Earnings Call Transcript - JD Q3 2023

Operator, Operator

Hello, and thank you for standing by for JD.com's Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Sean Zhang, Director of Investor Relations. Please go ahead.

Sean Zhang, Director of Investor Relations

Thank you, Operator. Good day, everyone. Welcome to JD.com's third quarter 2023 earnings conference call. For today's call, CEO of JD.com Ms. Sandy Xu will start with her opening remarks. And our CFO, Mr. Ian Shan will discuss the financial results. After that, we'll open the call to questions from analysts. Let me quickly cover the Safe Harbor. Please be reminded that during this call, our comments and responses to your questions reflect management's view as of today only and will include forward-looking statements. And please refer to our latest Safe Harbor statement in the earnings press release on our IR website, which applies to this call. We'll discuss certain non-GAAP financial measures. Please also refer to the reconciliation of non-GAAP measures to the comparable GAAP measures in the earnings press release. Also please note, all figures mentioned in this call are in RMB, unless otherwise stated. Now, let me turn the call over to our CEO, Sandy.

Sandy Xu, CEO

Thanks, Sean. Hello, everyone, and thanks for joining us today to discuss our Q3 results. We continue to see strong development across many of our operating and financial metrics. We saw a robust performance for our Singles Day Grand Promotion with double-digit order growth and many innovations. The successful promotion further amplified our efforts to bring lower costs, higher efficiency, and superior customer experience to our customers and business partners. This is JD's operating philosophy, which we have been committed to since day one. User experience is at the center of our operating philosophy, and we've gone the extra mile to further improve our user experience. Let me share some recent highlights. In Q3, we expanded free shipping coverage for our users by leveraging our improved logistics capabilities. We lowered the minimum order value for free shipping services from RMB99 to RMB59 for all users. And also to JD PLUS members, unlimited free shipping for 1P products. As always, JD.com customers will continue to enjoy our premium so-called 211, our same and next-day delivery services. JD's live streaming sessions hosted by our own category managers proved very popular with users and brands during our Singles Day Promotion. What's unique about JD's live streaming is that not only are the category managers the experts for the products they present, but they are also empowered by JD's supply chain capabilities. They do not charge any additional commission fees. This means that we can bring a great selection of products to our users at excellent prices. Customers and brands have embraced this new live streaming format, as they benefit from the streamlined cost structure and superior value. As a result, our live streaming sessions hosted by category managers attracted over 380 million viewers in total during the promotion period. We also stepped up our after-sale customer service by increasing the coverage of our industry-leading instant refunds and best price guaranteed services, both of which are increasingly resonating with our users. All these efforts to improve our customer service quality and user experience have been reflected in higher user engagement, as we saw an accelerated growth of user order frequency in Q3 compared to the past six quarters. Beyond the recent efforts to improve user experience, we are very focused this year on investing in long-term key capabilities to drive sustainable growth, namely, our strategies to build a differentiated platform ecosystem and improve everyday low price or EDLP mindshare. I would like to share our thinking on why this is the right direction for JD and on the progress we have made. Let me start with our platform ecosystem strategy. Providing the best-in-class user experience is at the heart of everything we do. Our platform ecosystem allows our 1P and third-party business to grow in a complementary and sustainable manner and together serve our customers better. By ensuring both 1P and 3P sellers follow the same operating philosophy, we can compete and thrive in a comprehensive platform ecosystem. JD is best able to provide consumers with a superior user experience. As such, we never drive one business model at the cost of the other. On the 1P side, JD's leading supply chain capabilities and scale advantages provide users with high-quality products at competitive prices and greater customer experience. This will always be a key offering and differentiator for JD. Our 3P marketplace gives us the flexibility to expand into new product categories where it is difficult to achieve the same level of efficiencies we have under our 1P model. So, in the face of consumers' rapidly evolving demand and increased price sensitivity, our 3P marketplace allows us to serve customers efficiently with a diverse selection. Our approach to building our platform ecosystem can be summarized in a few key steps. In addition to our 1P suppliers, it's equally important to encourage our 3P merchants to embrace and adhere to the same operating philosophy that we have committed to for the past 20 years. To do this, we are making tremendous efforts to improve our platform ecosystem, including traffic location, algorithm, operating tools, and infrastructure to encourage and empower the 3P merchants, while setting clear rules and stepping up our platform governance efforts to enhance risk management. On top of this, we are working to ensure that positive behaviors of 3P merchants are rewarded. The main goal is