Earnings Call: Q3 2015

Jan 29, 2015

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group December Quarter 2014 Results Conference Call. At this time, all participants are on 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 Panno, Head of Investor Relations of Alibaba Group. Thank you. Please go ahead. Hello, everyone, and welcome to Alibaba Group's December quarter 2014 earnings conference call. With us today are Joe Tsai, Executive Vice Chairman Jonathan Lu, Chief Executive Officer Daniel Zhang, Chief Operating Officer Maggie Wu, Chief Financial Officer. Also, as you know, we distribute our earnings press release through Alibaba Group's Investor Relations website located at www.alivabagroup.com. So please refer to our IR website for our earnings releases as well as the supplementary slides of the company's 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 also 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 Form F-one as amended originally filed with the U. S. Securities and Exchange Commission on May 6, 2014. Any forward looking statements that we make on this call are based on assumptions as of today and we do not undertake any obligation to update these statements, except as required under applicable law. Please note that certain financial measures that we use on this call, such as 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. Good evening or good morning depending on where you are. Thank you all for joining. Jonathan, Maggie, Daniel and I look forward to discussing our business with you today. In the quarter that ended in December, which is our fiscal Q3, I'm pleased to report that we saw continued strong growth across our core operating metrics. Those who follow our company closely know that we analyze the health of our business by focusing on a few select core metrics. On each of these metrics, we continue to see strong growth. We grew gross merchandise volume across our China retail marketplaces because of robust growth of active buyers. We continue to expand our strong position and competitive advantage as the unrivaled leader in mobile commerce across China. Our business continues to perform well and our results this quarter highlight both the strength of our ecosystem and the strong foundation we have for sustainable future growth in China and beyond. My colleagues will provide you with a more in-depth look at our business operations and financial results. But before they do that, I want to highlight a few of our key growth areas. We grew gross merchandise volume across our China retail marketplaces by 49% year on year, driven by strength in both Taobao Marketplace and Tmall. In just the 3 months ended December 31, 2014, we achieved US127 $1,000,000,000 in China retail GMV. For the calendar year 2014, we achieved US370 $1,000,000,000 in China retail GMV, which demonstrates the unparalleled scale we have been able to achieve. A key reason for the strong GMV growth is the continued growth in active buyers across our platforms. An active buyer is someone who came 334,000,000 compared to 2 to 334,000,000 compared to 231,000,000 in the 12 months ended a year ago. This growth represents an increase of 45% year on year and was driven by an increase in active buyers throughout China with substantially faster growth from lower tier cities. For context, when you consider our 330 4,000,000 annual active buyers, this means that a number of consumers that now surpasses the entire population of the United States is shopping and buying annually on our China retail marketplaces. Yet this 334,000,000 Chinese consumers represents only about half of the Chinese Internet user population and about a quarter of the total population in China. These numbers highlight the significant growth opportunity we have before us. I next want to touch on an area that I know you're watching and analyzing closely, and that is our progress in mobile commerce. Alibaba continues to be the unrivaled leader in mobile. For this quarter, we achieved 265,000,000 monthly active users on our mobile commerce apps, which is a net increase of 48,000,000 active users compared to 217 monthly active users in the prior quarter. This is a sequential growth of 22% and a year on year growth of 95%. Alibaba leads the China mobile commerce market with an 86% share of total mobile GMV according to iResearch and our mobile Taobao app continues to be the number one mobile commerce app and in fact one of the most popular mobile apps in all of China. This strength in mobile commerce demonstrates our ability to attract mobile users with strong commercial intent on a scale that we believe is unrivaled by any of our peers in China or globally. Turning to mobile GMV. In the December quarter, we saw US53 $1,000,000,000 in mobile GMV. This is a 2 13% increase compared to the same quarter a year ago. Mobile GMV now accounts for 40 2% of total GMV transacted on our China retail marketplaces in this quarter, compared to 36% in the September quarter and 20% in the December quarter a year ago. Stepping back, if you look at how much mobile business we do every year, for the 12 months ended December, we saw US130 $1,000,000,000 in mobile GMV on our China retail marketplaces. It is safe to say that Alibaba is today very much a mobile company and we have positioned ourselves for more growth in mobile users in the future. Our mobile strategy is helping us to attract new consumers to our retail platforms that we might not otherwise reach. For example, through our strong success in the past quarter with both the Double 11 Single Day Shopping Festival and the twelvetwelve promotion, we introduced a large number of new mobile users to our platforms. And overall, we saw significantly increased