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JD.com, Inc. (NASDAQ:JD)
Q4 2017 Earnings Conference Call
March 2, 2018, 7:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello and thank you for standing by for JD.com's Fourth-Quarter and Full-Year 2017 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, Ruiyu Li.

Ruiyu Li -- Senior Director of Investor Relations

Thank you, operator, and welcome to our Fourth-Quarter and Full-Year 2017 Earnings Conference Call. Joining me today on the call are Richard Liu, our CEO, and Sidney Huang, our CFO. For today's agenda, Mr. Huang will discuss highlights for the fourth quarter and full year 2017. Following the prepared remarks, Mr. Liu and Mr. Huang will answer your questions.

Before we continue, I refer you to our Safe Harbor statements in the earnings release, which apply to this call as we will make forward-looking statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most direct comparable GAAP measures. Finally, please note that unless otherwise stated, all the figures mentioned during this conference call are in RMB. Now, I would like to turn the call over to Sidney.

Sidney Huang -- Chief Financial Officer

Thank you. Hello, everyone. Thank you for joining us today. We are pleased to report another quarter of strong top-line growth, healthy core e-commerce profitability, and exciting new strategic initiatives. During the fourth quarter 2017, our net revenues grew 38.7%, a solid performance on top of an exceptionally strong fourth quarter in 2016. Our direct sales revenue grew 37%, led by home appliances, food and beverage, cosmetics, home furnishings, and baby products. Revenues from services and others grew 55% year over year -- the highest growth rate in the past six quarters -- driven by third-party supply chain management and advertising services. For full-year 2017, our net revenues increased over 40% and the revenues from services and others grew nearly 50%.

Gross margin in the fourth quarter was 13% compared to 13.7% in the fourth quarter last year. The margin reduction was mainly due to impact from new businesses, which included JD Logistics' third-party business, technology services, and overseas operations. JD Mall gross margin was slightly higher than the same quarter in 2016 and second quarter 2017. On a full-year basis, non-GAAP gross margin improved 42 basis points, from 13.4% in 2016 to 13.8% in 2017, reflecting economies of scale from third-party business and accelerating advertising revenue growth, partially offset by investments in new businesses.

During the fourth quarter, we invested heavily in logistics, marketing, and technologies. Most notably, we continued to expand our warehouse network during the quarter. It will take a couple of quarters to reach full-capacity utilization. We added 81 warehouses during the quarter for a total of 486 nationwide, with over 10 million square meters in total space at the end of 2017, up over 70% from 12 months ago. This capacity expansion effort affected the gross margin for the third-party business as well as our expense ratio for the core e-commerce business.

The fulfillment expense ratio improved 35 basis points from the same quarter last year. However, we believe these investments are worthwhile for our supply chain management services and have created both a source of revenue and a margin upside for 2018 and beyond. Our successful JD Logistics fundraising, backed by a group of top domestic and international institutions, clearly validated the logic of these investments.

Our non-GAAP marketing expense ratio was 4% in Q4, comparable to the same quarter last year and second quarter 2017 when we ran similar marketing campaigns. Our R&D expense ratio increased to 1.9%, up 38 basis points from the same quarter last year as we hired top talent in A.I., big data, and cloud-based solutions, as well as forming partnerships around the world to enhance technological innovation across our front-end platform and back-end infrastructure. On the other hand, our G&A expense ratio reduced 20 basis points as we continued to benefit from operating leverage.

Similar to the second quarter 2017, we essentially reinvested part of the excess profit in the prior quarter back into the business in the current quarter, especially during the Double 11 promotion season, when we returned excess profit back to our consumers. As a result, non-GAAP operating margin was -0.5% in the fourth quarter. Now, excluding new businesses, the non-GAAP operating margin for JD Mall was a positive 0.6%, down 32 basis points from the same quarter last year, mainly due to accelerated logistics capacity expansion in the R&D investments. On a full-year basis, however, non-GAAP operating margins improved to 0.8%, up from 0.6% in 2016, and non-GAAP operating margins for JD Mall improved 46 basis points from 0.9% in 2016 to 1.4% in 2017.

