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Alibaba Group Announces June Quarter 2018 Results

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Alibaba Group Holding Limited (NYSE:BABA) today announced its financial
results for the quarter ended June 30, 2018.

"Alibaba had another excellent quarter, with significant user expansion
and even more robust engagement across our growing ecosystem. Our China
retail marketplace business continues to gain share, with New Retail
initiatives driving further revenue growth and enabling our retail
partners to seamlessly serve customers. We are executing our plan of
providing more value and choice to users along the consumption
continuum, with digital entertainment and local service offerings that
tap into big addressable markets beyond core commerce," said Daniel
Zhang, Chief Executive Officer of Alibaba Group. "We will continue to
invest in strategic business opportunities and innovation to sustain our
competitive advantage and for long-term growth."

"We delivered another great quarter with 61% revenue growth as well as
strong profit growth, excluding one-time items. We are pleased with the
strength and rapid growth of our business at such significant scale,"
said Maggie Wu, Chief Financial Officer of Alibaba Group. "The
exceptional growth across our major segments of core commerce, cloud
computing and digital media and entertainment validates our strategy of
investing in customer experience, product, technology and infrastructure
for the future. We remain confident in our ability to continue to gain
market leadership by delivering unique value propositions to our
business customers, partners and consumers."

BUSINESS HIGHLIGHTS

In the quarter ended June 30, 2018:

  • Revenue was RMB80,920 million (US$12,229 million), an increase
    of 61% year-over-year.
  • Revenue from core commerce increased 61% year-over-year to RMB69,188
    million (US$10,456 million).
  • Revenue from cloud computing increased 93% year-over-year to RMB4,698
    million (US$710 million).
  • Revenue from digital media and entertainment increased 46%
    year-over-year to RMB5,975 million (US$903 million).
  • Revenue from innovation initiatives and others increased 64%
    year-over-year to RMB1,059 million (US$160 million).
  • Annual active consumers on our China retail marketplaces
    reached 576 million, an increase of 24 million from the 12-month
    period ended March 31, 2018.
  • Mobile MAUs on our China retail marketplaces reached 634
    million in June 2018, an increase of 17 million over March 2018.
  • Income from operations was RMB8,020 million (US$1,212 million),
    a decrease of 54% year-over-year due to a one-time increase in
    share-based compensation expense related to Ant Financial's awards to
    our employees, which was the result of a significant increase in the
    valuation of Ant Financial in its most recent round of equity
    fundraising (see "Costs and Expenses – Shares-based Compensation
    Expense" and "Business and Strategic Updates—Updates on Ant Financial"
    below). Excluding Ant Financial-related share-based compensation
    expense, our income from operations would have increased by 9%. Adjusted
    EBITA
    increased 13% year-over-year to RMB26,502 million (US$4,005
    million).
  • Adjusted EBITA for core commerce was RMB32,797 million
    (US$4,956 million), an increase of 22% year-over-year, representing a
    margin of 47%. Margin in our core commerce segment has been and will
    continue to be influenced by several factors: (i) gradual revenue mix
    shift towards self-operated New Retail businesses where revenue is
    recorded on a gross basis including the cost of inventory, (ii)
    inclusion of the logistics technology business of Cainiao Network in
    our consolidated financial statements, (iii) aggressive investment in
    local services, such as Ele.me, which we acquired and consolidated
    into our financial statements this quarter and (iv) international
    expansion in regions such as Southeast Asia. Excluding the effects of
    the above-mentioned long-term investments, our adjusted EBITA margin
    in the core commerce segment remained stable as compared to the same
    period last year.
  • Net income attributable to ordinary shareholders was RMB8,685
    million (US$1,313 million), and net income was RMB7,650
    million (US$1,156 million), representing a year-on-year decrease of
    41% and 45%, respectively. However, this decrease was attributable to
    a one-time increase in share-based compensation expense of RMB11,180
    million relating to Ant Financial's awards to our employees discussed
    in "Income from operations" above. Excluding the effect of such Ant
    Financial-related share-based compensation expense, net income for the
    quarter would have increased by 33% on a year-on-year basis.
  • Non-GAAP net income was RMB20,101 million (US$3,038 million). Diluted
    EPS
    was RMB3.30 (US$0.50) and non-GAAP diluted EPS was
    RMB8.04 (US$1.22).
  • Net cash provided by operating activities was RMB36,117 million
    (US$5,458 million) and non-GAAP free cash flow was RMB26,358
    million (US$3,983 million).

