Alibaba Group Holding Ltd

NYSE:BABA

Earnings Call Transcript 2019-Q3

[Operator]

Good day, ladies and gentlemen. Thank you for standing by. And welcome to Alibaba Group December quarter 2018 results conference call. At this time, all participants are in listen-only mode. After Company'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]

Good day, and good evening everyone, and welcome to Alibaba Group's December quarter 2018 results conference call. With us today are Joe Tsai, Executive Vice Chairman; Daniel Zhang, Chief Executive Officer; Maggie Wu, Chief Financial Officer.

This call is also being webcast from our IR section of the 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. SEC.

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 know that certain financial measures that we use on this call such as adjusted EBITDA, adjusted EBITDA margin, adjusted EBITA, adjusted EBITA margin, marketplace core commerce adjusted EBITA, non-GAAP net income, non-GAAP diluted EPS and free cash flow are expressed on a non-GAAP basis. Our GAAP results and reconciliation of GAAP to non-GAAP measures can be found in our earnings press release.

Unless otherwise stated, growth rate of all stated metrics mentioned during this call refers to a year-on-year growth rate versus the same quarter last year.

With that, I will now turn over to Joe.

[Joseph Tsai, Executive Vice Chairman]

Thank you, Rob. Thank you all for joining us. We had another good quarter with excellent business performance and sound execution against our overall strategy. But, we live in an environment where external factors seem to drive investor sentiment regarding Alibaba’s business.

I would like to address three macro issues that maybe on your minds. First is how to look at Alibaba in the context of the Chinese economy. Daniel later will offer his insights on the current state of the Chinese economy from the vantage point of Alibaba’s business.

I want to refresh your memory about three secular developments that I referred to in the last earnings call. One, consumption upgrade by China’s 300 million middle-class consumers continues its course. By OECDs projection, the Chinese middle-class will grow to 850 million people by 2030.

Two, the healthy balance sheet of Chinese households and the increasing availability of credit will fuel consumption. Three, Alibaba’s active role in digitizing the retail sector expands our total addressable market to the entire $5 trillion U.S. dollar retail economy in China.

The size of the Chinese economy is US$13 Trillion. In the future, obsessing on the rate of growth is not meaningful, because of the law of large numbers. The reality is the absolute dollar amount of new wealth creation in the Chinese economy will be well over US$800 billion each year.

We have conviction that e-commerce and digitization of retail will continue to grow at a faster rate than the overall economy, While the overall economy grew in single-digits, e-commerce sector GMV grew at 20% to 30% over the last several years. That is because technology innovation and improved productivity are driving sustain growth over a long period of time.

The second issue I want to address is the trade war. Concerns about trade tensions might affect sentiment, but Alibaba’s exposure to the tangible effects of trade tariffs is small. For our businesses in e-commerce, consumer services, entertainment and cloud computing, the primary growth driver is not exports but domestic consumption and corporate transformation.

Digitization of retail sector and the resulting productivity and efficiency gains will accrue to Alibaba with or without a trade war. Alibaba is well positioned to help solve the structural trade deficit issue, vis-à-vis the United States. With nearly 700 million Chinese consumers shopping on Taobao and Tmall, we are the platform of choice for American companies and farmers to gain access to the Chinese market.

The third issue is regulation. Recently investors have asked us about perceive regulatory tightening of internet businesses. Of all the economies in the world, China is at the forefront, when it comes to the confluence of rapid technology development and large scale wealth creation.

Our perspective is that China’s regulatory landscape should be expected to evolve along with the rapidly changing development in the new economy. We have witnessed the Government becoming more depth at calibrating the interplay between regulation and economic growth.

I would like to point to several policy directions that provide assurance to businesses operating in China. First, the Government has implemented fiscal policy initiatives that are business friendly. VAT rates were lowered in 2018 and are expected to be cut further in 2019. The Government also introduce lower social security contributions which is especially benefited small businesses.

Second, the Government raised the threshold for personal income tax exemption, giving lower income groups more to spend, this is expected to provide a broad-based spending stimulus as lower income groups devote a higher percentage of their disposal incomes as consumption.

Third, in early January, the State Council announced new initiatives to support small enterprises, by reducing corporate income tax rates and raising the monthly sales threshold for VAT exemption. With these policies it's clear to us that the Government intends to ignite business confidence and encourage business investments as well as consumer spending.

It is also clear to us that the Government recognizes the importance of small businesses as the backbone of the economy and job creation. We believe that anything that's good for business confidence and in particular good for consumers and SMEs will be good for Alibaba.

Now, I turned to Daniel for his remarks.

