Earnings Call: Q2 2018

Nov 2, 2017

Good day, ladies and gentlemen. Thank you for standing by, and welcome to Alibaba Group's September Quarter 2017 Results Conference Call. At this time, all participants are in 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 Mr. Rob Lin, Head of Investor Relations of Alibaba Group. Please go ahead, sir. Good day, everyone, and welcome to Alibaba Group's September quarter 2017 results conference call. With us are Joe Tsai, Executive Vice Chairman Daniel Zhang, CEO Maggie Wu, CFO. 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 20F and other documents filed with the U. S. Securities and Exchange Commission. 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 also note that certain financial measures that we use on this call, such as adjusted EBITDA, adjusted EBITDA margin, adjusted EBITDA, adjusted EBITDA margin, non GAAP net income, non GAAP diluted EPS and free cash flow are expressed on a non GAAP basis. Our GAAP results and the reconciliation of GAAP to non GAAP measures can be found in our earnings press release. With that, I will turn it over to Joe. Thank you, Rob. Thank you all for joining us. This quarter, our revenues grew 61%. It is the highest ever revenue growth rate for Alibaba since our IPO. We are demonstrating that Alibaba can deliver high growth at scale. Let me elaborate on how we did it. On the last earnings call, I emphasized how important it was to invest for the future. Several years ago, we invested heavily in the key factors that drive today's growth. And let me offer a few specific examples. Number 1, we invested in product innovation with new mobile features and content that drive our massive and growing user base in mobile commerce. Number 2, we invested in technology to enable us to accomplish algorithmic driven personalization, which provides great customer experience while delivering increasing uplift in monetization. Number 3, we invested in category expansion resulting in our gaining incremental share in strategic categories such as consumer electronics and FMCG. And number 4, we invested in logistics and cloud computing so that our infrastructure of commerce delivers customer satisfaction at scale. Our impressive results demonstrate the importance of investing for the long run. Sometimes long term investing cuts into short term profitability. This is where we feel adamant that responsible managers of businesses must choose long term benefits over short term results. When we invest for the long term, we not only see financial results come through, we also build lasting franchise value in the business. The manifestation of franchise value include the following: a growing and more engaged user base, a robust technology platform that can handle scale customer loyalty and mind share that is unrivaled and an ecosystem of active participants that contribute to the vibrancy of the Alibaba economy. It is this franchise value that underpins the sustainability as well as the capacity for future value creation of our business. I want to close by talking about the lens through which I look at China's economic development. Critics of China make the mistake of taking snapshots and interpreting events in isolation. People forget to look at China's development in the context of a long period of time, over 20, 30 years. The fact is, in the history of the world, there has never been an economy with a massive population of 1,300,000,000 that grew in such a sustained fashion over such a long period of time. In the 18 years since Alibaba was founded, China's per capita GDP grew by a compounded annual rate of 14%. By comparison, the per capita GDP of the United States grew 3% during the same period. We all understand the magic of compounding. When you compound at 14% rate over 18 years, which is the life of Alibaba, the average Chinese citizen is 10x better off today than in 1999, with per capita GDP growing from 870 to 8,100. While economically China is still a developing country, China has some of the world's most modern infrastructure, and it is the most advanced mobile economy in the world. The Internet has helped China to leapfrog ahead of the more developed countries. The Internet turned the lack of legacy infrastructure in the areas of retail, telecoms and banking into an advantage. Today, China's per capita GDP is still only oneseven of the per capita GDP of the United States. Based on the track record of sustained income growth over the past years, as well as on the backbone of a modern Internet infrastructure and productivity gains from technology, I'm very optimistic that China will continue to experience real income growth for years to come. This will translate into a rising middle class characterized by ever increasing and higher quality consumption, and this long term secular trend bodes well for Alibaba. Now, I will turn it over to Daniel for his comments. Thanks, Joe. Hello, everyone, and thank you for joining our earnings call today. Once again, we have delivered an outstanding quarter. The robust growth of our business speaks to the unique value proposition that we offer to customers through our strong execution and commitment to innovation. Mobile Taobao continued to reinforce its popularity among Chinese consumers as a preferred online destination for retail discovery and exploration. 