Alibaba Group Holding's (BABA) Daniel Zhang on Q4 2017 Results - Earnings Call Transcript

| About: Alibaba Group (BABA)

Alibaba Group Holding Limited. (NYSE:BABA)

Q4 2017 Results Earnings Conference Call

May 18, 2017, 07:30 AM ET

Executives

Robert Lin - Head-Investor Relations

Joseph Tsai - Executive Vice Chairman

Daniel Zhang - Chief Executive Officer

Maggie Wu - Chief Financial Officer

Analysts

Piyush Mubayi - Goldman Sachs

Mark Mahaney - RBC Capital Markets

Alan Hellawell - Deutsche Bank

Eddie Leung - Merrill Lynch

Eric Sheridan - UBS

Alicia Yap - Citigroup

Chi Tsang - HSBC

Jason Helfstein - Oppenheimer

Evan Zhou - Credit Suisse

Operator

Good day ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group March Quarter 2017 and Full Fiscal Year 2017 Results Conference Call. At this time all participants are on a listen-only mode. After managements prepared remarks, there will be a Q&A session.

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

Robert Lin

Good day, everyone and welcome to Alibaba Group's March Quarter 2017 and full fiscal year 2017 results conference call. With us today are Mr. Joe Tsai, Executive Vice Chairman; Daniel Zhang, Chief Executive Officer; Maggie Wu, Chief Financial Officer. This call is being webcast from our IR section of the corporate website. A replay of the call will be made available on our website later today. Now, let me go quickly 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 discussions of these risks and uncertainties, please refer to our latest annual report and Form 20-F and other documents filed with the U.S. Securities and Exchange Commission. Any forward-looking statements that we make on this call are based on assumptions as of today and we do not undertake any obligation to update these statements except as required under applicable law.

Please note that certain financial measures that we use on this call, such as adjusted EBITDA, 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 reconciliations of GAAP to non-GAAP measures can be found in our earnings release.

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

Joseph Tsai

Thank you, Rob. Thank you all for joining us. We had a great quarter. Before we get into the details of our business, I want to give some perspective on the China macro environment as well as our vision of new retail. Both of these are important to understanding a long view of Alibaba.

On China macro, there is an important secular trend underway. Chinese consumers are driving the shift of the Chinese economy from an export and investment led to a consumption led economy. When looking at investing in China, this secular trend is absolutely important to pay attention to, and that is what we focus on when we plan our strategy rather than on quarter to quarter cyclical trends.

There are a few underlying reasons for this secular shift to a consumption economy and these reasons are why we think the trend will be long term and sustainable. First, China’s GDP per capita is now more than US$8000.

For Context [ph] when I started at Alibaba in 1999, Chinese per capita GDP was US$870. So at the current US$8000 level, people’s basic needs were shelter and foods are satisfied. So consumption is moving up the higher key of economic needs, in other words people are spending more on discretionary goods and services. We believe the growth of per capita GDP in China will continue for years to come and eventually approach advanced economy such as the United States where GDP per capita is over US$50,000.

Second, over the past several years, among Chinese urban employees, wages have increased over 10% per year, year-on-year. So people have disposable income to spend. And lastly, the high savings rate in China means that Chinese consumers have a lot of cash on hand. Net cash on the Chinese household balance sheet that is total cash deposits minus debt is nearly US$4 trillion.

In addition, Chinese household debt as a percent of GDP is 45% as compared to 80% in the United States. The potential levering up of the Chinese consumer especially among the younger Chinese population will provide a powerful driver of consumption for many years into the future.

Proof of the strength of the Chinese consumer is reflected in the 2006 retail sales growth in China at 10.4%, which outpaced GDP growth. Now, what does all this mean for Alibaba?

Our view is the traditional thinking that pits e-commerce against physical retail no longer holds. The distinction between online and offline retail is quickly going away because of the mobile phone. Traditionally e-commerce is about you sitting at a home in your office buying stuff on your desktop computer. But Chinese consumers today are equipped with a mobile phone and they can buy anything, anytime, anywhere.

Now let’s focus on the concept of anywhere. Because of the mobile shopper this is changing the way we think about customer traffic, retail space, inventory location and logistics. Let me give you an example. Under our new retail model, if you walk into a grocery store at lunch time with your mobile phone you can do any of the following three things. First, you can eat in by ordering fresh items from the counter and have them cook it for you right there.

And second, you can buy a fresh lunch box to take back to your office. Third, you can order some fresh sea food and vegetables that you don’t want to look back to your office and ask the store to deliver them to your home before dinner time. You can do all of the above that’s by selecting items and paying with your mobile phone and all of your consumption activity is being captured digitally. So now the store knows your preferences and can give you a personalized selection of products on your mobile app no matter where you are. It knows you and can predict your needs.