On a full-year basis, non-GAAP net income attributable to ordinary shareholders was approximately 5 billion RMB, an increase of 140% from 2.1 billion RMB in 2016. The net margin was 1.4% in full-year 2017, up 67 basis points from 0.8% in 2016. All in all, it's a very healthy bottom-line improvement. Our free cash flow was -1.2 billion RMB during the quarter, compared to -2.2 billion RMB in the same quarter last year. Free cash flow for full year 2017 was a positive 15.7 billion RMB, up from 13.5 billion in 2016.

As we communicated 12 months ago, our CapEx in 2016 has been behind schedule, which began to catch up in the second half of 2017. CapEx totaled 11.4 billion RMB, up from 4.2 billion in 2016. Of the 7.1 billion RMB increase, over 6 billion RMB was due to land acquisition and construction of warehouses. As we mentioned in the past, given JD's contribution to the local economies, we are in a unique position to acquire land at very attractive economic terms. The warehouse facilities we've built are also highly sought-after assets and may be monetized for liquidity with large financial gains. We continue to believe such land and warehouse investments are highly accretive to our shareholders. Excluding the CapEx, our operating cash flow -- excluding JD Finance's impact -- totaled 27 billion RMB in 2017, up 52% from 18 billion RMB in 2016.

Now, I would like to highlight a few key strategic developments since our last earnings call. Over the past three months, we have formed a number of highly strategic partnerships -- for example, the joint investments with Tencent in Vipshop and joint venture with Meili Group, both designed to expand our product selections and long-tail merchant space, which in turn will improve our customer experience and attract female users and new customers in lower-tier cities and lower-income segments.

The joint investments with Tencent and Wanda Group and Better Life Group will also help expand our customer and product reach to omnichannel store tech solutions as part of our boundaryless retail strategy. We are very excited about these partnerships and expect to create winning synergies, strengthen our consumer mind share, and better serve our joint customers in 2018.

Now, let's discuss our financial outlook. We expect Q1 2018 net revenue growth to be between 30% and 33% on a year-over-year basis, taking into account the increasing seasonality effect of our business, excluding any impacts on JD Finance for both current and prior periods. For full-year 2018, we expect our non-GAAP net margin to be between 1% and 2%, which reflects our commitment to margin improvement while maintaining flexibilities to reinvest for future growth. This concludes my prepared remarks and we can now move to the Q&A session.

Questions and Answers:

Operator

The question and answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed. Our first question comes from the line of Jin Yoon of Mizuho. Please ask your question.

Jin-Kyu Yoon -- Mizuho Securities Asia Ltd. -- Analyst

Good evening. Thanks for taking my question. Sidney, did I hear you right? You said net income margin was going to be 1% to 2%. With the midpoint being about 1.5%, that means we're going to see very little -- if any -- operating for net income margin leverage. Can you just talk about the drivers and potentially the seasonality behind that, and potentially what your CapEx budget is for the year? Thanks.

Sidney Huang -- Chief Financial Officer

Sure. Obviously, this is the beginning of the year. No one can expect what happens ahead. I think the guidance -- as I mentioned, it's a reflection of our commitment to the improved margin, but at the same time, maintains enough flexibility to reinvest for future growth. As I mentioned earlier on the call, as you can see, we invested quite a bit in new businesses in the fourth quarter, including JD Logistics' third-party business. Some of those investments may take a few quarters to be fully utilized and we'll then have operating leverages. So, this is a very preliminary outlook for the full year.

Operator

Thank you. Our next question comes from the line of Ronald Keung of Goldman Sachs. Please ask your question. Your line is now open.

