Earnings Call: Q2 2016

Aug 10, 2016

Earnings release

Hello and thank you for standing by for jd.com's 2nd 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, Ms. Rae Weili. Thank you. Please go ahead. Thank you, operator, and hello, everyone. Welcome to our Q2 2016 earnings conference call. Joining me today on the call are Richard Liu, our CEO and Sidney Huang, our CFO. For today's agenda, management will discuss highlights for the Q2 2016. Following the prepared remarks, Hao Yu Xian, CEO of JD Mall, will join Mr. Liu and Mr. Huang for the Q and A session of the call. 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 directly 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 CEO, Richard. Thank you, everyone, for joining today's call. We are pleased to report another strong quarter of healthy growth. Sidney will update you on your progress shortly. Before he begins, as you saw in today's release, Haoyu will be moving to the U. S. For family reasons later this year and has been named President of JD International effective immediately. Working with me over the last 5 years, Huiyu has made outstanding contributions to the company. We are very grateful to him and glad we could accommodate his move. His new role will draw on his excellent international experience and we look forward to his future contributions. I'm also pleased to report that we have been developing a strong financial talent in JD Mall over the last several years, In particularly, the 6th business unit presidents in JD Mall are highly talented group, And we will continue to work closely with them as we further grow the business. Before Sidney's comments, I want to just add a few general remarks. As you know, we have made a number of changes this year. 1 is our organizational change and then 2 is changes made to our marketplace platform. So for our organizational change, we have formed a new sales and marketing organization comprised of 6 large business units. All the organizational changes have been put in place by now. So in the spirit of maintaining excellent customer experience and on our platform, We have during our annual renewal process with online platform merchants, we discontinued contracts with over 20,000 merchants, smaller merchants. Yes, over 2,200 over 2,200,000 merchants during the first half of this year. The vast majority of these merchants do have transaction volume. So by discontinuing contract with these merchants, we do suffer some financial losses in the process. And we have, on the other hand, attracted around a similar number of new merchants onto our platform. However, for new merchants to generate meaningful financial results, it would take normally 6 months for them to ramp up. Yes. So as a result, the GMV from our marketplace business will see a meaningful slowdown in the second and third quarter of this year. Yes. But we believe these measures will improve our user experience and the integrity of our platform, which will enable us to achieve much better growth in the future. We hope we'll see starting Q4 of this year resumed growth rate resumed growth in our platform. Okay. So now I will give you our financial highlights for the Q2. We are very pleased to report another quarter of solid growth with record non GAAP operating margin and record free cash flow. I will start with the free cash flow this time, which I was told by a few investors had been somewhat overlooked by the market in the past. Given the seasonality of cash flows, we will focus on the trailing 12 month basis. Our free cash flow totaled RMB11 1,000,000,000 for the trailing 12 months ended June 30, 2016, up 67% from RMB6.6 billion for the trailing 12 months ended June 30, 2015. This strong cash flow is probably the best validation for the underlying financial strength and working capital efficiency of jd.com. For your reference, we have also added the TTM free cash flow data for the past 6 quarters in the supplemental financial information table in our earnings release. Now back to other financial metrics. Our GMV excluding virtual items grew 52% year over year in the Q2 2016, reflecting the underlying strength of our growth momentum. GMV from general merchandise categories, excluding virtual items, grew 63% during the quarter. Food and beverage was the fastest growing general merchandise category, followed by cosmetics and home furnishing, while apparel and footwear continued to be the largest general merchandise category with solid growth. As a result of our integration efforts, high quality merchants are gaining better visibility and the top 100 apparel and footwear merchants had a year over year growth rate of well over 100% during the Q2 2016. GMV from electronics and home appliance products grew 43% during the quarter, led by the home appliance category. Our net revenue grew 42% in Q2, supported by solid momentum in both direct sales and marketplace platforms. Our direct sales revenues grew 40%, led by food and beverage, cosmetics, home appliance and home furnishing products. Our revenues from services and others increased 67% year over year, supported by better monetization of the platform. As I mentioned previously, in light of our balanced focus on profitable growth in 2016, an alternative measure of the underlying growth momentum is the gross profit. As we discussed in earnings release, non