京東 (JD) 2017 Q2 法說會逐字稿

Hello, and thank you for standing by for JD.com Second Quarter 2017 Earnings Conference Call (Operator Instructions) Today's conference is being recorded.

If you have any objections, you may disconnect at this time.

I would now like to hand the meeting over to your host for today's conference, Ruiyu Li.

Thank you, operator, and welcome to our second quarter 2017 earnings call.

Joining me today on the call are Richard Liu, CEO; and Sidney Huang, our CFO.

For today's agenda, Mr. Huang will discuss highlights for the second quarter 2017.

Following the prepared remarks, Mr. Liu and Mr. Huang will answer your questions.

Before we continue, I refer you to our safe harbor statement in the earnings press release, which applies to this call, as we will make forward-looking statements.

Also, this call including discussions for certain non-GAAP financial measures.

Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures.

Finally, please note that unless otherwise stated, all the figures mentioned during this conference call are in RMB.

Now I would like to turn the call over to our CFO, Sidney.

Thank you, Li.

Hello, everyone.

Thank you for joining us today.

We are reporting another quarter of strong top line growth, solid profitability and remarkable free cash flow.

Before I get into the financial highlights, let me first give you a quick update on JD Finance.

We are pleased to announce the deconsolidation of JD Finance as the result of the legal ownership transfer of the business on June 30, 2017.

All of our financial metrics in the earnings release have been revised to exclude the P&L impact of JD Finance, which is now reflected in a single line item for the discontinued operations.

The financial highlights that I'm about to discuss are results from continuing operations, unless otherwise noted.

As this is also the first quarter of the adjustments, I will also highlight a few metrics assuming JD Finance is still consolidated, so you can have an apples-to-apples comparison.

During the second quarter 2017, our net revenue from continuing operations grew 43.6%, well above the 33% to 37% company guidance, excluding JD Finance.

This represents an accelerated growth rate from both our Q1 and 2016 Q2 year-over-year growth rates.

If we add back the impact from JD Finance, our revenue would have grown 45%.

This strong growth was achieved through our highly successful June 18 anniversary sales season, supported by robust growth momentum across our full category retail platform.

Our direct sales revenues grew nearly 43% in the second quarter, led by home appliance, food and beverage, cosmetics, home furnishing and baby products.

Our revenues from services and others increased 52% year-over-year, the fastest growth rate in the past 4 quarters, supported by higher advertising and marketplace commission revenues.

If we add back the revenues from JD Finance, our total revenues from services and others would have grown 68%.

Our GMV grew 46% year-over-year in the second quarter.

Growth from JD Mall was 45%, the highest growth rate in GMV over the past 4 quarters.

Food and beverage, home furnishing, cosmetics and baby products were the fastest-growing general merchandise categories, while key accounts from the top apparel and footwear merchants were over 80%.

As disclosed in the earnings release, during the second quarter, we reclassified fulfillment expenses related to third-party logistic services into cost of revenues to better match such costs with the associated revenues.

As a result, both gross margin and the fulfillment expense ratios are retroactively adjusted, and they equally reduced by approximately 0.9% to 1.1% over the past 6 quarters.

Reflecting the effect from JD Finance deconsolidation and the third-party logistic service cost reclassification, non-GAAP gross profit increased 44% in the second quarter, slightly higher than our revenue growth, as we reinvested part of our gross margin back to our consumers during the June 18 sales season.

Non-GAAP gross margin was at 13.4%, up from 13.3% in the second quarter of 2016.

Without the JD Finance spinoff and the logistic service cost reclassification, non-GAAP gross margin would have been over 15% compared to 14.6% in the same quarter last year.

Non-GAAP fulfillment expense ratio was 6.7% in Q2, which improved 26 basis points from 6.9% in the second quarter last year as we continued to benefit from the operating leverage in our established logistics infrastructure, which was partially offset by our new investment in such areas as warehouse capacity for external customers and cold chain logistics network.

Our warehouse space increased over 22% in the past 3 months, from 5.8 million square meters in Q1 to 7.1 million square meters in Q2.

