First Time Loading...

Alibaba Group Holding Ltd
NYSE:BABA

Watchlist Manager
Alibaba Group Holding Ltd Logo
Alibaba Group Holding Ltd
NYSE:BABA
Watchlist
Price: 81.26 USD 0.57% Market Closed
Updated: May 25, 2024

Earnings Call Transcript

Earnings Call Transcript
2019-Q2

from 0
Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group's September quarter 2018 results conference call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question-and-answer session.

I'd now like to turn the call over to Rob Lin, Head of Investor Relations of Alibaba Group. Please go ahead.

Robert Lin
Alibaba Group Holding Ltd.

Good day, everyone, and welcome to Alibaba Group's September quarter 2018 results conference call. With us are Joe Tsai, Executive Vice Chairman; Daniel Zhang, Chief Executive Officer; Maggie Wu, Chief Financial Officer. This call is also being webcast from our IR section of the corporate website. A replay of the call will be available on our website later today.

Now let me cover the Safe Harbor. Today's discussion will contain forward-looking statements. These forward-looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations. For detailed instructions of these risks and uncertainties, please refer to our latest Annual Report on Form 20-F and other documents filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we do not undertake any obligation to update these statements, except as required under applicable law.

Please know that certain financial measures that we use on this call such as adjusted EBITDA, adjusted EBITA, adjusted EBITDA margin, adjusted EBITA margin, marketplace core commerce adjusted EBITA, non-GAAP net income, non-GAAP diluted EPS and free cash flow are expressed on a non-GAAP basis. Our GAAP results and reconciliation of GAAP to non-GAAP measures can be found in our earnings press release. Unless otherwise stated, growth rate of all stated metrics mentioned during this call refers to a year-on-year growth rate versus the same quarter last year.

With that, I will now turn the call to Joe.

J
Joseph C. Tsai
Alibaba Group Holding Ltd.

Thanks, Rob. Thank you all for joining us. Just in the past month, global macroeconomic conditions have become more uncertain. People wonder about potential reverberations from the global economic slowdown, the threat of rising interest rates and political and debt turmoil in Europe. In the case of China, we see reports of decelerating GDP growth, weak Purchasing Managers' Index, and stressed equity markets. I know that Alibaba investors have many questions about the operating environment in China, so I want to give you a straightforward assessment from our vantage point.

On China macro, retail sales growth was 9% according to the latest July and August data from the National Bureau of Statistics. The NBS data shows weakness in large-ticket items, such as home appliances and autos, which is consistent with the view that consumers see uncertainty in the future and are cutting back on durable goods purchases. However, on Alibaba's China retail marketplaces, we see continued robust growth in consumer staples, cosmetics, and apparels.

In consumer electronics, growth decelerated especially in cell phones due to the lack of major technology upgrades and new product offerings. While NBS data shows 24% growth in online goods sales in this quarter, overall growth of physical goods GMV on Tmall, excluding unpaid orders, was 30% year on year. Accordingly, we believe that Tmall made further gains in market share.

While in the short term, people may be concerned about cyclical factors, I would like to point out three long-term secular developments in Alibaba's favor. In fact, Alibaba is proactively contributing to the acceleration of all three of these developments. First is the phenomenon of middle class consumption upgrade. China's 300 million middle class consumers have experienced significant real wage growth over the past decade, and they are looking for high-quality products to satisfy their discretionary spend and an increasingly sophisticated lifestyle.

The OECD projects that by 2030, China will have 850 million people who will emerge into the middle class, further accelerating the consumption upgrade. Whether it's high-quality imported products offered on Tmall Global, or overseas travel experiences through travel portal Fliggy, or videos on digital entertainment platform Youku, or on-demand meal delivery and grocery delivery services from Ele.me and Hema, Alibaba is driving a comprehensive consumption upgrade that cannot be matched by any peers.

In our recently announced strategic partnership with luxury group Richemont, we are further tapping into the lifestyle upgrade opportunity by offering Chinese consumers easy access to a broad collection of luxury products both at home and when they travel abroad.

The second long-term development is the capacity and increasing availability of consumer credit. As of March this year, China's household debt was 49% of GDP compared to 77% in the United States, so that there's ample capacity to take on credit to fuel consumption. Alibaba's affiliate Ant Financial specializes in providing consumer credit to underserved individuals who borrow in small amounts and require flexibility to revolve frequently. The penetration of the amount of consumer credit to total online sales, while still in the low teens, has increased significantly during the first seven months of this fiscal year.

The third trend that Alibaba plays an active role in developing is digitization of the retail sector. This means that Alibaba's total addressable market will be the entire U.S. $5 trillion retail economy in China. Through our New Retail strategy, we have eliminated the E from e-commerce, as the distinction between online and offline sales goes away when shoppers buy from anywhere anytime using a mobile phone. This is made possible by digitizing the entire consumer journey, inventory tracking, and logistics work flow.