to incentivize 3P merchants to follow our operating philosophy and align their performance with our commitment to improving user experience. We have established a scoring system based on key elements underpinning our operating philosophy, including price competitiveness, product and service quality, and store ratings. The score system applies to both 1P and 3P merchants in a fair and transparent way. Merchants are able to review and check their scores across different aspects. We then embed these scores in our traffic distribution algorithm to create a virtuous cycle. We continue to strengthen our 1P business model in areas where it generates higher efficiency and delivers a better user experience. At the end of the day, it is the choice of our users to pick either 1P or 3P. I want to reiterate that we will not drive 3P development at the cost of our 1P business. What we do is create a platform ecosystem that enables both 1P and 3P businesses to compete on a level playing field and better serve our customers. To evaluate the long-term success of our platform ecosystem, we look at a set of key operating metrics. We were encouraged by the continued rapid growth of active 3P merchants and the growth of 3P orders and active users who purchased from our 3P merchants in Q3. Even though 3P monetization is not our priority in the near term, we have been delighted to see continuous double-digit growth in 3P advertising revenue, especially driven by the improving engagement of new merchants on JD's platform. On the 1P side, we are happy to see improved user experience as evidenced by increased users' NPS. Building this unique platform ecosystem is a long-term commitment, and we are still at the early stage of realizing its potential. We believe the set of operating metrics are moving in the right direction. We are determined to continue our efforts to strengthen our capabilities and build our unique platform ecosystem. Now let me continue to elaborate on why we are focusing this year on improving our EDLP mindshare. First, what does low pricing mean in JD's case? At JD, low price means improving our price competitiveness across different product categories, particularly branded products, and expanding the selection for white label products to cover a wider price range in order to make up for what we lacked in the past. I want to clarify some market misunderstandings here. JD is not shifting our focus away from our core competency in branded products or serving the top-tier market. On the contrary, we are further enhancing this strength by improving our price competitiveness. Additionally, we will never allow any bad quality or counterfeit products on JD's platform, while we provide low prices. Our low price commitment does not mean pursuing absolute low prices at the expense of other aspects of user experience, such as product quality and service. Why do we need to improve our price competitiveness? Price competitiveness is the most important value proposition for retail business, and one of the most important pillars of JD's customer-centric philosophy. Our focus on price competitiveness drives us to continually strengthen our 1P supply chain capabilities, improve efficiency, and foster a prosperous platform ecosystem where healthy competition among merchants and suppliers is encouraged. All this leads to better user experience, which is key to our long-term success. Both our 1P and 3P marketplaces play a critical role in this. In our 1P retail business, we are relentlessly driving down costs, improving operating efficiency along our supply chain through technology and scale, and passing on the efficiency gains to our customers. This is a sustainable way to ensure price competitiveness and allows us to fulfill our commitment to offering EDLP for our great products and services. A key part of our low-price strategy focuses on the 1P retail business, especially on branded products. To supplement this, on the 3P side, we aim to onboard merchants that offer diverse product selections covering a wider price range. Merchants are rewarded for offering low prices, great selection, and good services to our customers, based on the positive traffic feedback mechanism we are building. Since the beginning of this year, we have launched a series of new initiatives to enhance our value creation for customers. Our category manager live streaming during the Singles Day Promotion was a good example. Another is that we continue to enrich the value-for-money selection of 3P products within our RMB10 billion discount program, and we saw the 3P GMV contribution to the total of this program increased to over 50% in Q3. Lastly, how do we track and measure our progress on low price or EDLP mindshare building? We check the trend of key customer metrics, including customer NPS and engagement, while structural changes in NPS may take longer to shape. We are noticing strong early progress in user engagement, as evidenced by the double-digit growth of order volume and ARPU of users from lower-tier markets. We also note that the growth of low average order size orders accelerated and outpaced total order growth in Q3. All these are strong testaments to our early progress in EDLP mindshare building. We look forward to sharing more with you on the progress of our key indicators in the coming quarters and we look ahead to the future. We will continue to adhere to our operating philosophy and execute our strategy to provide the best customer experience. We believe this will guide us to achieve high-quality sustainable growth and win-win value creation for our users, business partners, shareholders, and society at large. With that, I will turn it over to Ian for our financial highlights. Thank you.