Non-GAAP marketing expense ratio was 4.0% in Q2, higher than the 3.3% in the same quarter last year but in line with the level in the fourth quarter last year when we ran our November 11 sales event with similar promotion intensity.

Our non-GAAP R&D and G&A expense ratios decreased 5 basis points and 12 basis points, respectively, compared to the same quarter last year, which reflect the operating leverage in spite of our heavy investment in logistic technologies and R&D talent.

The non-GAAP operating margin decreased 18 basis points to 0.6% in the second quarter compared to a non-GAAP operating margin of 0.8% in the same quarter last year.

However, if we compare our JD Mall non-GAAP operating margin with Q4 last year, excluding the effect from new businesses, we actually did slightly better in Q2 on the core operating margin.

Our non-GAAP net income from continuing operations attributable to ordinary shareholders was CNY 977 million with an increase of 59% on a year-over-year basis despite our [heavy] investment of this year.

Our free cash flow was exceptionally strong during the quarter, mainly benefiting from our non-GAAP earnings and our ability to improve our working capital on both inventory turnover and the payable turnover base, the latter of which benefited from our end of (inaudible) contract negotiation, which completed and it took effect in the second quarter.

We are pleased to see some solid improvements in the payment terms due to our scale economies, yet our payable days continue to remain meaningfully shorter than our key domestic and international retail peers.

For the trailing 12 month ended June 30, 2017, free cash flow totaled CNY 29 billion or USD 4.3 billion, up 215 -- 214% from the previous trailing 12 month.

Many of you may not realize, but this is roughly USD 3 per ADS.

Although we continued to expect our CapEx to significantly increase in the second half, given the remarkable free cash flow in the first 6 months, we are confident that our free cash flow for the full year 2017 will remain strong, which is at least another key metric, if not the more relevant one, to demonstrate the value of our business model.

I would also like to mention that June 30's cash balance on our balance sheet has not included the majority of the proceeds from JD Finance reorganization as most of the proceeds are deposited in an escrow account as disclosed in the earnings release.

Once we complete the standard safe procedures, the cash proceeds will be reflected in the investing activities on the cash flow statement in the future quarter.

I encourage our investors to read this earnings release carefully to capture the various changes in our financial statement presentation and the details of our (inaudible) transaction.

We have tried our best to disclose as much information as possible.

Now let's discuss our financial outlook.

We expect Q3 net revenue growth to be between 36% and 40% on a year-over-year basis, excluding any impacts on JD Finance for both current and prior year periods.

This is a strong growth rate for a seasonally slow quarter, especially in light of the increased seasonality patterns that we have observed in Q2 and Q4 sales seasons.

In addition, I'm pleased to raise our 2017 full year non-GAAP net margin by 50 basis points to between 0.5% and 1.5% to reflect the underlying strength of our core JD Mall earnings while still maintaining the full flexibility to reinvest.

We remain committed to investing heavily in our digital infrastructure and R&D talent, expanding our leadership as the largest retailer in China and creating the best experience for our customers, which, in turn, will create a long-term value for our shareholders.

This concludes my prepared remarks, and we can now move to the Q&A session.

(Operator Instructions) The first questions comes from Eddie Leung of Merrill Lynch.

I noticed that the GMV per order are continuing to improve, so just wondering if you could share a little bit more on the underlying drivers of this trend.

And did the trends apply to both 1P pieces and 3P pieces [refers] to both electronics and general merchandise?

Sure, Eddie.

Yes, you're right that the average order size as well as average purchase size per customer has been steadily increasing.

This is actually by no surprise as we continue to grow our user base and, at the same time, more and more of our existing customers are buying more.

So in a time of faster new user acquisition, the average -- or ARPU will remain relatively stable.

But as you continue to grow with the new customer adds becoming a smaller portion of your overall customer base, then your average revenue per customer will naturally increase.

And this increase applies to all categories and both for 1P and 3P.

Your next questions comes from Alicia Yap of Citigroup.

My questions is related to your international partnership.

