Earnings Call: Q4 2019

May 15, 2019

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group's March Quarter of 2019 and Full Fiscal Year 2019 Results Conference Call. At this time, all participants are in a 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 Lin, Head of Investor Relations of Alibaba Group. Please go ahead. Good day and good evening, everyone, and welcome to Alibaba Group's March quarter and full fiscal year 2019 results conference call. With us are Mr. Joe Tsai, Executive Vice Chairman Daniel Zhang, CEO Maggie Wu, CFO. This call is also being webcast on 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 report on the 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 core comps adjusted EBITDA, non GAAP net income, non GAAP diluted EPS and free cash flow are expressed on a non GAAP basis. Our GAAP results and reconciliations of GAAP to non GAAP measures can be found in our earnings press release. Unless otherwise stated, growth rate of all stated metrics mentioned during this call refers to year on year growth versus the same quarter last year or the previous year. With that, I will now turn the call to Joe. Thanks, Rob. Thank you all for joining us. We had a great quarter with operations, revenues and profits beating expectations. This shows the resilience of our business in the face of complex geopolitical and economic conditions. Before Daniel and Maggie take you through our exciting quarter, I want to address the elephant in the room, which everyone calls the trade war. Let's distill the complexity of U. S.-China relations to what it means for Alibaba. In short, the trade talks put Alibaba on the right side of all of the issues on the table. 1st, the reduction of the U. S. Trade deficit. China's commitment to purchase more American products means China will over the next several years become a net importing country. Consumers in China will benefit from the availability of quality imported products from all over the world, including from American farmers, brands and small businesses. Alibaba is set up to benefit from this secular trend of growing imports into China. We are the platform of choice for global producers of products and brands selling into China because we have the reach and deep insights of over 650,000,000 active Chinese consumers on our platform. The scale and effectiveness of our access to Chinese consumers is simply unrivaled. In cross border e commerce, our Tmall global platform is China's number one platform for overseas brands and merchants to sell to Chinese consumers directly without physical operations in China. Well established global retailers and brands that have built an online presence on Tmall Global include nutritional supplement vendors, Chemist Warehouse and Blackmores, baby products brand Pampers and apparels brand, Emporio Amani. 2nd, the trade negotiations will lead to China opening its markets to more foreign businesses in order to satisfy the massively growing demands of domestic consumers. We're not concerned about slowing China exports affecting GDP growth because the Chinese economy is shifting from an export economy to a domestic consumption economy. Job expansion is continuing in China. Over the last 5 years, while China lost 14,000,000 manufacturing jobs, the economy added 70,000,000 service jobs that drove real disposable income growth and consumption. The middle class in China has reached critical mass of over 300,000,000, almost as large as the entire U. S. Population. The middle class would double in the next 10 years, especially from the lesser developed Chinese cities. While total Chinese domestic consumption is US5.5 trillion dollars today, consumption from these 3rd, 4th and 5th tier cities with a combined population of 500,000,000 people will triple from US2.3 trillion dollars to nearly US7 1,000,000,000,000 in the next 10 years. 3rd, intellectual property protection. In recent years, China has made significant improvements in reducing IP infringement as China moves closer to global norms in protecting and paying for foreign IP. China also recognizes the need to protect its own innovators as well as being focused on Chinese consumers who demand genuine products of high quality. Alibaba is at the forefront of protecting intellectual property. Leveraging on our cutting edge technology, we take proactive and aggressive steps to crack down on counterfeits in our marketplaces because the customers who trust our platform demand it. Alibaba is the only e commerce company that is validated by global brands as having the highest commitment to IP protection. The Alibaba Anti Counterfeiting Alliance, which we initiated in 2017, has grown to 132 global brand companies from 16 countries in 12 industries. The Alliance members collaborate in 6 key areas: number 1, proactive online monitoring and protection number 2, product test buy programs number 3, offline investigations number 4, assisting law enforcement number 5, litigation against infringers and number 6, public awareness campaigns. 