[Daniel Zhang, Chief Executive Officer]

Thanks, Joe. Hello everyone. And thank you for joining our earnings call today. During this call, today, I will share our observation of the Chinese economy and how our investments in new businesses will support our long-term growth.

Based on data from the National Bureau of Statistics, China's GDP growth rate was 6.4% year-on-year in the fourth quarter of 2018, and the full-year growth rate was 6.6%. China's overall retail consumption grew around 8% year-on-year in the fourth quarter.

The slowdown of macro, by cost concerns in the market. However what we see from Alibaba platforms is that Chinese consumption growth is too strong driven by a growing base of increasingly affluent young consumers.

We saw aspirational Chinese consumers look for a rich shopping experience and high quality products and services on our platforms. Our Tmall’s physical goods grew 29% year-on-year this quarter, while China's overall online physical goods grow 21%. The robust growth was driven by strength in the FMCG, apparel and home furnishings categories, reflecting strong secular consumption trends.

Our Singles Day Shopping Festival generated US$30.8 billion in GMV, representing a growth rate of 27% year-on-year. During the event among the hundreds of millions of consumers that made purchases. 46% was born after 1990 and over 40% made purchases from international brands. This young generation of consumers continue to be the main power of consumption growth in China.

In addition, we saw the ongoing urbanization continue to be the engine of China's economic growth. Over 70% of the increase in our annual active users in this quarter was from Tier 3 and below cities.

From a category perspective, due to cooling off of the real estate market, large ticket categories, like white appliances has experienced slower growth. And the due to lack of technology innovation, mobile phones showed soften growth near-term. While categories in consumer support, apparel and a home furnishing exhibited resilient growth in this quarter.

We also observed sub categories like electronic toothbrush and a beauty electronic devices grow fast in our platform, representing Chinese consumers continue to upgrade their lifestyle. We believe as China seeks to generate sustainable high quality growth.

It has to transform from an export and investment oriented economy to a consumption driven economy. And it may result in softer near-term economic performance. So we believe the consumption power of 1.4 billion Chinese population is the growth engine of Chinese economy in the future.

Now let's talk about Alibaba, our core business has been exhibited robust and sustainable growth. In December 2018, our channel retail marketplaces had 699 million mobile MEUs, representing a quarterly net increase of 33 million.

Annual active consumers were 636 million, reflecting successful user acquisition programs such as referrals through the AliPay app, and is an early indicator of transition activity on our platforms. In October, we fully rolled out the new mobile interface, which drove effective user engagement and improved profit operating efficiencies in mobile product.

We are also proactively working on improving recommendation algorithms and making preparation for future monetization. We have executed robust marketplace core commerce probability as measured by adjusted EBITA of US$7.9 billion growing 31% year-on-year.

This allows us to invest in the strategic areas for the long-term prosperity of Alibaba digital economy. These areas include cloud, logistics, new retail, digital entertainment, local consumer services and globalization. We started our cloud business nine years ago and over the last few years, our cloud business delivered solid top-line growth and established a leading position in China's nascent cloud market.

In November, we made an organization change to appoint Jeff Zhang, as President of Alibaba Cloud adding his responsibility on top of his role as our Chief Technology Officer. We believe under this framework, we can make available much of our data technology used in our own business to our enterprise customers to accelerate their digital transformation. We continue to invest in Cainiao to build a logistic infrastructure of commerce.

So digitizing that incurred fulfillment and the delivery process. Cainiao continues to improve consumer experience and the lower industry costs. Our new retail business consists of two major directions, reforming old and creating new both of which a large addressable market. On the one hand, we continue to make good progress in digitizing partner retailers and enable their new retail transformation.

On the other hand Hema, our proprietary grocery retail chain continue to expand its footprint, optimized its existing stores and introduced new initiatives that improve customer experience. We continue to expand consumption use cases within the Alibaba Digital Economy. So the investments in digital media and the local consumer services. These businesses are critical to drive future customer acquisition and retention with our ecosystem.

We will be competitive and at the same time continue to improve our operating efficiencies. We are committed to globalize our business. One of the key regions, we will stay focused on in the near-term is Southeast Asia, which is the fourth largest region by GDP of the U.S., Europe and China. It has over 650 million in population that are relatively young. Online shopping penetration still at low-single-digits.

Leveraging our unrivaled technology and strengthening in management, we believe Lazada will well position to continue to capture shares in this growing market. China's economy is facing some uncertainty, but we do see opportunities. The opportunities rising strong consumption power, emergent disruptive technologies and innovative business models that drive the next growth space of digital China.