549,000,000 users are accessing our China retail marketplaces every month through mobile apps. This increase of 20,000,000 mobile MAUs since June is a fruit of our focus on fostering user engagement through a wide range of content driven and community driven mechanisms. Sophisticated real time personalized product recommendations, subscription based content and short form videos all help to create a stimulating and fun journey for consumers across our retail marketplaces. We are not only meeting the demands of the customers, but also creating the demand. To enhance engagement and the loyalty of our users, we launched a loyalty membership program that offers rewards such as members only live events and early or exclusive access to products. Our community driven focus is echoed in scoring system, which incorporates social engagement activity in addition to quality and frequency of their spending. We are pleased with Tmall's ongoing expansion of leadership position in the online B2C sector. Total physical goods GMV grew 49% year over year this quarter. We enjoyed robust gains across the board with accelerated growth in the consumer electronics and FMCG categories. Successful promotional and marketing campaigns have resulted in substantial new customer acquisition to the delight of brands and retailers on our platform. Our retail sourcing platform, Lin Sotong, now has more than 500,000 independently owned mom and pop stores in its network. It is empowering our brand partners to gain deeper penetration and insight into their distribution across China. Looking ahead, we remain firmly committed to reinvesting into our Tmall business to drive new user acquisition and promote customer satisfaction. Market leadership and its share gain for Tmall will continue to be our priority. This year marks the 9th anniversary of the Double 11 Global Shopping Festival. New retail will be a new key theme. More than 1,000 brands will be partnering with us to transform 100,000 physical retail locations into smart stores. Our 2nd annual See Now, Buy Now fashion show was broadcasted across 7 media platforms 2 nights ago. Our much anticipated televised annual Countdown Gala will be held in Shanghai this year. We will continue to pioneer new ways to blend interactive engagement with live entertainment. Globalization continues to be an important theme for November 11. One of our top initiatives is enabling 100 Chinese brands to sell directly to consumers around the world. Globalization continues to be a top growth driver. Our international commerce retail business grew 115% in revenue year on year. We are leveraging the strength of Tmall and Taobao in product selection to enable Lazada to better serve consumers across key Southeast Asia markets through Taobao Collection. Building on the success of small business focused events in Detroit last quarter, we hosted Gateway Canada in Toronto with the help of Prime Minister Justin Trudeau to allocate Canadian SMEs on opportunities available to the Chinese consumer market. Our cloud computing business continues to defy gravity. Revenue increased by 99% year over year. We continue to multiply our product portfolio, including the introduction of a new relational database and a state of the art server developed in house that serve the needs of large enterprise customers. At our recent Annual Cloud Computing and AI Conference in Hangzhou, we announced the launch of the Alibaba Daimao Academy. This global research initiative is an investment into our future that will secure the best talent for developing cutting edge technologies. This is part of our commitment to invest more than US15 $1,000,000,000 over the next 3 years on our research and development efforts. Our digital media and entertainment business continues to make progress. Investments in content acquisition is paying off. Youku enjoyed a number of successful summer breakout hits that have grown new subscribers. Video subscriptions have grown by 180% year over year. During the quarter, we agreed to make an additional investment to increase our ownership of Cainiao to a majority stake of 51%. This investment is a demonstration of our commitment to our new retail strategy to enhancing logistic capabilities within the Alibaba ecosystem. Furthermore, we will invest RMB15 1,000,000,000 in Cainiao over the next 5 years to expand our logistic network and provide greater value added services to our merchants. These investments will be focused on increasing R and D in logistics and data technology, developing smart warehouses and smart delivery solutions, and building a global logistics infrastructure. Now, I turn the call over to Maggie, who will walk you through the details of our financial results. Thank you, Daniel. Hello, everyone. We delivered another very strong quarter. I'll give you some financial highlights. So in September 2017 quarter, major operating and financial metrics continued to record very strong performances. Mobile MAUs on our China retail marketplaces reached 549,000,000 in September, an increase of 20,000,000 over June quarter. Annual active consumers on our China retail marketplace reached 488,000,000, net add of RMB22 1,000,000 from the 12 month period ended June. Our non GAAP free cash flow was US3.4 billion dollars for the quarter. The quarterly revenue growth is very strong. So total revenue grew 61% year on year. This was led by robust growth in our China Commerce Retail Business, International Commerce and Alibaba Cloud. We continue to deepen the value proposition of our China retail platform, which is demonstrated in our monetization growth. Our monetization is driven by the interaction of increased consumer engagement and enhanced value to our merchants. Annual revenue per annual