And Alibaba is best positioned to capitalize on this digital transformation, here’s why. Number one, we have the consumer scale with more than 500 million mobile active users engaged in commerce activity monthly. Because of this we are the partner of choice for operators with physical retail footprint. Number two, we have continuous fresh data generated by activity of these users across our ecosystem of internet services from shopping to local services to entertainment. Number three, we have the technology. Our cloud computing technology gives us the proprietary capability to manage massive amounts of data and our development in artificial intelligence gives us the brains to get value out of that data.

With that, I would like to turn it over to Daniel. Thank you.

Daniel Zhang

Thanks, Joe. Hello, everyone, and thank you for joining us on our earnings call today. We enjoyed an outstanding quarter and a fiscal year. Over the past year, our businesses have prospered through innovation and a realization of synergies between our various problems in commerce, digital entertainment, logistics and cloud computing. Our business is more than making connections. We are transforming existing business models so helping manufacturer’s rents, and the retailers cope with digital transformation.

In this ever changing environment, the impact of the internet continues to move up the retail chain from sales and marketing to supply chain, manufacturing and even further design. Our mission of making it easy to do business anywhere is more relevant than ever.

Our core commerce business sustained very healthy growth. It is defining more than expectations about the Chinese economy and even our own flow of large numbers. Today, we have more than 500 million mobile active users as a result of our continued excellence in capturing the consumers time and wallet share with discovery, personal recommendations and entertainment.

Taobao has transformed into a consumer community, powered by a risk mix of content and impacted features, such as live streams, news feeds, short – videos, photos generated by everyone from influences to celebrities to brands.

Even as our active user base grows, average time spent per user continue to remain robust while user stickiness, as measured by TAU divided by MAU ratio has increased to 41%.

Taobao is moving from satisfying demand to creating demand so the continuous improvement through our aggressive [ph] driven personalization and the roll out of [Indiscernible] merchandizing for different user segments.

Tmall remains the founder of choice for brands serving as cornerstone of their channel online retail strategy and operations. The value that it brings to merchants and surpass sales marketing and brand building customer management, new distribution channels to lower tier cities and the rural areas, and even new markets outside of China.

Tmall continues to be the primary engine for the ongoing consumption upgrade from daily items to high quality discretionary goods among Chinese consumers. Our global strategy achieved a key milestone with the launch in Malaysia of the first eWTP hub outside of China. We are working together with the Malaysia government to develop logistics, payments, training and the turnkey export services dedicated to supporting local business to grow through cross border e-commerce.

We continue to develop Lazada in order to grow more access to Southeast Asia consumers. Together with accelerated growth in AliExpress, we now have 83 million annual active buyers globally besides China.

Our cloud computing business continued to grow at a fast pace. We now have more than [Indiscernible] 7000 paying customers with revenue growth of 121% year-over-year during fiscal 2017. As our paying customer’s base continues to grow, we are also introducing cloud based applications and services that deliver new value to customers.

We have completed the initial phase of integration of our digital media and entertainment assets forming a close look metrics with a mix of both content distributors and content generators.

The successful data integration fitting our retail commerce platforms and our digital media and entertainment metrics now allows brands to track, engage and then manage the whole life cycle of their customers in our ecosystems.

Upon this foundation, we have introduced a solution for brands that we call Uni Marketing that is unmatching its potential to optimize digital brand, building and marketing campaigns. By facilitating brand into accumulate and analyze customer activity data for ongoing management we will help brands to convert marketing, spending from an expense into an investment.

Today, Alibaba group is an economy with 507 million active mobile users and a RMB3.8 trillion in -- GMV. And the opportunities ahead for our business is brighter due to the network effect and the possible synergies across our ecosystem. We are excited by the multiplied effects that can be gained through collaboration between our different platforms.

Now with immense potential for growing the user base of our core commerce platforms through conversion of users in our digital media and entertainment metrics as well as through the payment platform of our affiliate comp [ph] Alipay.

The opportunity for cost saving to users across the various platforms is clear. We have a long empowered [ph] businesses in digital sales and marketing and today we are progressing up the retail chain to support them in intelligent manufacturing and the project is run as well as cloud infrastructure.

As this is the increasingly digitalized their entire operations we can leverage the combined technology and infrastructure of our retail, logistics and cloud platforms to offer a solution that maximizes the value of digitalization.

In globalization, the manufacturers and the merchants representing our China retail platforms are eager to address the expanding and evolving consumption demands globally through our platforms. We will focus on leveraging the competitive advantage of our China retail platform, logistic platform and global retail platforms to work towards serving 2 billion global consumers.

