Alibaba Group Holding Ltd

NYSE:BABA

Earnings Call Transcript 2018-Q3

[Operator]

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group's December Quarter 2017 Results Conference Call. At this time, all participants are in listen-only mode. After management's 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, IR]

Thank you. Good day, everyone, and welcome to Alibaba Group's December quarter 2017 results conference call. With us are Joe Tsai, 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 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 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 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 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 the reconciliations of GAAP to non-GAAP measures can be found in our earnings press release.

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

[Joseph Tsai, Executive Vice Chairman]

Thank you, Rob. Thank you all for joining us. Alibaba had one of the best quarters in the company's history with 56% year-on-year revenue growth. We ended the quarter with 515 million annual active consumers on our China retail marketplaces. Compared to the 12 month period ended in the prior quarter, we added 27 million annual active consumers, this is the largest number of active consumer additions in the last three years. We've made tremendous progress in the execution of our New Retail strategy. As a result, revenues from New Retail initiatives are starting to make meaningful contributions to the growth of our China commerce revenues this quarter.

I want to say a few words about New Retail. Since Jack Ma coined the term New Retail in 2016, the term has been widely adopted in China by traditional retailers and internet companies alike. New Retail has become the most talked about concept in business. However, very few people appreciate what New Retail really means, much less what exactly is needed to accomplish true conversions of the online and offline consumer experience. In my view, Alibaba has three unique success factors that is enabling us to realize the New Retail vision.

First, Alibaba's marketplace platforms handle billions of transactions each month in shopping, daily services, and payment. These transactions provide us with the best insights into consumer behavior and shifting consumption trends. This puts us in the best position to enable our retail partners to grow their business. Second, Alibaba is a deep technology company. We contribute expertise in cloud, artificial intelligence, mobile transactions, and enterprise systems to help our retail partners improve their business through digitization and operating efficiency. Third, Alibaba has the most comprehensive ecosystem of commerce platforms, logistics, and payment to support the digital transformation of the retail sector.

Next I want to talk about our transaction with Ant Financial. We are announcing today that pursuant to a strategic agreement with the Ant Financial that was entered into in 2014, Alibaba has agreed to take a 33% equity stake in Ant Financial. Those of you who have followed us closely know that this is a significant step in our long term strategic relationship with Ant Financial, giving Alibaba equity ownership in a company that is a key player in the Alibaba ecosystem.

Ant Financial is not only an integral payment provider for transactions on our e-commerce marketplaces through China's number one mobile payments platform Alipay, it is also a provider of financial services such as loans, wealth management, and insurance products to hundreds of millions of consumers and millions of small businesses on the Alibaba platform. We believe deepening our relationship through an equity stake in Ant Financial will bring several key strategic benefits to us.

Number one, advancing our New Retail strategy with mobile payments; number two, increasing user acquisition and retention through collaboration with the Alipay digital wallet; number three, enhancing the execution of our international expansion; and number four, enabling Alibaba and our shareholders to participate in the future growth of the financial sector.

While we have filed a 6-K to summarize the transaction, I want to highlight some of the salient features here. The first thing is that Alibaba is taking the 33% equity stake and terminating our profit share in Ant Financial. Equity ownership allows us to participate in the long term value creation of Ant Financial as opposed to the quarter-to-quarter fluctuations of a profit share. Second, pursuant to the agreement between Alibaba and Ant Financial, Alibaba's subscription of new shares in Ant Financial does not require any cash outlay for Alibaba. Going forward Alibaba is going to be protected from the dilutive effect of future Ant fundraisings until an IPO of Ant Financial. Third, Alibaba will have significant governance rights in Ant Financial through board [ph] representation so that the two companies’ interest can be further aligned.

And now I would turn it over to Daniel for his comments about the quarter.

[Daniel Yong Zhang, Director and Chief Executive Officer]

Thanks, Joe. Hello everyone and thank you for joining our earnings call today. We delivered another outstanding quarter and our business is performing stronger than ever. This is the seventh consecutive quarter that our revenue has grown by more than 50%. It is the direct result of our long-term forward-looking approach of investing in new user acquisition, new technology, and creation of new retail experiences. The data we're able to generate from user activity at scale is used to refuel and improve consumer experience and business operation across our ecosystem. We will continue to invest for the future, not only to grow existing business but also to nurture new business innovations.

