Earnings Call: Q1 2017

May 8, 2017

Hello and thank you for standing by for jd.com's 1st Quarter 2017 Earnings Conference Call. At this time, all participants are in listen only mode. Now I would like to turn the meeting over to your host for today's conference, Ruoyu Li. Thank you, operator, and welcome to our Q1 2017 earnings call. Joining me today on the call are Richard Liu, CEO and Cindy Huang, CFO. For today's agenda, Mr. Huang will discuss highlights for the Q1 2017. Following the prepared remarks, Mr. Liu and Mr. Huang will answer your 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 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. Finally, please note that unless otherwise stated, all the figures mentioned during this conference call are in RMB. Now I would like to turn the call over to our CFO, Sidney. Thank you, Lee, and 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 1st 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 form a revenue growth rate in earnings release as it is relevant to our investors as we anticipate the completion of the JD Finance reorganization. If the spin off completed in the Q2, we will begin to deconsolidate the JD Finance financial results in the 2nd 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. Therefore, investors should use the pro form a revenue growth when modeling your 2017 growth projections. Our GMV grew 42% year over year in the Q1 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 1st 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 2nd largest contributor to the improved gross margin followed by our advertising business. However, 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 Q1. Non GAAP fulfillment expense ratio was 7.5 percent 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 in store base in the logistics infrastructure. The improved average ticket size in our 1st party business in the Q1 and the higher base last year before merging JD Doujia into Dada. The non GAAP operating margin improved to 2.2 percent in the Q1 compared to non GAAP operating loss in the same quarter last year. Of the 2 70 basis point margin improvement, roughly 160 basis points are attributable to JD Moore margin improvement, while the remaining from reduced losses of JD Finance and the impact of the data merger with JD DowJia. Our GAAP operating margin also had a 2 70 basis point improvement on a year over year basis and has turned positive to 1.1%. The difference between our GAAP and non GAAP operating income was RMB 823,000,000 or 1.1% of our net revenues. Our non GAAP net income attributable to ordinary shareholders also reached a new record of RMB1.5 billion with a net margin of 1.9% in the 1st quarter. And our GAAP net income was RMB239 1,000,000 with a net margin improvement of 200 basis points. The non GAAP EBITDA reached RMB2.2 billion with an EBITDA margin of 2.9 percent. Our free cash flow remained strong. For the trailing 12 months ended March 31, 2017, free cash flow totaled RMB16.8 billion, up 120 percent from the previous trading 12 months. However, as previously emphasized, there is a delay in our logistics 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 Q2. So our Q2 results from continued operations will likely exclude JD Finance. As mentioned last time, we expect to receive RMB14.3 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 and L impact, it is a real financial gain to our shareholders. Now 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% 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 Q1. However, we would like to caution our investors that the Q1 results are not necessarily an indication of our long 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. 2nd, the Chinese e commerce market remains highly competitive and 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 1 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 and our unwavering focus on superior customer experience will pay off for our long term shareholders. This concludes my prepared remarks, and we can now move to the Q and A 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 2 very quick questions. The first one is we noticed that the GMV per or fulfilled orders is kind of like going up year on year. So 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. And then secondly, Simeon, you mentioned that we need to be a bit cautious on the upcoming quarterly earnings for the rest of the year. So just wondering if you could give us a bit more color on what cost items might increase relatively to the Q1 in a bigger manner magnitude? Thanks. Okay. So on the ticket size, we did notice a year over year improvement actually since the Q4 last year. So, partly it's because our electronics categories are also growing at a very fast pace. So 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. So the recent trend is definitely very, very encouraging as we see consumers buying more and more each in each order. So it is we do see the improving ticket size across all categories. So despite of the mix continue to shift towards general merchandise categories, our overall 1st party ticket size on average has also been improving over the last two quarters. On the cautionary note on P and L, I think it's really more of a general note. I think we do have a very, very good Q1. But keep in mind, Q1 has generally less promotional activities. 2nd quarter, for example, when we invest in our annual sales event on June 18, we will return a lot of value back to our consumers. So, 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 only starting. So the full cost of those initiatives have not been reflected in our first quarter results. But 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, Cindy, Ray Yee, congratulations on the strong set of results and 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 RMB900 1,000,000 or so in this line. Is that mainly related to your revenues from your Indonesia subsidiary? And can you remind us is this Indonesia subsidiary mainly is a 1P business? And also kind of related to that, what is management view on the potential for Indonesia market going forward and overall plans and strategy there? And then any comment on the recent reported news about JD potential investment into Tokopedia? Thank you. Sure. So 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. So 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 and but we don't comment on any market rumors on any particular