At the same time, China’s commitment to importing US$2 trillion worth of goods as part of the one bill one rule initiatives presents a significant opportunity for our platforms to broader selection of high quality products to meet the demand of the world’s largest consumer market.

We will continue to invest significantly in AI technology such as voice recognition, machine learning and a natural language processing for application to our technology in real use cases, such as further discovery, personal recommendations and customer services. It will contribute to meaningful improvements in operating efficiency across all our platforms.

Further technology developed to serve our own business needs can be open to our customers, both existing and new. Now I’ll turn the call over to Maggie, who will walk you through the details of our financial results.

Maggie Wu

Thank you, Daniel. Hello, everyone. We are very happy to announce that we delivered another quarter of excellent results. In terms of quarterly revenue, this quarter the total revenue growth accelerated to 0%, the highest growth rate we have achieved since the IPO.

This was led by robust growth in our core commerce, Alibaba cloud as well as digital media and entertainment businesses. Our non-GAAP free cash flow was US$1.2 billion for the quarter demonstrating the strength of our business.

Revenue from China commerce retailing business now represents 57% of total revenue, down from 76% for the same period the last year. We now have a more diversified revenue base with gross drivers including Alibaba cloud, digital media and entertainment and the international businesses.

Our ability to monetize the users on our platforms continues to improve. Annual revenue per annual active buyers continued to increase, reaching RMB251 US$36 in the March quarter. Mobile revenue per mobile user reached RMB179 or US$26 in the March quarter.

Our mobile commerce platforms have become the destination for social commerce, consumption of content and brand engagements.

Quarterly cost trends; cost of revenue excluding stock-based compensation was RMB14.3 billion, as a percentage of revenue increased year-over-year, primarily due to the increase in content acquisition cost of Youku Tudou, cost of inventory of Lazada and the logistic cost associated with Tmall supermarket as we are talking about in previous quarters.

We continue to see strong operating leverage from our China commerce business. This operating leverage allows us to make strategic investments which positions us for long term revenue and margin expansion.

Our effective tax rate excluding SBC and the one-off items was 23% in the quarter ended March 31, 2017, up from 14% in the same quarter of 2016. The lower tax rate a year ago was primarily due to our investment in Suning, which was treated as reinvestment of earnings in China and does not subject to withholding tax. This quarter we are accruing the withholding tax on all distributable earnings by our PRC operations, which lead to an increase in our effective tax rate, which is actually a normalized tax rate. We expect in the future novelized annual effective tax rate excluding SBC one-off item will be in a range of 20% to 25%, assuming that no significant impact from investments or acquisitions etcetera.

Non-GAAP net income in the quarter was RMB10.4 billion, an increase of 38% year-over-year.

Free cash flow, capital expenditures and the cash; we continue to generate significant free cash flow. In the March quarter, we generated RMB8 billion or about US$1.2 billion in free cash flow. Our cash flow allows us strategic and operational flexibility to invest in technology and acquired us resources to accomplish our strategic objectives.

Total capital expenditures in March quarter were RMB3.4 billion in which RMB575 million is related to the acquisition of land use right and the construction in progress.

At the end of the March quarter our cash, cash equivalents and short-term investments were RMB146.7 billion or US$21 billion. This is an increase of RMB8 billion from the end of December quarter, primarily because of free cash flow generation from our operations.

Segment reporting; for our core commerce, revenue increased to 47% year-over-year. China commerce retail revenue grew 41% primarily due to the strong growth of online marketing service revenue.

Online marketing service revenue in our China retail market place grew 46% year-over-year which was driven primarily by mobile user growth and our ability to deliver more relevant content to consumers through our improved data technology. This growth resulted in higher average spending on our online marketing services by an increasing number of brands and merchants.

Commission revenue grew by 34% year-over-year, reflecting robust GMV growth on Tmall. Our consumers purchased more frequently across more categories on our China commerce retail market places. The average annual spend per active buyer for the 12-months ended March 31, 2017 continued to increase both year-on-year and then we continued to see healthy consumer growth on spending.

International commerce retail revenue increased 312%. This is a year-on-year increase, mainly due to the consolidation of Lazada, starting in mid-April and the re-acceleration of revenue growth from AliExpress.

Our AliExpress and Lazada businesses had about 83 million annual active buyer combined globally for 12-months ended March 2017. Our core commerce, core market place adjusted EBITDA margin of the segment remain flat year-over-year at 59%, still very high taking into the account of operating leverage generate of the business and investment we have made.

Cloud computing revenue increased to 103% year-on-year. This was less than increase in the total number of paying customers partially offset by a number of price cuts during the quarter as we continue to pass cost savings to our customers to improve technology and scale.

