Earnings Call: Q3 2020

Feb 13, 2020

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group's December Quarter 2019 Results 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. And I'd like to turn the call over to Mr. Rob Lin, Head of Investor Relations of Alibaba Group. Please go ahead. Good day, everyone, and welcome to Alibaba Group's December quarter 2019 results conference call. With us today are Daniel Zhang, Executive Chairman and CEO Zhou Cai, Executive Vice Chairman Maggie Wu, Chief Financial Officer. This call is also being webcast from our IR section of the corporate website. A replay of the call will be available on the website later today. Now let me quickly cover the Safe Harbor. Today's discussion will contain forward looking statements. These forward looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations. For detailed discussions of these risks and uncertainties, please refer to our latest Annual Report on Form 20 F and other documents filed with the U. S. SEC were announced on the website of the Hong Kong Stock Exchange. Any forward looking statements that we make on this call are based on assumptions as of today, and we do not undertake any obligation to update these statements, except as required under applicable law. Please note that certain financial measures that we use on this call, such as adjusted EBITDA, adjusted EBITDA margin, adjusted EBITDA, adjusted EBITDA margin, marketplace based core commerce adjusted EBITDA, non GAAP net income, non GAAP diluted earnings per share or ADS and free cash flow are expressed on a non GAAP basis. Our GAAP results and reconciliation of GAAP to non GAAP measures can be found in our earnings press release. Unless otherwise stated, growth rate of all of the stated metrics mentioned during this call refers to year over year growth versus the same quarter last year. In addition, I want to let everyone know that today's Q and A session will be conducted in both Chinese and English. A third party translator will provide consecutive interpretation for the Q and A session and our management will address your question in the language you asked. Please note that the translation is for convenience purpose only. In the case of any discrepancy, our management statement in the original language will prevail. With that, I'm going to pass to Daniel. Thank you, Rob. Hello, everyone. Thank you for joining our earnings call today. We delivered an outstanding quarter for a strong finish to the 2019 calendar year and celebrated 3 major milestones especially important to Alibaba. First, we successfully held our 11th Double 11 Global Shopping Festival. 2nd, we successfully listed on the Hong Kong Stock Exchange. 3rd day, Doctor. Wang Jian, Chairman of the Alibaba Technology Survey Committee, was the first ever representative from the private sector to be appointed as a member of the Chinese Academy of Engineering. However, like all the other companies in China, we are confronted with a Black swan event soon after the start of 2020, the novel coronavirus. The outbreak is having significant impact on China's economy and may potentially affect the global economy. It will present near term challenges to the development of Alibaba's business across the board, but at the same time, we will see opportunities created by the forces of change. Before further elaborating, I will share an overview of our performance for the December quarter. According to the China Ministry of Commerce, total retail sales across China increased by 8% year over year in 2019 for a total of RMB 41,000,000,000. Consumption contributed 58% of China's economic growth and accounted for 3.5 percentage points of China GDP growth. Online retail sales of physical goods for the year was RMB8.5 trillion, up 19.5% year over year. From these figures, it is clear that consumption has become the major driver of economic growth in China, and online retail is the engine driving consumption growth. Over the past quarter, our China retail marketplaces continued to maintain rapid growth in both GMV and user base. As of December 31, annual active consumers reached 711,000,000, representing a net increase of 18,000,000 over the previous quarter. Over 60% of new AAC came from less developed areas. China Retail Marketplaces MAU reached 824,000,000, up 39,000,000 from the previous quarter. We noticed stronger user engagement and buying frequency as measured by DAU growing faster than MAU. This reflects healthy user stickiness on Taobao. Tmall physical goods G and E grew 24% year over year, further consolidating our leadership position as the top consumer engagement and distribution platform for brands in China. Our 11th Double 11 Global Shopping Festival set a new GMV record of RMB268,400,000,000. This is equivalent to 2.3 times the combined online sales of Black Friday and Cyber Monday in the U. S. It reflects the strength of Alibaba's digital economy and of Chinese consumers' robust consumption power. More and more merchants are leveraging Double 11 to acquire new customers, launch new products and develop new categories. During this year's November 11, 15 brands surpassed RMB 1,000,000,000 in their total sales, 215 premium brands launched their new products and new categories, and 120,000 merchants each acquired over 10,000 new customers. Our globalization strategy enjoyed solid progress this quarter. Lazada and AliExpress continue to grow rapidly as a result of effective strategies in user acquisition and merchant onboarding. Lazada's quarterly orders increased 97% year over year and AliExpress DAU grew by 56% for the month of December. Tmall global paid GMV grew by 45% year on year and continued to consolidate its leading position in China's cross border import