and sustained mobile usage. These new mobile customers have now experienced the ease and convenience of shopping on our platforms and we believe these new consumers will help to drive even more GMV growth in the future. Maggie will address the revenue in more detail in her comments, but we are reporting today that mobile revenue from the China Commerce Retail Business increased by 4.48 percent year over year, primarily due to a greater proportion of GMV being generated on mobile devices as well as an increase in the mobile monetization rate. In absolute dollar terms, for the quarter ending in December, we delivered over US1 $1,000,000,000 in mobile revenue. We're seeing sustained progress in how we we monetize mobile. That's because consumers who come to use our mobile apps to shop with goods and services have clear commercial intent. And we are able to effectively convert that commercial intent into purchases that benefit our merchants and increase their appetite and propensity to allocate continued trend towards mobile provides us with a unique advantage to deliver a better consumer experience as well as more value to merchants. Because mobile users shop more frequently and we can serve them more targeted search results, we believe the increasing use of our mobile apps will fuel significant future growth in our China commerce retail business. Taken together, the results we are reporting today show our strong foundation for future sustained growth. Now, before I turn the call over to Maggie to go through the quarterly results, I want to address the news reports you may be seeing related to our interaction with the State Administration and for Industry and Commerce or SAIC in China. Let me first say that Alibaba is a company with strong values. Nothing is more important to than the trust we earn from our stakeholders, including our customers, business partners, regulators and shareholders. This trust is built on the expectation that everyone at Alibaba will act with absolute honesty and integrity to conduct our peers with the highest standards of ethics and transparency. Our commitment to ethical and transparent behavior is why we were so deeply troubled by an SAIC report released on January 23 that purported to publish the results of a product sample check in online commerce. As we said before, we believe this report was flawed and was based on arbitrary methodology and we gave our views to the SAIC. Yesterday, a so called white paper was posted on the SAIC website that specifically identified Alibaba and referred to a meeting between Alibaba and the regulators in July last year. We believe the flawed approach taken in the report and the tactic of releasing a so called white paper specifically targeting us was so unfair that we felt compelled to take the extraordinary step of preparing a formal complaint to the SAIC. I want to make sure you know the facts behind this so called white paper. Number 1, the first time we saw the white paper was when it was posted on the SAIC website yesterday. Number 2, like all international companies across the globe, we from time to time meet with regulators in the normal course of business. The meeting last July was no different. And at this meeting, we discussed working together to create a process to address key areas of consumer protection and orderly marketplace operations in online commerce. Number 3, today we observed that the SAIC has removed the white paper from its website. And 4th, I want to make it absolutely clear that Alibaba has never requested the SAIC to delay the publication of any report. At Alibaba, we believe in fairness. We support rigorous supervision of our company, but we also feel compelled to speak out when there are inaccurate and unfair attacks being leveled against us. The issues of counterfeiting and IP protection are a part of the problems in a growing economy today, whether it is online or offline. We have a zero tolerance policy towards counterfeits on our platform because the health and integrity of our marketplaces depend on consumer trust. To protect consumers, brand owners and legitimate sellers and to maintain the integrity of our marketplaces, we have a broad range of measures to prevent counterfeit and pirated goods from being offered and sold on our marketplaces. For example, we use data technology to analyze and track infringing products and identify hotspots for counterfeit distribution and sales. We work closely with Chinese public security, copyright, quality inspection and intellectual property agencies to take the online fight against counterfeits to offline perpetrators. We conduct periodic checks by using third parties to identify suspected counterfeit products on our marketplaces. And we have established cooperative relationships with over 1,000 major brand owners and several industry associations in connection with intellectual property rights protection to enhance the effectiveness of our takedown procedures. When we receive complaints or allegations regarding infringement or counterfeit goods, we follow well developed procedures to take swift action. If allegations of posting or selling counterfeit products are substantiated, we penalize the parties involved through a number of means, including enforcing the seller to reimburse the buyer, assessing penalties against the seller or limiting their ability to add listings, adopting a name and shame policy and closing down storefronts and permanently banning the seller from establishing another storefront and in the case of Tmall sellers confiscating the consumer protection security deposits that they have paid. These policies and procedures are tough and we work very hard to enforce them. In addition, we're devoting