Market Overview

Alibaba Group Announces September Quarter 2017 Results

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Alibaba Group Holding Limited (NYSE:BABA) today announced its financial
results for the quarter ended September 30, 2017.

"We had an outstanding quarter. Our consumer insights and technology
innovation were the key drivers behind our customer value proposition
across the Alibaba economy," said Daniel Zhang, Chief Executive Officer
of Alibaba Group. "We are seeing the early results from our efforts to
integrate online and offline with our New Retail strategy, and consumers
have benefited from access to high quality products, improved customer
experience and the tremendous convenience of shopping anytime, anywhere."

"This quarter we delivered excellent results, with overall revenue
growth of 61% demonstrating the robust momentum in our core commerce
business and across the Alibaba economy," said Maggie Wu, Chief
Financial Officer of Alibaba Group. "We generated approximately US$3.4
billion in non-GAAP free cash flow during the quarter,1 which
enables us to invest in our future growth areas of core commerce,
including logistics, cloud computing, digital entertainment and other
innovation initiatives."

1 For the quarter ended September 30, 2017, net cash provided
by operating activities was RMB30,507 million (US$4,585 million).

BUSINESS HIGHLIGHTS

In the quarter ended September 30, 2017:

  • Revenue was RMB55,122 million (US$8,285 million), an increase
    of 61% year-over-year.
  • Revenue from core commerce increased 63% year-over-year to RMB46,462
    million (US$6,983 million).
  • Revenue from cloud computing increased 99% year-over-year to RMB2,975
    million (US$447 million).
  • Revenue from digital media and entertainment increased 33%
    year-over-year to RMB4,798 million (US$721 million).
  • Revenue from innovation initiatives and others increased 27%
    year-over-year to RMB887 million (US$134 million).
  • Annual active consumers on our China retail marketplaces
    reached 488 million, an increase of 22 million from the 12-month
    period ended June 30, 2017.
  • Mobile MAUs on our China retail marketplaces reached 549
    million in September 2017, an increase of 20 million over June 2017.
  • Net income was RMB17,408 million (US$2,616 million), income
    from operations
    was RMB16,584 million (US$2,493 million) and adjusted
    EBITDA
    was RMB25,031 million (US$3,762 million). Operating
    margin
    was 30%, adjusted EBITDA margin was 45% and adjusted
    EBITA margin for core commerce
    was 57%.
  • Diluted EPS was RMB6.78 (US$1.02) and non-GAAP diluted EPS
    was RMB8.57 (US$1.29).
  • Net cash provided by operating activities was RMB30,507 million
    (US$4,585 million) and non-GAAP free cash flow was RMB22,505
    million (US$3,383 million).

BUSINESS AND STRATEGIC UPDATES

Core Commerce

Taobao – innovative programs driving loyalty and engagement.
Taobao App's highly relevant personal recommendations and engaging
content continue to drive robust growth in active users and engagement.
In September 2017, user activities on the Taobao App drove a quarterly
net increase of 20 million mobile MAUs on our China retail marketplaces
to a total of 549 million mobile MAUs. The Taobao App is not only a
destination for shopping but a community-based platform for sharing
product knowledge and lifestyle content that drives user engagement and
retention.

During the quarter, we launched a unified rewards-based loyalty program
across the Tmall and Taobao marketplaces, called 88 Loyalty Membership,
to enhance consumer engagement and loyalty. Membership is free and
members are tiered by loyalty scores based on their quality and
frequency of spending and social engagement, entitling them to different
levels of loyalty benefits. Members in progressively higher tiers gain
more access to exclusive privileges, products and content. Over 29
million consumers participated in our inaugural Members Festival on
August 8.

Tmall – extending B2C market leadership and delivering high quality
products to consumers.
Tmall recorded 49% year-over-year growth for
physical goods GMV in the quarter ended September 30, 2017. We achieved
robust growth across all major categories. In particular, the
accelerated growth in consumer electronics and FMCG categories reflects
our commitment to building leadership in these two important categories.
We witnessed success in new customer acquisitions through highly
coordinated marketing and promotional campaigns, which partially drove
an accelerated increase in annual active consumers to 488 million for
the 12 months ended September 30, 2017, a net increase of 22 million
from the prior quarter and taking annualized growth to double digits for
the first time in the past four quarters.