transaction. Yes. So let me elaborate a bit on our Southeast Asia strategy. For Indonesia, we expect for the next 5 years, we will be focusing on building out infrastructure including warehouses and the last mile delivery network. So in those 5 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, very crucial, crucial to build a superior customer experience. So 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. To what degree is this margin improvement driven by category mix change? And to what degree is it driven by same category margin expansion? And then how sustainable is this 80 basis point margin improvement on year over year basis for the rest of 2017? Thank you. Right. I mentioned earlier actually our first party margin 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. So this is definitely a quite sustainable and consistent improvement. Now maybe after the 4 quarters, we reach some sort of anniversary. So I cannot guarantee you on a forward basis. But as I mentioned, because we are still building out our scale and a number of categories are still not we are not the biggest in the country. And 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. So I think in the last 2, 3 quarters after his comment, we actually saw great validation on that point. So 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 Hanaway from Deutsche Bank. Please ask your question. Thank you very much and congrats on the quarter again. In FMCG, where has subsidy intensity trended as a percentage in GMV? And where might we expect it to go for the balance of the year? And could you also give us an updated sense of what we should assume the new DADA equity loss pickup should be for 2017? And finally, what percent of 1P GMV might now be apparel? And what is our longer term target? Thank you. So on FMCG, it's actually one of those categories we are still a few spots away from number 1. So as I mentioned again earlier, when we grow in a very meaningful way, we see tremendous incremental rebates from our suppliers. So 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. So it is still burning money, burning very significant money and we are committed to continue to invest in this category. And 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 data pickup, as I mentioned earlier, it's you can still and 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. So but just for your own purpose of modeling, you could assume roughly $100,000,000 on a non GAAP loss on a monthly basis, which has not changed for the last few quarters when I guide this. And for the first party GMV from apparel, it's I can tell you it's growing very, very fast, but it's off a very small base. But 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, 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 Jo of Credit Suisse. Please ask your question. Hi, good evening, Richard, Sydney. Thanks for taking my questions. Congrats on very strong set of points. 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. And I was wondering, can we kind of assume this to continue or any further investments into like, like Fei Fei mentioned, the CapEx enhancement may have some impact on to this cost items down the road? And 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 pretty I think this cost headwind seems to be pretty high. So I was wondering like 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 slide, Donald? Thank you. Okay. So first on the fulfillment, so it depends the trend will depend on our ability to continue to drive efficiency. So we have built out our nationwide logistic infrastructure over the past 3, 4 years to the lower tier cities. In that process, we have invested basically in low order density areas. But once we have installed base, as we grow our volume, the average efficiency ratio or for example, for delivery average orders per delivery man will naturally improve. So that's one driver for additional fulfillment efficiency. And then 2 is, as I mentioned, on ticket size. So there are various ways to encourage consumers to buy more. So those will be the 2 key drivers for further fulfillment leverage. Having said that, we are also investing in this area. For example, co 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 and D, the key investment will be talent. So this is actually one of the areas that I mentioned earlier that we are starting, but it's far from finishing. So we will continue to hire many, many more senior talent from around the world in areas that are critical for our long term growth. So we are expanding our Silicon Valley office. For example, we are also hiring senior talent from other parts of the world. So that on that part, you will probably see even higher growth in the R and 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 trend. 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 of investments for the future. But I'm wondering what will be your margin target in the mid to long term? For example, in the next 2 to 3 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? And 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. Yes. So on the margin trend, I think we don't come on the short term, but I think medium to long term, we have spoken in the past. If you look at our 1st party business, we would 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 plus percent. And this presents great, 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, lead based and also creative joint programs helping our top partners. So this is on the gross margin. And 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 5 to 6 percentage point advantage on overall expense ratio. And this is really the key drivers for our long term afford to offer everyday low price to our consumers while we can still earn a decent profit. So coupling with those two metrics, you can comfortably project our 1st party net margin should be at least similar to the best offline retailers, which traditionally ranging from, I guess, 3% to 5%. And if you consider the more competitive environment, you take a haircut, you still get 2% to 4%. And then on top of that, you will have the marketplace business, which has good benchmark in China and in the U. S. If you take the net margin of GMV, you get somewhere around 1% to 2% as the net earnings and you can translate that into a margin based on revenue. So you add those 2 together, you can come up with the long term margin target for our business. And that's before we consider