Digitization enabled by the technology and knowhow of Alibaba will help retailers to access a wealth of information about their customers and operations. We expect the value creation from traditional retailers' increased sales and more efficient operations will be significant, and this will ultimately accrue to the benefit of Alibaba as the enabler.

Now, I will turn the mic over to Daniel for his comments.

D
Daniel Yong Zhang
Alibaba Group Holding Ltd.

Thanks, Joe. Hello, everyone, and thank you for joining our earnings call today.

We delivered another strong quarter with 54% total revenue growth. The robust growth of our business speaks to the unique value proposition that we offer to customers through strong execution and commitment to innovation, demonstrating the power and the synergies of the Alibaba digital economy.

Today, Taobao is a large-scale, fast-growing consumer community that is the starting point of any retail journey for Chinese consumers. Over 45% of Chinese population discover and purchase products and content through Taobao mobile app. We are successful in acquiring and enticing even more new users onto our platform. Our unique value of highly relevant personalized content with a community-driven experience continues to attract new users while keeping existing users deeply engaged on a daily basis.

Annual active consumers increased 25 million to 601 million for the 12 months ended September 30, 2018. Around 75% of the increase in annual active consumers came from less developed areas. Growth of our monthly mobile app users accelerated this quarter. 666 million users are accessing our China retail marketplaces via mobile app monthly, an increase of 32 million users over the prior quarter.

Today's Taobao users are more diverse than ever with different demographics and consumption habits. To fulfill their diverse needs, we rolled out the new Taobao interface that presents unique user experience to different types of consumers. The secret sauce driving the success of this upgrade is our consumer insights, driven by AI. We have the world's largest e-commerce knowledge graph for products, content, and consumer insights, which can be used to active purchases and retain consumers. We have one of the leading proprietary technology infrastructures in the world that can handle hyperscale real-time computing and sophisticated algorithms.

For example, in this quarter, over 75% of our new consumers are from less developed areas. They may need a simpler and a more direct user interface with product recommendations that are value for money. On the other hand, advanced users who have years of Taobao experience with high spending power, they want more customized and relevant recommendations.

The new Taobao interface is also value enhancing for the merchant. By leveraging Recommendation Feeds throughout Mobile Taobao, we can help merchants create new demands by targeting the relevant consumer groups, building awareness and interest, activating purchase intent and retaining consumers in different stages of consumption. Today, the product and content discovery experience is very dynamic on Taobao, we believe recommendation is other effective way to distribute product and contents via curated post, video and live streaming activities.

During the quarter, we have seen some positive feedbacks. The engagement level of users who adopt the new interface increased, and the Recommendation Feeds section on Taobao front page enjoy higher click-through rate potentially. The new Taobao interface facilitates better consumer experience, enables brand and merchants to better target their customers. These Recommendation Feeds could potentially be monetizable in the future, supported by ongoing improvements of these engagement trends.

Moving onto Tmall, we continue to be pleased with Tmall's ongoing expansion of its leadership position in online B2C sector. Tmall's physical goods paid GMV grew 30% in this quarter. We enjoyed robust growth in all categories, including FMCG, home furnishing and apparel categories. Recently, we announced a partnership with Swiss luxury group Richemont to launch a China JV with Richemont-owned Yoox Net-a-Porter. This is a major development for the luxury industry in China, as the partnership demonstrates recognition by Richemont and the YNAP of the strategic importance of the China market, as well as Alibaba's leadership in enabling luxury brands to engage with and serve Chinese consumers both at home and abroad.

Our New Retail initiatives, including our self-operated Hema stores and the digitization enablement of Sun Art supermarkets are well on track. We are excited about the launch of our local service company, which combines Ele.me and Koubei under one management team.

Our cloud computing business continues to execute and expect a strong growth. Revenue grew 90% during the quarter, driven by growth of paying customers and a subscription for higher value-added products. Our cloud computing business continued to build a large and expanding ecosystem of developers and partners to enable the digital transformation of China. In September 2018, we held the largest cloud computing conference in China, more than 70,000 developers attended the conference in person.

We are making progress in our digital media and entertainment business. Daily average subscribers of Youku video growth continued to be robust, increased by 100%. Our original reality show Slam-dunk of China has become a new hit among young audiences in China. This speaks to the importance of having original production capability.

I also want to provide an update on our innovation initiatives. Amap, former AutoNavi, the largest map app and location-based technology platform in China, is providing important infrastructure to a comprehensive set of service offerings, both operated by us and by third parties. For example, in our on-demand delivery service, Amap provides essential mapping and optimal routing algorithms to delivering personnel. During China national holiday, the first day of the Golden Week holiday in China, Amap's DAUs exceeded 100 million for the first time.

Before I turn over to Maggie for financial highlights, I'd like to speak about our view of global macro environment that is top of mind from investors. The global economy is at a state of uncertainties, such as trade relationship, consumer trends, stock market and the manufacturing industry. The U.S.-China trade tensions create increased risk of instability. This is the third time in Alibaba's 19-year history that we have encountered a setback in the global economy. Where it gets difficult to do business, it is precisely the time to fulfill our mission to make it easy to do business anywhere.