market. And with the ongoing optimization of bonded warehouse import logistics solutions, Tmall Global's end to end order delivery time has further improved by 2.78 days, which is a 10% reduction in delivery time compared to the same period last year. China Network continued to go from strength to strength. During this November 11, Cainiao processed a record breaking 1,290,000,000 number of packages. Of those, 690,000,000 packages were delivered within 1 week, an improvement of 30% year over year. As a result of ongoing platform optimization and collective efforts with our logistics partners, We also saw a preference for using Cainiao Post, our last mile service stations in residential areas and campuses. The number of packages collected by our Cainiao Post increased by 88% year over year. In November 2019, we invested RMB23.3 billion to raise our equity stake in Cainiao from 51% to 53%. This investment is a demonstration of Alibaba's commitment to the development of a smart logistics platform as one of the core pieces of infrastructure for digital commerce. Alibaba Cloud continued its rapid rise with 52% year over year revenue growth. We celebrated 2 meaningful milestones this quarter. The first milestone is Alibaba Cloud revenue surpassed RMB10 1,000,000,000 in a single quarter for the first time. The second milestone was the successful migration of our e commerce business core systems onto the public cloud. During Double 11, our public cloud infrastructure and technology helped us to power the creation of over 544,000 orders per second at peak, process 970 petabytes data without any disruption and defend against 6,000,000,000 cyber attacks all within the 24 hour period. We believe the migration of Alibaba's core e commerce system to the public cloud is a worship event. Not only will we, ourselves, enjoy greater operating efficiency, but we believe it will also encourage others to adopt our public cloud infrastructure. Now, I would like to speak to the coronavirus situation on 3 areas. First, the responsibilities and the duties that we assumed towards the community immediately upon the outbreak second, our relief measures to support FMEs 3rd, the potential challenges and opportunities that we see for the Alibaba's business in connection with the outbreak. Let me start with our actions related to our community. We took every effort to protect the health and safety of our employees through flexible work policy and remote office collaboration using our proprietary technology. At the same time, we leveraged Alibaba's powerful forces of commerce and technology to deliver suppliers to the affected regions. This is our responsibility to our community. Soon after the outbreak, we also began to procure medical supplies from around the world. To date, over 40,000,000 units of medical supply worth RMB 4 68,000,000 are on their way or have been donated to Wuhan and other affected cities. Cainiao teamed up with our global industry partners to launch a fast track logistics channel that facilitates delivery of over 26,000,000 units of medical supplies into Wuhan and other cities to date. We also worked to ensure supply of food and other consumables for the residents in affected regions. Our self operated grocery chain, fishable, committed to a policy of remaining open for business, no raising prices and remaining stocked, particularly in the 18 stores across Wuhan. 3 Shekou became a lifeline for many local residents. Additionally, 3 Shepou and Ele. Me teamed up with restaurant chains to provide free meals and the necessities to the hospital staff in Wuhan and emergency response teams. Alibaba also contributed the power of our advanced technologies to combat the outbreak. ARMOR Academy provides free AI voice chatbot service to government and epidemic of prevention agencies to efficiently keep a daily health record of those who might have close contact with affected patients. Our enterprise communication and collaboration app, PingPook, introduced a digital health check-in feature to help companies maintain up to date health monitoring of their employees. To date, there have been more than 150,000,000 daily health check ins recorded in DingTalk. Now about our relief measures in support of SMEs. Together with N Financial, we announced a comprehensive set of relief measures that fall under 6 categories: 1, reduction of business operation costs on our platforms 2, financial support by waiving or lowering interest rates 3, subsidies for delivery personnel and raising level of logistic efficiency 4, provision of flexible job opportunities to guarantee income 5, additional tools for businesses to accelerate digitalization 6, remote working management for enterprises. We will support our merchants to overcome this challenging time and are taking proactive measures to fulfill our mission to make it easy to do business anywhere. Lastly, the potential impact on our business. We are closely monitoring the challenge as well as identifying opportunities for Alibaba's business as the situation evolves. For our e commerce business, the delay in employees returning to work following the spring festival holiday is preventing merchants and the logistic companies from resuming operations. For the 1st 2 weeks after the Chinese New Year holiday, we have observed negative impact on our commerce business as merchant operations have not returned to normal and a significant number of packages were not able to be delivered on time. In our new retail business, Xue Shipou and Taoxian Da average basket size increased significantly as a result of consumer migration to online purchasing of fresh goods, groceries and a broader selection of daily necessities. However, limitations in delivery capacity is preventing order