阿里巴巴 (BABA) 2017 Q3 法說會逐字稿

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

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

Good day, everyone, and welcome to Alibaba Group's December quarter 2016 earnings 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 on 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. 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, segment 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 on GAAP and non-GAAP measures can be found in our earnings press release.

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

Thanks, Rob. Thank you all for joining us. With 54% year-on-year revenue growth and $4.9 billion in free cash flow, our numbers speak for themselves. As Maggie will go through with you, we're increasing our revenue growth guidance for the full fiscal year from 48% to 53%. To put this in perspective, FY16 revenues grew by 33% versus the prior year. This means our revenue growth in FY17 is expected to accelerate by 20 percentage point to 53%.

Let me provide a qualitative perspective on our organic value creation, which is allowing us to accelerate growth on an ever bigger base. There are two primary reasons.

First, as we have said, our marketplaces are much more than distribution channels for brands and merchants. As we transform to a high value marketing platform, we are increasingly capturing more merchant spend on both distribution and marketing services. The shift to mobile has also created new ways to engage with users, which generates significant additional value, not only on the existing platforms, but also new opportunities by integrating mobile Internet with physical retail outlets.

Second, Alibaba is a data Company. We leverage data to better engage consumers, personalize their experiences and create value for brands and merchants doing business on our platform. Few companies have the rich dataset we have because of the diversity of our businesses. Moreover, we benefit from synergies between business units because of common data structures.

For example, our core commerce and digital media and entertainment units work together to leverage comprehensive consumer profiles to deliver a differentiated experience for our users and enhance customer loyalty. Higher personalization of content and more engaged users translate into incremental monetizable value to producers of goods, services and content who wish to access these users within our ecosystem.

I also think our mentality plays a role. We're constantly looking for the next technology breakthroughs that could disrupt our business, and we embrace them rather than shy away from them. Our mindset is constantly paranoid, which we believe is the hallmark of a great technology company.

Now, I would like to turn it over to Daniel. Thank you.

Thanks, Joe. Hello, everyone, and thank you for joining our earnings call today. We enjoyed another quarter of robust growth. This is the result of our focus on long-term, forward-looking strategies, combined with strong execution capability. Our results also demonstrate the continuing prosperity and expansion of the Alibaba ecosystem.

Our core commerce business continues to maintain substantial growth, with the total revenue increasing 45% year over year. Sophisticated personalization, based on our data analytics, as well as content-driven and interactive social engagement, have strengthened user acquisition and the stickiness on our China retail marketplaces. Mobile MAUs this quarter grew by 43 million to reach a total of 493 million.

Our cloud business made significant gains in customers and market penetration. The cloud computing unit added 114,000 paying customers during the quarter, to a total of 765,000 customers. At the same time, we expanded our global footprint by launching datacenters internationally, following our Chinese customers to new markets as well as acquiring new customers outside China.

Our digital media and entertainment business, the strategic big picture is taking shape as we integrate Youku and other investments in film, music, and sports. We are excited by the possibilities of an integrated approach between entertainment and commerce as we enhance customers' experiences and loyalty through offering that making shopping fun and entertainment affordable.

This past quarter we hosted the world's biggest shopping day, the November 11 Global Shopping Festival where, for the eighth year in a row, we continued our tradition of delivering new highs. Behind the $17.4 billion of GMV is a massive mobilization of infrastructure and resources across our ecosystem, with our network of partners working together in a highly collaborative fashion to provide consumers around the world a highly unique shopping experience.

Double 11 showcased the extraordinary competitive advantage of our platform model, as well as important emerging trends in the digital economy which I will highlight below.

First, entertainment and interactive engagement are part of the consumer commerce experience. During November 11, we saw plenty of examples of interactive features and entertainment contents in driving user engagement and ultimate spurring purchases. Programs such as Tmall collections fashion show, live streaming, interactive AR, and location-based games, and the Countdown Gala, in aggregate provided approximately 20 billion consumer interactive engagements with one another and with our platform.