any other new business lines. Yes. So in the long term, our net profit margin will clearly be higher than any of the offline retail players. Your next question comes from Jing Yuan, Mizuho Securities. Please ask your question. Hi, good evening guys. In recent past, I think you guys mentioned that GMV and revenue gap growth gap should close, which it has. But 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? And perhaps you could give us some color on this relationship in the near term as well as the long term? Thanks. Yes. So I think the near term GMV growth rate slowed down because we have been focusing more on the quality rather than quality of the number. So this has been consistent over the past 3, 4 quarters. We do foresee this will still continue to some extent given that a lot of the activities again as we mentioned earlier, there's a little bit you develop your system to catch some of the brushing activities, but because it has become a sophisticated industry, the Russian agents will continue to come up with new tactics. So 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 in the medium to long term 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. And thank you, Richard, Sydney. It's a very strong set of results. Just want to ask a bit on your offline, online initiatives. And we heard about the grand scheme for the 1,000,000 convenience stores over 5 years. Any updates on the Xintong Lu unit? We also read about the 5,000 maternity stores and the 10,000 home appliance stores. Different periods and different targets, mostly under this franchise model, but 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. Yes. So we actually started from last year various initiatives to to focus on a bridge between online and offline. Yes. So in addition to what you have seen such as 1,000,000 convenience stores and over 2,000 JD Bong Home Appliance Service Centers and also 100 of JD Home Jinong Zhejiang new stores. We are also working on some other new initiatives that have not been publicly announced. So first of all, all of these off line initiatives, they are on a franchise model. So they are not asset heavy. It's actually a relative asset light model. So 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. So we will enable these franchisees in several fronts including our brand, our supply chain, and our procurement and also our logistic capabilities. So 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. And lastly, for all of these models, from day 1, we adopt our philosophy to not to unlike to our e commerce model that we burned some quite a bit of money in the beginning. We do expect all of these models to be profitable since day 1. Your next question comes from Natalie Wu of CICC. Please ask your question. Hi, good evening, Richard, Jenny, Ryu and Jia. Thanks for taking my question and congratulations on a very solid quarter. My question is regarding fulfillment. Can you give us an update about how much percentage of your pop artists is fulfilled by JD? And how much marketplace merchants adopt JD's warehouse this quarter? So 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 seasonality seasonal promotions. So it remains to be seen. So just want to get some kind of feeling about the recent update. And since JD Fulfillment is now established as the new business group, so we're just wondering, will the new group should we anticipate any kind of innovation or aggressive expansion regarding this new business group going forward? Thank you. Sure. Yes. So on the in the Q1, we continue to fulfill on the delivery side low 20s in terms of number of orders on the platform on the marketplace fulfilled by JD. And for warehousing and delivery integrated services, we are quite pleased that after Q4, we saw the volume stayed up pretty high, continue to be in high single digit in the Q1. And 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 and also so that they can serve leverage their capabilities built over the years to serve the 3rd party business partners. And you mentioned about whether there will be more innovation. Innovation has always been one of the key advantages for this group. So definitely they will continue to build on build upon those innovative spirit. And now they can even more dedicated to serving the outside business partners. So it is we do expect this new restructuring will support its objective to better serve the outside parties. Yes. So on the logistics opportunities, I would like to add a few words. So we have seen in the recent years that there's tremendous opportunity for logistics services. In the past, we have seen brands mainly relying on self built logistic capabilities. But now increasingly we see brands outsource these logistic functions to more capable third party service providers. Yes. So 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. And for the mid to small sized 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. For our cold chain logistics, we are also forming a decent base for further enhancement. Yes. We have covered over 100 cities. We also have the unique system of crowdsourcing, delivery network powered by data. We also have quite a few bonded warehouses serving cross border logistic purposes. And over the years, we have supported purchases by large businesses and also our initiative in the convenience store services. So we have now also built a network to serve the businesses. So JD Logistics is probably the only logistic player in China today that have the capability of basically 6 logistic networks have the capability simultaneously across all 6. Yes. This benefit from jd.com already have these various use cases in through e commerce. So we have the privilege of building out those capabilities along the way. So 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. Firm belief that JD Logistics will transform from a call center to a profit center over the next few years so that it can create shareholder value for our long term shareholders. Your next question comes from Joy Cui of Daiwa. Please ask your question. Good evening and thanks for taking my question. I have a question on your 3rd party online marketplace. It's been about a year as we see the you guys have been taking more aggressive stance on the brushing activities. Could the 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? And also on a quick follow on on the cold chain investment, just wondering how much investment are we talking about here and 