Taobao continued to thrive as the top online consumer media and the retail destination for Chinese millennials. Growth of our monthly mobile app users accelerated this quarter. 580 million users now visit our China retail marketplaces via our mobile app monthly, an increase of 31 million users over the previous quarter. Our unique plan of highly relevant, personalized content with a community driven experience continues to attract new users while keeping existing users deeply engaged on a daily basis.

Tmall continues to expand its market leadership in B2C and enjoy robust growth across all major categories. Physical goods GMV grew 43% year-over-year. We're especially pleased with the accelerated growth in the mobile phone category, more than 75% year-over-year achieved through securing exclusive access to the industry's top premium smartphone launch, market leadership, and a share gain will continue to be our priority and we'll continue to reinvest into the Tmall business.

We celebrated our ninth November 11 Global Shopping Festival this past quarter, and once again we showcased extraordinarily competitive advantage of our platform model. Our commerce technology infrastructure continued to set new benchmarks in real time processing power. More than 160 merchants have sales exceeding RMB100 million. Of those 17 had more than RMB500 million in sales, four -- or six have more than RMB1 billion RMB in sales, and two have more than RMB2 billion in sales. Brand and retail partners leveraged our digital technology and omni-channel integration to transform more than 1 million physical locations, all over China to offer New Retail shopping experiences.

Our globalization strategy continued to demonstrate excellent momentum, our international commerce retail business grew 93% in revenue year-over-year. Lazada continued to leverage product selection and technology infrastructure from our China retail marketplaces to upgrade its service and experiences for South Asia consumers. Our eWTP hub in Malaysia, the first outside of China went into operation in November of 2017. The One Belt, One Road initiative is an important tailwind for our cross border import business which will help address the massive demand for imported products in ongoing consumption upgrades taking place in China.

Our cloud computing business continues to fly high, revenue grew 104% year-over-year, as Alibaba Cloud continues to be the market leader in China. We continue to expand products and new including proprietary AI technologies being deployed to address real world challenges. Our scientists recently received industry recognition for breakthrough in areas such as natural language processing and computer vision technology.

Our digital media and entertainment business continued to make progress. Our success in development of our digital content has contributed to more than 100% year-over-year subscriber growth. We're proud that our original Chinese hit drama developed Youku named Day and Night was acquired by Netflix for global distribution which was a validation of the creative capability of our digital video business.

Lastly, I want to provide an update on New Retail. Exactly one year ago, I shared with you, our outlook on the opportunities for a radical transformation in the retail landscape and a plan to reengineer the fundamentals of retail operations to all of our consumers' new value propositions. Since then we've demonstrated what New Retail looks like through innovations such as Hema and inspired a global wave of experimentation in New Retail. We believe the future of retail is much more than just connecting online and offline.

Our New Retail strategy is comprised of creating new and transforming old. We'll continue to innovate New Retail formats like Hema with a goal of addressing consumers evolving demand in the digital age with better products and services, giving them compelling reasons to visit both physical and virtual stores. These new formats will continue to experiment with new proprietary technology to improve consumer experiences.

Like our real time consumer insights is one of the key issues of China traditional retail today. We're enabling traditional retail partner to find new life by digitalizing across consumers and increase the attachment area online and offline thereby improving sales productivity. We're also leveraging our data technology to empower retailers to radically improve operating efficiency and allow them react on a real time basis based on consumer demand. We're committed to design more New Retail formats and our mission is to enable our retail partners to transform store digitalization.

Our investment in Sun Art is a comprehensive strategic partnership that will leverage our mutual strength to fundamentally change the economics of traditional retail. We've introduced top selling products on Tmall to over 160 our T-Mart locations across China and will soon share our proprietary New Retail technology developed by Hema to upgrade Sun Art's existing retail formats and operations. Additional synergies are being realized that will grow our mutual businesses.

