Earnings Call Transcript - BABA Q1 2020

Operator, Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba's June Quarter of 2019 Results Conference Call. We apologize for any static or any disturbances. Please go ahead.

Rob Lin, Head of Investor Relations

Okay. Good day, everyone, and welcome to Alibaba Group's June Quarter 2019 Results Conference Call. Before I get started, I just want to see if people on the line can listen well. Maybe you could take one question, operator, to make sure that someone on the line can answer, that they can hear well, because there are some technical issues here on this side. Okay. I think we'll proceed. Okay. Well, sorry about that. So with us today are Joe Tsai, our Executive Vice Chairman; Daniel Zhang, Chief Executive Officer; and Maggie Wu, Chief Financial Officer. This call is being webcast on our Investor Relations 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 current expectations. For detailed discussions of these risks and uncertainties, please refer to our latest annual results on 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 presumptions 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-based 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, growth rate of all 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

Thank you, Rob. Thank you all for joining us. Alibaba's business continues to do well in an uncertain economic environment, characterized by slower global growth and the trade war. In the last quarter, I explained why Alibaba is on the right side of all the solutions that could help us address issues in the trade war. If you haven't, please go back and read my speech from the last quarter. In this quarter, our core commerce business, comprised of China retail, wholesale, international commerce, logistics and local consumer services performed exceptionally well, with overall year-on-year revenue growth of 44% in this segment. The question that is invariably asked is how does Alibaba's business, which is consumption-driven, continue to deliver robust growth despite challenges in the broader economy? I want to offer two reasons. Both are big secular trends happening in China that we have taken advantage of. First is demographics, and the second is the rapid pace of digitization. On demographics. China's USD 5.5 trillion domestic consumption market is driven by two massive demographic forces. First is the emergence of a middle class of over 300 million people living in large cities. This affluent middle-class population is almost as large as the entire U.S. population, and their consumption needs and wants are approaching developed market levels. We have talked about the desire by these consumers to upgrade the quality of products they buy, especially the pursuit of brands and imported products. Alibaba's Tmall platform benefits tremendously from this ongoing trend, and we believe it will continue to be the leading choice for consumers looking for quality and consumption upgrade. The second massive demographic trend is the rise of urbanization, affecting third, fourth and fifth tier cities. Other than the major metropolitan areas like Shanghai, Beijing and Shenzhen, China has more than 150 cities with a population of at least one million people. In aggregate, these lower-tier cities and the surrounding townships have more than 500 million people with a consumption economy of USD 2.3 trillion. What is happening is the lower-tier cities are urbanizing very fast, with a projected 300 million people that will move from rural areas into these cities in the next 10 years. The economy of these smaller cities will grow faster than the major metropolitan areas. We've seen projections that retail consumption from the lower-tier cities and townships will triple from $2.3 trillion today to nearly USD 7 trillion by the year 2030. That is a compounded annual growth of more than 10% over a long period of time. In the current quarter, we grew annual active consumers of our China retail marketplaces to 674 million, of which more than 70% come from lower-tier cities. Alibaba's China retail platforms, especially Taobao marketplace, is very well positioned to capture the consumption demand from the lower-tier cities. Alibaba is uniquely positioned with a capability to capture opportunities of both the growing middle class in metropolitan areas and urbanization of lower-tier cities. This unrivaled capability is enabled by our multiple retail platforms that are highly trusted by consumers, extensive ecosystem of brands, merchants and manufacturers and AI-driven personalization technology. The second big secular trend I want to talk about is the rapid pace of digitization. Over the past 10 years, digitization of the Chinese economy has been driven by smartphones. Because of the convenient and always-connected nature of mobile devices, more and more users are spending more and more time connected to the Internet. This is giving the digital service providers like ourselves a great feedback loop to understand user trends so that they can rapidly and continuously improve their services. Under our all-in mobile strategy, Alibaba has become the leading player in digitizing commerce. We have developed the most sophisticated AI algorithms to serve consumers on our platform, which results in ever-improving user experience as well as increasing monetization opportunities. In the next 10 years, digitization of the economy will be further accelerated by the advent of 5G connection and proliferation of IoT devices. This will have far-reaching implications for all industries and processes, including public services, manufacturing, supply chain distribution, product development and marketing. By developing these essential technologies of a more digitalized world, such as data technology, cloud infrastructure and machine intelligence, Alibaba is very well positioned to help businesses succeed through our new infrastructure for commerce. Now I turn to Daniel for his remarks.