GAAP gross profit increased by 66% in the second quarter, which demonstrates the healthy monetization of both our 1P and 3P businesses. And it's very much in line with the growth rates in the past 4 quarters ranging from 67% to 83%. Our non GAAP gross margin improved to 14.6%, up from 12.5% a year ago, as a result of higher 1P gross margin and higher growth in service revenues. Gross margin on direct sales revenue improved over 1 100 basis points on a year over year basis, mainly due to increased scale economies and higher volume based rebates across all key categories. Non GAAP fulfillment expense ratio was 7.7% in Q2, compared to 7% in the same quarter last year. The higher fulfillment expense ratio was mainly due to our investments in the consumable product category, which has lower average order value. As we mentioned earlier this year, especially after our strategic alliance with Walmart, we will further expand our investment in the FMCG category through both jd.com and the EHoudian platforms in the remainder of 2016. The most recent example is EHoudian's 3 months promotion campaign launched this past Monday on August 8, with a budgeted spending of up to RMB 1,000,000,000, mostly funded by JD.com, which will provide greater savings to our customers in the Tier 1 cities and surrounding areas who love the supermarket products offered by EHAUDDian. Back to expenses, the non GAAP marketing expense ratio was 3.5% in Q2, largely in line with the 3.6% in the same quarter last year. Our non GAAP R and D and G and A expense ratios increased 26 basis points and 19 basis points respectively compared to the same quarter last year, which reflect our increased investment in R and D talent, while the higher G and A was entirely attributable to our new businesses. Our non GAAP operating margin was positive 0.6% in the 2nd quarter, a look at high with a 100 plus basis point improvement over the same quarter last year. Excluding the new businesses defined as JD Finance O2O Overseas Business and Technology Initiatives, Our core JD Mall business had an operating margin of 1.1% on a non GAAP basis, another record high with a 60 plus basis point improvement over the same quarter last year. This margin improvement was primarily driven by the higher gross margin, partially offset by the higher fulfillment and R and D expenses discussed earlier. The new businesses on the other hand incurred a non GAAP operating loss of over RMB2.3 billion during the quarter, mainly from JD Finance and Technology Initiatives. We deconsolidated the O2O business following its merger with data on April 26, 2016. So the Q2 operating results reflect only 1 month of the O2O operating loss. Loss from equity method investment in data will be recorded 1 quarter in arrears beginning in the Q3 of 2016. With the improved J. D. Moore operating margin and the reduced new business operating losses, we are pleased to report a non GAAP net profit of RMB391 1,000,000 with a net margin of 0.6 percent in Q2 2016. Our non GAAP EBITDA for the jd.comgroup also set a record at RMB 852,000,000 with an EBITDA margin of 1.3%. Now let me give you an update on JD Finance. In conjunction with our anniversary promotion in the Q2 of 2016, Net loan originations, including consumer and supplier financing, totaled RMB9.4 billion, up 88% from the same quarter last year. For the 1st 6 months of 2016, JD Finance incurred a net cash outflow of RMB13.6 billion in loan originations and investments, while received a net cash inflow of RMB19.6 billion through financing activities, including asset backed securitization and the Series A funding. In other words, JD Finance had a net cash inflow of RMB6 1,000,000,000 from the originations, investment and financing activities during the 1st 6 months of 2016, which is consistent with our commitment that it will self fund its growth in 2016 and beyond. Next, I would like to give you an update on our Walmart transaction, which consists of the acquisition of the EHAO Dian platform, Sam's Club membership collaboration, including an exclusive flagship store on jd.com and the O2O partnership with Jingdong Daojia. Our focus on the EHao DMPs, which will have an immediate impact on our Q3 financial results. As many of you know, EHAO Dient has been a well known online supermarket brand with a loyal customer base in the eastern and the southern regions of China. As part of the transaction, we have acquired this highly valuable brand and its customer base as well as its website and app, most of the marketplace business and or related IT system and back office functions. As of today, we have transferred approximately 900 employees, mainly R and D and platform supporting staff to JD.com. While the deal does not include 1P business of EHodian, As JD owns the platform, we are permitted to sell our own 1P products through the EHA. DAN channels after we complete the system integration during the Q3. Having said that, our objective is to preserve Ehotem's premium product selection, competitive pricing strategy and a unique user experience, so the EHaoDian platform can continue to attract and maintain its unique customer base. As a result, we'll continue to work closely with the EHaoDian 1P team to jointly promote this platform for the years ahead. On the financial impact to our results, we will pick up the GMV from