Ian Shan, CFO

Thank you, Sandy, and hello, everyone. In the third quarter, we delivered a stable top-line performance facing a mix of gradual macro recovery, seasonality, and a high base, while we continued our proactive strategic refocus. Our bottom line maintained healthy momentum with a non-GAAP net margin hitting an all-time high, which enabled us to invest in user experience sustainably. As Sandy mentioned, we saw improvements across many of our operating metrics, and we are on the right path to strengthen our core capabilities, enhance price competitiveness, and build a platform that allows both 1P and 3P to better serve our users, even though these efforts may not be fully reflected in the short-term financial results. With that, let me turn to our Q3 financial performance. Our net revenues grew by 2% year-on-year to RMB248 billion in Q3. Breaking down the revenue mix, product revenues were down by 0.9% year-on-year. By category, electronics and home appliances revenue was flat year-on-year, primarily due to seasonality and a high base from last year. That said, this category continues to outpace the industry in Q3 and in the first nine months of this year. This shows our strong user mindshare and robust supply chain with industry-leading service capabilities. General merchandise revenues were down 2% year-on-year in Q3 as the supermarket category is still recovering. The decline continued to narrow compared to the first two quarters of this year, and we started to see positive signs from supermarket and fashion-related categories, such as increased order volume, higher user shopping frequency, and a healthier product mix. Service revenue grew by 13% year-on-year in Q3, accounting for 21% of JD's total revenue. Within service revenues, marketplace and marketing revenues were up 3%. In particular, 3P advertising revenues once again recorded double-digit growth for the quarter, which was partially offset by the decline of 3P commission revenues. This is an expected short-term outcome and is in line with our platform strategy, under which we have rolled out several cost-cutting measures and operating tools to support 3P merchants onboarding and operation. This strategy has produced early results as we have seen substantial expansion of the active 3P merchant base in the quarter. At the same time, we are also deploying a more effective traffic allocation mechanism for both 1P and 3P to ensure better user experience and healthy development of our platform. Turning back to our service revenues, logistics and other service revenues grew by 19% year-on-year in Q3. Now, let me turn to our segment performance. JD Retail revenues increased by 0.1% year-on-year in the quarter as we continue to see headwinds on our short-term financial results from our strategic refocus. We know that our core business growth has maintained healthy momentum, as evidenced by the continued expansion of JD Retail's profitability. Both gross margin and fulfilled gross margin increased to record highs in Q3, despite our investment in low prices and user experience, such as extended free shipping service. This shows that our low-price offerings are enabled by our supply chain capabilities and healthy development of our platform instead of being driven solely by subsidies. JD Retail's non-GAAP operating margin came in at 5.2%, largely flat year-on-year as we continue to invest in improving user experience to encourage stronger user engagement, and this will help our long-term sustainable growth. We also saw encouraging trends in user shopping behavior in the quarter. JD PLUS members maintained a double-digit growth, and the group continued to show high loyalty and strong purchasing power. The annual ARPU was 8 times that of non-plus members in Q3. JD Logistics saw a 16% revenue growth year-on-year in Q3, driven by the acceleration of both internal and external revenues. External revenues accounted for 72% of revenues in Q3. In terms of profitability, JD Logistics' non-GAAP operating margin was 0.7% in the quarter, the same as last year. Dada reported revenues of RMB2.9 billion, up 20% year-on-year and a non-GAAP operating loss of RMB52 million for the quarter, a substantial narrowing down of 83% compared to last year. This was driven by better operating efficiency and economies of scale. The on-demand retail is still an important pillar for JD. In the quarter, the number of offline stores that cooperated with Daojia and Shop Now expanded from around 300,000 to over 400,000, providing more than 2,000 cities and counties with on-demand retail services covering a wide range of categories. Lastly, revenues from new business were RMB3.8 billion in Q3, down 24% year-on-year due to the scale back of our international business. New business operating loss was RMB139 million in the quarter, a notable narrowing down of 85% from an operating loss of RMB953 million a year ago, excluding the gain on disposals of JD Property's assets in Q3 last year. Moving to the consolidated bottom line, we recorded RMB10.6 billion non-GAAP net income attributable to ordinary shareholders in Q3, up 6% even from a high base in the same quarter last year. Non-GAAP net margin increased by 17 basis points year-on-year to a new record of 4.3%. Finally, our LTM free cash flow as of the end of September was RMB39 billion, an increase of 18% from RMB33 billion at the end of June and 52% from RMB26 billion at the end of September last year. This was driven by our improved profitability and further optimization of our cash conversion cycle. By the end of Q3, our total cash balance, including cash and cash equivalents, restricted cash, and short-term investments, added up to a total of RMB250 billion. Excluding interest-bearing debt and accounts payables, our net cash balance was RMB50 billion by the quarter end. To conclude, we've seen a set of encouraging trends during the quarter, and we will continue to firmly execute our strategies on low prices and platform ecosystem to provide better user experience. This will position us for long-term sustainable growth. With that, I will turn it over to Sean. Thank you.