Consumers discovered that through our innovative products and technology, the mobile interface is not just a digital shelf for inventory, but rather an access point to a fun and entertaining shopping experience. Through this, we are seeing new ways in which this generation of young consumers making their buying decisions.

Second, data-driven personalization is an immense competitive advantage. Drawing on our tremendous volume of consumer data, we are providing each user with a highly personalized shopping environment and product recommendations. Meanwhile, availability of customer data enables merchants to implement the customization backend tools to manage their store fronts to effectively segment their customers and display more relevant products on an individualized basis. During November 11, more than 400,000 merchants employed our technology to customize their store display for different consumer demographics.

Third, the combination of China's emerging middle class and enabling technologies are making the world smaller. The demand for high quality imported products for Chinese consumers has accelerated, with ongoing evolution in consumer taste and lifestyle, what has made this consumption-driven growth possible in years of real wage increases and a high level of savings in recent years. During this double 11, more than 47 million consumers on our platform bought goods from close to 15,000 international brands.

Looking ahead, as we enter a new year, I want to share with you my observations about changes in the retail sector as well as outlook on our cloud and digital media and entertainment business. We have coined the term New Retail to describe a world where the distinction between online and offline commerce becomes obsolete. This is possible because of Internet user behavior is changing from desktop computers to mobile.

New Retail will result in new value creation from the integration of traditional retail with mobile Internet innovation. Relationships among the consumer, merchandize and retail space will be restructured to offer a better value proposition to consumers, as well as enhanced operating efficiencies for merchants. This is a trend that will be inevitable and we will turn theory into action along these lines.

Recently, we completed an investment in the regional supermarket chain, Ningbo Sanjiang, and make an offer to acquire the department store group, Intime Retail. Both transactions are highly strategic in purpose, and we look forward to updating you in the future regarding our execution of the New Retail strategy.

Our cloud business is in a unique position to leverage the foundation of technology developed for our e-commerce platforms to serve new non-e-commerce clients. These sophisticated proprietary technologies include security middleware and content delivery network. We are also optimizing the enormous server capacity created for e-commerce and to serve third-party clients through a load-balancing system.

We will continue to grow our cloud ecosystem by working closely with independent software vendors, developers, and other technology and service providers in our [IaaS] and PaaS layers. Looking forward, we will continue to invest in our cloud business to enhance market leadership and scale.

We will continue to invest in our digital media and entertainment business. We believe digital content will make up an increasingly large proportion of total consumption volume by young consumers. Enabling hundreds of millions of consumers to simultaneously shop on our commerce platforms, and consume digital content on our digital media and entertainment platforms, enhances both our user value proposition and user stickiness.

Through the support of big data, our e-commerce merchants will be able to target and engage consumers seamlessly across our digital media and entertainment platforms and vice versa, resulting in the perfect unification of brand-building, marketing and sales.

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 set of excellent results this quarter. Total revenue grew 54% year on year to RMB53.2 billion, with revenue from the core commerce segment growing 45% year over year. Our core commerce segment EBITA margin was 64%.

Mobile contribution continued to climb, reaching 80% of total China commerce retail revenue as we added 43 million mobile MAUs to total of 493 million MAUs in December. Cloud computing revenue grew 115% year over year and the segment adjusted EBITA margin was negative 5%.

This quarter we generated $4.9 billion in free cash flow on non-GAAP basis. Total revenue grew 54% year on year, mainly driven by the robust revenue growth of our China commerce retail businesses, AliCloud, as well as the consolidation of newly acquired businesses, mainly Youku Tudou and Lazada.

The biggest component of the core commerce segment is the China commerce retail business. Its revenue growth was primarily driven by online marketing service revenue, which increased to 47% year over year. And China commerce retail also recorded accelerating commission revenue growth of 32% year over year, which is mainly driven by strong Tmall GMV growth.

