阿里巴巴 (BABA) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by and welcome to Alibaba Group's September quarter 2016 results conference call. (Operator Instructions).

I would now like to turn the call over to Mr. Rob Lin, Head of Investor Relations of Ali Baba Group. Please go ahead, sir.

Good day, everyone, and welcome to Alibaba Group's September quarter 2016 earnings conference call. With us today are Joe Tsai, Executive Vice Chairman; Daniel Zhang, Chief Executive Officer; Maggie Wu, Chief Financial Officer.

Also, as you know, we distribute our earnings release through Alibaba Group's Investor Relations website located at alibabagroup.com. So please refer to our IR site for our earnings release as well as supplementary slides accompanying the call. You can also visit our corporate website for the latest Company news and updates.

This call is being webcast at 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 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 adjusted EBITDA, adjusted EBITA, segmental 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 reconciliations of GAAP to non-GAAP measures can be found in our earnings press release.

With that, I will turn the call to Joe.

Thank you, Rob. Thank you, all, for joining us.

We delivered another terrific quarter with 55% year-on-year revenue growth and $2.1 billion in free cash flow. All of our business segments saw robust growth, and for those of you who have tracked us for a long time, you will observe that beginning in the last quarter, we have accelerated our revenue growth compared to growth rates in the prior year.

I want to provide my perspective on why Alibaba is growing faster this year than last year, even off of a bigger base; and, more importantly, why we think significant growth is sustainable into the future.

First of all, our core commerce segment continues to be very robust, with year-on-year revenue growth of 41%. On the basis of a very healthy China retail marketplace, now with 450 million mobile MAUs, we see tremendous opportunities for us to increase monetization of our user base. This is because user engagement of our platform is growing, and this generates strong value for branding and distribution to brands and merchants coming to our platform to reach consumers.

In addition, we see significant upside in building out our international marketplaces where penetration of Internet-enabled commerce is still relatively nascent.

Second, the core commerce business shows off tremendous cash flow to enable us to make investments in important strategic areas. Two of these strategic areas are cloud computing and digital media and entertainment. Both segments are coming into their own in terms of scale and market position, each seeing triple-digit revenue growth this quarter.

Third, we're extremely patient when it comes to developing potentially high-impact initiatives. A couple of quarters ago, I talked about investing for the long run, and how we focused on initiatives with long gestation periods. In our experience, the investment cycle for incubating businesses that eventually become massive value drivers could take seven to 10 years. We've seen this pattern in the case of Taobao, Alipay, cloud computing, etc., all of which we have developed organically in-house.

As I said before, having the ability to remain patient and have strategic flexibility to invest with a long view, is a huge competitive advantage.

Now I would like to turn the mic over to Daniel. Thank you.

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

We enjoyed a stellar quarter, and our business has continued to thrive. Our mission to help make it easier to do business anywhere is more relevant today than ever before.

Consumer behavior is evolving dramatically as the population is getting younger and more proactive in upgrading their lifestyle. At the same time, [merchants] increasing dramatically with latest technologies inspires them to embrace new ways to improve business efficiency and serve customers.

We believe the convergence of these factors will bring about a significant disruption of the existing commercial landscape and emergence of a new retail model.

Over the last 10 years, development of online shopping in China has been disconnected from brick and mortar retail. [RMB3 trillion] in online sales was an important milestone because it was the clear inflexion point that called for us to leverage the fundamental infrastructure for commerce that Alibaba has built: marketplace payments, logistics, cloud computing, big data, to transform the RMB30 trillion China retail economy.

The most important opportunity on the horizon is helping traditional business to upgrade into a new retail model and not continuing to grow online business in isolation.

Online and offline will be a single, seamless experience, not just in consumer interaction, but also in the entire business operation and execution. We want to improve efficiencies across the entire value chain of product design, manufacturing, distribution and services.

Taobao continues to flourish as a social commerce platform for China's millennials. As our mobile MAU expanded to 450 million, we are pleased that the DAU/MAU ratio and average daily time spent remains robust and constant. This is a resounding endorsement by users of an increasingly relevant and entertaining experience shaped by data-driven personalization, interactive innovations, and peer recommendations.

A wide variety of original video content is being produced from brands to celebrities to entrepreneurial [individuals], adding even more richness to the Taobao universe on top of photo and text-based content. Close to 170,000 live streams were offered this quarter, with average view time of 11.2 minutes per user.