Sean Zhang, Director of Investor Relations

Thank you, Ian. For the Q&A session, you are welcome to ask questions in Chinese or English. Our management will answer your questions in the language you asked. We will provide English translation as necessary for convenience purposes only. In the case of any discrepancy, please refer to our management statement in the original language. Operator, we can open the call for the Q&A session.

Operator, Operator

The first question today comes from Thomas Chong with Jefferies. Please go ahead.

Thomas Chong, Analyst

You are welcome to ask questions in Chinese or English. Our management will answer your questions in the language you asked, and we will provide English translation if needed. In case of any discrepancies, please refer to our management statement in the original language. Operator, we can open the call for the Q&A session. The first question today comes from Thomas Chong with Jefferies. Please go ahead.

Sandy Xu, CEO

Thanks, Thomas. I will address most of the questions. As I mentioned earlier, the platform ecosystem has always been one of JD's key strategic focuses, both from the corporate level and also the JD Retail level, and we are continuously refining this distinct platform ecosystem. This aims to realize JD's value proposition and establish a unified business philosophy followed by both our 1P and 3P merchants, and we are consistently enhancing platform infrastructure and tools to ensure that both 1P and 3P merchants on JD have ample resources, better competition, and shared growth opportunities, ultimately delivering an enhanced user experience for all our customers. Throughout this year, we've streamlined the merchants onboarding processes, increased the support for our new merchants, especially small and medium-sized sellers, and established an operational support system, leading to a historic high in both total active merchants in Q3. We are pleased to see that the number of total merchants maintained a triple-digit growth rate, especially in our 3P merchants in the categories of supermarkets, fashion, and home goods. Additionally, the number of active merchants is accelerating with an increasing number of new merchants gradually finding effective operating strategies to operate on JD and empower their sales growth. As I just mentioned in my script, while our ongoing investment in merchant support does not prioritize short-term 3P monetization, we have also observed continued double-digit growth in our 3P advertising revenues, thanks to our increasing engagement with new merchants. From the users' performance metrics, we've received positive feedback. The penetration rate of users shopping from 3P merchants continues to increase year-on-year, and 3P order volume also achieved healthy year-on-year growth. The platform ecosystem has, in the past two to three years, been our long-term investment direction, and given a unique opportunity, we aspire to build a unique JD-style ecosystem. This is an ongoing project, and we are still in the early stages of this goal, and there's plenty of room for us to continue to improve our governance and the tools within our platform ecosystem. We remain committed to creating a clearer growth path and a fair business environment for merchants, promoting mutual prosperity and development for both 1P and 3P businesses. Regarding whether users want to shop for 1P or 3P, this will be a natural outcome of choices from our users. As we see the gradual maturity of our platform ecosystem, I think in the long run, the share of 3P orders and GMV will surpass that of 1P, but of course, this will be an ongoing process. Our core objective is to meet the diverse needs of different users through a rich product supply, continuously enhancing our user experience. This will be one of our essential drivers for sustained growth of our long-term revenues and profits. Lastly, I would like to announce today that Mr. Lijun Xin will leave the role of CEO of JD Retail for another appointment within the company. Mr. Xin assumed the role of CEO in September 2021; in the face of changing external environments and industry dynamics, he has led the team to successfully expand collaboration with business partners and strengthen user mindshare, making significant contributions to the business. We truly appreciate Mr. Xin's dedication and believe he will continue to play a vital role in other positions at JD.com. JD Retail is, of course, the very core business of JD and contributes the highest proportion of our total revenue. It is also the cornerstone for us while exploring our diverse businesses. In this role, I will continue to drive the execution of retail strategies and strengthen synergies across business units. JD Retail strategies are set up by our Strategy Execution Committee, and we are personally involved in discussions and implementation of these strategies. Therefore, there will be no change to the JD Retail strategy. Thank you.

Sean Zhang, Director of Investor Relations

Thank you, Thomas. Operator, can we have the next question?

Operator, Operator

The next question comes from Ronald Keung with Goldman Sachs. Please go ahead.

Ronald Keung, Analyst

Thank you, Thomas. Operator, can we have the next question? The next question comes from Ronald Keung with Goldman Sachs. Please go ahead.