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

[Maggie Wei Wu, Chief Financial Officer]

Hello everyone. We delivered another strong quarter. Here are some of the financial highlights. In the December 2017 quarter, major operating and financial metrics continued to record very strong performances. Total revenue grew 50% year-over-year to RMB83 billion, revenue from core commerce grew 57% year-over-year to RMB73 billion. Mobile MAUs reached 580 million, an increase of 31 million over September quarter. Annual active consumers reached 515 million, an increase of 27 million from 12 month period ended September 2017.

Revenue from cloud computing increased 104% year-over-year, to RMB3.6 billion. Our non-GAAP free cash flow was RMB46 billion which is US$7.1 billion for the quarter compared to RMB34 billion in the same quarter of last year.

For the quarterly revenue, the 56% year-over-year growth was led by robust growth in our China commerce retail business, international commerce retail business, Alibaba Cloud as well as the consolidation of Cainiao Network. So excluding Cainiao, total revenue growth would have been 14% year-over-year.

Quarterly cost trends; cost of revenue excluding share based compensation was RMB33.8 billion. Excluding the effect of SBC expense, cost of revenue as a percentage of revenue increased from 35% in the quarter ended December 2016 to 40%.

I would like to provide color on changes to our gross margin due to the business mix shift. First, the consolidation of Cainiao affects our overall gross margin because logistics is a lower margin business compared to our original core business. Second, significant growth of our newly held businesses, in particular Intime Department Stores and Hema fresh grocery store means that new retail revenues were including -- on a gross basis include the cost of inventory and therefore would have the effect of lowering our overall gross margins. Third, constant development and acquisition costs of our digital media entertainment segment, is accounted for as a cost of revenue.

While these business mix shift factors structurally change our gross margin, the new lines of business in logistics, new retail and digital entertainment are highly strategic to our future growth and value creation. In addition, these new businesses do not change the highly profitable and cash flow generated characteristic of our core commerce marketplace business and our ability to reinvest core commerce profit for further market share gains.

Sales and marketing expenses excluding SBC were RMB8.1 billion in the quarter. Without the effect of SBC expense, sales and marketing expense as a percentage of revenue was 10% for the quarter which is consistent with the prior quarter. As a percentage of revenue, without the effect of SBC, all other major operating expenses remained stable year-on-year.

Let's look at other income and losses. Other net loss in quarter ended December 2017 was RMB348 million compared to other net income of RMB3 billion in the same quarter of 2016. The reversal from net income and net losses versus last quarter was primarily due to higher foreign exchange loss and a decrease in profit sharing from Ant Financial.

During the quarter, Ant Financial successfully executed an aggressive user growth plan that resulted in substantial new user additions and increased user engagement. As a result of the user growth initiatives, in December 2017, Alipay Wallet's daily active users more than doubled on a year-over-year basis. We expect that Ant Financial will continue to invest to expand its market leadership in digital payment, develop new technologies for inclusive financial services and accelerate its globalization strategy.

Non-GAAP net income in the quarter RMB27 billion, an increase of 20% year-on-year. Reconciliations of non-GAAP measures to comparable GAAP measures can be found in our press release. Free cash flow and cash; we continue to generate significant free cash flow. In December quarter, we generated RMB26 billion, in free cash flow. Our free cash flow allows us the strategic and operational flexibility to invest in technology and acquire the resources to accomplish our strategic objectives.

As of December 31, 2017, our cash, cash equivalents and short-term investments were RMB220 billion. The increase in cash, cash equivalents, and short-term investments during the quarter was primarily due to proceeds from our issuance of US$7 billion senior and secured notes and US$1 billion free cash flow generated from operations, partially offset by cash used in investing activities, including investments in Sun Art Retail and a repayment of a senior and secured note deal in the year.

Capital expenditures in the December quarter were RMB10 billion, in which about RMB1.4 billion relates to the acquisition of land use rights and construction in progress. The rest are investments in IT services sector.