volume from fully recovering. For the local consumer services, restaurants visits and food delivery orders declined noticeably year over year because many restaurants have not resumed normal operations. Other categories like grocery shopping have increased sharply. Our travel booking service, Sliggy, received material levels of cancellations for air tickets, hotel reservations and the tour packages. In accordance with government regulations, 3G provided unconditional and a penalty free cancellation to our customers. Pingtalk has experienced explosive growth in DAU and a number of corporate users. It is providing business with remote working features to maintain their operations and accelerate their digitalization. In addition, Singko also saw increasing popularity over virtual classrooms that helped schools and students resume their studies via live streaming classes. We are closely monitoring the impact of the ongoing outbreak on our business and will take necessary measures to ensure our business operations. Our mission is to make it easy to do business anywhere and we are being tested. True to our mission, we will stand together with all of our merchants to overcome the current challenges and facilitate our users and our communities to fight against the virus. 17 years ago, the e commerce business experienced tremendous growth after SaaS. We believe that adversity will be followed by changes in behavior among consumers and enterprises and bringing ensuing opportunities. We have observed more and more consumers getting comfortable with taking care of their daily living needs and working requirements through digital means. We are confident in the ongoing digitalization of China's economy and society and are ready to seize the opportunity to build the foundation for the long term growth of Alibaba's digital economy. Now, I will turn the call over to Maggie, who will walk you through the details of our financial results. Thank you, Daniel. Thank you, everyone, for joining us. Before we start, I would like to say that our thoughts and prayers go to those families deeply impacted by the coronavirus outbreak. At the end of my prepared remarks, I will also share with you our current assessment of the effects of this epidemic. So before talking about this quarter's financial results, let me give you a quick summary on this Hong Kong listing. On November 26, we successfully listed on Hong Kong Stock Exchange. We offered 575,000,000 new ordinary shares with proceeds of about HK100 billion dollars or about US13 1,000,000,000 dollars So our shares are multiple times oversubscribed. We view Hong Kong as strategically important to us. So overall, this is a very successful listing. So let me review our financial highlights. We had another strong quarter. We achieved strong results for our core commerce segment, reflecting our strategic focus on user acquisition and engagement, as well as enhancing product varieties and increasing our offerings of price competitive products. Mobile MAU were up 39,000,000 reaching 824,000,000. Annual active consumer on our China retail marketplace increased by 18,000,000 to 711,000,000. Over 60% of new active consumers were from less developed areas. The increase in consumer growth reflected continuous improvement in our consumer segment initiatives. These initiatives have been well received by consumers as evidenced by higher purchase frequency for our China retail marketplace business. When we look at December quarter revenue, our total revenue grew 38% to RMB161 1,000,000,000. And excluding the effects of consolidating acquired businesses, mainly Kala, total revenue would still have grown at 33%. The increase was mainly driven by robust growth of our China Commerce retail business and Alibaba Cloud. Our operation continues to run efficiently. So when you look at the quarter's cost trends, cost expenses are well controlled, while our business have continued to grow. So let's turn to the secondary reports. Core Commerce continued to be very strong. Revenue grew 38 percent to RMB 141,000,000,000. The fundamentals of our China retail business continue to be very strong and customer management revenue grew by 23% in the quarter. This growth was primarily the result of an increase in the average unit price per click and an increase in the volume of paid clicks from improving click through rate. The growth also reflects strong growth in number of paying merchants during the quarter. Commission revenue grew by 16%, primarily due to strong 24% growth of Tmall Online Physical Goods GMV. So when you look at the growth for revenue and GMV, there is a gap. And this is primarily because of 2 factors. Number 1, more merchants, particularly in those strategically important categories, received preferential commission rates. 2nd, the revenue mix shift within Tmall Supermarket from commission based revenue towards direct sales continued to have an impact, so like we discussed in the previous quarter. As you know, in our direct sales business, we do not receive commissions from 3rd party merchants, but rather realize our economics from product margins. The increase in direct sales volume helps us improve our our others revenue, this is mainly our new retail business. Revenue is still growing very strongly, 128%. This increase was driven by our direct sales business including Tmall Supermarket and Freshable, Hema. This quarter is also the 1st full quarter of consolidation of Kala, which we acquired September 2019. International retail. Now let's take a look at the details. So as Daniel mentioned, we experienced strong growth in our global markets. Lazada and AliExpress continue to deliver robust growth in orders and active merchants. Revenue for our international