Sean Zhang, Director of Investor Relations

Okay. Let me briefly translate the question. Ronald wants to ask about the strategy adjustment, KPI adjustment, and team restructuring. After this adjustment, what have you seen in terms of core GMV growth trends? Also, how has your 3P business been trending? The second question is, what is your basic assumption for macro and consumption for next year? Based on that, what is your strategy to maintain your core business or category market share? How do you balance between growth and profitability?

Ian Shan, CFO

Thanks, Ronald. Over the past four quarters, the growth rate of our core GMV has been significantly higher than the total retail sales of consumer goods. In this quarter, our core GMV achieved high single-digit growth, which was higher than total retail sales and the online retail sales of physical goods. In the last quarter, we shared the rapid growth of the onboarded merchants. We also witnessed accelerated expansion of active merchants in Q2 and Q3. At the same time, user shopping from 3P merchants has grown faster than total users in the past two quarters. We believe the current progress of the platform ecosystem is in line with our expectations. We are seeing more active merchants and more users. It takes time to convert them to 3P orders and the GMV growth. I still want to stress that we are committed to providing our users with more choices and cheaper prices through 3P. We are pursuing a sustainable and healthy ecosystem, allowing our 1P and 3P to work together to provide users with a better shopping experience.

Sandy Xu, CEO

For the second part of the question, with the recovery of China, it's expected that growth will continue, though the speed is slower than we anticipated at the beginning of the year. At the same time, driven by a series of effective policies supporting consumption, employment, and enterprises, we anticipate that consumer spending will continue to steadily recover next year, with consumption becoming a major driver of economic growth. From a categories perspective, for some categories where JD has an advantage, we will have a bigger market share, such as home appliances and electronics. Our supply chain strength and enhanced user mindshare have enabled us to maintain growth rates surpassing inventory levels in the first three quarters of the year. We will continue to gain market share in these current categories by leveraging our supply chain advantages to optimize cost efficiency and provide users with diverse products, competitive prices, and better services. In the mobile phone and electronics categories, we will lead by emphasizing trendy products. In the home appliances category, which heavily relies on services, we will enhance our retail and service capabilities, both online and offline. We will promote higher-end and emerging products while enhancing users' perceptions of cost-effectiveness in this category. Additionally, we are making breakthroughs in services for home appliances, such as trade-ins and comprehensive assembly, delivery, and installation services to elevate user experience and stimulate consumer demand. For our supermarket category, we have made proactive efforts this year through category planning, warehouse transformation, and refined operations, all making steady progress. We believe the supermarket category will return to a healthier growth trajectory next year, reaffirming our belief that it will remain one of JD's most important growth drivers in the long term. I want to remind you that this category has also benefited from last year's pandemic period, which gives it a high base a year ahead. For 2024, we expect adjustments will have less impact, with gradual recovery of the economy and consumption aligning with our supply chain improvements, leading to enhanced low-price mindshare and platform ecosystem strategies taking root. We anticipate high-quality growth next year while balancing growth and profitability. Our profit improvement will come from enhancing supply chain efficiency and gradual improvements to the platform ecosystem. Our long-term goal of steadily increasing profit margins remains unchanged. Thank you.

Sean Zhang, Director of Investor Relations

Thank you, Sandy. We are ready for the next analyst.

Operator, Operator

The next question comes from Charlene Liu with HSBC. Please go ahead.

Charlene Liu, Analyst

Thank you. The first question is about competition. Competition intensified in 2023. Can you please kindly shed light on how you expect the competitive landscape to change in 2024? How will this shape JD's strategy going forward? Will GMV and market share be the continued focus over profitability? The second part of my question is, with most structural adjustments expected to complete by the end of 2023, what growth can we expect for the overall company, retail, and most specifically for FMCG in 2024? What could drive results to potentially surprise us on the upside or downside and why? Thank you.

