Hello, thank you for standing by for JD.com's third quarter 2016 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 turn the meeting over to your host for today's conference, Ruiyu Li. Thank you. Please go ahead.
Thank you, operator, welcome to our Q3 2016 earnings call. Joining today on the call are Richard Liu, our CEO, and Sidney Huang, our CFO. For today's agenda, Mr. Huang will discuss highlights for the third quarter 2016. 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 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. I would like to turn the call over to our CFO, Sidney.
Thank you, Ruiyu, hello, everyone. We're very pleased to report another quarter of solid growth with record non-GAAP operating profits. Our net revenue grew 38% in Q3 2016, as we continued to pursue profitable growth during the quarter. Our direct sales revenue grew 36% in a seasonally slow quarter, led by food and beverage, home furnishing, cosmetics, and home appliance products. Our revenues from services and others increased to 60% year-over-year, supported by higher advertising revenues. Our GMV, excluding virtual items, grew 47% year-over-year in the third quarter. GMV from general merchandise categories, excluding virtual items, grew 61% during the quarter. Cosmetics, food and beverage, sporting goods, and home furnishing were the fastest-growing general merchandise categories, while apparel and footwear remained the largest, with solid growth. As a percent of the total, general merchandise GMV contributed 51.3%, a record high level for JD Mall.
GMV from electronics and home appliance products grew 36% during the quarter, led by the home appliance category. The non-GAAP gross profit increased by 59% in the third quarter, which again demonstrated healthy monetization of both our 1P and 3P businesses. Non-GAAP gross margin improved to 15.5%, up from 13.4% a year ago, as a result of higher 1P gross margin and higher growth in service revenues. Non-GAAP gross margin on direct sales revenue improved well above 100 basis points again on a year-over-year basis, driven by increased scale economies and higher volume-based rebates across all key categories. Non-GAAP fulfillment expense ratio was 8.2% in Q3, compared to 7.7% in the same quarter last year. The higher fulfillment expense ratio was mainly due to our investment in the consumable product category, which tends to have a lower basket size.
As we mentioned the last quarter, as part of our strategic alliance with Walmart, we further expanded our investment in the FMCG category through both JD and Yihaodian platforms during the third quarter, including our support to yihaodian.com promotion campaign launched in August. As a result of this collaboration, all of our major expense lines were affected, and the total impact to our operating profit was a negative CNY 0.3 billion during the third quarter. Our non-GAAP marketing expense ratio was 3.1% in Q3, largely in line with the 3% in the same quarter last year. Our non-GAAP R&D and G&A expense ratios increased 27 basis points and 28 basis points respectively compared to the same quarter last year, reflecting our increased investments in R&D talent and our new business lines.
The non-GAAP operating margin was 0.7% in the third quarter, another record high with over 100 basis point improvement over the same quarter last year. Excluding the new businesses, our core JD Mall operations had an operating margin of 1.1% on a non-GAAP basis, with a 45 basis point improvement over the same quarter last year. This margin improvement was entirely driven by the higher growth margin, partially offset by the higher fulfillment and R&D expenses discussed earlier, as well as our support to the Yihaodian platform. The new businesses, on the other hand, incurred a non-GAAP operating loss of nearly CNY 0.3 billion during the quarter, mainly from JD Finance and technology initiatives. With improved JD Mall operating margin and reduced new business losses, we are reporting a non-GAAP net income attributable to ordinary shareholders of CNY 289 million, with a net margin of 0.5%.
The non-GAAP EBITDA for the company set another record at CNY 932 million, with an EBITDA margin of 1.5%. Our free cash flow remained very strong. For the trailing 12 months ended September 30th, 2016, free cash flow totaled CNY 16.7 billion, or $2.5 billion, up 200% from the previous trailing 12 months. While there is a certain short-term timing effect in our favor, this robust cash flow is once again a strong validation of our financial strength and solid performance. In light of the strong cash flow, we stepped up our stock repurchase activities and bought back approximately 26 million ADS, or 1.8% of our total shares outstanding as of September 30th, 2016. Next, I would like to give you an update on the collaboration with Walmart and the development of yihaodian.com.