Daniel Zhang, Chief Executive Officer

Thanks, Joe. Hello, everyone, and thank you for joining our earnings call today. We had an exceptional quarter with impressive business performance and effective execution of our overall strategy, leading to remarkable revenue growth of 42% year-on-year, surpassing industry peers, even as we take a cautious approach to monetization to assist SMEs in the current uncertain macroeconomic environment. We also achieved solid profit growth due to measures aimed at enhancing operating efficiency. During the quarter, we experienced effective execution and operational advancements in various areas that I will detail, including successful expansion into less-developed regions, positive trends in the adoption of our New Retail technology by consumers and retail partners, efficient and innovative last-mile solutions from Cainiao, sustained improvement in our Lazada business in Southeast Asia, strong revenue growth in our cloud computing segment, and the realignment of our digital entertainment division to ensure healthy, long-term growth. In our China retail marketplace, we are continuously proving our ability to expand our customer base significantly. In June 2019, our China retail marketplaces reached 755 million mobile monthly active users, a net increase of 34 million in the quarter. There was an increase of 20 million annual active consumers, totaling 674 million, driven by effective user acquisition strategies and a record-breaking June 18 shopping festival. Notably, over 70% of the increase in annual active consumers came from less-developed areas, highlighting the success of our initiatives to engage a wider base of users. In our core commerce division, Tmall solidified its market leadership in the B2C market, growing at a pace faster than the sector average. Tmall's paid gross merchandise volume for physical goods increased by 34% this quarter, mainly driven by a rise in both user numbers and average spending. This June, we hosted the largest June 18 shopping festival in terms of business scale and customer engagement. The event witnessed robust consumer demand that fueled strong sales and increased brand and merchant penetration into less-developed regions. Over 120 brands achieved more than RMB 100 million daily in gross merchandise volume. Throughout the 18-day promotional period, Tmall's paid gross merchandise volume for physical goods rose by 38%, driven by growing consumer numbers and higher average spending. The daily active users of the Mobile Taobao App rose nearly 30%, reflecting an effective promotional strategy, with about 65% of buyers coming from less-developed regions. The success of the event stemmed from a promotional strategy that kept consumers engaged and ready to spend. Enhanced user acquisition programs, better reactivation of dormant users utilizing our data technology, and a diverse selection of value-oriented products attracted more buyers in less-developed areas while continuing to address the rising demand from middle-class consumers. For local consumer services, we saw strong growth in daily on-demand gross merchandise volume, propelled by solid order growth and rising average order size during the quarter. Additionally, we extended the availability of products and services in targeted low-tier cities where we saw improved market share. We remain committed to delivering value to restaurants and local service providers through our data technology. Our New Retail business focuses on both reforming the old and creating the new, broadening our market opportunities. We're making significant strides in helping retail partners navigate their New Retail transformation through various solutions, including Taoxianda and digital POS machines. Taoxianda allows consumers to order from nearby supermarkets via the Taobao app with secure delivery through our on-demand delivery network. Digital POS machines provide insights from local consumers’ in-store purchases. These New Retail technologies are yielding positive results for partners like Sun Art. Freshippo, or Hema, is achieving significant same-store sales growth, continuing to broaden its reach, optimize its stores, and implement new product initiatives. Hema