Hello, thank you for standing by for JD.com's second 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. Ruiyu Li. Thank you. Please go ahead.
Thank you, operator. Hello, everyone. Welcome to our second quarter 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 second quarter 2016. Following the prepared remarks, Haoyu Shen, CEO of JD Mall, will join Mr. Liu and Mr. Huang for the Q&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, has been named President of JD International effective immediately. Working with me over the last five years, Haoyu has made outstanding contributions to the company. We are very grateful to him and are 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 bunch of talent in JD Mall over the last several years. In particular, the six business unit presidents in JD Mall are a highly talented group.
I will continue to work closely with them as we further grow the business.
Before Sidney Huang's comments, I want to just add a few general remarks.
As you know, we have made a number of changes this year. One is our organizational change, two is changes made to our marketplace platform. For our organizational change, we have formed a new sales and marketing organization comprised of six large business units. All the organizational changes have been put in place by now. In the spirit of maintaining excellent customer experience on our platform, during our annual renewal process with online platform merchants, we discontinued contracts with over 20,000 smaller merchants. Yeah, over 22,000 merchants during the first half of this year. The vast majority of these merchants do have transaction volume. By discontinuing contracts with these merchants, we do suffer some financial losses in the process. 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 six months for them to ramp up. 所以这是截至到今年的第三季度末之前，我们的判断，我们的第三方卖家的这个GMV的增长比我们原先预期的会少很多。
Yeah. As a result, the GMV from our marketplace business will see a meaningful slowdown in the second and third quarter of this year.
但我们坚信我们这些动作将来都能够更加地保护我们的用户体验，保护我们的平台的声誉，能够迎来更加持续的健康的增长。
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.
我们预计从今年的第四季度开始，我们第三方卖家的这个GMV的增速将会逐步地恢复。
We hope we'll see, starting fourth quarter of this year, resumed growth in our platform marketplace.
好，接下来请Sidney。
I will give you our financial highlights for the second quarter. 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 months basis. Our free cash flow totaled RMB 11 billion for the trailing 12 months ended June 30, 2016, up 67% from RMB 6.6 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 six quarters in the supplemental financial information table in our earnings release. Back to other financial metrics. Our GMV, excluding virtual items, grew 52% year-over-year in the second quarter of 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 second quarter 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 profits 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 four quarters, ranging from 67%-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 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 Yihaodian platforms in the remainder of 2016. The most recent example is Yihaodian's three-month promotion campaign, launched this past Monday on August 8, with a budgeted spending of up to RMB 1 billion, 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 Yihaodian. 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&D and G&A expense ratios increased 26 basis points and 19 basis points respectively compared to the same quarter last year, which will affect our increased investment in R&D talents, while the higher G&A was entirely attributable to our new businesses. Our non-GAAP operating margin was a positive 0.6% in the second quarter, a record 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&D expenses discussed earlier. The new businesses, on the other hand, incurred a non-GAAP operating loss of over RMB 0.3 billion during the quarter, mainly from JD Finance and technology initiatives. We deconsolidated the O2O business following its merger with Dada on April 26, 2016. The Q2 operating results reflect only one month of the O2O operating loss. Loss from equity method investment in Dada will be recorded one quarter in arrears, beginning in the third quarter of 2016. With the improved JD Mall operating margin and the reduced new business operating losses, we are pleased to report a non-GAAP net profit of RMB 391 million with a net margin of 0.6% in Q2 2016.
Our non-GAAP EBITDA for the JD.com group also set a record at RMB 852 million, 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 second quarter of 2016, net loan originations, including consumer and supplier financing, totaled RMB 9.4 billion, up 88% from the same quarter last year. For the first six months of 2016, JD Finance incurred a net cash outflow of RMB 13.6 billion in loan originations and investments while received a net cash inflow of RMB 19.6 billion through financing activities, including asset-backed securitization and Series A funding. In other words, JD Finance had a net cash inflow of RMB 6 billion from the originations, investment, and financing activities during the first six 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 warm-up transaction, which consists of the acquisition of the Yihaodian platform, Sam's Club membership collaboration, including an exclusive flagship store on JD.com, and the O2O partnership with Jingdong Daojia. I will focus on the Yihaodian piece, which will have an immediate impact on our Q3 financial results. As many of you know, Yihaodian 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 all related IT system and the back-office functions. As of today, we have transferred approximately 900 employees, mainly R&D and platform supporting staff, to JD.com.
