JD.Com Inc

HKEX:9618

Earnings Call Transcript 2017-Q4

[Operator]

Hello, and thank you for standing by for JD.com's Fourth Quarter and Full Year 2017 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Ruiyu Li.

[Ruiyu Li, executive]

Thank you, operator. And welcome to our Fourth Quarter and Full Year 2017 Earnings Conference Call. Joining me today on the call are Richard Liu, our CEO; and Sidney Huang, our CFO.

For today's agenda, Mr. Huang will discuss highlights for the fourth quarter and the full year 2017. Following their prepared remarks, Mr. Liu and Mr. Huang will answer your questions.

Before we continue, I refer you to our safe harbor statements in earnings release, which apply to this call, as we will make forward-looking statements.

Also, this call includes discussions on certain non-GAAP financial measures. Please refer to our earnings release, which contains all reconciliation of non-GAAP measures to the most direct comparable GAAP measures.

Finally, please note that, unless otherwise stated, all the figures mentioned during this conference call are in RMB.

Now I would like to turn the call over to Sidney.

[Xuande Huang, executive]

Thank you, Li. Hello, everyone. Thank you for joining us today.

We are pleased to report another quarter of strong top line growth, healthy core e-commerce profitability and exciting new strategic initiatives.

During the fourth quarter 2017, our net revenues grew 38.7%, a solid performance on top of an exceptionally strong fourth quarter in 2016.

Our direct sales revenues grew 37%, led by home appliances, food and beverage, cosmetics, home furnishing and baby products.

Revenues from services and others grew 55% year-over-year, the highest growth rate in the past 6 quarters, driven by third-party supply chain management and advertising services.

For full year 2017, our net revenues increased to over 40%, and the revenues from services and others grew nearly 50%.

Gross margin in the fourth quarter was 13% compared to 13.7% in the fourth quarter last year. The margin reduction was mainly due to impacts from new businesses, which include the JD Logistics third-party business, technology services and overseas operations. Excluding new businesses, JD Mall gross margin was slightly higher than the same quarter in 2016 and second quarter 2017.

On a full year basis, non-GAAP gross margin improved to 42 basis points from 13.4% in 2016 to 13.8% in 2017, reflecting economies of scale from the third-party business and accelerating advertising revenue growth, partially offset by the investments in new businesses.

During the fourth quarter, we invested heavily in logistics, marketing and technologies. Most notably, we continued to expand our warehouse network during the quarter. It will take a couple of quarters to reach full capacity utilization. We added 81 warehouses during the quarter to a total of 486 nationwide, with over 10 million square meters in total space at the end of 2017, up over 70% from 12 months ago. This capacity expansion effort affected the gross margin for the third-party business as well as our expense ratio for the core e-commerce business. The fulfillment expense ratio increased 35 basis points from the same quarter last year. However, we believe these investments are worthwhile for our supply chain management services and have created both service revenue and margin upside for 2018 and beyond.

Our successful JD Logistics fundraising, backed by a group of top domestic and international institutions, clearly validated the logic of these investments.

Our non-GAAP marketing expense ratio was 4% in Q4, comparable to the same quarter last year and second quarter 2017 when we ran similar marketing campaigns.

Our R&D expense ratio increased to 1.9%, up 38 basis points from the same quarter last year, as we hired top talent in AI, big data and cloud-based solutions as well as forming partnerships around the world to [ intense ] technological innovation across our front-end platform and back-end infrastructure.

On the other hand, our G&A expense ratio reduced 20 basis points as we continued to benefit from operating leverage.

Similar to the second quarter 2017, we essentially reinvested part of the excess profit in the prior quarter back into the business in the current quarter, especially during the Double Eleven promotion season when we returned excess profit back to our consumers. As a result, non-GAAP operating margin was a negative 0.5% in the fourth quarter.

Now excluding new businesses, the non-GAAP operating margin for JD Mall was a positive 0.6%, down 32 basis points from same quarter last year, mainly due to accelerated logistics capacity expansion and R&D investments.

On a full year basis, however, non-GAAP operating margins improved to 0.8%, up from 0.6% in 2016. And non-GAAP operating margin for JD Mall improved 46 basis points from 0.9% in 2016 to 1.4% in 2017.

