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Alibaba Group Holding Ltd. (NYSE: BABA) Call for Second Quarter 2019 Results November 2, 2018 at 7:30 am ET
managerial staff
Robert Lin – Alibaba Group Holding Ltd.
Joseph C. Tsai – Alibaba Group Holding Ltd.
Daniel Yong Zhang – Alibaba Group Holding Ltd.
Maggie Wei Wu – Alibaba Group Holding Ltd.
Analysts
Eddie Leung – Merrill Lynch from Bank of America
Piyush Mubayi – Goldman Sachs (Asia) LLC
Grace Chen – Morgan Stanley Taiwan Ltd.
Alicia Yap – Citigroup Global Markets Asia Ltd.
Zachary Schwartzman – RBC Capital Markets LLC
Binnie Wong – HSBC Holdings plc
Gregory Zhao – Barclays Capital, Inc.
Youssef Squali – SunTrust Robinson Humphrey, Inc.
Operator
Hello ladies and gentlemen. Thank you for being here. Welcome to Alibaba Group's September 2018 earnings conference call. At this point, all participants are in listening mode only. After the remarks prepared by the management, there will be a question and answer session.
I would now like to make the call to Rob Lin, Alibaba Group's Investor Relations Manager. Please go from the front.
Robert Lin – Alibaba Group Holding Ltd.
Hello everyone and welcome to the Alibaba Group's September 2018 earnings conference call. Joe Tsai, Executive Vice President; Daniel Zhang, General Manager; Maggie Wu, Chief Financial Officer. This call is also webcast from our IR section of the company's website. A retransmission 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 could cause actual results to differ materially from our current expectations. For detailed instructions on these risks and uncertainties, please refer to our most recent annual report on Form 20-F and other documents filed with the SEC. All forward-looking statements we make on this call are based on assumptions as of today, and we assume no obligation to update such statements, except as required by applicable law.
Be aware that some of the financial measures we use for this call, such as Adjusted EBITDA, Adjusted EBITA, Adjusted EBITDA margin, Adjusted EBITA margin, Adjusted EBITA, Adjusted EBITDA, Adjusted EBITDA, Adjusted EBITDA, Adjusted EBITDA, Adjusted EBITDA, Adjusted EBITDA, Adjusted EBITDA, Adjusted EBITDA, Adjusted EBITDA Market trading, non-GAAP net income, diluted non-GAAP EPS and free cash flow are: expressed on a non-GAAP basis. Our GAAP results and the reconciliation of GAAP measures to non-GAAP measures can be found in our press release on results. Unless otherwise indicated, the growth rate of all mentioned parameters mentioned in this call corresponds to a growth rate from one year to the next compared to the same quarter of the previous year.
With that, I will now call Joe.
Joseph C. Tsai – Alibaba Group Holding Ltd.
Thank you, Rob Thank you all for joining us. Last month, global macroeconomic conditions became more uncertain. People are questioning the potential impact of the global economic slowdown, the threat of rising interest rates and political turmoil and debt in Europe. In the case of China, reports point to a deceleration in GDP growth, a very weak purchasing managers index and tensions in the stock markets. I know that Alibaba investors have many questions about the operating environment in China. So I want to give you a direct assessment of our point of view.
For China, growth in retail sales was 9%, according to the latest data from July and August of the National Bureau of Statistics. The SNB data show a weakness in expensive items, such as appliances and automobiles, which is consistent with the view that consumers see uncertainty in the future and reduce their purchases of durable goods. However, in Alibaba's retail markets in China, we are seeing continued strong growth in consumer staples, cosmetics and apparel.
In the consumer electronics sector, growth has slowed, especially in the mobile phone sector, due to the lack of major technological upgrades and new product offerings. While NBS data indicates 24% growth in online product sales during this quarter, the overall growth in Tmall's fair value weighted physical assets, excluding unpaid orders, was 30% over one year. As a result, we believe Tmall has achieved further market share gains.