more resources to the fight against fakes. For the past 2 years, Alibaba invested over RMB1 1,000,000,000 in the fight against counterfeiting and to enhance consumer protections. In addition, we have a special task force of thousands of employees who are focused on the urgent fight against counterfeiting and we have just announced that we are adding 300 more people. Our efforts of taking the online fight to offline perpetrators are yielding results. Last year, Alibaba cooperated with Chinese law enforcement agencies in over 1,000 counterfeiting cases. As a result of this collaboration, 400 suspects from 18 counterfeiting rings were arrested, while 200 brick and mortar stores, factories or warehouses involved in production and selling of counterfeits were closed. When you step back and look at our overall efforts to combat illicit activities, our track record is clear. We're certainly not perfect and we have a lot of hard work ahead of us. In the global e commerce marketplace, there will always be people who seek to conduct illicit activities. And like all global companies in our industry, we must continue to do everything we can to stop these activities. We take these issues seriously because we are an organization built on the value of integrity. We also take these issues seriously because we are also victims of counterfeiting. Our entire success as a company is built on the idea that customers can come to our platforms and have trust in the quality of the products they purchase. And customers clearly continue to give us their votes of confidence, especially when you consider the 334,000,000 annual active virus and 45% year on year growth in active virus we reported today. With that, I would like to turn the call over to Maggie, who will walk everyone through our financial results for the quarter. Thank you, Joe. Hello, everyone. Joe discussed our key operating metrics for the December quarter. And now I'll walk through the details of monetization and our financial performance. First, the highlights. GMV grew 49% year over year to RMB787 1,000,000,000 and was up 42% sequentially. Active buyers in the last 12 months grew to 334,000,000, up 45% year on year. Mobile MAUs grew to 265,000,000 in the month in the end of December, a record high net adds of 48,000,000 MAUs in 3 months' time. Revenue grew 40% year over year to RMB26.2 billion and was up 56% sequentially. Non GAAP EBITDA margin was 58%, down from 50% in the year ago period and up from 51% in September quarter. Non GAAP net income grew 25% year over year to RMB13.1 billion. Diluted non GAAP EPS, this is excluding SBC and amortization of intangible assets, etcetera was RMB5.05, an increase of 13% compared to RMB4.45 in the same quarter of 2013. Year on year, our revenue grew 40% to RMB23 1,000,000,000. China commerce retail revenue grew 32% to RMB21 1,000,000,000 and accounted for 82% of total revenue. The lower revenue growth rate relative to GMV growth rate was mainly a result of the greater percentage of total GMV coming from mobile GMV, which monetizes at a lower rate than PC GMV. Long term, we see this as a positive trend for our business. Mobile devices are extremely data rich and will eventually offer much better buyer experience, both organic and commercial that we believe will create significant long term value for our merchants our merchants and for our business. The rapid growth of our mobile GMV may give us some near term growing pains, but it bodes well for the future success of our entire ecosystem. In addition to a mix shift to mobile, lower monetization on PC interface also contributed to the slowdown of China's content retail revenue. This was driven by user experience improvements to our ad targeting and our P4P ranking algorithm, which lowered CPCs. I view this user experience improvement as an investment in future revenue growth, because they make our marketplace an increasingly attractive place for buyers and merchants to business. After revenue grew 266 percent on a year on year basis in this quarter, driven by the consolidation of UC Web and Autonavvy as well as the growth of interest income generated by our SME loan business. This business by the way will be transferred to ANS Group very soon. So as disclosed in the IPO prospectus, we agreed to sell our macro loan assets business Ant Financial. After the closing, which is going to be very, very soon in days time, we will no longer consolidate revenue generated by the solid asset in our financial results. Please note that we will also stop consolidating the costs associated with lending of this business and we'll begin collecting annual fee of 2.5% of the average daily book balance of the macro loan made by ANZ Financial. We expect this transaction to be complete this quarter, actually very soon. And I believe the net financial impact of sales will be roughly neutral for Group. In December quarter, our blended monetization rate was 2.7% versus 3.05% in the year ago period. The lower blended rate year over year was primarily due to lower revenue growth in our China commerce retail business, which was driven by the factors I just discussed. As we've said many times, we operate the marketplace as a whole rather than thinking of it in terms of PC versus mobile. Our buyers experience this with you and that we optimize for their experience across several platforms. That said, we currently break out our mobile take rates for investors in order to make our progress monetizing mobile transactions and traffic more transparent. Our mobile monetization rate has continued to improve. As you recall, in the March quarter, it was 0.98 percent. In June quarter, it grew to 1.49 percent. And in September quarter, it was 1.87 percent. And now