Feb 13, 2020
Operator
Good day, ladies and gentlemen. Thank you for standing by.
Welcome to Alibaba Group's December Quarter 2019 Results Conference Call. At this time, all participants are in listen-only mode.
After managements' prepared remarks, there will be a Q&A session. I'd now like to turn the call over to Mr.
Rob Lin, Head of Investor Relations of Alibaba Group. Please go ahead.
Rob Lin
Good day, everyone, and welcome to Alibaba Group's December quarter 2019 results conference call. With us today are Daniel Zhang, Executive Chairman and CEO; Joe Tsai, Executive Vice Chairman; Maggie Wu, Chief Financial Officer.
Daniel Zhang
Thank you, Rob. Hello everyone.
Thank you for joining our earnings call today. We delivered an outstanding quarter for a strong finish to the 2019 calendar year and celebrated three major milestones, especially important to Alibaba.
First, we successfully held our 11.11 Global Shopping Festival. Second, we successfully listed on the Hong Kong Stock Exchange.
Thirdly, Dr. Wang Jian, Chairman of the Alibaba Technologies Steering Committee was the first ever representative from the private sector to be appointed as a member of the Chinese Academy of Engineering.
However, like all the other companies in China, we are confronted with a black swan event soon after the start of 2020 the novel coronavirus. The outbreak is having significant impact on China's economy and may potentially affect the global economy.
It will present near-term challenges to the development of Alibaba's business across the board, but at the same time, we will see opportunities created by the forces of change. Before further elaborating, I will share an overview of our performance for the December quarter.
Maggie Wu
Thank you, Daniel. Thank you everyone for joining us.
Before we start, I would like to say that our thoughts and prayers go to those families deeply impacted by the coronavirus outbreak. At the end of my prepared remarks, I will also share with you our current assessment of the effects of this epidemic.
Rob Lin
Operator, before we start I just want to remind all the analysts that you can ask the question in Chinese or English and our management will respond to you in the language you asked. With that, operator let's open to questions.
Operator
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session.
Our first question comes from the line of Thomas Chong from Jefferies. Please go ahead.
Thomas Chong
Hi. Good evening.
Thanks management for taking my question. I have a question about the migration to online.
Post the coronavirus would our digitization strategy further speed up given off-line merchants realize the significance of going online and data insights from our ecosystem? The other question I have is about the synergies we've earned in local services.
What are the strategies to further unlock the potential of Ele.me on top of food delivery? Thank you.
Daniel Zhang
Thank you, Thomas. This is Daniel.
Let me answer these two questions. For the first one, I think in this outbreak, I think there are many, many relevance.
Many, many consumers they change their way of living and for many offices many workers they change the way of how to work. So people now work remotely from home.
People buy foods, buy fresh products, buy groceries, buy necessities from home. I think this is a very big challenge that -- the crisis is a very, very big challenge to the society, but also as I said in my remarks, give people a chance to try new way of living and new way of work.
So I think after all is done, I would expect that this is an inevitable trend that more and more business and more and more customers will have a digital life or digital working style. So this obviously will -- in the long-term will be good for the digital pace of the whole society.
And for your second question. Okay.
For the second question, I think local service is a very, very important sector in consumption. So you all know that Alibaba has a strong commitment to this sector and we don't view this as a business, but we think this is a foundation for the consumption.
So I think in the previous months, we are happy to have Simon Hu, the new CEO of Ant Financial taking -- also taking the Chairman role of our local service company I think which give us a good chance to realize more synergies between Alipay and the local service business. And Alipay today starting from a payment tool now is evolving and upgrading to a consumer -- a very strong consumer interface.
Thomas Chong
Thank you.
Yong Zhang
Next question.
Operator
Thank you. Next question comes from the line of Eddie Leung from Bank of America.
Please go ahead.
Eddie Leung
Thank you. Good evening.
And I would like to wish everyone well and trusted everybody is healthy. So my question is regarding Tmall and Taobao.
We heard both from Daniel and from Maggie that there's an impact on both supply and on logistics being brought about of course by this coronavirus outbreak. My question however goes to the demand side.
I'm wondering if you're seeing any different impact on demand for example in different categories or in different markets. For example, first-tier cities versus the less developed markets, at least from a direction perspective, could you tell us about any impact you're seeing on demand side for example in categories like clothing or white goods or others?
Thank you.
Yong Zhang
Well thank you very much for your question and also for your best wishes. The answer is yes, we certainly are seeing some relatively large changes in demand in different categories.