Ronald Keung -- Goldman Sachs Asia LLC -- Executive Director

Hello. Thank you, Richard, Sidney, and Ruiyu. Thanks for taking my question and thank you for the guidance that you mentioned just then. My question is more on the next growth drivers, particularly your strategy with Vipshop and with Meili. Can you just go through a few things? First, the Vipshop cooperation. When do you think the Level 1 access on your ample will begin, and what are you expecting the contribution of GMV growth or parallel contribution from the Vipshop tie-up? I think the other part is the WeShop, which is your joint venture with Meili. Can you just go through how many merchants so far have signed up and rough launch times and whether this JV will be counted as an investment, so it will not be consolidated? Also, the longer-term prospects of this joint venture. Thank you.

Sidney Huang -- Chief Financial Officer

Sure. Those partnerships will actually be launched within March, so you will see the superstore from Vipshop on JD within this month. As we mentioned when we announced the deal, we do expect great synergies between the two platforms. Vipshop has great product selection and a very complementary customer base, especially the female customer base, so we do expect the collaboration will be a win-win effort that will bring both products to JD customers, and at the same time, bring traffic and sales to Vipshop, which obviously will benefit both platforms.

For the Meili joint venture, you will also start to see the launch during March on the Level 1 entry point of JD in WeChat. It's a very decentralized model, so I would probably let you look at the actual development rather than elaborating too much on the details. We will not consolidate the joint venture, but it was targeted to attract a long-tail merchant base, and we already have so far recruited over 50,000 small long-tail merchants, obviously including some well-established merchants as well, and we will enable those merchants to form their own customer base through the WeChat ecosystem. It will be a very interesting experiment that you will begin to see in the very near future.

Operator

Thank you. Our next question comes from Natalie Wu from CICC. Please ask your question.

Natalie Wu -- China International Capital Corp. -- Analyst

Hi. Good evening, management, and thanks for taking my question. My question is regarding the overseas market exploration. We've seen that you've entered NA and you've entered Europe. I'm just wondering what kind of role JD is preparing to play globally and what's the related investment scope we should be expecting in the next year. Thank you.

Richard Liu -- Chairman and Chief Executive Officer

Right now, for international operations, we have announced in the past in southeast Asia, mainly Indonesia and Thailand. For North America and Europe, we have set up local offices -- for example, in L.A. -- to purchase -- to really develop local brand relationships and bring the U.S. product to China, but we will begin this year to start to consider ways to serve the local customers. But right now, at this point, no immediate plan has been set up.

Operator

Thank you. Our next question comes from the line of Wendy Huang from Macquarie. Please ask your question.

Wendy Huang -- Macquarie Capital Ltd. -- Managing Director

Thank you. Can you talk about for your existing major product categories, such as home appliance and consumer electronics, what kind of scale should they reach this year? And also, is there any further potential for these existing product categories to see a margin expansion?

Sidney Huang -- Chief Financial Officer

Sure. So, the home appliance and electronics -- those are our leading categories. As Richard mentioned in the past, in the retail business, when you become a market leader on a first-party basis, you can not only realize economies of scale through supplier relationships and joint brand efforts, whereby you increase the margin, but you will also -- because of the consumer mind share -- continue to grow faster in many cases in brand industry. So, this is what we have seen exactly in 2017. Even though we have been the largest player, we continue to see very robust growth way ahead of the industry average.

Operator

Thank you. Our next question comes from Eddie Leung from Merrill Lynch. Please ask the question.

Eddie Leung -- Bank of America Merrill Lynch -- Analyst

Hi. Good evening, Richard and Sidney. I'm curious on your advertising business. Your silos are growing pretty nicely. Could you talk a little bit about the drivers behind it? What's the main driver for the extra ration, as you mentioned? Are we talking about better clickthrough rate, higher pricing, or increased ad level? Any color on that front would be great. Thanks.

