阿里巴巴 (BABA) 2016 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Alibaba Group March quarter 2016 and full FY16 results conference call.

(Operator Instructions).

I would now like to turn the call over to Jane Penner, Head of Investor Relations of Alibaba Group.

Please go ahead.

Good day, everyone, and welcome to Alibaba Group's March quarter 2016 and full FY16 earnings conference call.

With us today are Joe Tsai, Executive Vice Chairman; Daniel Zhang, Chief Executive Officer; and Maggie Wu, Chief Financial Officer.

Also, as you know, we distribute our earnings release through Alibaba Group's Investor Relations website located at www.alibabagroup.com.

So please refer to our IR website for our earnings releases, as well as the supplementary slides that accompany the call.

You can also visit our corporate website for the latest Company news and updates.

Please check it out.

This call is also being webcast from the IR section of our 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 made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations.

Factors that could cause actual results to differ materially are set forth in today's press release.

To also understand these risks and uncertainties, please refer to our latest Annual Report on Form 20-F and other documents filed with the US 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 non-GAAP EBITDA, including non-GAAP EBITDA margins and non-GAAP net income, are expressed on a non-GAAP basis.

We have also adjusted our net cash provided by operating activities to remove purchases of property and equipment and intangible assets, excluding acquisition of land-use rights and construction in progress, and adjust for changes in loan receivables relating to micro loans of our SME loan business, which we refer to as free cash flow.

Our GAAP results and reconciliations of GAAP to non-GAAP measures can be found in our earnings press release.

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

Thank you, Jane.

Thank you all for joining us.

Today, we recorded excellent results.

Our revenues grew 39% year on year for the quarter.

There are now 423 million shoppers who have bought something on our China retail platform in the past year, and 410 million mobile users who are active on our China retail mobile apps during the month of March.

In these challenging times with the global economy, Alibaba is bucking the trend.

Why?

I want to offer a couple of perspectives; one macro, and the other one that is specific to Alibaba.

First, take a look at the Chinese consumer.

Chinese households today have aggregate net cash reserves of over $4.6 trillion.

This accumulated wealth and liquidity is the result of real double-digit wage growth over the past decade.

In contrast, in early 2008 on the eve of the global financial crisis, household debt in the United States was 98% of GDP and the average American family was in heavy debt.

Chinese consumers have a healthy balance sheet and ability to spend.

This will propel China's shift from an export and investment-led economy to a consumption-driven economy.

Alibaba rides the secular tide as we enable more products and services, whether they are domestic or import, to reach the consumer.

Another perspective comes from looking at Alibaba's businesses.

We have a balanced portfolio of businesses in our ecosystem that are in various stages of growth, profit trajectory and cash generation.

Depending on years in gestation, we group these businesses into what I call: first, core cash flow; second, emerging traction; and third, long-term strategic bets.

So I'll go through each of them.

First, core cash flow.

Our core commerce business is strong and extremely cash generative.

We achieved 41% year-on-year revenue growth in China retail marketplaces for the quarter, with high and sustainable operating margins.

On the strength of our core business, we delivered $8 billion in free cash flow in FY16.

This enables us to invest for the future.

Second, emerging traction.

We are excited that several of our businesses have emerged with high growth traction and expanding operating leverage.

AliCloud is, today, one of the largest cloud computing businesses in the world.

In the latest quarter, this business grew revenues 175% year on year, which is an acceleration of the 126% growth rate from the prior quarter.

Another emerging traction star is mobile Internet services, including mobile search and mobile media.

In this quarter, we have provided a glimpse into the potential of the mobile lifestyle in China, in addition to mobile commerce, as revenues from mobile Internet services and mobile operating systems grew around 50% year on year.

Third, long-term strategic bets.

Alibaba has an incredible track record of making long-term bets successful.

Here, a bit of historical perspective is important; take Taobao marketplace as an example.

We started Taobao in 2003 when online shopping in China was virtually non-existent.

For five years we didn't generate any revenues; instead, we focused on acquiring users and building an ecommerce ecosystem.

Taobao didn't produce meaningful profits until 2010; that is seven years after its founding.

History teaches us that it pays to be patient.

We are used to investing in long-term initiatives with long-term gestation periods.

New initiatives typically take five to seven years to grow into substantial profitability, and this growth usually takes on a step function trajectory rather than in a straight line.

The ability to remain patient is a competitive advantage.