For example, on Walmart, with your expanded cooperations with Walmart, can you share with us what kind of likely GMV or revenue upside that we could see, for example, from the inventory integrations and also the availability of the Walmart SKU selections now on the JD platform?

And then separately on these, for Walmart, any potential conflicts between the JD-Walmart versus the Walmart and the Daojia O2O offering?

Sure.

For Walmart, we conducted a very successful August 8 joint promotion.

We achieved remarkable sales results.

I think it was more than 10x of the average volume in the latest month.

But more importantly, also the order size increased more than 100% on that day.

Our Walmart's collaboration with Dada also increased more than 200% during that day.

So we had a lot of great results coming out of the latest promotion, which is just one example of our enhanced collaboration.

Now because the new Walmart flagship store was just launched during the second quarter, so the actual contribution to our overall GMV or revenue is still very, very small, but the growth rate has been very, very encouraging.

And also, your question on Dada.

There's no conflict at all.

In fact, we have seen very, very robust growth not only on the number of stores connected to our Jingdong Daojia mobile app, but also the average store sales through Dada has been growing at really, really fast pace.

So we're very, very pleased to see the development on both JD side and also Dada side.

Next questions comes from Alan Hellawell of Deutsche Bank.

Just with regard to the growth margin, we're obviously internalizing the reclassification of fulfillment expenses and then understanding the JD Finance deconsolidation.

I think we flagged that 1P gross margins, due to potentially -- particularly intensive promotions and rebating in the second quarter, may not continuously trend upward.

And that, however, linked with what is very -- the very encouraging lift in net margin guidance, just leads me to wonder how should we think about gross margins as we kind of get -- move our way through these reclassification as we move into the third and fourth quarters of the year?

Sure, Alan.

As we mentioned on our last earnings call and also previous earnings calls that we do expect our overall core operating margin continue to improve on annual basis from now on, so you will see meaningful improvement on an annual basis for sure.

So this is why we are raising our guidance this quarter.

Coming back to Q2, you mentioned about first-party gross margin.

What we had mentioned also in the previous quarter is that Q1 overall margin was exceeded -- has exceeded our expectations, and we had a full intention to reinvest that excess return or excess margin back to our consumers through more promotions and return value to our customers.

So we did exactly that in the second quarter.

And you saw from our results that our top line growth was very robust and the exact -- that's what -- exactly what we had hoped.

So with our preset of internal budget for our bottom line improvement, we'll reinvest the excess to maximize top line growth.

That has been our strategy, and that has not changed.

Our next questions comes from Eric Sheridan of UBS.

Would love to get a little more detail about the partnership with Baidu, our artificial intelligence, what you think might do for the platform medium to long term with respect to the deployment of Big Data and how that might inform the shopping experience?

(foreign language)

(foreign language)

Yes.

So Richard was saying that after we had the partnership with Tencent called the [Jin-Ten] plan, we had partnered with Toutiao, which has tremendous traffic on mobile Internet, as we announced before.

And we also just partnered with Baidu.

And we, in fact, expecting another major collaboration in the near future.

So with the 4 strategic collaboration with probably the foremost -- the highest traffic entry points and our mobile Internet, we expect 100% penetration to Chinese consumers or 100% reach to all the consumers in China.

Now having said that, these collaborations are still -- especially with Baidu and Toutiao, still in early stage.

We do have a lot to work with together with our partners.

So in the near term, you may not see a very meaningful GMV contribution, but we are very confident with the broader reach.

To the Chinese consumers, we will have very meaningful results.

(foreign language)

So every quarter, for example, even with Tencent, we have to continue to improve the quality of our data collaboration through both a lot of closer partnership and also artificial intelligence technologies, in that process, improve the ROI, the quality of our advertising results.

So we are also expecting to launch our JD-Tencent 2.0 program, part of the [Tencent].

And so we can expect even better results for both data analytics and the advertising results for both our brands and also for our companies to achieve better ROI.

Next questions comes from Grace Chen of Morgan Stanley.

My first question is about the Q3 guidance.

We noticed that, on a year-over-year basis, the Q3 sales guidance still represent very strong growth.

