Alibaba Group Holding Ltd

NYSE:BABA

Earnings Call Transcript 2019-Q1

[Operator]

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group's June Quarter 2018 Results Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer 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, Head of Investor Relations]

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

Now let me cover the Safe Harbor. Today's discussion will contain forward-looking statements. These forward-looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations. For detailed discussions of these risks and uncertainties, please refer to our latest Annual Report on 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 assumption as of today and we do not take 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 EBITDA margin, adjusted EBITA, adjusted EBITA margin, 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 press release.

With that, I will turn over to Joe.

[Joe Tsai, Executive Vice Chairman]

Thank you, Rob. Thank you all for joining us. Last quarter, I talked about three things in my remark. First, we gain incremental market share and a larger share of the consumer e-commerce wallet. We continue to grow at scale because we had a foresight to invest in technology, supply chain and logistics. Second, our new retail initiatives are substantially growing Alibaba's total addressable market in ecommerce.

And third, Alibaba is well positioned to capture more discretionary spend of Chinese consumers in addition to e-commerce through offerings in entertainment and local services.

So that's what I said last quarter. All of these things continue to play out in the current quarter, and I believe, will play out for many years to come as the Chinese middle class continues to grow. I want to particularly emphasize that Alibaba's three-pronged consumer offerings in retail, entertainment and local services will be the long-term drivers of value creation, as the Chinese middleclass expands, and more of these consumers demand a higher quality lifestyle. The good thing is our historical strength in e-commerce is giving us a distinct advantage, because we have already acquired our customers. To be exact, this quarter we gained another 24 million transacting users to a total of 576 million annual active consumers.

These consumers have made purchases on our platform, not just once or twice a year, but on a regular frequent basis. The average annual active consumer places 90 orders across 16 different product categories per year on our China retail marketplace platforms. And they trust Alibaba as the Company that will offer goods and services, where they can spend and get quality and value for their money.

Because of the loyalty of our consumer customers, we have the confidence to aggressively invest in new products and service offerings as well as innovations and necessary infrastructure to provide them with a better experience. Whether it is daily supply of fresh food, catching the latest fashion trends, access to luxury brands, the most popular videos, the most exciting sporting events, or a quick late night snack delivery, Alibaba is busy at work to satisfy our customers.

As I said on the last earnings call, we are extremely excited by the flywheel effects of the expanding consumer wallet share across our eco-system. The events of the past quarter, as we have seen the success of share gains and core commerce, video subscription growth, driven by FIFA World Cup, and the integration of food delivery into our service offerings had given us substantial confidence in our ability to capture more wallet share.

Now, I want to spend a few minutes on the current trade tensions. First, what’s the impact to our business? Well, Alibaba’s business is focused on capturing the Chinese domestic consumption opportunity and less reliant on Chinese exports. We believe that Chinese Government policy will continue to support imports into China to satisfy the rising demand of Chinese consumers. This coming November, China will hold the world's largest import exhibition in Shanghai that will showcase products from all over the world.

If U.S. goods become too expensive due to tariffs, Chinese consumers can shift to domestic producers or imports from other parts of the world. In terms of our international expansion, the world is a big place. We have made substantial progress in emerging markets like Southeast Asia and South Asia, as these markets are right for us to add more consumers into our ecosystem.

When you look at Alibaba’s presence in the United States, our focus is on helping American farmers and small businesses to sell their products to Chinese consumers.

In addition, as demonstrated by our partnership with Starbucks, we are working constructively with American brands to better serve Chinese consumers.

And next, just a few comments on the macro environment. It is clear that nobody wins in a trade war. Over the years, China has become less reliant on exports so that the Chinese economy can withstand the in-position of tariffs on Chinese products. The most important point, however is that the strength of the China’s domestic demand is critical to the stability of the Chinese economy and market confidence.

Domestic consumption and investment account for more than 90% of GDP growth. Domestic consumption is afforded by three important trends that we have seen in the past several years, which we believe will continue to be the case: number one, real wage growth with more people joining the middleclass; number two, healthy household balance sheets based on high savings rates; and number three, easier access to consumer credit due to supported government policy and innovative businesses like Ant Financial. These are the reasons why we strongly believe that the Chinese economy, as supported by domestic consumption, will continue to be resilient.

Now, I will turn it over to Daniel for his comments about the quarter. Thank you.

[Daniel Zhang, Chief Executive Officer]

Thanks, Joe. Hello, everyone, and thank you for joining our earnings call today. We sustained an outstanding place of growth, and it delivered another strong quarter with 51% total revenue growth, significant user expansion and even better engagement across our businesses.

Taobao continues to be the leading consumer media platform and the starting point of any retail journey for Chinese consumers. Mobile MAUs reached a total of RMB634 million, which represent a 20% year-on-year growth. We continued our investment in new customer acquisition, and our annual active consumers increased 34 million to 576 million for the 12 months ended June 30, 2018. Around 80% of the increase in annual active consumers came from low-tier cities.