Segment reporting; let's take a look at the core commerce. Core commerce segment had another strong quarter with revenue growth of 57% year-on-year. China commerce retail business which represents 82% of the segment revenue, grew 47% year-on-year. This is the first quarter in which we are including revenues from logistics as we begin to consolidate Cainiao. Excluding Cainiao, core commerce revenue growth would have been 49% year-over-year. China commerce retail, a robust revenue growth of 47%, this includes the growth of our New Retail initiatives, which added meaningful revenues compared to immaterial amounts in prior periods. The New Retail initiatives include Intime Department Store, import consumption and the fresh food grocery Hema and these new businesses which are highly strategic for our future growth and value creation will become more meaningful over time.

Revenue from our retail marketplaces continued to see strong growth. Customer management revenue grew by 39% year-over-year, driven largely by increases in average unit price per click and to a lesser extent the volume of clicks. Increasing price per click reflects our ability to deliver highly relevant ads to consumers through personalization technology, which drove -- increased the conversions. Thus, merchants put a higher value to clicks that can reach relevant users and drive higher conversions.

We're seeing higher average spending on our customer management services by increasing number of merchants. The 39% growth rate of customer management revenue in December quarter reflects a more normalized growth trend due to an anniversary effect of personalization already launched in September 2016, as discussed in our previous call.

We continue to focus on sustainable revenue growth for our China commerce retail business by giving attention to user experience and merchant's ROI. Therefore we will continue to be measured in approach to monetization. For example, we will prefer to increase as inventory rather than increase as load, and to monetize through technology improvements rather than price increases.

China commerce retail commission revenue representing 27% of China commerce retail revenue in the quarter grew by 34% year-over-year primarily due to a strong GMV growth in the physical goods GMV on Tmall. So we're growing 43% year-over-year in the physical goods GMV. The commission revenue growth rate was lower than the physical goods GMV growth; this is because of discount and rebate we provided to merchants during promotions.

So other revenue within this China commerce retail was RMB5.1 billion compared to RMB830 million in the same quarter of last year, primarily driven by New Retail businesses including Intime, import consumption and Hema. As you may have noted other revenue now represents 7% of settlement revenue and grew 525% year-over-year. We expect these New Retail businesses will become a more meaningful part of our growth and value creation in the future.

Our core commerce market segment adjusted EBITA margin was 53% in the quarter as compared to 64% in the same quarter of 2016. Excluding the consolidation of Cainiao core market segment adjusted EBITA margin would be approximately 67% for the quarter. In a discussion of our cost trends, I have discussed chiefly impact of our New Retail businesses which we believe will accrue longer term strategic value to Alibaba. In addition we're reinvesting margins from our China retail commerce business towards international markets such as Southeast Asia and new user acquisitions.

Cloud revenue growing 104% year-over-year primarily driven by increase in number of paying customers and the improving revenue mix of higher value added services. Adjusted EBITA margins of the Cloud Computing segment was a negative percent. This remained stable versus the same period last year. Our Cloud Computing business top priority remains expanding on market leadership and up selling of higher value added services.

Our digital media and the entertainment segment revenue in December quarter was RMB5.4 billion, increase of 33% year on year, both UCWeb and Youku contributed to the growth. We are particularly encouraged by the traction of Youku, especially the robust addition of subscribers due to our regional content. Daily average subscribers maintained strong momentum was more than 100% year-over-year growth. As a result of the increased subscription revenue Youku's total revenue growth rate for the quarter accelerated from prior quarter.

Adjusted EBITA margin of the digital media and entertainment segment was negative 41% this quarter comparing to negative 60% in same period last year. The narrowing of negative margin is primarily due to revenue growth from UCWeb which is a higher margin business partially offset by increase in listening content by Youku. With the strong growth of the subscription business in online video we see potential synergies within our digital media and entertainment business and the core commerce business both of which tap into the large consumer user base of our ecosystem.

Revenue from new innovation initiatives and other segments was RMB772 million in the December quarter. Starting June quarter 2017 we reclassified revenue from our fresh new store Hema, we talked about this last quarter. Previously reported under this innovation initiative segment, now we moved it to China core commerce retail business, because Hema has already gone beyond the incubation stage. So, adjusted EBITA margin of this segment was negative 130% primarily due to investment in new business initiatives.