Going forward, we're prepared to continue investing in high potential businesses that are highly strategic to Alibaba, from digital entertainment, to local services, to international expansion.

These businesses contribute to losses in our current income statement; however, we invest in them so that they can graduate to emerging traction and then on to core cash flow businesses in the future.

Now I would like to turn to Daniel who will discuss recent exciting developments and offer a strategic view of the future.

Thanks, Joe.

Hello, everyone, and thank you for joining our earnings call today.

I'm pleased to report that we ended the fiscal year on a very strong note.

We had a strong execution in our three key strategies of globalization, rural development, and big data cloud computing.

We reached two important milestones this fiscal year.

First, our annual GMV surpassed RMB3 trillion and we became the world's largest retail commerce company.

Second, our annual revenue surpassed RMB100 billion.

The continued strength of our business is reflected in the growth of our annual active buyers, which has reached 423 million.

The total revenue growth rate this quarter is the highest over the past four quarters, and the revenue growth rate of China retail marketplaces is the highest in the past six quarters.

We are on a path to realizing our vision of exceeding $1 trillion in GMV by FY20 and we want to serve 2 billion consumers.

Today, we are laying down solid foundations by transforming our ecommerce business and investing in driving businesses such as cloud computing and media and digital entertainment platforms to achieve our ambitious vision.

Over the past year, our retail commerce business has executed a significant and successful transformation from PC to mobile-first.

At the time of our IPO, mobile contributed less than 40% of our GMV, less than 20% of our China retail commerce revenue, and we had only 188 million mobile monthly active users.

Today, 73% of our GMV comes from mobile and our mobile MAU has reached 410 million.

We have completely reinvented the user experience and services to capitalize on the unique relationship that consumers have with their mobile phone in daily life.

Today, our merchants and consumers engage seamlessly across a multiscreen social commerce platform, driven firmly by user interaction and big data.

Taobao has long evolved beyond just for shopping.

Consumers come to Taobao for discovery and entertainment and to socialize in virtual communities with each other with shared interests or lifestyles during their shopping journey.

Internet celebrities, merchants, trendsetters are among the growing active population contributing rich and relevant content in the form of photos, videos, live streaming, recommendations, reviews and lifestyle guides which encourage conversations between users through sharing, comments, and liking features.

Tmall is now positioned more clearly than ever as the engine of digital transformation of the retail landscape in China.

Brands and retailers continue to turn to Tmall as a trusted partner and destination for consumer engagement, customer relationship management and brand building.

We remain focused on category expansion and sharpening brand mix for consumers.

We continue to grow core ecommerce business by increasing our consumer base and broadening our product assortment, namely through spreading our two wings of globalization and rural development.

Tmall global GMV has increased 180% year over year.

We continue to work closely with business partners to help sell their quality products to China.

Our acquisition of a controlling stake in Lazada, a leading online retail market operator in Southeast Asia, will allow access to 560 million consumers in one of the most promising markets for ecommerce.

Our rural development continued to be [pleasant].

Rural Taobao service stations have extended to over 14,000 rural locations.

We capitalized on the most important family holiday of the Chinese calendar to help spotlight rural products and encourage rural consumption and held the first Alibaba Chinese New Year shopping festival.

More than 70% of orders were completed via mobile and more than 2.1 billion items were sold during the five-day campaign.

Revenue for the core ecommerce business rose extremely well in March quarter, with a 39% overall growth rate and a 41% year-on-year growth rate for China commerce retail revenue.

The robust growth in China retail commerce revenue was driven by online marketing service revenue, particularly on mobile.

Online marketing revenue was driven by both the increased traffic and improving CPC on our marketplaces, trends that we believe will continue.

Why do we believe this?

Traffic is increasing because our desktop visitors remain very robust, while mobile MAU and traffic continue to grow, driven primarily by our mobile Taobao app.

We are confident about pricing because merchants and brands are willing to bid more and more on our P4P Alibaba platform.

In addition to increasing their online sales, it is also helping them acquire new customers, drive repeat purchase and build loyalty, ultimately benefiting their overall business, online and offline.

Our cloud computing business remains on its path of rapid growth with more than 500,000 paying customers and a revenue growth of 175% year over year.

We unveiled [DT plus], a platform that is a one-stop shop for big data-related solutions such as computing engines, data analysis, [machine learning] and data application.

We are benchmarking against international players.

Lastly, our media and digital entertainment ecosystem is coming together nicely.

We closed our acquisition of Youku Tudou in April which will anchor our video content and distribution reach.