We reached a record 874,000 paying customers this quarter. We continue to see strong new customer additions across a variety of industries and businesses. Our more established customers are increasing usage of higher value-added services and applications as well.

Adjusted EBITDA margin of the cloud computing segment improved from a negative 16% in the prior year's quarter, so negative 8% this quarter. Our cloud computing business top priority remains expanding market leadership. We will continue to acquiring customers through more cost-effective solutions for standard products, as well as developing and deploying more sophisticated products and services.

Our digital media and entertainment segment revenue increased 234% year-over-year primarily due to the consolidation of Youku and to increase in revenue from mobile value-added service generated by UCWeb.

Adjusted EBITDA margin of this segment improved slightly quarter-on-quarter to negative 44% this quarter. We will continue to invest in content user acquisition and infrastructure for the segment.

Going forward on full-year basis we expected the business will continue its fast growth and we expect the negative EBITDA margin for the digital media entertainment segment to narrow.

Revenue from innovation initiatives and other segment increased to 88% year-on-year, adjusted EBITDA margin for this segment was negative 74% reflecting ongoing investment in AutoNavi, YunOS and DingTalk.

For fiscal year 2017 financial highlights. Total revenue in fiscal year 2017 include 56% year-on-year to RMB158 billion, driven by the healthy and sustainable growth of our China commerce retail business, triple digit revenue growth of Alibaba cloud, as it continuous to drive market leadership.

The inclusion of Youku Tudou and Lazada in our financial statement also contributed to revenue growth on a year-over-year basis, but we are at the end of the full anniversary effect of this.

GMV [ph] transacted China retail marketplace in fiscal year 2017 was about RMB3.8 trillion, an increase of 22% compared to RMB3.1 billion in fiscal year 2016. Our China GMV growth was primarily driven by increased in spending per user growth with fast growth in order frequencies among active buyers.

New active buyers continue to drive GMV growth besides the GMV China retail marketplace we also see strong growth in GMV of our global businesses. We are on track to reach our RMB6 trillion GMV goal by 2020 fiscal implying CAGR of 17% year-on-year CAGR, yes.

Annual active buyers in China reached 454 million, an increase of 31 million from the 12 month period ended March, 2016. We had 83 million annual active buyers on AliExpress and Lazada marketplace combined globally here in fiscal year 2017.

We have successfully capitalized on the transition of users from desktop to mobile. For fiscal 2017 year end our mobile MAU reached 507 million. Mobile GMV transacted our China retail marketplace grew strongly by 49% year-on-year to RMB2.98 trillion which equals to US$433 billion and represented 79% of total GMV.

Mobile revenue growth was even stronger showing 80% annual growth and they represent 80% of total revenue for China retail marketplace. Since our IPO we have shared with you our belief that mobile monetization rate would exceed that of desktop and this has become a reality now.

Our cloud computing segment maintains strong growth in fiscal 2017. With revenue increasing 121% year-on-year to RMB6.7 billion, adjusted EBITDA margin improved to negative 7% from negative 41% in the previous year, primarily due to the robust revenue growth and economies of scale.

In fiscal 2017 we repurchased and canceled approximately 27 million of our shares for about US$2 billion. Our Board of Directors has authorized a new share repurchase program in the aggregate amount of $6 billion.

Looking ahead we are very excited about the prospect of fiscal year 2018. We expect a healthy and sustainable growth of our China commerce retail business. Our revenue base is now more diversified with businesses such cloud computing, digital media and entertainment, they are becoming more meaningful revenue growth drivers.

Same as last year we intend to give our fiscal 2018 revenue guidance which will be simultaneously webcast in the upcoming Investor Day. Our Investor Day will be held on June 8th, 9th in Hangzhou. For those who are unable to attend in person we will make presentation materials available on our corporate IR website.

That concludes our prepared remarks. Operator we are ready to begin the Q&A session. Thank you.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the question and answer section. [Operator Instructions] Your first question comes from the line of Piyush Mubayi from Goldman Sachs. Please ask your question.

Piyush Mubayi

Thank you, and congratulations on founding top-line growth, a record since the IPO, Joe, Daniel and Maggie. My first question is with regard to 46% growth in online marketing services we’ve seen. Would you be able to split that between the brand and pay-for-performance advertising? And if possible the growth that you’ve seen in paid click and cost per click. And while you talk through that if you could give us a sense of for how much longer we can expect this very quick pace of growth to be maintained? Thank you.

Maggie Wu

Hi, Piyush. Thank you for the question. The strong growth we’ve seen in our China retail marketplace especially online marketing service. Actually when I look at these drivers. Number of clicks, click through rate, all of these shows very healthy growth. And this actually due to our continue efforts in providing the relevant content through our data and technology to attract more users and buyers to our platform.