For example, in the category including food and daily necessities fast-moving consumer goods, we're seeing relatively rapid growth. Of course, part of that growth is coming from the traditional retail sales sector with delivery from close-by shops.
Daniel Zhang
Secondly, when you look at categories like closing and consumer electronics, of course, there's a big challenge there including on the supply side but also including reduced willingness on the part of consumers to make those kinds of purchases at the height of the epidemic. Of course, I'm confident that that will turn around as the situation improves.
And in terms of regional differences, one new thing that we're seeing in the face of the epidemic is increased uptake by online users in the lower-tier cities or the less-developed regions of China in terms of going online to purchase daily necessities. And we think in the long-term that would be a favorable trend.
Operator
Thank you. Your next question comes from the line of Alex Yao from JPMorgan.
Please go ahead.
Alex Yao
Thank you management for taking the question, and best wishes to working through the challenging environment. I would like to clarify with Maggie your comment about the financial implication to the quarter from the current situation.
Did you say that the business with a strong connection to physical production and fulfillment will be declined specifically, actually you talked about China marketplace revenue will be declined for March, which means your CMR and the commission revenue would decline. So that's the first part.
The second part is if we assume this coronavirus situation is short-lived just like what happened to 2003 from SARS, should we be expecting a V-shaped recovery or U-shaped recovery? Is there anything that prevents the business going back to normal immediately after the situation is gone?
Thank you.
Maggie Wu
Okay. Maybe I first answer this question on the financial impact and then Daniel could give his view on the shapes your view, okay.
I think -- so for financial impact Alex I talked about, so what could impact our financials for March quarter right? There are two things.
One thing is the coronavirus outbreaks impact our own business. The other thing is that we're also offering these relief programs to help our merchants okay?
So let me talk about overall impact. I said two things.
Number one is that we estimated March quarter revenue growth would experience negative impact, which means that the growth rate will come down. It's possible that growth rate come down significantly.
We just don't know yet, because this is just mid of February. And number two, I said that the business in our China retail marketplace these are pricing related, which means China retail marketplace, which means Taobao and Tmall, which is CMR and commission, as well as the local consumer service would likely experience negative revenue growth.
So that's to clarify.
Daniel Zhang
This is Daniel. Let me answer the second question.
I think -- will it be a U-correction or V-shaped correction is highly dependent on the -- on how long will it take to finish this outbreak. The longer time it takes, I think they will take even longer time to recover, because I think many service sectors are disrupted I mean during this outbreak.
And I think if we can recover as we see in recent days and we should see some good indication in cities out -- in major cities except for Wuhan, I think that takes time to see how quick we could cover.
Rob Lin
Next question, operator.
Operator
Thank you. Next question comes from the line of Binnie Wong from HSBC.
Please go ahead.
Binnie Wong
Hey, again best wishes to everyone and hope the situation will improve very soon. My question is actually on the local services.
If you look at the loss tracked to core commerce EBITDA right the line that adjusts for the FX in the losses in the local services, we see is positive to note that the loss margin percentage is actually narrowing. So should we expect similar trends go up to continue?
And I guess in this round of press release company especially mentioned that -- where Ele.me acquired a 48% of new customers from Alipay app. So can we expect that the competition in local services is rationalizing and then will be beyond just like price competition as we see in the last year?
That's the number one question. And second question, just a housekeeping as to we see meaningful operating leverage in the product development expenses.
I just want to understand what are the positive reasons we have seen on the improvement?
Daniel Zhang
Okay. For the first question for local service -- actually local service business is our long-term commitment and we don't manage the business purely by EBITA ratio.
We focus on creating the value for both the customers and merchants. So I think today all the sectors all the service sectors are in the process of digitalizing their business and the consumers are already enjoying their digital lives.
So I think we will work even harder try to identify the value for both merchants and consumers and try to give them to create the incremental to them.
Maggie Wu
Binnie, let me answer your second question regarding the product development leverage. So if you break it down the staff cost is mainly the item that brings this average.
So basically the growth of this payroll is not at the same growth of -- same pace of the revenue growth. We have been quite aggressively looking for these top data scientists, engineers, et cetera.
But we're -- in terms of this quarter what you've seen is that, since the revenue growth is very strong the recruiting this quarter is -- actually is not at the same pace. We have been recruiting throughout the past quarters.
So I guess along with the business growth some of the fixed costs wouldn't grow. This is where the operating leverage will come from.
Rob Lin
Next question.
Operator
Thank you. Next question comes from the line of Tina Long from Credit Suisse.
Please ask the question.
Tina Long
Thank you. Thank you management.