is consolidating its supply chain to enhance customer experience by directly delivering products from farms to tables. Cainiao Network has developed effective import procurement solutions by combining bonded warehouses in China with direct overseas shipments. Cainiao's warehouse network covers all major ports in China, and its comprehensive last-mile solutions include a global app offering on-demand pickup and delivery that allows consumers to send packages from their homes, facilitating easy returns. As of June 2019, Cainiao's speedy two-hour on-demand pickup service has reached nearly all districts and counties in China. Overall, one in every three returning packages on our platform was managed through Cainiao's global platform. On the global stage, Lazada has shown good operational improvement following enhancements to its third-party marketplace business, management team, and technology infrastructure. For the third consecutive quarter, Lazada reported over 100% year-on-year growth in orders, indicating strong consumer demand. The quarter also saw effective user acquisition programs, with mobile daily active users doubling year-on-year. Lazada's main goal is to maintain strong user growth and engagement in the upcoming years. Our cloud computing business continues to perform remarkably well, with revenue rising 66% year-on-year to RMB 7.8 billion, primarily due to an increase in average revenue per customer. We are committed to delivering high-value services while optimizing our offerings of standard products and services. Our strategy to expand market leadership includes increasing investments in talent and technology infrastructure and developing new value-added products. Alongside robust growth in public cloud, we are capitalizing on strong demand for private cloud, mainly driven by the digital transformation of major enterprise clients across various industries. During the quarter, our private cloud revenue grew over 250% year-on-year. The digital media and entertainment sector continues to face challenges from stricter content regulations and industry rationalization. Youku will maintain its focus on investing in original content, enhancing user experience, and growing its paying subscribers. During the quarter, Youku saw a 40% year-on-year increase in average daily subscribers. While we are dedicated to expanding our original content production capabilities, we are also implementing measures to improve cost efficiency and return on investment, which is evident in the reductions in losses during the quarter. The Alibaba digital economy continues to thrive despite complex geopolitical and economic conditions. Recent geopolitical uncertainties have added pressure on global growth. Looking ahead, we see this as both a challenge and an opportunity for the Chinese economy. Consumption and service sectors are positioned to become the new engines of growth in China. The purchasing power within Alibaba's digital economy is robust, coming from consumers in less-developed regions and the affluent middle class. We estimate that over half of the total addressable population in less-developed areas are already consumers within Alibaba's digital economy. We are consistently acquiring new customers through a comprehensive approach in these regions. With such a large existing customer base, we see substantial cross-selling opportunities within the Alibaba ecosystem that will enhance their purchase frequency and category diversification. For the affluent middle class, Alibaba is also well equipped to meet their evolving consumption demands. We are well established in top-tier cities and are continuously enhancing consumers' mindshare and wallet share across various aspects of their lives. Today's Alibaba digital economy is self-reinforcing and remains strong. Supported by consistent revenue growth and healthy financial performance, we are positioned to continue investing in strategic areas such as local consumer services, globalization, logistics, cloud computing, and digital content, which we believe will drive sustainable future growth for Alibaba's digital economy. Now I will hand over the call to Maggie, who will discuss the details of our financial results.