So, in terms going forward, we are very confident that all of these efforts we made will generate good results going forward and things like our aggregate improvement, personalization and the use of data, right now we see this is still at starting point at early stage.

Daniel Zhang

Piyush, I just want to supplement that. You asked about the distinction between brand and pay-for-performance advertising as those two are different types of -- coming from different types of advertising budgets. We actually don't see it that way. If you take a typical FMCG company, they are -- they will use pay-for-performance, in other words click-based type of advertising even to promote their brand because the landing page of the click could fall on something that as a brand promotional page as opposed to a detailed product item to be purchase.

So, they are seeing are suite of potential online marketing products from pay-for-performance to CPM-based advertising to special sort of customized brand promotional campaigns using our data sets. So, I don't think we are seeing the online marketing business as brand versus P-for-P type of split.

Piyush Mubayi

Understood. Thank you.

Daniel Zhang

Operator, next question.

Operator

Thank you. Your next question comes from the Mark Mahaney from RBC Capital Markets. Please ask your questions.

Mark Mahaney

Great. Thanks. I just want to ask about international. You had that data point in there about how you’ve now achieved 83 million active buyers. When you think about overall investment priorities for the company where does and since the IPO, as international now become much more material investment area for you in terms of potentially strategic actions or organic growth? Just lay that versus the other growth initiatives that you have now how does international rank? Thank you.

Daniel Zhang

This is Daniel. Yes. International is core strategy for the next five to ten years. We are very happy to see we made a concrete progress in the Southeast Asia. Actually last April since our investment in Lazada last April, actually their business grow very well and together with the existing AliExpress which is the cross-border export business, actually we are happy to see in terms of the GMV, in terms of the annual active buyer we a robust growth, but we do believe this is just the early stage of the new gain in the in the market outside China.

What we want to do is to leverage what we call the China engine to emprove the growth in other markets. China is famous for the manufacturing and we have so many local brands, China local brands and retailers and a small – OEM factories on our China retail platforms. Today they are eager to go with us to the new market outside China. We believe this give us a unique value proposition and the unique advantage to grow the new market outside China.

Mark Mahaney

Thank you, Daniel.

Robert Lin

Operator, next question.

Operator

Your next question comes from the line of Alan Hellawell from Deutsche Bank. Please ask your question.

Alan Hellawell

Thank you. And hi, Dan, congratulations. I was hoping to gain further color on margin profile for core e-commerce and media and entertainment as we move into FY 2018. Its very well profiled that in core e-commerce you have countervailing plan which is the extremely profitable and leverageable core retail business and for the time being at least the impact of growth businesses such Lazada and TMall supermarket. And so I’m just curious how we should think about the interplay of those two broad pieces in commerce from an EBITDA margin perspective as we move into FY 2018.

And then similarly, Maggie has very helpful you pointed out or suggested that there is scope for negative margin compression or margin improvement in digital media and entertainment. And I’m just wondering whether you could just outline the basic content center plans for IGE [ph] and then maybe topline related progress in subscriptions.

And then finally, so much just a big picture, so much of these story and the success story marketing services seems to crystallize in the experience of key account TMall storefronts. They get the brand and value proposition that Joe and company has been talking about over the past year. I’m just wondering the guys in the middle and the bottom of the pyramid what are we doing for them, because its been said at time that we have more than 1 million advertisers and love to find out how they are achieving success? Thank you.

Maggie Wu

Thank you, Alan. In terms of the margin as you have seen that our channel retail business continues to see very strong margin and that is a result of how the operating leverage offset our investments in those new areas. So, going forward, we continue to see this huge potential in each of our business development. So high profitability of our core commerce will support our investment in new business such as cloud computing and digital media and entertainment.

In the long run we do expect to see cross segments synergies that will further deliver overall leverages in the entire business, but having said that, like we mentioned before that we don’t manage the business to manage our overall margin profile. We will ensure the growth of the whole business and profitability. That’s how we look at the business margin.

Daniel Zhang

I would have a few more comments on the first question. I think in terms of Tmall Supermart and Lazada, I would say, like Tmall Supermarket, we never view this as a separate independent business, and we view this – it’s a very important piece of the entire team operation. And as far as this Tmall Supermart operation we very effectively improve the user stickness and improve the user experience because they all buying the daily necessities on Tmall Supermart.