BUSINESS AND STRATEGIC UPDATES

Core Commerce

Taobao – robust engagement and user growth supported by strong
business development.
In June 2018, we continued to experience
strong user activities on the Taobao App with quarterly net increase of
17 million MAUs on our China retail marketplaces to a total of 634
million MAUs. Ongoing improvements in search and personalized
recommendations on the Taobao App supported the acceleration of Taobao
paid GMV growth during the quarter. Annual active consumers increased 24
million from the 12 months ended March 31, 2018 to 576 million for the
12 months ended June 30, 2018. During the quarter, around 80% of the
increase in annual active consumers were from lower tier cities as we
broadened our offerings and services into those regions.

Taobao App provides a unique shopping experience with new, innovative
content formats and intelligent personalized recommendations.
Live-broadcast feature continues to be a fast growing consumer social
media engagement medium on the Taobao App. In the quarter ended June
2018, live-broadcast MAUs have grown over 100% year-over-year. Formats
such as curated posts, short-form videos and live-broadcast events
continue to help brands engage with their customers on our platform,
which in turn, drives purchase conversion and increases annual active
consumers.

In early August, we launched "88VIP," a new loyalty membership program
to enhance consumer engagement and loyalty. The subscription-based
program offers the most comprehensive set of benefits of commerce,
entertainment and local services in China. The exclusive membership
offerings and privileges across the Alibaba ecosystem include discount
savings on Tmall Supermarket, Tmall Global and brand stores on Tmall,
coupons for consumer electronics, subscriptions to our video-streaming
platform Youku and music-streaming platform Xiami, online movie tickets
on Taopiaopiao, and on-demand delivery service from Ele.me.

Tmall – B2C market share gains. Tmall continued to gain wallet
share and expand our B2C market leadership. Excluding unpaid orders,
physical goods GMV grew 34% year-over-year in the quarter ended June 30,
2018. The robust growth was driven by continued increases in conversion
rates and average consumer spending with strong performance from FMCG,
consumer electronics, apparel and home goods categories.

During the quarter, Tmall gained further mindshare among domestic and
international brands as the leading brand-building and distribution
platform that is capturing increasing consumer exposure and spending by
users in China. During the quarter, international brands such as MCM,
Moschino and Giuseppe Zanotti launched flagship stores on Tmall and
joined the Luxury Pavilion, our customized and premium shopping
experience for consumers.

New Retail – capturing consumption patterns of the future.
Execution of our New Retail strategy is driving a substantial
transformation of the traditional retail industry by digitizing
store-based operations, with a focus on in-store technology, on-demand
delivery, inventory tracking, supply chain management, consumer insights
and mobile payments.

Hema, our proprietary grocery retail format, continues to expand its
store network, introduce new initiatives to enhance consumer experience
and enable its retail partners to accelerate their digital
transformation. As of June 30, 2018, there were 45 self-operated Hema
stores in thirteen cities in China, primarily located in Tier 1 and Tier
2 cities.

Alibaba Group's cooperation with Sun Art (in which we hold an
approximately 31% effective equity interest) continues to deepen as Sun
Art stores adopt Hema's technologies and services including on-demand
delivery, joint procurement and supply chain management of fresh food
offerings. During the quarter, Hema and RT-Mart (a business unit of Sun
Art) established "Hexiaoma" (a.k.a Small Hema) to jointly explore
multi-format store expansion in the lower tier cities leveraging
RT-Mart's strong supply chain capability and Alibaba's data technology
platform.