Maggie Wu, Chief Financial Officer

Thank you, Daniel, and thank you all for joining us. We had another strong quarter. I will start with a review of the key financials and our outlook for the upcoming quarters. In the June quarter, we experienced significant user growth, reaching 755 million monthly active users and 674 million annual active consumers, meaning about half of the Chinese population is shopping on our platform. We also made strides in reaching less-developed regions in China, with over 70% of the new annual active consumers coming from these areas. Our extensive and engaged user base provides a strong foundation to not only enhance our market leadership in China's retail marketplaces but also to expand other consumer businesses within the Alibaba digital economy. Our total revenue for this quarter grew by 42% to RMB 114.9 billion. If we exclude the impact of consolidated acquired businesses, revenue increased by 38% year-over-year, with Ele.me and Alipay included in this consolidation starting in May of last year. The rise in total revenue was primarily driven by strong growth in our China commerce retail business, Ele.me's performance, Alibaba Cloud's revenue growth, and an increase in order volumes handled by Cainiao. This quarter, our costs and expenses, excluding SEC, were effectively managed, resulting in greater efficiency, especially in investment-stage businesses. The cost of revenue increased mainly due to higher inventory costs in our direct sales and New Retail segments, as well as increased logistics costs for Ele.me, driven by more order volumes, which was partially offset by a reduction in content expenditure for Youku. Now, regarding our business segments: our core commerce segment delivered a strong quarter with revenue growth of 44% to around RMB 100 billion. The fundamentals of our China retail business remain robust. The combined customer management revenue and commission revenue saw healthy growth of 26% this quarter, with customer management revenue increasing by 27%. This growth in customer management revenue was mainly due to an uptick in paid clicks resulting from user growth and better algorithm-driven listings that enhanced consumer experience. Merchant confidence is high, as indicated by robust merchant spending growth and an increase in the number of paying merchants. Commission revenue rose by 23%, driven by a significant 34% year-over-year growth in Tmall's paid physical goods GMV. The discrepancy between the commission revenue and Tmall physical goods GMV growth is chiefly due to the shift in Tmall Supermarket revenue composition from commissions to direct sales, with direct sales now reflected under Others within the China commerce retail business. Revenues from direct sales, including Tmall Supermarket and Hema, led to a 134% increase in other revenues to RMB 16.7 billion. In local consumer services, revenue reached RMB 6.2 billion, fueled mainly by our food delivery service, Ele.me. Our food delivery business showed strong growth in daily on-demand GMV due to robust order growth and larger average order sizes. We enhanced operational efficiencies through targeted market share expansion. We remain dedicated to penetrating less-developed areas in food delivery, which we believe will add long-term value to Alibaba's digital economy. We will be adaptive and optimistic in our investment approach for local consumer services moving into the latter half of the year. The performance of other sectors such as new retail, Cainiao, and international retail continues to be healthy, as Daniel noted earlier. Turning to core commerce profitability, we maintain strong adjusted EBITDA figures. Compared to last year, we increased adjusted EBITDA by RMB 9.8 billion, while the combined losses from our four strategic investment areas only rose by RMB 1.6 billion, reflecting our disciplined management approach. Incorporating these losses, core commerce adjusted EBITDA grew by 25% to RMB 41 billion this quarter. Cloud computing revenue soared by 66% to RMB 7.8 billion, primarily due to higher average revenue per customer. We are improving our revenue mix by emphasizing high-value services while rationalizing commoditized offerings. Adjusted EBITA showed a loss of RMB 358 million, but the adjusted EBITA margin improved from negative 10% to negative 5%. We will continue to implement strategies aimed at expanding our market leadership via value creation, investments in talent and technology, and new product developments. Revenue from our digital media and entertainment business increased by 6%, as the industry adjusts amidst tighter regulations on content. The adjusted EBITA for this sector was a loss of RMB 2.2 billion, though margins improved from negative 52% to negative 35% due to decreased content spending and operational efficiency improvements. Revenue from innovation initiatives grew by 21% to RMB 1.3 billion, largely driven by revenue increases from Amap, our modern initiative. However, adjusted EBITA losses for these initiatives rose to RMB 2 billion due to investment in technology and new business projects. Our business exhibits strong profitability and cash flow generation capacity, with a free cash flow of RMB 26.4 billion for the June quarter. While this reflects a slight year-over-year increase, it is not as substantial as our profit growth due to two main factors: the inclusion of annual royalty fee payments to Ant Financial affects cash flow, and a payment related to a U.S. federal class action lawsuit also impacted cash flow. As of the quarter's end, we held RMB 212 billion in cash, cash equivalents, and short-term investments. In May 2019, our Board of Directors authorized a share repurchase program of up to USD 6 billion over two years. Altaba, as previously disclosed, began selling its Alibaba shares on May 20, 2019, having sold 261 million ADS and retaining 22 million. Looking forward, the Alibaba digital economy remains resilient and continues to grow steadily despite complex geopolitical and economic circumstances. We had a strong start to our fiscal year, with revenue growth outpacing global technology peers. User engagement and consumer spending across our platforms remain robust. We plan to keep investing for long-term growth while achieving cost efficiencies in our investments. In the coming quarters, we expect significant user growth and-enhanced engagement in our China retail marketplace, supporting healthy monetization and steady profit growth. Profits generated from our marketplace-based core commerce will allow for investments in strategic areas like local consumer services, digital entertainment, international marketplaces, New Retail, logistics, and cloud computing. We are committed to enhancing market leadership in key sectors while improving overall operational efficiency. Many of these strategic businesses have established themselves as clear market leaders in recent quarters, and we believe there are still substantial opportunities in high-growth areas that will significantly grow our total addressable market. Lastly, I want to announce our 2019 Investor Day, scheduled for September 23 to 24 in Hangzhou, China. We aim to provide detailed business updates similar to those presented in past Investor Days, with further information available on our investor relations website. That concludes my prepared remarks. Let's open the floor to questions. Thank you.

