Good day, ladies and gentlemen. Thank you for standing by, 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, 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 and 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 U.S. Securities and Exchange Commission. Any forward-looking statements that we make on this call are based on assumptions as of today, we do not undertake any obligation to update these statements except as required under applicable law.
Please also know that certain financial measures that we use on this call, such as adjusted EBITDA, adjusted EBITDA margin, adjusted EBITA, adjusted EBITA 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 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. 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 three, we invested in category expansion, resulting in our gaining incremental share in strategic categories such as consumer electronics and FMCG. Number four, 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 1.3 billion 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 U.S. 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 10 times 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 a lack of legacy infrastructure in the areas of retail, telecoms, and banking into an advantage. Today, China's per capita GDP is still only one-seventh of the per capita GDP of the U.S.
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. 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 million users are accessing our China retail marketplaces every month through mobile apps. This increase of 20 million 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 the 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 its leadership position in the online B2C sector. Total physical goods GMV grew 49% year-over-year this quarter. We enjoy 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, Ling Shou Tong, 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 share gain for Tmall will continue to be our priority. This year marks the ninth 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 second annual See Now Buy Now Fashion Show was broadcasted across several media platforms two nights ago. Our much anticipated televised annual Hong Kong 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 11th. 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 focus event in Detroit last quarter, we hosted Gateway Canada in Toronto with the help of Prime Minister Justin Trudeau to educate 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 DAMO Academy. This global research initiative is an investment into our future that will secure the best talents for developing cutting-edge technologies. This is part of our commitment to invest more than $15 billion over the next three 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 $15 billion in Cainiao over the next five years to expand our logistic network and provide greater value-added services to our merchants. This investment will be focused on increasing R&D in logistics and data technology, developing smart warehouses and smart delivery solutions, and building a global logistic infrastructure. 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. In September 2017 quarter, major operating and financial metrics continued to record very strong performances. Mobile MAUs, our China retail marketplaces reached 549 million in September, an increase of 20 million over June quarter. Annual active consumers on our China retail marketplace reached 488 million, a net add of 22 million from the 12 months period ended June. Our non-GAAP free cash flow was $3.4 billion for the quarter. The quarterly revenue growth, very strong. 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 20.6 billion RMB. Excluding the effect of SBC, the cost of revenue as a percentage of revenue increased from 34% in the quarter to 38%. 34% was last year's September, and 38% for this quarter. The increase was primarily due to full quarter consolidation of the Intime, investments in Hema and Lazada, content acquisition costs for Youku Tudou, 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 CNY 22 billion, 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 CNY 22.5 billion, or about $3.4 billion 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. September 30, 2017, our cash equivalents, and short-term investments were CNY 160 billion or $24 billion.
The increase in 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 Lazada and Tokopedia. Total capital expenditures in September quarter were CNY 8.7 billion, in which about CNY 671 million related to the acquisition of land use rights and construction in progress. Increase here mainly represents our investment in technology, including server, IDC, et cetera. 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 were 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 CNY 3.2 billion, very strong growth compared to CNY 600 million in the same quarter last year. This is largely due to the progress of our New Retail efforts, i.e., consolidation Intime, as well as an increase in revenue from our fresh food store, Hema. Our China retail marketplace has recorded 488 million annual active consumers, representing a net add of 22 million, 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 CNY 2.9 billion, driven by the GMV growth in both Lazada and AliExpress. Core 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 three areas. Number 1, New Retail, mainly the consolidation of Intime and investment in Hema. Number 2, globalization, i.e., Lazada and AliExpress. Number 3, customer satisfaction and customer experience improvement 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 RMB 3 billion, 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 RMB 4.8 billion, an increase of 33% year-on-year. UCWeb maintained a robust growth driven by its VAS, such as newsfeeds and mobile search.