the Ehardian platform, but only part of the commission income and the related R and D and back office expenses going forward. In addition, we may promote select FMCG categories through EHaoDian's 1P business. By funding the incremental costs and expenses associated with such promotions, We treat it as an investment in the EHA Dian platform, which will be reflected in the various cost and expense line items on our income statement. For the second half of twenty sixteen, we expect an incremental operating loss of approximately RMB 1,000,000,000 from these promotion related costs and integration expenses in relation to the to be between 34% 38% on a year over year basis. This guidance reflects the increasingly pronounced seasonality pattern that we observed in the past 2 years, given the major sales in June November, as well as our conservative outlook in light of the slowing consumption growth in 2016. For the non GAAP net margin outlook, we maintain our previous guidance of positive 0.5% and a negative 0.5% for the full year 2016, excluding data related losses from the equity method pickup, which is not within the control of the company. This concludes my prepared remarks and we can now move to the Q and A session. Thank you. The question and answer session of this conference call will start in a moment. Great. Thank you very much. I had a question about your ad business. The very impressively services and other revenues came in well above what we would have anticipated. And I'm wondering is it ad revenues that may have surprised on the upside? I ask that because our understanding was there was indeed higher adoption of ad tools as we started clamping down on brushing, but not rapid enough to possibly backfill the loss of commissions as we remove brushing? And then I'm just wondering whether you can give us any more color on what the merged entity with Dada, what it actually does on the non operating basis? Thank you very much. Sure, Alan. This is Sidney. So we mentioned the advertising revenue really is a result of monetization from both 1P and 3P businesses. So as the platform continue to grow stronger, we will receive more and more advertising budget from both our merchants and suppliers. So I think that will probably answer address your question. And you did mention that, of course, with the anti aggression effort, at least some of the merchants will start to look at advertising as an alternative, a much better approach to promote their own storefronts. So Alan, this is how you maybe add more color to what Cindy just mentioned. So we used to have most of our ad inventory on PC, but PC traffic is stagnant. In the past quarter, we've added a lot of inventory on our mobile property and we improved our algorithm ad algorithm in our app and also we added some ad inventory in WeChat and QQ platform. So that's also part of the reason why we're seeing meaningful growth of ad revenue. Great. Thank you so much. Thank you. Your next question comes from the line of Eddie Leung of Merrill Lynch. Please ask your question. Good evening. Thank you for taking my question. I have a question more on the logistic business. The first one is, as you mentioned that you would be doing more FMCG product category. So just wondering how could that affect your fulfillment costs in the upcoming several quarters? And then secondly, more a big picture question. We have seen quite some last mile delivery companies preparing for IPO either in China or overseas, how could that change the competitive landscape for e commerce and especially yourself? Thanks. So FMCG, getting more of our GMV or sales of FMCG does put pressure on our logistic cost in terms of fulfillment cost per order because they tend to be comparing with traditional 3C or appliances, they tend to be smaller ticket and also heavier and bulkier. And it costs us more to deliver. It also costs us more to pick and pack in the store in our warehouses. But so far, I think we are definitely the best operator of FMCG Logistics. And we are continually innovating in our fulfillment process. And I think there's still a long way to go. I think down the road more innovations, I think, will help us to control the logistics cost better for FMCG. As far as your second question, Eddie, yes, there's a lot of them are going public. We don't work with them a whole lot. We deliver well over 95% of the parcels that come out of our own warehouses and we do work with some regional players for the areas that we do not cover. But we're happy to see that this industry is getting more mature in China. I think the customers are getting better services, and we're happy to be a part of that evolution. So that was Richard. He gave a technical point about why FMCG these days were seeing higher fulfillment costs because there are many, many SKUs in that category. So a lot of times, we fulfill the same order, one order from multiple warehouses because we don't have a lot of the warehouses we have are not big enough to house all the SKUs. So by fulfilling one order through or by multiple warehouses, that will increase our cost. In future, when we have more mega warehouses, such as Asia No. 1 online, this problem can also be mitigated. Got it. Thank you, Richard. Your next question comes from the line of Erica Worken of UBS. Please ask your question. Hi, thank you. My