Our mobile browser, UCWeb, is now a powerful media distribution channel with its mobile search, mobile app delivery and UC Headlines news feed services.

In combination with our OTT set-top box, we now have robust multiscreen digital content distribution.

More importantly, when combined with our retail commerce platform, we now offer unprecedented capability for multiscreen cross-platform integrated digital marketing.

Data integration across our network of media assets and partners allow brands and marketers to convert our numerous traffic during marketing campaigns into identifiable users that can be tracked across our network of media assets and partners.

Merchants will be able to more effectively engage and manage their customers and convert into sales on our retail commerce platforms.

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

Thank you, Daniel.

Hello, everyone.

We had a very strong quarter.

Revenues grew 39% year on year to RMB24.2 billion, with China retail marketplace revenue growing 41% year on year.

Activity on the platform is robust with 423 million annual active buyers and 410 million mobile MAUs.

We have completed a successful mobile transition, with mobile revenue as a percentage of total China commerce retail revenue reaching 71%.

Here are some financial highlights.

Our March quarter year-on-year revenue growth rate of 39% was the highest of any growth rate in the past four quarters.

It was driven primarily by the robust growth in our online marketing services revenue and exceptional growth of our cloud computing businesses, which grew 175% year on year.

We believe this growth in our China retail marketplace clearly demonstrates a recognition of the broader value proposition we provide to our merchants and brands.

For full FY16, revenue grew 33% to over RMB100 billion.

Our ability to monetize the users on our platforms continues to improve.

Revenue per annual active buyer has been increasing for several quarters, reaching RMB189 in March quarter.

On the mobile front, mobile revenue per mobile user has also been increasing for several quarters, reaching RMB123 in March quarter.

We believe the monetization improvements this quarter are driven, and will continue to be driven, by two trends in our business.

First, the increased engagement of users on our commerce and media platform, as we launched social and community new products on Taobao marketplace.

Second, the broad value proposition created by this engagement that we offer to merchants and brands.

This includes not just sales generation, but also marketing brand engagement, customer acquisition and retention, and the future opportunity for upsell.

So let's take a look at the quarterly revenue breakdown.

Cloud computing and Internet infrastructure revenue grew 175% year over year.

The growth was primarily due to an increase in the number of paying customers, which have more than doubled since a year ago quarter to more than 500,000.

And also, to an increase in their usage of more complex offerings, such as our constant delivery network and data-based services.

Other revenue increased 14% year over year.

The growth was primarily driven by increasing revenue from mobile Internet services provided by UCWeb and AutoNavi.

Excluding revenue related to the SME loan business, from both this quarter and the March quarter 2015, other revenue would have increased 51% to RMB1.5 billion this quarter.

[Please recall] that a year ago quarter included interest income from the SME loan business that we disposed to Ant Financial in February 2015.

Quarterly March returns, you can see that our non-GAAP EBITDA margin was 48%, slightly lower than 49% in the March quarter of last year.

Full year FY16 non-GAAP EBITDA margin was 52% versus 53% in full year FY15.

We did see operating leverage from our core business, offset by strategic investments.

Our core marketplace business continues to be very healthy, with EBITDA margin at around [60%], reflecting operating leverage.

We will continue to develop and consolidate new businesses; for example, we will be consolidating Youku, Lazada in the coming quarter.

They have information publicly disclosed, which you can tell they're still in a loss making, but they are strategically important to us.

Going forward, we will be giving you further transparency on our core marketplace performance, as well as our new business performance.

Cost of revenue, excluding stock-based compensation, was RMB8.5 billion.

As a percentage of revenue it increased year over year, primarily due to an increase in costs associated with our new business initiatives, mainly our mobile operating system, entertainment and our OTT service.

In addition, logistic costs relating to fulfilled services provided our affiliate, Cainiao Network, increased.

On a full-year basis, we paid Cainiao Network around RMB2.4 billion relating to logistic services, of which RMB689 million occurred during the March quarter.

Product development expenses, excluding stock-based compensation, was RMB2 billion which, as a percentage of revenue was flat year over year.

Sales and marketing expenses, excluding SBC, was RMB2.3 billion, decreasing slightly as a percentage of revenue due to operating leverage.

G&A was RMB1 billion, also a slight decrease as a percentage of revenue due to operating leverage.

The non-GAAP net income in the quarter was RMB7.6 billion, a decrease of 1% compared to RMB7.7 billion in March quarter 2015.