Therefore, we have recently decided in the near term we will not monetize incremental inventory generated from our growing users and engagement. In the light of current fluid macroeconomic conditions that may affect their operations, we want to support the merchants doing their business on our platform.

Amidst these uncertainties, we see opportunities. First, we see opportunity to greatly expand our addressable market by executing our New Retail strategy that digitalize store-based operations. Second, we have built a technology platform that empowers the digital transformation of enterprises in China. This will not only create new ways of sales and distribution, but also driving innovation in the entire value chain of retail operations. At the core, our data insights on both enterprises and consumers and our leading cloud computing technologies created a unique Alibaba business operating system for this digital era.

Looking ahead, Alibaba has built a comprehensive digital economy that is as strong as any ecosystem. We believe by leveraging our technology, experience and resources, we can deliver digital transformation for all our clients in the areas of retail, marketing, finance, logistics, manufacturing and other supporting services within the Alibaba business operating system.

Now, I turn the call over to Maggie, who will walk you through the details of our financial results.

M
Maggie Wei Wu
Alibaba Group Holding Ltd.

Thank you, Daniel. Hello, everyone.

In September quarter, major financial metrics continued to record strong results. Overall, as mentioned by Daniel, our strong core starts with our vast, high-quality and fast-growing user base. We delivered another quarter of strong user growth in both MAUs and annual active consumers, facilitated by our effort to target new consumer groups and penetrate into less developed areas in China. Roughly 75% of the 25 million newly-added consumers are from less developed areas during the quarter.

We also see enhanced consumer engagement from our existing users that resulted in robust GMV results in which Tmall continues to expand market leadership in B2C e-commerce and Taobao recorded its third consecutive quarter of strong GMV growth. We have a large and actively engaged user base that continues to exhibit a strong growth. Consumers are attracted to the platform because it offers the best user experience. As I will address later in my remarks, we believe that this strong and active user base combined with the changes we're making on our platform, provides the foundation to expand our revenue generation in the future.

Total revenue for this quarter grew 54%. The increase was mainly driven by the robust revenue growth of our China commerce retail business, the consolidation of Ele.me and the Cainiao Network as well as strong revenue growth of Alibaba Cloud. Our revenue growth during the quarter continues to outperform that of all global technology peers.

Cost of the revenue in the quarter was RMB 46.8 billion, up from RMB 22 billion in the same quarter last year. Excluding the effect of SBC, cost of revenue as a percentage of total revenue increased by 15 percentage points to 53% this quarter. The increase is mainly due to three reasons: number one, our consolidation of Ele.me and Cainiao Network, resulting in higher cost in logistics and fulfillment; number two, the cost of inventory from our New Retail businesses are included due to gross revenue accounting; number three, greater content investments by our digital media and entertainment businesses.

As a percentage of revenue, without the effect of SBC expenses, all other major operating expenses, including product development, sales and marketing, and general and administrative expenses remained stable year-on-year.

Now, let's turn to the segment reporting. Our core commerce segment had another strong quarter with revenue growth of 56%. The fundamentals of our China commerce retail revenue business continued to be healthy and strong. We see robust user growth, especially in less developed areas and improved engagement in our Taobao and Tmall marketplaces. The combined customer management revenue and commission revenue shows healthy growth of 27% year-on-year for the quarter.

Customer management revenue grew 25% in the quarter-ended September. The growth was due to increases in the volume of paid clicks and to a lesser extent, average unit price per click. We continue to see better engagement and purchase conversions from Recommendation Feeds that are mostly free of charge to merchants nowadays, driving higher ROI for the merchants on our platform. We have just started to explore ways to monetize these Recommendation Feeds.

Commission revenue grew strongly by 31%. This is consistent with the robust growth in Tmall physical group paid GMV, which is over 30%. We're pleased with our Tmall progress and continue to demonstrate market leadership with GMV growth faster than the overall industry during the quarter.

Other revenue from China commerce retail was up more than 150% year on year to RMB 8 billion. The rapid revenue growth was driven by the growth of Hema and Tmall Import.

Segment reporting, let's take a look at core commerce. We got a lot of feedback from our shareholders wishing to get more color about our core commerce segment that includes businesses in different stage of development. On this slide, we're showing our market-based core commerce EBITA, including businesses such as Taobao and Tmall. So we continued to generate solid market-based core commerce EBITA that grew at 27% to RMB 35.6 billion, because our market-based core commerce generates significant profits so that we're able to invest in the areas we believe would add value to our customers and to future growth.

For September quarter, losses from the four strategic businesses amounted to RMB 5.8 billion. Rank order the losses from these businesses from the highest to lowest would be: number one, Ele.me; number two, Lazada; three, New Retail and Tmall Imports; and then number four is Cainiao Network.