During the quarter, we successfully executed our content strategy of acquiring and developing a mixture of licensed and original content that resulted in greater consumer mind share 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 comparing to negative 39% in the same quarter last year. The decrease in margin loss is driven by the strong performance of UCWeb, partly offset by increase in content spending of Youku 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. Cainiao investment. During the quarter, we have agreed to make an additional investment of RMB 5.3 billion to increase our ownership of Cainiao to a majority stake of 51%. Cainiao will become a consolidated subsidiary of Alibaba starting the December quarter. We also announced the $15 billion, RMB 100 billion investment over the next five years. The investment demonstrates our commitment to implement our New Retail strategy and to enhance the logistic capabilities within Alibaba ecosystem. Looking ahead. Due to timing of consolidation in the second half fiscal year, we're revising up our full year revenue growth guidance to 49%-53% year-over-year.
Excluding the impact from the timing of consolidation, we're well on track to deliver our prior guidance range of 45%-49% provided during the Investor Day. We remain optimistic about revenue growth prospects for the second half of the fiscal year. As you know, we will get to the anniversary of the easy comp that's brought by our personalization algorithm launched last September. Therefore, we'll 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 investment 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 Alibaba Cloud conference last month, we announced our commitment to invest $15 billion in R&D and advanced technologies over the next three 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&A session. Thank you.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or the hash key. To give more people the opportunity to ask questions, please keep yourself to more than two questions at a time. Just to remind you, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. 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 Cainiao. Could you share your thought on the long-term positioning of Cainiao against the professional logistic service providers in China and globally? How to differentiate and perhaps cooperate in logistics. 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? Is 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 Cainiao ecosystem. 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. We will continue this strategy, and which is the partnership strategy, and to continue to work closely with our partners in China and in the world. The key thing is that the data-driven logistic network, actually, Cainiao is not going to be a logistic company, and we are not interested in to build another logistic company.
Instead, we will work with a lot of logistics companies, delivery companies, to build a network across the world. For your second question, new retail. I would say, actually, 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 Intime. In consumer electronics, we work with Suning. In food and FMCG categories, we work with Bailian and Sanjiang. Recently we invest another regional retailer, which is New Hua Du, and we will work closely with them to empower them with our irst-party data technology. Second is about a valid new retail format to enable them to operate efficiently. I think this is our new retail strategy.
We are still in the early stage, and our goal is to help the whole new retail world to be upgraded into a digital operation. 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 two. One 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 them participating in the discounting and the promotion activities. 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 rebate. Why is Tmall still growing at such a strong rate? 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, et cetera.
Do you view these as a 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 Intime, et cetera, to a wider range of the partners? 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. Actually, yes, you're right, we didn't give so-called financial rebate to our merchants in this quarter. I think that the revenue growth is driven by first, about the new customer acquisition. You see that in this quarter, we recorded a net add of 22 million new users. I think that this is very good. The second is about our continue 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. The third one, I think the growth is driven by our category strategy and actually our growth across all key categories.
Our merchants are very happy to working with us because today, most of them fully understand that 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. 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 margin level, I think when we set our business goal, we're focusing on value provision. 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. Either it's heavy or light, you call it, or higher margin, lower margin, as long as we could provide a value, I think we will surely get the profitability higher, which is much more meaningful to the investors because all of this investment going to bring in the top-line growth and then the absolute return on net profit.
Alex, I also want to just address kind of the philosophical question of asset heavy versus asset light. I think really in a business like ours, there's really not a distinction between whether you're 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. 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. 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. 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. With the upcoming Double 11 in December quarter, how should we be thinking about the commission revenue growth vis-a-vis the Tmall GMV growth? Should we expect some of the divergence happen again due to the promotional rebate in this seasonally strong quarter? 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 GMV growth for this quarter. Whether we'll continue to have the promotional and subsidies, we will have it, but not really evenly across these quarters and not all going to get through by offsetting the commission revenue. You've seen that we also invested in the marketing, et cetera. International expansion, right now the investments mainly reflected on Lazada and AliExpress.
Yeah. 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. Today, we are in a process of integration and the development of Lazada business. We will continue to do so. As I said during my script, actually today, we see a very clear synergies between the in-depth product selections in Taobao and Tmall, and the demand from the markets in Southeast Asia. We also have another very important business, which is AliExpress, and they are very popular in some of the emerging markets in Europe. We are continuing to invest in this cross-border export business and to acquire more and more new customers in other markets. Actually, you raised a very important question as in international expansion, a very important thing is infrastructure.