While the deal does not include the 1P business of Yihaodian, as JD owns the platform, we are permitted to sell our own 1P products through the Yihaodian channels after we complete the system integration during the third quarter. Having said that, our objective is to preserve Yihaodian's premium product selection, competitive pricing strategy, and a unique user experience so the Yihaodian platform can continue to attract and maintain its unique customer base. As a result, we will continue to work closely with the Yihaodian 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 Yihaodian platform, but only part of the commission income and the related R&D and back-office expenses going forward.
In addition, we may promote select FMCG categories through Yihaodian's 1P business by funding the incremental costs and expenses associated with such promotions. We treat it as an investment in the Yihaodian platform, which will be reflected in the various cost and expense line items on our income statement. For the second half of 2016, we expect an incremental operating loss of approximately RMB 1 billion from these promotion-related costs and integration expenses in relation to the Yihaodian transaction. Finally, let's discuss our financial outlook. We expect Q3 net revenue growth to be between 34% and 38% on a year-over-year basis. This guidance reflects the increasingly pronounced seasonality pattern that we observed in the past two years, given the major sales in June and 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 Dada-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&A session.
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 Mr. Alan Hellawell of Deutsche Bank. Please ask your question.
Great. Thank you very much. I had a question about your ad business. Very impressively, services and other revenues came in well above what we would have anticipated. 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 removed brushing. 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. We mentioned the advertising revenue really is a result of monetization from both 1P and 3P businesses. As the platform continue to grow stronger, we will receive more and more advertising budget from both our merchants and suppliers. I think that will probably address your question. You did mention that, of course, with the anti-brushing effort, at least some of the merchants will start to look at advertising as an alternative, a much better approach to promote their own storefront.
Alan, this is Haoyu, maybe add more color to what Sidney just mentioned. We used to have most 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 ad algorithm in our APP. Also we added some ad inventory in WeChat and QQ platform. 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 a more FMCG product category. Just wondering how could that affect your fulfillment costs in the upcoming several quarters? 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.
FMCG, getting more of our GMV or sales from FMCG does put pressure on our logistic cost in terms of fulfillment cost per order, because comparing with traditional 3C or appliances, they tend to be smaller ticket, also heavier and bulkier. It costs us more to deliver. It also costs us more to pick and pack and store in our warehouses. So far, I think we're 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.
Eddie。
The Santong Yida, 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. 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. That was Richard. He gave a technical point about why FMCG, these days, we're seeing higher fulfillment costs. There are many SKUs in that category. A lot of times, we fulfill the same order, one order from multiple warehouses, because a lot of the warehouses we have are not big enough to house all the SKUs.
By fulfilling one order 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 and Haoyu.
Your next question comes from the line of Erica Poon Werkun of UBS. Please ask your question.
Hi, thank you. My question is for Richard. Hello, Richard. Firstly, just wondering over the next two, three years, how do you plan to allocate your capital over your ever-growing business, which now encompasses e-commerce penetration, expansion of logistics network, O2O business, for example, Daojia, Internet finance, cloud, et cetera. Then a follow-up question is, I'm wondering what is your overall tolerance of having occasional operating losses in certain quarters. Thank you.
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 a fair amount of new capital. For our O2O initiative, as Jingdong Daojia has been merged into Dada, the combined entity will seek its own capital for its future growth. It will not take additional capital from the JD group. For JD Finance, as we mentioned earlier, it has and will continue to be self-funded going forward. Yes. At this point, other than these areas, we don't see any major capital expenditure, obviously, other than our ongoing warehousing build-out. Yeah. Based on our internal projection, we do expect a very strong free cash flow over the next five years. We don't have any issue with our internal cash and capital.
Thank you. The tolerance for-
Yeah, 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. As we continue to grow in scale, these investments will become less and less significant in light of the overall company's operating results. Over time, we hope these kind of regional or areas of investment will have smaller and smaller impact on our overall financial performance. Yeah. Given what I just mentioned about 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 Sidney.
Your next question comes from the line of Wendy Wang of Macquarie. Please ask your question.
Thank you. My question is still mainly about Yihaodian still. You just mentioned that actually JD has very strong cash reserve. If that's the case, what actually prevent you to go for that transaction with all-cash consideration? Now you are actually giving away 5% of your stake when the JD's own valuation at relative low level. Also earlier, I think you mentioned that JD will pick up the GMV from Yihaodian, but only a portion of the commissions. Does that mean that you will consolidate both 1P and the 3P platforms of Yihaodian, but only recognize part of its revenues? Thank you.
Right. On the deal transaction, it's really from the Walmart side that they don't treat it as an exit from China e-commerce. 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. On the 1P and 3P pickup, yes, because even the 1P business also running through the platform. We will pick up the GMV of the 1P platform, but we will not pick up the revenue out of the existing Yihaodian 1P business.
