Earnings Call: Q2 2019

Nov 2, 2018

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group's September Quarter 2018 Results Conference Call. At this time, all participants are in a listen only mode. After management's prepared remarks, there will be a question and answer session. I would now like to turn the call over to Rob Ren, Head of Investor Relations of Alibaba Group. Please go ahead. Good day, everyone, and welcome to Alibaba Group's September quarter 2018 results conference call. With us are Joe Cai, Executive Vice Chairman Daniel Zhang, Chief Executive Officer Maggie Wu, Chief Financial Officer. This call is also being webcast from our IR section of the corporate website. A replay of the call will be available on our website later today. Now let me cover the safe harbor. Today's discussion will contain forward looking statements. These forward looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations. For detailed discussions of these risks and uncertainties, please refer to our latest annual report on Form 20 F and other documents filed with the 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, adjusted EBITDA margin, adjusted EBITDA margin, marketplace core commerce 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 reconciliation 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 results to year on year growth rate versus the same quarter last year. With that, I will now turn the call to Joe. Thanks, Rob. Thank you all for joining us. Just in the past month, global macroeconomic conditions have become more uncertain. People wonder about potential reverberations from the global economic slowdown, the threat of rising interest rates and political and debt turmoil in Europe. In the case of China, we see reports of decelerating GDP growth, weak purchasing managers index and press equity markets. I know that Alibaba investors have many questions about the operating environment in China. So I want to give you a straightforward assessment from our vantage point. On China macro, retail sales growth was 9% according to the latest July August data from the National Bureau of Statistics. The NBS data shows weakness in large ticket items such as home appliances and autos, which is consistent with the view that consumers see uncertainty in the future and are cutting back on durable goods purchases. However, on Alibaba's China retail marketplaces, we see continued robust growth in consumer staples, cosmetics and apparels. In consumer electronics, growth decelerated especially in cell phones due to the lack of major technology upgrades and new product offerings. While MBS data shows 24% growth in online good sales in this quarter, overall growth of physical goods GMV on Tmall, excluding unpaid orders, was 30% year on year. Accordingly, we believe that Tmall made further gains in market share. While in the short term, people may be concerned about cyclical factors, I would like to point out 3 long term secular developments in Alibaba's favor. In fact, Alibaba is proactively contributing to the acceleration of all three of these developments. First is the phenomenon of middle class consumption upgrade. China's 300,000,000 middle class consumers have experienced significant real wage growth over the past decade, and they are looking for high quality products to satisfy the discretionary spend and an increasingly sophisticated lifestyle. The OECD projects that by 2,030, China will have 850,000,000 people who will emerge into the middle class further accelerating the consumption update. Whether it's high quality imported products offered on Tmall Global or overseas travel experiences through travel portal Fliggy or videos on digital entertainment platform, Yoku or on demand meal delivery and grocery delivery services from Ele. Me and Hema. Alibaba is driving a comprehensive consumption upgrade that cannot be matched by any peers. In our recently announced strategic partnership with Luxury Group Richemont, we are further tapping into the lifestyle upgrade opportunity by offering Chinese consumers easy access to a broad collection of luxury products, both at home and when they travel abroad. The 2nd long term development is the capacity and increasing availability of consumer credit. As of March this year, China's household debt was 49% of GDP compared to 77% in the United States. So that there's ample capacity to take on credit to fuel consumption. Alibaba's affiliate and Financial specializes in providing consumer credit to underserved individuals who borrow in small amounts and require flexibility to evolve frequently. The penetration of the amount of consumer credit to total online sales, while still in the low teens, has increased significantly during the 1st 7 months of this fiscal year. The 3rd trend that Alibaba plays an active role in developing a digitization of the retail sector. This means that Alibaba's total addressable market will be the entire US5 $1,000,000,000,000 retail economy in China. Through our new retail strategy, we have eliminated the e from e commerce as the distinction between online and offline sales goes away when shoppers buy from anywhere, anytime using a mobile phone. This is made possible by digitizing the entire consumer journey, inventory tracking and logistics workflow. Digitization enabled by the technology and know how of Alibaba will help retailers to access a wealth of information about their customers and operations. We expect the value creation from traditional retailers, increased sales and more efficient operations will be significant and this will ultimately accrue to the benefit of Alibaba as the enabler. Now, I will turn the mic over to Daniel for his comments. Thanks, Joe. Hello, everyone, and