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 Mubayi from Goldman Sachs. Please ask your question.
Thank you. My first question is to Daniel. Daniel, 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. Today, we are making a very good progress. What we will do in the future is to continue to invest and to redefine the retail formats and upgrade the existing retail model to improve the operating efficiency of the retailers.
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 for customers to come. Actually today, our long-term goal is to digitalize the whole RMB 30 trillion in social consumption. Compared to that goal, today, we are still in the early stage, but we will continue to do so. Thank you.
Yeah. Piyush, just to add to Daniel's comments. Your question on the New Retail developments, when is it going to be contributing to financially? 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 438% growth. That growth includes the consolidation of Intime and Hema. Intime was not there last year. Even if you take it out, it's still showing very strong growth. It's around 180% growth. Although the absolute dollar amount is still small, you can see that it start picking up. In terms of profitability, again, this is a new initiative. We're not aiming to the profitability anytime soon. 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 Tsang 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. In particular, as it relates to Intime, I was wondering if you can sort of give us an update or some type of roadmap for integration of Intime. Secondly, as it relates to Hema, what is your growth plan for Hema? In 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 upgrading Intime model, we are making very good progress. In Intime today, we already accomplished the integration of the customer profile. 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, because we integrate the customer profile of Intime, we can target the people actually on the location basis via our mobile Taobao. The people can either buy from Intime store on Tmall, or we can direct people to the Intime 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 actually they don't do merchandising. They just rent counter and space to the retailer.
Today, what we do is that we try to integrate the online, offline merchandising system so that all the stock available in store, the Intime store, can be available online at the same time. 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. In terms of Hema, actually Hema got a very warm feedback from the markets and show a very good customer stickiness, 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. 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. Please ask your question.
Hi, management. Congratulations on the strong quarter, and thanks for taking my question. My first question is about our Double Eight membership. We launched the membership in this quarter, and I think we connected Taobao, Tmall, as well as some Alipay functions. As we compare this to Amazon Prime membership, we've seen Prime membership normally the members have stronger consumption intent and higher output contribution. Do we have any initial financial numbers of our loyalty members to share? Shall we expect any broader product offerings such as digital contents and logistics services in the future? My second question, recently some headlines about our escalating investment in R&D, such as the CNY 15 billion investment in the DAMO Academy.
Specifically, what kind of support we expect from the R&D investment to our revenue by business category, and how shall we expect the financial impact from this? Thank you.
For Double Eight loyalty programs, this is a new program, we launched in this August. Because we truly believe that more than 500 million user base are the most important assets of Alibaba ecosystem. What we do is try to build up a scoring system among our consumers. Each customer have their own score, which is changed per month. We do give a lot of privilege to our super members to enhance their stickiness. As you said, we do see a lot of synergies among different business of Alibaba ecosystem, like the synergies between the retail platform and the digital and media platform. We don't want to simply copy the Prime model from Amazon to China. I think in China, we can generate our own model.
The purpose of this loyalty customer program is to enhance the stickiness of the loyalty customers, also give people a very clear roadmap how to be a loyalty customers, so that we have more and more people to be with us. Our current record shows very clearly that more time people spend with our ecosystem, then they will spend more across more categories.
Regarding your question on the CNY 15 billion spent. This CNY 15 billion is going to be spent over the next three years in the R&D areas for our group. If you look at the current product development cost we've incurred, which is around 10%, 11% of total revenue. Clearly, we're going to increase the spending
In this technology development. I think as a percentage of revenue, our R&D is comparable to our peers, slightly lower. It could be gradually over time, increasing to a higher level.
Thank you very much.
Sorry, Greg, your question is how does 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 five to 10 years is a time period where a lot of these fundamental technologies, like deep learning, computer vision, et cetera, 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. The time to invest is now. It is very important for us to deepen that commitment to the investment of fundamental technologies. That's obviously one of the most important factors of establishing research in that area is the acquisition of talent.
We will be bringing on board people that are experts in those areas.
Next question.
Thank you very much.