Today our fresh products business also grown very well through Tmall Supermart. So even we have a lot of investment in Tmall Supermart, but on a general basis you can see we have very robust growth and probability and we do believe this is a model, is a very healthy model. We will continue to invest on this. And in terms of Lazada, actually today is still early stage, but we are very happy to see the fast growth of their business, but we do see a strong synergies between the overseas market and China market, on top of the China supply to the world I mentioned just now, and we also trying to leverage the fulfilment network Lazada built in South Asia and to leverage this network to ship the product from China to that region and for multiple retail platforms of Alibaba. So that's the synergy we can see in our globalization.

Joseph Tsai

Alan, I’ll address your second question about kind of the content spending layout for the Youku business. The first thing to say is that we don't think this is a winner-take-all market. This is entertainment market that is large enough that can accommodate several players. And the market has basically settled to three main players as you know and we think that over time the market will become more rational.

Although in the near term they are still going to be pretty fierce competition for licensed content, but I think just like other players we have moved towards not just licensing content that we don't produce, but also to develop ways for developing proprietary content and we’re working with talent and directors for proprietary contents.

So, over time, the cost of content should come down. Obviously, we’re not going telegraph to you how much we’re going to spend over the next 12 to 18 months. This is a very competitive market and we will find a content that we want spend on accordingly.

Daniel Zhang

This is Daniel again. For the last question about the small scale business on our platform, I would say that's very important question and these group of business are very important to Alibaba, because our mission to help SMEs to make it easier to do business anywhere. So in terms of how to help them to do business better, today what we do is to leverage the data and technology, we develop a lot of tools and services to enable them to do bit efficiently.

And for example, today the small scale business they can -- maybe they don’t afford to do a very big brand activities, but they do have the tool, very efficient tool, to tailor-made their storefront homepage which could be driven by big data and for the visitors to the store and they can see the different selections and different views, even different views. And we also give them lot of promotion and marketing tools to these small merchants. And I think this is a gross, continues gross of our small merchant is very, very critical for the long-term success of our business.

Alan Hellawell

Thank you.

Robert Lin

Operator, next question.

Operator

Thank you. And your next question comes from the line of Eddie Leung from Merrill Lynch. Please ask your questions.

Eddie Leung

Hi. Good evening. Questions, the first one is about the product mix on your Chinese e-commerce platform. I’m just wondering if we have see a shifts of product mix from high margins products to low margin business [ph] or the other way round. And how it can affects the ability of your merchants to pay for your marketing and other services. So that’s my first question.

And then the second question is also related to your overseas business. So just wondering broadly speaking are we at the moment, are we going deeper in the existing market? Are we thinking more about increasing our geographical coverage to more countries? Thanks.

Daniel Zhang

In terms of product mix, I would say, actually we are such a big platform and we have over 500 million monthly mobile active users. So, we cannot give 500 million people the consistent high value or low value product, low price products. So that's why the data and the data driven business is so important for us. So today what I can share with you is that, we already accomplish the 100% data-driven personalization of page in all our major user interface and our mobile app. And people – but we run this not only big based on the price, but most important thing is based on the lifestyle, based on the demographic of our customers. So that’s the core of our operating mythology.

And in terms of the international strategy, as I said before this is a long term commitment, this is long-term strategy. We start with Southeast Asia. We believe this is a very, very important region with very big population, but close to China and perhaps have enough Chinese population there and Chinese products are very popular in this market. So that's why we start with South Asia. But so far our cross-border platform AliExpres we also cover a lot more countries. And we will continue to invest in this international market, but this is a long -- that’s a long way to go.

Eddie Leung

Thank you.

Robert Lin

Operator, next question.

Operator

Thank you. Your next question comes from the line of Eric Sheridan from UBS. Please ask you question.

Eric Sheridan

Thank you very much for taking the questions. Maybe the first, I was curious how short-form video or video around brand awareness or selling might become a bigger part of the platform longer-term sort of merging the world of video consumption with e-commerce. And what that might be for bandwidth or infrastructure cost longer-term?

Second question would be following up on Joe's comment from the presentation, maybe an update on how your leading advantage on mobile commerce is accelerating your efforts to blur the lines between off-line and online retail? Thank you so much.

Daniel Zhang

This is very interesting question. For the short-form video, we believe this is a very important content format and in the future in mobile commerce. And we do see, actually in our mobile ecosystem before we have buyer and seller, but now we have a lot more roles, a lot more partners than in this ecosystem. Some of them are the content providers and celebrities influences or even brand sell. But short compare to other form – content formats, actually short-form video are the e-commerce actually they have some advantage.

The biggest advantage is that, it’s a – lot of content are evergreen. Lot of contents can be repeatedly consumed and which will give us a lot of operating leverage and in the longer run we do see some costs increasing short-form video, but if we look at the overall user experience and the merchants tools, video as a merchant tools to promote their brand and broadcast their new content, new products, we believe this will definitely enrich their user experience and enriched the ROI of the merchant operations.