During our annual Taobao member festival on August 8, we launched the new 88 VIP tier to our membership program to drive consumers' engagement and loyalty in Alibaba ecosystem. 88 VIP program offers a comprehensive set of services to meet the needs of consumers from retail discount savings to local food delivery, entertainment, online movie ticketing and the video and the music streaming content services. 88 VIP members are also given exclusive access to a wide variety of products. This new loyalty tier has gained once by popularity since its launch. We are also seeing keen interest from a large number of brand partners who wish to join this program in order to access the high value customers across our ecosystem.

Tmall's leading position across all major categories in B2C has been further strengthened, excluding unpaid orders, physical goods GMV grew 34% year-on-year in June quarter. Our June '18 shopping festival drove excellent results in two areas: first Tmall paid GMV grew over 40% year-over-year during the campaign; and second, we expanded our June '18 festival to offline outlets, bringing in 70 shopping malls and 100,000 Tmall smart stores, Intime Department Stores, Hema Stores and RT-Mart hypermarkets. Market leadership and a share gain continued to be our priority for Tmall, and we will continue reinvest into the business.

In addition to our solid Taobao and Tmall growth, we are pleased to report our progress of the execution of the new retail strategy. Hema continued to generate exceptional popularity among consumers, which is testament to the middle-class lifestyle evolution in Chinese cities. And they are increasing in powerful demand for quality products.

As of June 30, there are 45 self-operated Hema stores over 13 cities in China currently located in Tier 1 and Tier 2 cities. Hema will continue to enlarge its coverage within these cities to meet the needs of more residents living within 3 kilometers of convenient access to fresh groceries.

Looking ahead, Hema will not only fulfill online orders through digitalization of its in-store operations, it will also be reshaping the whole supply chain through utilization of Big Data. Bringing back to products from their prices of averaging directly to the dinner table of hundreds of millions of Chinese families will become reality.

We are also gaining exciting momentum in the new retail transformation of our business partners. As of June 30, a third of RT-Mart hypermarkets have completed their digital transformation that integrates customer insights, supply chain management, retail technologies and the digital payments. RT-Mart is now enabled to fulfill 60 minutes delivery of online orders with the perimeter of its location-based services.

In addition to the enhancements of the leading position in our core commerce and new retail. We continued our investments in cloud computing, digital entertainment, globalization and other new businesses. Our cloud computing business continued its rapid growth over the past quarter. Cloud computing revenue for this quarter grew 93% year-on-year to US$710 million. Alibaba Cloud launched more than 660 new products and features during the quarter, including alanguage-based document and analysis tools, hybrid disaster recovery for enterprises and big data analytical tools.

The video streaming capability and the CDN services of Alibaba Cloud managed to handle the majority of China's online traffic demand during the live broadcast of FIFA World Cup Series. In addition to Youku, the other three official World Cup online streaming channels in China have chosen to partner with Alibaba Cloud to ensure the most high definition, low latency, real time access for the hundreds of millions of viewers in China.

During the FIFA World Cup tournament this summer, Youku streamed all 64 matches, and its users enjoyed World Cup matches on 180 million mobile devices and smart TVs. As a result, Youku saw updated its average subscriber growth of 200% year-over-year during the quarter. We are seeing increasing demand in sports content and invested in providing comprehensive digital media offering for our users. We made a strategic investment in Suning Sports.. Youku media content platform will collaborate with Suning Sports. to create a joint platform for high quality sports contents.

Our cross-border and international retail businesses continue to show promising growth. Revenue from our international commerce retail business reached US$652 million in the quarter ended June 30, representing 64% year-on-year growth.

Lazada has repositioned its business into include C2C marketplace LazMall and LazGlobal. Relaunched in June and July LazMall is revamped in most of its markets to showcase principles that offers premium services and the guarantee product authenticity. These brands have worked with Tmall in China for many years. And we, together, will pursue new opportunities in new markets. For LazGlobal, the platform will connect Chinese -- the platform will connect consumers in Southeast Asia with products supplied by Taobao and Tmall sellers in China while a cross-border model. We are confident the deepened Lazada integration will up with the Alibaba ecosystem will drive market share gains.

We are also active in investing in logistics. In the June quarter, we together with Cainiao Network lead an investment in ZTO Express. We will deepen our collaboration with ZTO in all aspects to promote the digital transformation of ZTOs logistic capabilities. This quarter, Cainiao necessity delivery services achieved a coverage of about 1,500 districts and counties and completed its business integration with four local LazMall companies. Cainiao has also completed a fundraising round for its pick-up station business subsidiary, Zhejiang, [indiscernible] with the participation of key industry partners including ZTO, YTO, Yunda, STO and the Fast Express [ph].

Boosting our global logistics network, Cainiao is leading a joint venture with The China National Aviation Corporation and YTO Express. That will invest approximately US$1.5 billion to build a world-class digital logistics center at the Hong Kong International Airport. This brings us another step closer to realizing our strategic goal of enabling international delivery anywhere within 72 hours.