Just a couple of small questions. My first question relates to the information received regarding differences in commission revenue and also in GMV for different merchants in different categories, where preferential pricing was applied.
And I'm wondering if that's a one-off thing for the 11.11 Singles' Day Shopping Festival or if that differential pricing is going to be an ongoing exercise going forward? And if you could tell us which categories are enjoying the preferential rates.
That's the first question. The second question has to do with the impact of the coronavirus outbreak.
Maggie has already indicated that for the coming quarter revenue growth is likely to be negatively impacted. I'm wondering, what you're thinking is on the cost side of things.
Obviously, you have fixed costs that you care too much about. But when it comes to variable costs, non-essential spending things like marketing are you giving any consideration to throttling back there so as to try to come out with earnings that aren't too badly hit.
Maggie Wu
Thank you. Well on your first question regarding commission discounts offered in the 11.11 Shopping Festival for different categories, it's true and 11.11 was – performed excellently this year.
Those discounts are being offered to eligible merchants in key categories including FMCG and electronics. And these are merchants who have performed very robustly in terms of their GMV, hitting GMV targets and therefore in line with our commission discount policy they're receiving a discount.
On your second question, as to what we are doing around cost and expenses in the current climate affected by the epidemic. The answer is yes, certainly there are some areas in which we can and will achieve some cost savings.
For example by having more off-line meetings and of course reducing travel. Many of our staff – management staff, front-line staff are now working remotely from home daily meetings between Daniel and the various business presidents are being held again on a remote basis.
And it's a good learning for us actually as a company because we're finding that efficiency is okay. Operations and management are being well handled even without having physical and face-to-face meeting.
So that certainly could be a takeaway for us going forward to do more things online and reduce physical meetings. So yes, certainly there are some savings in connection with that.
But your question is can this help with profit growth? And my answer to that is the profit really comes down to revenue.
The most important thing when it comes to profits is revenue and our revenue is being affected in the various ways we've already described to you. So there will be some savings from the areas I've described.
But the other thing to remember is we have very robust support programs that we've mentioned for merchants. Probably these are the most robust support programs ever offered by any company in this market or around the world in the face of such difficult circumstances.
And that again will have a negative impact as we said on our profit. So some of the learnings and outcomes will be good and result will improve.
But overall that is the situation. Next question?
Operator
Next question comes from the line of Mark Mahaney from RBC Capital Markets. Please ask the question.
Mark Mahaney
Thank you. I too wish you the best.
Well wishes. I wanted to ask a broad question about online retail penetration, those in China.
Those numbers that you mentioned at the very beginning of the call suggests that perhaps 27% or a quarter of retail activity in China occurs through online channels. I would imagine that there's a big discrepancy within the country.
There are some markets where that percentage is much higher and some that is much lower. Do you have a sense of what that range is like?
And most interesting is where do you -- how high penetration rates have you seen? How high have you seen online as a percentage of total retail sales get within China?
Thank you very much.
Daniel Zhang
This is Daniel. Thanks for your wishes, and let me answer your question.
I think for online retail penetration, we have to look at this from different angles. First, as you said, it's about the range.
And in top-tier cities, today in China online penetration is already quite high, but we do see the growing demand in the low-tier cities. So, that's why in this quarter we observed like over 60% of the new customers are actually from the less developed areas.
So, we are -- we believe that the lower-tier cities even in rural areas because of the penetration of the 4G and going forward 5G the infrastructure is there. So people can enjoy the same digital life as people are in the urban cities.
But let me share with you my thoughts on the second angle, which is the category. I think today even in the popular cities in China, the online penetration by category is quite different.
And before this, I mean coronavirus, what we saw is that -- was that for apparel for consumer electronics, the online penetration is relatively high. But for food category, especially for fresh food, the penetration is low even in urban cities.
But as I said in my remarks, in -- during the past, I mean one month, more and more people are getting used to shopping online for food for daily necessities. And they may shop from an e-commerce website or they shop from a mobile app operating by a store nearby.
And so I think the shift from home and store delivery or for hub-and-spoke model delivery, I think going forward will be -- have more penetration after this outbreak.
Rob Lin
Thanks. Next question.
Operator
Thank you. Next question comes from the line of Alicia Yap from Citigroup.
Please go ahead.
Alicia Yap
Hi. Thank you.
Thank you very much, thank you management for the presentations and for your detailed thoughts that you've shared on the impact of the current situation. So a few follow-up questions if I may.
My first was to Maggie, and it regards Cainiao, because I don't believe you mentioned Cainiao. Can we expect that in the March quarter the growth of Cainiao will also be negatively impacted as you said the China retail market and other businesses will be as a result of this outbreak?