But on a sequential basis, the midpoint -- well, the sequential basis Q3 sales guidance implies it's down probably around 10% to 12% Q-o-Q.

This compare with 4% to 6% sequential decline in the past 2 quarters.

I'm wondering whether this represented new normal in the future given the more aggressive promotion in the second quarter.

Also, my second question is about the marketing dollars that we still -- that the marketing expense as a [percent] of revenue increased a bit.

And can you tell us what are the key category -- product categories that are focusing on -- that we are focusing on in the past quarter?

Sure, yes.

On Q3 sequential, it's actually the flip side of the Q2 sequential growth.

So I did mention on the earnings call -- on my remarks earlier that we have observed increased seasonality patterns over the past couple of years where Q2 and Q4 will grow faster on top of a very strong previous sales season.

And then as a result, the sequential movement will also see a slightly larger kind of a holdback.

So this is all -- it is becoming a new normal, for sure.

On the marketing dollars, I mentioned that even though it's higher -- 0.7% higher than previous Q2, in fact, it -- if we use the same intensity, we will probably have been GAAP profitable.

But it is, however, consistent with our Q4 last year's intensity of promotion.

That marketing dollar is mostly actually spent on incentives to our customers mainly for the marketplace business.

Because there's no direct sales revenue against the marketplace sales volume, so any promotion incentives will go into the marketing dollars and, obviously, other marketing activities during the sales season.

So it's actually quite consistent.

We see a lot of similarities with the fourth quarter last year, both in terms of gross margin, operating margin and also other expense lines, if you take a closer look.

Your next questions comes from Ronald Keung of Goldman Sachs.

Richard, Sidney and Ruiyu, just want to ask about your apparel strategies.

Could you share some of the initial targets or some targets that you've set with Farfetch through investment and whether you would focus more on growing the apparel segment through organic or could open -- or is open to any acquisitions to grow the apparel segment further.

(foreign language)

Yes, so our investment in Farfetch is really part of our efforts to fulfill the demand of Chinese consumers for luxury products.

And in fact, we are also preparing for our own luxury platform to be launched later this year.

(foreign language)

So you may wonder, we have 2 platforms, would they be competitive or have any conflict?

We believe there won't be because Farfetch -- the specialty for Farfetch is they have collected a huge number of boutique stores around the world, and the product selections in -- under Farfetch merchants are quite unique and (inaudible) we have observed that vast majority of those selections not available in China.

And for JD, our own planned luxury platform will be focused on luxury products available through the official channels in China, of those, basically, the Chinese subsidiaries of the global luxury brands.

(foreign language)

We believe we will require both approaches, both means of -- or both types of selections to meet the rising demand of consumer -- Chinese consumers for luxury brands.

(foreign language)

Yes.

So if we see more similar opportunities, high-quality platforms like Farfetch, we clearly don't rule out the possibility of other investments.

(foreign language)

Yes.

So obviously, we will continue to pay more attention to our own apparel and footwear business.

This is one area, as we mentioned previously, we were trying to make some adjustments since last year to eliminate the brushing activities.

This is -- this happened to be the area -- the category where brushing activities are more prevalent throughout China.

So we continue to enhance our technologies to detect these kind of activities.

And at the same time, our focus this year is to the key accounts, as I mentioned earlier, and make sure that they are successful JD's platform and using those key accounts to bring better and better -- to facilitate the growth for medium and smaller merchants on our platform.

If we don't focus on the key accounts, we think the current traffic may not support the entire merchant base, especially for this particular category.

So this is our strategy, but we have seen very, very positive results out of our key accounts' growth rate and which, in turn, is bringing more traffic to us for the midsized merchants as well.

(foreign language)

Right.

And one side benefit of anti-brushing effort is actually benefiting the key accounts and the major brands, so -- because major brands do not conduct those activities, so as the less -- the smaller merchants' traffic and the activities reduce, the major accounts will actually benefit from enhanced exposure.

(foreign language)

Yes.

So in sum, our apparel category has now reached a very healthy state, which is what we had hoped and worked so -- worked for, so we are expecting a very healthy growth trajectory from now on.

The next questions comes from (inaudible) of HSBC.