Turning to enablement of retail service partner stores, in August, we announced a strategic partner with Starbucks in China that will enable a seamless Starbucks experience and it transforms Starbucks China into a digital operation. This will evolve collaboration across our ecosystem including digital stores in Alibaba consumer apps, coffee delivery for online orders, and the loyalty program collaboration. The strategic partnership with Starbucks is a proof of Alibaba’s empowerment of our business partners through our digital infrastructure.

Looking ahead, we will continue to develop our unique ecosystem offering to deliver exceptional value per division for our business partners and consumers in China and globally. We will be committed in growing our core commerce business and investing in cloud computing, digital entertainment, local service, logistics and globalization for the future growth.

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

[Maggie Wu, Chief Financial Officer]

Thank you, Daniel, hello, everyone. We delivered another strong quarter. In the June 2018 quarter, major operating and financial metrics continued to record strong results. Total revenue grew 61% year-over-year to RMB80.9 billion. And revenue from core commerce increased 61% year-over-year to RMB69.2 billion. Mobile MAUs on our China retail marketplaces reached RMB634 million in June 2018, an increase of RMB17 million over March 2018. Annual active consumers on our China retail marketplaces reached RMB576 million, a net add of RMB24

million quarter-over-quarter. Among the annual active consumers added, about 80% were from lower tier cities. Revenue from cloud computing increased 93% year-over-year to RMB407 billion.

Adjusted EBITDA achieved a growth of 17% to RMB29 million, and the adjusted EBITDA for core commerce was RMB32.8 billion, an increase of 22% year-over-year. Our non-GAAP free cash flow grew 16% year-over-year to RMB26 million for the quarter.

For the quarter total revenue grew 61% year-over-year. This was led by robust growth in our China commerce retail business and Alibaba Cloud. The consolidation of Cainiao Network and

Ele.me also resulted in greater revenue. Excluding revenue from the consolidation of Cainiao and Ele.me, our revenue would still have strong growth of 49% year-over-year.

Cost of revenue in the quarter was RMB43.7 million or 54% of revenue compared to RMB17.5 million or 35% of revenue. It shows the increase to the cost of revenue as a percentage of revenue increased from 33% in the quarter ended June last year to 50% in this quarter. I want to make sure you understand the changing nature of the cost of revenues: first, consolidation of Cainiao and Ele.me means logistic costs and operating losses in goods delivering are incorporated in our P&L; second, the costs of inventory from our New Retail businesses are included due to gross revenue accounting; third, the cost of the international expansion, particularly, Lazada startup losses, are included; fourth, an increase in content spending from Youku’s original contents and World Cup.

As a percentage of revenue, without a factor of SBC expenses or other major operating expenses including product development, sales and marketing and general and administrative expenses remained stable year-over-year.

Let me talk about the Ant Financial's impact in this quarter. During this quarter, Ant Financial announced that it has completed Series C equity financing totaling about US$14 billion, which resulted in the significant increase in Ant's valuation. Under U.S. GAAP we are required to mark-to-market the share-based awards granted to our employees by Ant Financial, and they recognized them as our SBC expense, even though the SBC has no economic cost to us and there is no dilution to our shareholders.

For this quarter, we have taken now one-time charge in the amount of RMB11.5 million to mark-to-market SBC granted to our employees from end. Including the effect of such and financial related share-based compensation expense, net income for the quarter would have increased by 33% on the year-on-year basis.

During the quarter, we recorded other net loss of RMB83 million compared to other net income -- other net income of RMB83 million compared to one point in the same quarter last year. This was primarily due to two factors. Number one, an exchange loss of around RMB1.5 million as RMB depreciated against the U.S. dollar during the quarter. Secondly, less profit sharing from Ant Financial as compared to same period last year as Ant Financial continued to execute an aggressive expansion plan and their business developed well.

Excluding the impact from foreign exchange loss and profit sharing from Ant Financial, non-GAAP net income grew 10% year-over-year to RMB20.7 million. We expect a positive impact would continue since RMB had further depreciated against the U.S. dollar since the end of June, and And Financial will continue to invest to expand its market leadership in digital payment and accelerated globalization strategy in the share.

Free cash flow and the cash position. As of the quarter-end, cash and cash equivalents and short-term investments were RMB177 million compared to RMB205 million as of March 2018. The decrease in cash and short-term investments during the June quarter is primarily due to cash used in investing activities, including investments such as Ele.me and ZTO Express, partly offset by robust free cash flow generated from operations of around $4 million. Our strong cash flow continues to allow us the strategic and operational flexibility to invest in technology and acquire the resources to accomplish our strategic objectives.

Capital expenditures. Total CapEx in the quarter were RMB11 million, in which about RMB1.4 million related to the acquisition of land use rights and construction in progress.

Let's turn into the segment report. Our core commerce segment had another strong quarter with revenue growth of 61% year-on-year. The robust performance was mainly driven by the China commerce retail business, that grew by 47% year-on-year and represented 78% of the segment revenue from the 85% same quarter last year. So we have other new businesses growing.

