Earnings Call Transcript - BABA Q2 2020

Robert Lin, Head of Investor Relations

Hello, everyone, and welcome to Alibaba Group's September quarter 2019 results conference call. With us are Daniel Zhang, Executive Chairman and CEO; Joe Tsai, Executive Vice Chairman; Maggie Wu, Chief Financial Officer. This call is also being webcast from our IR section of the corporate website. A replay of the call will be available on our website later today. Now let me quickly cover the safe harbor. Today's discussion will contain forward-looking statements. These forward-looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations. For detailed discussions of these risks and uncertainties, please refer to our latest annual report under Form 20-F and other documents filed with the U.S. SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we do not undertake any obligation to update these statements, except as required under applicable law. Please note that certain financial measures that we use on this call such as adjusted EBITDA, adjusted EBITDA margin, adjusted EBITA, adjusted EBITA margin, marketplace core commerce adjusted EBITA, non-GAAP net income, non-GAAP diluted earnings per share or ADS, and free cash flow are expressed on a non-GAAP basis. Our GAAP results and reconciliation of GAAP to non-GAAP measures can be found in our earnings press release. Unless otherwise stated, the growth rate of all stated metrics mentioned during this call refers to year-on-year growth versus the same quarter last year. With that, I will now turn the call to Joe.

Joe Tsai, Executive Vice Chairman

Thanks, Rob. Thank you all for joining us. In past earnings calls, we have kicked off company management remarks with my overall observations on strategic issues or macro trends. Starting this quarter and going forward, Daniel Zhang, who has assumed our Executive Chairman role, will deliver the overall strategic and macro state of affairs as well as his usual discussion of business operations. I will continue to make myself available for Q&A after our prepared remarks. Daniel, please go ahead.