As disclosed previously, we launched the Sam's Club flagship store as well as a Walmart global flagship store on JD.com in October. The initial results have been encouraging, and both parties are working very hard to raise awareness and deliver a great user experience. Our O2O platform, Dada, which is now also a Walmart investee, has launched nearly 50 stores on its APP as of early November. In addition, Walmart increased its stake in JD.com during the third quarter to approximately 10%, and Walmart's Asia CEO, Dirk Berghe, has joined our board as an observer to further strengthen our strategic alliance. As the two companies develop closer ties, beginning November 1st this year, JD has been taking the primary responsibilities of yihaodian.com's first-party business while using the previous Yihaodian 1P entity and its team as our purchasing agent to ensure the same merchandise selection and procurement.
As a result, we have begun to recognize the first-party revenue on yihaodian.com since November 1st, and we expect the business to contribute roughly 2%-2.5% to our fourth quarter total revenue. As a result of this operational change, together with the promotional support in October, as announced previously, we expect a total operating loss relating to yihaodian.com of approximately CNY 0.6 billion in the fourth quarter. We believe this investment is worthwhile as Yihaodian has a terrific online supermarket brand with a loyal customer base in the eastern and southern regions of China. Our first priority remains to preserve Yihaodian's premium product selection, competitive pricing strategy, and unique user experience. Over time, we will also use this platform to experiment some of the new innovations in FMCG categories to strengthen its differentiated market position.
I would like to share with you some color on the newly proposed JD Finance reorganization. As disclosed in our earnings release, the board of directors today approved a preliminary reorganization plan for JD Finance. JD.com intends to dispose its remaining equity stake in JD Finance, which is approximately 68.6% on a fully diluted basis, after taking into account the Series A shares and the reserved ESOP pool, through a series of equity sale license and business collaboration agreements. If the plan is successful, JD would receive cash at fair market value and 40% of the pre-tax profit of JD Finance in the future. There are four key objectives of this proposed transaction, two for JD.com, the listed company, and two for JD Finance.
For JD.com, the transaction will eliminate the downside risk associated with the finance business that some of you have been concerned about, while still keeping 40% of its upside through the various service agreements and the conversion right back into equity if permitted by the regulations. The second benefit for JD.com is to unlock shareholder value by taking some cash off the table and allowing our investors, mostly TMT and consumer specialists, to focus on our core business without getting distracted by the perceived riskier financial business. For JD Finance, the proposed transaction would allow its management to expand into broader areas of financial services without the constraint from its more risk-averse parent company. It would also facilitate its application of certain restricted licenses in areas such as securities and mutual funds.
Lastly, by restructuring JD Finance into a domestic entity, it would help its next round of financing as more domestic investors require the entity to be legally eligible in terms of corporate structure for a future domestic listing. Without a domestic structure, it may become increasingly difficult to raise new capital above the previous valuation level in light of the general decline in private equity valuation in recent months. While the last two points are JD Finance related, as the 40% indirect beneficiary, JD.com would also benefit. Therefore, we believe this is a thoughtful win-win solution to both our shareholders and the JD Finance business. As disclosed, Richard Liu, our Chairman and CEO, will be required to participate in this transaction to help reassure third-party investors and also ensure long-term close partnership between the two companies.
He would purchase a minority portion of the disposed shares at the same fair market value as third-party investors. To further ensure alignment of interest, Richard's economic interest in JD Finance will be similar to his economic stake in JD.com. Please be aware that this proposed plan is very preliminary, and there is no assurance that a transaction will be completed. The preliminary terms discussed above are also subject to change as we begin to search and negotiate with potential investors. Given Richard's participation, the transaction will require approval by the independent audit committee of the board. Finally, let's discuss our financial outlook. We expect Q4 net revenue growth to be between 37%-42% on a year-over-year basis. This guidance reflects our successful November 11th promotion season, as well as the expected 1P revenue contribution from yihaodian.com discussed earlier.