China's commerce retail, let's look at the key components. First of all, user and GMV. We continue to expand our market share in China commerce retail business. This quarter, we experienced strong user activities and robust GMV growth. Mobile MAUs on our China retail marketplace has a net adds of RMB17 million and annual active consumer with the net adds of RMB24 million, about 80% of this net adds are from the lower tier cities, as we broadened our offerings and services into those regions.

We're still accelerated growth in Taobao paid GMV given ongoing improvements in search and personalized recommendations on the Taobao app. Tmall continued to gain wallet share and expand our B2C market leadership. Excluding unpaid orders, physical goods GMV in Tmall is up 34% year-over-year, in the quarter. The robust growth was driven by continued increases in conversion rates and average consumer spends with strong performance from FMCG, consumer electronics, apparel and the homes goods categories.

Our fundamental is continued to be healthy and strong. We see strong user growth, especially in lower-tier cities and robust engagement across our growing ecosystem. The combined customer management revenue and commission revenue is pivoted healthy growth of 33% year-over-year for quarter.

The customer management revenue grew by 26% year-over-year. This growth trend is mainly due to, first of all, the measured approach to monetization by focusing on user experience and increased conversion to transactions for merchants. And also there was a high pace comparison in the previous years. So we showed 65% year-on-year growth in same quarter last year. We continue to see higher average spending from our merchants on our customer management services.

Commission revenue grew strongly by 65% year-on-year. This is primarily due to the first robust growth in Tmall physical goods exclude GMV 34% year-over-year. And nonetheless repays provided this quarter during June '18 promotions compared to last year. We're very pleased with our Tmall progress that continued to demonstrate market leadership with GMV grows faster than the overall industry during the quarter. Other revenue from China commerce retail was up more than 340% year-over-year to $7 billion. The rapid revenue growth was driven by the success of our new retail initiatives such as Tmall Import business, Hema fresh food grocery business.

The core commerce adjusted EBITDA margin was 47% in the quarter compared to 63% in the quarter last year. As discussed in the last earnings call, the financial profile of our new retail businesses were changed the margin profile of our core commerce segment over the next several years.

Our other revenue under China commerce retail, which consists primarily of our New Retail initiatives, grew from 3% of the total revenue during the same quarter last year to nearly 10% this quarter. We expect New Retail to become a more meaningful revenue contributor to core commerce in near-term. Over the long-term, we also believe New Retail will have a more meaningful profit contribution to core commerce.

Again, it is important to note that our core commerce revenue relating to marketplaces is recognized as a fraction of the total retail sales while New Retail revenue is primarily recorded on the gross bases, which includes the cost of inventory. The increasing mix of New Retail revenue was structurally changed the margin profile, the core commerce segments. However, we expect the growth of New Retail will lead to absolute profit growth in steady-state operations.

Excluding the effect of New Retail and Lazada as well as the consolidation of Cainiao element, adjusted core commerce EBITDA margin was similar to the prior year, which is approximately 62%, even taking into account of the investment that lead to faster user growth and expanding B2C market leadership.

We did see operating leverage from our core business offset by strategic investments. Our core marketplace business continues to be very healthy. It is our business philosophy to invest in strategic businesses for the long-term growth. And that will increase user, user base, improve the user experience and add value to our ecosystem.

Cloud computing revenue grew 93%. And this is primarily driven by both revenue mix towards the high value added products and services, and a robust growth of paying customers. Adjusted EBITDA margin of the cloud computing segment was negative 10% from negative 4% in the quarter ended last year, primarily due to our added investment in infrastructure and the capacity in anticipation of additional customers.

Our digital media and entertainment segment revenue in the quarter was RMB6 million, an increase of 46% year-on-year. This increase was primarily driven by increase in subscription revenue from Youku and the mobile value-added service revenue from UCWeb, such as mobile search and the other businesses. The success of the World Cup event and ongoing improvement of Youku's content offerings resulting in daily average subscriber growth of 200% year-over-year during the quarter. As a result, Youku total revenue growth rate for the quarter further accelerated from the private quarter. However, the cause of World Cup broadcasting rights increased overall content costs at Youku

Looking ahead, I want to take this opportunity to talk about the formation of a local services holding company that will hold Ele.me, a leading on-demand food delivery platform in China, and Koubei, a leading local services platform focused on in-store consumption in China. We plan to separately capitalize with the investments from Alibaba, Ant Financial and third-party investors. As of time of this announcement, we have received over US$3 billion in new investment commitments, including commitments from Alibaba and SoftBank. As a result of this reorganization, subject to closing conditions, we’ll consolidate Koubei, which would result in a material one-off revaluation gain when our transaction closes.

Local services is an essential part of Alibaba’s China three-pronged consumer strategy around goods, services and entertainment. It is a must win and must have for us. As China consumers demands more quality and diversity of services, this category represents a massive trillion dollar opportunity. Ele.me and Koubei will work together to provide a comprehensive local service offering that is core to our strategy. Together with our commerce and end reforms, this local services flagship subsidiary will offer complementary consumer insights, category expansion and on-demand logistic network infrastructure to strengthen our value preposition to our merchants and brand customers.