Daniel Zhang, Executive Chairman and CEO

Thanks, Joe. Hello, everyone, and thank you for joining our earnings call today. In September, Alibaba just celebrated our 20th anniversary. We truly appreciate our shareholders' support in the past years. Today, I'm honored to speak to you in the role of the Executive Chairman of Alibaba Group for the first time. I would like to take this opportunity to share my thoughts about the opportunities and our strategy over the next several years. Our mission has not changed since day one. It is to make it easy to do business anywhere. Today, our consumers, merchants, and partners are entering a new journey in the digital era. We will continue to create value for them by leveraging the power of data technology to make it easy to do business for them anywhere for the decades to come. We have set a goal for the near term to serve over 1 billion consumers and achieve at least RMB 10 trillion consumption by fiscal year 2024. Geopolitical uncertainties have placed additional pressure on global growth. We believe this is both a challenge and opportunity for the Chinese economy; and finding more opportunities in such an uncertain environment is the key to our business and strategy. I would like to point out two long-term developments that are in Alibaba's favor. One is to consumers, 2C; and the other is to business, 2B... In terms of the 2C, we see great potential in domestic consumption as an important driver for the Chinese economy. The overall size of consumption keeps growing with increasing penetration of digitalization. Specifically, China retail sales reached around RMB 30 trillion in the first nine months of 2019, growing at 8.2% year over year. This outpaced the overall GDP growth at 6.2%. More importantly, online e-commerce is still the key driver of China consumption, growing faster at 17%. We are growing even faster than the overall online e-commerce sector. Alibaba is the only platform to meet the diverse range of consumers' demands in physical goods, local consumer services, and digital entertainment. As we disclosed on our Investor Day, these three consumer-facing businesses as a whole already served 730 million unique consumers in the Alibaba digital economy. Over the next several years, we will continue to grow our user base, and at the same time drive user synergy by enabling merchants to cross-sell products and services in the digital economy... ...Our New Retail strategy further enlarged our addressable market. We aim to enable the digital transformation of brands and retailers, empowering them with data technology and consumer insights to better serve their customers. Another secular growth driver is enterprise digitization. IT spending in China for Internet companies amounts to around USD 80 billion while the spend for public sectors and the various industries is over USD 300 billion according to our estimate. This represents huge opportunity for enterprise-facing business. We leverage Alibaba's cloud computing technology and big data insights to empower the enterprise. The adoption of cloud services in China will be driven by not only the need for lower IT costs but also by the digital transformation of business models and processes. As a digital technology company, we are uniquely positioned to provide businesses with more intelligent and cost-effective cloud services. We call our solutions for enterprises the Alibaba Business Operating System, as we provide not just technology infrastructure services, but rather Business as a Service solutions. Now I will turn to the highlights of this quarter. We had another outstanding quarter with excellent business performance. We enjoyed robust revenue growth of 40% as we capture significant growth opportunities to reach an increasingly wide group of Chinese consumers. During the quarter, we continued to invest in user experience and technology solutions to create tremendous benefits for our customers. We have delivered solid profit growth for the quarter benefiting from measures to improve our operating efficiency. For China retail marketplaces, our strategy is very clear and unchanged. We want to add value to consumers and the sellers through consumer segment, product enrichment, and platform innovations. This strategy has provided us the ability to scale and grow our consumer base. In September 2019, our China retail marketplace had 785 million mobile MAUs, a quarterly net increase of 30 million. Our annual active consumers grew 19 million to 693 million... ...Consumers are the core of Alibaba's digital economy. They want choices that are relevant and their spending preferences are dynamic. Today, we are China's only e-commerce platform that offers the broadest and the deepest range of goods and services to Chinese consumers. We will further strengthen our suppliers in branded, imported, direct-sourced, and long-tail products. During the quarter, we see strong user engagement and stickiness as reflected by higher buying frequency and accelerating order growth. We also noticed that spending of our new users from less-developed areas reached about RMB 2,000 in their first year on our platform. This is a result of our diversified and comprehensive product supplies as well as targeted recommendations to connect the right product with the right consumers... ...In Alibaba's digital economy, we also provide services and entertainment to our 730 million annual active consumers across the platforms. We see still low penetration for Youku and local services users in the digital economy if we compare the overlap of consumers across the platforms. Thus, we see huge opportunity in terms of synergies between these groups. We are identifying and advocating new initiatives to convert users from our China retail marketplaces to users of the local services and the digital entertainment platforms. We believe these platforms will add tremendous value to the digital economy... ...Local consumer service segment has more consumption use cases, introduces more merchants and creates an on-demand delivery network that benefit more location-based commerce use cases. Digital Media & Entertainment segment provides a portfolio of quality content that resonates with Chinese consumers and thereby creating opportunities in digital advertising, memberships, and cross-selling within Alibaba's digital economy. Let's turn to our cross-border and international businesses. In September, we acquired NetEase import e-commerce platform, Kaola. Tmall Global and Kaola platforms have relatively low consumer overlap. We will integrate areas such as technology, procurement, and the supply chain to achieve optimization. The Kaola app will continue to operate independently. In Southeast Asia, Lazada is showing solid operational performance with order growth more than doubling for the fourth consecutive quarter... ...In the case of the Indonesian market, order growth more than tripled. Lazada's key priority is to maintain strong user growth and user engagement in the coming year. Our cloud computing business continues to exhibit strong growth. Revenue grew 64% year-over-year to RMB 9.3 billion, primarily driven by an increase in average revenue per customer. Alibaba Cloud serves customers from a broad range of industries beyond Internet and media. Based on the most recent available data in August, 59% of listed companies in China are customers of Alibaba Cloud. The reason why we are widely recognized by the market is that we have developed proprietary technology and solutions, which makes us different from other players in the China market. To conclude, we have a proven track record of innovation in the past 20 years. In the coming decade, we will continue to innovate with a goal of fulfilling our mission and keep investing for the long term...