thank you for joining our earnings call today. We delivered another strong quarter with 54% total revenue growth. The robust growth of our business speaks to the unique value proposition that we offer for customers through a strong execution and commitment to innovation, demonstrating the power and synergies of the Alibaba Digital Economy. Today, Taobao is a large scale fast growing consumer community that is the starting point of any retail journey for Chinese consumers. Over 45% of Chinese population discover and purchase products and content through Taobao mobile app. We are successful in acquiring and enticing even more new users onto our platform. Our unique value of highly relevant personalized content with a community driven experience continues to attract new users while keeping existing users deeply engaged on a daily basis. Annual active consumers increased 35,000,000 to 601,000,000 for the 12 months ended September 30, 2018. Around 75% of the increase in any active consumer came from less developed areas. Growth of our monthly mobile app users accelerated this quarter. 666,000,000 users are assessing our China retail marketplaces via mobile app monthly, an increase of 32,000,000 users over the prior quarter. Today's Taobao users are more diversified are more diverse than ever with different demographic and consumption habits. To fulfill their diverse needs, we roll out the new power of interface that presents unique user experience to different types of consumers. The biggest source driving the success of this upgrade is our consumer insights driven by AI. We have the world's largest e commerce knowledge graph for products, content and consumer insights, which can be used to active purchases and retain consumers. We have one of the leading proprietary technology infrastructures in the world that can handle hyperscale real time computing and sophisticated algorithms. For example, in this quarter, over 75% of our new consumers are from less developed areas. They may need a simpler and more direct use interface with product recommendations that are value for money. On the other hand, advanced users who have years of power experience with high spending power may want more customized and relevant recommendations. The new Taobao interface is also value enhancing for the merchant By leveraging recommendation fees throughout mobile Taobao, we can help merchants create new demand by targeting the relevant consumer groups, building awareness and interest, activating purchase intent and retaining consumers in different states of consumption. Today, the product and content discovery experiences is very dynamic on Taobao. We believe recommendation is other effective way to distribute products and content by curated posts, video and the live streaming activities. During the quarter, we have seen some positive feedbacks. The engagement level of users who adopt the new interface included in the recommendation feed section on Taobao front page enjoy higher click through rate potentially. The new Taobao interface facilitates better consumer experience, enables brand and merchants to better target their customers. These recommendation fees could potentially be monetizable in the future supported by ongoing improvement of these engagement trends. Moving on to Tmall. We continue to be pleased with Tmall's ongoing expansion of its leadership position in the online B2C sector. Tmall's physical goods paid GMV grew 30% in this quarter. We enjoy robust growth in all categories, including FMCG, home furnishing and apparel categories. Recently, we announced a partnership with Swiss Luxury Group Richmond to launch a China JV with Richmond owned YOOX Metal Per K. This is a major development for the luxury industry in China as the partnership demonstrates recognition by Richemont and the wide net of the strategic importance of the China market as well as Alibaba's leadership in enabling luxury brands to engage with and serve Chinese consumers, both at home and abroad. Our new retail initiatives, including our self operated Hema stores and the digitization enablement of Sunnat Supermarkets are well on track. We are excited about the launch of our local service company, which combines Ele. Me and Koubei under 1 management team. Our cloud computing business continues to execute and expect a strong growth. Revenue grew 90% during the quarter, driven by growth of paying customers and the subscription for higher value added products. Our cloud computing business continued to build a large and expanding ecosystem of developers and partners to enable the digital transformation of China. In September 2018, we held the largest cloud computing conference in China. More than 70,000 developers attended the conference in person. We are making progress in our digital media and entertainment business. Daily average subscribers of YouTube video growth continued to be robust, increased by 100%. Our original reality show, Slam Dunk of China has become a new hit among young audiences in China. This speaks to the importance of having original production capability. I also want to provide an update on our innovation initiatives. AMAP, formerly former Autonavvy, the largest map app and location based technology platform in China, is providing important infrastructure to a comprehensive set of service offerings, both operated by us and by third parties. For example, in our on demand delivery service, AMAP provides essential mapping and optimal routing algorithms to delivering personnel. During China National Holiday, the 1st day of the Golden Week holiday in China, AMAP's DAUs exceeded RMB100 1,000,000 for the first time. Before I turn over to Maggie for financial highlights, I'd like to speak about our view of global macro environment that is top of mind from investors. The global economy is at a state of uncertainties such as trade relationship, consumer trends, spot market and the manufacturing industry, the U. S.