Net income was negatively impacted, primarily because of a foreign exchange loss of approximately RMB500 million, related to our hedging of US dollar obligation in connection with our M&A activities.

Additionally, this quarter we had a loss share from Ant Financial instead of a profit share.

This is due to the net loss sustained by Ant during the quarter as a result of its proactive marketing and promotional activities to driver user growth and engagement, especially during the Chinese New Year holiday.

Ant continues to invest to enhance their market leadership, which we believe is a very positive thing, given the enormous opportunity ahead of it.

Despite the quarterly loss at Ant Financial, we believe we will derive long-term value from our economic interest and our right, subject to regulatory approval, to convert into 33% equity in Ant Financial, which recently completed a $4.5 billion round of financing from third parties at a post-money valuation of $60 billion.

You see in our results announcement that we have provided additional disclosure on share of results from our equity investees.

We believe this is a useful disclosure for investors to understand the performance of our major investee companies.

Our share of Koubei's loss reflects Koubei's high investment and promotional spending during the start-up stage in December quarter, which will pick up on a quarter lag basis.

We expect such share of loss to decrease in the future.

Cainiao's business continues to grow as well.

Its recent fundraising validates its business progress and future potential.

We expect Cainiao to continue invest in this business.

Regarding free cash flow, CapEx and cash, we continue to generate significant free cash flow.

Our cash flow allows us strategic and operational flexibility to invest in technology and acquire the resources to accomplish our strategic objectives.

In March quarter, we generated RMB4.4 billion in free cash flow and, in FY16, we generated RMB51 billion, or about $8 billion free cash flow.

Total cash CapEx expenditure in the March quarter was RMB683 million, a slight decrease from RMB700 million during the same quarter last year.

As of March 2016, our cash, cash equivalents and short-term investments were RMB112 billion, a slight decrease from RMB118 billion at the end of December quarter, due to the net cash used for investment, acquisitions activities and share repurchase.

We had a RMB112 billion cash balance is as of March 31 this year.

Strategic investment portfolio; as a final note, we update our slide with regard to our major investee companies for investors to better understand their respective values.

Looking ahead, our ecosystem keeps expanding and our business becomes big and more complex.

In the new fiscal year, we plan to provide a greater degree of disclosure and insight into our business.

This will include a few areas.

First, we will provide annual revenue guidance.

We believe annual revenue guidance will take some of the guesswork and uncertainty out of the investors' effort to model our growth trajectory.

Second, we continue to invest for the long term, with the priority on achieving our longer term strategic goals.

These new businesses may have different cost structure and margins, especially when they are in developing stages.

In order to help investors better understand our core business results, as well as the development of our new business, when we report the first quarter of FY17, we plan to provide more clarity on financial performance of our core business versus new businesses.

Third, Cainiao Network has been developing rapidly and we've already provided more disclosure today in this area to help investors better understand Cainiao's business; specifically, how it is doing financially and how its performance impacts Alibaba's financial statements.

We plan to share more about the business in the future.

Additional information about these three areas will be shared at our Investor Day, which will be held in Hangzhou next June.

For those not attending in person, the presentation materials will be available on our IR website.

That concludes our prepared remarks.

Operator, we're ready to begin the Q&A session.

Thank you.

(Operator Instructions).

Erica Poon Werkun, UBS.

I have two questions.

My first question is about your value adding to merchants.

I think you've been talking about how Alibaba's role with merchants has been evolving from one of a sales channel to become more of a holistic marketing channel.

Could you share with us how many and what type of your merchants are working with Alibaba on these marketing initiatives?

And my second question is, in the earlier remarks, Joe talked about bringing key initiatives from investment phase to cash generation.

I just wonder if you can share with us where you are in the investment cycles for the strategic initiatives like cloud computing, digital entertainment and local services, and wondering if you can frame the size of investments for these initiatives into FY17.

Thank you.

Thanks, Erica.

This is Daniel.

I would like to answer the first question.

As you know that actually today, on our China retail platform, in both Taobao and Tmall together, we have hundreds of millions of active sellers on our platform.

And all these sellers are our active marketers and they spend marketing dollars on our P4P, on our display ads and also in our affiliate network.

Today, their evaluation of the effectiveness of the marketing dollar spending is not only to look at the immediate sales and immediate ROI on our marketplace, but for a lot of the retailers and the brands they have the offline business, they will also look at the effectiveness of this marketing spending in terms of the acquisition of the new customers, in terms of managing the existing customers and retained customers.