Over the last ten years, Alibaba has built a whole range of platform businesses, including retail, marketing, financial, logistics and cloud computing services enabled by our Advanced Data Technologies. These form the core of the Alibaba business operating systems, which are important to the digital transformation of our enterprise customers and allow us to become the leading partner of businesses within China and around the world.

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. In the December 2018 quarter, our major financial metrics continued to record strong results. Our total revenue grew 41% to RMB117 billion. This is actually the first quarter our quarterly revenue surpassed RMB100 billion.

The increase is mainly driven by the robust revenue growth of our China commerce retail business. The consolidation of all amounts as well as strong revenue growth of Alibaba Cloud. Even stripping out acquired businesses, our revenue growth during the quarter continues to outperform that of almost all global technology peers.

As a percentage of revenue, without the effect of SBC expenses, all our operating expenses, including product development, sales and marketing, and general and administrative expenses remained stable year-on-year during the quarter.

Excluding the effect of our SBC, cost of revenue as a percentage of total revenue increased by ten percentage points to 50% this quarter. The increase was primarily due to first, the consolidation of Ele.me. Second, increase of the cost of the inventory and logistics from our self operated new retail and direct import businesses. Third, an increase in content spending by Youku, on original content as well as an impairment charges on licensed copyright.

Now let's turn to the segments. Core Commerce. Our core commerce segment had another strong quarter with revenue growth of 40% year-over-year. When you look at China commerce retail, the fundamentals of our retail business continue to be solid. The combined customer management revenue and the commission revenue is - healthy growth of 27% year-over-year for the quarter.

Customer management revenue grew 28% in the quarter. The growth was primarily the result of increases in volume and paid click driven by higher click through rate. Of course, these are all backed by the increased user base and enhanced user engagement. We continuously extend this user base and continuously improve our user experience.

Commission revenue grew 24% in the quarter. The growth of commission revenue was primarily due to strong growth in Tmall paid physical goods GMV of 29%. The discrepancy of the growth rates between the commission revenue and Tmall physical goods GMV is primarily due to our adoption of the new attempting requirements, which has the effect of spreading out recognitions revenue from annual service fees received from Tmall merchants. Whereas we previously recognized these fees at the end of each calendar year.

Orders from China commerce retail was up 122% to RMB11 billion. The rapid growth was primarily driven by contributions from Freshippo also known as Hema, Tmall Direct Import and other direct sale businesses. As of the quarter end there were 109 Hema stores in China and the retail chain continued to achieve robust in-store sales growth.

Revenue from local customer services was RMB5.2 billion. The growth of daily on-demand orders continued to be strong during the quarter. In December 2018, we combined our on-demand food delivery platform Ele.me with our third platform Koubei to create a local consumer service business segments. Koubei had a very limited impact to our local consumer service revenue this quarter.

We believe we have a strong management team in our local consumer services to execute our strategy to gain market share. Revenue from our international commerce retail business in the quarter was up 23% year-over-year to RMB5.8 billion. The increase was primarily due to the consolidation of Trendyol, Turkey's leading e-commerce platform.

During the quarter, Lazada strengthened its core marketplace businesses and reduce exposure to direct sales in merchandise categories. This business model shift resulted in accelerating marketplace GMV growth, with direct sales revenue declined during the same period.

As a result, the revenue growth of Lazada was slower than prior quarters, due to decrease in revenue generated from our direct sales business, where revenue is recorded on a gross basis including the cost of inventory. We believe the shift in model towards capitalize marketplace business, will solidify a healthier foundation for scalable growth in the future.

Now, let’s look at the drivers of core commerce possibility. We continue to generate solid market base core commerce EBITDA, that grew 31% to RMB54 billion during the quarter. This core profit growth was the main driver of our free cash flow for the quarter which came in at RMB51.4 billion, which is US$7.5 billion.

Because of the strong profit and cash flow generated, we are able to invest in four strategic areas, including number one, local consumer service, number two, Lazada, three, new retail and Tmall direct imports, and number four Cainiao. The loss was generated from these investments was RMB8.2 billion.

We have already started to see efficiency gains and greater synergies from these businesses insight Alibaba digital economy. We will continue to invest and work towards delivering enhanced financial return from these businesses in the long-term. After incorporating the losses from these investments, our core commerce EBITDA grew 20% to RMB46 billion during the quarter.

Cloud computing revenue grew 84% year-over-year to RMB6.6 billion, primarily driven by increased spending from enterprise customers. Adjusted EBITDA for cloud computing segment was the loss of RMB274 million reflecting a negative 4% EBITDA margin, improving from negative 5% from the same quarter last year.