This concludes my prepared remarks, and we can now move to the Q&A session.
Operator, questions, please.
Thank you. The question and answer session of this conference call will start in a moment. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. 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. Your first question comes from the line of Alan Hellawell of Deutsche Bank. Please ask your question.
Yes, hi. Sorry about that. Would love to get a better sense as we look forward, some of the levers that we have at our disposal to drive up margins further. Sidney, you've historically reflected on the business units working with new KPIs, which are more oriented toward profitability. You also, in your prepared remarks, discussed improving input pricing. There's obviously, theoretically at least, the ability to improve pricing onto customers. As we move forward, say, over the next year, how would you prioritize these or other levers in improving margins further? Thank you.
Sure, Alan. As we discussed previously, I think the key lever will continue coming from our scale economies with suppliers. If you look at our gross margin for the 1P business comparing to the top offline retailers, our gross margin remains to be extremely low, with more than 10 percentage points difference on average. This obviously partially is because of our scale has not reached number one in all categories. Which over time will happen. When we continue to work towards that objective, we will receive more and more economies of scale through more vendor rebates. I think that will be the primary source of future margin expansion. We are not in any hurry, and no plan to increase prices to consumers, except for certain optimization internally. For example, promotion strategies and various other operational levers.
Thank you very much.
Your next question comes from the line of Eddie Leung of Merrill Lynch. Please ask your question.
Good. Just a question on margins as well. We have seen the marketing expenses kind of doing quite well with the quarter in terms of control. Just curious on how much of that is about seasonality and how that can be affected by our promotion into the fourth quarter, as well as our commitments to JD Supermarket. Any color would be helpful. Thanks.
Sure. Our marketing expenses, yes, there is some seasonality. You see in the past, normally Q2 and Q4 tend to have higher marketing spending in relation to the promotions. Q1 and Q3 tend to have a lower expense ratio. In reality, in Q3, we're also putting a lot of investments in the FMCG category through both Yihaodian and JD platforms. This quarter, it's manageable at a fairly consistent level, I guess, slightly higher than last year's level. As far as marketing goes, we also mentioned before that we do spend quite a bit of money on branding, which is discretionary. Really, at this point, the market is still very large. If you look at a user base, now nearly 200 million, but still have a huge room to continue to expand. Branding, advertising continues to be an important investment area.
Over time, obviously, there could be operating leverage on that front.
Thank you.
The next question comes from the line of Erica Werkun of UBS. Please ask your question.
Hello, thank you. Sidney, I would like to just talk to you about the 3P mix, the contribution, it's at 45%, which is better than expectation. Does that signal the end of the anti-brushing effort? Also, could you just share with us, what is your current thinking on what is optimal in terms of 1P and 3P mix? Just also a quick question on JD Finance, if you don't mind sharing, what is your current thinking on timing on this deal? If you can also share some financial metrics, for example, top-line metrics and profitability, that would be very helpful. Thank you.
Sure. For 1P and 3P mix, we do see continued growth momentum from both areas. For 1P, for example, we continue to see a lot of scale economies, and brands love to work with us. Also, as we continue to grow our scale, even in general merchandise categories, we see opportunities to develop 1P business. 3P, on the other hand, given the anti-brushing initiatives, it's actually underappreciated this year. We actually see, all else being equal, we should have a better momentum next year. It will not only from the traditional categories such as apparel and general merchandise, but we're actually going to develop the electronics category as well, for certain long-tail products. We do see both 1P and 3P continue to have a very strong momentum over time.
As we mentioned previously, 3P will eventually going up in mix towards 50%, 50/50 at least. On JD Finance reorganization, we don't have a definitive timing, but we certainly wanted to move ahead as quickly as we can. It is still losing money. We also disclosed quite a bit of the financial metrics in the earnings release. You can see that it is trying to expand into more areas, and some of those areas may be perceived as risky for e-commerce company. We can discuss more separately, but you can first take a look at what we disclosed in the earnings release.