-China trade tensions create increased risk of instability. This is the 3rd time in Alibaba's 19 year history that we have encountered a setback in the global economy. Where it gets difficult to do business, it is precisely the time to fulfill our mission to make it easy to do business anywhere. Therefore, we have recently decided in the near term, we will not monetize incremental inventory generated from our growing users and engagement. In the light of current fluid macroeconomic conditions that may affect our affect their operations, we want to support the merchants doing their business on our platform. Amidst these uncertainties, we see opportunities. 1st, we see opportunity to quickly expand our addressable market by executing our new retail strategy that digitalize store based operations. 2nd, we have built a technology platform that empowers the digital transformation of enterprises in China. This will not only create new ways of sales and distribution, but are also driving innovation in the entire value chain of retail operation. At the core, our data insights on both enterprises and consumers and our leading cloud computing technologies created a unique Alibaba business operating system for this digital era. Looking ahead, Alibaba has built a comprehensive digital economy that is as strong as any ecosystem. We believe by leveraging our technology, experience and resources, we can deliver digital transformation for all our clients in the areas of retail, marketing, finance, logistics, manufacturing and other supporting services within the Alibaba business operating system. Now, I turn the call over to Maggie, who will walk you through the details of our financial results. Thank you, Daniel. Hello, everyone. In September quarter, major financial metrics continued to record strong results. Overall, as mentioned by Daniel, our strong core starts with our vast high quality and fast growing user base. We delivered another quarter of strong user growth in both MAUs and any active consumers, facilitated by our efforts to target new consumer groups and penetrate into less developed areas in China. Roughly 75 percent of the 25,000,000 newly added consumers are from less developed areas during the quarter. We also see enhanced consumer engagement from our existing users that resulted in robust GMV results, in which Tmall continues to expand market leadership in B2C e commerce and Taobao recorded a 3rd consecutive quarter of strong GMV growth. We have a large and actively engaged user base that continues to exhibit a strong growth. Consumers are attracted to the platform because it offers the best user experience. As I will address later in my remarks, we believe that this strong and active user base combined with the changes we're making on our platform provides the foundation to expand our revenue generation in the future. Total revenue for this quarter grew 54%. The increase is mainly driven by the robust revenue growth of our China Commerce Retail Business, the consolidation of OLEMA and its China network as well as strong revenue growth of Alibaba Cloud. Our revenue growth during the quarter continues to outperform that of all global technology peers. Cost of the revenue in the quarter was RMB46.8 billion, up from RMB22 1,000,000,000 in the same quarter last year. Excluding the effect of the SVP, cost of revenue as a percentage of total revenue increased by 15 percentage points to 56% this quarter. The increase is mainly due to 3 reasons. Number 1, our consolidation of Ele. Mexiao network, resulting in higher costs in logistics and fulfillment. Number 2, the cost of inventory from our new retail businesses are included due to gross revenue accounting number 3, greater content investments by our digital media and entertainment businesses. As a percentage of revenue without the impact of SPC expenses, all other major operating expenses, including product development, sales and marketing and general and administrative expenses remained stable year on year. Now let's turn to the segment reporting. Our core commerce segment had another strong quarter with revenue growth of 56%. The fundamentals of our China commerce retail revenue business continue to be healthy and strong. We see robust user growth, especially in less developed areas and improved indigenous in our Taobao and Tmall marketplaces. The combined customer management revenue and commission revenue shows healthy growth of 27% year on year for the quarter. Customer management revenue grew 25% in the quarter ended September. The growth was due to increases in the volume of paid clicks and to a lesser extent average email price per click. We continue to see better engagement and purchase conversion from recommendation fees that are mostly free of charge to merchants nowadays, driving higher ROI for the merchants on our platform. We have just started to explore ways to monetize these recommendation fees. Commission revenue grew strongly by 31%. This is consistent with the robust growth in Tmall physical group page GME, which is over 30%. We're pleased with our Tmall progress and continue to demonstrate market leadership with GMV growth faster than overall industry during the quarter. Other revenue from China Commerce Retail was up more than 150% year on year to RMB8 1,000,000,000. The rapid revenue growth was driven by the growth in Homa and Tmall import. Segment reporting, let's take a look at the core commerce. We got a lot of feedback from our