Earnings Call: Q1 2020

Aug 15, 2019

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 and A session. I would now like to turn the call over to Rob Lynne, Head of Investor Relations of Alibaba Group. And we apologize for any static or any disturbances. Please go ahead. Good day, everyone, and 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 side. Okay. I think we'll all proceed. Okay. Well, sorry about that. So with us today are Joe Cai, 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 annual 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 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 telecoms 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 metric expansion earnings costs refers to year on year growth versus the same quarter last year. With that, I will 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 2 reasons. Both are big secular trends happening in China that we have taken advantage of. First is demographics and the second is the rapid pace of digitization. On demographics, China's US5.5 trillion dollars domestic consumption market is driven by 2 massive demographic forces. First is the emergence of a middle class of over 300,000,000 people living in large cities. This affluent middle class population is almost as large as the entire U. S. Population and 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 and we believe it will continue to be the leading choice for consumers looking for quality and consumption upgrades. The 2nd massive demographic trend is the rise of urbanization affecting 3rd, 4th and 5th 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 1,000,000 people. In aggregate, these lower tier cities and the surrounding townships have more than 500,000,000 people with a consumption economy of US2.3 trillion dollars What is happening is the lower tier cities are urbanizing very fast with a projected 300,000,000 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 US2.3 trillion dollars today to nearly US7 1,000,000,000,000 dollars by the year 2,030. 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 674,000,000, 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 low 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 5 gs 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. Now I turn to Daniel for his remarks. Thanks, Joe. Hello, everyone, and thank you for joining our earnings call today. With an outstanding quarter with excellent business performance and a sound execution against our overall strategy. We 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 delivered 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 and number 6, repositioning our digital entertainment segment that ensures healthy long term growth. For our China retail market base, we continue to demonstrate the ability to grow our customer base at scale. In June 2019, our China retail marketplaces had 755,000,000 mobile MAUs, a quarterly net increase of 34,000,000. Annual active consumers grew 20,000,000 to 674,000,000, reflecting strong user acquisition programs and another record breaking June 18 shopping festival. During the quarter, over 70% of the ease 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 continues to strengthen its market leadership in the B2C market, growing faster than the sector average. T Mobile 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 June 2018 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 RMB100 1,000,000 a day in GMV. During the 18 day promotion period, Tmall Physical Group's 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 and about 65% of the buyers were from less developed areas. The success of the event was mainly due to successful promotional strategy that kept consumers engaged and willing to spend. More effective user acquisition programs penalized by better reactivation of dormant users leveraging our data technology, a diversified selection of valuable money products to attract more users 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 2 major directions, reforming old and creating new, both of which enlarge the addressable market. We are making good progress in digitizing partners, retail partners and enable their new retail transformation. We offer multiple new retail solutions for traditional supermarket chains that include the Cao Xanda and the digital parts machines. Taoxanda allows consumers to place orders in a nearby supermarket through Taobao app and secure delivery through our on demand delivery network. Digital parts machines capture the insight from local consumers' in store purchases. These new retail technologies have started to deliver positive impact to our retail partners like Sunar. Finshipu, 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. China Network has developed robust e support 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 global APP offers an on demand pickup and delivery services that allow consumers to send package from their homes, thereby facilitating returns. As of June 2019, Cainiao Gogol's speedy on demand pickup service within 2 hours has covered substantially all of the districts and the countries and the counties in China. In general, one out of every 3 returning package generated on our platform was handled through China Global Platform. On the globalization front, Lazada showed solid operational improvement after strengthening its 3rd party marketplace business, management team and technology infrastructure. For the 3rd consecutive quarter, Lazada achieved over 100% year on year growth 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's key priority is to maintain strong user growth and user engagement in the coming years. Our cloud computing business continues to execute and execute strong growth. Revenue grew 60 6 percent year over year to RMB7.8 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, including investments 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 these enterprise clients in various industries. During the quarter, our private cloud revenue grew over 2 50% year over year. Digital Media and Entertainment segment continues to be impacted by tighter content regulations and industry rationalization. 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 return on investments. 