Although in the short term, people may be concerned about cyclical factors, I would like to highlight three long-term secular developments in favor of Alibaba. In fact, Alibaba proactively contributes to the acceleration of these three developments. The first is the phenomenon of upgrading the consumption of the middle class. China's 300 million middle-class consumers have experienced significant growth in real wages over the last decade and are looking for high-quality products to meet discretionary spending and an increasingly sophisticated lifestyle.
The OECD predicts that by 2030, China will have 850 million people joining the middle class, which will further accelerate the rise in consumption. That's about imported high quality products offered on Tmall Global, travel experiences abroad via the Fliggy Travel Portal, videos on the entertainment platform Youku digital or meal delivery service on demand and grocery delivery offered by Ele.me and Hema, Alibaba driver comprehensive upgrade of consumption that can not be matched by any of the peers.
In our recently announced strategic partnership with the luxury group Richemont, we are further exploiting the opportunity to improve our lifestyle by offering Chinese consumers easy access to a large collection of luxury goods, at home or abroad. when they travel abroad.
The second long-term development concerns the capacity and increasing availability of consumer credit. In March of this year, Chinese household debt rose to 49 percent of GDP, compared with 77 percent in the United States, leaving a large credit capacity to fuel consumption. Ant Financial, an affiliate of Alibaba, specializes in providing consumer credit to underserved individuals who borrow little and need flexibility to frequently rotate. Consumer credit penetration in total online sales, while still low, increased significantly in the first seven months of this year.
The third trend on which Alibaba plays an active role in development is the digitization of the retail sector. This means that Alibaba's addressable total market will be the whole retail economy in China, valued at $ 5 trillion. As part of our New Retail strategy, we've eliminated e-commerce e-commerce because the distinction between online and offline sales disappears when shoppers buy from anywhere and anytime using a mobile phone. This is made possible by digitizing the entire consumer journey, inventory tracking and logistic workflow.
The digitization made possible by Alibaba's technology and know-how will help retailers gain access to a wealth of information about their customers and their operations. We expect value creation resulting from increased sales of traditional retailers and the efficiency of operations to be significant, which will ultimately benefit Alibaba as a catalyst.
Now, I'll leave the microphone to Daniel for his comments.
Daniel Yong Zhang – Alibaba Group Holding Ltd.
Thanks, Joe. Hello everyone and thank you for joining our call for results today.
We achieved another strong quarter with total revenue growth of 54%. The strong growth of our business demonstrates the unique value proposition we offer our customers through strong execution and commitment to innovation, demonstrating the power and synergies of Alibaba's digital economy. .
Today, Taobao is a large-scale, fast-growing consumer community that is the starting point for any retail journey for Chinese consumers. More than 45% of the Chinese population discovers and buys products and content via the Taobao mobile application. We have been successful in attracting and attracting even more new users to our platform. Our unique value of highly relevant personalized content coupled with a community-driven experience continues to attract new users while maintaining a deep commitment of existing users on a daily basis.
Annual active consumers increased by $ 25 million, to $ 601 million, for the 12-month period ending September 30, 2018. About 75% of the increase in annual active consumers came from less developed areas. The growth of our monthly mobile app users has accelerated this quarter. 666 million users access our consumer marketplaces in China monthly via a mobile app, an increase of 32 million compared to the previous quarter.
Current users of Taobao are more diverse than ever before, with different demographics and consumption patterns. To meet their diverse needs, we have deployed the new Taobao interface, which offers a unique user experience to different types of consumers. The secret to the success of this upgrade lies in our consumer knowledge, driven by AI. We have the world's largest e-commerce knowledge graph for consumer products, content and information, which can be used to make active purchases and build customer loyalty. We have one of the world's leading proprietary technology infrastructures capable of handling very large-scale real-time calculations and sophisticated algorithms.
For example, during this quarter, more than 75% of our new consumers come from less developed regions. They may need a simpler, more direct user interface with value-for-money product recommendations. On the other hand, experienced users who have years of Taobao experience with high purchasing power, want more personalized and relevant recommendations.