active consumer and mobile revenue per mobile user continued its healthy growth in the quarter. Cost of revenue excluding stock based compensation was RMB20.6 billion. Excluding the effect of SBC, the cost of revenue as a percentage of revenue increased from 34% in the quarter to 38%. So, 34% was last year's September and 38% for this quarter. The increase was primarily due to full quarter consolidation of Yintime, investments in Hema and Lazada, content acquisition costs for Youku to go, and logistic costs relating to Tmall Supermarket. These are areas representing great potential growth we will continue to invest. As a percentage of revenue, without the effect of SBC, all other major operating expenses remained stable or decreased year on year, reflecting the operating leverage of our business. Non GAAP net income in the quarter was RMB22 1,000,000,000, an increase of 71% year on year. Reconciliations of non GAAP measures to comparable GAAP measures can be found in our press release. Free cash flow. We continue to generate significant free cash flow. In the September quarter, we generated RMB22.5 billion or about US3.4 billion dollars in free cash flow. Our free cash flow allows us the strategic and operational flexibility to invest in technology and acquire the resources to accomplish our strategic objectives. For September 30, 2017, our cash, cash equivalents and short term investments were RMB160 1,000,000,000 or US24 $1,000,000,000 The increase in cash, cash equivalents and short term investments during the quarter was primarily due to free cash flow generated from operations, offset by cash used in investing activities, including investments in Ele. Me and Tokopedia. Total capital expenditures in September quarter were RMB8.7 billion, in which about RMB671 1,000,000 related to the acquisition of land use rights and construction in progress. The increase here mainly represents our investment in technology, including server, IDC, etcetera. It supports our cloud business as well as the core commerce. Segment reporting, our core commerce segment had an outstanding quarter with revenue growth of 63% year on year. This was led by China Commerce Retail Business that grew 64% year on year and represented 85% of the segment revenue. The primary contributors or new users increased traffic and the effects of personalization technology. These factors contributed to an increase in volume of clicks, which coupled with a meaningful increase in average unit price per click, drove 58% year on year growth in customer management revenue. Commission revenue grew by 47% year over year, primarily driven by 49% growth in Tmall Physical Goods GMV for the same period. Other revenue was RMB3.2 billion, very strong growth compared to RMB600 1,000,000 in the same quarter last year. This is largely due to the progress of our new retail efforts, I. E, consolidation in time as well as an increase in revenue from our fresh food store, Hema. Our China retail marketplaces recorded 488,000,000 annual active consumer, representing a net adds of 22,000,000 and also the MAU grew very strongly. Our cross border and international consumer businesses continued to exhibit solid growth during the quarter. Revenue from international commerce retail business grew 115% year over year to RMB2.9 billion, driven by the GMV growth in both Lazada and AliExpress. Now core market marketplace adjusted EBITDA margin was 57% in this quarter, as compared to 62% in the same quarter last year. This primarily reflects the impact of our investments offset by operating leverage. Our investments are mainly in 3 areas: Number 1, new retail, mainly the consolidation of Yintai and investment in Hema. Number 2, globalization, I. E. Lazada and AliExpress number 3, customer satisfaction and customer experience improvements such as promotion logistics. As I said earlier, we will continue to invest in our core commerce business, focusing on providing competitive offerings to consumers and improving consumer experience. Cloud computing revenue grew 99% year on year to RMB3 1,000,000,000 driven by robust paying customer growth and higher revenue per customer due to improving revenue mix of higher value added services. Adjusted EBITDA margin of the cloud computing segment was negative 5%, edged up slightly versus the same period last year. We have been successful in winning businesses from large paying customers as we develop holistic solutions to tackle the challenges of large enterprises across a variety of industries. Our cloud computing business top priority remains expanding our market leadership and upsell of higher value added services. Our digital media and Entertainment segment revenue in the quarter was RMB4.8 billion, an increase of 33 percent year on year. UC Web maintained a robust growth driven by its VES such as news feeds and mobile search. During the quarter, we successfully executed our content strategy of acquiring and developing a mixture of lessons and original content that resulted in greater consumer mindshare in both the drama and the variety show categories. As a result, daily average subscribers grew over 180% year on year during the quarter. Adjusted EBITDA margin of this segment was negative 36% this quarter, compared to negative 39% in the same quarter last year. The decrease in margin loss is driven by the strong performance of UC Web, partly offset by increase in content spending of Youku to go to drive user and paying subscriber growth. With the growth of a subscription business for content, we see potential