Operator, Operator

Our first question comes from Eddie Leung of Bank of America Merrill Lynch.

Eddie Leung, Analyst

Congratulations on a good quarter. I have a question about the less-developed area stretch. Could you elaborate on how you plan to differentiate from your competitors in the lower-tier cities? And then just a follow-up, do you have a feel that there is a high degree of overlapping of your new customers from the less-developed areas with your other e-commerce companies? Or do you think you are addressing a different user segment in those areas?

Daniel Zhang, Chief Executive Officer

This is Daniel. Thanks for the question. As we said in our script, we are making good progress in user engagement and customer acquisition. During this quarter, we added 20 million annual active consumers, and over 70% of them are from less-developed areas. Today, when we look at the consumer base, we essentially have two types of consumers. One is in top-tier cities and is driven by their consumption upgrading and the growing demand from middle-class families. The other is from the less-developed areas. What we see is that, because of the penetration of the mobile Internet, we see consumers in lower-tier cities becoming mobile Internet users and trying various new business applications. Shopping and consumption is one of these very important areas. We are very happy to see that over half of the populations in less-developed areas are already customers in the Alibaba ecosystem. We will continue our efforts to acquire more customers from these areas while at the same time cross-selling services in various categories to fully leverage the existing user base we have. One more important point is that today, on our platform, we have very dynamic supplies from branded products and products from manufacturers. The power of the platform enables the new customers we acquired in the low-tier cities to access various dynamic product supplies which also meet their existing demands and create new demands for them. This is a very important strategy for us to continue.

Joe Tsai, Executive Vice Chairman

Sorry, I just want to supplement Daniel's point on the differentiated strategy in the less-developed areas. It's just more than what we've talked about in the shopping context. We have a broad product selection, just a much broader platform and also access to direct factories. If you look at the Alibaba ecosystem, beyond e-commerce, we provide local services to lesser developed cities. We also have our sister company, Alipay, that provides payment services as well as a variety of daily services on their platform. This ecosystem brings in lots of synergies that enable us to capture more loyalty from each of the users in those lesser-developed areas.

Piyush Mubayi, Analyst

If we think of the overall China commerce retail business as one, what percent of the GMV is moving from 3P to 1P? And how should we think of this transformation in terms of the impact on margins? It's a question for you, Maggie. And Joe, could I ask you to elaborate on how you think IoT and 5G could prove transformative to Alibaba?

Chung Tsai, Executive Vice Chairman

Sorry, Piyush. You may want to repeat the second question.