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 quality as I mentioned earlier. So if you look at what we track is the growth rate of our top 20 merchants. And you can see that their growth rate has been very, very healthy. And not that we only focus on the big merchants. I said it's quality merchants. So 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. So the trend, you will continue I guess the best trend will probably be customer experience. So we are closely watching consumer feedback. We actually saw from some third party survey that consumers are actually appreciating the improved merchant quality. So that's probably the most important measure for us at this point. So in terms of number of merchants we released as of April 30, the number of merchants is similar to the year end merchants because we did go through the contract resigning our renewing process. So we again replaced some poor performing merchants with better ones. On the cold chain, it's a meaningful investment, but given our very, 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 co chain. So the investment will continue, but no worry, it's going to be stand out in terms of hurting the profitability. Your next question comes from Eric Yuan of Blue Lotus. Please ask your question. Hi, thanks management for taking my questions and congratulations on the spectacular quarter. I have some question 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? And what is the GMV contribution this quarter? And what growth do we expect in say 3 years? What kind of take rate can we expect for the logistic business? And what kind of gross margin should we model for this business? And 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. Yes. 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. So because we just started to reorganize within the group, so we don't have separate P and L yet. But I can assure you that once it started to operate on the new structure, it should be profitable from day 1. Yes. The key measure for this unit success is the percentage of revenue from third party sources. Yes. Only when the majority of the revenues and profit are coming from third party sources then it will be measured as it will be deemed as a success. So just quickly on the one point when you talk about GMV, there's really no GMV or very, very limited GMV involved in the logistics services. It will have some revenues, but not GMV. Keep in mind, this general merchandise volume, so logistics does not have any GMV. Your next question comes from Jialong Shi, Nomura Securities. Please ask your question. Hi, good evening management. Thanks for taking my question. I have a follow-up on the previous logistic question. I just wonder as of the 1Q, what is the percentage of the JD Logistics revenue from 3rd party merchants? And also for your 3P business, it's also a follow-up on previous question. Since 2Q last year was the low base for your 3P business due to the end of brushing campaign. So is it reasonable to forecast an accelerating GMV growth for your 3P business starting from 2Q this year? And also what is the 3P GMV growth in 1Q if we exclude the virtual goods items? Thank you. Okay. Yes. So for logistics revenue today is very small given it's a fairly new business. So we've said in the past, you can just take 1 percent as a rough number for now. It's not going to change significantly in the near term. And for the 3rd party marketplace, as I mentioned earlier, it is ongoing effort to continue to improve the quality. So but on the other hand, we do hope that 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 I cannot guide we don't guide GMV on a going forward basis. But 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, Rui, Sydney and Richard. Congratulations on a good quarter. I have a question regarding the user side. So as your active user annually already reaching 236,500,000, I wonder what do you see about the potential of your active user on the platform? And what's the strategy going forward in terms of user acquisitions? And 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. Yes. So I think for given there is a competitor in the market with a very a larger user base. So I think we have fairly good low hanging fruit in terms of user acquisition because these are already e commerce users. So 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. But we have seen many of them started trying jd.com sometimes could be just for one transaction. But we are increasing our visibility in the lower tier cities. So we do see tremendous potential for user growth and there's no limit really. As far as acquisition cost, it's quite we don't you can it's very tough to actually pinpoint a user acquisition cost because it's resulted from a combination of marketing activities, branding and promotions. But you can see that our marketing expense ratio actually this quarter has slightly declined. So we will continue to invest and particularly this year given the improving profitability, we are actually we'll probably be going to spend more on branding. So sometimes these cost branding costs may not see immediate GMV benefit, but we're sure that it will yield long term benefit to our platform. Your next question comes from Ming Xu from UBS. Please ask your question. Hi, Richard, Cindy and Weiwei. Thanks for taking my So my question is also related to the offline investments. So Richard, you mentioned you have various plans besides the 1,000,000 supermarkets for your O2O initiatives. So my question is specifically on the fresh good grocery market in Tier 1 cities. So do you have any specific plan besides the data business? And also 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. So how do you so what's your strategy in this market? And also how do you manage to compete with them with the 3PE business model? Thanks. Yes. So for now, at least, we actually have our first party fresh product business group. So on a 1P basis, we do have very decent actually very, very fast growing first party fresh business in the Tier one cities. And then we also have the existing O2O initiative with Walmart and Yonghui. So through the data network, we are seeing increasing traction, especially in Tier 1 cities that consumers are increasingly adopting this O2O model that we pioneered 2 years ago. We are now approaching the end of the conference call. I would like now to turn the call over to JD dotcom's Wei 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.