In August 2018, Alibaba Group and Starbucks Coffee Company jointly
announced a comprehensive strategic "New Retail" partnership that will
enable a seamless Starbucks Experience and enhance the way
customers enjoy their coffee. Under the partnership, Alibaba will begin
to deliver Starbucks coffee to customers through our food delivery unit
Ele.me, launch new "Starbucks Delivery Kitchens" dedicated for delivery
order fulfillment with Hema, and co-create a virtual Starbucks store
presence on multiple Internet platforms operated by Alibaba to deliver a
personalized online Starbucks Experience for Chinese customers.
The strategic partnership with Starbucks is proof of our New Retail
model at scale and showcases how Alibaba can help our brand partners
more deeply and innovatively engage with their customers in China.

Local services – aggressive investment for market share gains. In
May 2018, we completed the acquisition of Ele.me, one of the leading
online food delivery platforms in China. Ele.me and Koubei, a leading
local services platform focused on in-store consumption in China, work
together to provide a comprehensive local services offering that is core
to Alibaba. Our plan is to aggressively invest in these businesses to
gain market share and execute deep integration into the ecosystem of
Alibaba service offerings, such as incorporating local services users
into our new 88VIP, as well as delivery support to mom-and-pop
convenience store operators on Alibaba's Lingshoutong (LST) platform and
Hema supermarket stores.

We have established a company to hold Ele.me and Koubei as our combined
flagship local services vehicle, which we plan to separately capitalize
with investments from Alibaba, Ant Financial and third-party investors.
As of the time of this announcement, we have received over US$3 billion
in new investment commitments, including from Alibaba and SoftBank. As a
result of this reorganization, subject to closing conditions, we will
consolidate Koubei, which would result in a material one-off revaluation
gain when the transaction closes.

Cainiao Network – building and enabling a smart global logistics
network through partnerships.
As part of our eWTP initiative,
Cainiao is cooperating with the Malaysian customs at the regional
e-commerce hub near the Kuala Lumpur airport, the first eWTP hub outside
of China, and has improved the customs clearance capability.

In addition, Cainiao announced in June 2018 that it will lead a joint
venture with China National Aviation Corporation (Group) Limited and YTO
Express that will invest approximately US$1.5 billion to build a
world-class digital logistics center at Hong Kong International Airport.
This landmark property, leveraging leading technologies such as
automated warehousing and temperature control solutions, will be a
connection and routing point for ground transportation in the Pearl
River Delta, one of the most important regions in China.

In May 2018, Alibaba and Cainiao led a US$1.38 billion investment for an
approximate 10% equity stake in ZTO Express, a leading and fast-growing
express delivery company in China. In connection with this investment,
Cainiao and ZTO will deepen their collaboration in the transformation of
China's logistics industry amid the growth of New Retail.

International – further investments for long-term growth. Our
cross-border and international retail businesses continue to show
promising growth. Revenue from our international commerce retail
business reached RMB4,316 million (US$652 million) in the quarter ended
June 30, 2018, representing 64% year-on-year growth.

Lazada has developed a clear plan to position its business into three
segments: C2C marketplace, branded flagship store mall (LazMall) and
cross-border e-commerce (LazGlobal). Launched in June and July in most
of the countries where Lazada operates, LazMall is a new platform
tailored for brands' official and / or certified stores that offer
premium services and guarantee product authenticity. LazGlobal will
connect consumers in Southeast Asia with Taobao Collection businesses
and sellers from other countries where Lazada does not currently have a
presence. We believe the deepened integration with the Alibaba ecosystem
will drive enhanced customer satisfaction and market leadership in the
future. We are highly committed to the Southeast Asian market and will
continue to invest in Lazada's growth and customer reach.

