Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group's June quarter of 2019 results conference call. At this time, all participants are on listen-only mode. After management's prepared remarks, there will be a Q&A session. I would now like to turn the call over to Rob Lin, Head of Investor Relations at Alibaba Group, and we apologize for any static or any disturbances. Please go ahead.
Good day, everyone, welcome to Alibaba Group's June quarter 2019 results conference call. Before I get started, I just wanted to see if people on the line can listen well. Maybe you could take one question, operator, to make sure that someone on the line can answer that they can hear well, because there's some technical issue here on this end. Okay. I think we'll proceed. Okay. Well, sorry about that. With us today are Joe Tsai, our Executive Vice Chairman; Daniel Zhang, Chief Executive Officer; Maggie Wu, Chief Financial Officer. This call is being webcast from our IR section of the corporate website. A replay of the call will be available on our 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 earnings results on Form 20-F and other documents filed with the U.S. SEC. Any forward-looking statements that we make on this call are based on presumptions 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 EBITA, adjusted EBITA margin, marketplace safe core commerce adjusted EBITA, 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 the reconciliation of GAAP to non-GAAP measures can be found in our earnings press release.
Unless otherwise stated, growth rate of all metrics mentioned during this call refers to year-on-year growth versus the same quarter last year. With that, I would now turn the call to Joe.
Thank you, Rob. Thank you all for joining us. Alibaba's business continues to do well in an uncertain economic environment characterized by slower global growth and the trade war. In the last quarter, I explained why Alibaba is on the right side of all the solutions that could help us address issues in the trade war. If you haven't, please go back and read my speech from last quarter. In this quarter, our core commerce business comprised of China retail, wholesale, international commerce, logistics, and local consumer services performed exceptionally well with overall year-on-year revenue growth of 44% in this segment. The question that is invariably asked is how does Alibaba's business, which is consumption-driven, continue to deliver robust growth despite challenges in the broader economy? I want to offer two reasons. Both are big secular trends happening in China that we have taken advantage of.
First is demographics. The second is the rapid pace of digitization. On demographics, China's $5.5 trillion domestic consumption market is driven by two massive demographic forces. First is the emergence of a middle class of over 300 million people living in large cities. This affluent middle-class population is almost as large as the entire U.S. population. Their consumption needs and wants are approaching developed market levels. We have talked about the desire by these consumers to upgrade the quality of products they buy, especially the pursuit of brands and imported products. Alibaba's Tmall platform benefits tremendously from this ongoing trend. We believe it will continue to be the leading choice for consumers looking for quality and consumption upgrades. The second massive demographic trend is the rise of urbanization affecting 3-tier, 4-tier, and 5-tier cities.
Other than the major metropolitan areas like Shanghai, Beijing, and Shenzhen, China has more than 150 cities with a population of at least one million people. In aggregate, these lower-tier cities and the surrounding townships have more than 500 million people with a consumption economy of $2.3 trillion. What is happening is the lower-tier cities are urbanizing very fast with a projected 300 million people that will move from rural areas into these cities in the next 10 years. The economy of these smaller cities will grow faster than the major metropolitan areas. We've seen projections that retail consumption from the lower tier cities and townships will triple from $2.3 trillion today to nearly $7 trillion by the year 2030. That is a compounded annual growth of more than 10% over a long period of time.
In the current quarter, we grew annual active consumers of our China retail marketplaces to 674 million, of which more than 70% come from lower tier cities. Alibaba's China retail platforms, especially Taobao Marketplace, is very well positioned to capture the consumption demand from lower tier cities. Alibaba is uniquely positioned with the capability to capture opportunities of both the growing middle class in metropolitan areas and urbanization of lower tier cities. This unrivaled capability is enabled by our multiple retail platforms that are highly trusted by consumers, extensive ecosystem of brands, merchants, and manufacturers, and AI-driven personalization technology. The second big secular trend I want to talk about is the rapid pace of digitization. Over the past 10 years, digitization of the Chinese economy has been driven by smartphones.