This is Chi Tsang.

I was wondering if you could comment on what type of data you might share with your 3P merchants to enable them to drive higher conversion on your marketplace.

In particular, what type of customer segmentation and targeting can you offer?

Yes.

So we mentioned before that we have been improving the data analytics tools for our merchants so -- in this area because we are relatively younger in the marketplace business.

But over the years, we have collected and developed many, many very useful tools for our merchants.

And this year, you will see more and more of those products being introduced to our merchants, especially key accounts.

And so we are making very good progress.

Next questions comes from Jin Yoon of Mizuho Securities.

Sidney, did I hear you correctly the JD Finance impact was about 200 basis points where gross margins would have been over 15% if it was included?

So should that be the same impact in the second half of the year?

Or is there a certain seasonality regarding the impact of JD Finance?

Yes, no problem.

No, the impact is from 2 elements there: one is JD Finance and the other is the reclassification of third-party logistic service cost, which was grouped in fulfillment expenses.

And for that line item, it's roughly 1%, as we actually previously always mentioned.

So this time, we actually did a lot of detail work to allocate in a more methodical way so that we can reclass them back into the cost.

So that has roughly more or less 1 percentage point impact.

And then the remaining is from JD Finance, which is -- should be around 60, 70 basis points.

Next questions is from Zoe Zhao of Credit Suisse.

We've seen very strong cash flow this quarter.

But then since we still carry like Baitiao receivables and the related nonrecourse securitization debt on your balance sheet, could you elaborate the cash flow impact in this quarter from the deconsolidation from JD Finance?

Sure.

Yes, the deconsolidation itself doesn't result in any operating cash flow for continuing operations, nor any impact on free cash flow.

So all the free cash flow we discussed are from continuing operations.

The JD Baitiao balance remaining on balance sheet, we actually had a footnote underneath the balance sheet explaining there are really 2 very technical elements that prevented us from deconsolidating JD Baitiao: one is essentially the legal permit, and right now, we have -- the JD Mall has the permit; and then two is there's some technical aspect for securitization, which actually could potentially be resolved in the future quarters.

So in any event, as JD Finance is positioned as a finance technology company, so we expect future additional volume will more and more actually coming from the -- our banking partners rather than from our own balance sheet.

And also, this is true -- has been true even before spinoff, all the economics, basically, all the rewards and the risks have been passed to JD Finance.

So even though we continue to carry JD Baitiao and the securitization on our balance sheet, all the economic benefit and the cost will no longer and has not been part of the JD P&L.

Next questions comes from John Choi of Daiwa.

I have a question on your free cash flow right now.

Because if you look at your free cash flow from the past trailing 12 months, it's been very strong, but it seems to me, as you've mentioned in your earlier remarks, that the CapEx should be more or less towards the second half this year.

But at the same time, Sidney, you mentioned that your free cash flow should remain pretty strong.

So can you elaborate a bit more about how should we be thinking about the CapEx and also the overall operating cash flow towards the second half this year?

And also, just quickly on the key categories.

I've noticed that apparel and cosmetics have done extremely well the past couple of quarters.

What is -- what could the management do further in order to further enhance these categories?

Do you have to invest more?

Or do you have to also think about strategic investments in other companies?

Sure.

So on free cash flow, as I mentioned, it's also partly because we had our annual contract renewal in the second quarter, so much of the new payment terms became effective in the second quarter, which benefited our payment turnover days.

And also, our inventory turnover days was well under control.

Again, in fact, with our increasing scale, the average payment -- even on a trailing 4-quarter basis, you saw a decline in inventory turnover days.

If you look at it just 1 quarter, the improvement was even more notable, so it's really a very remarkable quarter.

And when I said earlier about full year 2017, as I commented before, when you look at the cash flow, you should look at on a trailing 12-month or trailing 4-quarter basis because there will be volatilities between and among the quarters.

So I was referring to the full year 2017, obviously, which will benefit from our Q2 free cash flow.

CapEx, as we mentioned before, we will see more spending in the second half.