Thank you very much.
Sure.
Once again, participants are requested to ask one question at a time. The next question comes from the line of Alicia Yap of Citigroup. Please ask your question.
Hi. Good morning, Sidney, Richard. Thanks for taking my questions. I have a questions regarding your electronics categories. With your electronic categories growing 36% in Q3, just wonder how should we look at these segments into Q4? Not too sure whether you have disclosed whether the growth rate for this electronic category is during the Singles Day period, if you can share some of the thoughts. Also just a follow-up on the Yihaodian, is there any revenues and GMV contribution from Yihaodian in the third quarter? Also the CNY 1 billion targeted expenses that you budgeted for Yihaodian increase, how much of that was recognized in Q3? Thank you.
Sure. On the electronics products, during November 11th's promotion, it actually performed surprisingly well across all categories. Not only, say the mobile phones, even the digital products and computers performed exceptionally well. Home appliance has been the strongest performer throughout the year as we continue to see above average growth rate. We're very excited about this business, even though we are, especially the consumer electronics, we have been a market leader, and in some cases, we are the market leader combining both online and offline businesses. It remains to be very strong. Having said that, these are more mature categories. If you look ahead, the growth rate will tend to be slower. We'll make up that through other categories.
That's why we're investing in apparel, investing in FMCG, and clearly home appliance category gets a longer runway given our market share is still not dominant. On Yihaodian, we did have a very small revenue contribution in Q3 from the marketplace business, and some incremental small revenue from the fulfillment services we provide. I mentioned earlier that, given that we were supporting its promotional activities on yihaodian.com, which is our platform, we incurred nearly CNY 0.3 billion in Q3, in relation to Yihaodian. I also mentioned that we expect to incur CNY 0.6 billion in Q4. Adding those two numbers together, it gets you to CNY 0.9 billion, fairly close to the CNY 1 billion number I mentioned on the last call.
Okay. Very helpful. Thank you.
Let me just add a point that I've heard investors concerned about the price wars in various categories. As I stated in the past, for the principal 1P business, as soon as it passed a critical mass when it turned profitable, the profit will be sustainable, and will not be affected by the price war. For example, our electronics category, we have been maintaining superior growth rate, far much higher than the competition. Despite of this growth rate and the competition in decline, we have achieved a profitability, very sustainable profitability. Again, also in contrast to the other industry participants, who are mostly losing money. We can assure you that in a category such as electronics, where we reach the market leadership position, we'll continue to grow significantly faster than competition while sustaining a very healthy profitability.
Despite of the competition, no matter the price war or else, or they're incurring losses, our profit will be sustainable. This will rotate through all other new categories, including FMCG, which we are in the investing phase at this point. If take a FMCG category, most people worry about price war. I can tell you that we have been investing in this category for several years. The growth rate has been tremendous. However, our loss ratio has been steadily improving every year. Regardless of how fierce the price war or perceived the price war could be, it will not affect our growth, and it will not affect our profitability. I think we have now three quarters of track record to prove that as well.
Operator, next question, please.
Thank you. The next question comes from the line of Alex Yao of JP Morgan. Please ask your question.
Hi, good evening, everyone. Thank you for taking the question. I have a quick one regarding the fourth quarter revenue guidance. It seems to me the revenue is accelerating even on excluding basis. Can you guys talk about what's driving the revenue acceleration? If it's a relatively lower profitability category, such as FMCG, will that impact the overall profitability outlook? Thank you.
Sure. Yeah, I think this is mainly attributable to the enhanced seasonality pattern that I had mentioned previously. What we observed is, increasingly, you see consumers buying more during the promotional seasons. Q2 and Q4. Even though the same quarters last year were already strong, you continue to see stronger performance versus Q1 and Q3, even though the baseline was low, you still have a relatively slower growth rate. It's really I think mostly stronger seasonality pattern. We don't see. It's not purely due to FMCG, which is obviously a leader in terms of growth categories within our company. As I mentioned earlier, during the November 11th promotions, we actually see very strong growth rate across all categories, including electronics and home appliance.
