Earnings Call: Q4 2016

May 5, 2016

Ladies and gentlemen, thank you for standing by. Welcome to the Alibaba Group March Quarter 2016 and Full Fiscal Year 2016 Results Conference Call. At this time, all participants are in a listen only mode. After management's prepared remarks, there will be a Q and A session. I would now like to turn the call over to Jane Pena, Head of Investor Relations of Alibaba Group. Please go ahead. Good day, everyone, and welcome to Alibaba Group's March quarter 2016 and full fiscal year 2016 earnings conference call. With us today are Joe Tsai, Executive Vice Chairman Daniel Zhang, Chief Executive Officer and Maggie Wu, Chief Financial Officer. Also, as you know, we distribute our earnings release through Alibaba Group's Investor Relations website located at www alibabagroup.com. So please refer to our IR website for our earnings releases as well as the supplementary slides that accompany the call. You can also visit our corporate website for the latest company news and updates. Please check it out. This call is also being webcast from the IR section of our corporate website. A replay of the call will be available on our website later today. Now, let me quickly cover the Safe Harbor. Today's discussion will contain forward looking statements made under the Safe Harbor provisions of the U. S. Private Securities Litigation Reform Act of 1995. These forward looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations. Factors that could cause actual results to differ materially are set forth in today's press release. To also understand 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 note that certain financial measures that we use on this call, such as non GAAP EBITDA, including non GAAP EBITDA margin and non GAAP net income are expressed on a non GAAP basis. We have also adjusted our net cash provided by operating activities to remove purchases of property and equipment and intangible assets, excluding acquisition of land use rights and construction in progress and adjust for changes in loan receivables relating to micro loans of our SME loan business, which we refer to as free cash flow. Our GAAP results and reconciliations of GAAP to non GAAP measures can be found in our earnings press release. With that, I will now turn the call over to Joe. Thank you, Jane. Thank you all for joining us. Today, we reported excellent results. Our revenues grew 39% year on year for the quarter. There are now 423,000,000 shoppers who have bought something on our China retail platform in the past year and 410,000,000 mobile users who were active on our China retail mobile apps during the month of March. In these challenging times for the global economy, Alibaba is bucking the trend. Why? I want to offer a couple of perspectives, one macro and the other one that is specific to Alibaba. First, take a look at the Chinese consumer. Chinese households today have aggregate net cash reserves of over US4.6 trillion dollars This accumulated wealth and liquidity is the result of real double digit wage growth over the past decade. In contrast, in early 2008, on the eve of the global financial crisis, household debt in the United States was 98% of GDP and the average American family was in heavy debt. Chinese consumers have a healthy balance sheet and ability to spend. This will propel China's shift from an export and investment light economy to a consumption driven economy. Alibaba rides the secular tide as we enable more products and services, whether they are domestic or import, to reach the consumer. Another perspective comes from looking at Alibaba's businesses. We have a balanced portfolio of businesses in our ecosystem that are in various stages of growth, profit trajectory and cash generation. Depending on years in gestation, we group these businesses into what I call, 1st, core cash flow second, emerging traction and third, long term strategic bets. So I'll go through each of them. 1st, core cash flow. Our core commerce business is strong and extremely cash generative. We achieved 41% year on year revenue growth in China retail marketplaces for the quarter with high and sustainable operating margins. On the strength of our core business, we delivered US8 $1,000,000,000 in free cash flow in fiscal 2016. This enables us to invest for the future. 2nd, emerging traction. We are excited that several of our businesses have emerged with high growth traction and expanding operating leverage. Ali Cloud is today one of the largest cloud computing businesses in the world. In the latest quarter, this business grew revenues 175% year on year, which is it's an acceleration of the 126% growth rate from the prior quarter. Another emerging traction star is mobile Internet services, including mobile search and mobile media. In this quarter, we have provided a glimpse into the potential of the mobile lifestyle in China in addition to mobile commerce, as revenues from mobile Internet services and mobile operating systems grew around 50% year on year. 3rd, long term strategic bets. Alibaba has an incredible track record of making long term bets successful. Here, a bit of historical perspective is important. Take Taobao Marketplace as an example. We started Taobao in 2003 when online shopping in China was virtually non existent. For 5 years, we didn't generate any revenues. Instead, we focused on acquiring users and building an e commerce ecosystem. Taobao didn't produce meaningful profits until 2010. That is 7 years after its founding. History teaches us that it pays to be patient. We are used to investing in long term initiatives with long term gestation periods. New initiatives typically take 5 to 7 years to grow into substantial profitability. And this growth usually takes on a step function trajectory rather than in a straight line. The ability to remain patient is a competitive advantage. Going