shareholders wishing to get more color about our core commerce segment that includes businesses in different stage of development. On this slide, we're showing our marketplace based core commerce EBITDA, including businesses such as Taobao and Tmall. So we continue to generate solid market based core commerce EBITDA that grew at 27% to RMB35.6 billion. Because of our market based core commerce generates significant profits, so that we're able to invest in areas we believe would add value to our customers and the future growth. For September quarter, losses from the 4 strategic business amounted to RMB5.8 billion. Rank order the losses from these businesses from the highest to lowest would be: number 1, Olema number 2, Lazada 3, New Retail and Tmall Import and then number 4, Payone Network. So all of our losses increased Q on Q due to two reasons. First, full quarter loss contribution in this quarter. Last quarter was the 1st quarter with strategy consolidate allowance, so it was not a full quarter impact. Number 2, higher spending for user acquisition. While it will take time for us to see financial return for these strategic investments in core commerce, revenue growth of these four business areas has been robust. We have already seen efficiency gains and greater synergies from these businesses within the Alibaba Digital Economy. After incorporating the losses from these investments, our core commerce EBITDA grew approximately 13% to RMB29.8 billion. And then let's take a look at cloud computing revenue growth, 19% year on year, continued to be very strong, primarily driven by revenue mix towards higher value added products and services and robust growth of paying customers. Adjusted EBITDA was a loss of RMB232 1,000,000, reflecting our investment in technology infrastructure in anticipation of future customer demands. Digital media and entertainment business revenue increased 24 The increase is primarily due to higher subscription revenue from Youku and an increase in revenue from mobile value added service provided by UC Lab, such as mobile search. Adjusted EBITDA was a loss of CNY 3,800,000,000 primarily due to ongoing investment in production for original content and licensed also broadcasting rights for the World Cup game in China. Revenue from innovation initiatives and others increased 20%. The increase is mainly due to an increase in revenue from Tmall Genie and AMAG. Adjusted EBITDA was a loss of RMB1.2 billion. So other financial metrics. Now let's take a look at a couple other metrics within the quarter. So in the other net loss for the quarter, compared to the last year's same quarter last year, which was CNY 1,700,000,000 this quarter CNY 1,500,000,000. The loss was primarily due to the following: number 1, foreign exchange loss of $900,000,000 due to RMB depreciation against the U. S. Dollar during the quarter Number 2, loss is sustained by Iron Financial during the quarter as a result of its investments in user acquisition and international expansion as well as their product innovations. So, ANZ Financial's net loss in the quarter lead to our reporting of a loss of RMB 900,000,000. The investment they made in new users has yielded positive results with annual active users exceeding 700,000,000 during the quarter. 70% of those users used 3 or more categories of Ant Financial Services. Tax rate. Income tax expenses in the quarter were RMB277 1,000,000 compared to RMB2.7 billion in the same quarter last year. We recognized a tax credit of about RMB4.7 billion during the quarter compared to RMB 2,300,000,000 in the same quarter last year. As certain key subsidiaries were notified of the renewal of their key software enterprise status for calendar year 2017 by relevant tax authorities. Excluding SBC expense, investment gain and loss, internal investments as well as the above mentioned tax credits, our effective tax rate would have been 23% in the quarter ended September 30. Share of results of equity and LFTs, we recorded an equity pickup of RMB 1,300,000,000 for the gain is largely due to our profit share from Sony in 1 quarter in arrears. Cash flow and capital expenditures. Our net income grew 5% to RMB18 1,000,000,000 in the quarter. Non GAAP net income was up to RMB23.5 billion, 6% growth. And cash flow in share repurchase. As of quarter end, cash, cash equivalents and short term investments were CNY172,000,000,000 compared to RMB177 1,000,000,000 as of June. The decrease is primarily due to cash used in investing activities, including acquisition of Trendu Investment in Focus Media, partly offset by free cash flow generated from operations and the disposal of investments. We generated robust operating cash flow of CNY31.4 billion and healthy free cash flow of CNY15 1,000,000,000 in the quarter. Please note that we have deducted our content spending when calculating free cash flow. Higher CapEx spending related to our technology infrastructure. New retail and the Cainiao business coupled with increases in acquisitions less than copyright and intangible assets from our digital media and entertainment segments resulted in year on year decrease in free cash flow. We're committed to enhance value for our shareholders through share repurchases. We have repurchased approximately 9,120,000 of our shares for a total purchase price of approximately US1.3 $1,000,000,000 as of today. Looking ahead, we are revising our fiscal year 2019 revenue guidance to a range of RMB375 1,000,000,000 to RMB383 1,000,000,000. The new guidance range reflects a 4% to 6% adjustment to the original revenue guidance. In light of the current macroeconomic conditions, we have recently decided for the near term not to monetize incremental inventory generated from growing