Alibaba’s China Commerce Retail Business Spurs Growth

China retail marketplaces revenue jumped 49% Y-o-Y to RMB23,383 million (US$3,518 million)

a1Chinese e-commerce giant Alibaba Group Holding Limited (NYSE: BABA) announced its Q1 FY17 financial results on August 11th, 2016.

The Hangzhou, China-based company is principally engaged in online and mobile commerce and offers products, services and technology that enable merchants, brands, and other businesses to transform the way they market, sell, and operate in China and internationally. Retail marketplaces and services operated by the Company include the China online shopping destination (Taobao Marketplace); the China brands and retail platform (Tmall); the China group buying site that offers products by aggregating demand from consumers through limited time discounted sales (Juhuasuan), and the global consumer marketplace targeting consumers around the world (AliExpress). Wholesale marketplaces operated by the Company include 1688.com and Alibaba.com. Alipay, an online payment escrow service, accounts for roughly half of all online payment transactions within China. Alibaba operates through four segments: Core Commerce, Cloud Computing, Digital Media and Entertainment, and Innovation Initiatives and Others. Read more about Alibaba’s financial results below.

Q1 FY17 financial highlights

During Q1 FY17, Alibaba reported a whopping 59% Y-o-Y growth to RMB32,154 million ($4,838 million). The increase was mainly driven by the continued revenue growth of the China commerce retail business and the consolidation of newly acquired businesses (Youku Tudou and Lazada). China retail marketplaces revenue jumped 49% Y-o-Y to RMB23,383 million ($3,518 million); and mobile revenue of China retail marketplaces zoomed 119% to RMB17,514 million ($2,635 million), representing 75% of the total China retail marketplaces revenue during the reporting quarter. GMV transacted on the China retail marketplaces jumped 24% Y-o-Y to RMB837 billion ($126 billion) and in absolute dollar terms, a Y-o-Y increase of RMB164 billion ($25 billion) during the reporting quarter.a2

During Q1 FY17, revenue growth far exceeded GMV growth due to increasing monetization in Core Commerce, revenue traction from Cloud Computing, and diversification into Digital Media and Entertainment. Overall revenue growth of 59% was driven by accelerated revenue growth of China commerce retail, robust growth of Cloud Computing, strong monetization of UCWeb users, and acquisition of Youku.

Alibaba’s cost of revenue in Q1 FY17 grew to RMB11,744 million ($1,767 million) compared to RMB6,711 million in the year-ago period. Product development expenses during the reporting quarter were higher at RMB3,988 million ($600 million) versus RMB3,241 million in the year-ago period. During Q1 FY17, sales and marketing expenses jumped to RMB3,614 million ($544 million) versus RMB2,241 million in the year-ago period. General and administrative expenses were higher at RMB2,743 million ($413 million) versus RMB2,244 million in the year-ago quarter.

Alibaba’s income from operations in Q1 FY17 rose 17% to RMB8,814 million ($1,326 million), or 27% of revenue versus RMB5,161 million, or 25% of revenue, in the year-ago period.

As a result of higher costs, Alibaba’s net income in Q1 FY17 fell 77% to RMB7,142 million ($1,075 million) compared to RMB30,816 million in the year-ago period, which included a non-recurring deemed disposal gain of RMB24,734 million arising from deconsolidation of Alibaba Pictures. Excluding the non-recurring deemed disposal gain, share-based compensation and certain other items, non-GAAP net income during the reporting quarter grew 22% to RMB12,187 million ($1,834 million) compared to RMB9,496 million in the year-ago period. Net income attributable to ordinary shareholders fell 76% to RMB7,550 million ($1,136 million) compared to RMB30,843 million in the year-ago period. The Company’s diluted EPS during the reporting quarter fell 75% to RMB2.94 ($0.44). Non-GAAP diluted EPS was RMB4.90 ($0.74), compared to RMB3.68 in the year-ago period.

Segmental highlights

a3Core Commerce: Revenue from the China commerce retail business in Q1 FY17 jumped 49% to RMB23,383 million ($3,518 million), or 73% of total revenue, compared to RMB15,712 million in the year-ago period. This increase was due to robust growth of online marketing service revenue and the number of brands and merchants using its marketing services.