Cloud Computing

Cloud computing revenue grew 93% year-over-year to RMB4,698 million
(US$710 million), driven by both revenue mix towards higher value-added
products and services and robust growth in paying customers.

In the June 2018 quarter, Alibaba Cloud's product innovation focused on
big data analytics, artificial intelligence, security and
Internet-of-Things applications. As part of deepening our relationship
with customers, we have launched products that enable customers to
achieve fast, cost effective and secure data migration from on premise
data centers onto the public cloud. For example, enterprises can
leverage Lightning Cube, our cloud migration solution that enables
uninterrupted migration of petabytes-scale data.

For the June 2018 quarter, Alibaba Cloud continues to deepen cooperation
with customers in a variety of industries. Selected large enterprise
customers and major partnerships include:

  • Minsheng Bank is the first major bank in China to successfully
    adopt a financial cloud with distributed core account architecture
    that is equipped with a disaster recovery system. Four months since
    launch of the new financial cloud, it has improved processing
    efficiency that is three times higher than that of the original core
    system.
  • China Communications Construction Group (CCCG), one of the
    largest engineering and construction companies in China, is leveraging
    our middleware and public cloud services to improve its supply chain
    management efficiency in design, construction and operation of
    infrastructure assets such as highways, high-speed rail, airports, and
    marine ports. By working with CCCG, we have further penetrated into
    the industrial and construction sector.
  • IHG® (InterContinental Hotels Group) is leveraging Alibaba
    Cloud's hybrid cloud solution, compliance and security services to
    provide on-demand room booking and related business for its global
    guests in Greater China.

Digital Media and Entertainment

We are executing our strategy to integrate entertainment elements into
our overall offerings to consumers beyond commerce. The synergy between
our commerce and entertainment businesses delivers a superior user
experience while increasing customer loyalty and subscription revenue,
as well as return on investment for advertisers.

During the quarter, Youku partnered with China Central Television (CCTV)
to stream all 2018 FIFA World Cup games to hundreds of millions of fans
in China. During the tournament, Youku users accessed 180 million unique
devices, including mobile devices and smart TVs, to watch the games.
Alibaba Group delivered unique consumer experience by integrating a
broad range of service offerings from our ecosystem, including red
packet promotions from Taobao and Alipay as well as late night delivery
services from Hema and Ele.me. Alibaba Cloud's proprietary technologies
delivered high resolution and low latency livestreaming of World Cup
games on Youku, with peak concurrent viewers exceeding that of the most
watched program during Chinese New Year. During the quarter, our World
Cup programming and ongoing improvement of video content offerings led
to daily average subscriber growth of 200% year-over-year for Youku.

Innovation Initiatives & Technology Development

Tmall Genie, our AI-powered voice assistant, achieved sales of 5 million
units since its official launch just a year ago. Tmall Genie connects
our customers with services offered by Alibaba ecosystem in an
interactive way. We have focused on educational and entertainment
content for families to widen user base and increase level of engagement
with the device. Tmall Genie is our gateway to link customers with new
services and experiences to be generated by IoTs and Smart Homes.

Updates on Equity Investees and Others

Focus Media – In July 2018, we announced our agreement to invest
RMB9.63 billion (US$1.46 billion) to acquire a 6.62% equity stake in
Focus Media, which operates the largest advertising screens network in
China that can be seen in elevators, on the streets, in subways and in
office buildings across 300 cities. In connection with this investment,
we and Focus Media will jointly explore innovative digital marketing
initiatives tied to our New Retail strategy. The strategic partnership
with Focus Media allows us to extend our digital advertising network to
the traditional offline environment, leveraging our consumer insight and
data technology.

Updates on Ant Financial

In June, Ant Financial completed its Series C equity financing totaling
approximately US$14 billion, which reflected a significant increase in
Ant Financial's valuation.