forward, we're prepared to continue investing in high potential businesses that are highly strategic to Alibaba, from digital entertainment to local services to international expansion. These businesses contribute to losses in our current income segment. However, we invest in them so that they can graduate to emerging traction and then on to core cash flow businesses in the future. Now, I would like to turn to Daniel, who will discuss recent exciting developments and offer a strategic view of the future. Thanks, Joe. Hello, everyone, and thank you for joining our earnings call today. I'm pleased to report that we ended the fiscal year on a very strong note. We had a strong execution in our 3 key strategies of globalization, video development and big data cloud computing. We reached 2 important milestones this fiscal year. First, our annual GMV surpassed RMB3 1,000,000,000,000 and we became the world's largest retail commerce company. 2nd, our annual revenue surpassed RMB100 1,000,000,000. The continued strength of our business is reflected in the growth of our annual active buyers, which has reached RMB 423,000,000. The total revenue growth rate this quarter is the highest over the past 4 quarters and the revenue growth rate of China retail marketplaces is the highest in the past 6 quarters. We are on a path to realizing our vision of achieving US1 $1,000,000,000,000 in GMV by fiscal year 2020 and we want to serve 2,000,000,000 consumers. Today, we are laying down solid foundations by transforming our e commerce business and investing in driving businesses such as cloud computing and media and digital entertainment platforms to achieve our ambitious vision. Over the past year, our retail commerce business has executed a significant and successful transformation from PC to mobile first. At the time of our IPO, mobile contributed less than 40% of our GMV, less than 20% of our China retail commerce revenue, and we had only 188,000,000 mobile monthly active users. Today, 73% of our GMV comes from mobile and our mobile MAU has reached 410,000,000. We have completely reinvented the user experience and the services to capitalize on the unique relationship that consumers have with their mobile phone in daily life. Today, our merchants and consumers engaged seamlessly across a multi screen social commerce platform, driven firmly by user interaction and big data. Taobao has long evolved beyond just for shopping. Consumers come to Taobao for discovery and entertainment and to socialize in virtual communities for each other with shared interests or lifestyles during their shopping journey. Internet celebrities, merchants, trendsetters are among the growing active population contributing rich and relevant content in the form of photos, videos, live streaming, recommendations, reviews and the lifestyle guides, which encourage conversation between users through sharing, comments, and liking features. Tmall is now positioned more clearly than ever as the engine of digital transformation of the retail landscape in China. Brands and retailers continue to turn to Tmall as a trusted partner and destination for consumer engagement, customer relationship management, and brand building. We remain focused on category expansion and sharpening brand mix for consumers. We continue to grow core e commerce business by increasing our consumer base and broadening our product assortment, namely through spreading our 2 wins of globalization and the rural development. Tmall Global GMV has increased 180% year over year. We continue to work closely with business partners to help sell their quality products to China. Our acquisition of a controlling stake in Lazada, a leading online retail marketplaces operator in Southeast Asia, will allow access to 550,000,000 consumers in one of the most promising markets for e commerce. Our rural development continued to be blossom. Rural Taobao service station has expanded to over 14,000 rural locations. We capitalize on the most important family holiday of the Chinese calendar to help spotlight rural products and encourage rural consumption and held the 1st Alibaba Chinese New Year Shopping Festival. More than 70% of orders were completed by mobile and more than 2,100,000,000 items were sold during the 5 day campaign. Revenue for the core e commerce business rose extremely well in March quarter with a 39% overall growth rate and a 41% year on year growth rate for China commerce retail revenue. The robust growth in China retail commerce revenue was driven by online marketing service revenue, particularly on mobile. Online marketing revenue was driven by both increased traffic and improving CPCs on our market basis, trends that we believe will continue. Why do we believe this? Traffic is increasing because our desktop visitors remain very robust, while mobile MAU and the traffic continue to grow, driven primarily by mobile top app. We are confident about pricing because merchants and brands are willing to bid more and more on our P4P Alimama platform. In addition to increasing their online sales, it is also helping them acquire new customers, drive repeat purchase and build brand royalties, ultimately benefiting their overall business online and offline. Our cloud computing business remains on its path of rapid growth with more than 500,000 paying customers and revenue growth of 175 percent year over year. We unveiled BT Plus, a platform that is a one stop shop for big data related solutions such as computing engines, data analytics, machine learning and data applications. We are benchmarking against international players. Lastly, our media and digital entertainment ecosystem is coming together nicely. We closed our acquisition of Youku to Dou in April, which will anchor our video content and distribution reach. Our mobile browser UC Web is now a powerful media distribution channel with its mobile search, mobile app delivery and the UC Headlines news feed services. In combination with our OTT setup set top bars, we now have robust multi screen digital content distribution. More importantly, when combined with our retail commerce platform, we now offer unprecedented capacity capability for multi screen, cross platform integrated digital marketing. Data integration across our network of media assets and partners allow brands and marketers to convert numerous traffic during marketing campaigns into identifiable users that can be tracked across our network of media assets and partners. Merchants will be able to more effectively engage and manage their customers and convert into sales on our retail commerce platforms. 