synergies between our digital media, entertainment business and core commerce businesses presented by the vast consumer base of our ecosystem. Revenue from innovation initiatives and other segments increased 27% year on year. Adjusted EBITDA margin of the segment was negative 56%, reflecting ongoing investments in our new business initiatives. Hainou Investment. So during the quarter, we have agreed to make an additional investment of RMB5.3 billion to increase our ownership of Cainiao to a majority stake stake of 51%. So Cainiao will become a consolidated subsidiary of Alibaba starting in the December quarter. And we also announced the RMB15 1,000,000,000,000 investment over the next 5 years. So the investment demonstrates our commitment to implement our new retail strategy and to enhance the logistic capabilities within Alibaba Ecosystem. Okay. Looking ahead, due to timing of consolidation in fiscal year in the second half fiscal year, we're revising up our full year revenue growth guidance to 49% to 53% year over year. Excluding the impact from the Cainiao consolidation, we are well on track to deliver our prior guidance range of 45% to 49% provided during the Investor Day. We remain optimistic about revenue growth prospects for the second half of the fiscal year, but as you know, we will get to the anniversary of the easy comp that brought by our personalization algorithm launched last September. Therefore, we will face a more difficult comp rather than easy comp in the second half against the prior year from a growth rate standpoint. We have seen good results from investments that have resulted in B2C market leadership expansion this year. In the immediate term, we expect to increase investments in the second half, focusing on further market penetration, improving user experience, as well as new growth businesses in new retail and international expansion. In the longer term, we're focused on growth and efficiency gains through substantial investments in technology. During our Ali Cloud Conference last month, we announced our commitment to invest US15 $1,000,000,000 in R and D and advanced technologies over the next 3 years. Alibaba is a company that always innovates and positions itself for the future. We believe that persistence in playing the long game will result in significant and sustainable returns for our shareholders. That concludes our prepared remarks. Operator, we're ready to begin the Q and A session. Thank you. Thank you. Ladies and gentlemen, we will now begin the question and answer session. The first question comes from the line of Eddie Leung from Merrill Lynch. Please ask your question. Good evening. Thank you for taking my questions. I have two questions. One is on Chinao. Could you share your thought on the long term positioning of China, again, as the professional logistic service providers in China and globally, How to differentiate and perhaps cooperate in logistics? And then secondly, on new retail, have we seen any change in the way that we cooperate with some of our brands and merchants across multiple channels after we developed our offline channel recently? Thank you. Thanks, Eddie. This is Daniel. I'd like to answer your questions. For the first one, Cainiao. Actually Cainiao is positioned as a smart logistic platform. Why smart? It's because this should be a data driven logistic platform. We truly believe that the data is the most important asset, which can generate value for the partners in the Tanyo ecosystem. So, what we do is that we work closely with our partners in not only warehousing, but also delivery network to enable them to optimize their operation. So, we will continue this strategy, and which is a partnership strategy and continue to work closely with our partners in China and in the world. And the key thing is that the data driven logistic network, actually we are Sanyo is not only is not going to be a logistics company, and we are not interested into building another logistics company. Instead, we will work with a lot of logistics companies, delivery companies to build a network across the world. And for your second question, new retail, I would say actually we our new retail strategy is very clear, and we will continue to execute our new retail strategy and to partner with the offline retailers in key categories such as in fashion categories we work with Yintai, in consumer electronics we work with Suning. In food and FMCG categories, we work with Bailian and Sanjiang. And recently, we invested in another regional retailer, which is Xinhua Du, and we will work closely with them to empower them with our first spec data technology. 2nd is about is a valid new retail format to enable them to operate efficiently. So, I think this is our new retail strategy, but we are still in the early stage, and our goal is to help the whole mid retail world to be operated into a digital operation. So actually we are on the way. Thank you. Thank you, Daniel. Next question? Thank you. The next question comes from the line of Alex Yao. Please ask your question from JPMorgan. Hi. Good morning and good evening, everyone. Thank you for taking my question. I have 2. 