So actually, as I said in my script, this will ultimately benefit their entire business, both on and offline.

So actually, today, this is our solid marketer base and we expect that they will continue to do so in our enhanced ecosystem, not only in our marketplace today, but also [in shape] media and entertainment ecosystem.

Okay.

Hey, Erica.

Thanks for your second question; both myself and Maggie will cover that.

You mentioned the different businesses in different investment phases and you wanted to understand the sizing of investments.

I think you mentioned cloud computing.

I'll cover that and then I'll let Maggie talk about the digital entertainment.

As you could see, the cloud computing business grew 175% revenues year on year.

In absolute dollar terms, it's also coming into a significant dollar level.

So we're very, very excited about this business.

As I said in my prepared remarks, we are now already one of the largest cloud computing businesses in the world, so we're benchmarking not just in China, but also against the world.

And the business, as you know, can gain tremendous scale.

When it reaches tremendous scale, it has a tremendous amount of operating leverage.

So we are looking, over the course of this year, that this business will not require a lot of additional investment into the business as it's generating cash flow.

That is how we look at the cloud computing business; high growth, and also coming into a high trajectory in terms of operating leverage.

I'll turn the mic over to Maggie to talk about digital entertainment.

Right.

So digital entertainment is a relatively new area that we invested.

When you look at it, the major asset there right now is Youku.

We also have [music and sports] that are relatively small.

So we just closed the Youku transaction in April; it's very recent.

And then, if you look at the market consensus for Youku before our acquisition, Youku was also a public company, you will notice that there are going to a couple of percentage point of margin dilution to ours.

But the thing is, like Joe said in his remarks, when you look at all of our past business, we have this history of investing in long-term initiatives with patience.

So new initiatives, very interestingly, typically it takes like five to seven years to grow into substantial profitability, so we're going to, in near term, continue to invest in this digital entertainment area.

This is just the beginning of the business.

Sean Zhang, 86Research.

Congratulations on a strong quarter.

We recently noticed you are rolling out product-level and store-level [initiative], 1,000 people saw the interface initiative.

Wondering what the timetable for a full launch, and so far, in your testing phase, what kind of result you have seen?

Maybe management can share with us some color there.

And also, we noticed some increased effort to support Tmall trends, such as the search portal on Taobao app is changed to highlight Tmall and personalization.

Wondering what [stock profit share] will be the trend for Tmall generally, going forward.

Thank you.

This is Daniel.

For the first question, yes, as a platform, actually our value add to our merchant is that to enable them to operate their storefront effectively.

So today, what we are doing is to use the big data we have to help the merchant to tailor-make their storefront to the right audience and in the right location.

So, so far, we are still actually in the beta test and we work closely with a couple of partners, a couple of sellers to do that.

So far, the result is very encouraging.

Because of the targeting, because of the data-driven service, actually the effectiveness of the ROI of the traffic, ROI of the traffic actually improved very tremendously.

We will continue to monitor the progress and, hopefully, we will pretty soon roll out this service to all our users and to all our merchants on our platform.

We expect the merchants can utilize this big data weapon to maximize their return of the traffic they get in the storefront.

And for the second question, actually we always manage our business as a whole, and Taobao and Tmall have separate brands.

But actually, in Taobao mobile app, people can find items both from Taobao and from Tmall.

And we did not give any preference in mobile Taobao app especially to promote Tmall products.

Actually, what we changed is that basically for the convenience of the users, because a lot of people want to select the item from Tmall directly.

So we give them a shop tag people can easily scan and get the results directly from Tmall.

So that's all we want to do and the purpose of this again is to improve the user experience.

Thank you.

Robert Lin, Morgan Stanley.

Congratulations on the very strong results.

I have two questions here; I guess one is under international.

We announced the acquisition of Lazada, and we also noticed that the international retail has accelerated after our restructuring of the AliExpress platform.

Can you provide some insight on how we plan to integrate the two platforms more in the medium term?

Are we separate operated and potentially cross-sell with our merchants?

And I guess in terms of the timing, Joe you pointed out that these are long-term bets and there's three of them.

Would you say international is one of those that will likely be profitable quicker than the others within those three that you mentioned?

I guess the second question more on Cainiao logistics.

We do appreciate the improved disclosure.

In the cost of sales line we talked about 3% revenue, RMB689 million, for the logistic fulfillment for the merchants.