Our plan is to aggressively invest in these businesses to gain market share and execute deep integration into the ecosystem of Alibaba’s service offerings, such as incorporating local service users into our new 88 VIP membership. Retail investments to gain food delivery market share in China and the consolidation of Koubei after completing the reorganization may result in slow our overall group profit growth near term. But these businesses will have substantial operating leverage once unit economic term positive.

Looking ahead we continue to have confidence in our value preposition and the long-term growth. We have shown a track record of delivering strong long-term profit growth by identifying new growth opportunities that is supported by solid execution.

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

[Operator]

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

[Eddie Leung, Merrill Lynch]

Good evening. Thank you for taking my question. Could you share your thoughts first on the e-commerce competitive landscape given the fast growth of some of your peers in the lower price point market so to speak? Just -- many years ago, if you remember, Taobao also started more in the lower price point market then developed into today's scale. So just wondering, how you think about the difference today versus many years ago? And then if you guys can -- could you also comment a little bit on the outlook of your customer management business. There has been a bit of deceleration, of course, we know there is a high base affect. But any color going into second half of this year would be helpful. Thank you.

[Daniel Zhang, Chief Executive Officer]

Operator -- and Eddie, on the phone -- so you come through very noisy. But let me summarize your question. Your first question is the lower price point competitor that and its impact to us, right? The second question is any color on customer management revenue in the second half.

[Maggie Wu, Chief Financial Officer]

Yes, let me answer the second question first and then Daniel will talk about the competitive landscape. So for customer management revenue growth, it's -- when you look at the fundamentals of our business, it all shows very healthy growth. The user net adds -- it's any of your annual active consumer shows one of the highest net adds in the past years. And GMV grew very strongly not only Tmall GMV but also Taobao accelerated for its paid GMV. So when you look at the revenue growth for China retail, as I mentioned last quarter during the call, people should combine customer management revenue and the commission. If you look at the combined revenue growth, 33%, it's pretty much the same level as in previous quarter. That's still a very strong growth. And, of course, we have been focusing on adding user as well as improve the user experience. And some of these business initiatives improving user experience could help on the transaction, but at the same time, may impact our [indiscernible] For example, for those buyers who want to click to enter into the store directly, we let them do it, don't have to click on the paid product listing. But overall, the China retail marketplace growth in the revenue represents -- the performance of the business represents the value we provided to these merchants who pay us.

[Daniel Zhang, Chief Executive Officer]

Yeah. Eddie, this is Daniel. I will comment on your first question. I think today, I think with the hundreds of millions of user base in Alibaba ecosystem, actually we do have consumers with different tiers with different consumption power. So all we want to do is to use the technology to do a roadmap matchmaking to make sure the right customers can find the right supply and the right assortments. So we do see that in recent years actually the new internet users grow, I mean, especially in low-tier cities, in rural markets. So that's why we spent a lot of -- we made a lot of efforts and investment in acquire the new customers in these areas. And this quarter, you'll see we have a very good in terms of new user acquisition. And we will continue to do that in terms of the expanding the user base in the low-tier cities, by the same time we do try to improve the product selections on our platforms to not only meet but also create the demand for the customers with different needs. By having said that, I think price, of course, is a very important user experience. By the same time, all the customers expect a reasonable quality of the products when even they enjoy very low price. So how to provide a low-priced product but with the good quality is a key thing. That's all we want to do. And this is what we, I mean, have achieved in the past few years. Thank you.

[Robert Lin, Head of Investor Relations]

Next question?

[Operator]

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

[Alicia Yap, Citigroup]

Hi, good evening, management, Joe, Daniel and Maggie. Thanks for taking my questions and congrats on solid results. I have some follow-up on these combined online core commerce. So with GMV growth and commissions lightly to experience potentially high base as well from last year, we see CMR also lapse out a tough comp. I think management previously commented about the increasing page view and time spent on the numbers of the recommended feed pagers. So are we still on track to introduce new potential some additional add lows to those second lending pages later this year? And also second question quickly is just, can you reconcile -- help us reconcile the 34% physical GMV versus the 55% commission revenue growth. Is that implying the take rate actually increasing? Thank you.

[Maggie Wu, Chief Financial Officer]

Sure, Alicia. For your first question, definitely, we have multiple monetization levers that support our customer management revenue growth going forward. Things like improvement in search and personalization technology and add inventory, add loans et cetera. So the important thing is that we continue to provide the value to our customers, both merchants and consumers. So that's all we do every day. And the question on the 34% year-on-year GMV growth compared to the 55% commission growth, like I said, the commission growth rate has one of the reasons is last year's easy comp. So last year this quarter, as we discussed in our earnings announcement that we have had promotion initiatives by giving merchants discounts and rebates. So that's one of the reasons, not necessarily, increasing the take rate in Tmall.