On a full year basis, non-GAAP net income attributable to ordinary shareholders was approximately RMB 5 billion, an increase of 140% from RMB 2.1 billion in 2016.

The net margin was 1.4% in full year 2017, up 57 basis points from 0.8% in 2016.

All in all, it's a very healthy year of bottom line improvement.

Our free cash flow was negative RMB 1.2 billion during the quarter compared to negative RMB 2.2 billion in the same quarter last year. Free cash flow for full year 2017 was a positive RMB 15.7 billion, up from RMB 13.5 billion in 2016.

As we communicated 12 months ago, our CapEx in 2016 had been behind the schedule, which began to catch up in the second half of 2017. CapEx totaled RMB 11.4 billion, up from RMB 4.2 billion in 2016. Of the RMB 7.1 billion increase, over RMB 6 billion was due to land acquisition and construction of warehouses.

As we mentioned in the past, given JD's contribution to the local economies, we are in a unique position to acquire land at a very attractive economic terms. The warehouse facilities we have built are also highly sought-after assets and may be monetized for liquidity with large financial gains. We continue to believe such land and warehouse investments are highly accretive to our shareholders.

Excluding the CapEx, our operating cash flow, excluding JD Finance impact, totaled RMB 27 billion in 2017, up 52% from RMB 18 billion in 2016.

Now I would like to highlight a few key strategic developments since our last earnings call. Over the past 3 months, we formed a number of highly strategic partnerships, for example, the joint investments with Tencent in Vipshop and joint venture with Meili group are both designed to expand our product selections and long tail merchant base, which, in turn, will improve our customer experience and attract the female users and new customers in lower-tier cities and lower-income segments. The joint investments with Tencent in Wanda group and Better Life group will also help extend our customer and the product reach through omnichannel stock solutions as part of our Boundaryless Retail strategy. We are very excited about these partnerships and expect to create win-win synergies, strengthen our consumer mind share and better serve our joint customers in 2018.

Now let's discuss our financial outlook. We expect Q1 2018 net revenue growth to be between 30% and 33% on a year-over-year basis, taking into account the increasing seasonality effect of our business excluding any impacts on JD Finance for both current and prior year periods.

For full year 2018, we expect our non-GAAP net margin to be between 1% and 2%, which reflects our commitment to margin improvement while maintaining flexibility to reinvest for future growth.

This concludes my prepared remarks, and we can now move to the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from the line of Jin Yoon from Mizuho.

[Jin Yoon, analyst]

Sidney, did I hear you right? You said net income margin was going to be 1% to 2%. With the midpoint being about 1.5%, that means we're going to see very little, if any, operating -- or net income margin leverage. Can you just kind of talk about the drivers and potentially the seasonality behind that? And potentially, what your CapEx budget is for the year?

[Xuande Huang, executive]

Yes, sure. Obviously, this is the beginning of the year when we -- no one can expect what happens ahead. I think the guidance is, as I mentioned, it's a reflection of our commitment to improve margin, but at the same time maintain enough flexibility to reinvest for future growth. As I mentioned earlier on the call, as you can see, we invested quite a bit in new businesses in the fourth quarter, including JD Logistics third-party business. Some of those investments may take a few quarters to be fully utilized and we'll then have operating leverage. So this is a very preliminary outlook for the full year.

[Operator]

Our next question comes from the line of Ronald Keung from Goldman Sachs.

[Ronald Keung, analyst]

Thank you for the guidance that you mentioned just then. My question is more on the next growth drivers, and I think particularly your strategy with the Vipshop and with Meili. Can you just mention -- just go through a few things? Firstly, the Vipshop cooperation, when do you think the level -- or access on your app will begin? And what are you expecting sort of the contribution of GMV growth or apparel contribution from the Vipshop tie-up? And the other part is the WeShop, which is your joint venture with Meili, can you just go through how many merchants so far have signed up and just rough launch times. And whether this JV will be counted as an investment, so it will not be consolidated, also the longer-term prospects of this joint venture.