So Ele.me losses increased Q-on-Q due to two reasons. First, full quarter loss contribution in this quarter; last quarter was the first quarter we started to consolidate Ele.me, so it was not a full quarter effect. And number two, higher spending for user acquisitions.

While it will take time for us to see financial return for these strategic investments in core commerce, revenue growth of these four business areas has been robust. We have already seen efficiency gains and greater synergies from these businesses within the Alibaba digital economy. After incorporating the losses from these investments, our core commerce EBITA grew approximately 13% to RMB 29.8 billion.

And then let's take a look at cloud computing revenue growth, 90% year on-year; continued to be very strong, primarily driven by revenue mix towards high value-added products and services and robust growth of paying customers. Adjusted EBITA was a loss of RMB 232 million, reflecting our investment in technology infrastructure in anticipation of future customer demand.

Digital media and entertainment business revenue increased 24%. The increase is primarily due to higher subscription revenue from Youku and an increase in revenue from mobile value-added service provided by UCWeb such as mobile search. Adjusted EBITA was a loss of RMB 3.8 billion, primarily due to ongoing investment in production of original content and licensed broadcasting – also broadcasting rights for the World Cup games in China. Revenue from innovation initiatives and others increased 20%. The increase was mainly due to an increase in revenue from Tmall Genie and Amap. Adjusted EBITA was a loss of RMB 1.2 billion.

So other financial metrics, now let's take a look at a couple other metrics within the quarter. So in the other net loss for the quarter compared to the same quarter last year, which was RMB 1.7 billion, this quarter RMB 1.5 billion, the loss was primarily due to the following: number one, foreign exchange loss of RMB 900 million due to RMB depreciation against the U.S. dollar during the quarter; number two, losses sustained by Ant Financial during the quarter as a result of its investment in user acquisitions and international expansion; as well as their product innovation.

So, Ant Financial's net loss in the quarter lead to our recording of a loss of RMB 900 million. The investment they made in new user has yielded positive results with annual active user exceeding 700 million during the quarter. 70% of those users used three or more categories of Ant Financial services.

Tax rate, income tax expenses in the quarter were RMB 277 million compared to RMB 2.7 billion in the same quarter last year. We recognized a tax credit of about RMB 4.7 billion during the quarter, compared to RMB 2.3 billion in the same quarter last year, as certain key subsidiaries were notified of the renewal of their Key Software Enterprise status for calendar year 2017 by the relevant tax authorities.

Excluding SBC expense, investment gain/loss, impairment of investments, as well as the above-mentioned tax credit, our effective tax rate would have been 23% in the quarter ended September 30. Share of results of equity investees, we recorded an equity pickup of RMB 1.3 billion for the gain. It's largely due to our profit share from Sony one quarter in arrears.

Cash flow and capital expenditures, our net income grew 5% to RMB 18 billion in the quarter. Non-GAAP net income was up to RMB 23.5 billion, 6% growth. On cash flow and share repurchase, as of the quarter end, cash, cash equivalents, and short-term investments were RMB 172 billion compared to RMB 177 billion as of June. The decrease is primarily due to cash used in investing activities, including acquisition of Trendyol, investments in Focus Media, partly offset by free cash flow generated from operations and disposal of investments.

We generated robust operating cash flow of RMB 31.4 billion and healthy free cash flow of RMB 16 billion during the quarter. Please note that we have deducted our content spending when calculating free cash flow.

Higher CapEx spending related to our technology infrastructure, New Retail and Cainiao business coupled with increases in acquisition of licensed copyrights and intangible assets from our digital media and entertainment segments resulted in year-on-year decrease in free cash flow. We're committed to enhance value for our shareholders through share repurchases. We have repurchased approximately 9.12 million of our shares for a total purchase price of approximately U.S. $1.3 billion as of today.

Looking ahead, we're revising our fiscal year 2019 revenue guidance to a range of RMB 375 billion to RMB 383 billion. The new guidance range reflects a 4% to 6% adjustment to the original revenue guidance. In light of the current macroeconomic conditions, we have recently decided for the near-term not to monetize incremental inventory generated from growing users and engagement in our China retail marketplaces in the near term. We expect this to benefit SMEs on our marketplace platforms.

As Daniel mentioned, we believe – oh, by the way, the growth rate after this adjustment on the revenue guidance shows that we're still a lot ahead of the global peers' growth, outperforming almost all of them.

As Daniel mentioned, we believe the Recommendation Feeds will be further enhanced by the new Taobao interface that include better discovery experience for consumers, enhanced ability to target, engage, and retain consumer by its merchants, increase monetizable properties for the platform. This will lead to large long-term monetization opportunity for incremental inventories, which complement the search.

Recommendation feeds create a more top of the funnel discovery experience for customers, enabling merchants and brands to build awareness and interest of their product, but it doesn't stop there. Recommendation feeds in our platform are either more powerful and can be applied to engage with consumers in their entire shopping journey down the funnel to entice purchases and the loyalty. All of these enhancements would not have been possible without our technology and deep consumer insights.