Maggie Wu, Chief Financial Officer

Thank you, Daniel. Thank you all for joining us. We had another strong quarter. So for today's call, I will start by going over financial highlights and end with how we view the coming quarters. Now let me go over the financial highlights. In the September quarter 2019, we delivered another strong quarter of user growth with mobile MAUs reaching 785 million, up 30 million compared to our June quarter. User engagement continues to improve with mobile DAU growing faster than MAU. In the first six months ended September, the Taobao app's DAU growth accelerated as a result of healthy organic traffic growth, effective user targeting and increasing engagement with interactive and entertainment features... ...For the September quarter, annual active consumers on our China retail marketplace reached 693 million, which increased by 19 million compared to our June quarter. The increase in consumer growth reflected our continued penetration in both developed and less-developed areas in China as we launched more effective consumer segmentation initiatives. These initiatives have been well-received by consumers, as evidenced by accelerating order growth from higher purchase frequencies. Our total revenue grew 40% year-on-year to CNY 119 billion in September quarter. Excluding the effects of consolidating acquired businesses, revenue would have grown 37% year-on-year, still very strong growth. The increase was mainly driven by robust growth of our China commerce retail business and Alibaba Cloud... ...We are very pleased to see that our operations are running in a very efficient way. Costs and the expenses are very well-controlled while our business has been continuously growing fast. Let's turn to our business segments. Our core commerce segment continues to be very strong. Core commerce revenue grew at 40% year-on-year to RMB 101 billion. The fundamentals of our China retail business continue to be strong. Customer management revenue grew 25% in the quarter, which primarily reflected the increase in the average unit price per click and, to a lesser extent, the volume of paid clicks. Commission revenue increased by 24% year-on-year, primarily due to the growth in Tmall physical goods GMV... ...China retail others, which is mainly this New Retail business like Hema, Tmall Import, grew at 125% year-on-year. This quarter, we acquired and consolidated Kaola. For our international retail segment, revenue was CNY 6 billion, which grew at 35% year-on-year. Revenue growth was driven by AliExpress and Lazada's growth. For Lazada, as Daniel has mentioned, it continued to perform well. For the fourth consecutive quarter, it achieved over 100% year-on-year order growth, reflecting strong consumption demand in apparel, accessory, and FMCG categories... ...AliExpress revenue growth remained strong due to increasing number of consumers and robust GMV growth. As an update, on October 9, we completed the formation of a social commerce joint venture in Russia with local partners. In terms of financial impact, AliExpress business in Russia will be deconsolidated next quarter because we own just less than 50% of the joint venture. For our local consumer services, revenue grew 36% year-on-year to RMB 6.8 billion. The robust revenue growth was primarily driven by strong order volume and increasing user order frequency. We have also been penetrating in new markets in less-developed areas with strong growth potential. During the quarter, GMV from less-developed areas grew 45%... ...Local consumer service segment is strategic to Alibaba Group, and we're committed to invest in the business and create long-term value. We're focused on increasing average spending per consumer as well as acquiring new users by leveraging assets within the Alibaba digital economy. In the quarter, about 39% of new food delivery customers came from the Alipay mobile app. The potential for further penetrating users in Alibaba's digital economy is significant as only 25% of our annual active consumers from our China retail marketplace have used our local consumer services. We're going to continue to take a targeted and systematic approach to investing in this business... ...Let's look at profitability. In our commerce segment, we continue to generate strong market-based core commerce adjusted EBITA. Compared to a year ago, we have increased adjusted EBITA by RMB 10 billion, while the losses in four strategic areas only increased by RMB 1.2 billion. So this reflects our targeted approach to allocate resources in key strategic growth areas while also systematically optimizing costs and improving efficiency. After incorporating these losses, our core commerce adjusted EBITA grew strongly at 29% year-on-year to RMB 38.6 billion. Cloud computing revenue increased by 64% year-on-year to RMB 9.3 billion. This was primarily driven by an increase in average revenue per customer. Adjusted EBITA was a loss of RMB 521 million, reflecting small widening losses versus the same quarter last year because we continue to invest in talent and technology infrastructure. ...Revenue from Digital Media & Entertainment business increased by 23% year-on-year to RMB 7.3 billion. Excluding the consolidation of Alibaba Pictures, revenue would have increased 8% year-on-year. Despite industry rationalization and tighter regulations on content, we continue to enrich our portfolio with original content that resonates with Chinese audiences. During the quarter, Youku was able to launch popular drama and variety shows with high viewership that resulted in 47% year-on-year growth in average daily subscribers. Adjusted EBITA for DME was a loss of RMB 2.2 billion, which narrowed year-on-year as we continued to focus on cost efficiency and return on investment for content spending. ...Revenue from innovation initiatives and others increased by 14% year-on-year to CNY 1.2 billion. Adjusted EBITA for innovation initiatives was a loss of RMB 1.9 billion. The increase in loss was primarily due to our investment in technological research and new business initiatives such as Ding Ding, Tmall Genie, and Amap. Look at the free cash flow and CapEx. Our business continued to show strong profitability and cash flow. As of September 30, cash, cash equivalents, and short-term investments were RMB 235 billion. For the September quarter, free cash flow was RMB 30.5 billion, which is USD 4.3 billion, which increased by 90% year-on-year. The increase in free cash flow is due to our robust profitability growth, timing of capital expenditure spending, and less content costs. ...So let's quickly go over the major items that impact GAAP and non-GAAP net income calculations. GAAP net income during the quarter was RMB 70.7 billion, up 288% year-on-year. The year-over-year increase was primarily due to a one-time gain of RMB 69.2 billion recognized upon the receipt of the 33% equity interest in Ant, partly offset by impairment charges and net losses from changes in fair value relating to certain investments and goodwill. Excluding these gains and losses and certain other items, our non-GAAP net income would have increased by 40% year-on-year. Looking ahead, last year this time, Daniel and I spoke about our commitment to deliver robust revenue growth and healthy sustainable profit growth. We have delivered. In the first six months of fiscal year 2020, our revenue grew 41% that outpaced global technology peers. And at the same time, we achieved 36% adjusted EBITA growth. We were able to achieve these results by achieving robust growth of active consumers, enhancing user experience, and generating operating efficiencies through synergies within the Alibaba economy... ...Looking into the second half, we will continue to execute our strategy. Specifically, we will be very focused on three things: Number one, improving user experience, which will result in higher engagement and customer spend; number two, aggressively reinvesting our discretionary profit in strategic areas to further our competitive advantages; number three, leveraging the synergies of Alibaba's economy to achieve operating efficiencies. We believe our commitment to invest and deepen our moat will ensure robust revenue growth and deliver healthy profit growth in the long term. Now let's turn to the Q&A session. Thank you.