Because of the convenient and always connected nature of mobile devices, more and more users are spending more and more time connected to the internet. This is giving the digital service providers, like ourselves, a great feedback loop to understand user trends so that they can rapidly and continuously improve their services. Under our all-in mobile strategy, Alibaba has become the leading player in digitizing commerce. We have developed the most sophisticated AI algorithms to serve consumers on our platform, which results in ever improving user experience, as well as increasing monetization opportunities. In the next 10 years, digitization of the economy will be further accelerated by the advent of 5G connection and proliferation of IoT devices. This will have far-reaching implications for all industries and processes, including public services, manufacturing, supply chain distribution, product development, and marketing.
By developing these essential technologies of a more digitized world, such as data technology, cloud infrastructure, and machine intelligence, Alibaba is very well positioned to help businesses succeed through our new infrastructure for commerce. I turn to Daniel for his remarks.
Thanks, Joe. Hello, everyone. Thank you for joining our earnings call today. We've had an outstanding quarter with excellent business performance and sound execution against our overall strategy. We've enjoyed exceptional revenue growth of 42% year-on-year, outpacing industry peers, even though we adopt a conservative approach in monetization to support SMEs in this uncertain macroeconomic environment. We also deliver solid profit growth, benefiting from measures to improve operating efficiency. During the quarter, we saw solid execution and operational improvements in multiple areas that I will address, including, number 1, successful penetration into less developed areas. Number 2, positive momentum in adopting our New Retail technology among consumers and retail partners. Number 3, efficient and innovative last mile solution offered by Cainiao. Number 4, sustained improvement of our Lazada business in Southeast Asia. Number 5, robust revenue growth of our cloud computing business.
6. Repositioning our digital entertainment segment that ensures healthy long-term growth. For our China retail marketplace, we continue to demonstrate the ability to grow our customer base at scale. In June 2019, our China retail marketplaces had 765 million mobile MAUs, a quarterly net increase of 34 million. Annual active consumers grew 20 million to 674 million, reflecting strong user acquisition programs and another record-breaking June 18 Shopping Festival. During the quarter, over 70% of the increase in annual active consumers was from less developed areas, which demonstrated the success of our initiatives to touch a broader base of users. In our core commerce business, Tmall continued to strengthen its market leadership in the B2C market, growing faster than the sector average. Tmall physical goods paid GMV grew 34% in this quarter, mainly driven by increases in the number of users and average spending.
In June, we achieved the largest ever 618 Shopping Festival in business scale and customer reach. The promotional event saw robust consumption demand that supported solid sales and greater penetration into less developed areas for brands and merchants. As over 120 brands generated more than CNY 100 million a day in GMV. During the 18-day promotion period, Tmall physical goods paid GMV was up 38%, driven by increases in consumers and a higher average spending. Mobile Taobao app DAUs was up close to 30%, reflecting successful promotional strategies. About 65% of the buyers were from less developed areas. The success of the event was mainly due to successful promotional strategies that kept consumers engaged and willing to spend. More effective user acquisition programs, catalyzed by better reactivation of dormant users, leveraging on our data technology. A diversified selection of value-for-money products to attract more buyers in less developed areas.
Continuing efforts to address growing demand from our middle-class consumers. For local consumer services, we achieved strong growth in daily on-demand GMV, driven by robust order growth and increasing average order size during the quarter. We have also expanded the coverage of products and services in targeted low-tier cities, where we saw improved market share. We will continue to focus on delivering value to restaurants and other local service merchants through our data technology. Our new retail business consists of two major directions, reforming old and creating new, both of which enlarge the addressable market. We are making good progress in digitalizing retail partners and enable their new retail transformation. We offer multiple new retail solutions for traditional supermarket chains that include the Taoxianda and the digital POS machines. Taoxianda allows consumers to place orders in a nearby supermarket through Taobao app and secure delivery through our on-demand delivery network.