Please note that the adjustment of the revenue guidance mainly related to our China retail business units, particularly in customer management revenue which has high profitability. At the same time, we'll continue our investments in strategic and important areas such as local services, logistics, entertainment, globalization and New Retail. These strategic initiatives are what we believe to be big growth areas that will substantially increase our total addressable market. Accordingly, we're confident to reinvest the profitability of our core to capture opportunities and long-term profit growth.

To wrap up, we remain confident about our value proposition to consumers and merchants. We have shown a track record of delivering robust revenue growth and healthy, sustainable profit growth by identifying new growth opportunities that is supported by solid execution. We will continue to grow new users and serve our customers, consumers and merchants with diversified offerings of goods, services and entertainment across our platform. Most important, we have and will be disciplined in the way we grow our business to capturing enormous opportunities presented to us in this new digital era.

Thank you. Now, we open the floor for Q&A.

Robert Lin
Alibaba Group Holding Ltd.

Operator. We're ready to take questions and answers.

Operator

Thank you. Ladies and gentlemen, we'll now begin the question-and-answer session. Our first question comes from the line of Eddie Leung of Merrill Lynch. Please ask your question.

E
Eddie Leung
Bank of America Merrill Lynch

Good evening. Thank you for taking my question. I think, Joe, you talked about the macro headwinds for the domestic e-commerce business. Could you also comment on the trends you see on the local service sector and travel as well as your overseas operation? Have we seen a similar trend affecting these other businesses? And then perhaps quickly, could you also remind us the potential impact of the new e-commerce laws? Thank you.

J
Joseph C. Tsai
Alibaba Group Holding Ltd.

So the area where we see the most impact are in the consumer durables, large ticket items, consumer electronics. In the area of local services, because these are basically staples, you order meals, you go to restaurants, they are largely not affected. As you know that we've combined the management team of Ele.me and Koubei under one team, and they have already made quite a bit of adjustments in terms of the operating structure in the local markets and are prepared to execute the strategy. So we're very happy with the progress there.

In terms of the international markets, the dynamic in countries, for example, in Southeast Asia, vary country-by-country. As you know, Indonesia is a very, very competitive market. We have doubled down in our commitment to Lazada to continue to grow that business. We do not see a huge economic or macroeconomic effect coming from those markets, but I think we remain cautiously optimistic. Maggie, you want to comment on the e-commerce laws?

M
Maggie Wei Wu
Alibaba Group Holding Ltd.

Right. For impacts from e-commerce law, note the law is out there but no detailed implementation rules. However, we believe that the government will have an overall consideration on all of these supports and positives that the goods e-commerce platform has brought about to support SMEs. For example, like stimulating the domestic markets and people ask questions about the tax impact, whether their eventual tax by the merchants on the platform. I think this is a topic we have been working with tax authorities for a long time, and we believe they have done detailed review work and the incremental tax brought by our platform, which if you look at whatever (38:07), actually, they are upper-stream, right, the manufacturers. The tax coming from that area would be lot bigger than whatever we're talking about on the retail platform. So, we will closely monitor and follow-up in the implementation rules, and, yeah, we'll update you if there is any news. Thanks.

E
Eddie Leung
Bank of America Merrill Lynch

Thank you. That's very helpful.

Robert Lin
Alibaba Group Holding Ltd.

Operator, next question.

Operator

Thank you. Our next question comes from the line of Piyush Mubayi of Goldman Sachs. Please ask your question. Hello, Mr. Mubayi. Your line is open now. Please go ahead with your question.

P
Piyush Mubayi
Goldman Sachs (Asia) LLC

Thank you. Looking through your revenue guidance, you wrote that you recently decided not to monetize in the near term the incremental inventory that's getting created. Could you take us through the rationale there and also help us understand the short term that you referred to? That's my first question. A very simple second question, if I might slip that in. Would you agree with our assessment that you're in a similar position with feeds monetization as you were with mobile monetization three years ago? Thank you.

M
Maggie Wei Wu
Alibaba Group Holding Ltd.

Yeah, Piyush, I'll talk about the considerations behind. So, about 45 days ago, we had our Investor Day Conference in Hangzhou and I said that we had no update on the revenue guidance by then. So, this is a recent decision made. You probably have all seen and experienced the economic conditions in the past, particularly the past month.

The condition is very uncertain and merchants are facing challenging times, so it does not make sense for us to maintain very high revenue growth. So, under these conditions, after we reviewed, we decided to not monetize for near term of the incremental inventory. So, we talked about the Recommendation Feeds growth, user growth, our engagement growth all very well, so this is the part of the rationale to factor the economic condition uncertainties.