4th, reforming the structure of the Chinese economy. The model of state dominated influence in traditional industries is being complemented by private sector initiatives to digitize the economy from manufacturing, supply chain, distribution, product development and marketing. Through our new retail strategy and support from our intelligent cloud computing solutions for enterprises, Alibaba is playing a leading role in building a new commerce infrastructure in an increasingly digitized economy. Our partnership with Starbucks is a case in point. Starbucks in China has established a prominent brand presence and customer engagement platform within our mobile ready China retail marketplaces. This has already resulted in Starbucks acquiring millions of new loyalty members online. We are also enabling Starbucks to expand their offering from store based operations to on demand delivery to customers. Through these initiatives, Starbucks has added an online dimension to its customer acquisition and engagement as well as fulfilling customer demand outside of its stores. This would not have been possible without the support of Alibaba's business operating system, data technology and on demand logistics infrastructure. To summarize, the vexing issues in the trade negotiations will resolve themselves as the Chinese economy is already evolving to close the gap between the interests of the United States and China. This means in the future, there will be bigger Chinese domestic consumption, more foreign imports, continuing focus on enhanced IP protection and further digitization of industries driven by participation of the private sector. As we look at the evolution of the Chinese economy, Alibaba is on the right side of all these issues. I cannot think of another company that is better equipped to drive these secular changes and participate in the ensuing long term benefits. Now, I turn to Daniel for his remarks. Thanks, Joe. Hello, everyone, and thank you for joining our earnings call today. We enjoyed an outstanding quarter and fiscal year. Over the past year, we achieved many important milestones across our entire businesses. We enjoyed exceptional revenue growth in our core commerce business, while successfully expanding our product and service offering from physical goods to local consumer services and to digital entertainment contents. In the past 12 months, we had phenomenal user growth. Our China retail marketplaces had 654,000,000 annual active consumers, representing an annual net increase of 102,000,000. Our GMV reached over RMB5.7 trillion with an annual net increase of approximately RMB1 1,000,000,000,000 demonstrating the unrivaled prosperity and the vitality of our Alibaba Digital Economy. We have a proven track record of execution and delivering long term growth. We are on track to achieve our US1 $1,000,000,000,000 total GMV target by fiscal year 2020, which was set 5 years ago. Looking ahead, in the new fiscal year, we will continue to focus on expanding our user base and gaining more wallet share from both existing and new consumers on our platforms. Our user acquisition strategies worked successfully in the past year. By cooperating with Alipay, we have been able to acquire, engage, and retain our consumers effectively. In the past year, over 70% of the increase in annual active consumers on our China retail marketplaces came from less developed areas. In fiscal year 2020, we will continue to have new initiatives that cut us towards a broad base of users and expand into products and services that will increase purchase frequencies, enhance user stickiness and increase our wallet share. In our core commerce business, Tmall continued to strengthen its market leadership in the B2C market. Tmall physical goods paid GMV grew 33% year on year in this quarter and 31% year on year in the fiscal year, while China's overall online fiscal goods respectively grew 21% 23%. Tmall not only developed a suite of distribution channel solutions to support merchants to sell effectively in China, but also evolved to be the platform for new product launches. In fiscal year 2019, Paybox, our product debut marketing solution, helped over 5,000 brands to drive successful new product launches. In addition, Tmall used proprietary consumer insight technology and advanced marketing solutions to help brands and merchants acquire, engage and retain their customers. In the past year, more than 1200 brands each acquired over 1,000,000 new customers on our platforms. Furthermore, Tmall also helped brands better manage their entire product lifecycle and the marketing plan on our China retail marketplaces. Tmall Super Brand Day has become a customized November 11 type of shopping festival for every brand. Last year, about 100 brands established their own brand day to engage with consumers on our platform. During this quarter, our customer management revenue grew by 31% year on year. The robust revenue growth was driven by expanding user base, better conversion rates from improving algorithms and the new trend of brands and merchants choosing us as their topic for new product launches and new customer acquisition efforts. We are also seeing positive results from the monetization of recommendation fees. However, currently, we are not planning on expanding the monetization of recommendation fees in the coming fiscal year. We plan to invest aggressively to expand users in Tier 3 and below cities and provide them with better user experience supported by broader product selection. Our new retail, our self owned and operated fresh goods and grocery retail chain, Pharma, continued to