Earnings Call: Q1 2016

May 9, 2016

Earnings release

Hello, and thank you for standing by for jd's.com First Quarter 20 16 Earnings Conference Call. At this time, all participants are in listen only mode. After management's prepared remarks, there will be a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Ruoyu Li. Please go ahead. Thank you, operator, and welcome to our Q1 2016 earnings conference call. On today's call, Sidney Huang, our CFO, will discuss highlights for the Q1 following his prepared remarks. Richard Liu, CEO of gd. Com and Hao Yu Shen, CEO of gd.com, will join Sidney for the question and answer portion of the call. Before we continue, I refer you to our Safe Harbor statements in the press release, which applies to this call as we will make forward looking statements. Also, this call includes some 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 figures mentioned during this conference call are in RMB. Now, I would like to turn the call over to our CFO, Sidney Kuang. Thank you, Ruiyi, and hello, everyone. We are pleased to report another quarter of solid growth and improving margins on our core business. Our core GMV grew 55% year over year in the Q1 2016, more than doubling the industry growth rate despite a notable slowdown in national consumption growth. More importantly, the growth was healthier and our JD Mall operating margin showed a meaningful improvement. I'll discuss both in more detail in a minute. From a macro perspective, China's overall consumption growth decelerated in the Q1 to 10.3% from 11.1% in the 4th quarter last year. As we have cautioned since last October, since last August, a sustained weak economic environment could over time hurt consumption. Although we continue to believe such impact may be moderate or delayed due to the secular trend of the offline online shift and healthy employment level supported by the government. During the Q1, we conducted a detailed review of our business lines in conjunction with our annual budgeting process. We made an important decision to rationalize our core e commerce business with a more balanced approach to growth and profitability. Business units on the JD Mall are being evaluated for their operating profitability for the first time in addition to their growth metrics. Concurrent with this balanced focus, we are now sharing with you the operating margin from our core e commerce business and the operating loss from the new businesses, thereby providing more visibility into the financial trends of these different segments. Now let's first review our growth metrics. The GMV from our marketplace business grew 63% in Q1 and accounted for 41% of our GMV during the period. Some of you may ask why the growth rate has seemingly slowed. So I'll share a few reasons in addition to the overall slowing consumption growth. First, our marketplace had experienced exceptional growth in the 4 quarters following our Tencent partnership with tremendous traffic support particularly helpful to our platform business, which began in the Q3 of 2014 and ended in the Q2 of 2015. Since the Q3 of last year, when we reached anniversary of the transaction, the growth rate began to gradually revert to a more normalized pace. That's why you have seen a deceleration of growth rate over the past 3 quarters. Although it is important to note that our marketplace still grew more than double the industry average this quarter. 2nd, as part of the business rationalization process mentioned earlier, we identified certain virtual product categories with extremely low take rates, which were not economically sensible to further growth. One example that we had mentioned before was the telecom operators cutting take rates on cell phone recharge sales starting January 2016. While such products will continue to be offered for user convenience and traffic generation purposes, we will discontinue promotional incentives for these same margin businesses, which will result in a GMV decline in these categories. 3rd, we have further strengthened and implemented new technologies since January 2016 to identify so called brushing transactions and penalize the violators with a downgrade mechanism and increased fines. As many of you know, brushing refers to merchant initiated transactions through fake customer accounts. Therefore, they are not easily identifiable by the platform. These activities create a misleading product reviews, damage customer experience and compromise the integrity of the platforms. While brushing has become a common practice on all e commerce platforms, we are committed to minimizing it at all costs. This anti brushing campaign marks our 2nd recent major initiative after we shut down paipai.com last November to uphold the JD platform as the most trusted e commerce designation in China. We hope our new anti brushing technologies will become more and more effective throughout 2016. So in summary, our marketplace GMV will continue to outgrow the market, but at a more normalized pace. In the Q1, our GMV from general merchandise categories grew 56% and accounted for 48% of total GMV 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 strong growth momentum. GMV from electronics and home appliance products grew 54% during the quarter, led by mobile devices and home appliance categories. Our net revenue grew 47% in Q1, supported by strong momentum in both direct sales and marketplace platforms. Our direct sales revenues grew 45% led by food and beverage, cosmetics, home appliance and mobile categories. I would also like to highlight our revenues from services and others, which