Can you provide additional insight on what that is and how should we think about that cost, going forward?

Thanks.

This is Daniel again.

I would like to answer the first question about the international expansion.

Yes, Lazada is a very important acquisition.

As people know, Lazada now has a very good brand recognition in South Asia countries, and especially in five or six countries they are all in the leading position.

And this market actually we have over 500 million consumers, so that's why we think this is a good vehicle for us to expand to this area.

Yes, in our portfolio we also have our self-operated, [self-billed] AliExpress business, and we are happy to see that there is good synergies between AliExpress and Lazada.

And in terms of the countries' coverage, actually AliExpress is now very strong in Russia, very strong in some European countries, and in the US, while Lazada is very strong in Southeast Asia.

So this gives us a wider coverage and this is good for us to achieve our 2 billion consumer vision.

In terms of synergies we can generate from these two businesses, it's obvious.

What we want to do is that first to leverage the merchant base we have, not only in AliExpress but also in our China retail platform, to help more Chinese merchants on-boarding Lazada and help them to get access to the consumers in Southeast Asia.

We are happy to see that, after our acquisition, a lot of clients call me and ask these questions to show their interest.

And we expect that we will pick up this process as a very important component of the integration.

In terms of profitability I would say, as we always do, we will invest in this international business, and what we will care about is the market share in the local country and the customer engagement and retention.

And we believe that customers with us, then merchants will be with us and we will generate value.

As long as we can provide value to the merchants to get access to the customers to serve the customers, then we can generate enough economics from this international business.

Thank you.

Robert, this is Maggie.

Regarding to your question about the logistics cost we paid to Cainiao, when you look at the total cost for the full year, RMB2.37 billion, which was about 2% of our revenue paid to Cainiao, that's mainly associated with time logistics fulfillment services Cainiao provided to AGH, to the Ali Group, for certain businesses we conducted in the Group, businesses such as Tmall supermarkets and rural.

If you look forward, these are areas still in early stage.

So we're going to keep expanding and then Cainiao's also going to continue to provide these services.

So if you look at the total logistic cost we're going to pay in the future, it will grow.

Eddie Leung, Merrill Lynch.

Two questions.

The first one is about product categories.

Would you mind sharing more color with us on the recent performance of some of your key product categories, because we have read articles and sometimes even press releases about the performance of some categories in certain regions?

So I'm wondering if you could summarize some of the trends and share with us.

That's the first question.

And then secondly, also a follow-up question on Cainiao.

Besides what Maggie mentioned about, for example, the geographical coverage and rural areas, so just wondering where we would see Cainiao going beyond China, because we have been seeing more activities on AliExpress, as well as some of these new regions that [see their income as basis].

Thanks.

Thanks, Eddie.

This is Daniel.

For the product categories' development, let me try to give you some color on this.

First, what we can see that the main categories, such as apparel and consumer electronics, still show very strong growth.

And especially Q1 for apparel and the winter time this year quite unusual; it's not that cold in December and in January, but it's quite cold in February and March.

This drives the sales of apparel to a certain extent, but not dramatically.

The reason is because most of the sellers their stock is not enough in late Q1 to support the sales of the winter products.

And for consumer electronics, actually we are doing very well in consumer electronics, especially in the large ticket items, and supported by our Cainiao affiliated network.

For cellphones in March, I would say the entire market, the big picture is not that good because the supply chain for the entire business had a [big headache] in Q1.

So what we can expect that in Q2 the business will warm up.

But having said that, the entire market almost fully penetrated by smartphones, and the total shipment for this year, for the entire cellphone business, cellphone industry, won't show a dramatic growth.

But I expect that ecommerce will continue to take share from the entire business.

And the last one is the fast growing categories.

What we can see today, especially in Q1, also driven by the Chinese New Year consumption, what we can see is food, and especially fresh food, and FMCG products and healthcare, show very good growth.

And I think in terms of penetration, online penetration by category, food, especially fresh food, still with a lower penetration, and we can expect the rapid growth in the coming quarters and coming years.

Right, Eddie, regarding the Cainiao question, I want to make it clear that Cainiao is not a traditional logistic service provider.

So by the time we set it up, we invested -- we have right now 47% shareholding in Cainiao, it tend to be a logistic data company, an information company.

So when you look at, nowadays we have around 35 million packages being delivered, Cainiao has been only less than three years old.

Before Cainiao was there, packages had been handled but never been handled at this efficiency as we have seen today.