Digital POS machines capture the insight from local consumers' in-store purchases. These new retail technologies have started to deliver positive impacts to our retail partners like Sun Art. Freshippo, also known as Hema in Chinese, has achieved robust same-store sales growth. It will continue to expand its footprint, optimizing its stores, and introduce differentiated product selections. Hema is consolidating the supply chain to bring the product directly from the farm to table to improve customer experience. Cainiao network has developed robust import fulfillment solutions utilizing a combination of bonded warehouse in China and the direct shipment from overseas. The bonded warehouse network operated by Cainiao covers all the major ports in China. As part of Cainiao's comprehensive last-mile solutions, Cainiao's Cainiao Guoguo offers an on-demand pickup and delivery services that allow consumers to send packages from their homes, thereby facilitating returns.
As of June 2019, Cainiao Guoguo's speedy on-demand pickup service within two hours has covered substantially all of the districts and counties in China. In general, one out of every three returning package generated on our platform was handled through Cainiao Guoguo platform. On the globalization front, Lazada shows solid operational improvement after strengthening its third-party marketplace business, management team, and technology infrastructure. For the third consecutive quarter, Lazada achieved over 100% year-on-year order growth, reflecting strong consumption demand. During the quarter, it executed effective user acquisition programs with mobile DAU doubling year-on-year. Lazada key priority is to maintain strong user growth and user engagement in the coming years. Our cloud computing business continues to execute and exhibit strong growth. Revenue growth 66% year-over-year to CNY 7.8 billion, primarily driven by an increase in average revenue per customer.
We are focusing on delivering high value-added services while rationalizing our offerings of commodity products and services. We will continue to execute a strategy of expanding our market leadership, increasing investment in talent and technology infrastructure and developing new value-added products. On top of robust growth in public cloud, we are capturing strong secular demand for private cloud, primarily driven by digital transformation of big enterprise clients in various industries. During the quarter, our private cloud revenue grew over 250% year-over-year. Digital Media and Entertainment segment continues to be impacted by tighter content regulations and industry professionalization. Youku will continue to focus on investing in original content, delivering superior user experience, and driving increasing paying subscriptions. During the quarter, Youku's average daily subscribers increased 40% year-over-year.
While we continue to invest in original content production capabilities, we are also taking consistent measures to ensure content cost efficiencies and a return on investment. These measures have been reflected in reduced losses during the quarter. Alibaba Digital Economy continues to show resilient growth in the face of complex geopolitical and economic conditions. Recent geopolitical uncertainties have placed additional pressure to global growth. Looking into the future, we believe this is both a challenge and opportunity for the Chinese economy. Consumption and the service sectors will become the new engine for China growth. The consumption power in Alibaba Digital Economy is strong, coming from 2 types of consumers, those from less developed areas and the affluent middle class. We estimate over half of the total addressable population in less developed areas are already consumers in Alibaba Digital Economy.
We continue to acquire new customers in a holistic approach in less developed areas. With such a large existing consumer base, we see great cross-sell opportunity within the Alibaba ecosystem that will drive up their purchase frequency and category expansion. For affluent middle class, Alibaba is also well-positioned to meet their consumption upgrading demands. We are well penetrated in top-tier cities and able to continuously grow the consumer's mind share and wallet share in various areas of their lives. Today the Alibaba Digital Economy is self-reinforcing, and it is as strong as ever. Fueled by consistent revenue growth and healthy financial performance, we are able to continue our investment in strategic areas such as local consumer services, globalization, logistics, cloud computing, and digital content, which we believe will drive future sustainable growth for Alibaba Digital Economy.
Now I turn the call over to Maggie, who will walk you through the details of our financial results.
Thank you, Daniel. Thank you all for joining us. We've had another strong quarter. For today's call, I will begin with a review of the key financials and end with how we view the coming quarters. In June quarter, as Daniel mentioned, we delivered another quarter of strong user growth with 755 million MAUs and 674 million of annual active consumers, which means approximately one out of two Chinese are buying from our platform. We also continue to be successful in penetrating the less developed areas in China. Over 70% of the increase in annual active consumers during the quarter were from less developed areas. Our large and active user base is a solid foundation for us to not only extend the market leadership of our China retail marketplaces but also grow other consumer businesses within the Alibaba Digital Economy.