retail business grew 27% to RMB7.4 billion. The increase is primarily driven by growth in revenue from Lazada, but partially offset by slower revenue growth from AliExpress, because we deconsolidated the Russian business of AliExpress in October 2019 to because we set up this JV with the local partners as we reported in previous quarter. So if you look at the okay, Cainiao, the fast growth across broader businesses supported the increased adoption fulfilled by Cainiao service. This growth contributed to strong revenue growth for Cainiao. In the quarter, Cainiao revenue reached RMB7.5 billion, growing at 67%. For our local consumer service, revenue grew 47 percent to RMB7.6 billion. During the quarter, we continued to achieve strong growth in GMV, driven by robust order growth and an increase in average order value. We will continue to take a targeted and systematic approach to invest in local consumer service. Alibaba Cloud. Cloud computing revenue grew at 62%, reaching RMB10.7 billion. So this is the Q1 that cloud business revenue surpassed RMB10 1,000,000. The robust cloud revenue growth was primarily driven by increased revenue contribution from both our public cloud and hybrid cloud business. Let's look at the profitability. In our commerce segment, we continue to generate strong market based core commerce adjusted EBITDA, which reached RMB66 1,000,000,000, growing at 22%. Comparing to a year ago, we have increased adjusted EBITDA by RMB12 1,000,000,000 in absolute dollar amount, while the combined losses in our 4 strategic areas were all flat year over year. This reflects our targeted approach to allocation of resources and investment in key strategic growth areas, while also optimizing costs and improving efficiency. After incorporating these losses, our core commerce adjusted EBITDA grew strongly by 26%. Now look at the cloud computing segment. Adjusted EBITDA was a loss of RMB356 1,000,000. The EBITDA margin improved slightly during the quarter. So the loss margin narrowed. Our Digital Media and Entertainment segment adjusted EBITDA loss was RMB3.3 billion. This loss has been significantly reduced from RMB6 1,000,000,000 in the same quarter last year. Excluding content impairment impacts, EBITDA losses would be RMB1.2 billion, a reduction from RMB2.8 billion in the same quarter last year. Innovation and initiatives. Adjusted EBITDA for innovation initiatives was a loss of RMB1.9 billion. Look at the free cash flow and capital expenditures. Our business overall continued to show strong profitability and cash flow. So as of December 31, cash, cash equivalents and short term investments were RMB352 1,000,000,000 or approximately US50 1,000,000,000 dollars For the December quarter, free cash flow was US78 $1,000,000,000 which increased by 52%. This is mainly due to our robust profitability growth as well as a decrease in capital expenditure. This is a kind of seasonal reason. Okay. Other financial metrics, the share of profit of other equity initiatives in the quarter reached RMB 82,000,000,000 reached RMB 2,000,000,000, which mainly includes our share of profit from Suning under equity accounting as Suning completed a transaction related to their financial businesses that created a one time gain. In addition, given we received a 33% equity interest in Ant Financial on September 23, 2019. We recorded our share of profits of RMB250 1,000,000 from Ant Financial for the period of September 24 to September 30. As a reminder, our equity account for stake in Ant Financial is on a 1 quarter lag basis, as in the case of our equity investees. There was no other income arising from our prior 37.5% profit sharing arrangement with AN Financial during this quarter as it was terminated in September and replaced by this equity pickup. GAAP net income during the quarter was RMB50 1,000,000,000, up 62%. To reconcile GAAP net income to non GAAP net income, we made the following adjustments. 1st, the exclusion of RMB17 1,000,000,000 in investment gains and others. These gains primarily include a one time gain related to our contribution to the AliExpress Russia businesses into a JV as well as a gain in the fair value of our equity investments. 2nd, the exclusion of an additional RMB 2,300,000,000 one time gain related to 33 percent equity interest in ANS that we received in September. Excluding these gains and losses and certain other items, our non GAAP net income would have increased by 56% to RMB46.5 billion. Okay. So now let's take a look at the okay. We've finished the cash flow discussion and that's pretty much other financial metrics and non GAAP. Okay. Now let's take a look at this impact from the recent coronavirus breakups. Okay. So we ended the calendar 2019 on a high note. We successfully listed on the Hong Kong Stock Exchange and delivered strong sets of results in December 20 19 quarter. The strong performance continued in the month of January with our major business maintaining solid revenue growth. As Daniel mentioned in his remarks, some of our major business have been negatively impacted in February due to coronavirus outbreak and the resulting business disruption that followed in most parts of the economy. At the same time, we have announced together with AN Financial 20 major initiatives and relief programs to help our customers and partners. While it's too early to quantify the financial impact of coronavirus on our business, I would have I would like to provide some qualitative observations on the situation. Okay. First, let me talk about the macro and how we think about this that happened recently. The epidemic has negatively impacted the overall China economy, especially the retail and service sectors. While demand for goods and services is there, the means of