Tmall continued to provide unique value to brands and retailers that contributed to growth of their overall business. Our unified ID system which allows merchants to track and target customers effortlessly across our integrated retail marketplaces and the digital media platforms continues to set us apart above the rest. More and more merchants are experimenting with live streaming to connect and engage with consumers.

Our compelling 'see now, buy now' feature built into the video-stream technology, enabling merchants to provide instant gratification to customers. Merchants are increasingly leveraging celebrity assets in campaigns to attract and convert their fan base.

Our leadership in branding reach and distribution capability made Tmall Apple's only third-party platform partner for the global launch of iPhone 7.

This year marks the eighth 11.11 Global Shopping Festival. This year will be our most global ever, with more than 11,000 international brands, including many first-time participants such as [Sephora], Target, Maserati, Shanghai Disneyland, and Victoria Secret.

Continuing a new tradition that started last year, we will hold a countdown gala that will broadcast live on video -- live on TV across China, Hong Kong, Singapore, Macau and Malaysia, in addition to live streaming on our own mobile apps.

Among the innovations this year is the launch of the pilot program enabling select merchants from around the world to sell to consumers in Hong Kong and Taiwan. Consumers will also experience a world-first, end-to-end VR shopping experience and an interactive mobile game that leads them on an adventure across online and [broken moded] location of merchants, such as [Suni, Ying Tai], Starbucks, KFC, [Unico], and many others.

Top brands and retailers are also capturing consumers' attention with exclusive new product launches and limited-edition goods.

Globalization continued to be an important growth driver. During the G20 Summit held in Hangzhou, global leaders responded with overwhelming support for the formation of an electronic world trade platform that is dedicated to supporting truly free and fair trade of small businesses across global borders. We continue to expand selection of merchants with quality imported products to meet the demands of consumption [upgrade].

Our cloud computing continues to shine. Revenue increased by 130% year over year, and paying customers grew to more than 651,000. We launched a new [clean] energy data center in Northern China capitalizing on the region's naturally advantageous weather conditions and innovative new ways to lower operational costs.

Over 40,000 developers from 58 countries attended our annual developers' conference for cloud computing and artificial intelligence in Hangzhou where we unveiled a City Brain project in collaboration with the Hangzhou Government to upgrade and transform city-wide management and services.

Our digital media and entertainment business continued to blossom. Revenue increased 302% year over year from strong content acquisition and in-house original productions. Youku Tudou enjoyed blockbuster success with Chinese drama, One Smile is Beautiful, which set new viewership record.

We announced the formation of Alibaba's Digital Media and Entertainment Group made up of Youku Tudou, UC, Alibaba Pictures, Alibaba Sports, Alibaba Music, Alibaba Gaming, Alibaba Literature, and our OTT TV set-top box business and an investment fund focused on entertainment content acquisition and development.

Finally, I'm excited to share some updates on our innovation initiatives. AutoNavi is now the recognized market leader in mobile marketing and navigation in China. According to the latest data from iResearch, AutoNavi is active on more than 29.8 million devices daily, and users spent an average of [17] minutes on the app every day. We believe location-based services will play an important role in consumer services delivery in the future.

Our travel business was rebranded Fliggy, flying pig in Chinese, to reflect its position as a leading leisure travel platform for Chinese millennials. To date, it has more than 200 million members and 10 million daily visitors to its mobile app.

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 delivered another very strong quarter. Total revenue grew 55% year on year, to RMB34.3 billion, with revenue from the core commerce segment growing 41% year on year.

Mobile contribution continues to climb, reaching 78% of total China commerce retail revenue as we added 23 million mobile MAUs to a total of 450 million MAUs in September.

Cloud computing revenue grew 130% year on year, and the segment-adjusted EBITA loss further narrowed to $8 million.

Our core commerce segment generated adjusted EBITA of $2.6 billion, representing 62% margin.

Total revenue grew 55% year on year due to, first, continued accelerated growth of our core commerce business; second, adding new [crew] to our digital media and entertainment segment since the last quarter; and thirdly, robust growth of cloud computing; number 4, strong monetization of UCWeb users.

The biggest component of the core commerce segment is China commerce retail, and its relative growth was primarily driven by online marketing service revenue which increased 47% year over year.

Average merchant spending and the number of brands and merchants using our marketing services have continued to increase, reflecting the broader value proposition derived from our platform.