Our total revenue grew 42% to CNY 114.9 billion in this quarter. Excluding the effect of consolidating acquired businesses, there is a much smaller impact starting from this year. The revenue would have increased by 38% year-over-year. These businesses include Ele.me, which we started consolidation from May last year. Ele.me could be in the Alibaba chain. The increase of our total revenue is mainly driven by the robust growth of our China commerce retail business and Ele.me, strong revenue growth of Alibaba Cloud, as well as an increase in volume of orders fulfilled by Cainiao.
This quarter's costs and expenses, excluding SEC, have been tightly managed, leading to greater efficiency, especially in those businesses in investment stage. The increase for cost of revenue is primarily due to increased inventory costs of our direct sales and new retail business, increased logistic cost of Ele.me, driven by increased order volumes, and partially offset by a decrease in content spending by Youku. Let's turn to our business segments. Core Commerce. Our Core Commerce segment had a strong quarter with revenue growth of 44% to approximately CNY 100 billion this quarter. The fundamentals of our China retail business continue to be strong. The combined customer management revenue and commission revenue exhibited healthy growth of 26% for the quarter. Customer management revenue increased 27% in the quarter.
The growth of customer management revenue was primarily the result of increase in the volume paid clicks due to user growth and more relevant listings driven by better algorithms, which resulted in better consumer experience. Merchant confidence remains healthy, reflected by strong growth in merchant spendings and increases in number of paying merchants. Commission revenue increased 23%, primarily due to strong 34% year-over-year growth of Tmall paid physical goods GMV. The primary reason of the gap between the commission revenue growth and the Tmall physical goods GMV growth is shifts of Tmall Supermarket's revenue mix from commission to direct sales. Revenue from Tmall Supermarket, that used to be all in the commission, now the revenue coming from the direct sales is reflected under others within our China Commerce Retail Business.
Contributions from direct sales business, including Tmall Supermarkets and Hema, resulted in other revenue growth, which is 134% to CNY 16.7 billion. Local consumer services. Revenue from local consumer services was CNY 6.2 billion, primarily reflecting the strength of our food delivery platform, Ele.me. During the quarter, our food delivery business exhibited strong growth in daily on-demand GMV, and was driven by robust order growth and increase in average order size. Ongoing operational upgrades, coupled with a more targeted and disciplined approach in expanding market share, also improved operating efficiency during the quarter. We remain focused on penetrating into less developed areas for the food delivery business, which we believe will add long-term value for Alibaba's digital economy. We will be flexible and optimistic in our approach to investing in local consumer service business in the later part of the year.
Performance of other businesses under core commerce, such as New Retail, Taobao, international retail, and wholesale, remain healthy, as noted by Daniel earlier in his remarks. Let's look at the driver of the core commerce profitability. We continue to generate solid market-based core commerce adjusted EBITDA. This is the core core that we used to call. Compared to a year ago, we have increased adjusted EBITDA by 9.8 billion CNY, while the combined losses from the four strategic investment areas only increased 1.6 billion CNY. This reflects of our disciplined approach when managing this business, which led to strong profit growth. After incorporating the losses, our core commerce adjusted EBITDA grew 25% to 41 billion CNY during the quarter. Cloud computing revenue increased 66% to 7.8 billion CNY, primarily driven by increase in average revenue per customer.
We're improving our revenue mix by focusing on delivering high value-added services while rationalizing our offerings of commodity-type products and services. Adjusted EBITDA was a loss of CNY 358 million. Adjusted EBITDA margin improved from negative 10% to negative 5% in the quarter. We will continue to execute a strategy of expanding our market leadership by creating value and flexibility for our customers, increasing investment in talent and technology infrastructures, and developing new value-added products and features. Revenue for digital media and entertainment business increased by 6% as the industry undergoes rationalization and tighter regulations on content. Adjusted EBITDA was a loss of CNY 2.2 billion, and the adjusted EBITDA margin improved from negative 52% to negative 35% in the quarter, primarily due to the decrease of content spending and efficiency gains during our operations.