The next question comes from the line of Jin Yoon of Mizuho Securities. Please ask your question.
Hi, good evening, guys. It's a question, going back to the gross margins. I think you alluded to the fact that I think rebates contributed to the gross margin upside. Can you talk about how the accounting works for rebates? First of all, do you see rebates for that particular quarter, or is there like a one-quarter lag on the rebates of what we're seeing today, what happened last quarter? Can you clarify that for us? Thanks.
Sure. Yeah. The rebates will take a few forms. For some it will be negotiated at the beginning of the year. It's based on the volume, the higher the volume you sell, the higher the rebate, which is in contract, very clearly defined. That's one. We do accrue on accounting basis of those rebates, based on historical pattern, on a quite conservative basis. Then, another type of rebates will be promotional event-driven. You could negotiate with suppliers on rebates that are given to a particular promotion, such as November 11th or our anniversary sales. There will be also other areas where if sometimes suppliers would work with us on a joint marketing campaign, there will be also rebates associated with those marketing activities.
Are those majority of Go ahead.
Yeah, mostly it's driven by volume. It has a direct connection to volume, and it also has a direct connection to the various promotional activities.
It's all recognized most of it in the same quarter then?
Yeah. It's based on accrued basis. It's not cash basis.
Got it.
Yeah. There's a very mature, very established methodology to accrue those rebates, which is very standard in the retail industry.
Got it. Thank you.
Sure.
Yeah. I can give you another way to observe and make a judgment call on category profitability. If we have a dominant market position, such as computer category, you can be assured that we will have very healthy profit margin for that business.
Yeah. For mobile phone, another example is, we are also the market leader in China. For home appliance, we are likely to surpass GOME this year, and we'll also be on a relatively equal footing with Suning this year. We're confident that we can surpass Suning in next year. Yeah. Another category is books. This year, our run rate is now on par with dangdang.com, the market leader. Based on the current growth rate, and the momentum, we expect our books category will also become number one in China next year.
因为中国传统的超市还包含很多服装、电子产品、生鲜等，而京东的快消品事业部实际上就是非常窄的一个品类。如果把传统的零售商与京东的快消品的品类相当的话，其实我相信京东在明年也会成为中国这个行业里面收入最大的。
For the FMCG categories, because the offline retailers tend to sell a broader selection, including apparel and electronic products, it may appear that we are much smaller. If you only look at the FMCG categories alone, we believe our FMCG business could be also one of the largest next year, if not the largest.
对，它还会在家装家居、汽车用品等各个品类，我们都在稳步地推进。我们的战略非常清晰，就是在没有成为绝对的市场老大之前，我们在这个品类是以增速为主。一旦拥有了绝对的市场地位之后，我们在品类都会实现持续的盈利，这是我们不变的战略。
The other categories like home furnishing products, automobile products, we continue to take market share, and also is growing tremendously. Our strategy has been that for any category that we are not market leader yet, growth will be our top priority. Once we achieve market leadership position, we should generate profitability on a sustainable basis.
当然，即使我们在取得行业地位、实现盈利的时候，我们依然能保证我们的增速在行业内是最快的。
Despite of the sustainable profit orientation I mentioned earlier, we are confident that we can continue to outperform the competition from a growth perspective.
然后对于服装这个品类，我们从今年开始，已经是在大规模地建立我们自己的自营团队，全面进入服装的自营业务。
For apparel, we are building a team to operate this category on the first-party basis, and we will push ahead next year, especially on the more standardized portion of this category.
当然，前几年它给我们带来的收入和GMV都有限，但是我们坚信这是一个非常好的增长的策略。
Yeah. In the earlier years, the contribution could be very small, for the 1P business, but we are confident that it will be a very promising business with great growth and profitability prospect.