[Daniel Zhang, Chief Executive Officer]

This is Daniel. I want to add more comments on this question. I think actually today Taobao is position as a consumer media platform. So when you browse on Taobao, it's not only about search and navigation, it's about lot of media content, which create a lot of page views on the -- content page views, not only the polar listing page views. And in -- actually we continued to invest in this and to enrich the contents on our platform, which apparently on track and we strongly believe this will give us a lot of potential for future monetization. But today the key thing for us is always like we want to give our users a better experience first and give our users a pro form habit of -- to browsing this content and spend more time with us. And then by this way they can find -- they can not only find what they need, but also discover the things beyond their expectation.

So in the long-term basis, we are -- actually, we are very careful, and we are very positive in monetization of this incremental page views in different, I mean, content formats.

[Robert Lin, Head of Investor Relations]

Next question.

[Operator]

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

[Grace Chen, Morgan Stanley]

My question is about the New Retail business. Alibaba has been doing several mergers and acquisitions, and also has been sending out Hema and partnerships with various companies to lay out the foundations for the New Retail business. So I'm wondering is there any -- is there still any missing parts in your business portfolio to implement your New Retail strategy? And after the recent merger and acquisitions, what is your critical next step to execute the New Retail strategy? Thank you.

[Daniel Zhang, Chief Executive Officer]

Well, this is a very good question. I will say we only talk about New Retail. We are, actually, we do two things. First, we incubate New Retail formats impelled by all our -- all of Alibaba's digital infrastructure. So today, I think the successful showcase is about -- is Hema, but I will say we will continue to do that to incubate new animals. And on the other hand that we are trying to help our retail partners to transform their existing retail infrastructure, retail outlets into digital operation. So I think this is more complicated. And this is not only relevant to the technology, but also relevant to the product assortment or relevant to supply chain and relevant to the understanding an insight of the millennials in China. So today what we do that in some of the vertical categories we work closely with some retail partners like Suning electronics, Intime Department Stores [indiscernible] Easyhome in decorating material categories. And recently we even, I mean, invest in focus media. And the purpose of this investment is to transform a so called traditional media into a digital media. And this is more like a -- in Alibaba, we call it the New Retail of Alibaba business. So I would say this is not the end of the world. But I think the key thing is that I do believe that in the future there were a lot of, I mean, new retail formats will arise, and a lot of existing retail formats will be upgraded. And all our mission is to make our business partners to do this transformation easier in the digital era. Thank you.

[Robert Lin, Head of Investor Relations]

Next question.

[Operator]

Thank you. Our next question comes from the line of Thomas Chung from Credit Suisse. Please ask your question.

[Thomas Chung, Credit Suisse]

My question is about food delivery business. Can management comment about the competitive landscape and our strategies and becoming the number one in this segment? Thank you.

[Daniel Zhang, Chief Executive Officer]

Yes, we have very strong commitment in food delivery business. And that’s why we make a huge investment and acquired Ele.me. And today, we are in a good – we are making very good progress in consolidating and integrating the business. The reason why we value this business is really quite simple. I think in both Joe, Maggie and I -- my script, we say very clearly, because we believe this is a very essential part of the – of what our customers' needs. And when Alibaba entered into this area, we strongly believe that we need to leverage our strong user base, 100s of millions of user base in China, and also to leverage what we build in the last mile and in the infrastructure, digital infrastructure to do this business in an innovative way. So that’s why we are very confident for the future of this business. And our CEO of Ele.me say it publicly that we’re trying to gain 50% market share in three years. So that’s the confidence is from the prospectus of Alibaba ecosystem. And we actually -- so far we are making quite good progress, and we believe that it's not food delivery business, not like it's just a food delivery, it's all about to meet the customer's need with good food quality and innovative meal, and also with a good service quality. So that’s the progress of our business.

[Robert Lin, Head of Investor Relations]

Next question.

[Operator]

Thank you. Our next question comes from the line of Mark Mahaney from RBC Capital Market. Please ask your question.

[Mark Mahaney, RBC Capital Market]

I wanted to ask about the sustainability of the digital media revenue growth. It seems like you had a nice impact from World Cup there. Could you talk about whether some of the newer customers or some of the newer business that came out of that event whether that looks like its sustainable, whether you -- those are new customers that will stay with the service. Anything you can tell about what their activity has been like post the World Cup? Thank you very much.

[Daniel Zhang, Chief Executive Officer]

Well, actually we do see the solid demand in the market about the sports contents. And that’s why -- in our presentation, we said that we have many, many viewers who came to our – came to watch the live streaming of World Cup and -- in over 180 phones and the smart TVs. And actually -- and post the World Cup, actually we’re working closely with our partners to launch to jointly build up this sports platform, digital sports platform, and on Youku. And so far I think the new season, new Soccer season just began, and you can find the sports content of British Super League and also our Chinese Super League in Youku already. And we’ll continue to work on this, and introduce all of these, I mean, five Super Leagues in Europe and other and good contents – sports content to our audiences.