it's September quarter, it was 1.87 percent and now it's 1.96% for December quarter. In the future, we expect mobile monetization rates will be driven by our ability to deliver more value to buyers and advertisers as we develop mobile specific ad formats, continue to refine people we target and improve our ranking algorithms. These increases may not always be linear given seasonality and other factors that change each quarter, But we continue to strongly believe that the longer term trend in mobile monetization is possible. In the December quarter, our non GAAP EBITDA margin was 58%, improved from 51% last quarter. Please note that our fixed costs, this including payroll, co location, etcetera, have increased, which gives us operating leverage in seasonality strong quarters, such as the December quarter, but can significantly pressure margins in seasonality weaker quarters like March quarter. Furthermore, we consider discretionary spending on new initiatives a strategic priority to drive future growth and as such that spending will likely continue at similar or greater levels in future quarters. In any case, please remember that we do not manage to a margin target. Rather, we invest optimistically in the overall growth of the entire ecosystem. Now, let's talk about our operating expense. Non GAAP cost of revenue was RMB6.1 billion. Non GAAP operating expense was RMB5.6 billion. Non GAAP product development expense was RMB1.8 billion and non GAAP sales and marketing expense was $2,600,000,000 and non GAAP general and M and A expenses was $1,200,000,000 dollars Non GAAP product development expenses as a percentage of revenue decreased year over year as we stopped paying royalty fees to Yahoo after our IPO in mid September. Non GAAP sales and marketing expense as a percentage of revenue increased year over year, largely because of the consolidation of marketing expense of our investee companies, which is UC Opera Navy. An increase in advertising spending in lower tier cities as well as the promotion of new business in the initiatives also contributes to that result. Non GAAP G and A expense as a percentage of revenue decreased year over year because of a one time active set of donation expense of RMB1.3 billion made in quarter ended December 31, 2013. Our GAAP net income in the quarter decreased 28% year on year. On its face, that seems to be a big decline, but on an operating basis, we're doing just fine. The decrease in GAAP net income was primarily due to 3 things. Number 1, an increase in share based compensation expense, including the effect of mark to market accounting of share based awards in an amount of RMB1.5 billion. Number 2, RMB830 1,000,000,000 one time charge for financing related fees, RMB830 1,000,000,000 dollars dollars 830,000,000 won't charge for the financing related fees as a result of the early repayment of our US8 billion dollars bank borrowings. Number 3, a year on year increase in income tax expenses, primarily as a result of the expiration of EIT exemption period for 1 of our major subsidiaries as we discussed in last quarter as well. On a non GAAP basis, net income increased by 25% year on year. We generated RMB23 1,000,000,000 of free cash flow in December quarter, increased from RMB9 1,000,000,000 in September quarter and RMB17 1,000,000,000 in the same quarter of prior year. Capital expenditures in the December quarter were RMB1.5 billion, a decrease from RMB1.6 billion near the last period and $3,400,000,000 in September 2014 quarter. There are two reasons on the following CapEx. First, we incurred lower real estate related CapEx in this quarter. 2nd, non real estate CapEx decreased sequentially as we invested last quarter to build our infrastructure ahead of peak shopping season of the year. Our cash and cash equivalents position as of December 31, 2014 is very strong at RMB107 1,000,000,000. In addition, we have RMB23.7 billion short term investments. Yes, that's the end of our prepared remarks. We would like to open up for questions. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Thank you. Questions and congrats on the very strong GMV and active buyers growth. My first question is on the tick rate. I guess on the tick rate, I guess the primary reason is mobile shift as well as PC take rate is lower. I wonder how long does this lower take rate is going to last? And what was the rationale for the changes during the quarter compared to prior quarters? And then I have follow-up questions. Thanks. Yeah. Hey, Dick. This is Maggie. Yeah, take rate the decrease is coming from two reasons. One thing is like we said mobile monetization rate although it's continued to improve, but as the take rate level is lower than PTs, well, you see we have a much higher mobile GMV as a percentage of total GMV. So that's number 1. And number 2 is the PC the those efforts were made on PC, which improves the experience that may impact on take rate. I think we're going to continue to make efforts on user experience improvement. And so in terms of how that turned out, as I mentioned earlier, we believe that long term this will this will energy the whole ecosystem and then the take rate will reflect the improved user experience in merchants' returns. Then it's hard to for us to say which quarter it's going to be. And also in the following quarters, there are also seasonality. For example, in Q1 normally it's a low season. Yes. Okay. Thanks, Becky. Maybe just a quick follow-up. And how about the for the commission rate itself, if I just do a simple math on the commission rate revenue, it seems to come down as well year over year. Was it mainly due to some of the rate changes? Or what are the reasons behind it? And maybe lastly, just wonder, I