Operator, Operator

Your first question comes from Alicia Yap of Citigroup. Congratulations on the strong quarter. My question is about the upcoming Singles Day this year. Does management see any significant differences compared to last year, particularly in terms of the countries and platforms participating in the event? Are there specific products that management believes will attract consumers? Additionally, with many platforms offering more discounts this year, do you think there's enough consumer demand to support spending and allow all platforms to succeed? Any insights on the upcoming event would be appreciated.

Daniel Zhang, Executive Chairman and CEO

Thanks. This is Daniel. Let me answer this question. I think everybody understands that we are approaching the 11.11 Singles Day. So after the past 10 years' efforts, I think first of all, this November 11 has become a consumer shopping day. People widely recognize this shopping day, and that's why we have a very organic momentum for consumers to join and enjoy that day. So people are ready to spend on that day. This is basically a habit people formed in the last 10 years. The other side of the coin is supply. After 10 years' efforts, all the merchants, all the brand companies, and retailers are actively preparing for this upcoming shopping day, shopping festival. They will provide the best products with the best prices and services to the consumers. Commercially, they view this as more like the commercial Olympic Games, and everybody wants to be the champion in their sector. So that's why we gather momentum from both the demand and supply side. This year, I think we have many new tailor-made products for November 11. We have worked with many brand companies to tailor-make exclusive limited edition products for November 11. So this is not only a shopping day, but also a marketing day for brands to engage new customers. In terms of the market, I think not only China, but also our cross-border and international marketplaces, Lazada and AliExpress, will participate in this shopping festival. We will localize the operation to meet the local demand of the customers. But we do see synergies in terms of product supply because most of the supplies from China can be consumed by people in other markets via cross-border export. We apply many new technologies into this November 11 preparation. So far, we see very good progress in terms of the warm-up activities, and we have achieved strong user engagement for this upcoming shopping festival. So we are ready for that day, and we will do all we can to ensure we have another success on that day.

Operator, Operator

Our next question comes from the line of Eddie Leung of Bank of America Merrill Lynch. I'm curious to hear your thoughts on the competitive environment you see today in the less-developed areas versus a few years ago when you competed in the Tier 1, 2 cities. At the moment, it seems to us that one similarity is the heavy discounts on certain standardized products. Just wondering how do you compete differently today versus a few years ago?