Cash Flow from Operating Activities and Free
Cash Flow

Net cash provided by operating activities in the quarter ended June 30,
2018 was RMB36,117 million (US$5,458 million), an increase of 40%
compared to RMB25,873 million in the same quarter of 2017. Free cash
flow, a non-GAAP measurement of liquidity, in the quarter ended June 30,
2018 increased by 16% to RMB26,358 million (US$3,983 million), from
RMB22,711 million in the same quarter of 2017, primarily due to our
increase in purchase of property and equipment, intangible assets and
licensed copyrights by RMB6,597 million. 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*

 
   

June 30,
2017

   

March 31,
2018

   

June 30,
2018

    Net adds
YoY     QoQ
 
China Commerce Retail:
Annual active consumers(1) (in millions) 466 552 576 110 24
Mobile monthly active users (MAUs)(2) (in millions) 529 617 634 105 17

__________________

*     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, 2018.
(1) For the twelve months ended on the respective dates.
(2) For the month ended on the respective dates.
 

JUNE QUARTER SUMMARY FINANCIAL RESULTS

 
    Three months ended June 30,    
2017     2018
    YoY %
RMB RMB

US$(1)

Change
(in millions, except percentages and per share amounts)
 
Revenue 50,184 80,920 12,229 61 %
 
Income from operations 17,513 8,020 1,212 (54 )%(3)
Operating margin 35 % 10 %
Adjusted EBITDA(2) 25,124 29,359 4,437 17 %
Adjusted EBITDA margin(2) 50 % 36 %
Adjusted EBITA(2) 23,518 26,502 4,005 13 %
Adjusted EBITA margin(2) 47 % 33 %
 
Net income 14,031 7,650 1,156 (45 )%(3)
Net income attributable to ordinary shareholders 14,683 8,685 1,313 (41 )%(3)
Non-GAAP net income(2) 20,019 20,101 3,038 0 %(4)
 
Diluted earnings per share/ADS (EPS) 5.65 3.30 0.50 (42 )%(3)
Non-GAAP diluted EPS(2) 7.95 8.04 1.22 1 %

__________________

(1)     This results announcement contains translations of certain Renminbi
("RMB") amounts into U.S. dollars ("US$") for the convenience of the
reader. Unless otherwise stated, all translations of RMB into US$
were made at RMB6.6171 to US$1.00, the exchange rate on June 29,
2018 as set forth in the H.10 statistical release of the Federal
Reserve Board. The percentages stated in this announcement are
calculated based on the RMB amounts.
(2) See the sections entitled "Information about Segments," "Non-GAAP
Financial Measures" and "Reconciliations of Non-GAAP Measures to the
Nearest Comparable GAAP Measures" for more information about the
non-GAAP measures referred to within this results announcement.
(3)

The year-over-year decrease was primarily due to the increase of
RMB11,180 million in share-based compensation expenses related to
the share-based awards of Ant Financial granted to our employees
as a result of the significant increase in Ant Financial's
valuation. Excluding the above impact, our income from operations,
net income, net income attributable to ordinary shareholders and
diluted EPS would have increased by 9%, 33%, 35% and 33%,
respectively.

(4) Non-GAAP net income remained flat year-over-year primarily because
of a decrease in profit sharing from Ant Financial and an increase
in exchange loss. Excluding these impacts, our non-GAAP net income
would have increased by 10%.
 

JUNE QUARTER INFORMATION BY SEGMENTS

The table below sets forth selected financial information of our
operating segments for the periods indicated:
 
    Three months ended June 30, 2018
        Digital media     Innovation        
Core Cloud and initiatives
commerce computing entertainment and others

Unallocated(1)

Consolidated
RMB RMB RMB RMB RMB RMB     US$
(in millions, except percentages)
Revenue 69,188 4,698 5,975 1,059 80,920 12,229
 
Income (loss) from operations 23,022 (2,074) (4,290) (3,775) (4,863) 8,020 1,212
Add: Share-based compensation expense 8,095 1,581 818 2,564 3,320 16,378 2,475
Add: Amortization of intangible assets 1,680 5 340 9 70 2,104 318
 