Sandy Xu, CEO

Thanks, Charlene. I will answer your first question. Currently, China's eCommerce market features various platforms and business models, each with distinct characteristics. Though I might repeat myself here, for JD.com, we constantly adhere to a supply chain-based and consumer-centric business model. Building core capabilities around supply chain and user experience, we collaborate with our partners to create a supply of high-quality and affordable goods to match suitable users and provide the ultimate shopping experience, earning user trust. This business model has created value and positive outcomes for consumers, business partners, and society at large. It is designed to be the most resilient and sustainable business model capable of navigating different economic cycles. In terms of competition in the retail market, we've observed that many players this year have focused on enhancing user experience and refining operational and sustainable development strategies. So yes, there's always competition, and this year it may feel more intensified. However, we believe that the platforms' profit margins have not been significantly impacted due to each platform's implementation of its business strategies and models. We continue to believe that our core strategy is to improve supply chain efficiency through technology and scale, enabling us to share the actual profit brought by efficiency improvements with our partners and users, which includes improving user experience. Our approach is that user experience improvement is not built on sacrificing our reasonable profit margins and shareholder interests. Thus, we maintain a virtuous cycle: better user experience drives more traffic, leading to more sales opportunities and generating more profit margins. With those margins, we can further reinvest to improve user experiences. Therefore, we will continue to adhere to our long-term strategy, and we are confident in our business model to sustainably maintain a virtuous cycle and gain market share. In terms of our KPIs, we have different business segments exhibiting distinctive characteristics and at various stages of development in terms of GMVs, profits, and cash flows. The weight of these three indicators might vary. Long term, we believe in achieving a healthy balance among these indicators.

Ian Shan, CFO

Regarding the second part of your question, our major structural adjustments have been implemented this year, targeting business health, enhancing user experience, focusing on low prices, and building our platform ecosystem strategies. The key impacts of these business adjustments will be reflected in this year's results. For next year, we anticipate that JD's overall and retail business will return to normal growth rates. We are confident in achieving faster growth than the national total retail sales of consumer goods. Given JD's substantial scale, our growth is highly correlated with the country's macroeconomic conditions and the retail market. We aspire to outperform industry growth while continuing to gain market share. Despite the challenges faced by supermarket categories due to these adjustments and the post-pandemic recovery in offline consumption, our proactive efforts, including business optimizations, will gradually materialize, leading the category to return to a healthier growth trajectory. We are confident that supermarkets will continue to be JD's most important growth driver in the long term. Starting next year, we expect that the positive effects of our adjustments will lead to growth rates faster than the overall retail market.

Sean Zhang, Director of Investor Relations

Okay. Thank you. Operator, can we have the last question, please?

Operator, Operator

The next question comes from Kenneth Fong with UBS. Please go ahead.

Kenneth Fong, Analyst

Thank you, management, for taking my question. My first question is about user behavior and strategy. Under the current uncertain macro conditions, can management share some of the behavioral changes of users? How is the performance split among different categories? Is there any change in the operating strategy in light of current macro challenges? Second, how do we balance margin and growth? On one hand, we continue to emphasize our low-price strategy and user subsidies, while competition intensifies. That said, we've managed to maintain a stable margin. Can management share with us the investment during Double 11 and beyond? How should we think about the balance between growth and investment? Any thoughts or updates on the JD Retail long-term margin target? Thank you very much.

Sandy Xu, CEO

Thank you. That's a very good question. For JD's platform, we've seen consumers making more rational purchasing decisions focused on price and quality. We continuously enhance our supply chain efficiency to lower procurement and operational costs, enriching the platform ecosystem while improving price competitiveness and the diversity of product offerings to meet consumers' diverse shopping demands. As we shared previously, the purchasing frequency of JD Retail users continues to grow, with the growth rate surpassing that of ARPU. Notably, as we increase product diversity from 3P merchants and lower the free shipping threshold, we witnessed an accelerated growth in order count, particularly in low average order value segments. The spending power of our users from the first and second tier cities remains robust, and JD PLUS continues to experience double-digit growth in user numbers, indicating strong user loyalty. It's also important to note that users do not want to compromise on service while pursuing low prices; they seek low prices without sacrificing product and service quality. Throughout this year, we've continuously improved efficiency, optimized procurement, expanded product choices, and made significant efforts to enhance services such as installation and after-sales to maintain high standards without compromise. For the long term, we'll continue to pursue services as our core competitive advantage in this fiercely competitive market. Regarding the balance between revenues and margins, this shouldn’t be an issue in the long run; it will eventually form virtuous cycles where growing revenues lead to growing profits. In the short term, it's a tactical issue regarding whether we need to invest more in marketing and user acquisition. Overall, our commitment to steady and sustainable growth and profit improvement remains unchanged, reinforcing that we don’t pursue extremely high short-term monetization and profitability but instead seek a reasonable profit in our industry. Thank you.

Sean Zhang, Director of Investor Relations

Thank you very much. Thank you, Kenny, for the questions. Operator, time is running out. I think that's all for today's Q&A session.

Operator, Operator

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

Sean Zhang, Director of Investor Relations

Yes. Thank you for joining us today on the call and for your questions. If you have further questions, please contact me and our team. We appreciate your interest in JD.com and look forward to talking to you again next quarter. Thank you.

Operator, Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.