production in the economy has been hampered by delayed opening of offices, factories and stores after Lunar New Year holiday. We as other like other businesses are not immune to this imbalance of supply and demand. However, we see this unfortunate situation as an opportunity to provide value and support to our customers in order to help them recover productions and supply capability as soon as possible. Their recovery and long term success will translate into sustainable long term growth for Alibaba Group. This is similar to what we experienced during the SARS outbreak in 2003. Okay. So number 2, let me talk about the what happened on our business. So Daniel mentioned the operational impact of serious disruption to supply chain, manufacturing activities and logistics so far in February. At the same time, we are supporting our customers by waiving fees. And together with ANSYS Financial, we're providing interest free or lower interest loans. The situation is to help normalize our merchants' operations. Then talk about the impact, because we are only halfway through the March quarter and because of there's still uncertain ongoing development of this coronavirus, it is really difficult for us to have an accurate estimation for the full financial impact for this March quarter. But as of today, what we've seen, particularly in the past like 12, 13 days since the starting of February, our overall revenue growth rate, we believe, will be negatively impacted for March quarter. Some of our businesses that rely on physical means of production on supply side would even show negative revenue growth for the quarter, such as China retail marketplace and local consumer services. Overall, we remain optimistic about consumption growth in China and continue to be confident about our long term growth prospects. So whatever we're seeing right now, we believe this is a one off occurrence. By helping our customers through difficult times, we and they will emerge even stronger and will have greater opportunity to drive long term sustainable growth. So that ends my remarks. Let's go to the Q and A. Thank you. Thank you. Operator, before we start, I just want to remind all the analysts that you can ask a question in Chinese or English and our management will respond to you in the language you asked. With that, that, Our first question comes from the line of Thomas Chong from Jefferies. Please go ahead. Hi, good evening. Thanks management for taking my questions. I have a question about the migration to online. Post the coronavirus. Would our digitization strategy further speed up given offline merchants realize the significance of going online and data insights from our ecosystem? The other question I have is about the synergies with end in local services. What are the strategies to further unlock the potential of Ele. Me on top of food delivery? Thank you. Thank you, Thomas. This is Daniel. Let me answer these two questions. For the first one, I think in this outbreak, I think many, many residents, many, many consumers, they changed their way of living. And for many offices, many workers, they changed way of how to work. So people now work remotely from home. People buy foods, buy fresh products, buy groceries, buy necessities from home. I think this is a very big challenge. The crisis is a very, very big challenge to the society, but also, as I said in my remarks, give people a chance to try new way of living and new way of work. So I think after all is done, I will expect that this is an inevitable trend that more and more business and more and more customers will have a digital life or digital working style. So this obviously will in the long term will be good for the digital pace of the whole society. And for your second question Okay. For the second question, I think local service is a very, very important sector in consumption. So you all know that Alibaba has strong commitment to this sector and we don't view this as a business, but we think this is a foundation for the consumption. So I think in the previous months, we are happy to have Simon Hu, the new CEO of N Financial, also taking a Chairman role of our local service company, I think, which gives us a good chance to realize more synergies between Alipay and the local service business. And Alipay today, starting from a payment tool, now it's evolving and upgrading to a consumer a very strong consumer interface. Thank you. Thank you. Next question. Our next question comes from the line of Eddie Leung from Bank of America. Please go ahead. Good evening. Wish everyone well. Thank you. Good evening. And I'd like to wish everyone well and trust that everybody is healthy. So my question is regarding Tmall and Taobao. We heard both from Daniel and from Maggie that there's an impact on both supply and on logistics being brought about by this coronavirus outbreak. My question, however, goes to the demand side. I'm wondering if you're seeing any different impact on demand, for example, in different categories or in different markets, for example, 1st tier cities versus the less developed markets, at least from a direction perspective, could you tell us about any impact you're seeing on demand side, for example, in categories like clothing or white goods or others? Thank you. Well, thank you very much for your question and also for your best wishes. The answer is yes, we certainly are seeing some relatively large changes in demand in different categories. For example, in the category including food and daily necessities, fast moving consumer goods, we're seeing relatively rapid growth. Of course, part of that growth is coming from the traditional retail sales sector with delivery from close by shops. Secondly, when you look at categories like