Sidney Huang -- Chief Financial Officer

Advertising is mainly driven by technology. I mentioned last quarter that increasingly using A.I. technology, the conversion for our merchants and brands is seeing meaningful improvement over the past several quarters. So, when the brands see better results, better conversion, they are more and more willing to spend more advertising dollars on our platform. So, this has been the main driver. We didn't increase, for example, the advertising inventory, didn't increase the positions our platforms, so it's really driven by technology, and we see continued momentum going forward. I want to mention quickly that in the fourth quarter, our advertising revenue growth was also the highest in the past five quarters.

Eddie Leung -- Bank of America Merrill Lynch -- Analyst

That's great. Thank you.

Richard Liu -- Chairman and Chief Executive Officer

If you look at the advertising revenue as a percentage of GMV, the percentage for JD is substantially lower than our industry peers, and this is because in the past, we did not provide enough advertising tools to our merchant groups, so we have been improving over the past several quarters and will continue to do so, providing more and more back-end solutions and advertising products to our merchants so they can have better control over their own promotional needs. So, the potential is huge, and we're seeing some actual results.

Operator

Thank you. Our next question comes from Alicia Yap from Citigroup. Please ask the question.

Alicia Yap -- Citigroup Global Markets Asia Ltd. -- Analyst

Hi. Good evening, Richard, Sidney, and Ruiyu. Thanks for taking my questions. I have questions regarding the gross margins. So, I'm not sure if my calculations are correct, but it seems like the 1P gross margin declined about 90 basis points year over year. If that's true, it suggests that the competitive situation seemed to be worsened a little bit in the fourth quarter. How should we think about the 1P gross margin for 2018, especially during the seasonally strong quarter? And then, related to your 1% to 2% net margin guidance for this year, can you share with us where would you be spending most of the investment area? We have to be cautious and be mindful of modeling. Is that more on logistics or is that more on sales, marketing, and branding? If you can share some of the color, it would be great. And lastly, on the housekeeping, how many of the 100 brands that previously left JD have now returned to your platform? Thank you.

Sidney Huang -- Chief Financial Officer

Let me do this one by one. For gross margin, I mentioned earlier that if you exclude the new businesses, the JD Mall gross margin was actually slightly higher than the same quarter last year and also than second quarter 2017. So, it was generally still healthy. A second reason -- we also mentioned in the past that our business was managed on a full-year basis, so because of the excess return in the first three quarters, our business managers were encouraged to return part of the profit back to our consumers during big promotions. We believe these are very worthwhile investments, so you can't look at any single quarter to extrapolate the profitability trend, just as I cautioned in the third quarter that you should not extrapolate that for the future quarters. So, I would strongly encourage our investors to look at the full-year trend, which I mentioned is still on the rise.

On the 1% to 2%, I mentioned about the new businesses. In 2018, we'll continue to invest in JD Logistics, mainly the third-party services -- supply chain management, integrated warehouse, and delivery services -- not only to our merchants, but also to third parties outside of JD business. So, those, and then, besides that, it will be technology services with developed cloud-based solutions, and we are actually seeing the business taking off that would -- in the short term -- be loss-making, but we do see huge potential in the technology, so this is an area. Overseas expansion is another one, as I mentioned earlier. So, if you exclude those, the core e-commerce business -- we implied that the core e-commerce business will actually have a quite meaningful margin expansion.

The last question on the brands -- we do start to see brands coming back, and I think more interesting data I would like to share with you is the key accounts for our apparel segment basically consisted of the top merchants staying with us through last year and the merchants came back at the end of last year. We saw over 100% increase in the first two months in transaction volume. So, very encouraging results. We do believe there will be more merchants coming back, but as we mentioned on the last earnings call, it may take two to three quarters, but we are already seeing very encouraging trends. The ones that did come back saw triple-digit growth over the past two months already.

Operator

Thank you. Our next question comes from Alex Yao from JP Morgan. Please ask your question.