Revenue from innovation initiatives and others increased 21% to CNY 1.3 billion, mainly due to an increase in revenue from our Amap and some other innovation initiatives. Adjusted EBITDA for innovation initiatives and others was a loss of CNY 2 billion. The increase in loss is primarily due to investment in technology research and innovation, as well as some new business initiatives. Our business has shown strong profitability and cash flow generation capabilities. For June quarter, we generated CNY 26.4 billion in free cash flow. Compared to a year ago, the free cash flow has shown a slight growth, not as big as the profit growth. There is a reason. The reasons are mainly two. Number one, the net cash provided by operating activities increased underpayment of royalty fees and software technology services from Ant Financial. That settlement of the cash incurred in this quarter plays impact on cash flow.
The second thing is the payment of CNY 250 million cash with a U.S. federal class action lawsuit related with the white paper. As of June, the end of the quarter, cash equivalent and short-term investment were CNY 212 billion. In May 2019, our board of directors authorized to refresh our share repurchase program for an amount of up to CNY 6 billion over a period of two years. I'll also talk about Altaba sales of our ADS. As publicly disclosed, Altaba started selling their Alibaba shares on May 20, 2019. So far, they have already sold 261 million ADS, only have 22 million left. These are all based on the most recent publicly available information. Looking ahead, the Alibaba Digital Economy continues to show resilience and steady growth in the face of complex geopolitical and economic conditions.
We had a strong quarter to start our fiscal year, with revenue growing faster than our global technology peers. We are pleased to see sustained user engagement and consumer spending across our platforms. We continue to invest for longer-term growth, while at the same time gaining cost efficiencies in our investment areas. Looking ahead, for the next two quarters, we expect our China retail marketplace to exhibit strong user growth and user engagement enhancement that support healthy monetization and steady profit growth. Substantial profits generated from marketplace-based core commerce allow us to invest in strategic businesses, including local consumer services, digital entertainment, international marketplaces, new retail, logistics, and cloud computing. We will remain proactive in our approach to increase market leadership in strategically important businesses, while also improving overall group's operating efficiency. These strategic businesses have already become the clear market leaders in the past quarters.
We believe there are still great potential in high-growth areas that will substantially increase our total addressable market. I also want to give information for our Investor Day this year. We would like to announce that our 2019 Investor Day will be held on September 23rd to 24th in Hangzhou, China. We hope to provide in-depth business updates as we did in previous Investor Days. Details will be posted on the investor relationship section of Alibaba Group's website. That concludes our prepared remarks. Let's open up for questions. Thank you. Thank you, operator. Open to questions.
Yes. Thank you. Ladies and gentlemen, we'll now begin the question and answer session. To ask a question, please press star one on your telephone and wait for your name to be announced. To cancel the request, please press the pound or hash key. To give more people the opportunity to ask questions, please keep yourselves to no more than one question at a time. Once again, to ask a question, please press star one on your telephone keypad. Our first question comes from the line of Eddie Leung of Bank of America Merrill Lynch. Please go ahead.
Good evening. Thank you for taking my question, and congratulations on a good quarter. I have a question about the less developed area strategy. Could you elaborate how you plan to differentiate from your competitors in the lower tier cities? Just a follow-up, do you feel that there is a high degree of overlapping of your new customers from the less developed areas with your other e-commerce companies? Do you think you are addressing a different user segment in those areas? Thank you.
This is Daniel. Thanks for your question. As we said in our script, we are making good progress in user engagement and in new customer acquisition. During this quarter, we net add 20 million
Annual active consumers, over 70% of them are from less developed areas. Today, when we look at the consumer base we have, basically, we actually have two types of consumers. One is in top-tier cities and driven by the consumption upgrading and power, and driven by the growing demand from the middle-class families. The other is from the less developed areas. What we see is that because of the penetration of the mobile internet, we see the citizens in the low-tier cities become internet users, fluent internet users. They are trying various new business applications. Obviously, shopping and consumption is one of the most important areas, and they want to try. That's why we make a lot of efforts in acquiring these new customers.