users and engaging our China retail marketplaces in the near term. This is we expect this to benefit SMEs marketplace platform. As Daniel mentioned, we believe by the way, the growth rate after this adjustment on the revenue guidance shows that we're still a lot ahead of the global payers growth, outperforming almost all of the same. As Daniel mentioned, we believe the recommendation fees will be further enhanced by the new Taobao interface that includes better discovery experience for consumers, enhanced ability to target, engage and retain consumers and buy the merchants, increase monetizable properties for the platform. This will lead to large long term monetization opportunities for incremental inventories, which complement the search. Recommendation fees create a more top of the funnel discovery experience for consumers, enabling merchants and brands to build awareness and interest of their products. But it doesn't stop there. Recognition feeds in our platform are even more powerful and can be applied to engage with consumers in their entire shopping journey from the funnel to entice purchases and the loyalty. All of these enhancements will not have been possible without technology and deep consumer insights. Please note that the adjustment of the revenue guidance mainly related to our China retail business units, particularly in customer management revenue, which has high profitability. At the same time, we will continue our investments in strategic and important areas such as local services, logistics, entertainment, globalization and retail. These strategic initiatives are what we believe to be big growth areas that will substantially increase our total addressable market. Accordingly, we're confident to reinvest the profitability of our core to captured opportunities and long term profit growth. To wrap up, we remain confident about our value proposition to consumers and merchants. We have shown a track record of delivering robust revenue growth and healthy, sustainable profit growth by identifying new growth opportunities that is supported by solid execution. We will continue to grow new users and serve our customers, consumers and merchants with diversified offerings of goods, services and entertainment across our platform. Most important, we have and will be disciplined in the way we grow our business to capture enormous opportunities presented to us in this new digital era. Thank you. Now we open the floor for Q and A. Thank you. Alberto, we're ready to take question and answers. Thank you. Ladies and gentlemen, we'll now begin the question and answer session. Our first question comes from the line of Eddie Leung of Merrill Lynch. Please ask your question. Good evening. Thank you for taking my question. I think, Joe, you talked about the macro headwinds for the domestic e commerce business. Could you also comment on the trends you see on the local service sector and travel as well as your overseas operation? Have we seen a similar trend affecting these other businesses? And then perhaps quickly, could you also remind us the potential impact of the new e commerce laws? Thank you. So the area where we see the most impact are in the consumer durables, large ticket items, consumer electronics. In the area of local services, because these are basically staples, you order meals, you go to restaurants, they are largely not affected. As you know that we've combined the management team of Ele. Me and Kobay under one team and they have already made quite a bit of adjustments in terms of the operating structure in the local markets and are prepared to execute the strategy. So we're very happy with the progress there. In terms of the international markets, the dynamics in countries, for example, in Southeast Asia vary country by country. As you know, Indonesia is a very, very competitive market. We have doubled down in our commitment to Logada to continue to grow that business. We do not see a huge economic or macroeconomic effect coming from those markets, but I think we remain cautiously optimistic. Maggie, do you want to comment on this e commerce law? Right. So our impact on e commerce law, not the law is out there, but no detailed implementation rules. However, we believe that the government will have the overall consideration on all of these supports and positives that the business and kind of platform has thought about to support SMEs. For example, like a stimulating the domestic demand and people ask question about the tax impact, whether they're eventually passed by the merchants on our platform. I think this is a topic we have been working with Techstars for a long time, and we believe they have done a detailed review work and the incremental tax brought by our platform, which if you look at whatever GMV we generate, actually they are upper stream, like the manufacturers. The tax coming from that area would be a lot bigger than whatever we're talking about on the retail platform. So we will closely monitor and follow-up in the implementation rules And yes, we'll update you if there is any. Thank you. That's very helpful. Thank you. Our next question comes from the line of Mariush Mubayi of Goldman Sachs. Please ask your question. Hello, Mr. Mubayi, your line is open now. Please go ahead with your question. Thank you. Looking through your revenue guidance, you wrote that you recently decided not to monetize in the near term the incremental inventory that's getting created. Could you take us through the rationale there? And also help us understand that short term that you referred to, that's my first question. A very simple second question, if I might skip that in. Would you agree with our assessment that you're in a similar position