[Xuande Huang, executive]

Sure. So both partnerships will actually be launched within March. So you will see the super store from Vipshop JV within this month, and as we mentioned when we announced the deal that we do expect great synergies between the 2 platforms. Vipshop has great product selections and very complementary customer base, especially the female customer base, so we do expect the collaboration will be a win-win effort that will bring both products to JD customers at the same time bringing CapEx and sales to Vipshop obviously, which will benefit both platforms. For the Meili joint venture, you will also start to see the launch during March on the level-1 entry point of JD in WeChat. It's a very decentralized model, so I would probably let you look at the actual development rather than elaborating too much on the details. It's -- we will not consolidate the joint venture, but it was targeted to attract a long-tail merchant base. And we already have so far recruited over 50,000 small long-tail merchants obviously, including some well-established merchants as well and we'll enable those merchants to form their own customer base through the WeChat ecosystem. It will be a very interesting experiment that you will begin to see in very near future.

[Operator]

Our next question comes from the line of Natalie Wu from CICC.

[Yue Wu, analyst]

My question is regarding the overseas market exploration. We think that you've entered -- a, you've entered Europe. Just wondering what kind of the role JD is preparing to play globally? And what's the related investment scope we should be expect in next year?

[Qiangdong Liu, executive]

[Foreign Language]

[Xuande Huang, executive]

So right now, for international operations, we have announced in the past in Southeast Asia, namely, Indonesia and Thailand. For North America and Europe, we had been really -- we said we have set up local offices, for example, in L.A., to purchase -- to really develop local brand relationships and bring the U.S. products to China. But we will, beginning this year, to start to consider ways to serve the local customers. But right now, at this point, no immediate plan has been set up.

[Operator]

Our next question comes from the line of Wendy Huang from Macquarie.

[Wendy Huang, analyst]

Can you talk about, for your existing major product categories such as home appliance and also consumer electronics, what kind of scale should they reach this year? And also is there any further potential for this existing product category to see the margin expansion?

[Xuande Huang, executive]

Sure. So the home appliance and electronics, those are our leading categories. As Richard mentioned in the past, in a retail business, when you become a market leader on a first-party basis, not only you can realize economies of scale through supplier relationships' joint brand efforts whereby you're increasing the margin, but you will also, because of the consumer mind share, continue to grow faster in many cases, than the industry. So this is what we have seen exactly in 2017. Even though we had been the largest player, we continued to see very, very robust growth way ahead of the industry average.

[Operator]

Our next question comes from the line of Eddie Leung from Merrill Lynch.

[Eddie Leung, analyst]

I'm curious on your advertising pieces, it sounds growing pretty nicely. Could you talk a little bit about the drivers behind it? What's the main driver for the [ exploration ], as you mentioned? Are we talking about better click-through rate, higher pricing or increased ad load? Any color on that would be great.

[Xuande Huang, executive]

Yes, our advertising is mainly driven by technology. And I mentioned in the last quarter that, increasingly, using AI technology, the conversion for our merchants and brands are seeing meaningful improvement over the past several quarters. So when the brands see better results, better conversion, they are more and more willing to spend more advertising dollars on our platform. So this is -- this has been the main driver. We didn't increase, for example, the advertising inventory, didn't increase the positions on our platforms. So it's really driven by technology, and we see continued momentum going forward. I just quickly will mention that, in the fourth quarter, our advertising revenue growth was also the highest in the past 5 quarters.

[Qiangdong Liu, executive]

[Foreign Language]

[Xuande Huang, executive]

Yes, so Richard is basically adding that, if you look at the advertising revenue as a percent of GMV, the percentage for JD is substantially lower than our industry peer. And this is because, in the past, we did not provide enough advertising tools to our merchant groups. So we have been improving over the past several quarters and we'll continue to do so and providing more and more back-end solutions and advertising products to our merchants, so they can have better control over their own promotional needs. So the potential is still huge, and we are seeing from our actual results.

[Operator]

Our next question comes from the line of Alicia Yap from Citigroup.

[Alicis a Yap, analyst]

I have questions regarding the margins on gross margins. So not sure if my calculations is correct, but it seems like the 1P gross margins declined about 90 basis point year-over-year. It's true it suggests that the competitive situation seems to be worsens a little bit in the fourth quarter. How should we think about the 1P gross margins for 2018, especially during the seasonally strong quarter? And then related to your 1% to 2% net margin guidance for this year, can you share with us where would you be spending the most of the investment area that we have to be cautious and be mindful on modeling? Is that more on the logistic or is it more on sales and marketing branding? If you can share some of the color, it would be great. And lastly, on the housekeeping, how many of these 100 brands that previously left JD now have returned to your platform?