1 is regarding the strong Tmall GMV growth rate. We understand that last quarter, you guys did some commission revenue rebate to the merchant to incentivize and participate in the discounting and promotion activities. So the GMV growth rate was very strong. In this quarter, based on the financials, I think that you guys didn't do much commission revenue rebates. Then why is the Tmall still growing at such a strong rate? And then secondly, regarding your long term margin profile, I think in the past several years, the margin has been trending down, partly because of the investment, partly because of the business model expansion towards more asset heavy ones such as Hema, InTime, etcetera, etcetera. Do you view this as temporary transition margin pressure? And the longer term, it will revert back to the high platform margin profile as you expand the successful models from Hema and InTamy, etcetera, to a wider range of the partners? Or do you see this as a philosophical change to basically embrace more asset heavy model and potentially leading to lower longer term margin structure? Thank you. This is Daniel again. For your first question, actually we are very happy to see the strong growth of Tmall, and with such large scale, we continue our rapid growth, which demonstrates the strength of our ecosystem. And actually, yes, you're right, we didn't give so called finance rebate to our merchants in this quarter. And I think that the revenue growth is driven by first about the new customer acquisition. You see that in this quarter we recorded net adds of 22,000,000 new users. I think this is very good. And the second is about our continued to innovate our technology and to personalize the recommendations and user experience, which enable the in-depth product selections matching to the right people at the right place. And the third one, I think the growth is driven by our category strategy and in the key actually our growth across all key categories and our merchants are very happy to working with us, because today most of them fully understand the power of our platform is not only to help them to sell more products, but also help them to engage new customers and to build their brand. So, they are committed to invest more and more resources into our platform. I think that's the key thing and that's the successful factor of our B2C platform. Right. Alex, regarding your question on the longer term and margin level, I think when we set our business goal, we're focusing on value provision. So we're focusing on the revolutionary reform of the whole supply chain, digitize the offline business, and help the efficiency improvement for merchants and better consumer experience. So either it's heavy or light, you call it higher margin, lower margin, as long as we could provide value, I think we will surely get the profitability higher, which is much more meaningful to the investors, because all of these investments are going to bring in the top line growth and then the absolute return on net profit. Alex, I also want to just address the philosophical question of asset heavy versus asset light. I think really in a business like ours, there's really not a distinction between the whether your asset heavy or asset light. The metrics that we look at are the efficiency and the productivity of inputs, the inputs of capital and the inputs of people. So, if you are getting into an area where you need to deploy a little bit more capital, then we look at the return on invested capital to inform ourselves as to whether we're being efficient. And the same thing is with people. We are constantly improving productivity of our headcount. As you can see, we grew revenues over 60%. We did not increase headcount by as much. So, those are the things that we look at instead of worrying about whether we're asset heavy or asset light. Next question? Thank you. The next question comes from the line of Alicia Yap from Citigroup. Please ask your question. Hi. Good evening, Joe, Daniel, Maggie and Rob. Thanks for taking my questions. I have two questions. The first one is the big reversal of the commission revenue growth this quarter, just to follow-up on the Alex questions. So with the upcoming 11 in December quarter, how should we be thinking about the commission revenue growth visavis the Tmall GMV growth? Should we expect some of the divergence happen again due to the promotional rebate in this seasonally strong quarter? And then second question is related to your international expansion. What type of investment that you plan to spend in the next couple of years? Is that you still need to do a lot more infrastructure investment or is it more on acquiring market share, which including further investment into some of the leader positions in certain countries? Thank you. Right. Alicia, in terms of the commission revenue growth, yes, the driver for the growth are the GME growth for this quarter. And whether we'll continue to have the promotional subsidies, We will have it, but not really evenly across these quarters and not all going to get through by offsetting the commission revenue. So, you've seen that we also invested in the marketing, etcetera. International expansion, right now, the investments mainly reflected Lazada and AliExpress. Yes. I think we have very clear international strategies and we are on track. Our current focus is Southeast Asia and Lazada is a very important investment. And today we are in the process of integration and the development of Lazada business and we will continue to do so. As I said during my script, actually today we see a very clear synergies between the product selection in-depth product selections in Taobao and Tmall and the demand from the markets in Southeast Asia. And we also have another very important business, which is AliExpress, and they are very popular in some of the emerging markets in Europe. And we are continuing to invest in this