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 development 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 frequencies and the categories 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 consumers' mind share and wallet share in various areas of their lives. Today's 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's 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 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. So in June quarter, as Daniel mentioned, we delivered another quarter of strong user growth with 755,000,000 MAUs and 674,000,000 of annual active consumers, which means approximately 1 out of 2 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 eyes of our digital economy. Our total revenue grew 42% to RMB114.9 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 on year. So these businesses include like Ele. Me, which we started consolidation from May last year, Ele. Me, co billion articulation. The increase of our total revenue was mainly driven by the robust growth of our China Commerce Retail Business and Olima, strong revenue growth of Alibaba Cloud as well as an increase in volume of orders fulfilled by China. This quarter's costs and expenses, excluding SEC, have been tightly managed, leading to greater efficiency, especially in those businesses in the investment stage. So the increase for cost of revenue is primarily due to increased inventory cost 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 UCO. Let's turn to our business segments. Core Commerce. Our Core Commerce segment had a strong quarter with revenue growth of 44 percent to approximately RMB100 1,000,000,000 this quarter. The fundamentals of our China retail business continue to be strong. The combined customer management revenue and commission revenue is typically 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 volume paid clicks due to user growth and more relevant listings driven by better algorithms, which resulted in better consumer experience. Merchant confidence remained healthy, reflected by strong growth in merchant spending and increases in number of paid merchants. Convention revenue increased 73%, 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 shift of Tmall supermarket revenue mix from commission to direct sales. So revenue from Tmall Supermarket used to be all in the commission. Now the revenue coming from the direct sales is reflected under others within China Commerce Retail Business. Contributions from direct sales business, including HEMO Supermarkets and Hema resulted in other revenue growth, which is 134% to RMB 16,700,000,000. Local consumer services. Revenue from local consumer services was RMB6.2 billion, primarily reflecting the strength of our food delivery platform, Creeloma. During the quarter, our food delivery business exhibited strong growth in daily on demand GME 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 and the core commerce such as new retail, Tanya, international return to wholesale remain healthy as noted by Daniel earlier in his remarks. Now 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 we used to call. Compared to a year ago, we have increased adjusted EBITDA by RMB9.8 billion, while the combined losses from the 4 strategic investment areas only increased RMB1.6 billion. So this reflects of our disciplined approach while managing this business, which led to strong profit growth. After incorporating the losses, our core commerce adjusted EBITDA grew 25% to RMB41 1,000,000,000 during the quarter. Cloud computing revenue increased 66% to RMB7.8 billion, 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 commoditized products and services. Adjusted EBITDA was a loss of RMB358 1,000,000. Adjusted EBITDA margin improved from negative 10% to negative 5% in the quarter. We will continue to execute the 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 regulation on content. Adjusted EBITDA was a loss of CNY 2,200,000,000 and 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 RMB1.3 billion, mainly due to an increase in revenue from AMAP, the modern innovation initiatives. Adjusted EBITDA for innovation initiatives amounted to the loss of $2,000,000,000 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 RMB 26,400,000,000 in free cash flow. Compared to a year ago, the free cash flow has shown us a slight growth, not as big as the profit growth. There is the reason. The reasons are mainly 2. Number 1, the net cash provided by operating activities increased annual payment of royalty fees in software and technology services from Ant Financial. So that settlement of the cash incurred in this quarter plays impact on the cash flow. The second thing is the payment of USD 250 1,000,000 cash with a U. S. Federal transaction lawsuit related with this white paper. As of June the end of the quarter, cash, cash equivalent and short term investment were RMB212 1,000,000,000. In May 2019, our Board of Directors authorized to refresh our share repurchase program for an amount of up to US6 $1,000,000,000 over a period of 2 years. I'll also talk about the Otter Tail of our ADS. As publicly disclosed, Autobahn started selling their Alibaba shares on May 20, 2019. And so far, they have already sold 261,000,000 ADS, only have 22,000,000 left. These are all based on the most recent publicly available information. Looking ahead, the Anubatai62 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 few quarters, we expect our China retail market to exhibit strong user growth and user engagement enhancement that support healthy monetization and steady profit growth. Sizable profits generated from marketplacescorecommerce 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. Each 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 margin. I also want to give some information for our Investor Day this year. We would like to announce that our 2019 Investor Day will be held on September 23 to 24 in Hangzhou, China. We hope to provide the in-depth business updates as we did in previous Investor Day. Details will be posted on the Investor Relationships section of Alibaba Group's website. That concludes our prepared remarks. Let's open up for questions. Thank you. So, Victoria, we're open for questions. 