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 had a very strong quarter. Revenues grew 39% year on year to RMB24.2 billion, with China retail marketplace revenue growing 41% year on year. Activity on the platform is robust, with 423,000,000 annual active buyers and 410,000,000 mobile MAUs. We have completed a successful mobile transition with mobile revenue as a percentage of total China Commerce retail revenue reaching 71%. Here are some financial highlights. Our March quarter year on year revenue growth rate of 39% was the highest annual growth rate in the past 4 quarters, and it was driven primarily by the robust growth in our online marketing service revenue and exceptional growth of our cloud computing businesses, which grew 175% year on year. We believe this growth in our China retail marketplace clearly demonstrates a recognition of the broader value proposition we provide to our merchants and brands. For full fiscal year 2016, revenue grew 33% to over RMB100 1,000,000,000. Our ability to monetize the users on our platform continues to improve. Revenue per annual active buyer has been increasing for several quarters, reaching RMB189 in March quarter. On the mobile front, mobile revenue per mobile user has also been increasing for several quarters, reaching RMB123 in March quarter. We believe the monetization improvements this quarter are driven and will continue to be driven by 2 trends in our business. First, the increased engagement of users on our e commerce media platform as we launch social and community products on Taobao Marketplace. 2nd, the broad value proposition created by this engagement that we offer to merchants and brands. This includes not just sales generation, but also marketing, brand engagement, customer acquisition and retention and the future opportunity for upsell. So let's take a look at the quarterly revenue breakdown. Cloud computing and Internet infrastructure revenue grew 175% year over year. The growth was primarily due to an increase in the number of paying customers, which have more than doubled since a year ago, quarter to more than 500,000. Also, to increase in their usage of more complex offerings, such as our content delivery network and database services. Other revenue increased to 14% year over year. The growth was primarily driven by the increase in revenue from mobile Internet services provided by UC Web and Automating. Excluding revenue related to the SME loan business from both this quarter March quarter 2015, other revenue would have increased 51% to RMB1.5 billion this quarter. Please recall that the year ago quarter included interest income from the SME loan business that we disposed to ANT Financial in February 2015. Quarterly margin trends. You can see that our non GAAP EBITDA margin was 48%, slightly lower than 49% in the March quarter of last year. Full year fiscal 2016 non GAAP EBITDA margin was 52% versus 53% in full year fiscal 2015. We do see operating leverage from our core business, offset by our strategic investments. Our core marketplace business continues to be very healthy, with EBITDA margin at around 60%, reflecting operating leverage. We will continue to develop and consolidate new businesses. For example, we will be consolidating Youku, Lazada in the coming quarter. And they have information in public discourse, which that you can tell they're still in a loss making, but they are strategically important to us. Going forward, we'll be giving you further transparency on our core marketplace performance as well as our new business performance. Cost of revenue excluding stock based compensation was RMB8.5 billion. As a percentage of revenue, it increased year over year, primarily due to an increase in costs associated with our new business initiatives, mainly our mobile operating system, entertainment and OTT service. In addition, logistic costs relating to fulfilled services provided by our affiliated Cainiao network increased. On a full year basis, we paid the Cainiao network around RMB2.4 billion related to logistics services, of which RMB689 1,000,000 occurred during the March quarter. Product development expense, excluding stock based compensation, was RMB2 1,000,000,000, which as a percentage of revenue was flat year over year. Sales and marketing expense excluding SBC was RMB2.3 billion, decreasing slightly as a percentage of revenue due to operating leverage. G and A was RMB 1,000,000,000, also a slight decrease as a percentage of revenue due to operating leverage. So non GAAP net income in the quarter was RMB7.6 billion, a decrease of 1% compared to RMB7.7 billion in March quarter 2015. Net income was negatively impacted primarily because of a foreign exchange loss of approximately RMB500 1,000,000 related to our hedging of U. S. Dollar obligation in connection with our M and A activities. Additionally, this quarter, we had a loss share from Ant Financial instead of a profit share. This is due to the net loss sustained by Ant during the quarter as a result of its proactive marketing and promotion activities to drive user growth and engagement, especially during the Chinese New Year