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 $35 in December quarter. On the mobile front, mobile revenue per mobile user has also been increasing for several quarters, reaching $24 in December quarter. Our mobile commerce platform has become the destiny for social commerce and brand engagement. We have accumulated a wealth of user behaviors, beyond conducting transactions, and demonstrated the substantial marketing value of the platform to brands and merchants.

Quarterly cost trends. Cost of revenue, excluding stock-based compensation, was RMB18.5 billion. As a percentage of revenue, it increased year over year, primarily due to an increase in content acquisition costs of Youku Tudou, costs of inventory of Lazada, and the logistic cost associated with Tmall supermarket.

Other cost items, excluding SBC, as a percentage of revenue all decreased slightly year over year, including product development, sales and marketing expense, and G&A. The percentage of revenue decreases reflect operating leverage in the seasonally strong quarter and solid revenue growth.

Non-GAAP net income in the quarter was RMB22.5 billion, an increase of 36% year over year.

Free cash flow, capital expenditures and cash. We continue to generate significant free cash flow. In the December quarter, we generated RMB34 billion, or about $4.9 billion, in free cash flow. Our cash flow allows us strategic and operational flexibility to invest in technology and acquired resources to accomplish our strategic objectives.

Total capital expenditures in December quarter were RMB7.3 billion, in which RMB4.1 billion is related from the acquisition of land use right and construction in progress. This is mainly our campus in the cities other than Hangzhou.

As of December 31, 2016, our cash, cash equivalents and short-term investments were RMB138.5 billion, or $20 billion. This is an increase of RMB31 billion from the end of September quarter, primarily because of free cash flow generation from our operations.

Segment reporting. Core commerce revenue increased 45% year over year. China commerce retail revenue grew 42%, primarily due to strong growth of 47% year over year in online marketing services revenue. The growth of online marketing service revenue was driven by increases in volume of clicks from strong traffic growth and better click-through rate. This is a reflection of our ability to deliver more relevant content to consumers through our improved data technology. This growth resulted in higher average spend in our online marketing services by increasing number of brands and merchants.

Commission revenue, representing 30% of our China commerce retail revenue in the quarter, grew by 32% year over year, reflecting strong Tmall GMV growth.

International commerce retail revenue increased 288% year over year, mainly due to the consolidation of Lazada starting in mid April and the reacceleration of the revenue growth from AliExpress. The adjusted EBITA margin of the segment was 64% this quarter, a slight decline from the same quarter last year. As communicated earlier, this is primarily due to the consolidation of Lazada and our investment in Tmall supermarket.

Mobile MAU growth was, again, very robust this quarter. Our China retail marketplaces added 43 million MAUs. We are encouraged by the level of user growth, as well as engagement on our mobile platforms, as our marketplaces have become the destination for social commerce and brand engagement.

The average annual spend per active buyer for 12 months ended December continued to increase both year over year and quarter over quarter. Our consumers purchased more and more frequently across more categories on our platforms.

Cloud computing revenue grew 115% year on year. The growth was primarily due to an increase in the number of paying customers, which have doubled since the year ago quarter to 765,000. And also to an increase in the usage of more complex offerings. We announced a number of price cuts of our core computing products during the quarter, actually at the beginning of the quarter, that had some impact to the top-line growth. But overall, the top line is still growing strongly.

We're committed to pass to our customers the benefits from cost saving achieved through improved technology and scale, our cloud computing paying customers across a variety of industries, and our businesses ranging from start-ups to larger corps. Cloud revenue from AGH related parties only contributed a single digit percentage of total cloud computing revenue.

Adjusted EBITA margin of the cloud computing segment significantly improved from negative 41% in the prior year's quarter to 95% this quarter. Our cloud computing business's top priority remains expanding market leadership. We will continue to invest in customers through more cost-efficient effective solutions for standard products, as well as developing and deploying more sophisticated value-added products and services.

Digital media and entertainment. Digital media and entertainment segment revenue increased 273% year over year, primarily due to the full effect of consolidating Youku and also to an increase in revenue from mobile value-added services provided by UCWeb.