At the same time, our mobile Taobao app continued to see increases in user engagement, which combined with personalized recommendations through data technology, resulted in continued year-over-year increase in number of clicks. Higher click-through is a more significant driver to online marketing service revenue as opposed to cost-per-click pricing.

Talk about monetization, our ability to monetize the users on our platform continues to improve. Revenue per annual active buyer has continued its increase, reaching RMB215, $32.

In the September quarter on the mobile front, mobile revenue per mobile user has also been increasing for several quarters, reached RMB151 in September.

Quarterly cost trends. Cost of revenue, excluding stock-based compensation, was RMB11.9 billion. As a percentage of revenue, it increased year over year primarily due to an increasing cost associated with our newly consolidated businesses such as Youku and Lazada, as well as the result of our investment in Tmall supermarket.

Product development expense, excluding SBC, was RMB2.7 billion, which as a percentage of revenue decreased slightly year over year.

Sales and marketing expense, excluding SBC, was RMB3.4 billion, stable as a percentage of revenue year over year; and G&A expenses, excluding stock-based compensation, was RMB1.7 billion, also stable as a percentage of revenue year over year.

Non-GAAP net income in the quarter was RMB12.9 billion, an increase of 41% year on year.

Free cash flow and capital expenditure and cash. We continued 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 the September quarter, we generated RMB13.9 billion, or about $2.1 billion in free cash flow.

Total capital expenditure in the September quarter were RMB3.6 billion. As of September 30, 2016, our cash, cash equivalents and short-term investments, were RMB108 billion, or $16 billion. This is an increase of RMB18 billion from the end of June quarter, primarily because of free cash flow generation from our operations.

Segment reporting. Core commerce; revenue from the core commerce segment increased 41% year on year. China commerce retail revenue grew 40% primarily due to strong growth of 47% year on year online marketing service revenue.

The growth of online marketing service revenue also reflected the full effect of online marketing inventory we added in September 2015. As we anniversary these impacts, we expect the subsequent quarters to face tougher comparables for online marketing service revenue.

Mobile MAU growth was very robust this quarter. In September, we had [450] million MAUs across our China retail commerce apps. This represents 23 million in net adds from just three months ago.

We ended this quarter with 439 million annual active buyers in our China retail marketplace. We're encouraged by the level of user growth as well as engagement on our mobile commerce platform, as our marketplace has become the destination for social commerce and brand engagement.

The average spending per annual active buyer continued to increase in the 12 months ended September this year, reflecting buyers purchasing more and more often, and across more categories. We feel very comfortable with the fundamental health of our China retail marketplaces.

International commerce retail revenue increased 178% year on year mainly due to the consolidation of Lazada starting in mid-April, and re-acceleration of growth of revenue generated from AliExpress. Our strong margin in the core commerce segment gives us the ability to invest in our future growth.

You will notice that adjusted EBITA margin in the segment was 62% this quarter, which is the same as the same period last year, and 1 percentage point higher than the prior quarter.

Due to operating leverage, margin is maintained despite our aggressive investments in the three highly strategic areas we talked about before: rural Taobao, Southeast Asia through Lazada, and Tmall supermarket.

We will continue to make investments in these highly strategic business areas and the investments might from time to time outpace operating leverage.

Cloud computing revenue grew 130% year on year. The growth was primarily due to an increase in the number of paying customers which have more than doubled since the year-ago quarter to 651,000; and also to an increase in their usage of more complex offerings such as our constant delivery network and database services.

Adjusted EBITA margin of the cloud computing segment significantly improved from negative 13% in the prior quarter to negative 4% this quarter, which demonstrates that this business has significant operating leverage once you reach scale and product sophistication.

However, as we communicated in the past, making the business profitable is not the top priority for AliCloud at this stage. The top priority is to keep expanding our market leadership. Therefore, we will continuously make investments to develop our cloud business for rapid expansion.

For example, during the cloud computing conference in mid-October, AliCloud announced price cuts across its product offerings, some as high as 50% cuts. Improvements in technology and economies of scale have driven our costs down, and we are passing the savings on to our customers. We do not anticipate materially negative financial impact from the price cuts, and from a strategic perspective, it helps us expand our market.

Digital media and entertainment segment. Revenue increased [to] 302% year on year, primarily due to the full effect of consolidating Youku, and also through an increase in revenue from mobile value-added service provided by UCWeb such as mobile search and news feed.