holiday. Ants continues to invest to enhance their market leadership, which we believe is a very positive thing, given the enormous community ahead of it. Despite a quarterly loss at ANZ Financial, we believe we will derive long term value from our economic interest and are right subject to regulatory approval to convert into 33% equity in Ant Financial, which recently completed a US4.5 billion dollars round of financing from third parties at a post money valuation of $60,000,000,000 You see in our results announcement that we have provided an additional disclosure on our share of results from our equity investees. We believe this is useful disclosure for investors to understand the performance of our major investee companies. Our share of Kubei loss reflects Kubei's high investments and promotional spending during its startup stage in December quarter, which will pick up on a quarter lag basis. We expect such share of loss to decrease in the future. Cainiao's business continues to progress well. Its recent fundraising validates its business progress and the future potential. We expect Cainiao to continue in this business. Regarding free cash flow, CapEx and cash, we continue to generate significant free cash flow. Our cash flow allows us strategic and operational flexibility to invest in technology and acquire the resources to accomplish our strategic objectives. In March quarter, we generated RMB4.4 billion in free cash flow. And in fiscal year 2016, we generated RMB51 1,000,000,000 or about US8 $1,000,000,000 free cash flow. Total cash CapEx expenditure in the March quarter were US683 1,000,000, a slight decrease from RMB700 1,000,000 during the same quarter last year. As of March 2015, our cash, cash equivalents and short term investments were RMB112 1,000,000,000, a slight decrease from RMB118 1,000,000,000 at the end of December quarter due to net cash used for investment acquisition activity and share repurchase. The CNY112 billion cash balance is as of March 31 this year. JT Investment Portfolio. As a final note, we update our slide with regard to our major investing companies for investors to better understand their respective values. Looking ahead, our ecosystem keeps expanding and our business becomes big and more complex. In the new fiscal year, we plan to provide a greater degree of disclosure and insight into our business. This will include a few areas. 1st, we will provide annual revenue guidance. We believe annual revenue guidance will take some of the guesswork and uncertainty out of the investors' effort to model our growth trajectory. 2nd, we continue to invest for the long term with a priority on achieving our longer term strategic goals. These new businesses may have different cost structure and margins, especially when they are in developing stages. In order to help investors better understand our core business results as well as the development of our new business. When we report our Q1 of fiscal 2017, we plan to provide more clarity on financial performance of our core business versus new businesses. 3rd, Cainiao network has been developing rapidly, and we've already provided more disclosure today in this area to help investors better understand China's business, specifically how it is doing financially and how its performance impacts Alibaba's financial statements. We plan to share more about the business in the future. Additional information about these three areas will be shared at our Investor Day, which will be held in Hangzhou in mid June. For those not attending in person, the presentation materials will be available on our website. That concludes our prepared remarks. Operator, we're ready to begin the Q and A session. Thank you. Thank you, ma'am. Ladies and gentlemen, we will now begin the question and answer session. We have the first question from Erika Paul Welkom from UBS. Please ask your question. Yes, thank you very much. I have two questions. My first question is about your value adding to merchants. I think you've been talking about how Alibaba's role with merchants has been evolving from one of a sales channel to become a more of a holistic marketing channel. Could you share with us how many and what type of your merchants are working with Alibaba on these marketing initiatives? And my second question is, in the earlier remarks, Joe talked about bringing key initiatives from investment phase to cash generation. Just wonder if you can share with us where you are in the investment cycles for the strategic initiatives like cloud computing, digital entertainment and local services. And wonder if you can frame the size of investments for these initiatives into 2000 or rather fiscal 2017. Thank you. Thanks, Erica. This is Daniel. I would like to answer the first question. As you know, actually today on our China retail platform, in both Taobao and Tmall, together we have 100 of millions of active sellers on our platform, and all these sellers are our active marketers, and they spend marketing dollars on our P4P, on our display ads, and also in our affiliate networks. Today, their evaluation of the effectiveness of the marketing dollar spending is not only to look at the immediate sales and immediate ROI on our marketplace, but for a lot of the retailers and brands, they have the offline business. They will also look at the effectiveness of this marketing spending in terms of the acquisition of the new customers, in terms of managing the existing customers and retained customers. Actually, this will, as I said in my script, this will ultimately benefit their entire business, both online and offline. So, actually today, this is our solid marketer base and we expect that they will continue to do so in our enhanced ecosystem, not only in our marketplace today, but also in our Inshape media and entertainment ecosystem. Okay. Hey, Erica. Thanks for your second