Adjusted EBITA margin of this segment was negative 60%, primarily due to aggressive content acquisition and the development costs of Youku, partially offset by improvement in UCWeb's margin. We will continue to invest in content, user acquisition and infrastructure for the segment. Going forward, on full-year basis, we expect the segment revenue would continue to fast grow, and we expect the negative EBITA margin for digital media and entertainment segment to narrow.

Innovation initiatives and others. Revenue from innovation initiatives and other segment increased 61% year over year. Adjusted EBITA margin of this segment was negative 93%, reflecting our continued investment in AutoNavi, YunOS and DingTalk.

As said earlier, our different businesses are in different development stages. The core commerce segment has delivered another quarter of strong revenue growth with a strong EBITA margin. The substantial profits and free cash flow generated from the core commerce segment has been, and will be, reinvested back into new growth drivers such as cloud computing, digital media entertainment and new businesses of the core commerce segment.

Our cloud computing business will continue to focus on talent technology investment to further strengthen our leading industry position in China. Our digital media entertainment business will continue to invest in a combination of licensed premium content and original programs to drive user growth and increase market share. So overall, we will continue to make investment in these strategic businesses and the investments may, from time to time, outpace operating leverage.

Guidance change. With revenue coming in ahead of expectations in the first three quarters of the fiscal year, and a good revenue visibility of the March quarter, we are adjusting up our full fiscal year revenue guidance from 48% to 53% growth year over year.

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

(Operator Instructions). Alan Hellawell, Deutsche Bank.

Tremendous results and congratulations. It looks as though core e-commerce is clearly going from strength to strength; I was just interested in the media and entertainment arm. Maggie, you just mentioned expectations that negative margins might narrow, I think, going through the end of the fiscal year. Does that speak more to accelerating revenue growth or moderating increases in content pricing?

And also, if you don't mind, do we think that that margin trend will continue throughout calendar year 2017? Thank you.

Alan, yes, I said just now that we expect the revenue for digital media and entertainment segment will continue to grow fast and we do expect the negative EBITA margin will narrow for the following years on a full-year basis. Of course, there is some seasonality, there are some [flashes] quarter by quarter, so we're talking about the full-year comparison.

So the reason we have that expectation, one thing is that we do expect after integration of that sector, especially Youku, we're going to see some synergy and we're going to see the powerful growth of that sector. So the revenue of that sector will continue its fast growth; that's reason one.

At the same time, we're going to continue invest in the content and other user applications, technology infrastructure, so investment won't be held back. So we still see great potential as well as seeing investment to grow.

Fantastic. Sorry, and my second question is, we've often given some very useful insights on the marketing services side around the interplay between paid clicks and CPC. Can you just give us an update? And forgive me, maybe you've mentioned this in the prepared remarks, if we think about the growth in marketing services revenues, to what extent was it paid clicks and what might have CPC inflation been? Thank you very much.

Sure. Alan, the increase in the online marketing revenue, if we look at the reasons, from the technical point of view, it's due to the increase in the number of clicks and also higher conversion. But there is another angle to look at it, which is the strategic angle that we have more users spend more time and more merchants with higher spending on our platform. This is what we see the power of the data technology we have been talking and working on that start to deliver results.

So when you look at the direct driver, a number of merchants and average spending of the merchants are growing. From the consumer side, number of the clicks, which is it the traffic and the conversions are growing.

Okay. Thanks so much.

Eddie Leung, Merrill Lynch.

Many congratulations on a very strong quarter. As regarding to 2017, could you talk about your main objectives for this year? What are some of the things that you would like to achieve in 2017?

And then, separately, could you also give us an update on your product mix? I understand that you won't disclose GMV any more, but just I want to get a sense on some of the faster-growing product categories and some of the underlying trends. Thank you.