cross border export business and to acquire more and more new customers in other markets. And actually you raised a very important question in international expansion. Very important thing is infrastructure. And that's why what I'm saying in my script is that we will continue to invest in Cainiao and one of the purposes is to build up a global logistics infrastructure to support the global trading. Thank you. Next question? Thank you. The next question comes from the line of Piyush Mubay from Goldman Sachs. Please ask your question. Thank you. My first question is to Daniel. Daniel on new retail, give us a sense of how quickly your retail partners are embracing this model and how far are we from this model expanding beyond grocery? Also, how do you think of new retail impacting online penetration and from a company perspective, the incremental revenue opportunity? Thank you. Yes. Today, we work with some of the partners. Actually we work with our partners in executing our new retail strategy. Actually our partners all believe in new retail, because they do understand that they have to embrace Internet, they have to be empowered by data technology. That's why they select Alibaba as their strategic partner. We are working very closely with them to not only to help them to sell more, but also to help them to transform a totally digital operation. And today, we are making a very good progress. And what we will do in the future is to continue to invest and to redefine the retail formats and upgrading the existing retail model to improve the operating efficiency of the retailer. Furthermore, actually most important thing is help them to digitalize the customer management, so that they can manage their customers more efficiently rather than just have a brick and mortar store and waiting customers to come. So, actually today our long term goal is to digitalize the whole RMB30 1,000,000,000,000 in social consumption. And compared to that goal, today we are still in the early stage, but we will continue to do so. Thank you. Please just to add to Daniel's comments. So your question on the new retail development, when is it going to be contributing to financially? So, you actually can see that starting from this quarter, the new retail started to have some contribution to our total revenue. It's under our China retail. There is a line other revenue shows that 4 38% growth. That growth includes the consolidation of Yintai and Homa. So Yintai was not there last year. So, even if you take it out, it's still showing very strong growth. It's like around 180% growth. So, although the absolute dollar amount is still small, but you can see that it starts picking up. But in terms of profitability, again, this is a new initiative. We're not aiming to set profitability anytime soon. So we focus on expanding the business and the top line. Thank you, Daniel. Thank you, Maggie. The next question? Thank you. The next question comes from the line of Chi Sang from HSBC. Please ask your question. Great. Thank you very much for taking my question and congratulations on an outstanding set of results. I also wanted to ask you about new retail. So in particular, as it relates to INTEIME, I was wondering if you can sort of give us an update or some type of roadmap for integration of INTEIME. And secondly, as it relates to Hema, what is your growth plan for Hema? I mean, longer term, do you expect Hema to be a major retail chain? Or do you expect more of the growth to come from licensing this new retail format to other supermarkets? Thank you very much. We have made great efforts to upgrade Yintai model, and we are making very good progress. And in Yintai, today, we already accomplished the integration of the customer profile. And after this, actually what we can do is that we can track and serve the customers online, offline and anytime, anywhere. People when they are online and we can integrate because we integrate the customer profile of Yinkai and we can target the people actually on the location basis via our mobile Taobao, and the people can either buy from Yingtai store on Tmall, or we can direct people to the Yinkai physical store. What we are doing right now is to try to integrate the merchandising products. I think that's the most difficult piece, because the previous department store model in China is that they don't actually they don't do merchandising. They just rent content counter and space to the retailer. So, today what we do is that we try to integrate onlineoffline merchandising system, so that all available in store, in Yintai store can be available online at the same time. And I would say this will totally change today's department store model in China. And we are very confident and we will make this happen. And in terms of Hema, and today actually Hema got a very, very warm feedback from the market and show a very good customer stickiness, and which validated the success of Hema model. This is the new model and the new retail format. This is not a supermarket. This is not a food mart. This is a new animal. And what we are doing right now is to open more stores in key cities in China to roll out the Hema model. But we don't want to open all the stores by ourselves. Instead, we work with our retail partners in different cities and we help them to copy Hema model into the local cities to franchise the business. Next question? Thank you. The next question comes from the line of Gregory Zhao from Barclays. So my first question is about our Double 8 membership. So we launched the membership