achieve robust same store sales growth, expand footprint, optimize sports and introduce new initiatives to improve customer experiences. As of March 31, 2019, we had 135 self operated Hema stores in China, primarily located in Tier 1 and Tier 2 cities. Also, Tmall Supermarket is transforming from a purely online grocery shopping destination to an onlineoffline model, integrating inventory with our offline retail partners, such as Sunark. Under this model, Tmall Supermarket is able to reduce fulfillment costs and improve delivery speed through our on demand network. In fiscal year 2019, Ele. Me experienced strong user growth by leveraging traffic from Alipay and Taobao apps. In addition, we integrated Ele. Me, our on demand food delivery platform with Kobei, our restaurant and local service guide platform and create a business that's called local consumer services. In fiscal year 2020, we will continue to expand Ele. Me and Kopi's operations into low tier cities and expand local service offerings. Moreover, we will penetrate into low tier cities as the entire Alibaba Digital Economy, not just from the local consumer service sector, to meet the growing consumer needs across China. Next, Alibaba Cloud continued to achieve substantial growth in the enterprise service sector. As China marches into the era of digital economy, all industry sectors have come to embrace digital technologies. Alibaba Cloud not only provides enterprise customers with cloud based IT infrastructures, but more importantly, enable them with advanced data processing and analytical strength and artificial intelligence capabilities. Our cloud based data technology capabilities, together with our expertise in commerce, financial services, and logistics, form the core of Alibaba Business Operating System. This system will empower the digital transformation of enterprises. On the globalization front, Lazada has successfully shipped from 1P to 3P marketplace model in Southeast Asia. AliExpress has huge growth potential in Eastern and Southern European markets such as Russia and Spain. In 12 months ended March 31, 2019, Lazada and AliExpress had a total of more than 120,000,000 annual active consumers. The recent U. S.-China trade negotiations have attracted worldwide attention. I believe this is both a challenge and an opportunity for the Chinese economy. Looking into the future, China will expedite its journey to transform from an export driven economy to a consumption driven economy. We believe consumption and the service sectors will become new benchmarks to bring new growth potential to China. We believe there are 2 engines to drive Alibaba's long term sustainable growth. 1st is consumption. China's evolving economic structure and the leading developments are being accompanied by strong consumption demand. As the largest e commerce platform, Alibaba is becoming synonymous with everyday consumption in China. We are well positioned to continuously grow consumers' mindshare and walletshare in various areas of their lives from physical goods, local consumer services, and digital content. 2nd is digital transformation of all businesses. As China marches into the digital era, Chinese enterprises will need core technology innovation, integrated data processing capability, and digitization of their businesses and entire value chain. In the past 20 years, we have built a broad range of platform services, including retail, marketing, financial services, logistics and cloud computing services, all of which are enabled by our advanced data technology and form the core of Alibaba Business Operating System. This system will allow our enterprise customers to achieve digital transformation and allow us to become the leading partner for enterprises in China and around the world. 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. I lost my voice yesterday. Please bear with me this voice. We had another strong quarter and delivered a strong set of annual results. For today's call, I will begin with a review of the key financials for the March quarter. I'll then recap the key financial highlights of fiscal year 2019, and then finally, I'll conclude with our outlook. In the March quarter, major operating and financial metrics continue to record very strong results. As Daniel mentioned, we delivered another quarter of strong user growth with 721,000,000 mobile MAU and 654,000,000 MAU active consumers on our China retail marketplaces, reflecting successful user acquisition programs. At the same time, we have also been successful in penetrating into less developed cities in China. More than 70% of our new and active consumers added were from less developed cities in this year. Our large and actively engaged user base continues to exhibit strong growth, which provides the foundation to expand our revenue generation in the future. As I will address later in my remarks, we are committed to delivering sustainable long term growth. In March quarter, our total revenue grew 51 percent to RMB93.5 billion. The increase was mainly driven by the strong growth of our China commerce retail businesses, the consolidation of Ele. Me as well as robust revenue growth of Alibaba Cloud. Talk about the quarter's cost trends. All the costs and expenditures have been well controlled. And when you look at the segment, our core