Today, we are very happy to see that over half of the populations are in the less developed areas, already the customers in Alibaba ecosystem. We'll continue our efforts to acquire more customers from these areas. At the same time, as I said before, we will do everything we can to cross-sell and cross over the services in various categories and to fully leverage the existing user base we have on our platform. One more important point is that today on our platform, we have very dynamic supplies from brand products and the products from the manufacturers. The power of the platform is to enable the new customers we acquire in the low-tier cities to access the various dynamic product supplies, which also not only meet their existing demand but also create new demand from them.
I think that is a very important strategy for us to continue.
Yeah.
That's all I have for Daniel. Thank you.
Sorry, I just wanted to supplement Daniel's point on differentiating the strategy in the less developed areas. He talked about the shopping context. We have broad product selection, just much broader platform, and also access to direct factories. If you look at the Alibaba ecosystem, beyond e-commerce, we have local services that we serve the lesser-developed cities. We also have our sister company, Alipay, that provides the payment service as well as a bunch of daily services on their platform. This ecosystem is bringing in lots of synergies that enable us to capture more loyalty from each of the users in those lesser-developed areas.
Operator?
Thank you. Next question is from the line of Piyush Mubayi of Goldman Sachs. Please go ahead.
Thank you. If we think of the overall China commerce retail business as one, what percentage of GMV is moving from 3P to 1P? How should we think of this transformation in the business in terms of the impact on margins? It's a question to you, Maggie. Joe, if I could ask you to elaborate on how you think IoT and 5G could prove to be transformative to Ali. Thank you.
Sorry, Piyush, you might want to repeat the second question.
The question for Joe, could you elaborate briefly on how IoT and 5G could prove to be transformative? Thank you.
Thank you, Piers. Regarding to your first question, 1P versus 3P. If you take a look at GMV, we reported CNY 5.8 trillion GMV for the last fiscal year. We're trending towards CNY 1 trillion. The first few business accounts were a very small portion in that total GMV. When you look at a Hema supermarket, these businesses account for only less than CNY 100 billion GMV. Just to give you a sense, it's not a big portion. In terms of people talking about margin impact, et cetera, like we said many times, rather than looking at the margin, we look at the profit growth. Actually, this business does contribute to our revenue growth and also eventually going to contribute to our profit growth. Let's look at this quarter's revenue, very strong growth, like 42% year-on-year.
There is some contribution coming from our first few business. Even if you take that portion out, the revenue will still be the highest among the global peers. To us, we see this as one piece of the business, and we should really be looking at it together. When you look at the revenue growth, the profit also showing very strong growth. The core providing strong cash flows. At the same time, all of these investment areas, including the New Retail, actually are not only disciplined, but also showing the growth in revenue as well as improvement in the profitability.
Thank you.
Thank you, Shao. To answer the question on IoT and 5G. Look, we're in the very early innings of this really transformational technology overhaul with 5G potentially coming online in the next year or two years. What that means is faster connections will enable more and more devices to be connected to each other and also to the cloud. You can imagine in a world where faster connection enables millions and millions of devices. What are these devices doing? There are sensors, there are other devices that could be collecting lots of data.
For service providers that are using kind of an IoT strategy to provide services to consumers as well as to enterprises in manufacturing and supply chain, what the end result of faster connection and millions and millions of devices is the need to manage large, huge amounts of data, massive amounts of data that will need to be collected, stored, cleansed, managed. I think if you look at our Alibaba Cloud business, our expertise is rooted in data management and data technology. Our Apsara operating system is a distributed data computing platform that will sit at the core of our cloud computing technology, and we're providing that service to our customers. It'll ultimately benefit our cloud business. That's just an example. As I said, we're in the very early inning and there could be endless possibilities that's beyond my own imagination.
Thanks, Joe.
Next question.
Thank you. Next question is from Alicia Yap of Citigroup. Please go ahead.