question is out for Richard. Hello, Richard. Firstly, just wondering over the next 2, 3 years, how do you plan to allocate your capital over your ever growing business, which now encompass e commerce penetration, expansion of logistics network, O2O business, for example, ZhaoJia, Finjina Finance, Cloud, etcetera, etcetera? And then a follow-up question is, wondering what is your overall tolerance of having occasional operating losses in certain quarters? Thank you. So Richard is saying that in terms of capital allocation, we do expect one of the major new areas will be in cloud computing, which may absorb fairly amount of new capital. For our OTO initiative, as Jinlong Dazha has been merged into Dada, so the combined entity will seek its own capital for its future growth. So it will not take additional capital from the JD Group. And for JD Finance, as we mentioned earlier, it will it has and it will continue to be self funded going forward. Yes. So at this point, other than these areas, we don't see any major capital expenditure, obviously, other than our ongoing warehousing build up. Yes. So based on internal projection, we do expect very strong free cash flow over the next 5 years. So we're clearly not we don't have any issue with our internal cash and capital. So yes, so given the competitive nature of e commerce, we do expect from time to time maybe one specific area that require a lot of investment like FMCG that we are investing right now. But as we continue to grow in scale, these investments will become less and less significant in light of the overall company's operating results. So over time, we hope these kind of regional or areas of investment will have smaller and smaller impact on our overall financial performance. Yes. And given what I just mentioned about strong, very strong cash reserve, if necessary and if we believe it will create long term shareholder value, we will not hesitate to invest very aggressively in any select areas and categories in any single quarter. Thank you very much, Richard and Anthony. Your next question comes from the line of Wendy Huang of Macquarie. Please ask your question. Thank you. My question is still mainly about Yiho Dian Steel. You just mentioned that actually JD has very strong cash reserve. If that's the case, actually what actually prevent you to go for that transaction with all cash consideration? So now you're actually giving away 5% of your stake when the JD is on valuation at a relatively low level. And also earlier, I think you mentioned that JD will pick up the GMV from EHaoDian, but only a portion of the commissions. So does that mean that you will consolidate both 1P and the 3P platforms of Yihoudian, but only recognize part of its revenues? Thank you. Right. So on the deal transaction, it's really from the Walmart side that it is not they don't treat it as an exit from China e commerce. So Walmart in fact insisted that they will receive stock for this transaction and so that they can continue to participate in the e commerce growth in China through jd.com. And on the 1P and 3P pickup, yes, because even the 1P business also running through the platform, so we will pick up the GMV of the 1P platform, but we will not pick up the revenue out of the existing eHodian 1P business. So just want to clarify that. So if you're already picking up the 1P's GMV, does that mean the 5% of the stake you paid for this transaction actually already includes the One Piece platform? Well, as I mentioned in my earlier remarks, because we own the platform, over time, we could obviously sell our own 1P products through this platform. So over time, you will have 1P revenue. And so yes, you can interpret that way, but clearly it's not including the existing Yihadeo and 1P revenue. Thank you. And by the way, we did mention previously at various investor conferences, for EHaoDian, its GMV size last year, was around 5% of jd.com's GMV, but this year, because it was not growing, so on a standalone steady state basis, it would contribute roughly 2% to 3% of our GMV base this year, which we will pick up starting Q3. Your next question comes from the line of Ms. Alicia Yap from Citigroup. Please ask your question. Thank you. Good evening, Richard, Sydney and Haoyi. Thanks for taking my questions. I have a question related to your gross margin improvement for your 1P business. So it does looks like you are increasing about 102 basis points. So just wanted to get a sense, is that mainly come from the home appliance category rather than the 3C? Is that due to the pricings on your sourcing? Any macro headwinds that you are seeing on your smartphone category? And just kind of related to the GMV from merchant side, I wanted to get a sense out of the 22,000 merchants that you removed in April on the general merchant side, can you give us a sense what type of categories these merchants are? And for the new merchants that you are adding in and what type of categories are there? Thank you. So on the 1P gross margin, as I mentioned, it's mainly from our scale economies. So when you buy more from suppliers, normally, suppliers will give you volume based rebate. So the improvement is primarily from these volume based rebates and better purchasing terms as we continue to grow. And it is, again, across all categories, not just home appliance. It does