Joseph Tsai

Eric, on your second question I think there is a -- this is a -- digitizing the offline retail sector is the very, very complex question, so its probably would take some time to get into all the details, but I think to get people better understanding of this is to understand that we are the partner of choice right now because of our large scale online presence and hundreds of millions of consumers coming to our platform and all the data we have on these consumers, so that the these physical retailers, retailers with physical footprint are very, very interested in working with us, try to figure out how to increase their foot traffic as well as obviously increasing their sales per square foot, how to better leverage their real estate to make their operations more efficient and also more sales.

They are now -- again a lot of the retailers are with physical footprint are not doing great, but they see an opportunity those that are willing to sort of disrupt themselves and adopt changes working with us will come out ahead and that's why we are pushing the strategy of new retail very, very hard. And I think if you come to Investor Day we’ll develop a more sort of comprehensive understanding of new retail. It is a complex area. We think we’re the only people that have the capability and understanding and the know how to execute it.

Eric Sheridan

Thank you.

Robert Lin

Operator, next question.

Operator

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

Alicia Yap

Hi. Thank you. Good evening managements. Congrats on the strong results. Thanks for taking my questions. I have a question, can management share with us among the big brands on your platform, how much of the percentage of ad budgets that you believe Ali is not capturing? And how much higher the overall as a percentage you could ultimately capture over the medium to long term? And then a quick question you said is there any plans for investing or partnering into the autonomous driving technology? Thank you.

Daniel Zhang

Yes. Today our retail marketplace we have a lot brand partners, they are not only sell products on platform but also are doing brand building activities, customer management activities, promotions and we do see they spend more and more starter on our platform. But we do see very interesting changing trend which is before they more like – they spend more like a dollar in nature of credit marketing before the people who running the business on our platform are traditional e-commerce team, we call e-commerce team, but today more and more company connect that e-commerce team with digital marketing team.

So today especially after our development of the digital media and entertainment platform we established a very good connection between us, digital marketing and the commerce and we are very confident that over time people will spend more and more marketing dollar, a branding dollar for the data driven cost platform solutions on our ecosystem.

Joseph Tsai

On the autonomous driving question, I think you have to understand, a lot of technology companies are doing this. Obviously the long term commercial opportunities are very murky, nobody has figured out the long term economic model for this, but people are doing it because there are some very interesting artificial intelligence related technology in a autonomous-driven car that gets all the technology, company is very intrigue, things like computer vision, LIDAR technology, simultaneous localization and mapping and all these technologies are very interesting and that's why companies are all investing in those technologies and the same is true in the case of Ali Baba.

We may not be investing those technologies for to create a driverless car, but we are investing in all those component technologies for other applications.

Alicia Yap from

Thank you.

Robert Lin

Operator, next question.

Operator

Thank you. Your next question comes from the line of Chi Tsang from HSBC. Please ask your question.

Chi Tsang

Great. Thank you very much and good evening everybody. I want to ask you about rural strategy. Can you give us an update on your plans to expand coverage and also to drive demand in rural China? And I'm also wondering if you can give us an idea of what percentage of your China retail businesses being driven by retail in terms of whether its buyers or sort of spending and how fast that’s growing? Thank you so much.

Daniel Zhang

Yes. Rural strategy is very, very important and during the past two years we have already develop a very – we have very rapid gross in rural areas. We have a rural Taobao strategy which today cover close to 30,000 villages across China. And today what you’ll see that -- and traditional brick-and-mortar chains cannot effectively and efficiently cover of the rural areas. Internet does give us a new way to serve the people in the village.

So what we are doing right now is to help our merchant’s brands on our retail marketplaces to work closely with them, to serve the people in the village. We even do tailor-made products with our partners to develop, to eliminate all the distribution channels to serve the end customers in the village.

But looking ahead we will do – we are not only trying to sell more from urban city to the rural areas, actually in rural village we also can have a very good organic agricultural product supply and what we want to do to -- again use our retail platform. We want to help them, help the farmer to sell more to the people in the city.

Maggie Wu

Regarding to your question on the revenue driver for China retail marketplace revenue, if you look at the direct driver, people were paying us are these merchants and brands, so the number of paying merchants and brands are increasing, as well as their spending level and our platform. So what makes them paying more and more people coming to us is what we have done on a marketplace both on user and user experience side. So, I mentioned about the gross driver of revenue increases in number of users coming to our platform. We’ve reported 507 million MAUs by the end of this quarter, and so that bottom of the clicks, and also the conversion of these matches all showing very positive growing trend. This reflect that our ability to deliver more rather than content consumer improve the data and technology.