只要我们能保证最好的用户体验，在任何品类我们都可以赢。
As long as we can ensure the best customer experience, we can win in all categories.
The next question comes from the line of Wendy Wang of Macquarie. Please ask your question.
Thank you. My first question is to follow up on your comments about different categories. Given the market positioning that JD is having at the FMCG and home furnishing, can you give us an update on the gross margin of these two categories? Also, you mentioned that rebates may help the home appliance business. How is the latest margin on that category as well? You touched upon the apparel category. You mentioned that you are going to build your own merchandise team. But in my understanding, the SKU of the apparel category is actually massive, and most of the other e-commerce platform choose to do it via the marketplace model. Right now, the most accessible merchandise team in the apparel space is probably Vipshop.
My question is, what kind of confidence do you have to tap into the apparel market by this kind of model? Also, with this kind of model, does that mean you may actually consider to collaborate with Vipshop? That's my first question.
先让我回答完，你再问好吗？关于服装的自营，我还是想跟大家说一下我们的战略。在所有的品类，我们的战略都是POP和自营同步发展，这不仅仅是在apparel品类，包括在电子产品，我们现在在大力发展第三方卖家。
Yeah. First, let me reiterate that for all categories, we will pursue both marketplace and first-party models, including, for example, electronics. We are also expanding in the marketplace business.
所以说我们在服装发展自营业务，并不代表我们会关闭任何一个第三方卖家，不会因此被关闭。包括所有品牌的官方企业店、他们的专卖店、零售商都可以继续保持他们的店面营业。
By operating a first-party apparel business, clearly, it does not preclude us from continuing to work with all apparel marketplace merchants and brands. In fact, we will work even closer with these third-party marketplace participants.
虽然服装的品类非常繁多，包括size、color等等，但是我们还是有很好的方法，我们已经找到很好的方法去做这种业务。
Despite the relatively large size, color, sort of long-tail nature of the apparel business, we found a model to operate this business.
当然我们也需要一些时间去积累自己的经验。所以目前我们主要还是集中在男装这块，因为相对比较标准化。
Yes, but it will take time for us to accumulate experience. At this point, we are mostly focusing on the male apparel segment, which has basically, generally more standardized.
但是不管是国外还是国内，是线上还是线下，事实上都已经是有很多的这种案例证明，这个服装税是完全可以走通的。
Yeah. If you look at both online and offline, look at the successful retailers, there's ample evidence that 1P model for apparel is clearly a workable model. On your earlier question, we don't disclose gross margin for each category. Again, coming back to the slide I showed you before, just on a blended basis, our gross margin is still significantly lower than the top five or any top offline retailers.
其实这才是我们真正的核心竞争力，就是我们在保持比行业毛利率低多得多的情况下，依然能够实现盈利，这才是京东真正的核心竞争力。如果我们的盈利是在建立在比竞争对手更高的毛利率基础上，说明这家公司是没有竞争力的。
Yeah. This is actually the perfect evidence that despite of a significant lower gross margin versus offline peers, we can still be profitable. That validates how effective our business model is. If your profitability is coming from higher gross margin than your industry peer, then the model is not sustainable.
所以大家其实简单分析一下卓尔产品的话，我可以告诉大家，卓尔永远是永无翻身之日，只要他改变不了自己的成本结构。
One example, if you look at electronics industry, just by looking at the cost structure of the offline competition, you can know that it's very difficult for these competitors to reverse the current trend.
Thank you. My second question is on your cooperation with social networking platform like Tencent and also the media platform like Toutiao. How has been the traffic conversion or sales conversion in the past quarter? Thank you.
I think we have mentioned that our partnership with Tencent has been very, very productive. The two channels, both WeChat and Mobile QQ, have continued to provide a tremendous traffic. The conversion ratio has been improving. We don't disclose exact conversion ratio, but they are definitely improving. Toutiao is a new partnership. It's more on the digital marketing collaboration, basically, utilizing their technology and our marketing technology to improve the advertising efficiency. It's still in the early stage, but results have been quite encouraging.