Digital media entertainment revenue grew 20% year-over-year to RMB6.5 billion. The increase is primarily due to increase in revenue from more value-added service provided by UCWeb, such as mobile search and game publishing and then increase in subscription revenue from Youko.

Adjusted EBITDA was a loss of RMB6 billion, this loss figure included impairment charges taken on licensed copyright, that did not generate the expected return following a regular evaluation programming. The evaluation resulted in a RMB2.8 billion impairment charges during the quarter.

During the quarter, we made necessary changes to management, who will expect to drive more efficient content strategies and synergies with the rest of our business. Revenue from innovation initiatives and other grew 73% year-over-year to RMB1.3 billion mainly due to an increase in revenue from Tmall Genie and Amap. Adjusted EBITA was a loss of RMB1.6 billion.

Now let me highlights a few financial metrics that impact net income during the quarter. Other income was RMB387 million compared to a loss of RMB348 million in the same quarter last year. The increase in other income was primarily due to a decrease in exchange loss incurred during the quarter.

We did not recognize any profit sharing from Ant Financial during the quarter. Ant Financials continued its strategic investments to acquire new users and capture growth opportunities in the offline payment market. Currently, AliPay and its affiliates have over one billion annual active users globally.

As of December 31, 2018, cash, cash equivalents and short-term investments were RMB192 billion, US$28 billion. The increase in cash was primarily due to free cash flow generated from operation partially offset by cash used in investments and acquisition activities and share repurchase.

We generated robust operating cash flow of RMB65 billion, and free cash flow of RMB51 billion. Please note that we have deducted content spending when managing FCS, even this such content spend was capitalized.

We are committed to enhance value for our shareholders through share repurchases. Since September 2018, we have repurchased approximately RMB10.86 million of our ADS for a total of approximately $1.57 billion as of yesterday.

Looking ahead, as Daniel discussed, the demand of product and services on China marketplace continue to be solid. Our new Taobo interface is driving effective user engagement and improving traffic operational efficiencies.

We are testing the potential monetization on recommendation feeds, we need to ensure improved merchants ROI as well as the better user experience. We will update the market of our progress to monetize recommendation fees at due course.

We remain confident about our value proposition to consumers and merchants and we will be focused on solid execution. We expect our core, core profit growth to remain healthy at the same time, we will continue to invest in strategically important areas to increase our addressable market and capture long-term growth opportunities.

Let's now turn to the Q&A.

[Robert Lin, Head of Investor Relations]

Okay. Okay operator, we are ready for Q&A.

[Operator]

Thank you. So ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Grace Chen from Morgan Stanley. Please ask your question.

[Grace Chen, Morgan Stanley]

Thank you. Thanks very much. My question is about investments in various new ventures. I’m wondering as we get into new fiscal year, how do we rank this initiative in terms of priorities, this investment include new retail local consumer services, digital media entertainment and Lazada. Should we expect a loss from these ventures to be narrow in the new fiscal year, especially digital media entertainment in which we see investment widen substantially in the December quarter? Also will there be any potential strategic changes or adjustments for December, are we investing more aggressively into the industrial internet segment. Thank you.

[Daniel Zhang, Chief Executive Officer]

Thank you. This is Daniel. Let me answer your question. I think as I said in my script. I think we are because based on the very solid I mean core, core businesses, I mean we have the possibility to invest for the future.

And I think in the new year we will focus on how to generate these synergies of the new areas we invest to build a strong connection and the synergies with the core business of Alibaba Ecosystem.

I think for the digital content for the local consumer services, we view these two areas are the expansion of categories of our consumer need to leverage the 700 million consumer base we have and that we believe that we need to provide with them a very comprehensive supplies ranging from physical goods to content and to local services. We think this is very important for the prosperity of our ecosystem.

And actually when we are doing this investment, on one hand, we try to make ourselves to be competitive in the market. And in each of the areas of these new business, you can see that in market there are a couple of players. So we have to make ourselves competitive.

But on the other hand, we will continue to improve our operating efficiency and we set a lot of disciplines to improve our - to make sure that we can deliver a solid results in each of these areas.

[Robert Lin, Head of Investor Relations]

Okay. Next question?

[Operator]

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

[Alicia Yap, Citigroup]

Thank you, good evening management, thanks for taking my questions. I have a question regarding your commission revenue. So regarding the adoptions of the new accounting treatment. Could you elaborate a bit, what would be the commission revenue growth rate this quarter, if there were no change of the accounting adoption. And should that translates to higher commission revenue growth than the GMV growth in the next three quarters? Lastly, any update on the timing of a rollout for the new recommended feed monetization? Thank you.