So this is – also by the end of day, merchants and brands look at the value we’ve provided to them, they vote by their feet right. They started -- more and more people start to realize that the value we provided are not only the transaction value but also help them acquire consumer and make the consumer to buy and then retain consumer, their loyalty, basically it’s a whole customer operations in the entire customer life. So that’s driver for the growth in China retail marketplace.

Chi Tsang

Thank you for that. I was actually referring to framing that question around rural, trying to get a understand of how much rural is impacting the china retail in terms of buyers or in GMV or something like that?

Maggie Wu

Yes. Rural is right now is still a very small business compared to our entire China retail, so, not that significant, nothing significant.

Robert Lin

Operator, we will take the last two questions, please.

Operator

Okay. Thank you. Your next question comes from the line of Jason Helfstein from Oppenheimer. Please ask your question.

Jason Helfstein

Thanks. Perhaps a longer term question, specific to the 2020 goal [Indiscernible] GMV and 2 billion customers, generally how do you see that broken down between domestic and international, just as you were thinking long term about our global strategy? Thank you.

Daniel Zhang

Well we do have a goal in 2020 we want to achieve a RMB6 trillion in GMV to end by fiscal year 2020, but I think to serve 2 billion consumers is a even longer term goal and we are working very hard towards that goal, but I think we just at the beginning stage to get our business globalized. And Southeast Asia is the first area we are exploring and we want to make sure that we understand the local culture and the local people because shopping is hardly relevant to the culture and the lifestyle. So actually this also gives us a lot of opportunities to train our people and upgrade our team to be a real global team. I think that’s the most important thing at this stage and with the more powerful team and people and we can serve more consumers around the world. Last question, please.

Operator

Your last question comes from the line of Evan Zhou from Credit Suisse. Please ask your question.

Evan Zhou

Hi, good evening. Thank you for taking my questions. My question is regarding our media related revenue, just wondering whether we can have some more colors on kind of the breakdown for that revenue because I think UCWeb has been doing really well besides the Youku business has also within Youku I think the industry trend is by the pace or circulated revenue in surpassing the [Indiscernible] revenue. So I was wondering whether we kind of see within the trend and also are there any other sort of like user [Indiscernible] singing and music related revenue that we can, we can kind of have some more colors on. And then finally on our RMB6 billion buyback program I think traditionally we view this as a kind of to offset the impact on SBC but as we see our SBC also being kind of trending down both on absolute numbers and as a percent of revenue. So I was wondering that whether we are kind of seeing the program to bar their program as on their way to kind of mutual value to shareholders. Thank you.

Daniel Zhang

For the first question, actually we view Youku, we view UCWeb and then our assets in digital media etcetera not a standalone assets again. We view this as an integrated part of our consumer media platform which is our mobile power and Tmall. So actually we have – we do see a big advantage to leverage our existing advertisers place on our China retail platform and to help them to promote their products and build their brands across platforms to Youku and to Youku to UCWeb. But using organic at format consistent with the contents in both of the – in each of the apps.

So today what we are in a very unique position to have a consumer media, we have a video side, we have the mobile search plus in use fees and as format and which is all – actually which is all in one solution to our advertisers. But most important thing is that backhand we have our unified ID in place to help our advertisers to track the footprints and of the advisors and all the datas could be collected and used further in their future operation. This is a unique position of our UCWeb and Youku revenue operation.

Yes, coming on the buyback program. So I think you need to look at the buyback program in the context of what we have already done over the last two and a half years since we became a public company. Over that period we spent a total of US$5.1 billion and brought back approximately three percentage points of our shares, and our reason that we have communicated very clearly was that we want to prevent dilution, so I’m very happy to say that since the IPO our share count, our outstanding share count has not increased despite the stock based compensation programs.

So the primary reason for buyback is to sterilize the dilutive effect of our stock-based comp program. And I think this US$6 billion buyback is no different, it’s for that name purpose, but when you say you know return value to shareholders it is you know in a buyback anytime you counter the dilutive effects you are --it’s not returning value to shareholders you are preserving value to shareholders. But where obviously cash is going out the door to some shareholders in a buyback program but we are not saying that, oh we have cash sitting on the balance sheet we don’t know what to do with. There are lot of very important strategic activities where we have US$20 billion of cash on the balance sheet that we want to deploy. And the buyback is part of our capital allocation thinking, but it’s not the only thing, there is – there are plenty of strategic areas and opportunities that we would want to be able to deploy our cash.

Robert Lin

Okay. Thanks to everyone for joining. If you have further questions, please reach out to the investor relations team. Thank you.

Operator

Thank you ladies and gentlemen. Unfortunately we have run out of time for further questions. That does conclude our conference for today. Thank you for participating. You may all disconnect.

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