Alex Yao -- JP Morgan Securities Asia Pacific Ltd. -- Analyst

Hi. Good evening, management, and thank you for taking the call. I want to follow up with Alicia's questions a little bit more. I understand that logistics is one of the key investment initiatives for 2018 and potentially beyond that. Can you give us a little bit of color in terms of where exactly you want to invest in this area? Is it more on the labor side, the equipment side, the warehousing side? And also, given the incremental investment, how should we think about the next couple of quarters of margin trend versus the previous years? And then, the mid- to longer-term outlook for this business, when should we expect this business to be more meaningful in terms of revenue generation from third-party vendors or merchants versus our own business? What kind of timeline are you looking at for this business in terms of profitability generation? Thank you.

Richard Liu -- Chairman and Chief Executive Officer

The investments in the logistics area will be comprised of two major areas. One is in the fixed assets, which includes land, equipment, and warehouses, and two is logistics technologies. You can easily understand the first area of investment. I would elaborate more on logistics technologies. We have launched the first fully automated warehouse in Shanghai and we have also completed -- two weeks ago -- the unmanned delivery station. Also, in the near future, you will see automated delivery robots in numerous campuses in Beijing. And, we expect to receive a license for drone operations in ten provinces this week. We have also tested the self-driving trucks for over six months.

These investments will probably not yield any near-term immediate operating or financial benefits, but we believe that as the technology continues to advance, and labor costs are expected to increase, these investments will be very valuable at a certain inflection point that will continue to put JD Logistics at the forefront of both operational efficiency and technical sophistication. We formed a separate, relatively autonomously operated subsidiary for JD Logistics. We've seen great operational results over the past few months, and we do expect over the next three to five years that external revenue will reach 50%. So, these third-party revenues will not only come from our third-party merchants on the platform but also from customers from our side of the JD Mall business. We have seen many of those also using our solutions.

Operator

Thank you. Our next question comes from Jerry Liu from UBS. Please ask the question.

Jerry Liu -- UBS Securities Asia Ltd. -- Executive Director

Hi, guys. Thank you for your time. My question is about gross and net margins. If we were to separate JD Mall from the areas of investment, do we think in 2018 that JD Mall margins will improve because of apparel brands coming back and FMCG scale, et cetera? And then, on the areas of investment, is this a full year of investment? Could margins decline before things get better? Thanks.

Sidney Huang -- Chief Financial Officer

Sure. So, as I mentioned earlier, because of the investments in new businesses, we do continue to commit for overall margin improvements, which in turn will imply that our core business will see a lot of meaningful margin expansion, and that could come from all categories -- not only the apparel and FMCG you mentioned, but also from our strong categories in home appliance and electronics, and obviously, on the service side, where we're advertising our logistics services. So, we do see potential for margin expansion across multiple areas.

Operator

Thank you. Our next question comes from John Choi from Daiwa. Please ask your question.

John Hyungwook Choi -- Daiwa Capital Markets Hong Kong Ltd. -- Executive Director

Good evening, guys, and thanks for taking my question. I have a few questions here. First of all, I would like to touch base on your product revamp strategy in 2018. I understand that JD has a plan to revamp their mobile app and include more personalization features. How's that coming through? Also, your merchant services -- what is the status here? Should we be expecting more merchant services-related revenue through your third-party revenue going forward? Secondly, a little bit on your free cash flow. I understand free cash flow has been improving over a period of time, so as we go into 2018, should this trend continue along with your CapEx -- so, being kind of reduced on a relative basis? So, that would be helpful. Lastly, if Richard could give us a little bit more color on the recent JV with Meili. Is this going to be a game changer for JD when it comes to collaboration with Meili and also for Tencent? Thanks.

Sidney Huang -- Chief Financial Officer

Okay. Let me see if I can remember all that. So, for the personalized recommendation, we do have -- it is one of our top priorities this year that we want to create a personalized user interface. We do expect our first major launch in the second quarter, which could be still on a soft testing basis, but you will start to see that happening, and probably more on the full scale in the second half. Merchant services is another top priority. We have introduced many new products to our merchants, including the advertising products and tools, the data and analytics tools. Those are all provided to our merchants and also to our suppliers, which we believe will enhance the ability to better market and sell their products on our platform.