Thank you. 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 LingShouTong? What kind of business model are you trying to build here? Also, what kind of monetization can you get from those 500,000 mom-and-pop shops in China in the long-term future? 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.
LingShouTong is a new business we incubate in the past 2 years. The purpose of LingShouTong 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. Traditionally, most of the brands, they have a traditional distribution network, which is sort of a pyramid-like distribution network, layer by layer. 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. Via this new model, we want to help the brand to distribute their products to whatever retailers they want. They can clearly see the sell in and the sell out.
Actually, we don't want to repeat the traditional model, which is we buy from the merchants, or we buy from the brand, and we turn around and sell to the partner 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 partner mom store on our platform. We provide the infrastructure, including the supply chain management and the logistics service, to help them to make this happen. In terms of revenue model, I think, actually, as always, we are not in hurry in monetize a young business. We see great value. Actually, we got very good feedback from the merchants, from the brands, because 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. They are very happy to work with us to share this distribution platform with each other. That's our model. We do believe that as long as we can create value for our merchants, for our brands, actually, finally we can share some benefit from them. Of course, on the other side, for the partner mom stores, actually they are traditionally operating their business in a very old way. We can provide them some digital weapon to help them to manage their store goods in and the goods 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, we enjoy some benefits from the successful drama hits in this summer. Actually, we have very strong pipeline. A few days ago, our digital media entertainment team disclosed their pipeline for the coming few quarters, we have very strong pipeline, 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 Humphrey. Please ask your question.
Excellent. Thank you so much. Two quick questions for Maggie. On the Cainiao, can you just speak to that CNY 15 billion investment that you've identified? How much of it will you guys be doing directly versus partners, and how will you fund it? On the CNY 4 billion-CNY 8 billion renminbi 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? What are the scenarios where you'll hit the high end versus the low end? Thank you.
Okay. For the CNY 15 billion spending in logistics over the next five years, you get like CNY 3 billion per annum. That is not our spending level, while you see that we increased our guidance by 4%, that's purely the adding, the consolidation with Cainiao. You can derive the revenue level. We have disclosed equity pickup of the losses Cainiao incurred. Their current spending level is already there. If you analyze it's already somewhere around two. The spending going to be both in CapEx and OPEX, but the funding sources, Cainiao has their financing round, raised the fund around a year ago. They have some funds sitting on their balance sheet, plus the Group, since now we are controlling the business, we're going to provide the funding. By the way, we have like CNY 159 billion cash on our balance sheet.
Your second question is about the guidance range.
Right. The CNY 4 billion-CNY 8 billion 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 being closer to the higher end or the lower end of that guidance. Thanks.
Right. Okay. You've seen that we've reported two quarters now and very strong growth. We currently have not adjusted our revenue guidance for the business excluding Cainiao. That's because, first of all, the guidance I gave during the Investor Day was already a very high guidance, actually. That was 10 percentage points higher than the consensus by that time. We're very well on track to achieve that high goal. Secondly, as I mentioned, we had this personalization algorithm launch last September, and now we get to the anniversary of that change. In December quarter, we're gonna no longer have the easy comp. Thirdly, if you look at the December quarter, it's gonna be a big quarter. The large events like Singles' Day and et cetera. This may impact the revenue. We would rather wait and see.
We do believe that we'll continue to have that technology enhancement, et cetera, but people shouldn't just assume our technology growth linear over quarters.
Youssef, I just want to add to what Maggie said. Essentially, before we outlined consumer 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?
Great. Thank you.
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? My second question is there any expectation in terms of the GMV for Double 11? Finally, can management give us some color about the number of cloud customers in September quarter? Thanks.
Actually, for your first question, on our core commerce business, we are actually execute a very clear strategy in content-driven and community-driven mobile Taobao. Following this strategy, actually, we add more and more contents in different formats, in short-form video, in news feeds, in recommendations to our customers. We receive very good feedback from customers. That's why we got a very good stickiness of the customers. Actually, as we always do, we don't try to monetize all this new traffic immediately. Instead, we try to improve the user experience and improve our algorithm to meet the users' demand. Going forward, we do see some potentials to monetize the value of these contents. 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.