The new Taobao interface also improves the value for the trader. By leveraging Mobile Taobao's recommendation feeds, we can help merchants create new demands by targeting the relevant consumer groups, building awareness and interest, enabling purchase intent, and enabling customers to reach new customers. consumer loyalty at different stages of consumption. Today, the product and content discovery experience is very dynamic on Taobao. We believe that the recommendation is another effective way to distribute products and content through post-posting, video and live streaming activities.
During the quarter, we had positive feedback. The level of engagement of users who adopt the new interface has increased and the Feeds Recommendation section of the Taobao home page potentially enjoys a higher click rate. The new Taobao interface facilitates a better customer experience, allowing brands and merchants to better target their customers. These streams of recommendations could potentially be monetizable in the future, thanks to ongoing improvements in these engagement trends.
Turning now to Tmall, we continue to be satisfied with the continued expansion of its leading position in the online B2C business. Tmall's paid GMV property rose 30% during this quarter. We saw strong growth in all categories, including consumer goods, furniture and clothing. Recently, we announced a partnership with the Swiss luxury group Richemont to launch a joint venture in China with Yoox Net-a-Porter, owned by Richemont. This is a major development for China's luxury industry, as this partnership demonstrates Richemont's and YNAP's recognition of the strategic importance of the Chinese market, as well as Alibaba's leadership in the development of brands that allow luxury brands to engage with Chinese consumers and serve them at home. and abroad.
Our New Retail initiatives, including our self-managed Hema stores and the digitization of Sun Art supermarkets, are well underway. We are excited about the launch of our local service company, which brings together Ele.me and Koubei on a single management team.
Our cloud computing business continues to operate and expects strong growth. Revenue was up 90% in the quarter, driven by growth in the number of paying customers and a subscription to higher value-added products. Our cloud computing company has continued to create a vast ecosystem of expanding developers and partners to enable China's digital transformation. In September 2018, we held the largest conference on cloud computing in China. More than 70,000 developers attended the conference in person.
We are making progress in our digital media and entertainment sector. The average number of daily subscribers to Youku video growth has remained robust, up 100%. Our original reality show, Slam-dunk of China, has become a new hit with young Chinese audiences. This testifies to the importance of having an original production capability.
I also want to take stock of our innovation initiatives. Amap, formerly AutoNavi, the largest location-based card and location-based application in China, provides important infrastructure for a comprehensive set of services, operated by both us and third parties. For example, in our on-demand delivery service, Amap provides delivery personnel with essential mapping algorithms and optimal routing. During the Chinese National Day, the first day of the Golden Week holiday in China, the Amap SADs exceeded 100 million for the first time.
Before I go to Maggie for the financial highlights, I would like to talk about our view of the global macroeconomic environment that is of concern to investors. The global economy is facing uncertainties such as trade relations, consumer trends, the stock market and the manufacturing industry. Trade tensions between the United States and China create an increased risk of instability. This is the third time in 19 years of Alibaba history that we are witnessing a decline in the global economy. When it is difficult to do business, the time has come to fulfill our mission: to facilitate business anywhere.
As a result, we recently decided in the short term not to monetize the additional inventories generated by the growth of our users and our commitment. In light of the currently fluid macroeconomic conditions that may affect their business, we want to help merchants who operate on our platform.
In the midst of these uncertainties, we see opportunities. First, we see an opportunity to significantly expand our addressable market by executing our New Retail strategy, which digitizes store operations. Secondly, we have built a technology platform that enables the digital transformation of enterprises in China. This will not only create new sales and distribution channels, but will also stimulate innovation across the entire value chain of retail operations. Our knowledge of business and consumer data, as well as our state-of-the-art cloud computing technologies, have essentially created a unique Alibaba operating system for this digital age.
As for the future, Alibaba has set up a global digital economy as strong as any ecosystem. We believe that by leveraging our technology, experience, and resources, we can offer a digital transformation to all our customers in the retail, marketing, finance, logistics, manufacturing, and manufacturing sectors. other support services within the Alibaba operating system.
I now call Maggie, who will explain in detail our financial results.
Maggie Wei Wu – Alibaba Group Holding Ltd.
Thank you Daniel. Hello everyone.