increased 91% year over year and demonstrated the strong growth in the underlying GMV and improving monetization of the JD platforms. Our non GAAP gross margin improved to 14%, up from 12.2% a year ago, as a result of higher 1P gross margin and higher GMV contribution from the marketplace. Non GMV gross margin I'm sorry, non GAAP gross margin on direct sales improved over 80 basis points on a year over year basis, mainly due to increased scale economies across all key categories. Non GAAP fulfillment expense ratio was 8.2% in Q1 compared to 7.2% in the same quarter last year. The higher fulfillment expense ratio was mainly due to our investments in rural areas and the expansion of the consumable product category, which has lower average order values. The non GAAP marketing expense ratio was 3.3% in Q1 compared to 3.0% in the same quarter last year. The year over year increase was mainly due to lower tier city marketing activities and the promotion of our new businesses. Our non GAAP R and D and G and A expense ratios increased 6 basis points and 11 basis points respectively compared to the same quarter last year, which were entirely attributable to the higher spending by our new businesses, partially offset by the operating leverage from JD Mall. Our non GAAP operating margin was negative 0.5% in the first quarter, which had a 32 basis point improvement over the same quarter last year. Excluding the new businesses defined as JD Finance, O2O Overseas Business and the technology initiatives including smart devices and cloud computing. Our core JD Moore business had an operating margin of 0.5% on a non GAAP basis with a 60 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 marketing expenses discussed earlier. The new businesses on the other hand incurred a non GAAP operating loss of nearly RMB0.6 billion during the quarter, mainly from JD Finance and JD Daojia. Now let's discuss our cash flow. In the Q1, the free cash flow totaled RMB2.9 billion excluding the impact from JD Finance loan balances, which had a net cash outflow of RMB1.6 billion during the quarter. In the same quarter, JD Finance raised RMB10.6 billion through the Series A fundraising, securitization and bank loans. As we stated in our last earnings call, JD Finance is expected to self fund its growth in 20 16 and beyond. On working capital, inventory turnover for the last 12 months stayed low at 37 days compared to 35 days in the previous LTM. The accounts payable turnover for the last 12 months was 46 days, 4 days longer than the previous LTM. We will be using the rolling 12 months turnover data going forward to avoid misleading quarterly volatility and provide a more meaningful trend to investors. Finally, let's discuss our financial outlook. We expect Q2 net revenue growth to be between 40% and 44% on a year over year basis. This guidance reflects our conservative outlook in light of the slowing consumption growth and our increasing focus on profitable growth in 2016. For the non GAAP net margin outlook, we maintain our previous guidance for the full year 2016, pending our assessment of the accompanying impact from the DaDa JD Daojia merger. 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. In order to be fair to all callers who wish to ask questions, I noticed that the GMV per order actually increased materially year on year. So just curious on what's the reason behind it? Do we see the ticket size of electronics or general merchandise going up? Or was it because of customer buying more products per order and hence we have seen an increase in GMV per order? Thank you. Yes, Eddie, this is Sidney. The reason is actually mostly related to the scale back on the cell phone recharge sales, which had a lower ticket size. So it actually had a quite meaningful impact on our GMV and which also in turn had a very meaningful impact on the average value per order. Thank you. Next question comes from the line of Ji Feng from HSBC. Please go ahead. Good evening. Thank you so much for taking my question. I wondered if you could give us a little bit more color regarding your commentary regarding the slowdown in marketplace GMV. You outlined 3 buckets, 10 Cent, business rationalization and brushing. I was wondering if you can just give us some more additional color around how you can buckets put those into 3 different buckets, please, in terms of the impact? Thank you. Right. So on the Tencent transaction impact, you could actually see there was a deceleration over the past three quarters with average over 20% a quarter. So that was really businesses maximizing max out the incremental contribution from the traffic support. And so we have mentioned this over the past 3 quarters. So if you want to quantify, you could take the previous 2 quarters pace of slowing down around 20% per quarter. And then you have the 2 other elements. For the virtual product kind of rationalization, we it's if you look at the virtual product category as a whole, we actually saw a meaningful decline during the quarter. If you assume, let's say, so there is actually a magnifying impact on the growth rate. So if you take less for example 3% of the marketplace GMV from last year for example. By eliminating that you would have a negative impact on the growth rate of nearly 6% this year. So that gives you some idea on why the growth rate would decelerate a little bit bigger because you're essentially not only not growing that category, but you actually decelerate that category. And for the anti brushing, it's really, really difficult to quantify as they are they couldn't be identified to begin