come from the 3C categories, mobile phones, every category, obviously, general merchandise as well. I don't have the as far as the 22,000 that we decided not to renew contracts with, I don't have exact statistics in front of me, but I think they're probably spread pretty evenly across all categories because we don't sort of, in particular, treat different categories differently. These tend to be merchants or sellers that are lower quality and probably in the past repeatedly violated some of our rules. So, Richard said, about 70% are from home and apparel BU and the rest from consumables to general merchandise. These are the 2 categories that we have the bulk of the merchants anyway. The new entrants also from those major categories, those tend to be longer tail categories where marketplace can be a good fit. But we said we're also looking at expanding our merchant base of appliances in 3C categories to complement our selection, but these are comparing with the number of merchants in the 2 other BUs, these are still not in terms of numbers, very small. Okay. Thank you. Your next question comes from the line of Shan Zhang of 86 Research. Please ask your question. Great. Thank you for taking my question management. 2 things. Number 1, on the category focus, am I right to understand that the FMCG or the online supermarket grocery category is our new focus to drive user growth, to drive our total GMV. Can you tell us what's the main logic of going heavily into this category? And number 2, maybe on the personalization, I think we had discussion before about compared to competitor, JD mobile app doesn't offer the same level of personalization or kind of data based curated sale environment. So consumer come to our platform to search, mainly search, but there's a lack of sense of window shopping. But we see the content driven, the curated UGC kind of content are driving a lot of traffic on our competitor app and they generated bookmarking, they generated buskating and for potential sales in the future. So I want to understand what we have done to improve our personalization in this regard. Thank you. FMCG is definitely one of our top priority categories. This is great category for e commerce because these tend to be for the most part tend to be standardized products and it creates loyalty with our customers, increased traffic. It's definitely challenging for our economics, as we mentioned earlier, as far as just the cost is concerned, but we're confident that we will figure out ways to make this category profitable. Your question on personalization, we do have quite a big effort in the company looking at personalization to our customers on PC or app. Actually, in the past June 18 campaign, we tried out algorithm of personalization. So the results are quite encouraging. Of course, there's still a long way to go. And also as far as content and making the site or app more interesting or more browsable, if you will, we also have a big effort going on. Recently, actually, as part of the recent reorganization, we consolidated multiple groups within the company working on content under one organization. So I think hopefully not in near future, hopefully, you will see some changes in our site and app on these dimensions. So your next question comes from the line of Jaeme Yoon of Mizuho Securities. Please ask your question. Hi, good evening. Couple of things. So we've seen a nice ramp up again in customer growth. How much of that is incrementally contributed by JD Finance? And where would that customer growth be without the contribution from JD Finance? And second of all, if I remember, I think you mentioned that there was going to be an incremental RMB1 1,000,000,000 cost structure associated with the new acquisitions. Can you kind of break down in terms of where is that RMB1 1,000,000,000 hitting? You mentioned promotions and so forth. Can you just kind of give us a clearer color in terms of where that numbers are actually going into? Thanks. Sure. So for JD Finance customer basis, there are actually a lot of overlaps, particularly the JD Consumer Financing customers, they tend to buy, more. So we do have internal analysis on the overlap customer base in terms of incremental contribution to our overall user growth, it's been very, very small. So the vast majority of the growth did come from the JD e Commerce platform. Yes. On the RMB1 billion, as I mentioned, there will be we will be supporting EHAO Dan's platform's promotional activities. And because at this point, the 1P business is run by the EHaoDian 1P team, So we will be supporting its effort through marketing activities, for example, promotional coupons and expense reimbursements, etcetera. So basically, we will absorb the majority of the investment in the recent 3 months marketing promotional campaign that we just started in the past Monday. So that's probably the bulk of it. And then there will be other ongoing expenses I mentioned about. Obviously, we took over the IT system and the staff and also all the back office expenses. And there will be also some integration related charges. But mostly, it will be coming from incremental investment in this category through various promotions. Great. Thanks. Thank you. Your next question comes from the line of Mr. Alex Yao of JPMorgan. Please ask your question. Hi, good