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 questions 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 limited cities? And then 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. What 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 the new customer acquisition. And during this quarter, we net adds 20,000,000 annual active consumers and over 70% of them are from left look areas. And today, when we look at the consumer base we have, basically, we are actually have 2 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 left of that areas. And what we see is that because of the penetration of the mobile Internet, we see the recipients in the local cities they become Internet users, fluent Internet users and they are trying various new business applications. Obviously, shopping and consumption is one of the most very important areas and we really want to actually they want to try. So that's why we made a lot of efforts in acquiring these new customers. And today, we are very happy to see that over half of the populations are in the less than the areas already the customers in Alibaba ecosystem. So we'll continue our efforts to acquire more customers from these areas. But at the same time, as I've said before, we will do everything we can to cross sell cross over the services in various categories and to fully leverage the existing user base we have on our platform. And then one more important point is that today on our platform, we have very dynamic supply from brand products and the products from the manufacturers. So the power of the platform is to enable the new customers we acquire in the low tier cities to access the various dramatic product supplies, which also not only meet their existing demand, but also create new demand from them. So I think that that is very, very important strategy for us to continue. Yes. That's very helpful, Tommy. Thank you. Sorry, I just wanted to supplement Daniel's point on the differentiated strategy in the less developed areas. It just you talked about the shopping context. We have broad product selection, just much broader platform and also access to direct to factories. But also if you look at the Alibaba ecosystem, there are 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 sort of services on their platform. So 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. Thank you. Next question is from the line of Darius Mubay of Goldman Sachs. Please go ahead. Thank you. If we think of the overall China Commerce retail business as 1, what percentage of GMV is moving from 3P to 1P? And how should we think of this transformation in the business in terms of the impact on margins? It's a question to you, Maggie. And Joe, if I could ask you to elaborate on how you think IoT and 5 gs could prove to be transformative to Ali? Thank you. It's not clear. You might wonder if you could repeat the second question. And a question for Joe. Could you elaborate briefly on how IoT and 5 gs could prove to be transformative? Thank you, Piyush. So regarding to your first question, 1 gs versus 3p, if you take a look at GMV, we reported RMB5.8 trillion for the last fiscal year and we're tripping towards US1 $1,000,000,000 So the first two business accounts for a very small portion in that total GMV. When you look at the whole market, the single market, this business counts for only less than RMB100 1,000,000,000 GMV. So to see a sense, it's not a big portion. In terms of people talk about margin impact, etcetera. Like we said many times, rather than looking at the margin, we look at the profit growth. So actually, this business that contributes to revenue growth and also eventually then contribute to our profit growth. So let's look at this quarter's revenue, very strong growth, like 42% year on year. There is some contribution come from our first P business. Now even if you take that portion out, the revenue will still be the highest among the global peers. But to us, we see this as one piece of the business and we should really be looking at together. And then when you look at the revenue growth, the profit also showing very strong growth. So the core, core providing strong cash flows. At the same time, all of these investment areas, including the new retail, actually are not only very not only disclaimed, but also showing the growth in revenue as well as the improvement in profitability. Thank you. Thank you, Sha. Yes, to answer the question on IoT and 5 gs, look, we're in the very early innings of this really transformational technology overhaul with 5 gs potentially coming online in the next year or 2 years. What that means is faster connections will enable more and more devices to be connected to each other and also to the cloud. So you can imagine in a world where faster connection enables millions and millions of devices and what are these devices doing? They're sensors, they're other devices that could be collecting lots of data. So 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. And I think if you look at our Alibaba Cloud business, our expertise is rooted in data management and data technology. Our Aspera operating system is a distributed data computing platform that will sits at the core of our cloud computing technology and we're providing that service for our customers. So it will ultimately benefit our cloud business. That's just an example. But as I said, we're in the very early inning and there could be endless possibilities that's beyond my own imagination. Thank you. Next question is from Aditi 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? And on the 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. And also this fan base management, customer management is not going to isolate customer management efforts and even marketing efforts, we want to provide them a vehicle to land it all the marketing campaigns that they have to promote their events across channels. But finally, all these marketing campaigns better and the fans can be accumulated and landed in the special store, which creates a very unique end to end customer management journey. And in terms of monetization, we don't want or we do intend to charge additional fees based on the storefront upgrading. But obviously, if more and more brands are using this Tmall, I mean, flagship 2.0 framework, we will have more marketing campaigns integrated into our platform, which obviously will lead to more marketing spending on Alibaba ecosystem. Thank you. 