Hi. Good evening, management. Congratulations on the strong quarter. Thanks for taking my questions. I have a question related to your recent Tmall Flagship Store 2.0 upgrade. In addition to potentially driving higher conversions and better user experience, could you help us understand what could be the additional outcome or monetization opportunity we could get from the storefront upgrade? Would that be any incremental service fee or take rate opportunity? On a broader scope, how should we relate and compare the personalization upgrade on the storefront versus the recommended feed features on the main Taobao app? Thank you.
Thank you. This is a very good question in operating strategy. I think we recently launched our Tmall Flagship Store 2.0 version. The purpose of this new version is to upgrade the storefront to enable our brand partners who operate on Tmall not only to sell their products, to manage their customers, but also give them a vehicle to manage their fan base they have across platforms. Also this fan base management, customer management is not isolated. I mean, customer management efforts and even marketing efforts. We want to provide them a vehicle to land it all the marketing campaigns the brand have to promote their brands across channels. Finally, all these marketing campaign data and the fans can be accumulated and landed in this Flagship Store. Which create a very unique end-to-end customer management journey.
In terms of monetization, we don't intend to charge additional fees based on the storefront upgrading. Obviously, if more and more brands are using this Tmall Flagship Store 2.0 framework, we will have more marketing campaign integrated into our platforms, which obviously will lead to more marketing spending on Alibaba ecosystem.
Thank you.
Next question.
Thank you. Next question is from Grace Chen of Morgan Stanley. Please go ahead.
Thank you. Thank you very much for taking my call. In this call, it is very encouraging to see Alibaba's strong margin performance. It'd be great if the management can elaborate a bit more about what efforts have the management done to help improve the margin performance, especially in Core Commerce and Digital Media Entertainment, and whether we're going to see the strong margin performance will continue in the following quarters. Congratulations. Thank you.
Thank you, Grace, for the question. Let me elaborate on what we have done to bring out the operating efficiency. I think, first of all, the revenue growth is very strong, right? That's obviously driven by the user growth and also all of our efforts on user experience enhancements have paid off. When you look at the costs and expenditures, we have started later last year, emphasizing on all of these efficiency of these spendings, not only on the marketing but also the headcount, but also on the spending on the content, et cetera. We do have specific measures continuing to review and measure the ROIs of these spendings. This is number one. Number two is that we have seen so much synergy coming out of not only Alibaba Group, but also a synergy with our sister companies.
Things like marketing spending, we're targeting another 200 million, 300 million of potential users, consumers coming to our platform. This is also the target of Ant Financial, and this is where that we can work together, that they are good at acquiring such consumers in the lower tier cities, and the public's good at retaining these consumers so that we don't have to spend it twice. It's a very effective way of doing the marketing and acquire users. Hope that helps. DME. You see the negative margin get narrowed. 55% negative margin from last year and 35%. Actually, there was a one-off last year, which is the World Cup spending. If you take that out, last year's negative EBITDA margin would have been somewhere around 42%, but still down by a lot.
I think the DME negative margin narrowing is mainly coming from our discipline on the spending, particularly in the content spending.
Next question.
Thank you.
Next question is from the line of Binnie Wong of HSBC. Please go ahead.
Good evening, management. Congrats on the set of further update results. My question is for local consumer services on your food delivery business. We see that there's a strong top line growth along with less margin narrows down from 9% to 5% this quarter and a very strong top line growth. We want to understand the major driver. Is it through efficiency improvement or less subsidy? Also, can we get clarity on your priorities going forward? Is it still gaining market share, especially in lower tier cities, and also synergies between the new retail system along with Hema, and also building deeper to be digitalization transformation, basically tapping into merchants IT budget as well?
Yeah, there's a lot of noise.
Okay.
Maybe just I do want to clarify your question. You're asking about local consumer service?
Yes. The efficiency improvement. Yep.
Efficiency improvement.
Also the priorities.
Okay.
Thank you.