During the quarter, Tmall demonstrated its data technology capabilities
as the leading brand-building and retail distribution platform in China.
Our Luxury Pavilion on Tmall offers a unique channel for premium brands
to extend their reach, launch new product campaigns and take advantage
of omni-channel solutions specifically targeting affluent Chinese
consumers. For example, the algorithms powering our Tmall App enabled
easy access by higher tier members of our 88 Loyalty Membership to the
Luxury Pavilion, with personalized brand pages and product
recommendations. These members also receive exclusive perks such as
pre-orders of limited edition products and invitations to celebrity
events. The growing list of partnering brands include Loewe, Burberry,
LA MER, Maserati, Guerlain and Zenith.

11.11 Global Shopping Festival. In the ninth year of the world's
largest 24-hour shopping event, this year's 11.11 will showcase:

  • Alibaba Economy at scale. 11.11 will demonstrate the
    technological innovation and global scale of the entire Alibaba
    Economy. More than 140,000 brands and hundreds of millions of
    consumers will participate in 11.11 this year. This shopping festival
    will be supported by our global cloud, payment and logistics
    infrastructure. Consumers will enjoy seamless payment and consumer
    loan services provided by Ant Financial. Alibaba Cloud will serve as
    the core technology and computing backbone to ensure the best consumer
    experience throughout the festival. Cainiao Network expects over 3
    million logistics personnel to facilitate the hundreds of millions of
    packages that will be generated from the festival.
  • Power of the Chinese consumer. We expect that hundreds of
    millions of Chinese consumers who visit our platforms on November 11
    will have access to over 60,000 international brands and merchants to
    satisfy their increasing demand for goods and products from around the
    world. This year, Tmall will, for the first time, leverage its
    popularity outside China to bring over 100 domestic Chinese brands to
    international markets, targeting millions of overseas Chinese
    consumers in Asia and the rest of the world.
  • New Retail implementation. Our unique New Retail model with
    integrated online-offline customer offerings will be showcased in
    store locations across China. More than 1,000 brands will convert
    nearly 100,000 physical locations into "smart stores" and our channel
    distribution solutions make it easy for more than 500,000 local
    neighborhood stores and Rural Taobao service centers to sell to
    consumers in lower-tier cities and rural villages.

New Retail – from proof of concept to rapid expansion. As part of
our effort to create a seamless online and offline consumer experience,
we expanded our Hema fresh grocery footprint and launched Tmall-branded
franchised convenience stores.

During the quarter, Hema added new stores in major cities in China,
bringing the total number of Hema stores to 20 as of September 30, 2017.
We have taken our Hema model to our retail partners, who have begun to
open and operate Hema franchised stores, extending coverage for the
benefit of consumers.

In August, the first Tmall-branded franchised convenience store opened
through the Lingshoutong Retail Sourcing Platform ("LST"). The LST
platform is a digital sourcing platform that has been adopted by over
500,000 neighborhood mom-and-pop shops across China. The platform allows
merchants to source from a broad selection of brands and products that
can be efficiently delivered to their stores; increasing their potential
revenue opportunity and lowering operational costs. The brand partners
of LST benefit from deeper distribution channels, especially in lower
tier cities in China where organized retail is less developed.

International – further investments for long-term growth. Our
cross-border and international consumer businesses continue to exhibit
robust growth. Revenue from our international commerce retail business
reached RMB2,878 million (US$433 million) in the quarter ended September
30, 2017, representing a 115% year-on-year growth, driven by strong
growth in our Southeast Asian platform Lazada and our China outbound
platform AliExpress. The growth of Lazada and AliExpress further expands
our customer base outside China.

During the quarter, cooperating with Taobao Marketplace, Lazada expanded
the "Taobao Collection" to expand Lazada's product offerings in three
additional markets including Indonesia, the Philippines and Thailand,
adding to the existing markets of Singapore and Malaysia. We will
continue to invest aggressively in the nascent markets in Southeast Asia
as well as launch innovative services to benefit consumers in the region.

Building upon the significant progress made in educating the U.S. market
on the Chinese consumption economy during the Gateway '17 conference in
June, we expanded the geographic reach of our efforts to on-board small
businesses from outside China to sell into China by hosting the first
Gateway '17 conference in Canada in September. Over 3,000 Canadian small
businesses and entrepreneurs attended the event in Toronto to learn
about business opportunities in the China market that present themselves
through our ecosystem.

Cloud Computing

Cloud computing revenue grew 99% year-over-year to RMB2,975 million
(US$447 million), driven by both robust growth in paying customers and
improving revenue mix to higher valued-added services. We are seeing
significant traction and diversification of customers and revenue, and
will continue to invest to further expand the market through valuable
services for our cloud customers.