commerce segment had a very strong quarter with revenue growth of 54% to RMB78.9 billion. The fundamentals of our China leisure businesses continue to be strong. The combined customer management revenue and commission revenue showed healthy growth of 31% for the quarter. Customer management revenue increased 31% in the quarter. The number of paying merchants that generate customer management revenue increased during the quarter, which we believe reflects improved merchant confidence in allocating marketing spend. We're making progress on the monetization of recommendation fees and enhancing recommendation algorithms. During the quarter, we allocated more traffic for testing of recommendation monetization, which generated incremental customer management revenue in the quarter with seasonally lower revenue. Commission revenue increased 30%, primarily due to strong growth in Tmall's paid physical goods GMV, which is 33% in the quarter. Performance for other segments like cloud computing, digital media and entertainment and innovation initiatives remained healthy. And when you look at our quarterly adjusted EBITDA, we continue to generate solid market based core commerce adjusted EBITDA, which increased 38% to RMB34.7 billion in the quarter. Our solid profit generation capability within China retail marketplace allow us to invest in strategic areas within core commerce as well as in other strategic initiatives areas. So in the core commerce, we have these areas that we invested: local consumer service, Lazada, new retail and direct import as well as Cainiao. The combined losses generated from these businesses was RMB 7,200,000,000 in the quarter. After incorporating the losses, our core commerce adjusted EBITDA grew 24% to RMB 27,500,000,000 during the quarter. Cloud computing revenue increased 76% to RMB7.7 billion, primarily driven by increasing average spending per customer. Alibaba Cloud continues to be the leading cloud service provider in China and Asia Pacific, according to Gartner. Adjusted EBITDA margin for cloud computing segment was negative 2%, improving from negative 8% from the same quarter last year. Digital Media Entertainment's adjusted EBITDA was a loss of RMB 2,800,000,000. The total adjusted EBITDA was RMB20.8 billion, representing 24% year over year growth. Let's look at the fiscal year financial highlights. We had a very solid fiscal 2019. Total revenue grew 51 percent to RMB376.8 billion. Excluding acquisitions, organic revenue grew 39% in the fiscal year and continued to outperform all of the global technology peers. We expect the proportion of revenue from our direct sales business will continue to increase as we further implement our new retail strategy. We're on track to achieve our $1,000,000,000,000 total GMV target by March 2020. In the fiscal year 2019, GMVR China retail marketplace increased 19% to RMB5.7 trillion, primarily driven by an increase in the number of annual active consumers. Total paid physical good GMV showed strong growth, and we have been reporting Tmall physical GMV growth, which is for the full year is 31%. Market based core commerce adjusted EBITDA increased 31% to RMB 162 1,000,000,000. Core commerce adjusted EBITDA increased 19% to RMB136 1,000,000,000. Our cloud computing segment maintained strong growth in fiscal 2019. Our cloud computing business' top priority right now still remains at expanding our market leadership and upselling of higher value added services. We're seeing significant traction and diversification of customers and revenue. And in the fiscal 2019, Alibaba's cloud served over half of the listed companies in China. Talk about the free cash flow and capital expenditures. Our business has shown strong profitability and cash flow generation of capabilities. For fiscal 2019, we generated RMB104 1,000,000,000 in free cash flow, slightly higher than last year. During the year, technology related CapEx accounted for more than half of the incremental change in operating CapEx as we continue to invest in our cloud computing business and other innovation initiatives. As of March 31, 2019, cash, cash equivalents and short term investments were RMB190 3,000,000,000, approximately US28.8 billion dollars We're committed to enhance value for our shareholders through share repurchases. We purchased about 10,900,000 of our shares for a total purchase price of US1.6 billion dollars in the fiscal year. Looking ahead, in fiscal year 2020, we expect to generate over RMB 500,000,000,000 in total revenue. We believe that our revenue growth will continue to outperform our global peers. Now, let me elaborate on how we think about customer management revenue. In the case of monetization of recommendation fees, although we saw moderate positive impact in the past quarter when we tested the monetization of some feed traffic, Currently, we do not plan on expanding the monetization of recommendation fees in the coming fiscal year. Here is the reason. Similar to how we invested in the past year to expand our B2C market leadership, We plan to invest aggressively to further expand our user base in less developed cities. This past fiscal year, we added over 100,000,000 annual active consumers with more than 70% from these less developed cities. Given the enormous consumption potential of these newly acquired consumers, being