Daniel Zhang, Executive Chairman and CEO

If you look at our customer base today, we have nearly 700 million annual active consumers, with 693 million in our China retail marketplaces as of September. These customers come from both top-tier and lower-tier cities, giving us broad coverage. For new customers on our platform, our advantage lies in our extensive selection across all categories and price ranges, which is accessible to everyone. Technology plays a crucial role in aligning the right demand with the right supply. So far, we've seen significant growth in average revenue per user among new customers on our platform within a year, indicating the effectiveness of our platform. For newcomers, they may spend a lot of so-called marketing dollars to subsidize the customer and merchants, but I always believe that the key is to generate sustainable value for both merchants and customers. As a platform, while they transact, if they are always subsidizing, I don't see this as a sustainable model in the long run. I'm sure all the investors can agree with this. From our side, we invest to acquire new customers as we always do, and that's why we see robust user growth. We added another 30 million MAUs this quarter, but we care more about customer retention. Technology will continue to play a vital role in improving user stickiness.

Operator, Operator

Our next question comes from the line of Binnie Wong of HSBC. My question is also regarding the less-developed market strategy. I recall the company disclosed the percentage of new users coming from low-end markets has been over 70% in the past several quarters. Just wondering if there's any update. Also, with you expanding into lower-tier products, how do you see that our Taobao or Tmall merchants are spending on their advertising budget?

Maggie Wu, Chief Financial Officer

In terms of the low-tier user addition, we continue to show strong growth in user acquisition. After several quarters of strong acquisition from lower-tier cities, if you look at users coming from lower-tier cities as a percentage of total, it has come down a little bit. But overall, it's still very strong. We're not only acquiring users from lower-tier; we also continuously add consumers from top-tier cities. I think one thing that's very important is that it's not only the user growth but also healthy ARPU growth. Retention is also important — as I mentioned during Investor Day, if you look at our high-end customers who spend over CNY 10,000 per annum, there are like over 130 million of them, and when you look at the retention rate, it's about 98%... The other question was regarding cross-selling to the other 75% of users.

Daniel Zhang, Executive Chairman and CEO

I think these are the synergies we are in the process of realizing in the local consumer services, and we have integrated consumer marketplaces. Today, 25% of our annual active users from the China retail marketplaces also purchase local services. We see huge synergies to improve this penetration, which is why we make continuous efforts to integrate our products and technology infrastructure to make the entire Alibaba digital economy fully integrated. Going forward, we will continue to strengthen our supply from local cities to ensure we have a good supply for location-based consumers...

Operator, Operator

Our next question is from the line of Grace Chen of Morgan Stanley. My question is about the differences in Alibaba's approaches to capitalize on opportunities in the affluent, middle-class and urbanization/low-tier cities. It will be great if management can talk about the differences in consumer behavior and preferences in these two segments, industrial strategies and differences in the competitive landscape. If possible, could you use the upcoming 11.11 promotion as an example to elaborate your strategies, especially in less-developed regions?

Daniel Zhang, Executive Chairman and CEO

If you look at the users' habits from different tier cities, I think it is highly relevant to their local lifestyle and their income levels. In different shopping events, especially November 11, I think consumers want to get the best products even if they're not spending on brand products day-to-day; they will during the shopping festival because of the good prices and product availability. Most consumers will try to explore branded products. However, their day-to-day purchases for categories that are not focused, people make shopping decisions based more on functions and price advantages. That's why technology is essential for providing real-time reflections of customer needs.

Maggie Wu, Chief Financial Officer

In terms of spending from lower-tier cities and high-end customers, we have also observed that the ARPU from lower-tier city consumers is not as low as people perceive. Spending is more tied to user experience, which also includes being able to find whatever they want. We have addressed product supply and consumption segmentation well in our Taobao app.

Operator, Operator

Our next question is from the line of Zachary Schwartzman of RBC Capital Markets. Profit growth trends across the business as a whole, and on core marketplaces, have stabilized or even accelerated. I guess this gives you some more flexibility as you said, in discretionary investing to strengthen your strategic moats. Maggie, can you elaborate more on expense discipline and operating efficiencies as you expand some of the recently integrated businesses in core commerce? And just to confirm, was there any change in priority with your final comments in your prepared remarks for the second half of the year?