[Maggie Wu, Chief Financial Officer]

Sure Alicia, this is Maggie. So your first question regarding commission revenue growth if we exclude the impact of that, just accounting treatment. The growth would have been just inconsistent with the growth of GMV. So basically the mixed commission rate has not been changed that much.

And for the recommendation feeds monetization as Daniel mentioned that during the call. We are testing and have been working on this, but there is no exact timetable. We are going to update you at due course. One thing for sure is that by time we rollout this monetization, we would have a very good violence of merchants ROI as well as the user experience.

[Robert Lin, Head of Investor Relations]

Okay. Next question?

[Operator]

Our next question comes from the line is Piyush Mubayi from Goldman Sachs. Please ask your question.

[Piyush Mubayi, Goldman Sachs]

Hi, I appreciate the opportunity. Thank you. During third quarter, what drove the higher click-through rates which led to the higher paid clicks and the acceleration in customer management revenue that we saw? Was this on the search side and a function of the evolution of the algorithm, or was it the new Taobao app design that made the difference? And if I can sneak a question on feed, I understand that it's an update we can receive from you in due course. But is it going to be linked in any way to the quarter ago, you talked about the fluid macroeconomic conditions. Is it in any way going to be linked to a recovery in the economy? That's my question. Thank you.

[Maggie Wu, Chief Financial Officer]

Right. Piyush, when looking at customer management revenue growth, we said that the growth is mainly coming from the growth of the paid clicks, which is driven by the click-through rate growth. So it's coming from actually several things, when you look at the active user base being expanded and engagement being enhanced. At the same time, we are optimizing our search and all of these contribute to the growth of the CTR. So the second question was…

[Piyush Mubayi, Goldman Sachs]

The second question is the potential monetization recommendation linked to a recovery of the economy?

[Daniel Zhang, Chief Executive Officer]

Actually, we don't tie these monetization process with the economic condition. I think we do have to take care of the merchants ROI. But I think, if we give them more flexible I mean marketing tools, and it's also good for them to do more business and acquire new customers for each of the merchants.

So today as we said, we are actually making preparations from a tech perspective to make sure, we can have the right algorithm and right technology and to make sure we have these native either recommendation to ensure the user experiences at the same time we can ensure a good returns - recoup ROI for the advertisers.

[Piyush Mubayi, Goldman Sachs]

Thank you Maggie and Daniel.

[Robert Lin, Head of Investor Relations]

Okay. Next question?

[Operator]

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

[Eddie Leung, Merrill Lynch]

Hey thank you for taking my questions. I have currently questions on the smaller merchants. Have we seen any differentiation in the business activities between the small sellers and large merchants? Recently given the different external change in economic conditions and similar to that to, could you share more color with those on the potential impact of our e-commerce lows on the smaller merchants? Thank you.

[Daniel Zhang, Chief Executive Officer]

Well Eddie, I think this is a very good question. I think that the very beautiful effect in Taobao marketplaces is like every year we generate a lot of more new merchants. But actually today when you look at our eco-system in recent years, we do have a lot of new merchants, they are not like a traditional reseller on the platforms.

And I don’t think they are the traditional small merchant just in terms of size, actually a lot of merchants today they are doing a live streaming on the platform, they are key opinion leader, but at the same time they are good seller.

So, I think we do encourage the selections of the merchant types and we also try very hard to provide them with technology and tools to help them to show their uniqueness to the customers. So I think that’s the long-term gross driver and that’s the long-term guarantee of the prosperity of Taobao marketplaces.

[Joseph Tsai, Executive Vice Chairman]

Eddie, I wanted to address the potential ecommerce law. In fact I referred to this in my opening script. The State Council just announced a tax relief for small businesses. So the ecommerce law, the fundamental point there is that the SAIC require registration of all the merchants and so the merchants, they created a lot of uncertainty among the merchants about what the effect of registration is because the concern is that the tax enforcement will be tightened.

Now on the other hand with this tax relief or SMEs, this basically offsets that concern. Specifically the tax relief involve two aspects, number one, the tax exemption threshold for VAT tax has been raised from RMB30,000 per month to a RMB100,000 per month. In other words if you are a small business that’s doing less than a RMB100,000 per month in sales, you would be exempt from the VAT regime.

And the second aspect of the tax relief is, corporate tax rate has come down from 25%, that’s the normal corporate tax rate in China, but for small businesses it has come down to 5% for the first RMB1 million in profits and than 10% for the next from RMB1 million to RMB3 million, so effectively you are lowering corporate tax rates by a lot. So the combination of these two tax relief measures has basically offset the concern about the e-commerce law relating to registering small businesses.