guess Joe commented on the on some of the other press, some of the news on the SAIC issue. Wonder, is there any impact maybe in the Q1 or in the near term? Thank you. Yes. The commission rate changes, it reflects certain category mix changes. So that's really the reason. Hi, Dick. So the as you saw, the SAIC report, we believe, was based on fraud methodology and we have been very vocal about protesting and we're prepared to file a complaint about that. Obviously, any time you have a situation like this, it doesn't help. But I think we want to take a step back and look at the bigger picture. In Q4, we added 27,000,000 new active buyers. So now we have a base of 334,000,000 active buyers. These people wouldn't come to our website to purchase things, if they are getting bad quality stuff on our site. It's really a vote of confidence from our consumers that we're seeing. And the other thing is we're seeing very good mobile growth. We are generating 265,000,000 monthly active users. If you compare that to the last quarter, that is a net add of 48,000,000 new monthly active users on mobile, just in 3 months. So we're very excited about that. And this is long term positive for the business. Great question. Thanks a lot, Joe and Maggie. Thank you. Thank you. Your next question comes from the line of Angela Mo from Morgan Stanley. Please ask your question. Thanks. I just had a couple of questions on more on the top line end users. So first on the GMV, could you provide a little bit more color on the trends? Given W11, we would expect a little bit of potential pull forward. Or could you comment a little bit on December quarters? Do you see any general slowdown? And also the trends in January so far? So that's the first thing. Angela, it's Jane Penner. We're having a very hard time hearing you. I'm not sure if your connection is bad. Could you try that again? Yes, sorry. Is this better? Yes, it is better. So okay. So first question on the GMV, if you could provide a little bit more color on the general trends on a monthly basis, given your double 11 probably resulted in a little bit of a full forward in demand. Did you see any like slowdown in December and the trend so far in January? I guess looking out into the March quarter, given Chinese New Year is later this year, do you expect that to add on a little bit of a boost for the quarter? Yes. Actually the GMV in Double 11 we hit a new high and let's say we achieved RMB 57 1,000,000,000 in a single state. And we do see some seasonality in the Q1 because actually the Chinese New Year in this will be in this February. And actually, but we see the trend actually is in line with what happened in the previous years. So we believe that our GMV will continue to grow as a result of our continuous acquisition of the new customers, especially in the low tier cities. Okay. Thanks, Angela. The second question sorry just one other question on the CPC rate. I think you mentioned that that was down. And Maggie had talked about increasing the user experience etcetera. I mean is this sort of related to the more targeted sort of essentially customization of the web pages, right? So essentially you're helping your merchants expect this to essentially result in a little bit pressure on the monetization rate? Yes. Actually the personalization of the web page. For the CPC actually had some decline and because that we have we launched a keyword recommendation tool and this tool will suggest to our advertisers some long tail keywords. Obviously, these long tail keywords will have lower CPC because there is less demand for them. And the second reason is that we decreased in July, we decreased the rate of the keyword bidding and add more personalization components in our ranking methodology. And we believe this change will improve the relevance of the P4P search, but obviously, this will lower the CPC. And from the last reason for which might have some negative impact on CDC is that we continue to deliver personalized and customization search results in our organic search. And then people will have actually have more pay more attention to this organic sales because it's more relevant to them. Okay. Thank you. Thanks, Angela. Next question please. Thank you. Your next question comes from the line of Alan Halliwell from Deutsche Bank. Please ask your question. Thank you very much. Two questions. One of them would love to get a little more clarity on your promotional spending. I assume that ranges from subsidies on kuai d taxi hailing to other things. I would love to get a better sense as to what the magnitude of that was in the quarter? And how you think about these O2O initiatives going forward? And then I think my second question was somewhat was largely answered. But net net, it looks as though ad revenues grew really kind of 20% year on year. In addition to the tweaks around the pay for performance algorithm, were there any other is there any other color you can bring to bear that would imply that commissions obviously grew much more strongly than ad revenues? Thank you very much. Yes. Alan, in terms of the sales and marketing spending, we see that this quarter is we just talked about the spending on the promotional activities for our own core business as well as consolidation of some of the investees. This actually didn't include the significant spending on the taxi business, because currently that business is promoting the online payment, which is the cost is kind of verified by the ANZ Group. I think going forward, as I said, we're going to continue to invest, including invest in sales and marketing, because the new business as well as the existing business there's we see the potential and we're going to we do have the relatively higher