But once again, when we actually incur those, we believe investors should be thankful because, normally, we will get very, very good deals from the government because we are creating jobs for this local municipality when we acquire land in their jurisdiction.

And so normally come with those land acquisition, we'll get a lot of benefit, not only very, very cheap land price but also a lot of other government support locally.

One example, for our logistics headquarters in Xi'an, the government actually gave us one office building.

So it's just one example where, when we actually start securing those local partnership, you'll see a lot of benefits to our shareholders.

Next questions comes from Alex Yao of JPMorgan.

I have 2 quick ones.

One is on the revenue side.

You guys have been showing a lot of the strength in the past few quarters, and the revenue accelerated in this quarter.

Can you help us to understand what are the key drivers for the strength of the revenue growth?

And how sustainable can we think of the top line strength?

Apparently, there are a number of things you guys are benefiting from, such as the structural migration from offline transaction to online, the expansion of [cold cover] into FMCG, and low base last year, et cetera, et cetera.

In terms of the importance to the top line, what are the key drivers among the underlying read?

And then secondly, can you give us updated thoughts in terms of how are you approaching the offline opportunities?

Apparently, you guys are doing a number of new initiatives this year, including building the convenience store network nationally.

I think there are also a number of other things you guys are currently exploring.

Can you give us updated thoughts in terms of how you approach these offline opportunities?

Sure.

So maybe on the first question, I think growth -- sales growth has always driven fundamentally by better customer experience.

As we -- over the years, we continue to improve that, and the growth is really an outcome, not -- in the end, it's all about continuously improving customer experience, and a part of that is benefiting from our scale economies.

And as we mentioned in the past that with the scale economies, we can continue to be able to offer everyday low price and very, very attractive promotions and incentives to continue to attract new customers and also reward our existing customers.

So there's really no other metrics because sales growth coming -- are coming from all categories.

It's not about any particular category, not about any kind of unique events impacting any of the particular categories.

For -- so that's why we continue to be quite optimistic for our future growth.

For the offline opportunities, I think we talked about we are, in fact, deepening our O2O initiative in China, starting from our Jingdong Daojia initiative, by connecting offline supermarkets to a location-based mobile app.

So we have seen very, very encouraging growth.

In fact, there has been -- we start to see some deflection point in that business as volume continued to improve in a very dramatic way.

And the same-store sales for Walmart and the Yonghui, for example, on Dada has been growing at a exponential kind of way.

So that's one of -- the first initiative and continue to gain traction.

The other areas, as Richard actually mentioned on the last earnings call, we essentially leverage our existing capabilities, whether it's from our supply chain or from our user reach, to create really more customer interface.

We won -- in addition to Jingdong Bang, for example, we had in the past, we are introducing JD Home concept stores, which specialize in selling electronic products.

And comparing to, for example, Apple Store, which is a single-brand concept store, and we actually can -- we have the benefit of having multiple brands having their best products in those very, very chic showrooms.

So we had -- we see some very, very good initial success in those initiatives, but all of those initiatives are franchise based.

They're asset light.

It will not cost a lot of heavy investments.

Next questions comes from Natalie Wu of CICC.

For the payment-related costs, given that JD Finance already deconsolidated, so just wondering which line where the segment-related fee go, costs or expenses.

And if management could share with us the gross profit margin for direct sales in second quarter of 2017 on apple-to-apple basis, that will be great.

Yes.

On the payment-related costs, they are part of the fulfillment expenses.

So they have always been in that line.

With the deconsolidation, you are right, so whatever we pay to JD Finance will be reflected in the fulfillment expenses, whilst historically, that amount will be eliminated at a consolidation.

For the gross margin, as I mentioned, we don't necessarily look at quarter-by-quarter, especially given that Q1, we well exceeded our internal budget.

So we clearly -- we had mentioned and we, in fact, reinvested during the second quarter.

So on the -- I think it may be better to look at a trailing 12-month basis, just like cash flow, going forward.

We are committed to steadily improving all of our core margins on annual basis or on a trailing 12-month basis.

Next questions comes from Jialong Shi of Nomura.