Just want to clarify that. If you are already picking up the 1P's GMV, does that mean the 5% of the stake you paid for this transaction actually already includes the 1P 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. Over time, you will have 1P revenue. Yes, you can interpret that way, but clearly it's not including the existing Yihaodian 1P revenue.
Thank you.
By the way, we did mention previously at various investor conference, for Yihaodian, its GMV size last year was around 5% of JD.com's GMV. This year, because it was not growing, on a standalone steady state basis, it would contribute roughly 2%-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, Sidney, and Haoyu. Thanks for taking my questions. I have a questions related to your gross margin improvement for your 1P business. It does look like you are increasing about 102 basis point. 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? Just kind of related to the GMV from merchant side, I wanted to get a sense, out of the 22,000 merchants that you remove in April on the general merchant side site, can you give us a sense what type of categories these merchants are? For the new merchants that you are adding in, and what type of categories are they? Thank you.
On the 1P gross margin, as I mentioned, it's mainly from our scale economies. When you buy more from suppliers, normally suppliers will give you volume-based rebate.
The improvement is primarily from these volume-based rebates and better purchasing terms as we continue to grow. 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. Richard said about 70% are from home and apparel BU, and the rest from consumables to general merchandise, because these are the two categories that we have the bulk of the merchants anyway.
Recently, we're also looking at expanding our merchant base of appliances and 3C categories to complement our selection. These are comparing with the number of merchants in the two other BUs. These are still not in terms of the numbers, very small.
Okay. Thank you.
Your next question comes from the line of Sean Zhang of 86Research. Please ask your question.
Great. Thank you for taking my question, management. Two 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? 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. Consumer come to our platform to search, mainly search, but there's a lack of sense of window shopping. 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 generate basketing and for potential sales in the future.
We 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 a great category for e-commerce because these, for the most part, tend to be standardized products. It creates loyalty with our customers, increases traffic. It's definitely challenging for our economics, as we mentioned earlier, as far as just the cost is concerned. We're confident that we will figure out ways to make this category profitable. Your question about 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. The results are quite encouraging. Of course, there's still a long way to go. 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.
As part of the recent reorganization, we consolidated multiple groups within the company, working on content under one organization. I think, in the near future, hopefully you will see some changes in our site and app on these dimensions.
Your next question comes from the line of Jin Yoon of Mizuho Securities. Please ask your question.
Hi, good evening. Couple of things. We've seen a nice ramp-up again in customer growth. How much of that is incrementally contributed by JD Finance? Where would that customer growth be without the contribution from JD Finance? Second of all, if I remember, I think you mentioned that there was going to be an incremental RMB 1 billion cost structure associated with the new acquisitions. Can you kind of break down in terms of where is that RMB 1 billion 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. For JD Finance customer bases, there are actually a lot of overlaps. Particularly the JD consumer financing customers, they tend to buy our products on JD more. 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. The vast majority of the growth did come from the JD eCommerce platform. RMB 1 billion. Oh, yes. Yeah, RMB 1 billion. On the RMB 1 billion, as I mentioned, we will be supporting Yihaodian's platforms promotional activities. Because at this point, the 1P business is run by the Yihaodian 1P team, we will be supporting its effort through marketing activities, through for example, promotional coupons and expense reimbursements, et cetera.
Basically, we will absorb the majority of the investment in the recent three months promotional campaign that we just started in the past Monday. 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. There will be also some integration-related charges. Mostly will be coming from incremental investment in this category through various promotions.
Great, thanks.
Thank you. As a reminder, we will be getting one question at a time from each caller. 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 Yihaodian. I'm just wondering, does the transaction enable you to cooperate with Walmart in the areas such as the supply chain and the merchandising? Thank you.
Yes. 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. Definitely, there will be very close collaboration on that front.
Thank you.
Your next question comes from the line of John Choi of Daiwa. Please ask your question.
Thanks for taking my question. 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 continuing to expanding this kind of trend, particularly from the 1P business? Secondly, on the 3P, Richard did mention starting from fourth quarter, we should see a nice re-acceleration of the business. I was wondering if you could elaborate a bit more on that. Is it gonna come from the new merchants, or is it more from their broader category from the general merchandises? Thank you.
Right. On the margin for 1P business, we have, in fact, for JD Mall business, we have committed at the beginning of the year that we will improve our JD Mall operating margin in a meaningful fashion. We have proved that in the past two quarters. Now we don't give you quarter-by-quarter forecast. In light of the recent FMCG expansion effort, we are giving back to our consumers through the promotions in conjunction with Yihaodian, for example. 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. It's sustainable, as we have repeatedly mentioned in the past, that the scale will bring margin upside. It is very visible. There will be discretionary spending along the way, such as the one we are going through at this point.