Maggie Wu, Chief Financial Officer

Yes. I mentioned that we're going to focus on three key things, right? Improved user experience is always the most important thing. And this will result in higher engagement and customer spending. I also talked about reinvesting back to these competitive areas. Just like previous years, we have been very successful in that round of reinvestment and expanded our market share. The third focus is on discipline and operating efficiency. It's important because Daniel mentioned that we don't believe continuous subsidizing or aggressive spending in marketing would lead to sustainable business. We're going to be smart about spending our money and continue to emphasize operating efficiency.

Daniel Zhang, Executive Chairman and CEO

Yes. I just want to address the seeming conflict between expense, operating efficiency with discipline versus being aggressive in reinvesting our profits into specific strategic areas. In acquiring new users in lower-tier cities, we can now acquire users for the Taobao retail marketplace, but those same users could also potentially engage with our local service business. Therefore, we only need to spend marketing dollars once to acquire that user but then use our cross-selling with multiple platforms to penetrate those users who have not used local services before.

Operator, Operator

Our next question is from the line of Alex Yao of JPMorgan. Congratulations on a very strong quarter. I would like to follow up, specifically regarding Maggie's comment that you plan to reinvest discretionary profit in the second half, targeting strategic areas. If we look at your first half financial results, the impact from new initiatives under core commerce continues to narrow, which leads to strong profit growth. Should we consider that you will be more aggressive in those initiatives in the second half such that the financial result trend in the first half cannot be extrapolated to the second half? Also, what are your priorities across the four initiatives: local consumption, international, logistics, and new retail?

Maggie Wu, Chief Financial Officer

Sure, Alex. Firstly, I want to highlight again to our investors that our revenue growth and profit growth are both very strong, way ahead of almost all of our global peers. So we have this luxury to reinvest because of our strong core and good management. In the second half, in strategic areas like local consumer service, globalization, and logistics, we're going to continue to invest. At the same time, we are seeing competitive pressure in China retail commerce and local service businesses. It's not a reaction to competition, but we think it's a good time for us to reinvest. While we don't guide on profitability, we do care about business efficiency, and it's prevalent among our senior management outlook for growth. Our prioritization of investment will cover these areas equally: cloud, DME, local consumer services, and logistics.

Operator, Operator

Our next question is from the line of Gregory Zhao of Barclays. I have a question for Daniel. As you highlighted during the prepared remarks and at the Investor Day, Alibaba is enhancing its digital economy strategy, splitting it into two groups: consumer and business segments. Given the differences between the two business types, I just wanted to understand more about execution and how do you coordinate between the two segments? We see successful examples like Amazon and Microsoft. How’s your strategy different from these peers? Also, a quick follow-up on Singles Day. We see some delivery companies have announced to increase delivery fees during the 11.11 promotion this year. Could you help us understand what's the implication for you and your competitors?

Daniel Zhang, Executive Chairman and CEO

I think when we say we have two flying wheels, 2C and 2B strategies, these strategies relate to different business types that require different skill sets and team DNA. Alibaba is a digital economy consisting of a diverse skill set and ways of working. For consumer businesses, we encourage young people to take responsibility for innovating product features to fit young customer needs. For enterprise services, through Tmall's past ten years of efforts, we have built a model for serving big brands and retailers, and now we roll this out to more categories, including cloud services for corporate clients. We will continue to pursue this strategy and we believe that these two approaches, 2C and 2B, with good connection and chemistry is Alibaba's core value and competitive advantage. Regarding the logistics companies' pricing strategies during November 11, so far, I haven't heard of any significant pricing changes from our logistics partners. We are working closely with them to ensure the right capacity and services are available for the upcoming shopping event.

Operator, Operator

Our next question is from the line of Tina Long of Crédit Suisse. Congratulations again on the results. I have one quick question on live streaming. As this format of live streaming grows in popularity, can you provide an update on the GMV contribution from this format in the first half of this year? Additionally, I want to understand the monetization for this format, especially when live streaming is native versus those from third-party sites like Douyin or Kuaishou.