On the free cash flow and the CapEx, for CapEx, it's a little tricky there. We are expecting to invest in more land acquisition and warehouse facilities, but I also mentioned that a number of institutions have been chasing us for partnership and collaboration, so there is a possibility that we could have our partners invest part of that CapEx, and that through the partnership, we can continue to maintain certain control over the assets, but at the same time, leveraging third parties' financial resources.

So, we do want to have somewhat of a lighter model going forward, especially given that we are taking opportunities to secure land, as there are many local governments approaching us for collaboration. Again, these are all governments approaching us because when JD sets up a warehouse in their jurisdiction, it brings job opportunities, brings local activities, and local taxes, and we are working with many of those governments. And so, it's a very exciting opportunity. We're just looking for ways to manage both the opportunities and at the same time, manage the appropriate level of CapEx. So, we'll give you more updates hopefully in the second quarter.

Operator

Thank you. Our next question comes from Scott Devitt from Stifel. Please ask the question.

Scott Devitt -- Stifel, Nicolaus, & Co. -- Managing Director

Hi, thanks. First, I was just wondering if you could give the third-party mix as either a percentage of units or GMV, and also, what portion of the third-party GMV is being fulfilled by JD. Bigger-picture question -- JD is still a very young company, building a business for the next many decades, and I'm wondering why you think there's such a hyper-focus on margin progression of the business at this stage of the development and whether you think that focus is the right way to assess value creation by the company and how you think investors should measure the company on profits, given that you don't seem to be focused on optimizing for profits still for many years. Thank you.

Sidney Huang -- Chief Financial Officer

Sure. So, our third-party logistics services revenue did increase very significantly in the fourth quarter on a triple-digit rate, so a majority of that growth came from supply chain management, which also helps our merchant experience. So, in terms of percentage of order contribution, it is in the low teens and rising quite quickly. On the margin, it's a very interesting question. As we mentioned in the past quarters, more often than not, the margin came up without trying to manage it, so if we don't do anything, margins would improve, and we have seen that both in Q1 last year and in Q3 last year. We normally will make an effort during big promotion season to return part of that margin back to our consumers.

Because of this -- so, this basically indicates that our scale is at such a level that the profitability was quite natural and improving margins should be quite natural, but just as you mentioned, we're still in a very early stage of a very long-term growth trajectory, so our focus has been on growth, and we also made a very intentional effort to reinvest part of that profitability back into the business, whether through return to consumers or investing in new technologies, as Richard mentioned, and also in complementary businesses. So, that's exactly what we've been doing to reinvest, but at this current scale, I think margin expansion should be quite a natural result as well.

Operator

Thank you. Our next question comes from Thomas Chong of Credit Suisse. Please ask your question.

Thomas Chong -- Credit Suisse Hong Kong Ltd. -- Analyst

Hi. Thanks for taking my questions. I have a quick question on 7Fresh. Can management provide some highlights about the expansion for this year and our target number of stores in the next few years? Thanks.

Sidney Huang -- Chief Financial Officer

For 7Fresh, it's really an experiment -- an omnichannel store tech experiment that we tried to create our own model of offline business that can realize very high sales per square meter because not only the products and the services, but technology in the store can attract a lot of traffic at the same time with the online angle through our Dada Jindong Daojia network. So, you can essentially realize much higher in-store sales. But, our intention is not to open many stores. I think we will use this story to develop the omnichannel store tech solutions so that we can use those solutions to enable our partners. I mentioned about our investments in some of the offline stores and offline retailers. Those solutions that we developed through 7Fresh will be used to strengthen our partnership with those offline partners.