[Eddie Leung, Merrill Lynch]

Thank you, Daniel and Joe.

[Robert Lin, Head of Investor Relations]

Next question?

[Operator]

Thank you. Next question comes from the line of Binnie Wong from HSBC. Please ask your question.

[Binnie Wong, HSBC]

Management thank you for the opportunity ask the question. I have a question on the improvement in margins and also the investment cycle. So we see an improvement in the margin side, especially in your marketplace core commerce. Which clearly show strong operating leverage and efficiency. So how should you think about the stage of coming this investment cycle, especially in terms of can management elaborate more on, is the efficiency coming more on like the local customer services or new retail and also can you comment on the competitive landscape in our local services and how our strategy has evolved in response to competition, say in terms of takeaways or promotions.

And just very lastly is that, if you look at our longer term as our ecosystem has been expanding and we are penetrating into different business segments, how have we been seeing the cross-selling, right across the different products within our ecosystem to go deeper into customers pocket. Thank you.

[Maggie Wu, Chief Financial Officer]

Several questions from Binnie. Let me answer the margin and profitability investment first and then Daniel could answer on the local currency service progress in cross-selling question.

So, when you talk about margin, as we talked throughout all of these quarters we encourage people to look at the profitability while we are growing into such a big size of the business, right.

The absolute dollar profit is meaningful to the EPS and calculate your returns on capital.

Okay. So basically the substance of that question is how much more we are going to invest in profit growth. I understand that the investors have questions concerns or even worried about how much are you guys going to invest in those strategic initiatives? How much more you are going to spend?

I want to talk about two things, number one, we invest in these strategically important areas that spending money that generated from our core business, while our other competitors are just spent money from what they raised from the investors from the market.

And how strong is our core, core? When you look at our customer management revenue and commission revenue, if you add them together, it gives you like 70 billion in the quarter's time. And then when you look at the core, core profit which we reported 54 billion, right. So mostly are coming from China retail. You can tell the margins if you will and you can tell the powerfulness of our core, core. So this provides a strong support for us to invest in those strategic areas.

Number two, when we look at investment, we emphasize a lot on the operating efficiency, investment efficiency. So we do have internal measures on each of these investments. All of these investment are still in the stages which is early to talk about financial returns, right, profit. However, they are business progress which we are very well on-track.

[Daniel Zhang, Chief Executive Officer]

In terms of the local services business, later last year as we said, we merge the Koubei and all of our business and are forming new local consumer service company. And we strongly believe that by doing this we can reduce the overlap of the spending in client acquisition and client services.

And today, if you look at this food business, actually for each of the restaurants and the in-store business and that food delivery business equally important to every single restaurant. So today by combining these two business, we anticipate a lot of synergies in NewCo.

And I think back to your last question about the cross selling opportunity, I think this is really our advantage of Alibaba Ecosystem. And we try very hard try to build the synergies across business and bring new customers are closer to each other things within Alibaba Ecosystem.

Take an example and in November 11, not only our channel retail platform is the main driver, actually all the user interface I mean of Alibaba big family participate, there were along 20 business participated and we do a lot of customer engagement through different mobile interface. And which also bring a lot of new customer not only to our retail business, but also to other business like NewCo, like a mobile browser, like travel so on and so forth.

And we will continue to do that and the 700 million active customers is the most important asset in Alibaba Ecosystem and we will try to leverage this power and unlock the potential of the consumption.

[Robert Lin, Head of Investor Relations]

Okay. Before the next question, I would just encourage the analyst to limit to one question for the opportunity for others. Next question.

[Operator]

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

[Zachary Schwartzman, RBC Capital]

Hi, Thank you, it's Zachary Schwartzman for Mark. Outside of your market based core commerce segment or any of your newer investments in core commerce between local consumer services, international, new retail, direct to import and logistics growing more quickly from a profitability perspective than you were initially expecting? And can you please provide a ranking here in terms of profitability or loss contribution? And any recent learning's from this quarter from these consolidations? Thank you.

[Maggie Wu, Chief Financial Officer]

Sure. We mentioned in our earnings that the investment we made within the core is mainly in these four areas Ele.me, Lazada, New Retail and Tmall. So we make this in the order of spending from high to low or the last level from high to low.

[Zachary Schwartzman, RBC Capital]

Thanks.

[Robert Lin, Head of Investor Relations]

Next question.

[Operator]

Next question comes from the line of Gregory Zhao from Barclays. Please ask your question.