with. So now we are providing severe penalties and we also started to implement a number of downgrading mechanisms. So the impact there will be a ripple effect on the merchants' behavior and for that part, it's very difficult to quantify. Thank you. The next question comes from the line of Erika Poon Wurkin from UBS. Please go ahead. Hi, Sidney. Thank you. How should we think about the 1P, 3P mix shift going forward? How do you balance the need to maintain quality and service on the one hand and on the other, the need for scale and profitability? Thank you. Yes. So I think I'll begin first. So we will continue to see stronger growth from 3P businesses. And now on the surface, you may see the 3P growth slowing down a bit more than the underlying business fundamentals because of the unfavorable comparison to previous year, right? So I think over the next few quarters, the growth rate just based on year over year numbers may seem to be a little less than what's the underlying growth momentum. But it should still grow faster. The healthy part of the business should definitely grow faster than the 1P business. But having said that, as you can see, our 1P business has been growing at a very solid pace and will continue to grow in the foreseeable future. Thank you. Just a bit more commentary on what Cindy said. So we are the marketplace GMV grew slower. So growth rate decelerated a little bit this quarter, but it's still growing faster than the first party, the B2C direct sales business. Our hypothesis is that there still will going forward, there will still be a differential between the growth rate of marketplace GMV and Drexel GMV. We've maintained our advantage over the industry growth rate at I think the past few quarters, every quarter we grew at double the growth rate of industry rate and we'll continue to do that. Thank you. The next question comes from the line of Ellen Halliwell from Deutsche Bank. Please go ahead. Thank you, management. This is Eileen Dung on behalf of Allen Halliwell. I have a question regarding your electronic products. Could management give some color about the recent trend, especially on the smartphone competition? And what is the outlook for the full year? Thank you. Electronics. Right. So for the consumer electronics, the cell phones, the computers, the pads, I think the macro environment is definitely slowing down as you have seen in from other from some manufacturers. But we continue to be the leading retailer of that category. And I think we're still gaining share from all other retail channels. And we in the Q1, we continue to see good growth momentum across all electronics categories, including cell phones and computers and pads and peripherals. So we are already the by far the leading retailer of these categories and we'll continue to gain share in spite of the overall slowdown of industry. But it's definitely impacting our growth rate, but we continue to grow at much faster rate than the industry. Thank you for the questions. Next question comes from the line of George Meng from Goldman Sachs. Please go ahead. Hi, good evening management. Thank you very much for taking my question. My question is related to your new business, which generated about the RMB0.6 billion loss this quarter. So I understand this is mainly from JD Finance and DowJE, But you also mentioned this time, I think for the first time about all these technology initiatives as well as overseas business. And within the technology, I think you just mentioned cloud computing and smart devices. So can you maybe quantify how big the investment or loss you're expecting this year? Because I think from last quarter, you mentioned the absolute loss of all these new business will be not growing that much on a year on year basis in 2016. So just wondering what's our plan in this non JD Finance and DowJia, but also other technology related and also overseas business? And can you remind us how big those businesses are as of today? Thanks. Our investment in technology this year will continue to grow. But in terms of percentage of our total revenue, it's not a fair big number. Yes. And it will maintain at a similar percentage of revenue this year. So it is actually a very small amount at this point. Same for the overseas business, which we have we mentioned before that at this point, we only have one joint venture in Indonesia. Thank you. The next question comes from the line of Shawn Zhang from 86 Research. Please go ahead. Thank you. Follow-up on the 3P marketplace strategy. Maybe can management walk us through your maybe your thought process here? What's your new strategy for the 3P category, because I have seen a lot of brand flagship store opening on JD, maybe just share some color on your 3PE strategy going forward? And also maybe touch upon your June 18 anniversary sale. What have you prepared in terms of category? I've seen 3PEA, of course, which is your strongest category has done conferences with suppliers. Maybe give us some color on the preparation to the June 18th anniversary sale? Thank you. We don't really have a new strategy for marketplace business. Our strategy is always we want to give our customers good selection by having a good variety of merchants on our platform. You may have noticed that we are just about 100,000 we have just about 100,000 merchants on our platform right now. We're not looking to increase that number too much because we believe that number of merchants already can provide a good selection and we don't want to have in the crowded marketplace. We want all the merchants to be profitable on our platform. And