Okay, looking ahead, given a fair degree of visibility until end of March 2018, we are releasing our year-over-year revenue guidance to a range of 55% to 56% for fiscal 2018. As Daniel mentioned earlier our mission for New Retail to digitize the entire value chain of the retail industry, which would then enable a seamless conversion of consumer experience between online and offline. Over the next several years you'll see an unfolding of how we execute the New Retail strategy as it becomes an integral part of Alibaba ecosystem -- Alibaba economy.

The way we look at New Retail's financial impact to Alibaba are as follows. First, the market has huge potential, digitalization of offline retail that using our data technology to enable conversions of online and offline commerce is a huge opportunity that expands our addressable market. Total China retail is a RMB33 trillion economy, while nearly 20% of it is online. Our New Retail strategy will enable us to tap into the 80% of the retail consumption that remain offline in China. We believe we have the technology advantage and proprietary knowhow to execute the New Retail strategy at large scale.

Second, New Retail may have different cost structure but has similar high capital return characteristics as pure internet businesses. I have already discussed the structural changes to margin as a result of the business mix shift to New Retail. This is not a concern to us at all, because we believe we can maintain the same capital efficiency over time, and generate similar returns in invested capital as our internet based market base business.

Finally technology will drive sustainable and scalable long term profit growth in New Retail. With our strategy of partnering with retailers we will build an ecosystem where our technology and knowhow will reach businesses far beyond our own. The value created from the improvement in operating efficiencies and the financial performance of our retail partners will generate additional monetization opportunities through capital light fee based models such as commissions and management fee.

Alibaba is best positioned to transform China's traditional retail landscape given our large mobile consumer scale and insight, advanced cloud and AI infrastructure and the best in class knowhow in digital commerce.

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

[Operator]

[Operator Instructions] Your first question comes from the line of Eddie Leung of Merrill Lynch. You can ask your question.

[Eddie Leung, Bank of America Merrill Lynch]

Thank you for taking my questions. The question is about Ant Financial. At the operating level, how will this deal change the cooperation? Is there anything you can achieve now that you couldn't in the past? And then just quickly, perhaps also some color on the retention rates of your users. There has been very fast growth in users like in the past year or two. Just curious how has been the retention rate given this fast growth period?

[Joseph Tsai, Executive Vice Chairman]

Yes, Eddie this is Joe Tsai. I'll take your question about Ant Financial. We are -- with our equity stake in Ant Financial, this will align our interests further in a number of areas. For example, Ant Financial as you know is the number one payments company in China, and in the execution of our New Retail strategy, a very important component of working with physical retailers is that they are enabled with mobile payments. So that a customer can go to the store for -- and without a mobile phone and pay, so there's a lot of cooperation there that we can have with them. Another example is to be able to interact with -- between -- for example our e-commerce apps like Taobao App and also the Alipay Wallet, so that we can have established presence for example of our e-commerce presence within the Alipay Wallet. This actually helps us to increase user acquisition in terms of new users because there are users that are using the Alipay App but are not buying on our Taobao platform. And another example of cooperation is in international expansion, in -- where in new markets e-commerce presence will need to have a payment solution and payment growth, payment expansion into new markets will be looking for new use cases. So these are just a few examples of cooperation with -- equity stake, I think there is going to be tighter cooperation between the two.

Your second question about user retention; I think we have been able to retain the users very well. I assume that's a question addressing Alipay. As you know, in the fourth quarter, the growth of daily active users of Alipay have gone up more than doubling of our daily active user,s and going substantially into January, we just passed January in the last month that the level of daily of active users and engagement have remained. So we don't see any sort of drop off, so retention is very good.

[Operator]

Your next question comes from the line of Alicia Yap with Citigroup. You may ask your question.

[Alicia Yap, Citigroup Global Markets Asia Ltd.]

Hi, good evening. Management thanks for taking for questions and congrats on the solid quarter. My question is related, can you share with us if there is any trends on or any ongoing technology advancement or improvement of the Taobao App that you are working on and any chance for potentially increasing the monetization on some of our pages, for example, by adding the inventory or potentially adjusting the app loads on the search result? Thank you.