Wei Wu, Chief Financial Officer

Thank you, Piyush. Regarding your first question about 1P versus 3P, GMV reached RMB 5.7 trillion to RMB 5.8 trillion for the last fiscal year, approaching USD 1 trillion. This business accounts for a very small portion of that total GMV. Looking at Hema, Tmall Supermarket, this accounts for less than RMB 100 billion GMV. So just to give you a sense, it is not a big portion. In terms of margin impact, as we've said many times, rather than looking at margin, we look at deposit growth. This business contributes to revenue growth and will eventually contribute to our profit growth. If you look at this quarter's revenue, that's very strong growth at 42% year-on-year. Even if you exclude the impact from the commerce retail business, the revenue remains the highest among global peers. We see this as one piece of the business, and we should look at it together. When you look at revenue growth, the profit is also showing very strong growth. The core business continues to provide strong cash flow, while these investment areas, including New Retail, are also showing growth in revenue as well as improvement in profitability.

Chung Tsai, Executive Vice Chairman

To answer the question on IoT and 5G, we're in the early innings of a really transformational technology overhaul, with 5G potentially coming online in the next year or two. What that means is faster connections will enable more devices to connect to each other and to the cloud. In a world where faster connections enable millions of devices, these devices will be collecting vast amounts of data. Service providers using an IoT strategy to provide services will need to manage this massive data. Alibaba Cloud is rooted in data management and technology. Our operating system is a distributed data computing platform that sits at the core of our cloud computing technology, providing that service for our customers. This will ultimately benefit our cloud business. We're in the early stages, and the possibilities are beyond imagination.

Alicia Yap, Analyst

Congratulations on the strong quarter. I have a question related to your recent Tmall flagship store 2.0 upgrade. In addition to potentially driving higher conversions and better user experience, could you help us understand what could be the additional outcome for monetization opportunities we could get from the storefront upgrade? Would there be any incremental service fee or take rate opportunity? And on a broader scope, how should we compare the personalization upgrade on the storefront versus the recommended fee features on the main Taobao app?

Daniel Zhang, Chief Executive Officer

I think it is a very good question in our operating strategy. We recently launched our Tmall flagship store 2.0 version. The purpose of this new version is to upgrade the storefront to enable our brand partners on Tmall not only to sell their products but also to manage their fan base across platforms. This fan base management does not isolate our customer management efforts and marketing efforts. We want to provide a vehicle to land all marketing campaigns brands have to promote across channels. The amount of campaign data and fan data can be accumulated and reflected in the flagship store, creating a unique end-to-end customer management journey. In terms of monetization, we do intend to charge additional fees based on the software upgrading. But if more brands use the Tmall flagship 2.0 framework, there will be more marketing campaign integrated into our platform, which will lead to increased marketing spending within the Alibaba ecosystem.

Grace Chen, Analyst

In this call, it's very encouraging to see Alibaba's strong margin performance. It would be great if the management can elaborate a bit more on the efforts that have been made to improve margin performance, especially in core commerce and digital media, entertainment, and whether we will see strong margin performance continue in the next quarters. Congratulations.

Wei Wu, Chief Financial Officer

Thank you, Grace, for your question. Let me elaborate on what we have done to bring out operating efficiency. First of all, revenue growth is very strong, right? So that's coming from user growth and user experience enhancements. Regarding costs and expenditures, we have started emphasizing efficiency on spending - not only on marketing, but also on headcount and content spending. We have specific measures to review and measure the ROI of this spending. Secondly, we have seen synergies coming out of not only Alibaba Group but also with our sister company. In marketing spending, we're targeting another 200 million to 300 million potential users coming to our platform while Alipay is good at acquiring consumers in lower-tier cities. Taobao is good at retaining these consumers to not have to spend twice. It's an effective way of assuming the market and core users. I hope that helps. The Ele.me margin opened narrow from 55% negative last year to 35%. Actually, there was a one-off in last year, the World Cup spending. If you take that out, last year's net EBITDA margin would have been around 42%, but it's still a lot down. The GMV negative margin narrowed primarily due to our discipline on spending, particularly on content.