we are increasingly offering our logistics services to them, to our merchants, be it last mile delivery services or warehousing services. So we will continue to grow this business and all these sort of non electronic categories, a lot of the non electronic categories are actually driven by 3rd party merchants. As for the preparation for our anniversary campaign, we're going to have an event in a few days. And we will we have lined up many big brands and merchants to work together with us to have a really rewarding experience for our customers. And it's a because it's our anniversary sale, we put a lot of resources behind it and we will be having big campaigns across all categories, be it 1st party electronics categories or marketplace, 3rd party home and payroll categories. And I just want to add one point. One side benefit of the anti brushing campaign is that we actually noted the large merchants are benefiting from this new initiative. And if you look at March April sales data, larger merchants were growing much faster than average. So not that we know smaller merchants are not benefiting, but it's just one of the side benefits. Thank you for the question. Next question comes from the line of Jin Monster from Piper Jaffray. Please go ahead. Hey, good evening. I just want to follow-up on just the overall expectations about GMV growth. You talked about the reasons for the slight deceleration and also you talked about the significant market share gains that you've had relative to overall e commerce. And my question is, if you're going to think about the next year or so, should we think about a continued slowdown in GMV, but still outpacing overall e commerce? Or any sort of feedback or color you can give us to how to model this out for from a high level? Thank you. Yes. I think as Richard mentioned earlier that we have been growing at more than double the industry average for many years and that's still our target going forward given our superior user experience and are improving user engagement. So it is however difficult to model for the next few years because it's partly also dependent on the overall consumption growth in China and also the overall e commerce growth as a sector. Yes. So nevertheless, we are very confident that our growth rate will significantly outpace the overall e commerce growth rate over the next few years. Thank you. The next question comes from the line of Robert Paik from SunTrust. Please go ahead. Yes, thank you so much. Just two quick questions. One, Sydney, I was wondering if you could update us on just the competition from merchants, large sellers, if that's heated up at all or sort of subsided? And then number 2, were there any anomalies to call out during the quarter? Was there any impact from weather, etcetera? Thanks so much. Yes, I'll take Shah and then Hao you can add. We the competition has always been very fierce. We have seen competition from offline major players in the past and we continue to see severe, very, very severe competition from our largest e commerce competitor. So we don't see any material change in terms of competitive dynamic. And for any other reasons in Q1, I think we have tried our best to explain the reasons we think are meaningful. We haven't really it's very difficult to quantify other factors like weather. Thank you for the question. Next question comes from the line of Wendy Huang from Macquarie. Please go ahead. Thank you. My first question is on your fulfillment. So fulfillment cost as a percent of GMV and also the fulfillment cost per order has gone up this quarter. So what's the reason behind that? Was it more driven by the OTO business? If this is the case, how should we expect the fulfillment cost to change in the future? And also another part of fulfillment is about the fulfillment in the rural areas. I think Alibaba mentioned last week that they had Taobao service stations in over 140,000 villages. So what do you think of the competition from Alibaba in the rural areas? And what's your strategy expanding into the lower tier cities and also rural areas? And the second question is on your operating loss. So you mentioned that you had about $600,000,000 non GAAP operating losses on 2 business, JD Finance and JD Home. Can you just give more color as to which one is a bigger jagger? And also, how should we expect JD Home's stand alone losses going forward? Thanks. Yes. I'll explain number 1, number 3 first. And so for the fulfillment expense ratio I mentioned earlier, it's really related to investments in the lower tier cities and rural areas, similar to some of our competitors that we are also we've recruited many village agents. And so there is higher fulfillment expenses associated with that. The other very, very important factors is the consumable categories growth, which has lower average basket size. So that has a very, very important impact on the fulfillment expense ratio. And as I mentioned we mentioned before, we are in the process of evaluating ways to improve that order economics in this particular category. And on the RMB0.6 billion for new businesses, so if you want to in terms of magnitude, JD Finance definitely had the largest operating loss at this point, followed by the O2O. And then the remaining new businesses actually had a very, very small impact at this point. For the next quarter, because of the Dada and the Dowjia merger, there will be the reason we are still in the process of assessing the impact is it is most likely to be deconsolidated. However, because the new company on an ordinary share basis, JD still owns a large majority