margin to invest. So overall, I think I will not change my message based on 1 quarter on the margins. So that also gives you a sense of our continuous spending and investment in terms of market. So your second question is about the commission. Yes, I think if you compare to online marketing revenue, commission grow at a higher rate. So going forward, as Daniel talked about our continuous efforts on the user experience improvements, etcetera that will more impact put more impact on the P4P, right? So, yes, that's why when you compare the growth rate for the 2 revenue items, the online marketing, which mainly includes the PIPORT shows a brand is slower growth rate. Thank you. Thank you. Your next question comes from the line of Alex Yao from JPMorgan. Please ask your question. Hi, good morning and good evening everyone. Thank you very much for taking my question. The first one is, can you guys help us to understand the 2015 investment strategy and the priority? Where do you look at for the bigger opportunities? Prioritize your resource allocation? Secondly, can you give us an update on the integration with UCweb and AutoNavy, the financial impact in the we have the 334,000,000 that accounts for only 50% of the Internet population in China and only one quarter of the whole population in China. Missed focus to keep expanding the buyer base. That actually has been the driver and will be the driver of the growth of our GMV. So that's the policy for the core business growth. And at this time, we also have other initiatives and to integrate those targeted companies we acquired, invested and as well as keep exploring the globalization strategy. So in terms of the integration of the invested company, maybe on Yes. This is Jonathan. I'll give you the update of the UC Web and auto labor investment. On the good view, the investment for UC Web is very strategic and important to our group. User web has good understanding of mobile users' behavior and also mobile traffic. YouTube web's cinema search is by now is the number 2 mobile search player in China, BYJU in terms of unique visitors. This way has more than 100,000,000 daily active users. After acquisition, Zuzuru has improved the mobile aspect capability and mobile experience of Taobao users. And regarding the Autolaby, Autolaby provides essential LBS and banking information to our marketplace. After acquisition, Autolavie is the sole supplier of mapping service of Honey Papa Marketplace. AMAP is the number 2 mobile app map app in China and provide key support for Taobao local service. Due to its solid navigation business, Autodavia has strong cooperation and working relation with the automakers in China. And can support Alibaba Group growth of Tmall Auto Channel and UnoWEST installation into auto mobile. Great. Next question please. Thank you. Your next question comes from the line of Alicia Yap from Barclays. Please ask your question. Hi, good evening everyone. Thanks for taking my questions. I actually have follow-up questions regarding the comment on the lower pay for performance monetization on the PC this quarter. So I think Maggie or maybe management, can I just get some more colors that when was the adjustments first to roll out? And it does seem that it will also impact the coming quarter. So how should we expect that to affect marketing revenues? And then in relation to that, how should we reconcile the comment that you have last quarter when you say you guys actually roll out the new recommendations to improve the conversion rate. And then for this quarter, we also see the Taobao GMV growth continue to reaccelerate. So I just wanted to maybe you guys can share some color how should we reconcile the 2 different kind of like one is impacting the revenue versus the other one supposed to be improving? Thank you. Yes. This is Daniel. Let me try to give you more color of our Pay for Performance business. And as I said before, we did a lot to try to improve the ROI of the advertiser and not rather than just look at the revenue. And we try to make sure that people spend money on our pace as they can get a better result and better ROI. So that's the principle of our P4P business. So that's why we try to continue to personalize our P4P results and to add more features of the personalization and also consider the quality of the promoted items. So that's the result is that the bidding process is only one of the components in the to win the PPP and we also have to consider other factors. But the main purpose of this is to ensure the merchant can get the benefits and continue to spend money on our platform in the longer run. So we believe that P2P model is actually is a discovery mechanism by the market. So we believe as long as our market can continue to bring value to our merchants. Our consumers can stay with us, continue to our users continue to grow. The merchants were willing to pay spend more money on our platform. So then how long should we expect this to affect the marketing revenues in the coming quarters? How long should we expect that to normalize on a year over year basis? It's hard for us to give a near term guidance accurately seeing how long that okay. What we believe is that it's eventually as well as we bring the benefit to merchants, it will get there. However, there are some near term impacts since we just started this personalization efforts and other efforts improve. So there will be some impacts for near term. Okay. I see. Okay. Understood. Thank you. Thank you. Your next question comes from the line of Piyush Mubayi from Goldman Sachs. Please ask question. Thank you. In the December quarter, you've benefited from new categories such as auction transactions. Could you talk about new categories