Adjusted EBITA margin of this segment was negative 39% primarily due to constant acquisitions and development cost for Youku offset by improvement in UCWeb's margin. We are committed to investing in our content library and proprietary IP as part of our digital entertainment strategy.

Revenue from innovation initiatives and other segments increased to 78% year on year, primarily due to an increase in revenue from new initiatives such as YunOS, our operating system for mobile phones, automobiles and Internet of Things.

Adjusted EBITA margin of this segment was negative 110%, reflecting our continuing investment in AutoNavi and new business initiatives such as DingTalk.

The valuation of our Company. So finally, I'd like to provide an update on this, of the value of our various business segments.

As you can see, different businesses are in different development stages, so the approach to value each of these should be different. For example, our core commerce business has high profit margins and can be measured using metrics such as profitable multiples, while our other businesses are currently in the investment stage. So investors can approximate their evaluation using revenue multiples and operational metrics.

In terms of the value of our portfolio -- strategic investments, we have updated valuation of our stake or economic interest in these [investing] companies.

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

Thank you.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. (Operator Instructions).

Chi Tsang, HSBC.

Congratulations on a very strong set of results across the board. I have two questions.

Firstly, can you walk us through some of the drivers of revenue growth and engagement for the China retail business, please?

And secondly, can you address the New York Post article on the SEC inquiry?

Thank you.

Right. So for the drivers of the revenue growth, we talked about the engagement. It's actually not one effort or two; there are many things we have been making effort on.

If you look at our [Tao] app, you probably have noticed that there are a lot of new products and functions that -- including live broadcasting reviews that seek for your advice and etc., that brings tremendous new attraction to these users.

So this -- you can tell by looking at not only the daily active user growth, but also when you look at the [our TAU] versus MAU, it still stays at very high levels.

So last quarter, we recorded 40%; it's quite high level. And also, when you look at the time spent, actually, time spent we talked about. It's about 20 minutes. It's even higher than some of the social platforms.

Daniel, you want to supplement?

Yes. Actually, I would like to add more color on the revenue growth engines, especially in the China regional marketplaces.

I think the first engine was the continued growth of our traffic, but today, I think most of our profit now is on the mobile, and we are happy to see our mobile MAU continue to grow very rapidly. The net adds in this quarter is about 23 million. This is very strong net adds. And at the same time, the (inaudible) continued to be very constant and robust. And so actually, I think this is the first engine.

And second, as Maggie mentioned, on our Taobao mobile app, actually, it is not only a shopping app, it's a social commerce app. So we add a lot of new products and features in the app like social, like recommendations, peer recommendations; like video stream. And from -- actually, we also [stood] a lot of opinion leaders have had their own mini site on our mobile app to broadcast, to share their experience, their shopping experience; share their recommendations to their friends. So all these create that incremental inventory for -- to be monetized.

Today, I'd say in terms of percentage of inventories monetized are still very low percentage. So we have enough inventory in reserve in the future to consider, but we will consider to use a negative approach to monetize the inventory and make sure the consumer experience is [still enough].

The last one actually is that improvement in technology, and as far as the improvement in technology, [pace of] technology, improvement in our advice (inaudible), advertising technology, not only in our retail market business but also [from] platforms to deliver content platforms, we can effectively improve the ROI of the advertiser, but also to improve the critical offering metrics like CPC, cost-per-click, in our [PepoP] business, in our cost to [play] -- [to display good impression] in our display ads.

So I think all these factors give us enough space to continue to grow our revenues in our core business.

To answer the second question, as you know, we've been in the process with the SEC. They've sent us a letter enquiring as to a number of issues.

On this we've been very transparent with you guys about what's going on. We disclosed all the issues involved and the fact that we're voluntarily cooperating with the SEC in their inquiry.

We don't think there's any factual basis to the New York Post story, so on that score, when we have real news we will update everyone.

I just want to say I'm not surprised that in the days leading up to Singles' Day our detractors will want to divert people's attention, but we're not going to be distracted. Instead, we're going to focus on what's really important: bringing the best Singles' Day experience to our customers.

Thanks.

Robert Peck, SunTrust.

Two questions, please.

One, Maggie, could we get a little more color on the revenue drivers? We had a tough time hearing some of your answers. There again, I was typing away loudly. Particularly I wanted to see if we get a breakout of what's driving revenue between CPCs, click-through rate, and ad load.

And then there's part of that, you know on slide 5 you give us a helpful chart on revenue per active buyer as well as revenue per mobile MAU. Can you help us equate those two numbers? Can we know what percent of mobile MAUs are active buyer? If we could compare those two numbers in the eventual [K-grade] uplift we can get.