clothing and consumer electronics, of course, there's a big challenge there, including on the supply side, but also including reduced willingness on the part of consumers to make those kinds of purchases at the height of the epidemic. Of course, I'm confident that that will turn around as the situation improves. And in terms of regional differences, one new thing that we're seeing in the face of the epidemic is increased uptake by online users in the lower tier cities or the less developed regions of China in terms of going online to purchase daily necessities. And we think in the long term that will be a favorable trend. Thank you. Thank you. Your next question comes from the line of Alex Yao from JPMorgan. Please go ahead. Thank you, management, for taking the question and best wishes to working through the challenging environment. I would like to clarify with Maggie your comment about the financial implication to the quarter from the current situation. Did you say that the business with a strong connection to physical production and the fulfillment will be declined? Specifically, I heard you talk about China marketplace revenue will be declined for March, which means your CMR and the commission revenue will decline. So that's the first part. The second part is, if we assume this coronavirus situation is a short lived just like what happened to 2,003 from SaaS, should we be expecting a V shaped recovery or U shaped recovery? Is there anything that prevents the business back to normal immediately after the situation is gone? Thank you. Okay. Maybe I first answer Eddie's question on the financial impact and then Daniel could give his view on the shapes, view or view. Okay. I think so for financial impact, Alex, I talked about so what could impact our financials for March quarter, right? There are 2 things. One thing is the coronavirus outbreak impact our own business. The other thing is that we're also offering these relief programs to help our merchants. Okay. So let me talk about overall impact. I said 2 things. Number 1 is that we estimated March quarter revenue growth would experience negative impacts, which means that the growth rate will come down. It's possible that growth rate come down significantly. We just don't know yet, because this is just mid of February. And number 2, I said that the business in our China retail marketplace, these are production related, which means China retail marketplace, which means Taobao and Tmall, which is CMR and commission, as well as the local consumer service, would likely experience negative revenue growth. So that's to clarify. This is Daniel. Let me answer the second question. I think will it be a new correction or V shape correction? It highly depends on the on how long will it take to finish this outbreak. The longer time it takes, I think they will take even longer time to recover because I think many service sectors are disrupted during this outbreak. And I think if we can recover as we see in recent days and we see some good indication in cities out in major cities except for Wuhan. I think let's take time to see how quick we could cover. Next question, operator? Thank you. Next question comes from the line of Binnie Wong from HSBC. Please go ahead. Hey, again, fresh wishes to everyone and hope the My question is actually on the local services. If you look at the loss track to the core commerce EBITDA, right, the line that adjusts for the effects in the losses in the local services, we see it's positive to note that the loss margin percentage is actually narrowing. So should we expect similar trend to continue? And I guess in this round of press release, company especially mentioned that OLEMA acquired 48% of new customers from Alipay app. So can we expect that the competition in local services is rationalizing and then move beyond just like a price competition as we see in the last year? That's the number one question. And second question, just a housekeeping as to we see meaningful operating leverage in the product development expenses. I just want to understand what are the positive reasons we have seen on the improvement. Thank you. Okay. For the first question, for local service actually local service business is our long term commitment and we don't manage the business purely by EBITDA ratio. We focus on creating the value for both the customers and merchants. So, I think today all the sector all the service sectors are in the process of digitization in their business and the consumers are already enjoying their digital lives. So I think we will work even harder, try to identify the value for both merchants and consumers and try to give them to create an increment to them. Binbin, let me answer your second question regarding the product development leverage. So if you break it down, the staff cost is mainly the item that brings this leverage. So basically, the growth of this payroll is not the same growth of same pace of the revenue growth. We have been quite aggressively looking for these the top data scientists, engineers, etcetera. But we're in terms of this quarter, what you've seen is that since the revenue growth very strong, the recruiting on this quarter actually is not at the same pace. We have been recruiting throughout the past quarters. So I guess along with the business growth, some of the fixed costs wouldn't grow. This is where the operating leverage comes from. Leverage. Next question. Thank you. Next question comes from the line of Tina Long from Credit Suisse. Please ask your question. My first question relates to the information received regarding differences in commission revenue and also in GMV for different merchants in different categories where preferential pricing was applied. And I'm