像和今日头条这样的合作，京东现在会跟越来越多这样的公司。
We do expect similar collaborations as the Toutiao collaboration with more other partners down the road.
这跟我们在两年前内部成立的叫开普勒项目有关系，现在这个项目已经是逐步成熟落地。
This is really from a project we internally call the Project Kepler that we started two years ago. We are really seeing more and more projects coming out of that project.
Once again, participants are reminded to ask one question at a time. Your next question comes from the line of Robert Peck of SunTrust. Please ask your question.
Yeah. Thank you. Just two quick ones. First, on logistics, given the robust growth in GMV and category expansion, could you talk to us a little bit more about the capital intensity for the business for logistics, going forward 2017 and beyond? Sidney, just on procedurally, some of the steps here for the JD Finance spin. Can you tell us just some of the milestones we should be looking for? I know you mentioned the audit approval. Is there a shareholder vote or regulatory approval? How do we think about the various checklists of things we should be looking for? Thank you.
Yeah, sure. On logistics, on operating expense side, it will still grow with the scale. On CapEx, there is some delay in terms of building out some of the larger warehouses, really because of the readiness of the land. When I mentioned earlier about a certain timing difference for cash flow purpose, CapEx was one factor. This year, the CapEx was below our original budget, and we do expect you should also model in a much higher CapEx next year. We don't have the exact number, but you should consider that some of the CapEx was moved from this year to next year. Again, this should be clearly within our operating cash flow. Okay? Free cash flow will remain to be strong and clearly positive.
For process on JD Finance reorganization, the next step is to go out and talk to investors, and once we get enough investor interest, then we will prepare a plan for the independent audit committee to approve, which will then, in turn, submit for board approval. There is no shareholder approval, neither any regulatory approval.
The next question comes from the line of Chi Tsang of HSBC. Please ask your question.
I just wanted to sort of get your sense on some of the growth drivers for 2017 in terms of both sort of 1P and 3P GMV, and maybe sort of framing out some of the different categories or different sort of initiatives that would be driving your top line. Also sort of framing versus sort of direct sales versus services and advertising, because advertising has been growing very rapidly. Thank you.
Yeah. I think we're still in the process of doing our 2017 budget. At this point, as we mentioned earlier, we should continue to see clearly above industry growth rate across all categories, whether it's a profitable category or it's a growth stage category. There will be difference, obviously, more mature categories may see slower growth, but for each and every category, we should grow significantly faster than other industry peer in that category. We will report to you in more details next quarter when we guide our 2017 growth rate. For 1P, 3P, I mentioned earlier, we continue to see growth from really both models, because for each and every category, we wanted to have healthy 1P business, but also have a very healthy marketplace ecosystem. We have clearly demonstrated it is achievable. Yeah.
I wanted to reiterate, I wouldn't respond to so many questions, maybe in the future, but I wanted to reiterate that our strategy has been very consistent for all these years, that we will continue to grow both 1P and 3P, and even within 3P business, we will work with the brands, work with specialty stores, and work with distributors. We work with all of these various forms of third-party merchants to ensure the success of the platform.
The next question comes from the line of Shan Zhang of 86Research. Please ask your question.
Thank you for taking my question, and congratulations on a solid quarter. Just want to shift gear a little bit to the user growth. You have very rapid user growth, 57% in the quarter. Just want to get your sense on how you balance the user growth potential with For example, you talk about customer experience. What do you think about customer experience? Is it user engagement or is it helping user to make fast, very efficient shopping decisions? Maybe just share your thought on that in light with our competitors increasing every user time spent. Another small question would be, we're seeing a lot of domestic courier such as ZTO, SF, going public. With more capital raised from the market, we are seeing these guys are improving, upgrading their logistics system. How do we think our competitive edge in the logistic area? Thank you.