conservative on monetizing the traffic generated by new users will improve user experience and provide incentives for merchants to develop merchandising to cater to those users. Having said that, revenues from China retail marketplaces generate the highest profitability and strong cash flow. In the past fiscal year, adjusted EBITDA of our marketplace based core commerce business was nearly US24 $1,000,000,000 We expect strong profitability and positive cash flow characteristics of this revenue base to continue into fiscal 2020. This would allow us to invest in strategic businesses, including local services, digital entertainment, international markets, new retail, logistics and cloud computing. These strategic businesses are what we believe to be big growth areas that will substantially increase our total addressable market. We will continue to be disciplined, patient and innovative in our approach to growth of strategically important businesses that add long term value to the customers in Alibaba Digital Ecom. That concludes our prepared remarks. Let's open for Q and A. Thank you. Ladies and gentlemen, we'll now begin the question and answer session. Our first question comes from the line of Pavel Xiao of JPMorgan. Please ask your question. Hi, good evening, management, and thank you for taking my question. I want to follow-up on Maggie's comment regarding the investment strategy in lower tier cities. I think you guys have been doing similar initiatives such as Suntao for a while. And given the current change in operating environment such as competitive landscape, penetration rate in different cities, disposable income across different demographics, etcetera, etcetera. What do you think does it take to be competitive in the lower tier cities in FY 2020? And what kind of the financial resource you are willing to invest in these cities and consumer demographics? Thank you. Well, as you see, in fiscal year 2019, we add over 100,000,000 new customers in our China core marketplaces, and over 77 of these new customers are from low tier cities. As we addressed in our remarks, we will continue to invest in these low tier cities and in the rural areas to acquire new customers. And we strongly believe that these new customers will actually when they tap into our marketplaces, when they change their lifestyles, and actually we will basically give them broader selections, which will enlarge our addressable market. So, that's why we expect to continue to invest in terms of the marketing spending, in terms of a very well planned marketing solution, and also, as we said in our remarks, we don't want to for these low tier city customers and new customers, we want to give them better experiences with organic results of the search and recommendations as well as to give them broader selections for their first few purchases. Thank you. The next question comes from the line of Grace Chen of Morgan Stanley. Please go ahead. Yes. Thank you very much for taking my question. Congratulations for the strong results. The question is about the guidance for fiscal year 2020. Can you help can you walk us through the details of the sales guidance, for example, the core core revenue expectation in other segments? And also under what kind of macro conditions have we baked into the sales guidance? Maggie, you just mentioned that we currently do not plan to monetize fees in fiscal 2020. I'm wondering does that imply there could still be potential changes in the plan if the business and market conditions allow us to monetize recommendation fees in fiscal 2020? Thank you. Sure. When you look at the RMB 500,000,000,000 revenue, it represents approximately 33% year on year growth. So, as you see from the previous years, our significant revenue are coming from our China retail businesses. This will also be the case for the fiscal 2020. One thing I would like to mention is that we do expect the proportion of revenue from our direct sales business will continue to increase as we further implement our new retail strategy. So, the second well, the first is on the DASM and the breakdown. The second is what type of macro conditions have been baked into that guidance? Yes. So, macro conditions, it's Joe talked about the U. S.-China trade war, etcetera. In fact, the U. S.-China related business, if you look at as a percentage of our total revenue, let's say, right now, it's relatively small. So the business we're talking about is the cross border and particularly between China and U. S. So, actually, the impact wouldn't be that significant if we're talking about this year. So RMB 500,000,000,000 revenue guidance has affecting certain relevant impact, but I should say not that big. I would just like to add that macro conditions that we look at are all long term secular trends. Those are the more significant drivers of our business as opposed to kind of quarter by quarter GDP growth or industrial production and things like that. In fact, if you look at most of the markets looking at China's macro being too focused on the manufacturing sector and I've just referred to the Chinese economy shifting toward a service oriented economy with last 5 years losing manufacturing jobs, but adding a lot more service jobs. And those kind of continuous job growth are the factors that are driving disposable income