This is Daniel; I will try to answer your first question. Yes, actually, 2017 is coming. I would say in this new year, we will continue to execute our strategy and we have three very clear strategies. First is globalization; second is rural China; third one is cloud computing and big data. I think the strategies are very clear as they actually give us a very clear guidance for the future growth. So we'll continue to execute, and we have already demonstrated excellent execution capability and will continue to do so.

And also, actually, I think this in the coming year, we also will try our best to realize the synergy of the investments we made and the new business we invested. For example, in cloud computing, as I said in my remarks, we want to generate enough synergy from technologies and infrastructures and the capacities we build up and in e-commerce and leverage in the cloud computing. And in digital entertainment, what we want to build up is to leverage the user base we have in e-commerce platform and to convert to the digital content consumers in digital marketing platform.

Also, from the merchant perspective, now today, all the merchants want to spend marketing dollars smartly and cross platforms. So our digital media and entertainment platform, we'll leverage the big data, consumer data we have and to provide the big data solutions, marketing solutions, to help them to build brand, to engage customer and to mix sales in one total solution.

Regarding to your second question [even], first of all, I want to clarify that it's not correct to say that we stopped reporting GMV. We actually will continue to report GMV on an annual basis. The only reason that we don't report on a quarterly basis is that our value creations already go beyond GMV in transaction and we don't manage on quarterly basis.

And then to come back to your question on the product mix going forward, obviously, the four business segments we have, the new business initiatives like cloud computing, digital media entertainment, will grow fast. Cloud computing shows much faster growth than the core business. So these businesses demonstrate an increasing importance in terms of their contribution to total revenue, but our core business is going to still show strong growth.

And within the e-commerce segment, the product mix, the big product categories of soft goods, apparel, electronics, FMCG, those categories the mix have not changed, over time.

Got that. Thank you very much.

[Alicia Yap, Citigroup].

My first question is related to your approach on Koubei. So with the latest rounds of the equity financing, and the industry landscape getting more settled, will Koubei become more aggressive in gaining market share, given the competition's scaling back a little bit? Any update on that strategy will be appreciated. And I have a second question. Thanks.

Yes, actually, Koubei is our joint venture with Ant Finance and we are very, very happy to see they made very good progress in the business expansion, in terms of payment volume and the value created for the offline retailers and restaurants. Today, I think they are in a very good position and getting access to the offline merchants by payments for the service. But looking ahead, I would say, actually, by the big data we will have and data shared between AGH and Ant Finance, I think Koubei can leverage that data we have to create a lot of marketing services and value-added services to the offline merchants. I think that will give more value to the merchants.

Okay. My second question is actually related to your China retail's revenue growth. If we remember correctly, I think management did highlight, during the last earnings call, that given the [large softer ad-load] benefit, we will start to see some tough comp in December quarter. But yet, today you reported a very strong growth in marketing service revenue. Obviously, that's reflecting the merchants and brands recognitions and also the increased clicks and all that, and also the strong seasonality.

So just wanted to get a sense, was there still any benefit from the ad-load and how should we look at this marketing line for the March quarter and also FY18? It does look like our monetization ability could actually be sustained at a very strong growth. Thank you.

Okay. First of all, we are very happy to see the strong growth of the marketing service revenue in this quarter and actually, this quarter we have not added any ad-loads in this quarter. The main driver of the strong growth is from two things. First is from the growth in the traffic which actually, you can see from the net adds of the mobile MAU this quarter, and also, people spend more time on our mobile app because of the interactive engagement.

And the second driver of the revenue growth is from the technical improvement which drives higher the fixed rate. So I think these two are the main drivers of the marketing service revenue growth. I think this is also very good for the future.

Okay, great. Thank you.

Ken Sena, Evercore ISI.

Just on the video content spend in digital media and entertainment, can you maybe just walk us through how you're thinking about the ramp there? And also anything you could say on your approach to amortization as far as how we might want to think about phasing this more into our models as this steps up?