(foreign language) I would like to ask Richard for his colors on the private-label e-commerce.

Like what (foreign language) is doing, I just wonder how Richard think of the outlook and the potential of this private-label e-commerce service.

Will JD have any plans to enter this niche market in the future?

(foreign language)

Yes.

So Richard said that the Yonghui Asian model is actually quite interesting, and it's a good model.

But for JD, because we are a full category retailer, are supporting numerous brands, so our priority is continue to support our brand partners in the foreseeable future.

However, we are experimenting in a smaller way in -- for quite a few categories of our own private label products.

(foreign language)

Yes.

So in comparison to a full-category retailer like JD.com, despite how successful it could be for private-label business, it will remain as a very small part of our overall business volume.

(foreign language)

Yes.

(foreign language)

Yes.

But we'll continue to explore private-label initiatives.

So over a long-term -- longer-term period, we expect it could become a somewhat meaningful part of our business.

(foreign language)

So for the strategic collaboration with Baidu, because it's strategic and a comprehensive collaboration, so there will be many, many areas of collaboration with different types of collaboration models.

So with those model, they will have different fees or revenue in terms of whether it's CPF or CPC.

But in the end, we believe the collaboration can significantly improve the ROI and also enhance the CapEx in our user base.

(foreign language)

Yes.

So we believe it's a win-win partnership for both of us where Baidu can expect increasing advertising revenue, and we can expect a much higher quality of advertising spending and ROI.

Next questions comes from Eric Wen of Blue Lotus.

A question on the logistics side.

I noticed that we had launched a few initiatives on the logistics area, and one of those initiatives is the collaboration with SF Express regarding the use of pickup cabinets, (foreign language).

I just want to know how the reception of our customers towards picking up the delivery from the cabinets.

And it seems I noticed that we also have our own pickup station, (foreign language).

I want to ask, what is our view towards the pickup [cabinets] and its future in the delivery industry?

And lastly, if I can clarify, if JD Logistics reduced our margin by 1%, and the fulfillment cost reclassified is RMB 2.6 billion, what is the revenue size of JD Logistic under this calculation?

And is the loss mainly G&A or marketing?

Sure.

Yes, so for our collaboration on the (foreign language) self-pickup cabinets, it -- we actually had our own small network as well, so this is nothing new.

We actually call our customers before we put any of the packages into those self-pickup cabinets, and so it's only at the permission of our customers that we'll do that.

Increasingly, we see, especially for working professionals, that they may not be at home during the working hours or if they could be stay out fairly late, so there is a demand for consumers for those type of dropoff services.

This is also very similar for our own self-pickup locations.

So again, these are all based on consent from our customers before we will actually put their products -- drop off their parcels in those locations.

And we do think this is potentially one interesting last-mile alternative.

It also helps save cost because it will clearly improve the efficiency of our delivery men.

But again, this will be based on consent -- prior consent for our customers on a case-by-case basis.

For Logistic revenue, we had mentioned in the past, we have been running our third-party logistic services on a more or less breakeven basis.

So obviously, this is not 100% flat based on cost.

There will be potentially some volatility among different quarters.

But altogether, it should be quite close to a breakeven basis.

Next questions comes from Ella Ji of China Renaissance.

My first -- I have -- first, I have a quick follow-up regarding the sales and the marketing spending.

So Sidney, you mentioned regarding the current quarter spending, the pattern is similar to 4Q last quarter.

However, that was comparing to 2Q last year, it was an acceleration.

So I wonder, looking forward, given that the current market competition is still strong, shall we expect 4Q this year, the sales and marketing spending will likely be even higher than the 2Q levels?

Then my second question is, overall, this year in, so far, the online retail sales, the market has been really strong, especially in certain categories, including home appliance.

I wonder if management can share your insights.

What do you think are the drivers that help driving up the whole online market acceleration?

Sure.

So I think the first one, we invest and run our business based on our own business fundamentals.

So if you look at when we continued to improve our underlying strength of the core business, we do have more and more resources to reinvest and give back to our consumers.