And one more comment on this is that actually before we introduce sports content to Youku, and actually we have more female than male on Youku platform. Because we introduced a lot of drama show and variety shows -- drama hits and variety shows. But with that sports content, we do get more men coming to us. And they are very young and very passionate. And we do, on top of these sports contents, we do see opportunity to find synergies between the sports content platform and the commerce platform, which we can help our brand partners and to acquire new customers in sports categories in the joint platform. Thank you.

[Robert Lin, Head of Investor Relations]

Next question?

[Operator]

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

[Gregory Zhao, Barclays]

My first question is about your international -- some international brands, which, during the quarter, more international brands coming on to your Tmall marketplace. So how shall we expect the advertising and the commission revenue contribution from these new players? And how shall we expect growth trends going forward? And very quick follow-up is on your 88 VIP. So how do we expect the membership to integrate your existing services and improve user engagement? And can you share some initial metrics of the business? Thank you.

[Daniel Zhang, Chief Executive Officer]

For the first question, international, I think, globalization is our long-term strategy. That's why we make very big investment in Southeast Asia. And that's why we newly acquired a business in Southern Asia, Daraz, and our investment in Trendyol, a Turkey e-commerce -- leading e-commerce company. So we have a very big picture in terms of globalization. And so far, actually we do see a very big progress on in terms of customer acquisition and user growth and the category expansions in the new markets. And one advantage we are taking is that we have a lot of, as I said in my script, we have a lot of brand partners with us for many years. Today we are working with not only in China anymore, but also in the new markets. And also, China is famous for manufacturing base, and we have a lot of good supplies with very good prices, and which are very popular in Southeast Asia and the Southern Asia markets. So we will continue to do that to do this -- to leverage what we supply from China, and what we are partner with this brand to build a unique advantage in these new markets. And in terms of 88 VIP, I would say, actually this is the new program. And so far, we get very warm feedback from market. And the purpose of this program is to enhance the loyalty and the stickiness of our customers in our core commerce platforms, and other -- I mean, new businesses. So that's why for the first time, we consolidate the most of the consumer service we have in Alibaba ecosystem, starting from the retail discounts, exclusive offering of some products to movie and to entertainment, music even food delivery. So we strongly believe that in each of the business lines we may find some other, I mean, players, who can offer these kind of services. But we are more -- actually, Alibaba today is more like all-in-one. And we want to provide this all-in-one membership program to our loyalty customers, to enhance their stickiness in our ecosystem.

[Joe Tsai, Executive Vice Chairman]

Yes, Greg, so just -- to touch on your international brand comment, we do have a lot of luxury brands and international brands coming to working with us. You've seen that in the Luxury Pavilion that we've had success. We continue to attract them. Give the consumers a differentiated experience for the higher tier consumers. And that's how we can continue to offer value to the consumers. And you see some of these luxury brands actually opening up Tmall flagship stores as well when they joined the Luxury Pavilion.

[Robert Lin, Head of Investor Relations]

Okay. Next question please?

[Operator]

Thank you. The next question comes from the line of Wendy Huang of Macquarie. Please ask your question.

[Wendy Huang, Macquarie]

Two very quick questions. The first, your revenue growth is very strong yet the adjusted EBITDA growth was only the 13% this quarter. And given that you've mentioned the New Retail's margin was structurally different from previous. So should we expect the EBITDA growth to stay at the current level for extended period of time? And second, very quickly, on your overseas strategy so there has been some new reports talking about US$5 billion investment in the Indian market, in the Reliance Retail. So can you give us update on your overseas expansion and investment? Thank you.

[Maggie Wu, Chief Financial Officer]

Wendy, look at EBITDA growth, right, so take a look at the core commerce EBITDA first. In one quarter's time, I think, if you compare with the quarter last year of absolute EBITDA profit growth from US$3.9 billion to US$4.8 billion. So that means we net added approximately US$1 billion profit in the quarters time. That gives us the flexibility to invest. So we talked about the investment in all of these strategic important areas, local services, logistics, New Retail and also entertainment business, including some investment -- seasonal investment like this World Cup investment in this quarter. So going forward, I think, we're very clear that the core business we're going to continue to emphasize the healthy growth, which going to support our investments. So strategic investment will not be anything in two or three quarters time, it will continue. But the thing is that we believe those are the areas that has big time at the same time, we, Alibaba Group has advantage to provide better service and the integration on different businesses, get a synergy out of these businesses, and eventually, add value to our customers and then we could maintain better in the future.

[Robert Lin, Head of Investor Relations]

So Wendy, your voice was low. Can you repeat the second question?

[Wendy Huang, Macquarie]

Yes, investment in the overseas, and also the media reported about US$5 billion investment into Reliance Retail in India?

[Daniel Zhang, Chief Executive Officer]

So just to summarize, I think, you're asking about our overseas investments, particularly on, I guess, the news about the Reliance Retail in India. Is that correct?

[Wendy Huang, Macquarie]

Yes, correct.