question. Both myself and Maggie will cover that. You mentioned the different businesses in different investment phases, and you wanted to sort of understand the sizing of investments. I think you mentioned cloud computing. I'll cover that and then I'll let Maggie talk about the digital entertainment. So as you can see, the cloud computing business grew 175% of revenues year on year. In absolute dollar terms, it's also coming into a significant dollar level. So we're very, very excited about this business. As I said in my prepared remarks, we are now already one of the largest cloud computing businesses in the world. So we're benchmarking not just in China, but also against the world. The business, as you know, can gain tremendous scale. When it reaches tremendous scale, it has a tremendous amount of operating leverage. So we are looking at over the course of this year that this business will not require a lot of additional investment into the business as it's generating cash flow. So that is how we look at the cloud computing business, high growth and also coming into a high trajectory in terms of operating leverage. I'll turn the mic over to Maggie to talk about digital entertainment. Right. So, digital entertainment is a relatively new area that we invested. When you look at it, the major asset there right now is Youku. We also have music and sports that are relatively small. So we just closed the Youku transaction in April. It's very recent. And then if you look at the market consensus, before our acquisition, Youku was also a public company, You will notice that there's going to be a couple of percentage points of margin dilution to ours. But the thing is, like Joe said in his remarks, when you look at all of our past business, we have this history of investing in long term initiatives with patients. So new initiatives, very interestingly, typically takes like 5 to 7 years to grow in the substantial profitability. So, we're going to, in near term, continue to invest in this digital entertainment area. This is just the beginning of the business. We'll take the next question, operator. Thank you, ma'am. We have the next question from the line of Sean Zhang from 86 Research. Please ask your question. Thank you. Congratulations on a strong quarter. We recently noticed you are rolling out product level and store level Tianjin with 1,000 people saw the interface initiative. Wondering what's the timetable for a full launch? And so far in your testing phase, what kind of results you have seen? Maybe management can share with us some color there. And also, we also noticed some increased effort to support Tmall trends, such as the search portal on Taobao app is changed to highlight Tmall and personalization. Wondering what's the thought process here and what will be the trend for Tmall GMV going forward? Thank you. Thanks. This is Daniel. For the first question, yes, we as a platform, actually, our value add to our merchant is to enable them to operate their storefront effectively. So, today, what we are doing is to use the big data we have to help the merchant to tailor make their cell phones to the right audience and in the right location. So far, we are still actually in the beta test and we work closely with a couple of partners, a couple of sellers to do that. So far, the result is very encouraging because of the targeting, because of the data driven service, actually the effectiveness of the ROI of the traffic actually improved very dramatically, and we will continue to monitor the progress and hopefully we will pretty soon roll out this service to all our users, to all our merchants on our platform. We expect the merchants can utilize this big data weapon to maximize their return of the traffic they get in the storefront. For the second question, actually we always manage our business as a whole and Taobao Tmall has separate brands, but actually in Taobao mobile app, people can find items both from Taobao and from Tmall. We did not give any preference in mobile Taobao app, especially to promote Tmall products. Actually, what we changed is that it's basically for the convenience of the users because a lot of people want to actually select an item from Tmall directly. We give them a short pack. People can easily scan and get the results directly from Tmall. So that's all I want to do, all we want to do. And the purpose of this, again, is to improve the user experience. Thank you. Next question please. Thank you, ma'am. We have the next question from the line of Robert Lin. Please ask your from Morgan Stanley. Please ask your question. Good morning and good afternoon, everyone. Congratulations on the very strong results. I guess I have two questions here. I guess one is on the international. We announced the acquisition of Lazada. And we also noticed that the international retail has accelerated after our restructuring of the AliExpress platform. Can you provide some insight on how we plan to integrate the 2 platforms more in the medium term about are we separate operated potentially cross sell with 4 merchants. And I guess in terms of the timing, Joe, you pointed out that these are long term bets and there's 3 of them. Would you say international is one of those that will likely be more be profitable quicker than the others within those three that you mentioned. I guess the second question more on China logistics. We do appreciate the improved disclosure. In the cost of sales line, we talked about 3% of revenue, dollars 689,000,000 for the logistics fulfillment for the merchants. Can you provide additional insight on what that is? And how should we think about that cost going forward? Thanks. This is Daniel again. I'd like to answer the first question about the international expansion. Yes, Lazada is a very important acquisition. As people know, Lazada now has a very good brand recognition