This quarter, we are making good progress in local services, especially in the particular low-tier cities. We are gaining market share in these particular cities. At the same time, we are very happy to see the operating efficiency is also improved and with our continued efforts. We will continue work on this and to grow our user base in this food delivery and local service business by leveraging the synergies in Alibaba ecosystem. As I said, I think we have a unique advantage that we have like 750 million mobile active users in Alibaba various consumer platforms. How to cross-promote it, the local services within this existing user base especially in the low-tier cities, I think is our big advantage. We will continue to work on this.
At the same time, because of this local services, we build a very efficient on-demand delivery network, and which also leveraged by our New Retail initiatives. Today, this on-demand delivery network helps our retail partners, local retail partners, to do the on-demand delivery for the orders away from stores. I think by doing so, we also improving operating efficiency of these last mile services. All these capacities can be fully utilized in serving the various city stages.
Thank you. Just want to follow up on the priorities going forward within this segment.
Well, as I said, we will continue to invest and grow our local business especially in the low-tier cities and the priorities that leverage our user base we have. Also we are continuing to improve our operating efficiency as well.
Thank you.
Next question.
Thank you. Next question comes from the line of Gregory Zhao of Barclays. Please go ahead.
Hi, management. Thanks for taking my question. A very impressive result. My question is about the recommendation fees. Just wanted to check the recent progress of your monetization of the recommendation fees, and what the contribution to your customer management, the revenue. Also want to understand if there is any seasonality of the business, such as last monetization, maybe during the 618 and Double 11, the promotion to push your keyword search advertising, and also quick follow-up on lower tier city expansion. I think you talk a lot about the opportunity in lower tier city, we also know you prioritized the strategic position of the Juhuasuan during the quarter. We just want to understand how will you differentiate your lower tier city expansion strategy with your peers? Thank you.
Okay, Greg. Talk about customer management revenue and the recommendation fees monetization. First of all, we've seen that our customer management revenue grew 27% year on year. The reason for the growth or the driver is mainly bigger user base and better user experience, so that the merchants are satisfied and willing to pay more. We said that for recommendation fees, we do not plan to roll out the monetization, particularly in the current uncertain macro environment. This is one of the ways of helping us acquire new customers. From the competition point of view, we also won't be aggressively targeted on the revenue growth by rolling out the recommendation fees.
Well, in terms of our strategies in the lower tier cities, as I said before, today, over half of the populations in the less developed areas already our customers. I think very important, we will continue to leverage this user base we have in our ecosystem to provide them various supplies. As we said, we have various promotional initiatives, including Juhuasuan and Daily Deals, so on and so forth. Via these very effective and efficient promotion platform and new customers from lower tier cities are very easy to find the products value for money. Via these efforts, we effectively increase the user frequencies, buying frequencies and the business. In terms of the new customer acquisition, we still see a good opportunity, and by leveraging the power of Alibaba ecosystem, and we together with Alipay and local services, to further penetrate these new customer base.
The digital checkout of the new customers actually also give us a good opportunity to check-in them into our shopping and consumption platforms. We will continue to work on this.
Operator, next question.
Thank you.
Thank you. Our next question comes from the line of Jerry Liu of UBS. Please go ahead.
Hi. Thank you. Yeah. My question is about our comments on the call so far about the rationalization and optimization, especially in a lot of our investments that we've done so far this year. If I look at actually EBITDA growth this quarter, the year-over-year growth is actually better than the EBITDA revenue or EBITDA growth of the core core, which is the first time in over a year. I'm wondering, is there more rationalization we can continue to do to continue this trend? Thanks.
Yeah. As I said, I think first of all, the revenue growth is very strong, right? 42%, if you compare with all the other peers, where most of them are in 20-ish. At the same time, we talk about the discipline cost and operating efficiency and all of these efforts and getting the synergy out of the group and the Alibaba Digital Economy. We're going to continue to do so. We do see great potential in the market. While we're talking about the discipline, we're also flexible and optimistic in our approach to investing in all of these different initiatives. Just like how we did in the past 20 years, investing in these new areas, investing in innovation brings sustainable growth for longer term.
Thank you.
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Thank you. Ladies and gentlemen, that concludes the conference for today, and thank you for participating. You may now all disconnect.