So I mentioned Q4 was -- obviously, Q4, we also had a very, very robust quarter of growth, and so the additional investment in sales and marketing provided very good ROI; and similarly for Q2 as well.

So I think we will also formulate our strategy in the second half, but this is not necessarily in reaction to any competition.

I think we -- first and foremost, is to really follow our own business logic in running our business.

On the overall acceleration of online sales, I think it does reflect -- again, I think it is similar to our earlier -- to my earlier comments about retail business, in the end, is about customer experience.

So I think overall, the online retail and e-commerce market or players has been obviously providing very, very good value proposition to our consumers in China.

I think this is fundamentally what's driving the accelerated growth.

Obviously, the healthy economic environment is also helpful.

Overall retail consumption volume has also been quite stable, driven by the fundamentals we had mentioned before about stable employment rate, rising salary and also the high savings rate in the consumer -- among the consumers.

Your next questions comes from Wendy Huang of Macquarie.

(foreign language) My -- I have 2 questions.

The first question is about your Logistic business.

Can you give us some update about percentage of your third-party merchants using your warehouse and fulfillment?

And also, with the reorganization of your Logistic business, are you also opening to any third-party platforms merchants, such as Taobao merchants?

Second question is about your collaboration with 3 Internet companies: Tencent, Toutiao and Baidu.

Given the high user base of those companies and also the overlap of their user base, are you actually seeing any difference in terms of the users or the shopping behaviors that you can actually acquire through their channels?

(foreign language)

Right.

So the reason we opened up our logistic platform capabilities is to really -- as a result of seeing tremendous demand from the brands for logistic services.

So JD happened to have built a very strong logistic network not only on the small-, medium-sized products but also big -- large appliance products, cold-chain logistics and also O2O outsourcing logistics, so we can -- we are best equipped to fulfill this need.

We have seen, for example, apparel brands requiring services to ship their products to various store locations and also their official stores, requiring logistic services to serve their consumers and also our O2O initiatives, where consumers place orders, and their stores can help fulfill.

So there would be a lot of demand in core channels for our services.

(foreign language)

Yes.

So in the past, the brands, because of these different requirements, will have to contract very different types of logistics service providers.

But because JD has all of these services available -- or capabilities available, so we can offer a one-stop solution to these brands.

(foreign language)

So although we only opened our services in 2 months, we can -- we have already seen a lot of big brands approaching us and -- or using our services, so we're pretty confident, even just for the first year, we can probably achieve $600 million of revenue.

(foreign language)

Yes.

And we will expect over 100% growth next year and also decent profitability for this business.

But more importantly, we will -- in addition to the traditional services, where we can offer one-stop solution, but we can also utilize our Big Data to help these customers to enhance the efficiency of their supply chain.

And when that objective is accomplished, there will be huge win-win opportunities for both of us.

(foreign language)

And this kind of Big Data analytic capabilities is not currently available with existing logistics service providers, so we are very, very uniquely positioned to take advantage of this demand.

And for this reason, we believe our business could be very profitable over the long term.

(foreign language)

Yes.

So for the differences between those different platforms, whether Tencent or Baidu, even though Tencent has this huge amount of number of customers, because different mobile internet destinations have different value propositions, so customers go into different sites for different purposes and using their different products.

So for that reason, we'll continue to see very different insight when working with different partners.

(foreign language)

Yes.

So we hope our -- in the end, our advertising products can be available in all different channels, not only in WeChat but also in search engines and in the media and streaming -- video streaming products and also -- and games, yes.

(foreign language)

Yes.

And also, cyber safety products, for example.

(foreign language)

Yes.

So we believe with those multiple channels of collaboration, we can optimize the -- our advertising quality and ROI and creating win-win solutions for everyone.

(foreign language)

Yes.

So after we collect the user behavior in all these different channels, we can also better analyze and utilize those data to better target these customers.

We are now approaching the end of the conference call.

I will now turn the call over to JD.com's Ruiyu Li for closing remarks.

Thank you, operator.

Once again, thank you for joining us today.

Please feel free to contact if you have any further questions.

Thank you for your continued support, and we're looking forward to talking with you in the coming months.

Thank you for participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.