[Xuande Huang, executive]

Okay, yes. So let me get one by one. So for gross margin, I mentioned earlier that if you exclude the new businesses, the JD Mall gross margin was actually slightly higher than the same quarter last year and also second quarter 2017. So it was generally still healthy. A second reason, we also mentioned in the past that our business was managed on a full year basis. So because of the excess return in the first 3 quarters, our business managers were encouraged to return part of the profit back to our consumers during big promotions. We believe these are very worthwhile investments. And so you can't look at one quarter, any single quarter, to extrapolate the profitability trend, just as I cautioned in the third quarter that you should not extrapolate that for the future quarters. So I would still only encourage our investors to look at the full year trend, which I mentioned, is still on the rise. On the 1% to 2%, I mentioned about the new businesses. I think, in 2018, we'll continue to invest in JD Logistics, mainly the third-party services, supply chain management, integrated warehouse and delivery services not only to our merchants, but also to third-parties outside of JD business. So those -- and then beside that, there will be our technology services. We've developed cloud-based solutions and we are actually seeing the business taking off [ therewith ]. In the short term, we'll be lossmaking, but we do see huge potential in the technology services area. Overseas expansion is another one, as I mentioned earlier. So if you exclude those, the core e-commerce business, which implied the core e-commerce business will actually be quite meaningful margin expansion. And the last question, on the brands. We do start to see brands coming back. And I think more interesting data I would like to share with you is the key accounts for our apparel segment, actually saw -- basically consisted of the merchants, the top merchants, staying with us through last year and the merchants came back at the end of last year, we saw over 100% increase in the first 2 months in their transaction volumes. So very, very encouraging results. We do believe there will be more merchants coming back. But as we mentioned on the last earnings call, it may take 2 to 3 quarters, but we're already seeing very, very encouraging trend. And the ones that did come back see triple-digit growth over the past 2 months already.

[Operator]

Our next question comes from the line of Alex Yao from JPMorgan.

[Alex Yao, analyst]

I want to follow up with Alicia's questions a little bit more. I understand that logistic is one of the key investment initiative for 2018 and potentially beyond that. Can you give us a little bit color in terms of where exactly do you want to invest into this area, is it more on the labor side, equipment side, the warehousing side? And also given the incremental investment on there, how should we think about the next couple of quarters the margin trend versus the previous years? And then mid- to a longer-term outlook for this business, when should we expect this business to be more meaningful in terms of revenue generation from third-party vendors or merchants versus our own business? How -- what kind of time line are you looking at this business in terms of profitability generation?

[Qiangdong Liu, executive]

[Foreign Language]

[Xuande Huang, executive]

Yes, so the investments in logistics area will be comprised of 2 major areas: one is in the fixed assets, which include the land and the equipment and the warehouses; and two is logistics technologies.

[Qiangdong Liu, executive]

[Foreign Language]

[Xuande Huang, executive]

So you can easily understand the first areas of investments, I would elaborate a bit more on logistic technologies. We have launched the first fully automated warehouses -- warehouse in Shanghai, and we have also completed 2 weeks ago the on-land delivery station. And also, in the near future, you will see automated delivery robots in numerous campuses in Beijing.

[Qiangdong Liu, executive]

[Foreign Language]

[Xuande Huang, executive]

And we expect to receive license for the drone operations in 10 provinces this year.

[Qiangdong Liu, executive]

[Foreign Language]

[Xuande Huang, executive]

We've also tested the self-driving trucks for over 6 months. So these investments will probably not yield any near-term immediate operating or financial benefits. But we believe, as the technology continue to advance and labor costs are expected to increase, these investments will be very valuable at certain inflection point that will continue to put JD Logistics at the forefront of both operational efficiency and technical sophistication.