And what Cainiao has been focused on is to line up and set up this information hub, the information center, and utilizing the data it has to improve the efficiency in the whole logistic chain, rather than just providing fulfillment and delivery services.

Having said that, then look at the cost we pay to Cainiao, these are services provided Cainiao and its aligned to our, like the Tmall supermarket and rural businesses.

This is the testing field for Cainiao to further setup its information hub, and also to have this testing field for the data usage to improve the efficiency for us and also for the partners in the logistic area.

Vivian Hao, JPMorgan.

I have two questions here.

My first one is regarding the related impact from recent tax policy change and also more strict custom checks on [CyCo] for both Taobao and Tmall platforms.

Can we get a rough sense of CyCo percentage of our total GMV?

My second question is regarding the outperformance of cloud computing.

Is it possible if we can get a penetration or adoption rate of all AliCloud services and not merchants?

Also, what should we expect as the margin profile, going forward, given the business scale's up quite impressively?

Thank you.

Thanks, Vivien.

For the first question, actually, on our Taobao and Tmall business, we have two main businesses relating to the cross-border imports.

The first one actually is Tmall global, which is not CyCo, which is a B2C model, and we have a lot of foreign partners, foreign brands and retailers on our Tmall global platform to do the cross-border sales.

And the recent change in government policy do have some impact on Tmall global business and also, I think, the entire import industry also have some impact.

But having said that, actually, we are happy to see the government regulate this cross-border import because we did observe that there are a lot of [trade] activities in the bonded warehouse solution structure.

So the change in government policy actually can eliminate all these activities and actually, we believe that Alibaba can benefit from this and to do whatever business model under the regulation.

Actually today, bonded warehouse and change of the tax rate, and the [CIQ] requirement, etc., do have an impact.

But actually, government will encourage, for example, the general trade model, and this is all cross-border general trade, bonded warehouse solutions, actually we're basically pursuing all the models available in the market.

We believe that the consumption is always there and people want to buy high-quality products from overseas market.

So the demand is so solid and we believe that business will continue to grow.

And we're also happy to see that, following the policy change, the government is actively monitor the market reaction.

Actually, our team is now working very closely with the government and the regulators to share our [observations] and give them our feedback.

And for the other part of the cross border, actually, as you said, is CyCo and in our Taobao marketplace we have a global buy business, potential growth in Chinese.

Actually, this is a personal CyCo, individual CyCo.

Actually, this business have been there for many years and we see very active trading in this global buyer.

And we also see a very magic phenomenon, which is a lot of social network and opinion leaders arises in this global buy business.

And I think this is a very unique strength for Taobao to do this cross-border social commerce because, for most of Chinese citizens, they are not aware of a lot of international products.

Actually, they need opinion leader, they need talent to share their experience and share their experience of a product and a service to them then they will follow and to consume.

So this is the magic of Taobao and we will continue to do this to enable our consumers to find, to enjoy the fun of cross border, enjoy the fun of CyCo in our global marketplace.

Thanks.

Vivian, regarding the cloud question, you've seen that our cloud business grow very rapidly.

If you look at the top line it is growing at three digits and we expect that the growth is going to continue.

And I should say that AliCloud is getting very close to the break-even point, so if we want to turn this business into profit, then we can do it very soon.

And I think that the growth is mainly coming from, number one, the increased number of paying customers.

We reported we have over 500,000 paying customers at the end of March, compared to 240,000 we reported a year ago, so very rapid growth.

And these customers are across all size and across different industries.

Another growth driver is the continued expanding the variable products and services, and also continued enhancement of the technology and the quality of these products, so we are very optimistic to the cloud business.

We have seen that other players are reporting at the beginning break even and then 16% and 18% of the margin, and then continue expanding.

We don't see any big difference from the AliCloud and other players, like [AWS].

Just to sum up what Maggie said, I think, Vivian, you also asked about the adoption rate of cloud computing from our merchant base.

The cloud computing business is a business that its customer base is very wide, well beyond just the ecommerce merchants that are doing business on our platform.

We see a lot of potential in different segments, in corporates, in SMEs and also in government segments, and then in vertical segments like financial services, healthcare, game developers, so it runs the gamut.

So you should think about the customer base of cloud computing as well beyond our existing customer base.

Now, our merchant base right now, a lot of them are using the service effectively for free because they're using the service in one-time situations.

For example, on November 11 when there's a surge in volume and traffic in their business, they will come on to our [Juhuasuan] platform to enjoy the cloud computing service for free.