The other thing is that, looking ahead one side is helping the merchants. The other thing is not monetized right away. That also give us time to take this period of time to refine our monetization products, our new value provided. So, we believe this is a transitional period. The Recommendation Feeds shows very encouraging trend of the growth not only in traffic but also in conversions. However, we don't believe that the value we created to the merchants is just exactly the same as we created in the past 10, 15 years.

So, as I mentioned, it's not only transaction value but also the consumer engagement value, which provides the tools and possibility for merchants to operate and manage their consumer base. So, they're not only paid for – and eventually not only paid for the near-term GMV, but also paid for the possibility of the future GMVs.

So, once they could manage their consumer base, compared with other merchants, their peers, competitors, whoever, that will not get the tools, they have advantages. So, that's basically macro and also internally we feel that this is good for us to take more time to refine the monetization products.

Robert Lin
Alibaba Group Holding Ltd.

I guess the second question was – it is similar to the PC-to-mobile transition. I think, Maggie, you already answered that. Thank you.

M
Maggie Wei Wu
Alibaba Group Holding Ltd.

Right. Okay.

Robert Lin
Alibaba Group Holding Ltd.

Next question?

Operator

Thank you. Our next question comes from the line of Grace Chen of Morgan Stanley. Please ask your question.

G
Grace Chen
Morgan Stanley Taiwan Ltd.

Thank you. Thank you for taking my questions and also the presentation. My question is to follow up about the local services. Can you share with us the latest development of Ele.me and Koubei after the integration? What are the new business initiatives, and what's your business and financial targets achieved through this combined entity? Thank you.

D
Daniel Yong Zhang
Alibaba Group Holding Ltd.

Actually, we just announced that we combined the two businesses, and we will have one management team to run this in the future combined local service business. And especially you can see from this decision, like we still observe a lot of synergies between these two businesses because our one Koubei business is relevant to the in-store, in-restaurant dining services, while food delivery is also from the restaurant to home. So basically, Koubei and Ele.me, they are serving the same group of clients, which are restaurants, who both serve, in-store clients, in-store customers, also serve customer at homes. So we do see a lot of synergies, and not only on the business side but also in the operating and also to improve our operating efficiency. And after the NewCo is established, we are actually prepared to go further to penetrate more cities in more areas and to give people our multiple services.

Robert Lin
Alibaba Group Holding Ltd.

Okay. Next question?

G
Grace Chen
Morgan Stanley Taiwan Ltd.

Thank you. Just a follow-up...

Operator

Thank you. Our next question comes from the line of Alicia Yap of Citigroup. Please ask your question.

A
Alicia Yap
Citigroup Global Markets Asia Ltd.

Hi. Good evening, management. Thanks for taking my questions. I have some follow-up questions regarding just the overall advertising side. How long do you think the temporary hold-off on these monetizations will last? In addition to you not wanting to monetize, I wonder if any change of the budget spend adjustment from the big and global brands on the upcoming single-phase promotional activity. And then will BABA actually also take one step further to subsidize some of this commission rebate to help out the smaller merchants' promotional discount during Singles' Day in light of the tough macro? Thank you.

M
Maggie Wei Wu
Alibaba Group Holding Ltd.

Right. So the first question is about when we decide to manage, how long we'll hold on this monetization. I think whenever – two things are ready. One is product, the other is merchants, whether the merchants are ready and whether their products are. So in terms of product readiness, I mentioned that we have started to explore the new monetization format to better reflect the new value created, so that takes a little bit of time.

And the other thing, merchant readiness is also something to do with the macro environment. Once they're not pressurized by the macro uncertainty and also once they learn and understand the new product format and really find the true value of the new ad format, we are confident on this value we provide. Compared to all of the peers around, nobody else actually can have such a comprehension value provision to the merchants. So it's just a matter of the readiness of the two.

D
Daniel Yong Zhang
Alibaba Group Holding Ltd.

But in terms of the existing supply of the ad services, I don't think this will impact existing demand. I think we have huge existing inventories monetized, actually which are monetized through our various commercial products to different types of advertisers, including the big brands and SMEs. So actually all of them are now well-prepared for the coming November 11. And we do believe that all the people will participate in this big event, also take this opportunity not only to get the sales on that day, but also to engage many new customers, and with the smart spending.

J
Joseph C. Tsai
Alibaba Group Holding Ltd.

Daniel, I think there's a question on commission rebates, whether that's going to come.

D
Daniel Yong Zhang
Alibaba Group Holding Ltd.

Actually, so far we don't have a plan to give a commission rebate to the merchants in the event.

A
Alicia Yap
Citigroup Global Markets Asia Ltd.

Okay, thank you.

Robert Lin
Alibaba Group Holding Ltd.

Okay, thank you. Next question.

Operator

Thank you. Our next question is from the line of Mark Mahaney of RBC Capital Markets. Please go ahead.

Z
Zachary Schwartzman
RBC Capital Markets LLC

Hey, it's Zachary Schwartzman on for Mark. What are you doing to help merchants learn and adapt to the new mobile marketplace platforms? How much effort are you placing in making sure that merchants understand and can take full advantage of these changes once the macro environment turns positive?