In the September 2017 quarter, Alibaba Cloud launched 245 new products
and features, including major products that enable large enterprises to
achieve higher computing performance and storage capability. For
example, our new self-developed X-Dragon Cloud server combines the
performance and isolation capabilities of bare metal servers and the
elasticity and agility of virtual machines. It is particularly suitable
for mission critical applications requiring high performance guarantee
and strong tenant isolation for enterprises. In addition, the newly
released relational database POLARDB is integrated with our proprietary
distributed storage backend for optimized performance and can store up
to 100TB of data per TB instance.

Alibaba Cloud continues to develop holistic solutions to tackle the
challenges of large enterprises spanning a variety of industries.
Selected large enterprise customers in China include:

  • Philips, one of Fortune 500 companies, has migrated their
    Enterprise IT applications in China onto Alibaba Cloud. This has
    resulted in improved operational data utilization and efficacy as well
    as largely reduced costs.
  • Kweichow Moutai, one of the world's most valuable Chinese
    liquor companies, which is publicly-traded in China, is using our
    cloud products including elastic computing, content delivery,
    database, security and others services to build its digital marketing
    platform which enables it to better engage with its consumers.
  • Bank of Nanjing, a publicly-traded bank in China, is migrating
    the core system of its Internet finance business to the Alibaba Cloud
    platform. Bank of Nanjing is adopting a range of proprietary cloud
    products including our OceanBase database and big data platform as
    well as other services designed specifically for the financial service
    sector by both Alibaba Cloud and Ant Financial.

We held the annual Computing Conference 2017 in Hangzhou in early
October. The four-day event featured more than 800 industry experts and
thought leaders at over 120 forums, covering topics such as artificial
intelligence, blockchain, Big Data, quantum computing, DevOps and the
Internet of Things (IoT). Approximately 60,000 people attended in person
and millions viewed the conference online.

During the conference, we launched an innovative global research
program, "Alibaba DAMO Academy," which is designed to bridge the gap
between academic and industry research in the field of technology
development to solve real-world problems.

We intend to invest more than US$15 billion over the next three years on
our research and development efforts, which will include the Alibaba
DAMO Academy.

Digital Media and Entertainment

During the quarter, we successfully executed our strategy of acquiring
and developing a mixture of licensed and original content that resulted
in greater consumer mind share in both the drama and variety show
categories. As a result, daily average subscribers of Youku video
subscriptions increased over 180% year-on-year during the quarter ended
September 30, 2017. We believe a strong content pipeline, especially
with a focus on original content, offering greater flexibility around
availability and distribution, will bring us sustainable long-term
advantages in video entertainment.

Innovation Initiatives

AutoNavi continues to strengthen its position as a leading provider of
digital map, navigation and location-based services in China. For the
National Day Golden Week holiday campaign, AutoNavi launched
location-based interactive marketing services for brands and retailers
across different industries, resulting in approximately 4.7 billion
branded impressions and enabled the distribution of RMB1.1 billion in
targeted coupons.

Updates on Equity Investees and Others

Cainiao Network – greater synergy with Alibaba ecosystem and
commitment to increased logistics capability.
We have completed an
additional investment of US$803 million (RMB5.3 billion) to increase our
ownership of Cainiao Network to a majority stake of 51%. The investment
demonstrates our commitment to implement our New Retail strategy and to
enhance the logistics capabilities within the Alibaba ecosystem.
Together with Cainiao Network, we plan to invest RMB100 billion (US$15.0
billion) over the next five years to further strengthen our global
logistics network with the aim to realize the mission of fulfilling
orders within 24 hours in China and within 72 hours anywhere in the
world, and enable greater efficiencies and lower costs in China's
logistics sector.

Cash Flow from Operating Activities and Free
Cash Flow

Net cash provided by operating activities in the quarter ended September
30, 2017 was RMB30,507 million (US$4,585 million), an increase of 77%
compared to RMB17,206 million in the same quarter of 2016. Free cash
flow, a non-GAAP measurement of liquidity, in the quarter ended
September 30, 2017 was RMB22,505 million (US$3,383 million), an increase
of 61% compared to RMB13,943 million in the same quarter of 2016. A
reconciliation of net cash provided by operating activities to free cash
flow is included at the end of this results announcement.

KEY OPERATIONAL METRICS*

 

September 30,
2016

 

June 30,
2017

 

September 30,
2017

  % Change
YoY   QoQ
 
China Commerce Retail:
Annual active consumers(1) (in millions) 439 466 488 11% 5%
Mobile monthly active users (MAUs)(2) (in millions) 450 529 549 22% 4%
*   For definitions of terms used but not defined in this results
announcement, please refer to our annual report on Form 20-F for the
fiscal year ended March 31, 2017.
(1) For the twelve months ended on the respective dates.
(2) For the month ended on the respective dates.
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