[Gregory Zhao, Barclays]

Hi Management. Thanks for taking my question. So based on the guidance you updated last quarter, last earnings conference call and your first three quarters earnings results. So this imply some accelerated total revenue gross fiscal 4Q. So would you please help us understand the key for acceleration drivers behind and also do we have any updates to the full-year guidance? And also very quick follow-up, we noticed you already launched some promotions and activities such as red envelope during the Chinese New Year's celebration. So would you please help us to understand how the promotions are compared to last year and with implication to user growth and margins? Thank you.

[Maggie Wu, Chief Financial Officer]

Right. So when you look at the revenue growth for the quarter, which is 41% year-on-year, it's a big quarter and we think this 41% is very strong and a way to look at the customer management revenue, which shows acceleration in the growth rate that’s mainly because of the increase in volume paid clicks driven by higher click through rate. So if you look at the driver for that, that basically continues the extended user base increased engagements and also optimize the search.

[Daniel Zhang, Chief Executive Officer]

I think today from a business perspective. We continue to enhance our - I mean we try to continue to enhance our leadership position in the market. So that's why the new customer acquisition to us is very strategic. So that's why so far, we focused a lot on these new customer acquisition and retention.

And as we said in the script and we have done a lot together with Ant Financial - AliPay to acquire new customers. And in terms of the Chinese New Year promotion, I think we are still on the way and AliPay just launched their Wufu and New Year Eve campaign and this became a new IP, super IP in China and we anticipate a lot of consumers will participate.

And from AGH perspective, we view this as another golden opportunity to acquire new customers. So that's the synergies we have validated and we will continue to do so.

[Maggie Wu, Chief Financial Officer]

You also asked about the guidance. We don't have any update on guidance.

[Robert Lin, Head of Investor Relations]

Okay. Next question.

[Operator]

Thank you. Next question comes from the line of Youssef Squali from SunTrust. Please ask your question.

[Youssef Squali, SunTrust]

Excellent. Thank you very much. Good morning. Quick question for Joe, if I could. Talking about the Government stimulus. I was just wondering if you can point to or share any proof points in recent past that some of these stimulus work that the Government has done so far has actually had, had a positive impact or the desired impact. How quickly you may have taken shape.

One example recently is that in cars and household appliances it looks like the National Development and Reform Commission told to state broadcasts, CCTV that the Government will be rolling out some measures to boost that. I was just wondering if you can provide any kind of color you may have on that since you guys have talked about how household appliances saw some slow down? Thank you.

A - Joseph Tsai

Okay. well, I think the most recent tax relief for small businesses have just been announced, very recently, just a few days ago. So the effect of that obviously we anticipate that to work through, but we haven't seen any actual effects yet at this point.

But over the course of the last year, there is also some discussion on the lowering of the VAT rate itself as well as raising the tax exemption level for personal income tax which improve the disposable income level especially the lower income groups.

We think that those will all work through, but the bigger point here is that the Chinese Government is now getting quite sophisticated in terms of targeting the Government measures more towards fiscal policy.

We have seen in previous cycles that there is an overall sort of pumping up more liquidity into the system using monetary policy. But in previous cycles that might have worked at previous sort of debt levels, but currently we have debt levels in the economy that's - it's not extremely high but it's sort of at a fairly high point.

So the Government is turning into fiscal policy to stimulate the economy. We think it's the right thing to do. We think tax cuts is right on point, and so we anticipate that these various cuts on both individual spending, cuts that encourage both individual spending and also on small businesses will work through the economy overtime.

[Robert Lin, Head of Investor Relations]

Next question.

[Operator]

Thank you. Next question comes from the line of Alex Yao from JPMorgan. Please ask your question.

[Alex Yao, JPMorgan]

Hi good evening management. Thank you for taking my question. Can you give us an update on your video content strategy into 2019? And how should we think about the P&L impact upon the recent Fan Bingbing scandal and celebrity tax situation? Thank you.

[Robert Lin, Head of Investor Relations]

So I'll repeat. So the question is our content spending strategy this year. And then how do we view I guess this or there scandals among the celebrities, how do we view that in terms of our important products business.

[Daniel Zhang, Chief Executive Officer]

We have very consistent content strategies, and we will closely monitor the effectiveness of this content strategies? And so far as you said, I think the bulk is quite cooling down. And I think it is good for the market and for the whole content market. And the cost of the production, the cost of the actors and actresses actually has been reducing.

I think this is a good for the health growth in the future and we will continue to monitor, closely monitor the operating efficiency of the content production and the content distribution. And the key thing is like we want to leverage the user base several hundred million on a consumer user base we have in the digital media and digital content area.

[Robert Lin, Head of Investor Relations]

Okay. Next question?