And quick on cloud computing, that came in strong this quarter. Can you call out any specific industries that drove the strong performance there? Thank you.

D
Daniel Yong Zhang
Alibaba Group Holding Ltd.

It does take some time for us to educate the merchants to understand the new consumer journey we created in this new mobile interface, which is the recommendation flows. So I think actually today our team are working very hard to train the merchants and also to give them showcases, how to leverage the new mobile interfaces, not only to make the immediate sales, but also to engage and manage the customers and to create that new demand.

So I think it takes some time, but I think merchants – based on our experience, actually merchants are very, very sensitive to the new method to grow their business. So they are fast learning, and I have confidence that they will actually understand a whole new methodology in a very short period of time.

M
Maggie Wei Wu
Alibaba Group Holding Ltd.

Mark, to add on to that, how much effort we have been putting onto this, we've had a special task force headed by Daniel himself to work on this. So this task force included people from different teams, including merchant services, Alimama, Taobao, and technology teams.

So the key is that, how we could let the merchants understand this new value, right? This is a value that they don't really get from other service providers. It's a mix value from, I said, the top of the funnel to the bottom funnel is not only transaction but also the engagement, not only today's GMV but also the possible future GMV generation. So, yeah, that's – we're on it.

J
Joseph C. Tsai
Alibaba Group Holding Ltd.

On your cloud computing question, the sector that sort of stood out in, I guess, this quarter also and the last couple of quarters is the whole media and entertainment segment, including streaming video, short-form video. We just entered into a agreement with the Olympic Broadcasting Services, where we would provide the cloud computing services for production of games for the Tokyo Olympics in 2020.

Z
Zachary Schwartzman
RBC Capital Markets LLC

Thank you, Joe, Daniel, Maggie.

Operator

Thank you. Our next question is from the line of Binnie Wong of HSBC. Please ask your question.

B
Binnie Wong
HSBC Holdings plc

Good evening, management. Thank you for taking my questions. My questions is on the Recommendation Feeds in our Taobao upgrade. Can management give us more color in terms of like the timing of the full rollout in terms of our monetization? And also in terms of our pricing strategy, of the recommendation fees and also the margin profile, how does that compare to our core search?

And lastly is just on the categories. Do you feel that there are more certain categories that are more fitted with like a Recommendation Fees such as those with like impulse purchase behavior, maybe even like categories that are say, apparel would be more fitted with Recommendation Feeds? How should we think about those? Thank you, management.

D
Daniel Yong Zhang
Alibaba Group Holding Ltd.

Well, as we said in our press release, actually considering today's macroeconomic condition, we decided not yet to monetize the incremental inventories from these, I mean, recommendation flows and other new user engagements and to support our merchants to do a better business in today's condition. And I think we do – but technically we also are working very hard to prepare the right commercial products and the mixture there in place to serve the merchants and to help them to create the incremental value for their business.

In terms of categories and the product and which is more fit for the recommendations, I think generally speaking, I think it is – the recommendation is to serve the purpose of the discovery, so we will help to the merchants to acquire new customers and enable the consumers to identify and find the new items and beyond their expectations. I think that's the purpose for both the merchants and for the consumers.

And as I said in my script, actually, so far we've built up a very comprehensive product and consumer bio or the graph, a knowledge graph for both products and consumers. I think that is very, very important for the success of the recommendation flows. And also, of course, this is driven by AI and by the technology.

B
Binnie Wong
HSBC Holdings plc

Thank you, Daniel. I guess maybe my question is more on – in terms of what – I guess, the follow up is, what are the economic indicators you see that will signal a turnaround and then will start kick off with our monetization on the incremental inventories, as you have mentioned? What are the signs that you will see there? Thank you.

D
Daniel Yong Zhang
Alibaba Group Holding Ltd.

Well, I think this all depend on the value we create for our merchants. As I said, our purpose to help the merchants to engage the new customers and retarget the existing customers in this recommendation flows. So, I think the economics will form the recognition of this value provided to our customers.

Robert Lin
Alibaba Group Holding Ltd.

Next question.

B
Binnie Wong
HSBC Holdings plc

Thank you.

Operator

Thank you. Our next question comes from the line of Gregory Zhao of Barclays. Please ask your question.

G
Gregory Zhao
Barclays Capital, Inc.

Hi, management. Thanks for taking my question. So in terms of the loss of the categories inside China, e-commerce business you rank the [Chinese language] (55:11). So in the future, how will you rank the loss contribution for, let's say, the next two to three years?

And a quick follow-up, so for the Recommendation Feeds, we know you postponed the monetization. So the first thing, will you please give us a update, like with the percentage of users has been upgraded to the new version with Recommendation feeds, and also with the recommendation functions based on my understanding, it may generate very, I mean, little revenue contribution to advertising, but that can help improve your January growth, am I correct? Thank you.