On the GMV improvement starting fourth quarter, I think Richard was mentioning that, for the new merchants that we recruited, it will take normally six months for them to ramp up their sales volume. I think it's just a matter of time for those new merchants to begin contributing to the platform. Hello, operator, next question please.
Thank you. Your next question comes from the line of Jialong Shi of Nomura. Please ask your question.
Hi. Good evening, Richard, Haoyu Shen, Sidney. Thanks for taking my call. I have a quick follow-up on the RMB 1 billion incremental operating loss related to Yihaodian. I just wonder, should we classify these losses as part of your core business or your new business? Also, in your earnings release, you mentioned that you will adopt a new share buyback scheme. 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. The RMB 1 billion R&D 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. 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 evening, Richard, Sidney, and Haoyu. 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.
The partnership has hit its two-year mark. We actually, last year, I reviewed with the top management at Tencent, our collaboration in the past two years, and we're all happy about the progress we've made in the past two years in terms of traffic, GMV, especially new customers. We are now, I don't want to say these entry points are maturing, but they're definitely past their first phase. We're continuing to look at how to add some social components to shopping through collaboration with Tencent. 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 in the past, we haven't been differentiating these two very much.
Now we've reached agreement with Tencent, we'll be looking at these two gateways separately and cater to the different user bases. The collaboration on other dimensions, such as advertising, data sharing, app promotion, app installation, I think all of these are going quite well, on track. Management of both companies are happy with the relationship and progress, the relationship that we built, the trust we built, and the progress we made. Just to add one data point, the key contribution from the two traffic entry points from WeChat and Mobile QQ is to attract new users to the JD platform. In the most recent quarter, again, those two channels continued to contribute around one quarter of our new user base. It is 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 Wen of Blue Lotus. Please ask your question.
Hi. Thanks management for taking my question, Sidney 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 Yihaodian and Dada do to your working capital items? Thanks.
Right. 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. 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. That's why what Richard mentioned earlier that we do see continued free cash flow improvement in the next three to five years. This will not actually be affected by the Dada transaction because, again, Dada is deconsolidated from JD.com, which will self-fund its own growth. With regard to the Yihaodian business, the existing 1P business will not affect.
It's really, to put it simple, there wouldn't be much impact on working capital going forward.
Thanks. Very helpful.
Your next question comes from the line of LRG. Please ask your question.
Hey, good evening, management. I just want to clarify regarding the RMB 1 billion investment. Will it only include the promotions on Yihaodian platform, or does it include the promotions on your own JD platform as well? Relating to that, since Yihaodian, you will maintain the domain separately, can you talk about how you think about trying to cross-sell the customers you gain on Yihaodian platform and trying to get them to become your own JD platform customer?
Okay, on the CNY 1 billion, it will be all spent on the Yihaodian platform. It will be supporting the existing Yihaodian 1P promotions and possibly in Q4, it could also support our own effort, obviously on the Yihaodian platform. Again, it's all related to incremental spending on Yihaodian, excluding our own spending on FMCG category, which could also see its own promotions. On the customer base, we intend to maintain the Yihaodian platform as is. We will be working with the existing team, as I mentioned earlier, to maintain its own selection and also its own pricing strategy, which has been very competitive. We don't intend to necessarily move the customer base to JD.com. I think the two 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. I think as far as FMCG goes, the existing positioning of the two 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. My question is regarding Yihaodian deal. Just to confirm with what you said before, are you saying that Yihaodian 1P GMV will be consolidated since the third quarter into JD's 1P GMV or to be included into JD's 3P GMV? You mentioned that for the RMB 1 billion sales campaign to be carried out by Yihaodian, JD mostly funded it. Since you haven't consolidated with Yihaodian on your income statement yet, just wondering what kind of impact will this promotion be to JD's income statement?
Right. On the GMV, it will be a 3P GMV because we operate a platform, and Yihaodian 1P business will be acting as a merchant on the platform. It's all 3P GMV. On the promotional impact, it will be most likely through marketing and potentially some fulfillment expenses, R&D, as we are already running the entire IT infrastructure of the platform. The G&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 three-year view. Also, any big changes we can see on the overseas business side. Thank you.
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. Those are really our key technology initiatives, which will take a multi-year phase of investment. On the international front, we now have a joint venture in Indonesia. We are gaining momentum in less than a year period. At this point, we don't have any other tangible plan on the international front.
The investment in cloud computing, what scale is this going to be?
Until we provide more color on that, right now it's still very early stage. 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.com's Ruiyu 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're 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.