in South Asia countries, especially in 5, 6 countries, they are all in the leading position. In this market, actually, we have over 500,000,000 consumers, so that's why we think this is a good vehicle for us to expand to this area. Yes, in our portfolio, we also have our self operated, self built up AliExpress business, We are happy to see that there is good synergies between AliExpress and Lazada. In terms of the country's coverage, AliExpress is now very strong in Russia, very strong in some European countries and in the U. S, while Lazada is very strong in Southeast Asia. So, actually, this gives us a wider coverage and this is good for us to achieve our 2,000,000,000 consumer mission. In terms of synergy we can generate from these two businesses, it's obvious. What we want to do is, first, to leverage the merchant base we have, not only in AliExpress, but also in our China retail platform to help more Chinese merchants onboarding Lazada and help them to get access to the consumers in Southeast Asia. Actually, we are happy to see that after our acquisition, a lot of clients actually call me and ask these questions to show their interest. We expect that we will kick off this process as a very important component of the integration. In terms of profitability, I will say as we always do, we will invest in this international business. Actually, what we will care about is the mind share in the local country and the customer engagement and retention. We believe this customer with us, the merchant will be with us, and we will generate value. As long as we can provide value to the merchant to get access to customers, to serve the customers, then we can generate enough economics from this international business. Thank you. Yes, Rob. This is Maggie. Regarding to your question about the logistic costs we paid to China, when you look at the total cost for the full year, RMB 2,37,000,000,000, which was about 2% of our revenue paid to Cainiao. That's mainly associated with the logistics fulfillment services China provided to ATH, to the Ali Group, for certain businesses we conducted in the group, businesses such as Tmall Supermarket and our Rural. So, if you look forward, this area is still in early stage, so we're going to keep expanding. And then China is also going to follow-up, continue to provide this service. So if you look at the total logistic costs we're going to pay in the future, it will grow. Next question, operator? Thank you. We have the next question from the line of Eddie Leung from Merrill Lynch. Please ask your question. Good evening. Thank you for taking my questions. Two questions. The first one is about product categories. Would you mind sharing more color with us the recent performance of some of your key product categories? Because we have read articles and sometimes even press releases about the performance of some categories in certain regions. So wondering if you could summarize some of the trends and share with us. So that's the first question. And then secondly, also a follow-up question on China. So besides what Maggie mentioned about, for example, the geographical coverage and rural areas, So just wondering where we would see China going beyond China because we have been seeing more activities on AliExpress as well as some of these new regions specific e commerce business. Thanks. Thanks, Eddie. This is Daniel. For the product categories development, let me try to give you some color on this. First, what we can see is that the main categories such as apparel and consumer electronics still show very strong growth. Especially Q1, actually for apparel, and actually the winter time this year, actually it's quite unusual. It's not that cold in December and in January, but it's quite cold in February March. This actually drives the sales of apparel to a certain extent, but not dramatically. The reason is because most of the sellers, actually, their thought is not enough in late Q1 to support the sales of the winter products. For consumer electronics, actually, we are doing very well in consumer electronics, especially in large ticket items and supported by our affiliate network. For cell phones in March, I would say actually the entire market, the big picture is not that good because they are actually the supply chain for the entire business actually had a bit of headache in Q1. We can expect that in Q2, the business could actually warm up. Having said that, the entire market is actually almost fully penetrated by smartphone, and the total shipment for this year for the entire cell phone business, cell phone industry, won't show a dramatic growth, but I expect that e commerce will continue to take in share from the entire business. The last one is fast growing categories. What we can see today, especially in Q1, that's also driven by the Chinese New Year consumption. What we can see is the food, especially fresh food, and FMCG products and healthcare show very good growth. I think in terms of online penetration by category, food, especially fresh food still with a lower penetration, and we can expect the rapid growth in the coming quarter and coming years. Regarding the Cainiao question, I want to make it clear that Cainiao is not a traditional logistics service provider. So, by the time we set it up, we invested. We have right now 47% shareholding in China. It tends to be a data, logistic data company, the information company. So when you look at nowadays, we have like the 35 million around 35,000,000 packages being delivered. Cainiao has been only like less than 3 years old. Before Cainiao was there, packages had been handled, but never been handled at this efficiency as we have seen today. What Cainiao has been focused on is to line up and set up this information hub, information center, and utilizing the data it has to improve the efficiency in the whole logistic chain, rather