Richard Liu -- Chairman and Chief Executive Officer

We will open more stores in Beijing just to test and validate the model, and once the model is validated, we will expand to a franchise just to work with our partners to enable their stores to adopt the same model. The unique advantage for JD moving into the offline supermarket is that we already have a very well-established pricing system, and with that system, we can move very fast once the model is established. So, in this regard, even for established retailers for over 20 or 30 years, they still can cover only some of the cities in China, but with our supply chain management system, we can cover the entire China.

Operator

Thank you. Our next question comes from Tian Hou from T.H. Capital. Please ask your question.

Tian X. Hou -- T.H. Capital LLC -- Founder and Chief Executive Officer

Hi, Sidney and Richard. I have two questions. One is related to the investment in Vipshop. Would you please elaborate how in the near term JD is going to benefit from such an investment? That's No. 1. No. 2, looking at the P&L from Q4, the cost of the revenue was not a lot, so I wonder how much of it comes from the cost traffic -- the traffic acquisition cost, which has started in this advertising alliance in Q3? So, that's my two questions. Thank you.

Richard Liu -- Chairman and Chief Executive Officer

To address the first question on Vipshop, in the short term, it's really complementary to both platforms through our complementary products. Namely, Vipshop is specialized in apparel and other long-tail categories with female customers in the lower-tier cities, while JD is much stronger in the other categories, and also, male customers in Tier 1 and Tier 2 cities. So, it's very complementary from both product selection and user base. In the long term, we are looking to create more synergies on the supply chain and on the logistics. For example, we can share some of the warehouses or delivery stations -- some of those infrastructures -- so that we can save costs and create more efficiency for both companies.

And then, on your second question about cost and whether it included the traffic acquisition cost, most of the traffic acquisition cost will be in the marketing expense line. The only related item in cost will be the cost for our advertising revenue, which is actually quite small, so that's not the main reason. The main reason -- I mentioned it earlier -- is because of new business for JD Logistics third-party service because of a pretty massive buildout of warehouse facilities, including co-chain facilities that were not fully utilized in Q4, and also in technology services, where we're still building up the business.

Operator

Thank you. Our next question comes from Ella Ti from Renaissance. Please ask the question.

Ella Ji -- China Renaissance Group -- Managing Director

Hi. Good evening, Richard, Sidney, and Ruiyu. My question is still about the margins. First of all, looking at the relatively near term for 2018, Sidney, if I hear you correctly, you said that JD Mall alone -- last year, the OP margin actually improved 46 bps year over year. So, if we back that out, the new businesses' drag on your OP margin is about 28 bps. How should we think about the magnitude of your new businesses' drag in 2018? Is it going to be bigger or at a similar level? And then, related to that, can you also comment on the long-term margin target on a company-blended basis and for JD Mall both? Can you also comment on the timeframe, please? Thank you.

Sidney Huang -- Chief Financial Officer

Sure. For the new business, because it's new -- so, we do have an internal budget -- a quite aggressive budget -- but it's evolving, and it depends on a lot of dynamics during the year. So, all I can tell you is our budget, we have a quite aggressive budget for the new businesses. Essentially, to reiterate my point earlier, at our scale, our core business should naturally generate increasing profitability and we want to use at least part of that to reinvest. And so, it is also relatively flexible as we progress through the year, so it's tough to pinpoint any more detailed number at this point.

Long-term, we mentioned the core retail business as the scale continues to improve, so you can see our gross margin still has huge potential compared to the biggest offline retailers. For example, our JD Mall operating margin continued to enjoy an advantage despite heavy investment in technology. So, margin trends should be very promising for the established business. It's a matter of how much we invest, and that reinvestment will also depend on what kind of opportunities we see that are complementary to our core business and that are accretive to our shareholder value.

Operator

Thank you. Our next question comes from Wayne Wang from HSBC Global Research. Please ask the question.