And so in terms of adoption, a lot of them are already on our cloud computing platform, but in terms of paying potential, I think there's a lot of room to grow.

Vivian, I'm Daniel.

I just want to add one more comment on the first question.

Yes, actually the government policy change actually do have some impact on our cross-border import, but I have to say that today, in terms of scale, this business is in a low base and this won't have any material impact on our entire retail business.

And for our C2C global buy, actually this policy change does not have any impact.

Thanks.

Carlos Kirjner, Bernstein.

I have two questions.

One about the Ant losses and one about customer loyalty.

Can you talk a little bit about the losses at Ant Financial?

Shouldn't that business be at a large enough scale to acquire customers, grow and also make money at this point?

I know you said in the press release, and Maggie reinforced the view, that you're confident that Ant will be valuable, so set aside the private valuation round, can you add some color on any operational business metrics that help us understand why you think there's going to be a lot of value from their business?

Secondly, on a separate topic, do you believe there will ever be room for some type of loyalty program like Amazon does with Prime on your platform?

Is that type of program just not practical in a marketplace construct?

And if you don't have something like Prime and you think of a [Cainiao beauty] fulfillment centers, do you think it will be able to attract sellers to fulfillment centers and scale them and make money with that business?

Thank you.

Right, Carlos.

It's Maggie.

The Ant question, if you look at in this quarter, we shared some losses from Ant; actually in previous quarter, we have always shared profit from them.

That quarterly loss was mainly the result of its marketing promotion activities to drive their user growth and engagement, especially during this Chinese New Year holiday.

We are very happy to see that Ant has been progressing very nicely, and their customer base and their various business expansions are very healthy.

This also can be evidenced by their recent round of finance which indicates the published -- I mean the valuation is already over $60 billion.

So we think that overall, actually, if you look at the whole year FY16 for Ant, they are a profit-making business.

We believe that this is still going to be the case.

So there is some seasonality.

There is also the strategic investment decisions to make for the next round of growth.

We're going to do a deep dive on Ant Financial on our Investor Day in June.

For the question of customer loyalty programs, yes, customer loyalty is so important in our retail business.

Today, we have over 400 million active buyers on our retail platforms, and one of the key operating targets is to maximize the customer spending across categories.

And especially today, right after our acquisition of digital entertainment business, Youku, and also our investment in [AutoNavi] and how to cross-sell our physical products with the digital entertainment products and local service, actually, this could create a good opportunity for us to enhance users' [business] and also, to do the cross sales.

So we are very actively working on this, but we won't just replicate the loyalty program for any other companies, because actually, we are such a unique landscape and our user base is huge now.

Also, we have a platform and we have very unique strengths which not only us who can do these cross sales and to enhance customer loyalty, we have so many merchants, so many brands with us, each of them have the strong desire to have their own customer loyalty program, have their own cross-sell tool and services to enhance their users' business.

So we will try to maximize these synergies as a platform to improve the users' business and the loyalty for the entire platform.

Thank you.

Robert Peck, SunTrust.

Two questions, please.

The first is on Ant Financial.

Maggie, you talked about a 33% equity ownership; could you just walk us through that process and how you go from the economic relationship to the equity ownership and how we should track that?

And then number two, Joe, if you wouldn't mind just touching base on your thoughts on the Yahoo!

process and the 384 million shares they own and your view on those shares?

Thanks so much.

Okay.

Yes, thank you, Rob.

I'll address both questions.

On the process of Alibaba Group to further participate in the actual equity ownership of Ant Financial is a process of regulatory approval.

So in order for us to hold a direct stake, we have to get specific approval from the regulators, from the financial regulators in China.

And that is because ownership in financial institutions by foreign companies is very limited and there are no precedents for an entity like Ant Financial.

And so the regulators are going to be looking at this as a case of first impression, but we're having a very constructive dialog with them about this.

So that's the process.

In the absence of a conversion into direct equity, Alibaba Group will continue to share 37.5% of the profits of Ant Financial, so that's an either/or situation.

Your second question relates to the Yahoo!

Process, which is something that is a little bit unknown to us because they're running their own process of selling the core business; we're not in that process.

We expect that, if they sell the core business, then they will continue to be a company that will continue to be a 15% shareholder in our Company, so nothing will change.

Thanks so much, Joe.

Congratulations.

With that, we conclude the call, operator.

This concludes our presentation.

Thank you for your participation, you may all disconnect.