than just providing fulfillment and delivery services. So, having said that, then look at what the cost we pay to China. These are services provided that China is aligned to our, like HMO, supermarket and rural businesses. This is a kind of testing field for Cainiao to further set up its information hub and also to have this technical towards data usage to improve the efficiency for us and also for the partners in the logistic area. Our next question, operator? Thank you. Next question is from the line of Vivien Hao from JPMorgan. Please ask your question. Hi, management. Thank you for taking my question. I have two questions here. My first one is regarding the related impact from recent tax policy change and also more strict custom checks on DAIGO for both Taobao and Tmall platform. Can we get a rough sense of like Daigou percentage of our total GMV? My second question is regarding the outperformance of cloud computing. Is it possible if we can get a penetration or adoption rate of other cloud services and not merchants? Also, what should we expect as the margin profile going forward given the business scales up quite impressively? Thank you. Thanks, Vivian. For the first question, actually, on our Taiwan Tmall business, we have 2 main businesses relating to the cross border import. The first one actually is Tmall Global, which is not like Go, which is actually B2C model. We have a lot of foreign partners, foreign brands and retailers on our Tmall Global platform to do the cross border sales. The recent change in government policy do have some impact on Tmall Global Business, and also I think the entire import industry also has some impact. Having said that, actually, we are happy to see the government regulate this cross border import because actually we did observe that there are a lot of great activities in the bonded warehouse solutions sector. So, the changing government policy actually can eliminate all these activities, and we believe that Alibaba can benefit from this and to do whatever business model under the regulation. Actually, today, bonding warehouse and change of tax rate and the CIQ requirement, etcetera, do have some impact, but actually government will encourage, for example, the general trade model. This is all actually cross border, general trade, bonded warehouse solutions. Are all actually we're physically pursuing all the models available in the market, and we believe that the consumption is always there and people want to buy high quality products from overseas markets. The demand is so solid, and we believe the business will continue to grow. We're also happy to see that following the policy change, the government is actively monitoring the market reaction. Actually, our team is now working very closely with the government and the regulators to share our observations and give them our feedback. The other part of the cross border, actually, as you said, is a cycle. In our top of our marketplace, we have a global buy business, chuan chou go in Chinese. Actually, this is a personal daigou, an individual daigou. Actually, this business has been there for many years, and we see very active trading in this global buyer, and we also see a very magic phenomenon, which is a lot of social network and the talent opinion leaders arises in this global buy business. I think this is a very unique strength for Taobao to do this cross border social commerce Because for most of Chinese citizens, they are not aware of a lot of international products. Actually, they need an opinion leader. They need talent to share their experience and share their experience of the products and the service to them, so they will follow and to consume. So, this is the magic of Taobao and we will continue to do this to enable our consumers to find to enjoy the fun of cross border and enjoy the fun of Daigou in our Taobao marketplace. Thanks. Yes. Vivien, regarding the cloud question, you've seen that our cloud business grow very rapidly. If you look at the top line, it's growing at the 3 digits, and we expect that growth is going to continue. And I should say that Ali Cloud is getting very close to the breakeven point. So, if we want to turn this business into profit, then we can do it very soon. And I think that the growth is mainly coming from, number 1, increased number of paying customers. We reported we have over 500,000 of paying customers at the end of March compared to 240,000 we reported a year ago, so very rapid growth. And these customers across all sizes and across different industries. And another growth driver is the continued expanding the variable products and services, and also continued enhancement of the technology and the quality of these products. So, we are very optimistic to the progress we've seen that other players reporting at the beginning breakeven, then 16%, 18% of the margin and then continue expanding. We don't see any big difference from the iCloud and other players like Just to supplement what Meng said, Vivian, you also asked about the adoption rate of cloud computing from our merchant base. The cloud computing business is a business that its customer base is very wide, well beyond just the e commerce merchants that are doing business on our platform. So, we see a lot of potential in different segments, in corporates, in SMEs and also in government segments, And then in vertical segments like financial services, healthcare, games, developers. So, it runs the gamut. You should think about the customer base of cloud computing as well beyond our existing customer base. Now, our merchant base right now, a lot of them are using the service effectively for free because they're using the service in sort of one time situations. For example, on November 11, when there's a surge in volume and traffic their business, they will come on to our Qiu Sita platform to enjoy the