And then maybe also just on the New Retail comments, can you speak to maybe how Intime fits into that? Also, you mentioned the RMB2.8 billion in maximum cash, just how that's been determined and over what period? Thank you.

This is Daniel; I will try to answer the New Retail question first. Actually, we elaborate our New Retail strategies very clearly. We strongly believe that online/offline will be highly integrated and will create a brand new user experience in the future. So as part of our efforts to execute the New Retail strategy, we are now in the process of -- we are making an offer to acquire [Intime]. And the purpose of the acquisition is to make a full-scale test of the online/offline New Retail format.

We strongly believe that the value creation and user experience will form a redefinition of the retail format. And this will reposition the people, the merchandisers and the retail space. I think this will create a lot of new experience.

But over the past two years, we have done a lot of exercise to prepare the technology infrastructure. For example, today to make a [technology] we can support the sharing of inventory online/offline, and we can help the merchants to connect their on and offline loyalty membership program. And we also can connect the online/offline service and make online purchase enjoy the offline service, vice versa.

So I think that's very important, but basic preparation for omnichannel for the further integration. But having said that, to create a new experience, it's all about restructuring the elements of the retail outlets. And that's why we want to privatize [Intime] and to do a full scale test.

Right. Regard to your first question on the investment in content, we will continue to invest in a combination of licensed premium content, and also regional programs, to drive the user growth and increase the market share for our digital media entertainment business.

And talk about amortization schedule, we charge it to P&L when the content gets broadcasted. Normally, it's within [a year's] time.

Okay. And then, just any color on the maximum cash output for Intime, as far as how that's been determined or over what period?

You're referring to the $2.6 billion we have announced in terms of the cash outlay. That is just our share of the acquisition price to take control of the company. So basically, that cash is going to the existing shareholders of Intime, for us to acquire the company.

Got it. Thank you.

Ming Zhao, 86Research.

I have two questions. The first question is, can you elaborate a little bit more about your new retail strategy and the potential financial impact in your revenue and margin? So acquisition of Intime seems to indicate that you buy more offline retailers. Is that correct, because online, you are a 3P platform, but offline, you're doing 1P direct retail? So we want to get more color about that strategy.

And the second one is, can you comment on the margin outlook for the cloud computing business? You have cut some prices in the fourth quarter. It seems like the break-even time is delayed a little bit, so any color would be helpful. Thank you.

Thanks, Ming. This is Daniel; I answer your first question. I have to say that, actually, we operate online business using a platform model. But actually, today, take Intime as an example, this is also a platform, but offline shopping mall platform. And when you look at the merchants, the clients we have in each of our platforms, actually, they are largely overlapped right now. So this makes it possible for us to do this on and offline integration, because we have some merchant base, and we have some brand connections. So that's the first point.

The second point is that, actually, today, when we look at the growth of the retail business, online retail business, we strongly believe that our job is to empower the offline retailer to upgrade, to make the total $4.8 trillion addressable retail market to be digital. So that's our mission.

So actually, we believe this will give us a very big space to grow our current GMV from current stage to a higher stage. And we believe that, as a data company, our consumer data, our technology, can empower the offline retailers to experience a successful digital transformation.

Right. Ming, talking about the financial impact from Intime, particularly, Intime is a profit-making business, so it adds up to the top line, bottom line. There might be a slight drag down on the margins, but not significant at all, if you look at overall business.

So to answer your second question about the cloud profitability, we do see great potential in this cloud area, and we are very confident that, with the data, with the technology and the team we have, we're going to quickly extend our market leadership and extend the customer base. So profitability is not our priority, although it's not a very difficult thing, or seeing the profitability will not be in the very far future.

Thank you very much.

[Erica Werkun, UBS].

Congratulations for the strong quarter. This is Ming Xu asking on behalf of Erica. I have two questions. The first is on the active buyer growth and engagement. The China retail revenue grow by 42% in this quarter, on the back of 9% year-on-year growth of buyers. Just want to maybe understand more on this side, so what do you see as maybe the ceiling for, or the next step for user growth?