with feed monetization as you were with mobile monetization 3 years ago? Thank you. Yes. Rishi, I'll talk about the considerations at the time. So Mark, about 45 days ago, we had our Investor Day company in Hangzhou, and I said that we had no update on the revenue guidance by then. So this is a recent decision made. You probably have seen and used the economic conditions in the past, particularly the past month. The condition is very uncertain and merchants are facing challenging times. So it does not make sense for us to maintain very high revenue growth. So under these conditions after we reviewed, we decided to not monetize near term of the incremental inventories. So we talked about the recommendation fees growth, user growth, engagement growth, both very well. So this is part of the rationale to factor the economic condition and uncertainties. The other thing is that looking ahead, one side is helping the merchant decide. The other things are not monetized right away. That also give us time to take this period of time to refine our monetization products on our new value provided. So we believe this is a transitional period. The recommendation fee shows very encouraging trend of the growth, not only in traffic, but also in conversions. However, we don't believe that the value we created to the merchants is just as kind of the same as we created it in the past 10, 15 years. So as I mentioned, it's not only transaction value, but also the consumer engagement value, which provides the tools and possibilities for merchants to operate and manage their consumer base. So they're not only paid for and eventually not only paid for the near term GMV, but also pay for the possibility of the future GMV. So once they could manage their consumer base compared with other merchants, their peers, competitors, whoever, that will not get the tools, they have advantages. So that's basically macro and also internally, we feel that this is good for us to take more time to refine their marketing products. So this is the second question, which is similar to the PC to mobile transition. I think Maggie, you already answered that. Okay. Next question? Thank you. Our next question comes from the line of Grace Chan of Morgan Stanley. Please ask your question. Thank you. Thank you for taking my questions and also the presentation. My question is to follow-up about the local services. Can you share with us the latest development of Ele. Mei and Kobe after the integration? What are the new business initiatives? And what's your business and financial targets achieved through this combined entity? Thank you. Actually, we just announced that we combined the 2 business and we will have a one man competing to run this the future combined local service business. Actually, you can see from this decision, like we still observe a lot of synergies between these two businesses because, 1, the corporate business is relevant to the in store in restaurant dining services, while food delivery is also from the restaurant to home. So basically, Kobe and Ele. Me, they are serving the same group of clients, which are restaurants, who both serve I mean, in store clients, in store customers also serve customers at homes. So we do see a lot of synergies and not only on the business side, but also in operating and also to improve our operating efficiency. And we will after the new coal is established, we are actually prepared to go further to penetrate more cities in more areas and to deliver to get people our multiple services. Thank you. Our next question comes from the line of Alicia Yap of Citigroup. Please ask your question. Hi. Good evening, management. Thanks for taking my questions. I have some follow-up questions regarding just the overall advertising side. How long do you think the temporary hold off on these monetization will last? In addition to you not wanting to monetize, wonder if any change of the budget spend adjustment from the big and global brands on the upcoming Singles based promotional activity? And then will Baba actually also take one step further to subsidize some of these commission rebate to help out the smaller merchants' promotional discount during the same time stays in light of the tough macro? Thank you. So the first question is about when we decide to monetize, how long we'll hold on this monetization? I think whenever 2 things are ready, one is products, the other is merchants, whether merchants are ready and what are products. So in terms of product readiness, I mentioned that we have started to explore the new monetization format to better reflect the new value created. So that takes a little bit of time. And the other thing, merchant regiments is also something to do with the macro environment. Once they are not pressurized by macro uncertainties and also once they learn and understand the new product format and really find the true value of the new ad format. We are confident on this value we provided compared to all of the peers around nobody else actually can have such a comprehension value provision to the merchants. So it's just a matter of the readiness of the field. In terms of the existing supply of the ad services, I think this I don't think that this will impact the existing demand. I think we have a huge, I mean, existing inventory, I mean, monetize actually, which are monetized through our various commercial products to different types of advertisers, including the big brands and SMEs. So actually, all of them are now well prepared for the coming November 11. And we do believe that all the people who participate this big event are also and take this opportunity not only to get the sales on that day, but also to engage many new customers and with