Thank you so much.

So when you look at the revenue drivers, I think we see growth in many of these detailed drivers. So we're talking about the continuing year-on-year increase in the number of clicks. Right? This is basically coming from -- originally from the increase in our DAUs. And a higher click-through is more significant driver to online marketing service revenue as opposed to cost-per-click pricing.

So regarding your question on the MAUs versus annual active buyer, so MAU is actually a user, so that the purpose of we are showing that our revenue per -- mobile revenue per MAU is to demonstrate the monetization ability on our mobile platform. It cannot be really on -- it's kind of a different measure, if you look at the active buyers. So those are the overall --

So they're overlapped, and I think it just -- we're trying to present different things. So our ability to monetize [this thing] represents the value provided and being recognized by merchants; and the value actually originate -- coming from buyer and user, number of buyer and users as well as engagement of this group of people.

So the revenue -- another way to look at this revenue growth is that the -- these are the two [direct travel] we're talking about. One is the number of merchants; the other is the average spending of these merchants. We see both have shown growth, very -- in a very healthy way.

Thanks very much.

I think the reason we're presenting both charts, revenue per active buyer and also revenue -- mobile revenue per mobile MAU, is that the monetization model, as you know, with online marketing services does not require someone to actually buy something. It is a click-based and it's basically marking service revenue.

And it is relevant for you to look at MAUs on mobile, these mobile users that are coming in. And we now have 78% of our revenues in China retail marketplace that's coming from mobile, so that is growing very robust.

Daniel.

Thanks, Joe.

Yes. Actually, in terms of how many active buyers -- how many MAUs are active buyers, I think this quarter what we disclosed is that 78% of our GMV, of our transactions, are from mobile. I think this number, 78%, can well address your question.

Thank you.

Operator, next question.

Wendy Huang, Macquarie.

So first if you can give us some update on the electronics (technical difficulty). I understand that (inaudible) you have (inaudible) paying customers (inaudible) [partner] you are working with -- what kind of partners you're working with. Also, what kind of (inaudible) are you charging on this (inaudible). Also having the (inaudible).

Similarly, you mentioned in your press release that there was a (inaudible).

Wendy, we can't hear you clearly. Wendy, sorry. The line is not very good. Can you repeat?

Okay. Can you hear me better now?

Yes.

Is it better now?

Much better. Thank you.

Yes, sure. My first question is about the cloud business model. You mentioned about your (inaudible) and large paying customer base. I just wonder if you can give us some update on the service provider you are working with. And also, (inaudible) with those service providers. I'd just like (inaudible) with the [new commerce mentioned].

And secondly, it's about your UCWeb. You mentioned about the strong monetization of the UCWeb users. Could you elaborate the [revenue orders] of the UCWeb at the moment. Is the revenue mainly from the [news feed] or other type of revenue streams?

Thank you.

Okay. For the first question, cloud business revenue engine, I think there are basically two engines for the cloud revenue model.

First is obviously the paying -- number of paying customers. And because cloud is such a pervasive and fundamental infrastructure to the new commerce, and I would believe today, and even though we have very rapid growth in the user base, in the client base, and this quarter reached over [251,000], so we think we have a lot room to grow.

And it can cover wide range of the business starting from the [penal] enterprise, government agencies, to developers and to third-party business.

And the second one, I think even more important is that we try to deliver first an in-house developed service and its tools to our client on the cloud. For example, we successfully convert our middleware services which we get a very strong expertise from our e-commerce business. Actually, we converted middleware service from an in-house service to a third-party service to our client on the cloud, and we also leverage our expertise in the security service, and now security service is one of the main services in our cloud business.

And looking ahead, we will continue to develop more services and to put it in our cloud. And on the other hand, we will work with a lot of [ISVs], partners, to power their services on our cloud. And we can -- basically, we can serve our mutual clients more successfully.

And in terms of reaching customers, there's a number of different models of service providers, of sales agents, where they get an agency commission; also resellers where they are basically systems integrators and they buy the service from us and resell to the end customers. So there's a range of different models to reach the customers. We also obviously have the right customers that come to our platform.

There was a question on --

Thank you. And how about UCWeb?

UCWeb monetization.