Wai Yan Wong, Analyst

Congrats on the very upbeat results. My question is about local consumer services, particularly in your food delivery business. We see that there is strong top line growth along with the loss margin narrowing down from 9% to 5% this quarter with very strong top line growth. So we want to understand the major driver. Is it the efficiency improvement or less subsidy? Can we get clarity on your priorities going forward? Is it still gaining market share, especially in lower-tier cities and synergies within your New Retail system along with Hema and building the B2B digitalization transformation, basically tapping into merchants IT projects as well?

Rob Lin, Head of Investor Relations

Yes, there's a lot of noise. I would like to clarify your question regarding local consumer service.

Daniel Zhang, Chief Executive Officer

This quarter, we made good progress in local services, especially in low-tier cities, and we are gaining market share in these particular cities. At the same time, we are very happy to see operating efficiency has improved with our continued efforts. We will continue to grow our user base in this local service business by leveraging the synergies in the Alibaba ecosystem. I think we have a unique advantage with 750 million mobile active users across various consumer platforms. How to cross-promote local services within this existing user base, especially in low-tier cities, is a big advantage for us. We will continue to work on this. This on-demand delivery network helps our retail partners with ad-hoc deliveries for orders away from stores which also improves the operating efficiency of the last-mile services.

Chung Tsai, Executive Vice Chairman

Well, as I said, we will continue to invest and grow our local business, especially in the low-tier cities. Our priority is to leverage our user base we have while also continuing to improve our operating efficiency.

Gregory Zhao, Analyst

A very impressive result. My question is about the recommendation fees. I just wanted to check the recent progress of your monetization on recommendation fees and what the contribution to your customer management revenue is. Also, I want to understand if there is any seasonality of the business such as less monetization during the 6.18 and 11.11 promotions to push keyword search advertising. A quick follow-up on lower-tier city expansion. I think you talked about the opportunity in lower-tier cities. And we just want to understand how you will differentiate your lower-tier city expansion strategy with your peers.

Wei Wu, Chief Financial Officer

Okay. Talking about customer management revenue and the monetization of recommendation fees. First of all, our customer management revenue grew 27% year-on-year. This growth is primarily driven by a bigger user base and a better user experience, leading merchants to be satisfied and willing to pay more. For recommendation fees, we do not plan to roll out monetization, particularly in the current uncertain macro environment as a way of supporting our SME customers. From the competitive perspective, we will target revenue growth by rolling out the recommendation fee more aggressively.

Daniel Zhang, Chief Executive Officer

In terms of strategies in the low-tier cities, today, over half of the population in less developed areas are already our customers, so we will continue to leverage this user base in our ecosystem to provide them value. Our promotional initiatives include Juhuasuan and daily deals, allowing us to effectively increase user frequency and buying frequency. In terms of new customer acquisition, we see a significant opportunity to penetrate further with the power of the Alibaba ecosystem, working together with Alipay and local services to further engage these customer bases. The digital checkout for new customers provides a good opportunity to integrate into our shopping and consumption platforms. We will continue to work on this.

Rob Lin, Head of Investor Relations

Operator, last question.

Jerry Liu, Analyst

My question is regarding comments on rationalization and optimization, especially in our investments so far this year. This quarter's EBITDA growth is actually better than the year-over-year growth of either revenue or core EBITDA, which is the first time in over a year. I'm wondering if there is more rationalization we can continue to ensure this strength?

Wei Wu, Chief Financial Officer

Yes, Jerry. The revenue growth was very strong, right? So 42%, if you compare with other peers, as most of them are in a 20% range. At the same time, we talked about disciplined costs and operating efficiencies and all of these efforts in extracting synergies from the group and the Alibaba economy. We will continue to do so while we see great potential in the market. While we're focused on discipline, we’re also flexible and optimistic in our approach to investing in all these business initiatives because, like we've done in the past 20 years, investing in innovation brings sustainable growth for the long term.

Rob Lin, Head of Investor Relations

Thank you everyone for joining the call today. If you have further questions, please reach out to the Investor Relations team at Alibaba. Thank you.

Operator, Operator

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