And conversely, in the cloud could we expect there to be any benefit there from the epidemic in the March quarter, or would you expect the benefit to be more of a long-term benefit? And then secondly, I'd like to follow up on the previous question regarding the preferential commission rates that are being offered for certain categories, FMCG and electronics.
Were those preferential rates only for the 11.11 Shopping Festival or over a longer period of time and will they continue in the March quarter? And then finally still on preferential commissions.
In the face of this epidemic, will you consider offering preferential commissions for a broader range of categories? For example, fashion, but also other categories and perhaps continuing those preferential rates beyond the March quarter and in the longer term?
Maggie Wu
Thank you for the two questions. I'll start with the question about the impact of the coronavirus epidemic on Cainiao.
You were asking whether there could be negative growth there similar to what we've talked about expecting to see with Taobao and Tmall and local services. The answer is that, there is a very real impact on the business of Cainiao as a result of the epidemic, but less of an impact on the financial side of things.
And I'll explain why that is. With many couriers not being able to return to work capacity remains very low.
It's around 10-plus percent less than 20% of capacity availability. But revenues are not changing that much, despite the situation and this is because we have technology products for which we're now charging fees, as well as good revenue performance from the last-mile services that Cainiao is providing.
So this represents an increase in the revenue base for Cainiao compared to last year. And the second reason is because Cainiao is an acquired company, so it's not subject to adjustment for intercompany elimination in terms of its cooperation with Tmall, Tmall Supermarket.
So for these reasons you don't expect to see such a big impact on the revenues of Cainiao as on its actual operations. Your second question had to do with the preferential commission policy.
So to clarify this is not a new policy. It wasn't new this year and it wasn't just for the 11.11 Shopping Festival.
It's there to encourage and reward good merchants with good performance who meet targets defined in the policy. So we will continue to have this policy to reward merchants and we'll certainly consider expanding into new kinds of categories.
Rob Lin
So operator lets have the last question.
Operator
The final question comes from the line of Piyush Mubayi from Goldman Sachs. Please go ahead.
Piyush Mubayi
We sincerely hope that all the families that the Alibaba ecosystem touches are safe. I wondered Daniel talked about, I thought an improvement over the last 12 days.
Could you just take us through qualitatively what is the degree of improvement we've seen over the 12, 13 days? And I think initially Daniel also talked about the opportunities that get created out of a period like that and I know we talked about DingTalk and how that seems such a transformation with more than 200 million folks working from home.
What are the top three features in DingTalk that have been -- that have proven to be very popular? And how do we see this product evolve in terms of size, scale, MAU DAU for example since CNY?
Rob Lin
Thank you Piyush for your kind words…
Daniel Zhang
Thank you. So in the past actually things changed very fast in the past 10 to 15 days.
I think, before this week, most of the merchants they are -- they don't have assets back to work. But I think this Monday, I think in big cities in China like, Shanghai, Beijing, Guangzhou, Shenzhen more and more companies' staff they're back to work, partially.
And also we see the logistics network start to resume operation, especially in the sortation center, in big cities, in big hub. So that's why I'm saying that, situations are getting slightly better, but it takes time to back to normal.
So -- but I think the key thing is about -- is all about supply, the supplier of the products, the supplier of the delivery, the supplier of the services. And the demand, I think is still there.
And we -- I strongly believe that, after virus leaves away, I think consumers have strong desire to -- because they have been in home for a longtime. And they will go out anyway to consume.
So for DingTalk, yes, I think is experiencing explosive growth, during outbreak. I think we facilitate via DingTalk our people to work from home.
And then to study in the virtual class online. And also we facilitate -- as I said in my remarks, facilitated many companies to do the healthy check-in every day, with their employees.
And we do -- we have like a video conference, like minutes, like the virtual classroom. I think all are very popular among the workers, office managers, office staff, as well as -- and for education sector, we do see very big popularity among the teachers and students, in terms of the virtual classroom.
So we will continue to extend our capacity. And I can share with you like, in the past 10 days, we keep expanding our capacity.
And -- but we -- but even with the capacity increase we do have -- we have to conquer some difficulties that is in data center. And we may be prohibited to access some data center in some regions, because of the anti-coronavirus.
But I think that, things are getting better after many, many people go back to work.
Rob Lin
Okay. Thank you everyone for joining our earnings call today.
If you do have any additional questions, please feel free to contact anyone, at the IR team. Thank you.
Operator
Thank you. Ladies and gentlemen, that does conclude our conference for today.
Thank you for participating. You may all disconnect.