evening, everyone. Thank you for taking my question. Just a quick one regarding the transaction with Walmart and Yihoudian. I'm just wondering, does the transaction enable you to cooperate with Walmart in the areas such as supply chain and the merchandising? Thank you. Yes. So we are as part of the transaction, we've agreed to work together in select areas and particularly in FMCG category that we could leverage each other's strengths, especially expanding our product selections. So definitely, there will be very close collaboration on that front. Thank you. And your next question comes from the line of John Choi of Daiwa. Just a quick one on the margin trend right now. We've seen a nice bump, I think, this quarter. I think as you go into second half this year and also next year, should we be continued to this kind of trend, particularly from the 1P business? And also secondly, on the 3P, Richard did mention starting from Q4, we should see a nice reacceleration of the business. I was wondering if you could elaborate a bit more on that. Is it going to come from the new merchants or is it more from their broader category from the general merchandises? Thank you. Right. So on the margin for 1P business, we have in fact, for the JD Mall business, we have committed at the beginning of the year that we will improve our JD Moore operating margin in a meaningful fashion. So we have proved that in the past two quarters. Now we don't give you quarter by quarter forecast. And in light of the recent FMCG expansion effort, we are giving back to our consumers through the promotions in conjunction with Yihoutian, for example. So you don't necessarily see the same extent, but I think through the past two quarters, you can see that this is something clearly achievable and it's sustainable. As we have repeatedly mentioned in the past that the scale will bring margin upside. So it is very, very visible, But there will be discretionary spending along the way, such as the one we are going through at this point. And on the GMV improvement starting Q4, I think Richard was mentioning that for the new merchants that we recruited, it will take normally 6 months for them to ramp up their sales volume. So I think it's just a matter of time for those new merchants to begin contributing to the platform. I have a quick follow-up on the RMB1 billion operating loss incremental operating loss related to Yihao Jian. I just wonder, should we classify these laws as part of your core business or your new business? And also in your earnings release, you mentioned that you will adopt a new share buyback scheme. And I just wonder why you decided to adopt this new share buyback scheme? And how is it different from buyback shares directly from open market? Right. So the RMB 1,000,000,000 investment is definitely part of the core business because it's related to mainly the FMCG category. The second question on buyback, it's actually the same buyback program we announced last year. So there is no new buyback plan. Thank you. Sure. Your next question comes from the line of Rodney Hall of SunTrust. Please ask your question. Yes. Good morning. Good evening, Richard, Sydney and Hadi. I would like to ask on the Tencent relationship. Just as we anniversary that relationship, I wanted to see if management could provide an update on how that is impacting user growth as well as GMV going forward? Thanks very much. So the partnership has hit its 2 year mark. We actually, last year, I reviewed with the top management Tencent, our collaboration in the past 2 years, and we're all happy about the progress we've made in the past 2 years in terms of traffic GMV, especially new customers. And we are now these I don't want to say these entry points are maturing, but they're definitely past their first phase. And we're continuing to look at how to add some social components to shopping through collaboration with Tencent. And also, we are looking into differentiating our entry point or our gateway on WeChat versus our gateway on QQ because, as you know, they have drastically different user base. And we haven't in past, we haven't been differentiating these 2 very much. Now we've reached agreement with Tencent. We'll be looking at these 2 gateways separately and cater to the different user bases. And collaboration on other dimensions such as advertising, data sharing, app promotion, app installation, I think all of these are going quite well, on track. So we're both management management of both companies are happy with the relationship and progress, the relationship that we build, the trust we build and the progress we made. Yes. Just to add one data point, the key contribution from the 2 traffic entry points from WeChat Mobile QQ is to attract new users to the JD platform. So in the most recent quarter, again, those two channels continued to contribute around 1 quarter of our new user base. So it is very, very powerful and continue to contribute significantly to our user growth. Thanks very much. Thank you. Your next question comes from the line of Eric Yuan of Blue Lotus. Please ask your question. Hi. Thanks management for taking my question, Cindy and Haoyu. My question regarding your working capital seems to be continued to demonstrate very nicely the negative cash cycle, especially in account payables and accrued expenses. Can you