[Daniel Yong Zhang, Director and Chief Executive Officer]

Taobao App is now, actually is positioned as a shopping, as a consumer community, and a company-drive platform, and we apply our most recent new technologies like the personalized technologies, algorithms, and the real-time timing and behavior driven algorithm on Taobao. And so that's why today people will see a very personalized experience on mobile Taobao. And going forward, we will continue to do so and apply our new technology in Taobao. And with expansion of our categories and services and expansion of our user base, we will have more and more consumer data and behavior, which will also enhance our understanding of people's demand. What we want to do to make our algorithm more intelligent, which is not only to meet the existing demand of the customers, but also help to create a new demand of the customers.

So that's all about how to make the technology marry with commerce. And in terms of the monetization, actually we have a very clear strategy in monetization. We always believe that the most important thing is to enhance the user experience and make people spend more time and more people to come to our site. Actually today, as a shopping -- as a commerce mobile app, actually all the content could be monetized, and today we only monetize a very low percentage of the inventory -- of the pages on our mobile app. And all the content and the recommendations and the search results actually is relevant to and -- is relevant to consumer, I mean what consumers need and what the customers want promoted. So we have a very clear schedule to monetize our pages, but we still want to make sure we have a very native experience for our customers.

[Operator]

Your next question comes from the line of Alex Yao of JPMorgan. Please ask your question.

[Alex Yao, JPMorgan Securities (Asia Pacific) Ltd.]

Hi, good evening, management and thank you for taking my question. I have a follow-up question on Ant Financial. Can you elaborate a bit more on the sharp decline in Ant Financial's profitability in this quarter? For example, is it because the competition in domestic offline payment market is intensifying or is it because our spending to expand overseas market share and usage? If the competitors in these markets react with even more aggressive marketing strategy, how do you think about the competition strategy and the financial outlook for this as in 2018? And then related to that will the new investment strategy in Ant Financial apply to the New Retail strategy as well? Thank you.

[Joseph Tsai, Executive Vice Chairman]

Hey, Alex, I'll address that. Ant Financial is a profitable business. They're profitable in all three major lines of business and that is credit products like consumer credit and SME loans and then the third is wealth management in terms of distributing other people's wealth management products on the platform. So it's profitable in all three of those business lines. What it means is that it has the luxury of reinvesting profits and cash flow into very strict areas of growth. And during the fourth quarter what we've seen is that Ant Financial embarked on a very aggressive new user acquisition strategy and that was very successfully. They were able to grow new users by more than doubling the active users on the platform, on the Alipay Wallet platform.

And we have also communicated in our earnings release that we expect Ant Financial to continue this fairly aggressive plan to continue to gain more new users and take market share. So it's clear that I think if you look at third-party research data, Ant Financial has claimed market share away from competition over the last quarter. As far as your question about how we think about the growth of our own e-commerce business, maybe, Daniel can address that question.

[Daniel Yong Zhang, Director and Chief Executive Officer]

Actually we do see a lot of synergies between AGH and Ant Financial. And today -- and because of the very active, I mean, new user acquisition strategy, we see a lot of new customers going to Alibaba ecosystem by firstly doing a mobile payment, and we are actually -- work closely with Ant Financial to transform these new users to be buyers on our ecosystem. But having said that, actually, we are -- we see a great -- a broader, I mean, opportunities in New Retail landscape. And for people, for the retail partners what they want is a all-in-one solutions to help them to improve the user's experience and improve the operating efficiency in their exiting retail formats.

So payment obviously is one of the advantages and people want to -- because of the digital payment and the retailers can digitalize the -- to have the data of the payers. And from AGH perspective, we will go even further to help the merchants -- to help the retailers to digitize their entire product assortment and the entire footprint in the physical store, so which will bring even more data. So together, actually we can help -- Ant Financial and AGH can help the retailers to transform to a totally digital operation, which will bring a lot of that for their operation in the future.

[Operator]

The next question comes from the line of Piyush Mubayi at Goldman Sachs. Please ask your question.

