? What's the strategy going forward in terms of user acquisitions? Related to that, how do you see the user acquisition cost, the trends of that? That's my question, in the user front. Thank you.
Yeah. I think given there is a competitor in the market with a larger user base. I think, we have fairly good low-hanging fruit in terms of user acquisition, because these are already e-commerce users. Our effort, for example, expanding into the lower tier cities is to reach out to these consumers, even though many of them today may not be the ideal customers, given that the income level may be slightly below our typical customer profile. We have seen many of them started trying JD.com, sometimes could be just for one transaction. We are increasing our visibility in the lower tier cities. We do see tremendous potential for user growth. There's no limit really. As far as acquisition cost, it's very tough to actually pinpoint a user acquisition cost because it's resulted from a combination of marketing activities, branding, and promotions.
You can see that our marketing expense ratio actually this quarter has slightly declined. We will continue to invest. Particularly this year, given the improving profitability, we're probably going to spend more on branding. Sometimes, these branding costs may not see immediate GMV benefit, we're sure that it will yield long-term benefit to our platform.
Your next question comes from Ming Xu of UBS. Please ask your question.
Hi, Richard, Sidney, and Ruiyu. Thanks for taking my question. My question is also related to the offline investments. Richard, you mentioned you have various plans besides the 1 million supermarket for your O2O initiatives. My question is specifically on the fresh good grocery market in tier 1 cities. Do you have any specific plan besides the Dada business? We noticed your competitor and also some venture capital-backed startups are very active in this field, and they tend to operate a 1P business model while you mentioned you tend to do a kind of franchise business model. What's your strategy in this market, and also how do you manage to compete with them with the 3P business model? Thanks.
For now, we actually have our first-party fresh product business group. On a 1P basis, we do have very decent, actually very, very fast-growing, first-party fresh business in the tier 1 cities. We also have the existing O2O initiative with Walmart and Yonghui. Through the Dada network, we are seeing increasing traction, especially in tier 1 cities, that consumers are increasingly adopting this O2O model that we pioneered two years ago.
We are now approaching the end of the conference call. I would like now to turn the call over to JD.com's Ruiyu Li for closing remarks.
Thank you, operator. Once again, thank you for joining us today. Please don't hesitate to contact us if you have any further questions. Thank you for your continued support and look forward to talking with you in the coming months.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.