comment on how sustainable these two changes are going forward? And how would the integration of Yihoutian and Dada do to your working capital items? Thanks. Yes. So we have discussed this in the past and you probably have seen the comparison of our working capital days to our industry peers, both in China and internationally. So we have JD's operating efficiency has been clearly market leading and as demonstrated in our inventory turnover days continue to be at the industry low. On the other hand, payable cycles, despite of some increase over the past few quarters, continue to be at the low end versus our industry peer in China. So that's why what Richard mentioned earlier that we do see continued free cash flow improvement in the next 3 to 5 years. In the this will not actually be affected by the data transaction because again data is deconsolidated from jd.com, which will self fund its own growth. With regard to the EHaoDian business, the existing 1P business will not affect. So it's really, to put it simple, there wouldn't be much impact on our working capital going forward. Your next question comes from the line of Ella Ji. Please ask your question. Hey, good evening management. I just want to clarify regarding the KRW 1,000,000,000 on the investment. So will it be only includes the promotions on EHAO Tian platform or does it include the promotions on your own platform as well? And then relating to that, since EHao D and E will maintain the domain separately, can you talk about how you think about trying to cross sell the customers again on YihaoDian platform and trying to get them to your to become your own JD platform customer? Okay. So on the RMB1 billion, it will be all spent on the ERD platform. It will be supporting the existing ERD and 1P promotions and possibly in Q4, it could also support our own effort, obviously on the YiHodian platform. So again, it's all related to it's incremental spending on Yihoutian, excluding our own spending on FMCG category, which could also see our face on promotions. On the customer base, we intend to maintain the Yihogian platform as is. And so we will working with existing team, as I mentioned earlier, to maintain its own selection and also its own pricing strategy, which has been very, very competitive. And so we don't intend to necessarily move the customer base to jd.com. I think the 2 platforms have worked very well in the past, attracting their respective customer base, and we intend to keep it that way. Obviously, there will be future cross sell opportunities maybe in other categories like the 3C and home appliance categories. But I think as far as FMCG goes, the existing positioning of the 2 companies, we think it's very well positioned and will be kept that way. Thank you. Your next question comes from the line of Natalie Wu of CICC. Please ask your question. Hi, good evening, management. Thank you for taking my question. So my question is regarding EHodian deal. So just to confirm with what you said before, are you saying that EHaoDian 1P GMV will be consolidated since the Q3 into JD's 1P GMV or to be included into JD's 3P GMV? And also you mentioned that for the 1,000,000,000 sales campaign to be carried out by EHao Jian, JD mostly funded. But you since you haven't consolidated with Yiho Dian on your income statement yet, so just wondering what kind of impact will this promotion be to our JD's income statement? So on the GMV, it will be a 3P GMV because we operate the platform and EHAJAN 1P business will be acting as a merchant on the platform. So it's all 3P GMV. On the promotional impact, it will be mostly most likely through marketing and potentially some fulfillment expenses and also R and D as we are already running the entire IT infrastructure of the platform and the G and A, of course. Thank you. Your next question comes from the line of Piyush Mubayi of Goldman Sachs. Please ask your question. Thank you for taking my question. You've talked about in terms of new businesses, JD Finance and O2O. I wonder if you could shed light on technology initiatives you're undertaking and what these big projects might be with a 3 year view? And also, any big changes we can see on the overseas business side? Yes. On the tech front, Richard mentioned about cloud computing, which we started fairly late, but is making a major push into the space. We have also invested in smart devices area. So those are really our key technology initiatives, which will take a multiyear phase of investment. On the international front, we now have a joint venture in Indonesia, and we are gaining momentum in less than a year period. But at this point, we don't have any other tangible plan on the international front. And then the investment in cloud computing, what to what scale is this going to be? Yes. So until we provide more color on that, right now, it's still very early stage. And you will see that reflected in the new businesses as we disclose every quarter. Thank you. Thank you. We are now approaching the end of the conference call. I will now turn the call over to JD dotcom's Ray Li Li for closing remarks. Thank you, operator. Thank you, everyone, for joining us today. Please feel free to contact us if you have any further questions. Thank you for your continued support, and we are 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.