[Qiangdong Liu, executive]

[Foreign Language]

[Xuande Huang, executive]

Yes. So we formed a separate and relatively autonomously operated subsidiary for JD Logistics. We've seen great operational results over the past few months. And we do expect over the past -- over the next 3 to 5 years the external revenue will reach 50%.

[Qiangdong Liu, executive]

[Foreign Language]

[Xuande Huang, executive]

So these third-party revenues will not only come from our third-party merchants on our platform, but also from customers from outside of the JD Mall business and we have seen those -- many of those already in our services.

[Operator]

Our next question comes from the line of Jerry Liu from UBS.

[Yuan Liu, analyst]

My question is about growth in net margins. If we were to separate JD Mall from the areas of investment, do we think in 2018 JD Mall margins will improve because of apparel brands coming back and FMCG scale, et cetera? And then, on the areas of investment, is this a full year of investment, could margins decline before things get better?

[Xuande Huang, executive]

Sure. So as I mentioned earlier, because of the investments in new businesses and we do continue to commit for overall margin improvement, so which, in turn, will imply that our core business will see rather meaningful margin expansion and that could come from actually all categories, not only the apparel and FMCG you mentioned, but also from our strong categories in home appliance and in electronics and so we do see -- and obviously on the service side, whether it's advertising or logistics services. So we do see potential for margin expansion across multiple areas.

[Operator]

Our next question comes from the line of John Choi from Daiwa.

[John Choi, analyst]

I have a few questions here. First of all, I would like to touch base on your product revamp strategy in 2018. I understand that JD has a plan to kind of revamp their mobile app with more personalization features. How is that coming through? And also your merchant services, what is to say this year, should we be expecting more merchant services-related revenue through your third-party revenue going forward? And secondly, a little bit on your free cash flow. As we see, I understand free cash flow has been improving over a period of time. So as we go into 2018, should this trend continue along with your CapEx, so being kind of -- be reduced on a relative basis, so that will be helpful. And lastly, for you, Richard, could you give us a little bit more color on the recent JV with Meili [ shop ]? Is this going to be a game-changer for JD when it comes to collaboration with Meili and also for Tencent?

[Xuande Huang, executive]

Okay. So let me see if I can remember all that. So for the personalized recommendation, we do have -- it is one of our top priorities this year that we want to create personalized user interface. We do expect our first major launch in the second quarter while -- which could be still on a soft testing basis, but you will start to see that happening and probably more on a fully scale -- full scale in the second half. Merchant services is another top priority. We have introduced many new products to our merchants, including the advertising products and tools, the data analytics tools, that -- those are all provided to our merchants and also to our suppliers, which we believe will enhance their ability to better market and sell their products on our platform. On the free cash flow and the CapEx, for CapEx, it's a little tricky that we are expecting to invest in more land acquisition and warehouse facilities. But I also mentioned that there are a number of institutions have been chasing us for partnership and collaboration. So there's a possibility that we could have our partners to invest part of those CapEx, and through the partnership, that we can continue to maintain certain control over the assets, but at the same time leveraging third-party's financial resources. So we do want to have somewhat of a lighter model going forward, especially given that there will be -- that we are taking opportunities to secure land as many local government are approaching us for collaboration. Again, these are all governments approaching us because when JD set up a warehouse in their jurisdiction, it brings job opportunities, it brings local activities and local taxes. So -- and we are working with many of those governments. And so there is -- it's a very exciting opportunity. We're just looking for ways to manage both the opportunities, at the same time, manage the appropriate level of CapEx. So we'll give you more update hopefully in the second quarter.

[Operator]

Our next question comes from the line of Scott Devitt from Stifel.

[Scott Devitt, analyst]

First, just wondering if you could give the third-party nexus, either a percentage of units or GMV. And also, what portion of the third-party GMV is being fulfilled by JD? And then, a bigger picture question. JD is still a very young company building a business for the next many decades. And I'm wondering why you think there is such a hyper focus on margin progression of the business at this stage of the development, whether you think that focus is the right way to assess value creation by the company? And how you think investors should measure the company on profits, given that you don't seem to be focused on optimizing for profit still for many years?