of the ordinary shares. And the data shareholders are mostly preferred shareholders. So from a loss allocation point of view, we will still absorb the majority of the combined entities losses in the other equity pickup line. So we are that's why we need to give the new entity some time to come up with their annual budget, so that we can have a better visibility to share with our investors. So internally, when we look at fulfillment costs, we don't really look at fulfillment costs as a percent of revenue. We look at per order fulfillment cost, if you look at that number on an apples to apples comparison basis in the past few years, we're seeing declining fulfillment cost and we were able to achieve that despite the fact that we are going to more and more rural areas where the order density is less than the bigger cities. I just want to ask you what Richard said. We are very vigilant about basket size because we do know that with that, we see sort of the percentage of logistic costs as a percentage of revenue. So we are as we're selling more and more general merchandise and consumable merchandise, we're seeing the basket size has downward pressure. But we are trying different things to maintain basket size. For example, as you may know, we increased our minimum order size for free shipping recently again. And so far, it's been about a month now and so far we're seeing results that we would like to see. So just to let you know that we are very mindful of basket size. All right. The question about penetration into lower tier cities, I think our competitor has 14,000 presences in villages, right? And we're trying a different approach as we mentioned before. We have representatives working for us to promote JD in villages. So I think the latest count is about 200,000 of them covering 200,000 villages all across China and we're seeing good contribution to our GMV from these representatives. And we're continuing to push ahead. Thank you for the questions. Next question comes from the line of Vivien Hao from JPMorgan. Please go ahead. Hi, management. Thank you for taking my questions. I have two questions here. The first one is about your gross margins. So what are the top growing categories, for example, like food and beverage in your 1P business as the gross margin profile? And probably just to give us maybe the top 3 fastest growing categories in your 1P business. And the second question is when you mentioned earlier in the prepared remarks on anti brushing efforts on your 3P marketplace, can we get a sense of how we should think about the percentage of GMV impact and the categories that are most affected by brushing? Thank you. Right. So on the gross margin, we actually saw improvement to our 1st party business across all key categories. And so it probably doesn't help to further kind of order these categories because they may change from quarter to quarter based on the different promotion schedules. But we did see meaningful pickup across all categories as they compare to the previous year quarter. Thank you. Your next question comes from the line of Robert Lin from Morgan Stanley. Please go ahead. Hi. So two questions here. First on the finance business, could the management provide some of the key metrics from finance business? I know you provided actually disclosure this time about new business, but particularly key metrics such as GMV contribution, consumer finance. We also book a cost of sales of interest expense in the 1P line, maybe also the revenue received. And related to finance business, obviously, some of our biggest competitors are potentially coming onto public market, right? And so what is our timeline on the finance business IPO, if any? So that's first. On the fulfillment side, I think one of the things that you talked about is JD, the consumer growth products. Will we have something like a JD Supermarket business that's very similar to Tmall Supermarket that we can do bundle and increase the efficiency of the ecosystem fulfillment going forward? Thanks. So I'll answer the first one. So for JD Finance, first of all, there's no timetable for IPO. I mean, it's really too early. We're still developing the infrastructure and the initial business buildup at this point. Your question about the consumer financing volume and impact on our GMV, In Q1, actually we looked at order volume, 55% of consumer finance business, consumer finance volume were repaid within 1 month during the interest free period. So they're really like a credit card. So if you then look at the remaining 45% that were on installment, the volume contributed very it's in low single digit to the overall GMV. So it's very small impact in terms of impacting the GMV growth. And we mentioned this before that we run our Internet finance business not for the benefit of e commerce. There is a side benefit, but that was not the purpose. The purpose is to build a financial technology company leveraging the big data and also the risk management model so that we can monetize over that technology. We mentioned about self funding nature of the business, and we hope to share with you more color on how they will monetize their technology without leveraging the balance sheet at all, hopefully in the near future. As far as FMCG or consumable category, I think that's a category we're very first of all, of all, we have a very sizable business in that category already. And it's a category that's had tremendous growth in past few quarters. And we are it's a category as you know very suited for 1P model and logistics is obviously very, very important to that category. So as