In September, the main financial measures continued to show solid results. Overall, as Daniel mentioned, our hard core begins with our extensive, high quality and fast growing user base. We recorded another quarter of strong user growth, both for AMUs and annual active consumers, facilitated by our efforts to target new consumer groups and enter less developed areas in China. About 75% of the 25 million newly added consumers come from less developed regions during the quarter.
We are also seeing increased consumer engagement from our existing users, resulting in robust GMV results. Tmall continues to develop its leadership in the B2C e-commerce market and Taobao has recorded its third consecutive quarter of strong growth in GMV vehicles. We have a large and actively engaged user base that continues to show strong growth. Consumers are attracted to the platform because it offers the best user experience possible. As I will discuss later in my remarks, we believe that this strong and active user base, coupled with the changes we are making on our platform, is the necessary foundation for increasing our revenue generation in the future.
Total revenue for this quarter increased 54%. This increase is mainly due to strong revenue growth in our China retail business, the consolidation of Ele.me and the Cainiao network, as well as strong revenue growth at Alibaba Cloud. Our revenue growth over the quarter continues to exceed that of all global technology peers.
Revenues for the quarter reached RMB 46.8 billion, compared to RMB 22 billion in the same quarter last year. Excluding the effect of SBC, product costs as a percentage of total revenue increased by 15 percentage points to 53% this quarter. This increase is mainly due to three reasons: first, the consolidation of Ele.me and Cainiao Network, which resulted in higher costs in logistics and execution; Second, the inventory cost of our new retail operations is included due to the recognition of gross revenue. Third, the largest investments in the content of our digital media and entertainment businesses.
Expressed as a percentage of revenue, excluding SBC expenses, all other major operating expenses, including product development, sales and marketing, and general and administrative expenses, remained stable.
Let's move on to sectoral information. Our core business was another strong quarter with revenue growth of 56%. The core business of our retail business in China continued to be strong and successful. We are seeing strong growth in the number of users, particularly in less developed areas, as well as better engagement in our Taobao and Tmall markets. Combined revenue from customer and fee management posted healthy growth of 27% year-over-year for the quarter.
Revenue from customer management increased 25% for the quarter ended September. This growth is due to the increase in paid clicks and, to a lesser extent, the average unit price per click. We continue to see better engagement and purchase conversions from referral feeds, which are essentially free for merchants, which generates a higher return on investment for merchants on our platform. We have just begun to explore ways to monetize these flow of recommendations.
Commission revenues increased sharply by 31%. This is consistent with the robust growth of GMV paid for by the Tmall physical group, which exceeds 30%. We are pleased with Tmall's progress and continue to demonstrate market leadership with a faster GM business growth than the industry as a whole during the quarter.
Other retail revenues in China grew more than 150 percent year-on-year to RMB 8 billion. Rapid revenue growth was driven by the growth of Hema and Tmall Import.
Sector information, let's look at basic trade. We received many comments from our shareholders who wanted more color in our core business segment, which includes companies at different stages of development. On this slide, we show our market-based core EBITA, including companies such as Taobao and Tmall. As a result, we continued to generate a market-based core trading EBIT of 35.6 billion RMB, which grew by 27% as our core business generates significant profits, allowing us Investing in areas that we believe would add value to our business. customers and future growth.
For the September quarter, losses from the four strategic businesses amounted to RMB 5.8 billion. To classify the losses of these companies from highest to lowest would be: number one, Ele.me; number two, Lazada; third, new imports at retail and Tmall; and then number four is Cainiao Network.
Thus, Ele.me losses have increased Q-on-Q for two reasons. First, contribution to the total loss of the quarter during this quarter; The last quarter was the first quarter in which we started to consolidate Ele.me. The effect was not complete. And number two, higher spending for user acquisitions.
While we will need time to generate a financial return for these strategic investments in core business, the revenue growth of these four business lines has been robust. We have already seen efficiencies and greater synergies from these companies in Alibaba's digital economy. After taking into account the losses related to these investments, our adjusted operating profit (EBITA) of basic trade increased by 13%, reaching 29.8 billion RMB.