in this quarter and we connect I think we connected Taobao, Tmall as well as some Alipay functions. So as we compare this to Amazon Prime membership, we think Prime membership normally has the members have stronger consumption intent and higher ARPU contribution. So do we have any initial financial numbers of our loyalty members to share? And shall we expect broader product offerings such as digital contents logistics services in the future? And my second question about our recently some headlines about our escalating investment in R and D such as the RMB15 1,000,000,000 investment in the Danvers Academy. So specifically what kind of support we expect from this R and D investment to our revenue by business category And how shall we expect the financial impact from this? Thank you. For Double 8 loyalty programs, this is a new program we launched in this August. And because we truly believe that the 500,000,000 user base are the most important assets of Alibaba Ecosystem. And what we do is try to build a scoring system among our consumers, and each customer has their own score, which is changed per month. And we do give a lot of privilege to our super members to enhance their stickiness. And as you said, we do see a lot of synergies among different businesses of Alibaba Ecosystem, like the synergies between the retail platform and the digital and media platform. But we don't want to simply copy the prime model from Amazon to China. I think in China, we can generate our own model. But the purpose of this loyalty customer program is to enhance the thickness of the loyalty customers and also give people a very clear roadmap how to be a loyalty customer, and so that we have more and more people to be with us. Our track record shows very clearly the more time people spend with our ecosystem, more time then they will spend more across more categories. Right. So regarding your question on the 15 $1,000,000,000 spend, this 15,000,000,000 is going to be spent over the next 3 years in the R and D areas for our group. So, if you look at the current product development costs we've incurred, which is around 10%, 11% of total revenue. So, clearly, we're going to increase the spending in this technology development. I think as a percentage of revenue, per P and D is comparable to our peers, slightly lower. So, it could be gradually over time increasing to a higher level. Greg, your question is how does the spend the investment in research and development spread across different business lines? Obviously, there are specific businesses that we are dedicating the development investment into, but also there's a stepped up effort in general research in fundamental technologies. We see that the next 5 to 10 years is a time period where a lot of these fundamental technologies like deep learning, computer vision, etcetera, areas of artificial intelligence as well as quantum computing that will really begin to take off and some of the technologies can be applied to actual applications. So, the time to invest is now. It is very, very important for us to deepen that commitment to the investment of fundamental technologies. So, that's obviously one of the most important factors of establishing research in that area is the acquisition of talent. So, we will be bringing on board people that are experts in those areas. The next question comes from the line of Wendy Huang from Macquarie. Please ask your question. Thank you. I have two questions. First, can you give some color on the Lingshou Tong? What kind of business model are you trying to build here? And also, what kind of monetization can you get from those 500,000 mom and pop shops in China in the long term future? And second, for your digital entertainment business, are you seeing any impact from the recent Congress meeting, I. E. Any impact for your Q4 revenue there? Thank you. Ling Sotong is a new business we incubate in the past 2 years. The purpose of Lin Sotong is to build a data driven digital platform to enable brand partners to distribute their products to the mom and pop stores in low tier cities, even in rural areas. And traditionally, most of the brands, they have a traditional distribution network, which is sort of a pyramid like distribution network, layer by layer. But via Internet, via digital technology, we can narrow the gap of the layer and also to keep all the distribution behaviors transparent to the brand. So, by this new model, we want to help the brand to distribute their top products to whatever retailers they want, so they can clearly see the sell in and sell out. But actually, we don't want to repeat the traditional model, which is we buy from the merchants, we buy from the brand, and we turn around and sell to the apartment store. This is not our model. Instead, our model is, again, is a platform model. We keep everything transparent. We enable brands to distribute directly to Papa Mom's store on our platform. But we provide infrastructure including the supply chain management and the logistics service to help them to make this happen. And in terms of revenue model, I think actually, as always we are not in a hurry monetizing a young business. We see great value. Actually, we got very good feedback from the merchants, from the brands, because a few brands in China, they can have their own distribution network covering all the areas in China, because China is too big. For a brand to build a standalone distribution network, it's too expensive. So, they are very happy to work with us to share this distribution platform