M
Maggie Wei Wu
Alibaba Group Holding Ltd.

Right. In terms of first question, the areas we invested within the core commerce are local service, globalization, New Retail and logistics. And right now, we give out the investments' missing orders, so we're seeing that – we're pretty sure that we're going to continue to invest, quite committed to the investment in local service globalization, New Retail and logistics, all of these areas. In terms of order, it might change depending on the time and the market conditions, so yeah, that could be changed.

D
Daniel Yong Zhang
Alibaba Group Holding Ltd.

But we never manage the business by profit and loss. Actually, we look at the strategic value, but we do have the discipline and we have a very clear business plan in terms of how to develop in these new businesses. But, I think, so far, we are all on track.

Robert Lin
Alibaba Group Holding Ltd.

And, Greg, so your other question is when is the new follow-up, the Taobao app, as well as the GMV growth contribution; is that your third question?

G
Gregory Zhao
Barclays Capital, Inc.

I think as a bit on new function of the recommendation as I think my understanding, is that helpful for both the merchant to promote their products that that may help to drive your Tmall, Taobao, the GMV growth, also the short term, the advertising revenue contribution may be not that meaningful. Yeah. Am I correct?

D
Daniel Yong Zhang
Alibaba Group Holding Ltd.

Well, the new Taobao interface, I think will actually enhance the experience for both merchant and customers. And from customers' perspective, I think actually consumers can enjoy the fun of exploration and discovery through these recommendation flows, and which will enhance their stickiness to our platform, which we always said that we are helping our people to kill their time, even without any specific shopping purpose they will still come back to us to enjoy this recommendations. So I think this is very good for the consumers. And if people spend more time with us and enhance engagement with us, I think GMV is the organic results for this interaction.

G
Gregory Zhao
Barclays Capital, Inc.

Thank you very much.

Robert Lin
Alibaba Group Holding Ltd.

One last question.

Operator

Thank you. Yes. We're taking your next question coming from the line of Youssef Squali of SunTrust. Please ask your question.

Y
Youssef Squali
SunTrust Robinson Humphrey, Inc.

Hey, great. Thank you very much for taking my question. I just have one. Maggie, thank you very much for the new revenue guidance. I think you said that the biggest delta there is coming from customer management revenue from within China retail. That's the business that carries higher profit margin.

Can you help us just get a sense – or how do you guys look at the bottom-line impacts from the revenue revision? And in other words, would management kind of rethink potentially at least short-term the level of investment that you have going on just to effectively protect the EBITDA or EBITDA expectations that Wall Street is expecting? Thank you.

M
Maggie Wei Wu
Alibaba Group Holding Ltd.

Right. It's not easy to answer that question, but I can give you directions. So first of all, whatever profitability growth would be, that can be obviously impacted by the customer management revenue growth because that's the revenue that generates high profitability. So you could calculate the range, the base case and the high case based on the revenue guidance I gave.

One thing for sure is that, the investment we're making today are those areas we believe has high-potential. So the total addressable market for this business can be substantially enlarged once we get – once we tap into those markets. So we're very firm to continue to invest in those areas, which means that when you look at the revenue and the spending, that could be not closely linked together, right? The revenues generated customer management, and the others are local services, et cetera.

So as Daniel mentioned, we're going to be – we have been very disciplined in terms of investment and spending. So the way we look at the returns on those new investment areas are not really financial returns at this stage, particularly as business progresses and the market shares, user base expansion. So if we are feeling comfortable about this growth, we're going to just continue to invest and harvest later on.

Y
Youssef Squali
SunTrust Robinson Humphrey, Inc.

Okay.

J
Joseph C. Tsai
Alibaba Group Holding Ltd.

Yeah, I think just philosophically, I think we don't think about the so-called protection of our existing core business margin when we do make investments. But we do have metrics that are pretty well spelled out for our investments, for example, in local services, in entertainment, in international. Depending on the stage of growth of the business, it could be based on business volume or users or repeated purchase. There are a lot of metrics that we would look at depending on their development.

I think it's safe to say that there's a lot of discipline that are applied to measuring those metrics and tracking performance. But one of the most important things about these new investments is that we make sure that they have the right people in place, the right management team. The move that we made to combine the Ele.me and Koubei business under one management is one such move, and we're very confident when we have the right people in place that execution there is going to be very good.

Y
Youssef Squali
SunTrust Robinson Humphrey, Inc.

Great. That's helpful. Thanks, Joe. Thanks, Maggie.

Robert Lin
Alibaba Group Holding Ltd.

Okay. Thank you, everyone, for attending today's conference call. If you have any questions, please feel free to reach out to the Alibaba IR team. Thank you.

M
Maggie Wei Wu
Alibaba Group Holding Ltd.

Thank you.

Operator

Thank you, ladies and gentlemen. This does conclude the conference for today. Thank you for participating. You may now all disconnect.