And then, let 's take a look at the growth of cloud computing revenue, 90% from one year to the next; remains very strong, mainly due to the mix of revenue from high value-added products and services and strong growth in the number of paying customers. Adjusted EBITA resulted in a loss of 232 million RMB, reflecting our investment in technology infrastructure in anticipation of future customer demand.
The business figure of digital media and entertainment activities grew by 24%. The increase is mainly due to the increase in Youku's subscription revenues and to an increase in revenue from mobile value-added services provided by UCWeb, such as mobile search. Adjusted EBITA represents a loss of RMB 3.8 billion, mainly due to continued investment in the production of original and licensed content – as well as broadcast rights for World Cup matches in China . Revenues from innovation and other initiatives increased by 20%. The increase is mainly due to increased revenues from Tmall Genie and Amap. Adjusted operating profit represents a loss of 1.2 billion RMB.
So, other financial indicators, let's now look at some other indicators of the quarter. Thus, in the other net loss of the quarter compared to the same quarter of last year, which amounted to 1.7 billion RMB, against 1.5 billion RMB this quarter, the loss was mainly due to following factors: first, RMB900 million foreign exchange loss due to RMB depreciation against the US dollar during the quarter; second, the losses suffered by Ant Financial during the quarter as a result of its investment in user acquisitions and international expansion; as well as their product innovation.
Ant Financial's net loss during the quarter therefore resulted in our loss of 900 million RMB. The investment they invested in a new user yielded positive results, with an annual number of active users exceeding 700 million during the quarter. 70% of these users used three or more categories of Ant Financial Services.
The tax rate and the income tax expense for the quarter amounted to RMB 277 million, compared to RMB 2.7 billion in the same quarter the previous year. We saw a tax credit of around RMB 4.7 billion in the quarter, compared with RMB 2.3 billion in the same quarter of last year, with some key authorities having notified the renewal of their status as taxpayers. key software company for the 2017 calendar year by the relevant tax authorities. .
Excluding SBC expenses, investment income, investment impairment and the above-mentioned tax credit, our effective tax rate would have been 23% for the quarter ended September 30th. As for the results of the issuing entities, we recorded a 1.3 billion RMB pickup for the gain. This is largely due to our share of Sony's profits with a quarter late.
Cash flow and capital expenditures, our net profit rose 5% to RMB 18 billion during the quarter. Non-GAAP net income was RMB 23.5 billion, an increase of 6%. In terms of cash flow and share repurchase at the end of the quarter, cash, cash equivalents and short-term investments amounted to RMB 172 billion, compared to CHF 177 billion in June. The decrease is mainly attributable to cash flows from investing activities, including the acquisition of Trendyol, investments in Focus Media, partially offset by free cash flow from operations and disposal of investments .
We generated a robust operating cash flow of 31.4 billion RMB and a healthy free cash flow of 16 billion RMB during the quarter. Please note that we deducted our expenses in content when calculating free cash flow.
Increased capital expenditures related to our technology infrastructure, New Retail and Cainiao operations and increased acquisitions of licensed copyrights and intangible assets in our digital media and entertainment businesses a entraîné une diminution des flux de trésorerie disponibles par rapport à l'année précédente. Nous nous sommes engagés à accroître la valeur pour nos actionnaires par le biais de rachats d’actions. Nous avons racheté environ 9,12 millions de nos actions pour un prix d'achat total d'environ 1,3 milliard de dollars US à ce jour.
À l’avenir, nous révisons nos prévisions de recettes pour l’exercice 2019 de 375 à 383 milliards de RMB. La nouvelle plage de prévisions reflète un ajustement de 4% à 6% des prévisions de revenus initiales. À la lumière des conditions macroéconomiques actuelles, nous avons récemment décidé, à court terme, de ne pas monétiser les stocks supplémentaires générés par la croissance du nombre d'utilisateurs et par l'engagement sur nos marchés de détail en Chine. Nous prévoyons que cela profitera aux PME sur nos plates-formes de marché.
Comme Daniel l'a mentionné, nous pensons – oh, au fait, le taux de croissance après cet ajustement des prévisions de recettes montre que nous avons encore beaucoup d'avance sur la croissance de nos homologues mondiaux, les surpassant presque toutes.