with each other. So, that's our model. So, we do believe that as long as we can create value for our merchants, for our brand, actually, we can finally, we can share some benefit from them. Of course, on the other side, for the problem of mom stores, actually, they are traditionally doing a very they operate their business in a very old way, and we can provide them some digital weapon to help them to manage their good in and the good out and to manage their customers. I think this also gives them a huge advantage to digitalize their business. For digital entertainment business, I would say, as I said in my script, actually, we had a good summer, and we enjoyed some benefits from the successful hits, drama hits in this summer, and we will actually, we have a very strong pipeline. A few days ago, our digital media and payment team disclosed their pipeline for the coming few quarters. And we have very strong pipeline, and we are very confident to grow our business and to enhance our leadership in this sector. Next question? Thank you. The next question comes from the line of Youssef Squali from SunTrust Robinson. Please ask your question. Two quick questions for Maggie. On the China, can you just speak to that $15,000,000,000 investment that you've identified? How much of it will you guys be doing directly versus partners? And how will you fund it? And then on the $4,000,000,000 to $8,000,000,000 RMB increase in investment that you guys discussed at Analyst Day for 2018, now that we're almost halfway into the year, maybe not quite, but almost there, can you maybe help us narrow that range? And what are the scenarios where you'll hit the high end versus the low end? Thank you. Okay. So for the US15 $1,000,000,000 spending in logistics over the next 5 years. So, you get like RMB 3,000,000,000 per annum. That is not while spending level, while you see that we increased our guidance by 4%, that's purely adding the consolidation with Cainiao. So, you can derive the revenue level, and then we have disclosed equity pickup of the losses Shenyang incurred. So, their current spending level is already there. If you analyze it, it's already somewhere around 2. So, the spending is going to be both in CapEx and OpEx. The funding sources, Cainiao has their financing raised the fund around a year ago, so they have some funds sitting on their balance sheet, plus the group since now we are controlling the business, we're going to provide funding. So, by the way, we have like RMB159 1,000,000,000 cash on our balance sheet. And your second question is about the guidance range. Right. The $4,000,000,000 to $8,000,000,000 increase in renminbi that you discussed at Analyst Day, just trying to understand if you have maybe better visibility in whether you'll end up up being closer to the higher end or the lower end of that guidance? Thanks. Right. Okay. You've seen that we've reported 2 quarters now and very strong growth, and we currently have not adjusted our revenue guidance for the business excluding China. So that's because, first of all, the guidance I gave during the Investor Day was already a very high guidance actually. So that was 10 percentage points than higher than the consensus by that time. So we're very well on track to achieve that high goal. Secondly, as I mentioned, we had this personalization algorithm launched last September, and now we get to the level of that change. So, in December quarter, we're going to no longer have the easy comp. And thirdly, if you look at the December quarter, it's going to be a big quarter. So, the large events like Singles' Day and etcetera, so this may impact the revenue we would rather wait and see. We do believe that we'll continue to have that technology enhancement, etcetera. But people shouldn't just assume our technology growth linear over quarters. Youssef, I just want to add to what Maggie said. So essentially, what we outlined in investment, we spent a portion of it. We've highlighted during the prepared remarks that we will increase spend for the Double 11 and the second half of the year. Okay. I think that will be our last question. Thank you. The next question comes from the line of Thomas Chong from Credit Suisse. Please ask your question. Hi. Thanks management for taking my questions. I have a couple of quick questions. The first one is about our content strategy. Is there any plan to monetize the front page in the medium term? And my second question is about, is there any expectation in terms of the GMV for 11? And finally, can management give us some color about the number of cloud customers in September quarter? Thanks. Our Actually for your first question, we are on our core commerce business, we are actually execute a very clear strategy in content driven and community driven mobile Taobao. And following this strategy, actually we add more and more content in different formats in short form video, in news feeds, in recommendation to our customers, and we received very good feedback from customers. That's why we got very good fitness of the customers. But we are very actually, as we always do, we don't try to monetize all these new traffic immediately. Instead, we try to improve the user experience and improve our algorithm to meet the users' demand. But going forward, we do see some potentials to modify the value of these content. But we are not in a hurry to do that. Operator, that's the last question. Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for your participation. You may all disconnect the lines now. Thank you.