Wayne Wang -- HSBC Global Research -- Analyst

Thank you, management, for taking my question. I have a follow-up on the traffic acquisition strategy. So, what's our key traffic acquisition strategy in 2018 as far as the traffic partners in 2017? Also, another question regarding the technology and common cost. You're saying 4Q's cost is relatively high. Is this mainly due to one-offs or will this be a continuing effort? Thank you very much.

Sidney Huang -- Chief Financial Officer

I think for traffic acquisition, we have all of the conventional channels that we'll continue to use. Clearly, we have established a great relationship with all of the major traffic sources. And then, the alliance we talked about with top internet companies -- obviously, including Tencent, 360, and a number of others. So, we will see actually more of those partnerships and we'll be effectively using all the means.

For the technology and R&D spending, this will be a long-term trend -- at least a medium-term trend that will continue to step up the investment. So, this is not one-time. We will continue to invest in hiring those top talents around the world. We expanded our Silicon Valley office, for example, from over 10 people to now over 100 people, hired the top talent from the best internet companies in the United States. We do expect that investment to continue.

Operator

Thank you. Our last question comes from Jamie Shen from Bank of China International. Please ask your question.

Jamie Shen -- Bank of China International -- Analyst

Hi, management. I have a question on the third-party market size GMV growth. Based on my very rough calculation, I think the GMV growth has picked up meaningfully in the last quarter compared to the third quarter. Just wondering what the drivers are behind that. Also, looking forward into 1Q, as management just commented on some apparel brands coming back, should we be expecting the apparel categories to revive growth in the first quarter? Thanks.

Sidney Huang -- Chief Financial Officer

We no longer discuss details about GMV because the metric now is really for industry comparison only, but the underlying net GMV growth was actually still under pressure for the marketplace business in the fourth quarter. We mentioned on the last earnings call that it would take two to three quarters to begin to see recovery. So, on apparel, in particular, I mentioned about key account growth. We do still have the right customer base and the right platform, so it's just a matter of time for the many merchants -- at least, a majority of them -- coming back, and we're also working with many of those merchants to establish new sub-brands and also new talents, new brand designers. So, there will be multiple means to improve this category, and we are actually quite optimistic, but I do not expect a very quick fix. We don't necessarily see a major pickup in Q1, but in the next several quarters, you should see gradual recovery.

Operator

Thank you. We are now approaching the end of the conference call. I will now turn the call over to JD.com's Ruiyu Li for closing remarks.

Ruiyu Li -- Senior Director of Investor Relations

Thanks, operator, and thank you for joining us today. Please feel free to contact us if you have any further questions. We are looking forward to talking with you in the coming months. Thank you. Goodbye.

Operator

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

Duration: 60 minutes

Call participants:

Ruiyu Li -- Senior Director of Investor Relations

Sidney Huang -- Chief Financial Officer

Richard Liu -- Chairman and Chief Executive Officer

Jin-Kyu Yoon -- Mizuho Securities Asia Ltd. -- Analyst

Ronald Keung -- Goldman Sachs Asia LLC -- Executive Director

Natalie Wu -- China International Capital Corp. -- Analyst

Wendy Huang -- Macquarie Capital Ltd. -- Managing Director

Eddie Leung -- Bank of America Merrill Lynch -- Analyst

Alicia Yap -- Citigroup Global Markets Asia Ltd. -- Analyst

Alex Yao -- JP Morgan Securities Asia Pacific Ltd. -- Analyst

Jerry Liu -- UBS Securities Asia Ltd. -- Executive Director

John Hyungwook Choi -- Daiwa Capital Markets Hong Kong Ltd. -- Executive Director

Scott Devitt -- Stifel, Nicolaus, & Co. -- Managing Director

Thomas Chong -- Credit Suisse Hong Kong Ltd. -- Analyst

Tian X. Hou -- T.H. Capital LLC -- Founder and Chief Executive Officer

Ella Ji -- China Renaissance Group -- Managing Director

Wayne Wang -- HSBC Global Research -- Analyst

Jamie Shen -- Bank of China International -- Analyst

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