that we could see it come on board in the near future such as pharmaceuticals? And if possible give us a sense of how large these new categories could be? And my second question addressed to Maggie is Maggie, we see margins EBITDA margins on a non GAAP basis have bounced around in the past three quarters. Maybe if you could help us quantify the impact of consolidation for the quarter? And if possible, give us a sense of how we be thinking of the next few quarters? Thanks. This is Daniel. Let me answer your the first question. And the top actually what we can see in Q4 is that our accessories and furniture and decorations and also the other auction model actually experienced a high growth. And actually when we look at these categories actually the they generally have a lower Internet penetration in China. So we can see a great potential in the future for the further growth. And in terms of the pharmaceutical, again in China now the primary online sales of pharmaceuticals is quite actually it's very low compared to what it is in the U. S. And you may know that we have a our pharmaceutical business. And today we our platform, we have a lot of merchants who have the license to sell the farms online, actually the online farmers. But today they only sell the OTC drugs. But what we are doing right now is try to work with the government and with the partners to see, is it possible to sell the drugs and the prescription. So what we can see is that these new categories will continue to grow in the future. Thanks. Yes. Regarding the EBITDA margin, I will not change my message of EBITDA margin just based on this 1 past quarter. If you look at our fixed costs like payroll co location etcetera, they have increased. This gives us operating leverage in seasonally strong quarters. So for example, summer quarter when you look at the revenue, right, RMB26 1,000,000,000 versus previous quarter is a lot higher. So operating leverage in revenues seasonally strong quarters and pressure rise to margin in seasonally weaker quarters, because there are certain costs fixed over there. Furthermore, we consider the discretionary marketing spending on initiatives such as our local service or mobile OS, the digital entertainment etcetera. These are strategic priority to drive future growth. And as such, that spending will likely continue at a similar or even greater levels. So in any case, please remember that we don't manage to our margin targets rather we invest in new and existing business in order to create long term growth. Thank you. So overall, yes, EBITDA margin has to remain changed for the year. Thank you. Your next question comes from the line of Thomas Chong from Citigroup. Please ask your question. Hi. Thanks for taking my questions. I have two questions. The first one is your Vuo City's initiative. Can management give us some color what's the goal in 2015 about the rural cities penetration? And my second question is about the expansion in product categories. Apart from healthcare, what other product categories do management think will further penetrate in 2015? And also how should we think about your digital entertainment initiative for this year? Thank you. Thank you. This is Jonathan. Regarding the rural areas study, I'd say it's in right now it's in the early stage. As you know that 34% of Chinese people in urban area use e commerce, but only 5% of Chinese people in the rural area do. So this is a big opportunity for long term. And our vision is that we will enable the farmers to sell their farm product to 50 people and at the same time will encourage Chinese China 600,000,000 farmers to buy online from Taobao. There are also an opportunity to bring some large agriculture categories that are currently offline, including fertilizer and farm equipment. And right now, we are starting to bring bridge office to domestic local residents who are not our staff, but our partners. This village office measures get commission from the sellers. This report by on behalf of the local committee, help them collect products and arrange payment because the village the villagers often do not have Alipay or Internet. British Western pay cash to village office to pay via Alipay. They then help them to also help them to receive the package. And Alibaba will establish operating center managed by our staff in county managing this village office and in charge of making campaign locally. Yes. So we just begin this U. S. Strategy and we have already established office in some areas. Yes, in terms of the fast growing category in 2015, I would say in addition to the furnitures and decorations and car accessories, I expect that large electronic appliance and food and groceries and these categories will continue to grow online, because actually for larger clients actually now experience a transition to the smart equipment. So all the large electronics plants are will be the Internet equipment smart equipment. So we can see the large change condition. And in terms of groceries, what we can see is that people will actually people buy this stuff. Most of people are actually they're the city buyers. They buy again because of the use of the food and they eat up the food and use of the groceries. So people buy it for convenience. So online shopping gives us the most convenient way to do that. And in terms of the digital entertainment, this is very important strategy to us. We are working on this very hard and we as you know we have already invested in Youku to Dou. And on top of this PC and mobile channel to distribute the digital contents, we are also working very hard to promote our OTT box and to promote a smart TV of our partners, which invented our Reno S. So we believe that living room is a very