[Piyush Mubayi, Goldman Sachs (Asia) LLC]

My first question is does the Ant stake mean that the Honk Kong IPO partner ownership part is open? Also theoretically, would you invest more into Ant and to own more of it? And second question if I might slip in one, customer management revenue growth drivers have reversed this quarter from volume of clicks to price by click on higher conversions. Could you give us a sense of how much further the price by click improvements could be in the next couple of quarters if possible? Thank you.

[Maggie Wei Wu, Chief Financial Officer]

Hi, Piyush, this is Maggie. Okay. So Ant hasn't talked about any IPO plan yet. So that's Hong Kong, Asia, we don't know yet. And for our -- whether we are going to further invest in Ant, so 33% is the equity swap arrangement that's stated in the 2014 agreement. So that's pretty much the shareholding we will get from Ant based on this arrangement. And in terms of customer management revenue, well, we're talking about PBC growth is stronger. And to a lesser extent that we see the number of clicks growth and so the reason is that basically the technology, one thing is that the technology improvement brings better conversion.

Merchants are willing to play for higher clicks because they are calculating their ROI and it must be whatever the pay it got a return -- reasonable return before making that decision to invest. And how much further this we can grow, I think -- okay, first of all, you have seen this growth for customer management revenue 39% year-over-year compared to previous quarter shows, appears to be a slower growth. We talked about the anniversary. But there is another reason that we proactively give to merchants. We leverage our technology enhancement and there are a couple of projects maybe we can talk more about later in our meeting. But this is voluntarily give returns to merchants which has impacted a little bit on our monetization to revenue.

And going forward, I think it's -- when you look at the technology reserves, we do have many technology initiatives in our pipeline and these are the potential assets for future monetization and we will launch these whenever it's ready in the due course. So we are quite confident about the longer term growth for our ecosystem, since the data technology do bring value to merchants.

[Operator]

Your next question comes from the line of Youssef Squali of SunTrust Robinson Humphrey. You may ask your question.

[Youssef Squali, SunTrust Robinson Humphrey, Inc.]

Thank you very much and congrats on a good quarter. Maggie just a quick question for you. I may have missed this, but ex-China and ex-New Retail what was the organic growth in core commerce? And I guess related to that as we look out to fiscal 2019, in terms of both of revenue growth and margin, can you just help us, think through, or how do you guys thinks through the framework of organic growth and margin? I think in 2017 we have seen about a 400 basis points compression in 2016 -- 2018 we saw or we're likely see about 600 basis point compression in margins. Just how do we think through it for 2019? Thank you.

[Maggie Wei Wu, Chief Financial Officer]

Okay, first of all, if you still remember like eight months ago, when we had our Investor Day, right, where I gave the revenue guidance for fiscal 2018, the market consensus for our revenue growth was somewhere around 37% -- 38% year-over-year. And we guided 45% to 49% annual growth and now we adjusted that growth level to 55% to 56%. That's pretty much like 18 percentage points higher than the original market expectation. Okay, Cainiao, right, Cainiao we are seeing that, we're talking about this quarter Cainiao added like 4 percentage points to the revenue growth. So if you take it out from the 55% to 56%, we are still growing 50% plus. And New Retail is integral part of our core commerce. We disclosed the number of the revenue amount and the percent of revenue you can derive if you take it out, but it doesn't really make sense taking it out. This business is going towards New Retail. So this is going to be a very critical part of our core commerce, it is the core commerce.

And margin, yeah, I talked about the structural changes to margin, as a result of the business mix shift to New Retail, so basically New Retail may have a different cost structure, which could show a lower margin, going forward. But this is not a concern to us, because remember first of all lower margins does not necessarily equal to a lower profit, because we are making the pie much bigger. So, 60% of apple compared to 40% of watermelon, right, which one do you want. And second point is that, lower margin not necessarily equals to lower cash flow. For example, inventory can be a positive contribution to cash flow, due to negative working capital nature of the retail and the risk of the inventory can be reduced with consumer insight and data technology.

[Operator]

The next question comes from the line of Grace Chen of Morgan Stanley. You may ask your question.