wondering if that's a one off thing for the Double 11 singles day shopping festival or if that differential pricing is going to be an ongoing exercise going forward. And if you could tell us which categories are enjoying the preferential rates? That's the first question. The second question has to do with the impact of the coronavirus outbreak. Maggie has already indicated that for the coming quarter, revenue growth is likely to be negatively impacted. I'm wondering what you're thinking is on the cost side of things. Obviously, you have fixed costs that you can't do much about. But when it comes to variable costs, non essential spending, things like marketing, are you giving any consideration to throttling back there so as to try to come out with earnings that aren't too badly hit? Thank you. Well, on your first question regarding commission discounts offered in the Double 11 Shopping Festival for different categories, It's true and Double 11 was performed excellently this year. Those discounts are being offered to eligible merchants in key categories, including FMCG and electronics. And these are merchants who have performed very robustly in terms of their GMV, hitting GMV targets and therefore in line with our commission discount policy there receiving a discount. On your second question as to what we are doing around cost and expenses in the current climate affected by the epidemic, The answer is yes, certainly there are some areas in which we can and will achieve some cost savings, for example, by having more offline meetings and of course reducing travel. Many of our staff management staff, frontline staff are now working remotely from home, daily meetings between Daniel and the various business presidents are being held again on a remote basis. And it's a good learning for us actually as a company because we're finding that efficiency is okay. Operations and management are being well handled even without having physical and face to face meetings. So that certainly could be a takeaway for us going forward to do more things online and reduce physical meetings. So yes, certainly there are some savings in connection with that. But your question is, can this help with profit growth? And my answer to that is that profit really comes down to revenue. The most important thing when it comes to profits is revenue and our revenue is being affected in the various ways we've already described to you. So there will be some savings from the areas I've described. But the other thing to remember is we have very robust support programs that we've mentioned for merchants. Probably these are the most robust support programs ever offered by any company in this market or around the world in the face of such difficult circumstances. And that again, we will have a negative impact, as we said, on our profit. So some of the learnings and outcomes will be good and result in improved, but overall that is the situation. Next question? Next question comes from the line of Mark Mahaney from RBC Capital Markets. Please ask your question. Thank you. I too wish you the best and well wishes. I wanted to ask a broad question about online retail penetration. Those in China, those numbers that you mentioned at the very beginning of the call suggest that perhaps 27% or a quarter of retail activity in China occurs through online channels. I would imagine that there's a big discrepancy within the country. There's some markets where that percentage is much higher and some that it's much lower. Do you have a sense of what that range is like? And most interesting is where do you how high penetration rates have you seen? How high have you seen online as a percentage of total retail sales get within China? Thank you very much. This is Daniel. Thanks for your wishes. And let me answer your question. I think for online retail penetration, we have to look at this from different angles. First, as you said, it's about the rigid. And in copier cities today in China, the online penetration is already quite high, but we do see the growing demand in the low tier cities. So that's why in this quarter, we observed like over 60% of the new customers actually from the less development areas. So, we are we believe that the lower tier cities even in rural areas because of the penetration of the 4 gs and going forward 5 gs and the infrastructure is there, so people can enjoy the same digital life as people in the urban cities. But let me share with you my thought on the second angle, which is the category. I think today, even in the top tier cities in China, the online penetration by category is quite different. And before this, I mean, coronavirus, what we saw is that was that for apparel for consumer electronics, the online penetration is relatively high. But for food category, especially for fresh food, the penetration is low even in urban cities. But as I said in my remarks, during the past, I mean, 1 month, more and more people are getting used to shopping online for food, for daily necessities. And they may shop from an e commerce website or they shop from a mobile app are operating by a store nearby. And so I think the shop from home and store delivery or hub and spoke model delivery, I think going forward will be have more penetration, I mean, after this outbreak. Next question comes from the line of Alicia Yap from Citigroup. Please go ahead. Hi. Thank you. Commission rate. Fashion Beyond the March quarter, Thank you very much. Thank you, management, for the presentations and for your detailed thoughts that you shared on the impact of the current situation. So a few follow-up questions, if I may. My first was to Maggie in regards Cainiao, because I don't believe you mentioned Cainiao. Can we expect that in the March