and continuous consumption. So that's one big macro trend. We've also referred to the shift towards the domestic consumption economy. That's a big macro trend that will last for many, many years, as well as in the future, China is importing a lot more with a government commitment as well as reaction to the trade negotiations, China will make commitments to import more. So these are all the macro factors that we actually factor into our business. And in fact, if you're looking at our business as sort of swimming in a stream, if you will, were swimming, flowing in the direction of the tide as opposed to going upstream against the tide, because all of those long term secular macro factors are actually providing the tailwind to push our business forward. Next question. Thank you. Our next question comes from the line of Piyush Mubayi of Goldman Sachs. Please go ahead. Thank you for taking my questions and congratulations on a clean beat. Could I ask of the RMB900,000,000,000 increase in GMV you've seen in the last 1 year, how much has come from the 100,000,000 new annual active consumers on your platform? And what is the sort of continued increase you've seen in your existing buyer base? This is basically extension of the data you shared with us, Maggie, at the Investor Day. That's my first question. And second again, Maggie, I realize you mentioned that Alibaba will continue to invest in local services, digital entertainment, logistics and cloud services. Could you give us a sense of just going down the P and L into FY 2020, whether the magnitude of spend that saw in 2019 will likely come down for margin improvement? Thank you. Right. So, Piyush, I could share that if you look at the cohort, right, because this 100,000,000 new ads, majority are from the lower tier cities. So if you look at these per tier consumers, their spending levels are lower than the same age group in previous years, but not as significantly low. I think I should say it's comparable to those 1st year consumer in the past. That gives you a sense of the spending level of these less developed area consumers. And talk about the margins or I would say you're more interested to get to know the spending in those businesses which are still in a loss situation. I think for digital entertainment and local services, These are the 2 biggest loss making business units. As I said, we are going to continue to be disciplined. However, at the same time, we do prepare to fight for competition to extend our market share. So I think we, during the business plan, have a wise balanced approach to achieve the business goals with efficient spending. Thank you. Our next 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 I hope Maggie get well soon. We see Taobao and Tmall coming under the same precedent recently. So could you talk about if there is any new idea or new strategy on the positioning of Taobao and Tmall going forward? Any possible differentiation and how could it be different than in the past? Actually, recently, we have Zhang Fan in charge of both Taobao, Tmall. And I think the reason why we made this change is because actually Taobao and Tmall substantially is 2 highly integrated marketplaces. And mobile Taobao is a very important entrance point for consumers to navigate both to explore both Taobao and Tmall products. So, we need a very integrated product architectures and to serve the different consumer purposes. So, I think Jiangpa as a new leader of both Taobao and Tmall businesses, he has a very strong product interface on his background. And I think he will serve as the Chief Architector of these 2 integrated marketplaces. And to enhance our enhance and differentiate the positions for both Taobao and Tmall. And I think Taobao is still positioned as a consumer community and the value proposition is in-depth selection and discovery and the front of discovery, while Tmall tried to give people a very high quality product and services with a high degree of certainty. So, I think in Taobao marketplaces, in Taobao interface, Tmall supply is also very, very critical to enrich the Taobao selections. So, I think that this organization change will enhance the positions of both Taobao and Tmall. Okay. Next question? Thank you. Our next question comes from the line of Gregory Zhao of Barclays. Please go ahead. Hi. Good evening, Joe, Daniel, Maggie and Rob. So congrats on the strong quarter and thanks for taking my question. So my question is about your investment plan in the non e commerce business such as food delivery, digital media, logistics and implication to your margin and EBITDA growth trend in next year? And also a quick follow-up for Alex's question. So we know you have some of your affiliated company and the investment companies such as Ant Financial and the Qutoutiao, which is a territory. So we have pretty strong presence in the lower tier cities. So just want to understand how will you utilize these resources to expand your user growth in the lower tier cities? Thank you. Yes. In terms of the investment, I really care about whether the law is going to be expanded, etcetera. As I said, what we could ensure is that our spending will be more efficient and effective. And we're very committed to expand the market share and market relationships in those new business initiatives areas like