recently I've seen talk to many leading FMCG brands and we are increasingly the number one retailer for these leading FMCG brands in China and we've built great partnership. And we are also going to try different things to in this space. Globally, e commerce in FMCG is also an area that different parties are trying different things. And you can stay tuned that we are going to try different approaches to win in this space. And by the way, we do have a JD Supermarket brand and we've been promoting that brand since Q4 of last year. So it's sort of a sub brand, if you will, under JD. Thank you. The next question comes from the line of Natalie Wu from CICC. Please go ahead. Hi, thanks for taking my question. I noticed that your gross profit actually grew at a very rapid pace at 70 5% this quarter. Just wondering if you are focusing on gross profit growth going forward instead of GMV? And how should we see the GP margin going forward for this year and as well as for the foreseeable future? And also I have a second question about the non GAAP operating margin. I recall that you mentioned last quarter that J. D. Moore has already achieved the profitability for the last several quarters in a row. Just wondering, will this trend be carrying on? Shall we expect an improving JD Mall OP margin this year? Thank you. Right. So I think we mentioned earlier about a balanced approach between growth and profitability. So we are we will continue to pursue growth, but we want to pursue profitable growth going forward. Growth is still very important. If you look at the key KPIs to our business unit presidents, There are still out of 4 KPIs, 2 of them are top line growth related. We just added a bottom line metric this year. So yes, on the operating J. D. Moore operating margin, yes, we have repeatedly mentioned in the past few quarters that we do expect our JD Mall operating margin continue to improve. And we are now quantifying that improvement starting this quarter and you should expect continued improvement for the remainder of this year. Although on a quarterly basis, you may still see volatilities again due to different promotional schedules. But the overall trend will definitely be improving by a meaningful pace. Well, we always have one of the good balance between profitability and growth. As you have seen in the media, a lot of categories we are in are not in a place. Computers and IT products, the overall market is in decline and cell phone is flat, it's not declining. Home appliances are also declining according to major brands and manufacturers. So we think under this context, this macro situation, if we want to maintain a high growth rate as before, we probably would have to pay a very high price. Even for apparel, we've heard from some major international brands, they're also flattering decline. Right. Major FMCG companies as well, including P&G. Thank you. The next question comes from the line of Jialong Shi from Nomura. Please go ahead. Hi, good evening. Management, thanks for taking my call. And I have two questions here. For FMCG, just wonder how much of your GMV is contributed competition from Tmall Supermarket on FMCG? And my second question is about the service revenue. Just wondering if management can provide breakdown of this category between marketing and the commission revenue. How do you think of that growth for each? Thank you. Yes. We don't disclose the percentage for each category, but I can tell you FMCG is the 2nd largest mirror merchandise category behind apparel and shoes. And it's growing very fast as far as competition as I mentioned earlier. This is a category where it's very which is very suited for 1st party model. It's relatively standardized and logistics plays a big role in the success of this business. So we are very determined to win. Other service and other Right. So for that, we just qualitatively mentioned and the trend continues that the commission revenue still contribute the biggest portion of the service revenue followed by advertising revenues. And the 3rd category will be logistic services to the 3rd party merchants. And then the remaining we have now very small portion from the Internet Finance business, but it's still very tiny at this point. Thank you. The next question comes from the line of Tian Hou from TH Capital. Please go ahead. Hi, Cixin, how Yi. Two questions. One is related to the users. The user growth is quite significant at 73% in the last 12 months. I wonder how many of them are repeated users? And also, on average, in each quarter, what is the repeated shopping times? How many times they shop on the jd.com? And what is this number before? So I would like to have the views from today and a year ago in terms of how many times they shop. That's the first question. The second question related to the fact you raised the rate for the minimum ticket rate for the free shopping. So my understanding is this is not the first time you will raise such rate ticket rate. So I wonder what's the result from last time of such doing? And what's the result do you expect to come out to this time of the ticket rate raising? That's a good question. Thank you. Right. As for users, we disclose number of active users in the past rolling twelve months and we don't disclose more detail than that in terms of how many are sort of old or existing users, how many are new. But we are happy with what we are seeing. On one hand, we want to have a lot of repeated users to show that we can retain them on our platform. On the other hand, there's still large potential in terms of new user acquisition. So we are seeing