quarter, the growth of China will also be negatively impact, as you said, the China retail market and other businesses will be as a result of this outbreak? And conversely, in the cloud, could we expect there to be any benefit there from the epidemic in the March quarter or would you expect the benefit to be more of a long term benefit? And then secondly, I'd like to follow-up on the previous question regarding the preferential commission rates that are being offered for certain categories FMCG and Electronics. Were those preferential rates only for the Double 11 shopping festival or over a longer period of time and will they continue in the March quarter? And then finally, still on preferential commissions. In the face of this epidemic, will you consider offering preferential commissions for a broader range of categories, for example, fashion, but also other categories and perhaps continuing those preferential rates beyond the March quarter and in the longer term. Thank you for the two questions. I'll start with a question about the impact of the coronavirus epidemic on Sainal. You were asking whether there could be negative growth there similar to what we've talked about expecting to see with Taobao, Tmall and local services. The answer is that there is a very real impact on the business of Cainiao as a result of the epidemic, but less of an impact on the financial side of things. And I'll explain why that is. With many couriers not being able to return to work, capacity remains very low. It's around 10% plus less than 20% of capacity availability. But revenues are not changing that much despite the situation. And this is because we have technology products for which we're now charging fees as well as good revenue performance from the last mile services that Cainiao is providing. So this represents an increase in the revenue base for Cainiao compared to last year. And the second reason is because Cainiao is an acquired company. So it's not subject to adjustment for intercompany elimination in terms of its cooperation with Tmall, Tmall Supermarket. So for these reasons, you don't expect to see such a big impact on the revenues of Cainiao as on its actual operations. Your second question had to do with the preferential commission policy. So to clarify, this is not a new policy. It wasn't new this year and it wasn't just for the Double 11 shopping festival. It's there to encourage and reward good merchants with good performance who meet targets defined in the policy. So we will continue to have this policy to reward merchants and we'll certainly consider expanding to new kinds of categories. So operator, let's have the last question. Thank you. The final question is from the line of Piyush Mubayi from Goldman Sachs. Please go ahead. Thank you. We sincerely hope that all the families that the Alibaba ecosystem touches are safe. I wonder, Daniel talked about, I thought, an improvement over the last 12 days. Could you just take us through qualitatively what is the degree of improvement we've seen over the 12, 13 days? And, I think initially, Daniel also talked about the opportunities that get created out of a period like that. And I know we talked about DingTalk and how that seems such a transformation with more than 200,000,000 folks working from home. What are the top three features in DingTalk that have been that have proven to be very popular? And how do we see this product evolve in terms of size, scale, MAU DAU, for example, since CNY? Thank you. Thank you, Kiyush, for your kind words. Thank you. So in the part actually things changed very fast in the past 10 to 15 days. I think before this week, most of the merchants, they are they don't have access back to work. But since this Monday, I think in big cities in China like Shanghai, Beijing, Guangzhou, Shenzhen and more and more companies start to stay back to work partially. And also we see the logistic network start to resume operation, especially in the sortation center in big cities, in big hub. So that's why I'm saying that situation are getting slightly better, but it takes time to back to normal. So But I think the key thing is about is all about supply, the supplier of the products, the supplier of the delivery, the supplier of the services. And the demand, I think, is still there. And I strongly believe that after the virus leaves away, I think consumers have strong desire to because they have been in home for a long time and they will go out anyway to consume. So for DingTalk, yes, I think DingTao experienced explosive growth during the outbreak. I think we facilitate while DingTao, we people to work from home and to study in the virtual class online. And also, we facilitate, as I said in my remarks, facilitate many companies to do the healthy check-in every day with their employees. And we have like video conference, like minutes, like the virtual classroom, think all are very popular among the workers, office managers, office staffs, as well as for education sector, we do see very big popularity among the teachers and students in terms of the virtual classroom. So we will continue to extend our capacity. And I can share with you that in the past 10 days, we keep expanding our capacity. And but even with the capacity increase, we do have we have to conquer some difficulties that is in data center and we may be prohibited to access some data center in some regions because of the anti coronavirus. But I think the things are getting better after many, many people go back to work. Okay. Thank you everyone for joining our earnings call today. If you do have any additional questions, please feel free to contact anyone at the IR team. Thank you. Okay. Well, thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.