important channel and we try to reach the consumers in this new channel and we can distribute the various digital contents to them. Of course, in the digital strategy, content is very important and we will be very disciplined and selective to purchase very unique content as well as to self produce some unique content to give people very unique experience on our content operation platform. Thank you. Thank you. Your next question comes from the line of Carlos Kershner from Bernstein. Please ask your question. Thank you. I have two questions. If my math is correct, Taobao GMV accelerated 400 bps, while Tmall decelerated 1800 bps sequentially. Can you help us understand the drivers for both the Taobao GMV acceleration, but most importantly the Tmall GMV deceleration? Secondly, over the last few weeks, we saw several events that suggest that Unfinancial and Alibaba will build some type of consumer credit business including the notice about the preparation of personal credit rating by the PBOC to N Financial and the launch of Sesame Credit by Alipay. Can you tell us what are your aspirations in consumer credit? And maybe help us understand the role that Alibaba will play versus Ant and if you're going to take credit risk and the potential implications on the balance sheet? Thank you. For the first question on the growth of Tmall, actually on an absolute dollar basis Tmall GMV still grows of RMB110 1,000,000,000 year over year and RMB117 1,000,000,000 sequentially. So actually this is very clear that Timo still exists the robust growth. Since in Q4, we have November 11 and the year over year growth of GMV on November 11 and also the double twelve December compared to what happened in year ago actually the growth rate in 2014 is lower compared to the previous year, because the size is already very huge. So we cannot actually we didn't achieve the same growth rate in November 11 and 2012. So this has some impact on our year over year growth rate. And this deceleration of Tmall GMV growth is also affected by the people shift to the mobile. Actually, when we look at our mobile strategy, we promote very heavily our Taobao mobile app in the past year. As a result, our users tend to use Taobao app even though they want to find Tmall listings because they can find Tmall listing on Taobao app. So actually that's resulting in fact that Tmall actually gets less organic mobile traffic on this mobile app compared to on the PC time. So looking forward, we will work very hard to promote the Tmall mobile app and to get more and more organic traffic on our on the mobile side? Thank you. Yes. Carlos, address the thinking on Financial Services. First of all, all the Financial Services business will be carried out through Ant Financial. So Alibaba Group will benefit from that through our profit share arrangement with Ant Financial. So if we get into a credit business where credit risk is being undertaken, being underwritten, Ant Financial is going to do that and any loans, consumer credit or SME credit will be the Ant Financial balance sheet. But Alibaba Group will participate in the profitability of Ed Financial. So sitting where we are at Alibaba Group, you sort of get the of both worlds. Now the thinking on Financial Services for AM Financial, there are really two reasons why we believe an Internet business can execute a sound financial services strategy. Number 1, Internet businesses have a lot of data on users. So with e commerce related data and payment data, you can create very good credit profiles of potential borrowers that is merchants and also consumers. And number 2, Internet platforms are very good distributors of financial assets. So we have already seen the success of Ant Financial in distributing money market fund products. So we think having those advantages of data and distribution capabilities and financial is very uniquely positioned to execute its financial services strategy. Thanks. All right. Thank you. Your final question comes from the line Erika Poon Wirtgen from UBS. Please ask your question. Erica, your line is open. Please ask your question. Yes. Hi. Thank you. My first question is for Joe. Just wanted to ask you in 3 years' time, how much do you think the mobile will contribute to your overall GMV in sort of rough term? And do you expect that after all the efforts in improving the user experience and the ROI of the advertisers that your mobile take rate at that point will be closer to your PC take rate? That's the number one question. And the second question is that we've been hearing recently potential changes in the VIE structure. Just wanted to check what do you think are the potential changes for Alibaba? Thank you. Yes. Okay. Well, it's also always hazardous to do a 3 year projection of mobile. What just look at the facts, right? In this quarter, we have 42% of GMV already coming from mobile. Having said that, we don't think the desktop computer is going away. E commerce is the kind of activity where people want sit down and spend time, especially on large ticket items. And that usually will happen still on a desktop computer. And so we see people buying stuff on mobile that are more impulse buy items. But over the longer term, we think that probably most of our users will have both purchased on PC, but also have purchased on mobile. We now have 3 35 sorry, 334,000,000 active buyers. And our monthly active user base on mobile is already at 265,000,000. So I think the future is very much mobile. On your VIE question, these are draft rules that we that the regulators are proposing and various lawyers and parties are going to submit comments. We're taking a wait and see approach. We're not going to comment further on that question at this point.