UCWeb, we talked in our announcement that the growth of the business is very strong. It also shows in the revenue, shows in both revenue and profitability. So at that time we acquired that business, it was a browsing business. Nowadays, if you look at the business, it's been added many new elements, including mobile search and news feeds. They also have a small [gearing] business.

But for mobile search, we talked about it. We already become the number 2 mobile search service provider in China. And they continue to grow very well, although we haven't disclosed the daily search query sector, but these operator metrics showing very encouraging growth trend. And for -- so the monetization on that business is pretty much the same as other mobile search business.

The other new areas that we've developed there, well, it's the news feed. So if you look at when we compare our DAU for that business, it's already become one of the top 3 news feed platforms, or news distribution platforms in China.

So the way we monetize that, there are multiple ways. It could be pay per displays and also pay per (technical difficulty) displays, so pay per -- many ways; click per display, per [impression]. So this is still in early stage but we see good potential to grow.

Another thing worth to mention is the Internet globalization of the UCWeb. They have been into Indonesia, India and a couple of other countries. They already become the number 1 (inaudible) business service provider in Indonesia and India. So we'll later on, once the business get a [spend in], we're going to monetize it substantially on those business growth as well.

Operator, next question, please.

Eric Sheridan, UBS.

First one really on the competitive landscape. Wanted to know if I could get an update on the way you're looking at the competitive landscape as we go into Singles' Day, as we come in and out of the end of the calendar year.

And the follow-up question will be on logistics. Maybe a little bit of discussion on the pace and velocity of the need to invest in logistics medium to long term, and how that improves the platform ecosystem and strengths you're currently sitting with.

Thank you so much.

Okay. First question, I think competition always exists. And actually, as a market leader, what we will always do is to -- we rely on innovation and we rely on meet the customer demand to enhance our market leadership, and we will continue to do so.

And eight years ago, we created November 11, and now we are very happy that November 11 become the shopping festival for the consumer across the world. And we are also very happy to see that a lot of players and online/offline, and they all view November 11 as a shopping festival.

I think this is all good for our mutual customers; but, obviously, when you ask people, and November 11 -- the money share of November 11 belongs to Tmall, belongs to Alibaba.

And for the second question on logistic, I would say actually, as we always do, we continue our partnership model in logistic, and recently, we are very happy to see a couple of out logistic partners, delivery companies, they successfully got listed, which proves again the magic of the ecosystem.

And we not only actually try to serve our customers by ourselves but also leverage the expertise of our partners, and we will continue to do so. And we believe that with the mutual success of our business and our ecosystem, will be more [prospectors].

Eddie Leung, Merrill Lynch.

I have two questions. The first one is about your commission revenue. We have seen a bit of slowdown in the commission revenues in the quarter. Could you comment on that? And is there any one-time factor behind it?

And then secondly about international strategy. Just wondering how you guys decide on the timing and the pace of expanding into a new country, and how that could affect your investment and margins going forward.

Thank you.

Eddie, I'll answer your first question and then Daniel will talk about the second one.

So the commission mainly commission revenue from Tmall marketplace. We see Taobao and Tmall as well integrated marketplace, and our value position has already gone beyond the GMV. So [commission] reflects one thing, but online marketing revenue growth also showing the other values we provided which you can tell, 47% year-on-year growth on online marketing.

So overall, growth for the China retail marketplace is 40% year on year revenue growth.

So to us, it's overall one marketplace providing different values. Eventually, we're going to monetize all of them, not only one thing but also others. So we're satisfied with the overall revenue growth for our China retail marketplace.

In terms of the international strategy, when we look at the opportunities in new markets, we usually consider a couple of factors. First is population. Is there a big enough population?

Second is, are there a mix of population; about young generation and how big is the group of the young generation.

The next one is about the retail landscape and is the retail -- it's sophisticated and achieve (inaudible)?

And the next one is about the mobile penetration. I think mobile for us is critical in developing the business in the new markets.

And having said that, globalization is a long journey, and we have a great vision. We have a great vision to serve 2 billion consumers in next 20 years, and we are now just at the beginning stage. And we will continue to invest in the international business as we just did in the data. And so far, we are very happy about the integration process; and we are very happy to see the business growing very rapidly after our investment. And we will continue to look at other opportunities in other markets.

Scott Devitt, Stifel.

Google and Facebook have used a combination of price and volume to drive effective monetization in a very long duration of high rates of revenue growth. And you've done a very good job of articulating the opportunity, more similar to them than being tied directly to transactions over time.