Maggie Wu, Chief Financial Officer

Live streaming is already generating over CNY 100 billion GMV per annum. Over 50% of our merchants are using this service. It's very popular and valuable for these merchants. In terms of monetization, we haven’t formally started monetizing yet. There are multiple ways to monetize this service, and we will update you when we begin formal monetization.

Operator, Operator

Next question comes from the line of Jerry Liu of UBS. I have two quick questions. One is about multiple new revenue drivers discussed at the Investor Day, including live streaming and the secondhand platform. As we look ahead into next year, is feed still a primary focus for monetization? Are some of these other opportunities also possible as we progress into next year?

Maggie Wu, Chief Financial Officer

In terms of growth drivers, we have multiple new businesses and services that are generating significant revenue. These present opportunities for us to monetize, including Idle Fish, the largest secondhand platform in China, as well as our live streaming platform. Looking ahead, it is possible we will begin to monetize these businesses as they grow. Monetization on recommendation fees is something we are testing. We tend to um undermine monetization rather than over-monetize because we prioritize consumer experience and ROI for merchants alongside our revenue growth.

Operator, Operator

Our next question comes from the line of Youssef Squali of SunTrust. I have two quick questions. First, could you provide an update on food delivery traction in lower-tier cities? What is the number of cities and the competitive intensity there? And second, more broadly, for either Joe or Daniel, we are seeing conflicting data regarding the Chinese economy recently. The NBS for July and September suggests a slowdown in the economy. However, a new private survey this morning indicated that manufacturing expanded much faster than expected in October. How do you interpret this, and how predictive is this of demand for Alibaba’s services, particularly from our perspective as outsiders?

Daniel Zhang, Executive Chairman and CEO

Regarding local service food delivery, we have been expanding our coverage in lower-tier cities and we have successfully entered many lower-tier cities in the past year, but I think that’s not enough. We’ll continue to strengthen our supply which is very important. We have a strong advantage in consumer engagement and can leverage significantly in the digital economy regarding cross-sell to consumers. We see very positive trends with proper supply in a region. But we will keep working to ensure stronger local supply.

Joe Tsai, Executive Vice Chairman

On whether macroeconomic data is a good predictor for Alibaba's performance, you've seen multiple quarters where Alibaba's business outperforms the overall economy and even outperforms total retail sales. Total retail sales are growing about 8%, while e-commerce is growing in the high teens according to NBS data. Alibaba’s growth is outpacing the entire retail sector, as well as the e-commerce sector. E-commerce is taking share from traditional retail, and Alibaba is driving that trend. Regarding our peers, we are also outperforming because we are benefiting from a variety of synergies. One, technology — being able to match product supply across categories and formats, our technology matches products effectively with the right consumers. Two, we have approximately 700 million annual active consumers in our China retail marketplace with cross-selling opportunities for local services and entertainment.

Operator, Operator

Our last question is from the line of Piyush Mubayi of Goldman Sachs. Maggie, on the points you made about improving user experience which would result in higher engagement and customer spending, can I ask where you are on user experience in terms of defining that and where you want to take it? And second, does that not imply, and I know you’ve discussed the contradiction there — where does that lead in your ability to control or reduce spending in the second half? You specified the word 'aggressively reinvesting' — why that word?

Maggie Wu, Chief Financial Officer

In terms of user experience, we have many measures. Our focus on user expansion includes word-of-mouth, besides marketing activities, as well as retention and spending. We track time spent on our platform and cross-platform engagement. Our conversion rates from users to buyers and repeated buyers are crucial metrics. In terms of spending, we want to convey that being disciplined in spending is crucial, but we also have significant room to invest. So, while we are emphasizing discipline, we are in a good position to invest.

Joe Tsai, Executive Vice Chairman

What Maggie means is that we can afford to be aggressive with our spending as market conditions may vary quarter to quarter. We have the luxury of a strong EBITA. This quarter we achieved CNY 45 billion EBITA, and we are allocating about 15% to aggressively invest in core areas like local services, international business, New Retail, and logistics. We can afford to be aggressive while managing our spending well.

Robert Lin, Head of Investor Relations

Okay. Thank you, everyone. That was the last question. If you have any questions, feel free to reach out to the Alibaba IR team. Thank you.

Operator, Operator

Thank you. Ladies and gentlemen, that concludes the conference for today, and thank you for participating. You may now disconnect.