the smart spending. Danny, I think there's a question on commission rebate, whether that's going to come. Well, actually, we so far, we don't have a plan to pay this commission rebate to the merchants in the event. Okay. Thank you. Next question. Thank you. Our next question is from the line of Mark Mahaney from RBC Capital Markets. Please go ahead. Hey, it's Zachary Schwartzman on for Mark. What are you doing to help merchants learn and adapt to the new mobile marketplace platforms? How much effort are you placing in making sure that merchants understand and can take full advantage of these changes once the macro environment turns positive? And quick on cloud computing that came in strong this quarter. Can you call out any specific industries that drove the strong performance there? Thank you. Well, it does take some time for us to educate the merchants to understand the new consumer journey we created in this new mobile interface, which is a recommendation flows. So I think today our team are working very hard to train the merchant and also to give them a showcase how to leverage the new mobile interfaces to not only to make the immediate sales, but also to engage and manage the customers and create new demands. So I think it takes some time, but I think merchants based on our experience, actually merchants are very, very sensitive to the new method to grow their business. So they are fast learning and I have confidence that they will actually understand the whole new methodology in a very short period of time. Yes, Mark, to add on to that, how much efforts we have been putting on to this, we believe had a special task force headed by Daniel himself to work on this. So this task force included people from different teams, including merchant services, Alibaba, Taobao and technology team. So the key is that how we could let the merchants understand this new value, right? This is a value that they don't really get from other service providers. It's a mixed value from, as I said, the top of the funnel to the bottom of the funnel. It's not only the transaction, but also the engagement, not only today's GMV, but also the possible future GMV generation. So yes, that's we're on it. On your cloud computing question, the factor that sort of stood out in, I guess, this quarter also in the last couple of quarters is the whole media and entertainment segment, including streaming video, short form video. We just entered into an agreement with the Olympic Broadcasting Services, where we would provide the cloud computing services for production of games for the Tokyo Olympics in 2020. Thank you, Joe, Daniel, Maggie. Thank you. The next question is from the line of Binnie Wong of HSBC. Please ask your question. Good evening, management. Thank you for taking my question. My question is on the recommendation fees in our Taobao upgrade. Can management give us more color in terms of like the timing of the full rollout in terms of our monetization? And also in terms of our pricing strategy of the recommendation fees and also the margin profile, how does it compare to our core search? And lastly, it's just on the categories. Do you feel that there are more certain categories that are more fitted with like our recommendation sheet, such as those with like in house purchase behavior or maybe even like categories that apparel would be more fitted with recommendation seats. How should we think about those? Thank you, management. Well, as we said in our press release, actually, we are considering today's macro and economic conditions, we decided not yet to monetize the incremental inventories from recommendation flows and other new user engagements and to support our merchants to do a better business in today's condition. And we I think we do, but technically, we also are working very hard to prepare the right commercial products and make sure they are in place to serve the merchants and to help them to create an incremental value for their business. In terms of categories and the products and which is more fit for the recommendations, I think generally speaking, I think it is the recommendation is to serve the purpose of the discovery. So we will help the merchants to acquire new customers and enable the consumers to identify and find new items and beyond our expectations. I think that's the purpose for both the merchants and for the consumers. And as I said in my script, actually, so far, we've built up a very comprehensive product and consumer bio of the graph, knowledge graph for both products and consumers. I think that is very, very important for the success of the recommendation flow. And also, of course, this is driven by AI and by the technology. Thank you, Daniel. I guess, maybe my question is more on in terms of what I guess a follow-up is what are the economic indicators you see that will signal a turnaround and then will start kick off with our monetization on the incremental inventories, as you have mentioned? What are the signs that you will see that you think? Thank you. Well, I think that this all depends on the value we created for our merchants. As I said, our purpose to help the merchants to engage in new customers and retarget the existing customers in this recommendation flows. So I think the economics will form the recognition of this value provided to our customers. Our next question comes from the line of Gregory Zhao Yao of Barclays. Please ask your question. Hi, management. Thanks for taking my question. So in terms of the loss of the categories inside of China, e commerce business, you ranked the Ulema, the Jada, New Retail and Cainiao. So in the future, how will you rank your loss contribution to let's say next 2 to 3 years? And a quick