local service as well as digital media entertainment. For the second question, yes, we are working very closely with our partners, including media partners like Street Hotel and other people to penetrate the customers in low tier areas. As people can imagine, and I think for the new Internet users, they will start with the social network, start with the consumption of the very basic Internet content. Well, going forward, they start the 1st trial of shopping and spending money on internet. So, I think it's good for us to navigate with our media partners, especially who has very broad user base in the low tier areas and to help us to grow the new customers in that area. Yes. Talk about efficiency of spend, maybe I can give you an example to further explain. For example, like local service. Right now, we see these local first of all, the total orders from the lower tier CDs are just approximately 20% of our total orders, which means there is a high potential for us to grow in these less developed cities. And when you look at our spending for top tier cities, the spending efficiency is pretty much the same as the peers, but we haven't really got into the lower tier cities. When we get into it, then it could enhance give us a chance to increase the efficiency. Another thing is that by leveraging the synergy among our group companies such as user and traffic acquisition efforts, we will see the efficiency come out. Total orders from Taobao and Alipay for Ele. Me now represents around 30% of Ele. Me orders. So this is what our strength and uniqueness compared to the peers in this business. Could you really utilize the assets from our other group companies to cross sell? Next question. Thank you. Our next question comes from the line of Alicia Yap of Citigroup. Please go ahead. Hi. Thank you. Good evening, management. Thanks for taking my questions. Congrats on the strong result. So Maggie, I wanted to make sure I hear it correctly and did not hear it wrong. I think you mentioned a little bit that during the quarter, the March quarter, you guys have been allocating more traffic to testing on the monetizations of the recommended feed, which contributed to the incremental CMR revenue growth this quarter. And is that correct or I heard it wrong? And if you mentioned and then you also mentioned you have no plan to extending the recommended fee testing to 2020 fiscal. So is that mean we should expect to see some potential decelerated growth in the coming quarters? Or is it depending on if you continue to tax out the recommended feed from quarter to quarter, we may see some fluctuations of the CMR growth in fiscal 2020? Thank you. Yes. Alicia, you heard it correctly. Yes, we did allocate more traffic for the monetization test for recommendation fees. I also said that we do not have a plan to expand the monetization of recommendation fees in the coming fiscal year. So just to translate it, when you see the customer management revenue growth for this quarter is very high by 31% versus 26%, 27% in previous quarters. So this is because partially because we expanded we allocate more traffic for the recommendation fees test. And for the reason that we're not going to expand that monetization test, it's just similar how we invested in the B2C market share expansion. So what we're telling people is that if we want to monetize this, we can increase the revenue and expand the CMR quickly, but we're targeting for long term growth. We want to acquire user from less developed CDs first and provide them with best user experience and also attract merchants to come and develop merchandising to cater these users for longer term growth. So that's the plan. Next question. Thank you. Our next question comes from the line of Binnie Wong of HSBC. Please ask your question. Thank you, management, for taking my questions. And hi, Maggie. Hope you also get more RevPAR's results. In terms of the food delivery strategy in Ele. Me, so as we are 1 year over now since we acquired Ele. Me, can you give us some update in terms of how we see the competitive landscape has changed, our market share has evolved? Also we looked at this quarter, revenue of this segment seems relatively flat, but then losses here, is it also narrowed? How should we be thinking about it? And on longer term, because can you also share with us how do you think this will add value to our ecosystem and also our logistics strategy? Thank you. Yes. Actually, this April, actually, we just celebrated our 1 year anniversary after Ele. Me joined Alibaba Big Family. And when we look at the past year, I mean, what we experienced in past year, we all of us believe that this is the right decision to have Ele. Me in Alibaba Digital Economy. I think, first, it's about category expansion. I think, today, food delivery is a necessity of all the consumers' lifestyle in China. And it all depends on the frequency, but at least you have to try. From time to time, you need for delivery services. So, I think this is part of consumers' life today. So, I think which is very, very important to make sure we can meet all the demands of our customers. So, second, Ele. Me also brings us a very important on demand delivery network, which today not only serve Ele. Me business, but also serve other businesses in Alibaba Ecosystem, including our recent collaboration with Starbucks. So, I think Ele. Me actually played a very important role and 2 roles in Alibaba. 