Mobile MAUs in China retail marketplaces grew to 427 million during Q1 FY17, representing a net addition of 17 million MAUs in the quarter and a 39% increase from 307 million in the year-ago period. The growth in mobile MAUs in this quarter was primarily due to higher adoption of mobile devices by consumers as the primary method of accessing Alibaba’s platforms.

The China retail marketplaces had 434 million annual active buyers in the year ended June 30th, 2016, compared to 423 million in the year ended March 31st, 2016, which translates into a net addition of 11 million annual active buyers from Q4 FY16 and an 18% Y-o-Y rise compared to 367 million in the year ended June 30th, 2015.a4

Alibaba’s revenue from the China commerce wholesale business in Q1 FY17 jumped 26% to RMB1,261 million ($190 million), while revenue from its international commerce retail business jumped 123% to RMB1,117 million ($168 million). a5Revenue from its international commerce wholesale business grew 15% to RMB1,432 million ($216 million) during the reporting quarter.

Cloud Computing:

Revenue from the cloud computing business jumped 156% Y-o-Y to RMB1,243 million ($187 million) in Q1 FY17, primarily driven by higher number of paying customers to 577,000, representing a Y-o-Y increase of 119%, and also by an increase in their spending, reflecting increased usage of services.

a6Digital Media and Entertainment:

Revenue from the digital media and entertainment business zoomed 286% Y-o-Y to RMB3,135 million ($472 million) in Q1 FY17, due to the consolidation of Youku Tudou, and an increase in revenue from mobile value-added services provided by UCWeb.

a7Innovation Initiatives and Others:

Revenue from innovation initiatives and others grew 30% Y-o-Y to RMB535 million ($80 million) in Q1 FY17. This was mainly due to an increase in fees from Ant Financial and YunOS.

Other highlights

Free cash flow: In Q1 FY17, Alibaba generated RMB12,745 million ($1,918 million) in non-GAAP free cash flow, enabling the Company to take strategic initiatives and make strategic investments.

a8Diversification: Alibaba has been focused on developing rural business, international expansion, logistics synergies and branching into high-growth areas like cloud computing. The Company is now tying up with German software company SAP SE to get them to use its cloud to reach Chinese customers. Since the Chinese market is largely untapped, Alibaba is well positioned as a platform for these firms to reach customers in China.

Alibaba also recently entered into a first-of-its-kind deal with HTC Corp. of Taiwan, to jointly build necessary data center infrastructure to deliver virtual reality content to HTC’s virtual reality (VR) customers. The deal is aimed at speeding up VR content creation in China.

Joint venture with SoftBank: In Q1 FY17, Alibaba Cloud and SoftBank formed a joint venture to launch cloud computing services in Japan, enabling the Company to further expand its cloud computing platform to business customers in Japan.

Share repurchase

a9In Q1 FY17, Alibaba repurchased and canceled approximately 27 million shares for US$2.0 billion. Alibaba Partnership purchased $400 million worth of common stock in a transaction with Softbank, in addition to the approximately $3.1 billion in share repurchases executed since the Company’s Board of Directors authorized a $4 billion stock buyback plan in August 2015. As a result of these buybacks, as of June 30th, 2016, Alibaba had approximately 2.50 billion shares issued and outstanding.

Guidance for full year FY17

Despite worries about China’s economy, Alibaba appears to be going full steam with its mobile and cloud strategy. Within its core retail business, Alibaba continues to forge ahead in the international markets. Moreover, the cloud computing segment in China is nascent, fast-growing and protected from competitors by the Chinese government, giving Alibaba a first-mover advantage. To top that off, Alibaba has a growing media business, supplementing it with a number of acquisitions.

Stock Performance

a10Alibaba’s stock ended the day at $96.86, slipping 0.14%, at the close on Friday, August 19th, 2016, having vacillated between an intraday high of $97.24 and a low of $96.34 during the session. The stock’s trading volume was at 14,259,261 for the day. The Company’s market cap was at $239.97 billion as of Friday’s close.

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