Comme Daniel l'a mentionné, nous pensons que les flux de recommandations seront encore améliorés par la nouvelle interface Taobao, qui comprend une meilleure expérience de découverte pour les consommateurs, une capacité accrue de cibler, d'engager et de fidéliser le consommateur par ses marchands, d'accroître les propriétés monétisables de la plate-forme. Cela créera une grande opportunité de monétisation à long terme pour les inventaires incrémentiels, qui complètent la recherche.
Les flux de recommandations créent pour les clients une expérience de découverte d'entonnoir encore plus performante, permettant aux marchands et aux marques de développer la notoriété et l'intérêt de leurs produits, mais cela ne s'arrête pas là. Les flux de recommandations de notre plate-forme sont soit plus puissants et peuvent être utilisés pour impliquer les consommateurs tout au long de leur parcours d'achat dans l'entonnoir, afin de susciter des achats et de les fidéliser. Toutes ces améliorations n'auraient pas été possibles sans notre technologie et nos connaissances approfondies des consommateurs.
Veuillez noter que l'ajustement des prévisions de revenus concerne principalement nos unités commerciales de vente au détail en Chine, en particulier les produits de gestion de la clientèle, qui présentent une rentabilité élevée. Dans le même temps, nous poursuivrons nos investissements dans des domaines stratégiques et importants tels que les services locaux, la logistique, le divertissement, la mondialisation et le nouveau commerce de détail. Nous pensons que ces initiatives stratégiques sont des zones de forte croissance qui augmenteront considérablement notre marché total adressable. En conséquence, nous sommes convaincus de réinvestir la rentabilité de notre noyau pour saisir les opportunités et la croissance des bénéfices à long terme.
En conclusion, nous restons confiants dans notre proposition de valeur pour les consommateurs et les commerçants. Nous avons démontré notre capacité à générer une croissance robuste des revenus et une croissance saine et durable des bénéfices en identifiant de nouvelles opportunités de croissance soutenues par une exécution solide. Nous continuerons à développer de nouveaux utilisateurs et à servir nos clients, consommateurs et commerçants, avec une offre diversifiée de biens, de services et de divertissement sur notre plate-forme. Plus important encore, nous avons adopté et nous ferons preuve de discipline dans la façon dont nous développons notre entreprise afin de saisir les énormes opportunités qui nous sont présentées dans cette nouvelle ère numérique.
Thank you. Nous ouvrons maintenant la salle pour les questions et réponses.
Robert Lin – Alibaba Group Holding Ltd.
Opérateur. Nous sommes prêts à répondre aux questions et réponses.
Séance de questions et réponses
Opérateur
Thank you. Mesdames et Messieurs, nous allons maintenant commencer la séance de questions-réponses. Notre première question vient de la lignée d'Eddie Leung de Merrill Lynch. S'il vous plaît posez votre question.
Eddie Leung – Merrill Lynch de la Bank of America
Good evening. Merci d'avoir pris ma question. Je pense, Joe, que vous avez parlé des difficultés macroéconomiques du commerce électronique national. Pourriez-vous également commenter les tendances que vous observez dans le secteur des services locaux et des voyages, ainsi que dans vos activités à l'étranger? Avons-nous constaté une tendance similaire affectant ces autres entreprises? Et ensuite peut-être rapidement, pourriez-vous également nous rappeler l'impact potentiel des nouvelles lois sur le commerce électronique? Thank you.
Joseph C. Tsai – Alibaba Group Holding Ltd.
Ainsi, les domaines dans lesquels nous constatons le plus d’impact sont les biens de consommation durables, les gros articles, l’électronique grand public. Dans le domaine des services de proximité, comme il s’agit essentiellement de produits de base, vous commandez des repas, vous allez au restaurant, ils ne sont généralement pas affectés. Comme vous le savez, nous avons réuni l’équipe de gestion d’Ele.me et de Koubei au sein d’une même équipe, qui a déjà procédé à de nombreux ajustements en termes de structure opérationnelle sur les marchés locaux et qui est prête à exécuter la stratégie. Nous sommes donc très satisfaits des progrès réalisés.