[Operator]

Thank you. Next question comes from the line of Han Joon Kim from Deutsche Bank. Please ask your question.

[Han Joon Kim, Deutsche Bank AG]

Great. Thank you for the chance to ask a question. I wanted to follow-up on the digital media business. And I think Daniel you just mentioned that we have a fairly consistent strategy. But as we integrate this with solid pictures as well, how do we think about the KPIs for this business? And should we be anticipating that the current level of losses kind of continue. Or perhaps why widen or perhaps narrow just kind of framing. What are the key KPIs that you generally care about for…

[Daniel Zhang, Chief Executive Officer]

Han Joon you are breaking off. So maybe you can. I believe the KPI that you are looking for this business right?

[Han Joon Kim, Deutsche Bank AG]

Yes, the key focus of the KPI as the business gets restructured or merged with all the pictures?

[Daniel Zhang, Chief Executive Officer]

Well, I think we focus on the user growth in our digital content business. So actually we see quite robust growth of the number of subscribers this quarter in our content, our DME business. And I think that's very important that we can distribute the content to the broad base consumers we have i.e. Alibaba family and also we are trying to enhance our users experiences also to give a multiple consumption categories in both physical group, in all of the physical groups local services as well as digital contents.

[Joseph Tsai, Executive Vice Chairman]

Yes, so I think just so Daniel, I think because we have a broad ecosystem of including commerce and also local services, so the entertainment business, we don’t look at the entertainment business as a standalone business in terms of KPIs because, if you are offering good content and that increases retention for our ecommerce business and also increase per user spend in ecommerce or local services, that is cross-selling and that improves the KPIs in our other segment. So, we need to look at those KPIs as a whole, so thanks.

[Unidentified Analyst]

Great, thank you very much.

[Robert Lin, Head of Investor Relations]

Last two questions.

[Operator]

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

[Thomas Chung, Credit Suisse]

Hi, thanks management for taking my questions. I have a question about cloud computing business, given that we have already achieved a 50% in terms of the market share. What our next milestone and is there any timeline that we can think about to put event timing? Thank you.

[Daniel Zhang, Chief Executive Officer]

Actually we have very clear cloud strategy and we are very happy to see the progress we have made and today we are obviously the market leader in cloud business in China. But if you look at the cloud market in China today, we still believe today it is in the very early stage, due to our every single business need to go to cloud and also I think when we people have a definition of cloud, people talk about various services.

So actually in Alibaba Ecosystem we have already built a very strong cloud interrupt in terms of IaaS app service. But in terms of PaaS and in terms of SaaS we also have a lot of expertise and for example and our middleware and data base services is very, very important are very critical imparts and our retail technologies actually our marketing technologies, our technologies in the in Ant Finance and our technologies in Cainiao are also relevant to all the financial institutions and the logistic companies.

So we are trying to share this SaaS based technology through our Alibaba cloud into the market and so that’s why in our recent organization upgrading and we even renamed the BU of cloud into Cloud Intelligence. So we believe cloud is not only about infrastructure, cloud is all about data technology and data intelligence capability. So we want to share this data technology and data intelligence capability into the whole market.

[Robert Lin, Head of Investor Relations]

Okay operator, last question.

[Operator]

Thank you. Next question comes from the line of Jerry Liu from UBS. Please ask your question.

[Jerry Liu, UBS]

Hi, thanks guys. I appreciate the earlier comments on macro and regulation. I wanted to see if we can get some similar comments on the outlook for advertising market this year especially as some of the larger advertisers reset budgets at the beginning of the year? Thanks.

[Daniel Zhang, Chief Executive Officer]

Actually when we look at the advertising market, actually we don’t view this as a separate market, we view this is a part of our core commerce ecosystem. So today most of the merchant, most of the brand partners advertising on our platform they don’t view us as only a sale platform and neither only a marketing platform.

Actually we are the only platform in the world which people can tie marketing tie branding into the end sales. So how to make this end-to-end value chain from brand building from awareness thing to attention into purchase and into loyalty customer. This AIPL is the customer lifecycle management opportunities we want to offer to our both merchants, brand partners and advertisers.

So we continue to strengthen our unique role in this advertisement world. But again, we are now trying to be one of the advertisement platforms to our advertisers. We try to give them all-in-one ecosystem to help them to generate sustainable growth in the new digital era.

[Robert Lin, Head of Investor Relations]

Okay. Thank you everyone, for joining. And if you have any questions, please contact the IR team of Alibaba. Thank you.

[Operator]

Thank you. This concludes our conference for today. Thank you all for participating. You may all disconnect.