On the user experience, for any retailer, it's really about product quality, about product selection, and it's about service. I think these are really the core elements of user experience. Our focus has been on these three areas, making sure that quality is solid, customers don't have to worry about counterfeits. They can also return the products they don't like. This is about service, the speed of delivery. These are also about service selection that we continue to expand into more and more category with more and more product selections.
Price.
Oh, and yeah, and price. We focus on these core retail experience. I don't think we care too much about what competition is doing. I think in the end, it's really about each business has its own core elements, and you should ask consumers what they care most. Sorry. Every time you ask two questions, I lost track on the second one. I think that getting listed for these third-party logistic companies should be healthy for the industry. As you know, it's been fiercely competitive in terms of pricing, and also the quality has been pretty subpar, substandard, with a lot of these third-party companies, because they adopt a franchise model. With these companies becoming listed companies, there will be better oversight, whether from a public investor's point of view, from a lot of government regulation point of view.
We do believe, hopefully, the quality will improve, but at the same time, the pricing environment will improve. In the end, consumers will be willing to pay for that service. Right now, because of the price competition and low quality, there is actually artificially low pricing environment for logistics services. Regarding the customer experience, I wanted to give you my view. There will be different segments of consumers. Some customers may prefer a very easy and convenient shopping experience. In this respect, JD.com is clearly the best choice, where consumers can come and find the products very quickly and also get delivered very quickly. For this segment of customers, what we care about is the frequency of their shopping on JD.com, or the frequency of the coming, browsing the products.
One of the initiatives, for example, is we launched this JD Daojia platform to engage consumers with daily necessities, people come to shop on a daily basis. There will be another type of customers who wanted to spend more time on a platform, whether it's to going through various selections, browsing, and more like window shopping and finding surprises. With these type of customers, we are also designing new interface, including video streaming and direct broadcasting, to allow these consumers to find their own shopping experience on JD.com. If you look at these models back in one, two decades, you see a lot of these products have its own life cycle and lifespan. One example, for those of you know, in Chinese, it was very hot, very popular for a while, but after a while, it's no longer a very popular destination.
像直播这东西，我们并不认为它是成为客户购物的主流模式。它火起来的时候会很火，当然消退的时候也会消得很快。所以京东来讲，我们观点永远是用户体验，永远是我们永远讲的一个故事，从来不会随着市场的这种风向的不断去改变自己的故事。
There are similar phenomenons in the U.S. I'm sure that you also experienced in your own country where this kind of new forms kind of come and go. The direct broadcasting model, for example, we believe it could be something popular in the short term, but it's not necessarily the main forms of retail business down the road. We should come back to the fundamentals and look for what customers really want in terms of shopping experience. The fundamentals should never change.
Our next question comes from the line of John Choi of Daiwa. Please ask your question.
Thanks for taking my questions. Just quickly on the JD Finance. I think you guys mentioned that more JD Finance allow management to expand into more broader areas. In the longer term, what is management thinking about how this business is going to evolve just from the current consumer and the supply financing. Lastly, just quickly on the Dada and equity investees. Seems to be a bit less than what we expected. Can you give any comments on this part? Thank you.
Sure. Yeah. For JD Finance, again, this may be a very mature business in Western countries, but in China, this is still a very emerging industry. There are a lot of opportunities, a lot of areas that could be interesting. One example we mentioned in the earnings release is because we have been doing asset-backed securities to raise its own funding, we became expert. They actually started a practice to advise other companies securitizing their portfolio. Examples like this in the West, you say, "Oh, any bank could do it," but in China, there are a lot of these emerging opportunities. You have to stay innovative, and you want to take risks whenever you think it's warranted. With a big e-commerce parent company, we are actually very risk-averse, so sometimes we may impose restrictions on those new business models.
On Dada, remember that there is a one quarter lag in terms of picking up equity losses. We are picking up only two months of losses occurred in Q2. Next quarter, you should expect a higher loss from Dada.
We are now approaching the end of the conference call. I will now 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 feel free to contact us if you have any further questions. Thank you for your continued support and looking 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.