So be interested in your view in how investors should think about some of the benefits to monetization annualizing here in the coming year versus having a very long runway to drive monetization similar to those companies.

And then secondly on cloud, if you could maybe breakdown, or help us understand better the customer makeup, SMB, mid-market enterprise, and how you see that changing over time as the capabilities of that platform get stronger and stronger.

Thank you.

Scott, I'll try to answer your first question.

I think it's -- when you look at a marketplace where a big part of the monetization relates to online marketing services, performance-based marketing, you have to look at the nature of the marketplace.

I think we have a superior marketplace in that there's really no church and state when it comes to content and ads because when the user comes to our marketplace, they have very high commercial intent. And so when you look at an ad listing versus a, quote-unquote, organic listing in our marketplace, it's basically the same thing. It is basically an item that a merchant has put up for sale that they want to sell.

So that has implications for ad load, for example. In a Google or Facebook context, ad loads are quite limited because if they start to load in a lot of ads, then that really affects the user experience so they have to be very careful about it.

Now we philosophically are very careful about layering an ad load, and as you have referred to, last year we had an ad load increase by increasing one [slot] in our PepoP advertising, and now we've seen the full effect going forward. And that Maggie referred to as the anniversarying of that effect making year-on-year comp a little bit tougher.

But let me just say this. For those users -- for those of you who actually use our app and our user interface, there's actually not a lot of ads. So we're still being very, very conservative when it comes to ad load. And obviously, that is a -- that has implications to the volume question.

The other driver of volume which is clicks is technology. If your recommendations for the ads are more relevant to the user, then the click-through rates can increase and you get more clicks. So with our ability to basically personalize every single user interface, so every person, every consumer coming to the platform can see different products and different recommendations, that drastically increases our ability to generate relevant clicks and drive performance on our online margin platform. So that's another driver to the volume question.

As Maggie has referred to before in her script, I think this quarter mainly we are getting the revenue increases in online marketing from the volume side of things. In other words, clicks and click-throughs, increasing click-throughs as opposed to price increase of the ads.

So I hope that answers your question.

Right. But in terms of cloud customer base, if we reported 651,000 paying customers at the end of this quarter, which doubled the same period as last year's, and we still see great potential for this paying customer base growth, and our next milestone goal is going to be 1 million.

And then when you look into the customer base, it actually shows a great variety. It's not only the Internet startups, but also financial institutions; also healthcare, public transportation, energy, manufacturing, and government agencies.

And if you look at ownership of this business, it varies from private companies, listing companies, state owned, and our major customer base, although is SMB, we do see the big guys coming to us with some leads; and more and more companies like [SANOPAC], a state-owned enterprise, are coming to us.

So there is one data point. We've seen that over 50% of the unicorn companies in China are paying for AliCloud services. So these are the companies that grow really fast and get to a certain size in a very short period of time. They are -- more than one-half of them are using AliCloud services, which is very encouraging.

Thank you.

Operator, last question, please.

Alex Yao, JPMorgan.

The first question is on the China retail marketplace. We understand that you guys have started disclosing the quarterly GMV starting from this quarter. Can you qualitatively give us some color on what's driving the 40% revenue growth for this segment? Is it more on GMV or take rate?

And then also can you share more insight in terms of how sustainable is the take-rate improvement trend, particularly with the higher revenue base comp into the next couple of quarters?

And then secondly, you guys talked about Tmall is playing an increasingly important role in large brands (inaudible) in channel expansion and new product launches in the prepared remarks. Can you help us understand the commerciality of those ready for [addition] from a monetization standpoint?

Thank you.

Yes. For the first GMV question, yes, we will report GMV on annual basis. And the GMV so far looks good and growth is on track.

And for the second question about the growth of the big brands --

On Tmall.

On Tmall. I would say actually today, all the brand companies, they are in the process of transforming to a digital operation, and what they have done is that they decided to switch their marketing data budget from traditional media to digital media.

So that gives us a very good prospect to help them to spend their dollar, marketing dollar smartly. And via our [unified ID], and via our [synergy splitting] the retail marketplace and the digital media platform, we can successfully help our brand partners, which either -- which both our merchants, our retail platform and advertiser, on either retail or the digital media platform, to manage the customers effectively and in a digital way.

So this actually we believe had great potential, and so far, we have a lot of very great examples and successful stories. And we will continue to roll this out to many more clients to help them to do this digital transformation.

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

Thank you.

Thank you.