En ce qui concerne les marchés internationaux, la dynamique des pays, par exemple en Asie du Sud-Est, varie d’un pays à l’autre. Comme vous le savez, l’Indonésie est un marché très très compétitif. Nous avons doublé notre engagement envers Lazada pour continuer à développer cette activité. Nous ne voyons pas d’effets économiques ou macroéconomiques énormes sur ces marchés, mais je pense que nous restons prudemment optimistes. Maggie, vous voulez commenter les lois sur le commerce électronique?
Maggie Wei Wu – Alibaba Group Holding Ltd.
Right. Pour les impacts de la loi sur le commerce électronique, notez que la loi est en vigueur, mais pas de règles de mise en œuvre détaillées. Cependant, nous pensons que le gouvernement tiendra compte de tous ces éléments de soutien et de tous les éléments positifs que la plate-forme de commerce électronique des biens a apportée pour soutenir les PME. Par exemple, comme stimuler les marchés intérieurs et les gens posent des questions sur l'impact fiscal, que ce soit leur taxe éventuelle par les marchands sur la plate-forme. Je pense que c'est un sujet sur lequel nous travaillons depuis longtemps avec les autorités fiscales, et nous pensons qu'elles ont effectué un travail de révision détaillé et la taxe supplémentaire générée par notre plate-forme, qui, si vous regardez quoi que ce soit (38:07), ils sont en amont, à droite, les fabricants. La taxe provenant de cette région serait bien plus importante que tout ce dont nous parlons sur la plate-forme de vente au détail. Nous allons donc surveiller et suivre de près les règles de mise en œuvre et, oui, nous vous tiendrons au courant s’il ya des nouvelles. Thank you.
Eddie Leung – Merrill Lynch de la Bank of America
Thank you. C'est très utile.
Robert Lin – Alibaba Group Holding Ltd.
Opérateur, question suivante.
Opérateur
Thank you. Notre prochaine question vient de la lignée de Piyush Mubayi de Goldman Sachs. S'il vous plaît posez votre question. Bonjour M. Mubayi. Votre ligne est ouverte maintenant. S'il vous plaît aller de l'avant avec votre question.
Piyush Mubayi – Goldman Sachs (Asie) LLC
Thank you. En examinant vos prévisions de revenus, vous avez écrit que vous aviez récemment décidé de ne pas monétiser à court terme l'inventaire supplémentaire créé. Pourriez-vous nous expliquer les raisons et aider également à comprendre le court terme auquel vous avez fait référence? C'est ma première question. Une deuxième question très simple, si vous me le permettez. Est-ce que vous seriez d'accord avec notre évaluation selon laquelle vous êtes dans une position similaire avec la monétisation des flux de données comme vous l'étiez avec la monétisation par mobile il y a trois ans? Thank you.
Maggie Wei Wu – Alibaba Group Holding Ltd.
Oui, Piyush, je vais parler des considérations derrière. Ainsi, il y a environ 45 jours, nous avons eu notre conférence de la journée des investisseurs à Hangzhou et j'ai dit que nous n'avions aucune mise à jour sur les prévisions de revenus d'ici là. C'est donc une décision récente. Vous avez probablement tous déjà vu et vécu les conditions économiques du passé, en particulier le mois dernier.
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.
Maggie Wei Wu – Alibaba Group Holding Ltd.
Right. D & # 39; agreement.
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.
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.
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.
D & # 39; agreement. Next question?
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.
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.
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.
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.
Joseph C. Tsai – Alibaba Group Holding Ltd.
Daniel, I think there's a question on commission rebates, whether that's going to come.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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?
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?
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.
Gregory Zhao – Barclays Capital, Inc.
Thank you so 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.
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.
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.
Youssef Squali – SunTrust Robinson Humphrey, Inc.
D & # 39; agreement.
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.
Youssef Squali – SunTrust Robinson Humphrey, Inc.
Great. That's helpful. Thanks, Joe. Thanks, Maggie.
Robert Lin – Alibaba Group Holding Ltd.
D & # 39; agreement. 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.
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.
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