cloud computing service for free. So, in terms of adoption, a lot of them are already on our cloud computing platform, but in terms of paying potential, I think there's a lot of room to grow. I'm Daniel. I just want to add one more comment on the first question. Yes, actually the government policy change actually do have some impact on our cross border import, but I have to say that today, in terms of scale, this business is actually in a low base and this won't have any material impact on our entire retail business. For our C2C global buy, actually this policy change does not have any impact. Thanks. Next question. Thank you. We have the next question from the line of Carlos Cringina from Bernstein. Please ask your question. I have two questions, one about land losses and one about loyalty, customer loyalty. Can you talk a little bit about the losses in financial? Shouldn't that business be at a large enough scale to acquire customers, grow and also make money at this point? I know you said in the press release and Maggie reinforced the view that you're confident that Ant will be valuable. So to set aside the private valuation round, can you add some color on any operational or business metrics that help us understand why you think there's going to be a lot of value from their business? Secondly, on a separate topic, do you believe there will ever be room for some type of loyalty program like Amazon does with Prime on your platform? Or is the type of program just not practical in a marketplace construct? And if you don't have something like Prime and you think of Tania Beauty Fulfillment Centers, do you think it will be able to attract sellers with fulfillment centers and scale them and make money with that business? Thank you. Hi, Carlos. This is Maggie. The answer question, if you look at in this quarter, we shared some losses from ANZ. Actually, in previous quarter, we have always sharing profit from them. That quarterly loss was mainly a result of its marketing and promotion activities that drive their user growth and engagement, especially during this Chinese New Year holiday. So, we are very happy to see that ANZ has been progressing very nicely, and their customer base and their various business expansions are very healthy. This also can be evidenced by their recent round of finance, which indicates the valuation was already over 60 $1,000,000,000 So, we think that overall, actually, if you look at the whole year, 20 16 fiscal for ANZ, they are a profit making business. We believe that this is still going to be the case. There is some seasonality there, also the strategic investment decisions are made for the next round of growth. We're going to do a deep dive on AM Financial on our Investor Day in June. For the question of customer loyalty program, yes, customer loyalty is so important in our retail business. And today we have over 400,000,000 active buyers on our retail platforms. One of the key operating targets is to maximize their customer spending across categories. Especially today, right after our acquisition of our digital entertainment business, Youku, and also our investment in Ele. Me, and how to cross sell our physical products with digital entertainment products and local service. Actually, this could create a good opportunity for us to enhance the use of this business and also to do the cross sales. So, we are very actively working on this, but we won't just replicate the royalty program for any other companies because actually we are such a unique such a unique landscape and our user base is huge enough. Also, we have a platform and we have very unique strength, which is not only us who can do this cross sales and to enhance customer loyalty, We have so many merchants, so many brands with us. Each of them has a strong desire to have their own customer loyalty program, have their own cross sell tool and services to enhance their users' business. So, we will try to maximize these synergies as a platform to improve the user's fitness and royalty for the entire platform. Thank you. Operator, we're ready for our final questions. Thank you. We have the final question from the line of Robert Peck from SunTrust. Please ask your question. Yes. Thank you. Two questions, please. The first is on Ant Financial. And Maggie, you talked about a 33% equity ownership. Can you just walk us through that process and how you go from the economic relationship to the equity ownership and how we should track that? And then number 2, Joe, if you wouldn't mind just touching base on your thoughts on the Yahoo! Process and the 384,000,000 shares they own and your view on those shares? Thanks so much. Okay. Rob, I'll address both questions. On the process of Alibaba Group to further participate in the actual equity ownership of Ant Financial is a process of regulatory approval. So, in order for us to hold a direct stake, we have to get specific approval from the regulators, from the financial regulators in China. And that is because ownership in financial institutions by foreign companies is very limited. There are no precedents for an entity like Ant Financial, and so the regulators are going to be looking at this as a case of first impression. But we're having a very constructive dialogue with them about this. So that's the process. In the absence of a conversion into direct equity, Alibaba Group will continue to share 37.5% of the profits of Ant Financial. So that's an either or situation. Your second question relates to the Yahoo! Process, which is something that is a little bit unknown to us because they're running their own process of selling the core business. We're not in that process. We expect that if they sell the core business, then they will continue to be a company that will continue to be a 15% shareholder in our company. So nothing will change. Thanks so much, Joe. Congratulations.