1st is like is a new category killer. 2nd is on demand logistics infrastructure. And if we review what we did in the past year, I think we've already integrated Ele. Me's technology platform with Alibaba technology. And in the New Year, we'll continue to invest to expand our coverage across China for food delivery business. Today, I think most of our Irma operations are focused on major cities, but we will continue to move ahead to cover more cities, especially low tier cities, where we see growing demand and market needs. So, we will I think we are well prepared to move forward to win the battle in this sector. Next question. Thank you. Our next question comes from the line of Zachary Schwartzman of RBC Capital Markets. Please go ahead. Hey, thanks for taking my question. A little expansion on that previous question with Ele. Ma. Clearly, core business, very healthy, 7 point sequential acceleration in marketplace, core commerce adjusted EBITDA growth that allows you to invest more in the strategic businesses. But two questions here. The first is, how much do you see core commerce initiatives becoming as a percentage of the total commerce revenues for the upcoming fiscal year? And then, I know you don't manage the business on a margin basis, but gross margins were notably down this quarter and fiscal year. How much was this due to seasonality this quarter? And if any, and if not, how much do you expect this to continue as you invest in gaining market shares over peers? Specifically, just trying to get a better sense of how much you are using incentives for drivers and maybe even consumers for local consumer services and if they're temporary or permanent as you expand into Tier 3 cities and below? Thank you. In our IR side, the PPTs we put on website, it shows that where the spendings are and how our EBITDA profitability grow for core core as well for the core and also for the overall So that could give you a better sense on where the money goes. That's on Page 12 of the material. So in terms of rather than talking about margin, yes, we talk about our profitability growth. In the past year, you could tell from the presentation, I just mentioned that we did spend or invest in the areas not only in those cloud computing, digital, media and entertainment, but also within core, we have several areas that we have invested and also showed a very positive business progress to these areas, including local service and international business in Lazada, new retail and logistics. So I think overall, we're looking at this business for down 3 to 5 years is our next milestone rather than the next quarter or next year. As I said, although we committed to invest, at the same time, we're also committed to enhance the efficiency of the investment, which means that for every dollar we spend, we look at ROI internally. So that's how we decided whether we're going to expand the spending on certain businesses. Thank you. Our next question comes from the line of Marketplace right. The question on the marketplace revenue as total revenue is still going to contribute. If you look at our core commerce, 1st of all, core commerce still going to contribute significant part of the total revenue. I think previous years, we have shown somewhere around 80%. In the coming year, the percentage wouldn't change significantly. The percentage will be pretty much at the same range. Last question. Thank you. Our last question comes from the line of Han Joon Kim of Deutsche Bank. Please go ahead. Great. Thank you for the time to ask the question. I just wanted to round up with a question on the guidance. So based on everything that you guys have said and based on the 4th quarter numbers, which was running at a pretty high rate, it would seem to me that kind of a 33% rate would be more of a kind of a minimum number that we start off with that we want to work north of. Would that be a fair assessment? Hanjin, could you repeat the question? You were breaking up in the middle. I assume you were asking the question about revenue guidance being the minimum. Is that right? Yes. I mean, you guys sound pretty confident to this fiscal year, this fiscal 2020, and we exited last year north of 50%. So just on that cadence, I feel like a 33% YOY would be or reflects more of a kind of a minimum threshold that we set and try to move up from that throughout the course of the year? Yes. Let me explain on that. So if you look at fiscal 2019, our overall revenue year on year growth was 51%. However, we did have some newly acquired businesses being added in this fiscal year, which means that there was 0 base for fiscal 2018. For example, Ula Lama, right, Panios added late 2018. So, if you take those out, our revenue growth, the organic revenue growth would have been 39%. So this is starting point and then we're talking about CNY 500,000,000,000 plus, which is 33%. I believe this is comparable to last year's organic growth. The key is that 33%, we believe this growth will continue to outperform all of our global peers. Hope that helps. Well, thank you, everyone, for joining tonight. If you have any questions, please feel free to reach out to the IR team of 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.