[Xuande Huang, executive]

Sure. So on -- our third-party logistics services revenue did increase very significantly in the fourth quarter on a triple-digit rate. So part of -- a majority of that growth came from supply chain management, which does -- also which, in turn, helping our merchant experience. So we -- in terms of percentage of orders contribution, it is in the low teens and rising quite quickly. And on the margin, it's a very interesting question. As we mentioned in the past quarters, more often than not, the margin came out without trying to manage it. So if we don't do anything, margins would improve and we have saw that -- we have seen that both in Q1 last year and Q3 last year. And we normally will make an effort during big promotion season to return part of that margin back to our consumers. And because of this -- so which basically indicates that our scale is at a such a level that it's -- the profitability was quite natural and improving margins should be quite natural. But just as you mentioned that it's a still -- we are still in the very early stage of a very, very long-term growth trajectory, so our focus has been on growth and we also made a very intentional effort to reinvest part of that profitability back into the business, whether through return to consumers or investing in new technologies, as Richard mentioned, and also in complementary businesses. So that's exactly what we've been doing, to reinvest. But at its current scale, I think margin expansion should be a quite natural result as well.

[Operator]

Our next question comes from the line of Thomas Chong from Crédit Suisse.

[Yiu Hung Chong, analyst]

I have a quick question on 7Fresh. Can management provide some highlights about the expansion for this year and our target on those stores in the next few years?

[Xuande Huang, executive]

So for 7Fresh, it's really an experiment. I think, for us, it's omnichannel store tech experiment that we tried to clear down model of off-line business that can realize very, very high sales per square meters because not only the products and the services, the technology in the store can attract a lot of CapEx, but at the same time with the online angle through our Dada-Jingdong Daojia network, so you can essentially realize a much, much higher same-store sales. So -- but our intention is not to open many, many stores. I think we use this store to develop the omnichannel store tech solutions so that we can use those solutions to enable our partners. I mentioned about our investments in some of the off-line stores and off-line retailers. So those solutions that we developed [ slow ] 7Fresh will be used to strengthen our partnership with those off-line partners.

[Qiangdong Liu, executive]

[Foreign Language]

[Xuande Huang, executive]

Yes. So we will open more stores in Beijing just to test and validate the model. And once the model is validated, we will expand through franchise and also just to work with our partners to enable their stores to adopt the same model. The unique advantage for JD in moving into the off-line fresh supermarket is that we already have a very well-established supply chain system, and with that system, we can move very fast once the model is established.

[Qiangdong Liu, executive]

[Foreign Language]

[Xuande Huang, executive]

Yes, so in this regard, even for the established retailers for over 20, 30 years, they still can only cover some of the cities in China. But with our supply chain management system, we can already cover the entire China.

[Operator]

Our next question comes from the line of Tian Hou from T.H. Capital.

[Tian Hou, analyst]

I have 2 questions, one is related to the investment in the Vipshop. So would you please elaborate how in the near-term JD is going to benefit from such investment? So that's number one. Number two, looking at the P&L for Q4, the cost of the revenue was not a lot and so I wondered how much is it come from the cost of traffic -- the traffic acquisition cost, so which you guys started in this advertising alliance in Q3. So that's my 2 questions.

[Qiangdong Liu, executive]

[Foreign Language]

[Xuande Huang, executive]

So let me address the first question on Vipshop. In the short term, I think it's really complementary to both platforms through our complementary products, namely -- for example, Vipshop is specialized in apparel and other long-tail categories with female customers in the lower-tier cities while JD is much stronger in the other categories and also male customers in Tier 1 and Tier 2 cities. So very, very complementary from both product selection and user base.

[Qiangdong Liu, executive]

[Foreign Language]

[Xuande Huang, executive]

So in the long term, we are looking to create more synergies on the supply chain, also on the logistics. For example, we can share some of the warehouses or delivery stations, some of those infrastructures, so that we can save costs and create more efficiency for both companies. And then on your second question about the costs, whether it included the traffic acquisition costs, most of the traffic acquisition costs will be in the marketing expense line. The only related item in costs will be the costs for our advertising revenue, which is actually quite small. So that's not the main reason. The main reason I mentioned earlier is because of the new business for JD Logistics third-party service because of a pretty massive buildout of warehouse facilities, including cold chain facilities that were not fully utilized in Q4 and also in technology services when we're still building up the business.