And also, on engagement side, I remember in previous quarters, you mentioned that every user opened the app seven times a day and spent around 20 minutes on the app. So is it possible for you to maybe give us an update on the quantitative measures of the user engagement? And I have a follow-up. Thanks.

Sure, Ming. To your first question on the active buyer growth, it will continue growth, definitely, [what we see as a cap]. I think we should be able to expect to see active buyer base definitely over 500 million, maybe 600 million. At this stage, we're very happy to see that active buyers shows increasing engagement and higher spending level. So that is the qualitative buyer and the activeness, and the spending power of the buyer getting from that buyer base.

In terms of the user engagement, you can see that this quarter we had 43 million mobile MAU. And with such a rapid growth of MAU, what I can share with you is that the time people spend on mobile app has not diluted. I think that is a very good trend and that proves our product experience and [stickiness] in our mobile app.

Thanks, Maggie and Daniel. My second question on the content cost of the media entertainment business, I think you recently mentioned that you will spend around [RMB50 billion] in the next three years on content. Could you maybe elaborate more on the pacing of the spending? Also maybe the rough split between different kind of spending, particularly on the online video side, which I think is particularly competitive, given the landscape. Thanks.

Okay. RMB50 billion commitment actually demonstrate our strong commitments to the digital entertainment business. I would say in this very fast-changing industry landscape and very intense competition, I would say actually we still believe content is the key to acquire customers and keep customers stay with us. Obviously, we have to develop our content-generation strategies very smartly.

First of all, I think we still have to invest in the [greatest] hits, in the hot hits, in the great hits. Great hits is very important to acquire, and especially to acquire a big group of fans. In the past few months, actually the great hits of like (inaudible) also all proves that. We will continue to make good judgment and make good investment in great hits.

Secondly, we are going to develop our self-produced ecosystem, together with the internal studio and the contracted studios, and to create self-produced good contents, and this is unique to the customers on our platform.

The last one is build up a ecosystem and create a lot of [UPGC] contents. This contents will give us a solid base of the selection of the contents, and it can give people very different experiences.

One clarification to make, Ming, is that when our media entertainment group talk about RMB50 billion investment over the next few years, content investment is a major component, but it's not only about content but also about user acquisition and also investing in infrastructures.

Great. Thanks, Daniel and Maggie.

Evan Zhou, Credit Suisse.

Congratulation on a strong set of quarters and happy early Chinese New Year. For questions regarding -- quick follow-ups on media entertainment as well, I was wondering if we can talk about the pay subscriptions progress within Youku. I think Youku have a decent set of pay subscription members and there has been some news around, like a lack of disclosure of a decent [number]. Also I think our competitors have been very vocal about that as well. I was wondering if you can provide an update on that.

How do we compare the [new] economics of pay subscription monetization model versus the traditional [IaaS] model [down the road]? Is this a main reason why we're seeing the profitability for media segment is actually getting better rather than getting worse in the coming quarters? That's my first question; I have [follow-up].

Subscription model is very important in digital entertainment business. Actually, when we look at our opportunity, we will see definitely our potentials to convert our hundreds of millions of consumers in our e-commerce platform to be the subscriber, to be the users, loyalty customers in the digital platform. That is the synergies we can see in Alibaba Group.

Actually, we are very happy to see we have made some progress in this respect. And in the past November 11, digital media business work closely with Tmall and with e-commerce to develop the pay customers. For example, we give the loyalty buyers in November 11 some award to test the membership program in Youku. We received very good feedback, and we see a very good retention rate after the experiment, after the testing period is over. So we will continue to do so, to convert our existing buyers group in e-commerce to digital business.

Okay. Thanks, Daniel. Second question is regarding the recently announced Olympic spending. I was wondering if you can share some thoughts around how we could leverage that influential power to our globalization initiatives. Also, is that categorized into our branding or marketing dollar spend budget or into the more broadly speaking kind of content spending budget? Thank you.