follow-up, so for the recommendation fees, we know you postponed the monetization. So the first thing, would you please give us an update like what percentage of the users have been upgraded to the new version with recommendation fee? And also with the recommendation functions, based on my understanding, it may generate very later revenue contribution to advertising, but that can help improve your GMV growth. Am I correct? Thank you. In terms of the first question, the areas we invested within the core commerce are local service, globalization, new retail and logistics. And right now, we give out the investment within orders. So we've seen that we're pretty sure that we're going to continue to invest quite committed to the investment in local service, globalization, new retail and logistics, all of these areas. In terms of order, it might change depending on the time and the market conditions. And so that's could be changed. We never manage the business by profit and loss. Loss. We look at the strategic value, but we do have the discipline and we have a very clear business plan to how in terms of how to developing these new businesses. So I think so far we are all on track. And Greg, so your question your other question is when is the new forward rollout of Taobao app as well as the GMV growth contribution? Is that your third question? Yes. So I think as a bit on your new function of the recommendation, as I think my understanding is that helpful for both the merchant to promote the product that may help to drive your Tmall Taobao, the January growth, also the short term advertising revenue contribution may be not that meaningful. Am I correct? The new Taobao industry, I think, will actually enhance the experience for both merchants and customers. And from customers' perspective, I think actually consumers can enjoy the fun of exploration and discovery through these recommendation flows and which will enhance their thickness to our platform, which we always say that we are helping our people to pay their time even without any specific shopping purpose. They will still come back to us to enjoy these recommendations. So I think this is very good for the consumers. And if people spend more time with us and enhance engagement with us, I think GMV is organic results for this interruption. Thank you very much. Thank you. Yes, we're taking the next question coming from the line of Youssef Squali of SunTrust. Please ask your question. Great. Thank you very much for taking my question. I just have one. Maggie, thank you very much for the new revenue guidance. I think you said that the biggest delta there is coming from customer management revenue from within China retail. That's the business that carries higher profit margin. Can you help us just get a sense or how do you guys look at the bottom line impacts from that revenue revision? And in other words, would management kind of rethink potentially at least short term the level of investment that you have going on just to effectively protect the EBITDA or EBITDA expectations for that Wall Street is expecting? Right. It's not easy to answer that question, but I can give you directions. So first of all, whatever profit growth would be, that's going to be obviously impacted by the customer management revenue growth because that's the revenue that generate high profitability. So you could calculate the range, the base case and the high case based on the revenue guidance I did. One thing for sure is that the investment we're making today are those areas we believe has high potential. So the total addressable market for this business can be substantially enlarged, but once we get once we tap into that market those markets. So we are very firm to continue to invest in those areas, which means that when you look at the revenue and the spending, they could be not closely linked together, right? The revenue is trying to reach the customer management and others are local services, etcetera. So as Daniel mentioned, we have been very disciplined in terms of investments and spending. So the way we look at the returns on those new investment areas are not only are not really financial returns at this stage particularly, as the business progresses and the market shares, user base expansion. So if we are feeling comfortable about this growth, we're going to just continue to invest and have it later on. I think philosophically, I think we don't think about the so called protection of our existing core business margin when we do make investments. But we do have metrics that are pretty well spelled out for our investments, for example, in local services, in entertainment, in international. Depending on the stage of growth of the business, it could be based on business volume or users or repeated purchase. There are a lot of metrics that we would look at depending on their development. I think it's safe to say that there's a lot of discipline that are applied to measuring those metrics and tracking performance. But one of the most important things about these new investments is that we make sure that they have the right people in place, the right management team. The move that we made to combine the Ele. Me and Kode business under one management is one such move and we're very confident when we have the right people in place that execution there is going to be very good. Great. That's helpful. Thanks, Joe. Thanks, Maggie. Okay. Thank you, everyone, for attending today's conference call. If you have any questions, please feel free to reach out to the Alibaba IR team. Thank you. Team. Thank you. Thank you. Ladies and gentlemen, that does conclude the conference for today. Thank you for participating. You may now all disconnect.