[Operator]

Our next question comes from the line of Ella Ji from Renaissance.

[Diying Ji, analyst]

My question is still about the margins. First of all, looking at the maybe relatively near term for 2018, Sidney, if I hear you correctly, you said that the JD Mall alone, in last year the OP margin actually improved 46 bps year-over-year. So if we back that out, the new businesses drag on your OP margin is about 28 bps. So how should we think about the magnitude of your new businesses drag in 2018? Is it going to be bigger or at similar level? And then relating to that, can you also comment on the long-term margin target on a company blended basis and then for JD Mall both? And can you also comment on the time frame, please?

[Xuande Huang, executive]

Sure. So for the new business, it's also -- because it's new, so we do have internal budget, actually quite aggressive budget, but it's evolving and it depends on a lot of dynamic during the year. So all I can tell you is, in our budget, we have a quite aggressive budget for the new businesses. Essentially, to kind of reiterate my point earlier that, at our scale, our core business should naturally generate increasing profitability and we want to use at least part of that to reinvest. And so it is also relatively flexible as we progress through the year and so it's tough to pinpoint any more detailed number at this point. Long term, we mentioned about the core retail business as the scale continued to improve. As you can see, our gross margin still has huge potential comparing to off-line biggest retailers. For example, on our JD Mall operating margin continue to enjoy an advantage despite of heavy investment in technology. So it's -- margin trend should be very promising for the established business. It's a matter of how much we reinvest and the reinvestment will also depend on what kind of opportunities we see that are complementary to our core business and that are accretive to our shareholder value.

[Operator]

Our next question comes from the line of Wayne Wang from HSBC Global Research.

[Ningchuan Wang, analyst]

I have a follow-up on the traffic acquisition strategy. So what's our like key traffic acquisition strategy in 2018 aside from the like traffic or partners in 2017? And also another question regarding to the technology and [ accounting ] costs. I think, in 4Q, the cost is relatively high. Is this mainly due to one-off? Or will that be a continuing effort?

[Xuande Huang, executive]

Yes. Well, I think for traffic acquisition, we have all of the conventional channels that we'll continue to use. Clearly, we have established a great relationship with all of the major traffic sources and then the alliance we talked about with top internet companies, obviously including Tencent, 360 and a number of others. So we will see actually more of those partnerships and effectively using all the [indiscernible]. For the technology and R&D spending, this will be a long-term trend -- or at least a medium-term trend that we'll continue to step up the investment. So this is not onetime. We'll continue to invest in hiring those top talents around the world. We expanded our Silicon Valley office, for example, from over 10 people to now over 100 people, hired really the top talent from really the best Internet companies in the United States. We do expect that investment to continue.

[Operator]

Our last question comes from the line of Jamie Shen from Bank of China International.

[Chen Shen, analyst]

I have a question on the third-party marketplace GMV growth. Based on my very rough calculation, I think the GMV growth have picked up meaningfully in the last quarter compared to the third quarter. Just wonder what are the drivers behind. And also looking forward into 1Q, as management just commented on some apparel brands coming back, should we be expecting the apparel categories to revive growth in the first quarter?

[Xuande Huang, executive]

Yes, so we no longer discuss details for our GMV because the metric now is really for industry comparison only. But the underlying net GMV growth was actually still under pressure for the marketplace business in the fourth quarter. We mentioned on the last earnings call, it will take 2 to 3 quarters to begin to see recovery. So on apparel, in particular, I mentioned about a key account growth. So we do have -- still have the right customer base and the right platform. So it's just a matter of time, we believe, for the remaining merchants, at least majority of them, coming back. And we are also working with many of those merchants to establish new sub-brands and also new talents, new brand designers. So there will be multiple means to improve this category and we are actually quite optimistic. But I do not expect a very quick fix. We don't necessarily see a major pickup in Q1. But in the next several quarters, you should see gradual recovery.

[Operator]

We are now approaching the end of the conference call. I will now turn the call over to JD.com Ruiyu Li for closing remarks.

[Ruiyu Li, executive]

Thanks, operator, and thank you for joining us today. Please feel free to contact us if you have any further questions. We are looking forward to talking with you in the coming months. Thank you. Bye-bye.

[Operator]

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.