[Joe Tsai, Executive Vice Chairman]

Yes. Wendy I'll take that question, this is Joseph Tsai. We -- look Reliance is a very good company, strong company in India. We've a lot of respect for them. But what you read in the news is just untrue. I think taking a step back, we've -- I've talked about investing in the emerging markets both Southeast Asia and South Asia. So as you know, we have -- we put a lot of resources into Lazada, which operates in six Southeast Asian countries. We've also recently invested in the largest e-commerce business in Pakistan and Bangladesh. These are sort of off the beaten track markets, it seems to you guys, but, just remember that Pakistan has a population of 200 million people. It's about the same size in terms of population as Indonesia. So these are some of the areas that really excite us. And, by the way Bangladesh, if don't recall, has 160 million people. Although they're growing from very low base, we think they have very good long-term potential. So we're also very excited about these South Asian markets.

[Robert Lin, Head of Investor Relations]

Operator we'll take the last question.

[Operator]

Sure. The last question comes from Alex Yao from JPMorgan. Please as your question.

[Alex Yao, JPMorgan]

I have a few in terms of the formation of the local service holding company. Firstly, from capital allocation perspective, why do you guys need to seek external investors given the critical importance of these business in your broader New Retail strategy, and your healthy free cash flow generation capability? And secondly, I think the transaction highly likely will be closed in FY '19. Can you talk about what could be the financial impact for FY '19, including the consolidation of Koubei as well as the potential step-up in pricing subsidy for Ele.me? And lastly, I think Ele.me is a very important to support the overall new retail strategy. And potentially the long-term transportation for those services delivery and product delivery would transform from intercity to intracity. So is the investment in Ele.me enough to support the whole New Retail strategy? Are there any other incremental investments you need do to further improve the local on-demand point to -- intracity delivery? Thank you.

[Daniel Zhang, Chief Executive Officer]

Alex, you broken up during these questions. Can you just summarize the three questions for us?

[Alex Yao, JPMorgan]

Okay. So number one, for the formation of the local service holding company, why do you want to seek external investors and the funding source? Number two, in light of the consolidation of Koubei, and more investment in Ele.me, can you talk about the financial impact in FY 2019 from this local service holding company? Thirdly, in addition to investments in Ele.me, are there any other areas that you think it will worth investing in terms of the local delivery? Thank you.

[Daniel Zhang, Chief Executive Officer]

Let me answer your first question. In terms of the local service holding co, actually we are – this is a newly startup company and which we combined both Koubei and Ele.me business in -- under this holdco. And as we said in our earnings release. And we are very happy to work with other investors and commit RMB3 billion in this – in the coming fund raising, and which we believe that will give a very solid support to our local service business to gain the market share and to acquire new customers in the ecosystem. And we strongly believe that this is very, very important area, and we will do everything we can to win the battle. And we are committed to invest not only the money but also the technology. But actually -- because this is a new area, so that’s why we are very happy to work with other investors on this as well. And in terms of the -- I think, Maggie may answer your second question. But let me finish your third question at the same time. I think, yes, while the investment in Ele.me we have – today we have a very good large-scale on-demand point-to-point delivery network. And I think this is a very, very unique network and which is good not only for food delivery but also it is necessary for the new commerce any in-store fulfillment delivery. And this is, I think could be relevant to any other categories to do in-store fulfillment and peer point-to-point delivery. So we are actually – today we are working very hard to consolidate this network – integrate this network with our other business. And we do believe that if we add more business cases into this point-to-point network, this will enhance attractiveness and stickiness of the riders in the system, and also improve efficiency of the operation, which on a long-term, we believe is fundamentally important to this new retail strategy.

[Joe Tsai, Executive Vice Chairman]

Yes, let me just supplement the first question, why we include third-party investors. We’re combining two businesses. And in the Koubei business, we already have third-party investors. So when we bring both companies into one holding company, those third-party investors will become part of the investors in the holding company. So we start with a starting point already with third-party investors. And also we want to make sure that this is a business that can be validated by the market in long run. And we have been talking to SoftBank, they came in and take a look, and they really like the business. So they are making this -- a very, very large commitment to our business, which is a really great validation of the business. But this is just the first step. We only announced about RMB3 billion of commitments that we have received, but more money will be coming from other third-party investors.

[Maggie Wu, Chief Financial Officer]

Alex, to your second question about the financial impact. So this investment into the local service area together with combined consolidating of Koubei will have an impact in our financial, it will result in slower overall group profit growth in near term. So to the extent, if you look at our core commerce EBITDA, we said that without this investment that business, EBITDA margin level could be comparable to the previous quarters. So that gives you a sense of how much we have invested in those strategic areas. And at Ele.me, local service represents somewhere around 20% of that investment, if we're talking about the quarter. And so although, it will drag down our profitability, but this business will have a substantial operating leverage once unit economics turns positive and then we have the confidence that to turn that business -- to first grow that and then turn it into profitable business. Thanks.

[Robert Lin, Head of Investor Relations]

Okay. So that concludes our call today. Thanks everyone for joining. If you have any questions, please contact the Investor Relations team at Alibaba. Thank you.

[Operator]

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.