a good balance between existing and new users. And if we look at I recently did look at some cohort numbers. If we look at users that we acquired in early years, how well we are able to retain them, how they perform over time, we're seeing a very consistent trend where if they stay with us first of all, there's a reasonably high retention rate. And if they stay with us, they would buy more merchandise of more categories from us, they will spend more with us. So for example, if we look at 2,008 cohorts versus 2009, 2010, 2011, we're seeing pretty consistent trend in terms of their increasing purchase from us. And second question about free shipping policy change, so we've been doing that increasing the free shipping basket size by about, I think, RMB 20 annually, always in springtime. We've been doing that for several years. Every time we did some analysis on how the basket size in different intervals change. And we think it did help us to offset the otherwise stronger pressure, downward pressure on basket size as we sell more and more FMCG products. And on the other hand, I think increasingly customers are willing to pay for service, pay for speedy and consistent and reliable shipping. And we don't disclose those numbers, but what I can tell you is shipping fee has increasingly become a meaningful part of our revenue. And with that, that's what we like to see going forward. Thank you for the questions. Next question comes from the line of Eric Yuan from Blue Lotus. Please go ahead. Hi, good evening. Thanks very much for taking my questions. I have two housekeeping questions. One is in your calculation of non GAAP operating profit, you mentioned a line item called recognition of deferred revenue resulting from equity investees. Can you explain the nature of this line item, please? And second, if you can give an update on your CapEx guidance for the year, it will be very appreciated. Thanks. Yes. So on the first question, it is actually it's related to resource based support that we provide to equity investees. So one example would be our partnership with Bitauto where we provide the auto channel in exchange for its equity. So there is a deferred revenue stream from that partnership. And in calculating our non GAAP profitability, we actually exclude that revenue much like the same way that we exclude the amortization of BCA from business collaboration with Tencent. So this is consistent. So it will actually reduce, but in the non GAAP calculation, it reduce our profit. And the second point on CapEx, we maintain our previous guidance that we will manage our CapEx within our operating cash flow from JD Mall. Thank you. The next question comes from the line of John Choi from Daiwa Capital Markets. Please go ahead. Thanks for taking my question. I have a couple of questions here. Can you guys elaborate a bit more on your contribution from mobile and how is the cooperation with Tencent has been going? And secondly, any updates on the progress on your flash sales or cross border will be appreciated? Thank you. Right. I think we mentioned that 72% of the orders in the past quarter were placed on mobile devices. And for us, that really means our own app and our entry point on WeChat and Mobile QQ. So the GMV contribution and also to order percentage from our partnership with Tencent has been increasing, although we believe, as Cindy alluded to in his prepared remarks, we believe that the sort of steep component of that curve is over. Now it's still increasing as a percentage of our total business, it's growing at a more steady growth rate. And it continues to contribute a lot of the new user acquisitions for us. Thank you. The next question comes from the line of Billy Leung from Haitong International. Please go ahead. Hi, thanks for taking my questions. Just back to the O2O business again. Can we just sort of get an idea of where we are in terms of, for example, the market share? Are we seeing competitors? Where we are in terms of investment phase for the O2O business? And lastly, just a strategy on this segment, especially after the stake in data. Are we going to see more vertical acquisition? Or is this going to be going into a consolidation phase? Just a bit more color on the O2O business of ours. Thank you. Right. So we have mentioned in the past that our focus for the O2O is on physical goods, in particular fresh products from supermarkets and the grocery neighborhood grocery stores. So in that market, in fact, we are not only the market leader, but we are probably the only meaningful player and continue to be that way. 1 of our major competitor in that space actually announced that they will exit the physical e commerce business from auto platform. So it's we are clearly the market leader in this space and we are not eager to branch out to the more kind of crowded competitive space. Now having said that, this business has now merged into the data combined entity. So it will be up to the new management to determine the strategy going forward. As far as M and A, we have been quite prudent in our recent deal evaluation process. I think given the market correction in the recent months, we do expect the valuation of private deals will also come down in the next 6 to 9 months. So we will be patient and not to jump on any deals unless it's extremely strategic to us. We are now approaching the end of the conference call. I will now turn the call over to JDs.com's Reiyu 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 we look forward to talking with you in the coming months. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.