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's very encouraging to see Alibaba's strong margin performance. So it would 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 entertainment and whether we're going to see the strong margin performance will continue in the following quarters? Congratulations. Thank you. Thank you, Cushing, for the question. Let me elaborate on what we have done to bring out operating efficiencies. I think, first of all, the revenue growth is very strong, right? So that's always coming from driven by the Easter growth and also all of our efforts and retail experience enhancements have paid off. And then when you look at the cost and expenditures, we have started later last year emphasizing on all of these efficiency of the spending, not only on the marketing, but also the headcount, but also on the spending on the content, etcetera. So we do have specific measures to the team to review and measure the ROIs of the spending. And this is number 1. Number 2 is that we have seen so much synergy coming out of not only as of group, but also a synergy with our sister companies. So things like marketing spending, right, we're targeting another 200,000,000, 300,000,000 of potential users, consumers coming to our platform. So this is also a target of Ant Financial. And this is where that we can work together, that they are good at acquiring customers in the lower tier cities and the top of it is 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 the core users. Hope that helps. DME. You see the negative margin get narrowed. So 55% negative margin from last year and 35%. Actually, there was a one off last year, which is the World Cup spending. So if you take that out, last year's negative EBITDA margin would have been like somewhere around 42%, but still down by a lot. I think the GMV 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 fair update results. So my question is for local consumer services on your food delivery business. We see that there's a strong top line growth along with loss margin narrows down from 9% to 5% this quarter and a very strong top line growth. So we want to understand the major driver, is it through efficiency improvement or less subsidy? And also can we get clarity on your priorities going forward? Is it like still gaining market share, especially in lower tier cities? And also synergies, looking at new retail system along with Homa and also building deeper to be digitalization transformation, basically tapping into merchants' IT budget as well? And just lastly, is that along with this Yes, there's a lot of noise. Okay. Maybe just I do want to clarify your question. So you're asking about local consumer service? Yes, yes. The efficiency improvement, yes. And also the priorities. Okay. Thank you, Rob. This quarter, we are making good progress in local services, especially in the particular low tier cities. And we are gaining market share in these particular cities. But at the same time, we are very happy to see the operating efficiencies also improved and with our continued efforts. And we will continue to work on this and to grow our user base in this particular 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 7,000,000 mobile active users in Alibaba consumer by various consumer platforms. So how do cost promoted local services within this existing user base, especially local cities, I think is our big advantage. We will continue to work on this. And at the same time, because of these local services, we build a very efficient on demand delivery network and which also led by our new retail initiatives. And today, we these on demand delivery network help our retail partners, local retail partners to do the on demand delivery for the orders away from stores. I think by doing so, we're also improving operating efficiencies of these last mile services because all these other capacities can be fully utilized and improving the various business cases. And thank you. Just one follow-up on the priorities going forward within this section. Well, as I said, we will continue to invest and grow our local business, especially in the low tier cities. And the priority is that leverage our user base we have and also we continue to improve our ordering efficiency as well. 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. So my question is about the recommendation fees. So just want to check the recent progress of your monetization on the recommendation fees and what's the contribution to your customer management to revenue? And also want to understand if there is any seasonality of the business such as less monetization maybe during the 618 and Double 11 promotion to push your keyword search advertising? And also a quick follow-up on lower tier city expansion. I think you talked a lot about the opportunity in lower tier city. And we also know you prioritized the strategic position of Zhihuacan during the quarter. So we definitely understand how will you differentiate your loyalty city expansion strategy with your peers? Thank you. Okay. Greg, talk about customer management revenue and the recommendation, please, Mal, Patricio. 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. And we said that for recognition 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 our SME customers. And so from the competition point of view, we also won't be targeted on the revenue growth by rolling out the recommendation fees. Well, in terms of our strategies in the way tier cities, as I said before, today, over half of the populations in the last lot areas already are our customers. So I think very important, we will continue to leverage these user base we have in our ecosystem to provide them various supplies. And as we said, we have various promotional initiatives, including Juho's on daily deals, so on and so forth. And varieties, I mean, very effective and efficient promotion platform and the new customers from LTPS is very easy to find the product value for money. So by these efforts, we effectively increase the user frequencies, buying frequencies and business. And 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. And the digital checkout of the new customers actually also gave us a good opportunity to check-in then into our shopping and consumption platforms. So we will continue to work on this. Operator, last question. Thank you. Our next question comes from the line of Jerry Liu of UBS. Please go ahead. Hi, thank you. Yes, 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 first time in over a year. So I'm wondering, is there more rationalization we can continue to do to continue this trend? Thanks. Yes. As I said, I think, first of all, the revenue growth is very strong, right? So, 42%, if you compare with all the other peers, where most of them are in 20 ish. And 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 Alibaba economy. So, we're going to continue to do so. We do see good potential in the market. So while we're talking about the discipline, we're also flexible and optimistic in our approach to investing in all of these business initiatives because just like how we did in the past 20 years, investing in these new areas, investing in innovation brings growth, sustainable growth for longer term. Thank you. Thank you everyone for joining the call today. If you have further questions, please reach out to the Investor Relations team at Alibaba. Thank you. Thank you. Ladies and gentlemen, that does conclude the conference for today, and thank you for participating. You may now all disconnect.