Evan, can you repeat the question? It got cut off on which component of the content [you're referring to].

Sorry. The question is regarding the recently announced Olympic sponsorship. I was wondering how it can resonate with our globalization strategy, when it comes to implementation in the following quarters or the next eight years. Also in terms of the announced amount, should that fall into the category of our branding or marketing dollar OpEx, or related to the broadly defined content-related spending pool? Thank you.

We are very happy and very honored to be partner of IOC and to sponsor the Olympic Games for the next 12 years. As we announced, our sponsorship will cover two categories: first is e-commerce platform service; second is cloud computing services. We believe that Alibaba can bring a lot of innovation and technology to empower IOC to have a successful digital transformation. But, of course, being a partner of the Olympic Games, this also can greatly promote Alibaba as a global brand in the global stage.

Actually, over the collaborations with IOC, there is one business related to digital entertainment which is Olympic channel. And we are authorized to operate Olympic channel for Chinese audience, on top of the e-commerce merchandise business and the cloud computing service to IOC. And people can easily understand that Olympic Games has a lot of very precious, very valuable digital content in the previous years. And we are very happy to consolidate and to operate these contents and to make it available to Chinese people, and to make more Chinese young generations to be Olympic fans.

On your question of what category would the sponsorship fit into in terms of potentially our costs, one thing I wanted to say is that none of the so-called reported numbers are accurate. When you look at it, the sponsorship has a cash component but also has a barter component when it comes to us providing cloud computing services to the IOC and also all of their programs. So in reality, as we assess a 12-year deal with the potential cash cost spread over that period, we find the deal quite attractive to us and quite reasonable.

Got it. Thanks Joe, thanks Daniel, for the call.

Piyush Mubayi, Goldman Sachs.

Looking at the tremendous growth in online marketing spend, I wonder if you could talk through what percentage of marketing spend by merchants is on marketing technology, as well as where you think this figure could go to. That's my first question.

When you look at our marketing services today and the value we provide to our merchants, our advertisers, it's different to what it was several years ago. And day one, when we developed marketing service, it's more for the merchants to promote their goods on a platform to making media sales. But today, what we build up, along with our development of our mobile commerce platform as a consumer engagement platform and consumer community, the merchants discover that this is a good place, not only to do the trade marketing, to making media sales, but also very good to do the consumer engagement and even brand building, which can address why people tend to spend more dollars on the platform.

I'm always actually asked by people how to look at the P&L of the merchants on our platform, and what's the ceiling of the marketing services. Marketing service as a percentage of revenue, is it too high? But today, actually, our sales story is not like that. We cannot just compare the marketing dollar spend on our platform with the GMV generated by this platform. But instead, we have to look at this marketing dollar spend on our platform, how to benefit of the entire business. We have to look at the entire revenue of the client, online/offline, so that's the measurement we look at.

In this regard, we believe that there are very big space in the future, especially when we fully integrate our digital media platform with the e-commerce platform, and we can see great potential.

Thank you, Daniel. And my second question is on cloud. After quarter after quarter of growth, as well as an extension of your own services and offerings and finally global branding, what's your updated thinking around the TAM for this segment?

Well, Piyush, I think we have said on a couple of conference calls before that we think the TAM is measured -- the way -- there's not a lot of third-party reliable reports because cloud computing is such a nascent industry in China. But total IT spend in China is $200 billion a year and if you assume, let's say, a 20% penetration of the traditional IT spend and moving that spend onto the cloud, that is a $40 billion number.

And then we have talked about previously that, to attract people to the cloud, you obviously have to provide a more affordable option than the traditional spend, so take a 25% discount off of that $40 billion number, we get to a TAM of $30 billion. That's the math that we have given you before, and we have not changed that thinking at this point. We feel very positive about the potential growth of the entire cloud computing sector in China.

Joe, that's just the China market, right?

Correct.

Okay. Thank you very much.

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