[Grace Chen, Morgan Stanley]

My first question is about the potential personalization in Alibaba's platform. I will understand that the most recent key algorithm update was in September 2016. So this leads to a tough comp of the customer management revenue in the December quarter. The personalization should be in the beginning. So we're wondering, how big the tally remains coming from further algorithm upgrades in the future? And my question is about the change in dynamics in e-commerce competitive landscape. As we see fast growth in those emerging smaller social commerce players, what's your view of these recent phenomena and have you seen any impact to your ecosystem now or potentially in the future? Thank you.

[Maggie Wei Wu, Chief Financial Officer]

Okay. So this personalization algorithm how much is that we have and how much technology can help in the monetization revenue. So I can share about is that, we do have a lot of things going on with this technology improvements and upgrading the AI, the neural network, et cetera. So later on, when we are starting the new fiscal year, we are also going to about -- revenue guidance. So by that time you will have a sense of that.

[Joseph Tsai, Executive Vice Chairman]

Just quickly, I just want to add to the -- Grace, your question about personalization and technology. The question is, do we still have sort of tricks in the bag, when it comes from technology to improve personalization the answer is, absolutely yes. But the one point that is not be missed, is Daniel earlier referred to this point, is the fact that, because we have a very robust user growth on higher engagement by these users we are now creating additional inventory. So when you start thinking about whether changing algorithm will drive more revenue growth, I think don't forget to look at additional expansion in terms of ad inventory that we haven't even monetized. So there is really no need to increase ad load, but think about increasing ad inventory. So I think that's a point that I missed.

[Daniel Yong Zhang, Director and Chief Executive Officer]

Well in terms of new opportunities in social commerce and other initiatives, I will say actually what we have done in the past 18 years is always to make innovations in new initiatives and to apply the new technologies into the real commerce world, enable our merchants and retail partners to be a digital operation. And today, I would say with the development of mobile internet and all the people are living on internet and more and more players are trying to take this opportunity to try e-commerce and from different angle. And we are happy to see that, because this will make us move faster and make us continue our innovation. And we are happy to see a growing plan in terms of customer acquisition, in terms of the customer retention and in terms of the growth of our merchants. And as I've said in my script and last year's November 11th is a very typical example and how many merchants sales exceeded 100 million in one day and which is actually -- which is a very solid evidence of the prospects of our ecosystem. And we will continue to invest and innovate in our ecosystem and to make our platform valuable for both merchant and consumers and also third party service providers.

[Operator]

Your next question is from Gregory Zhao of Barclays. Please ask your question.

[Gregory Zhao, Barclays Capital, Inc.]

Hi, management and thanks for taking my question, and congratulation on the strong quarter. So I have two questions. First one is recently Alibaba appointed two very young -- new Presidents to Taobao and the Tmall platforms. So both guys are with pretty strong Big Data management and marketing experience. So can you share some colors and reasons of new appointment and what kind of changes they could bring to Alibaba? And a quick follow-up questions, the Chinese New Year holiday will come a little bit later this year, so would you please share some color like the potential impact to the coming quarter? Thank you.

[Daniel Yong Zhang, Director and Chief Executive Officer]

I think we are very happy to have young people joining our Senior Executive team and we think young -- because our -- if you look at our customer base they are getting younger and younger and we do need people who understand the young customers and to serve them. So that's why we are so happy to have both Jiang Fan and Jing Jie to join our Senior Executive team and both of them have been working with us for quite a few years and have very -- also demonstrated very proven results in each of their previous jobs. And today actually with their onboarding on the new role I am confident that they will take both Taobao and Tmall [indiscernible] and to the next journey.

And in terms of the Chinese New Year, actually this year Chinese New Year will be on February 16 and we -- as usual we are preparing Chinese New Year and these days we have a good Chinese New Year festival and in Chinese [Foreign Language] on our platforms. And we also see very good results in this new [frontier] and we are trying to serve our people and not only I mean for the Chinese New Year, but also in the Chinese New Year, and we'll also have a good marketing campaign during the Chinese New Year.

[Operator]

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