Adjusted EBITA 32,797 (488) (3,132) (1,202) (1,473) 26,502 4,005
Adjusted EBITA margin 47%(2) (10)% (52)% (114)%

 

33%
 
Three months ended June 30, 2017
Digital media Innovation
Core Cloud and initiatives
commerce computing entertainment and others

Unallocated(1)

Consolidated
RMB RMB RMB RMB RMB RMB
(in millions, except percentages)
Revenue 43,027 2,431 4,081 645 50,184
 
Income (loss) from operations 24,808 (532) (3,388) (1,612) (1,763) 17,513

Add: Share-based compensation expense

1,560

 

428

 

502

816

 

713

4,019

Add: Amortization of intangible assets

602 1 1,138 162 83 1,986
 
Adjusted EBITA 26,970 (103) (1,748) (634) (967) 23,518
Adjusted EBITA margin 63% (4)% (43)% (98)% 47%

__________________

(1)     Unallocated expenses are primarily related to corporate
administrative costs and other miscellaneous items that are not
allocated to individual segments.
(2)

Adjusted EBITA margin is lower than prior year period mainly due
to strategic investments in New Retail, the consolidation of
Cainiao Network and Ele.me and investments in Lazada. Revenue of
New Retail, which is included in the core commerce segment, is
primarily recorded on a gross basis, which implies lower gross
margins. Our New Retail businesses primarily include Hema, Tmall
Import and Intime.

JUNE QUARTER OPERATIONAL AND FINANCIAL RESULTS

Revenue

Revenue for the quarter ended June 30, 2018 was RMB80,920 million
(US$12,229 million), an increase of 61% compared to RMB50,184 million in
the same quarter of 2017. The increase was mainly driven by the robust
revenue growth of our China commerce retail business, the consolidation
of Cainiao Network and Ele.me, as well as strong revenue growth of
Alibaba Cloud.

 

The following table sets forth a breakdown of our revenue by
segment for the periods indicated:

 
    Three months ended June 30,    
2017     2018
    % of         % of YoY %
RMB Revenue RMB US$ Revenue Change
(in millions, except percentages)
Core commerce:
China commerce retail
- Customer management 26,220 52% 33,053 4,995 41% 26%
- Commission 8,878 18% 13,756 2,079 17% 55%
- Others 1,614 3% 7,159 1,082 9% 344%
36,712 73% 53,968 8,156 67% 47%
China commerce wholesale 1,641 3% 2,250 340 3% 37%
International commerce retail 2,638 6% 4,316 652 6% 64%
International commerce wholesale 1,609 3% 1,837 278 2% 14%
Cainiao logistics services 3,327 503 4% N/A
Consumer services 2,612 395 3% N/A
Others 427 1% 878 132 1% 106%
Total core commerce 43,027 86% 69,188 10,456 86% 61%
 
Cloud computing 2,431 5% 4,698 710 6% 93%
Digital media and entertainment 4,081 8% 5,975 903 7% 46%
Innovation initiatives and others 645 1% 1,059 160 1% 64%
Total 50,184 100% 80,920 12,229 100% 61%
 

Core commerce

  • China commerce retail business

    Revenue
    Revenue from our China commerce retail business in the quarter ended
    June 30, 2018 was RMB53,968 million (US$8,156 million), an increase of
    47% compared to RMB36,712 million in the same quarter of 2017. This
    robust revenue growth reflected over 340% year over year growth of
    Others revenue, which consists primarily of our New Retail
    initiatives, mainly Tmall Import, Hema fresh food grocery business and
    Intime Department Stores.

    In addition, revenue from our
    China retail marketplaces continued to see strong growth. Customer
    management revenue grew by 26% year-over-year, and commission revenue
    grew by 55% year-over-year. The growth of customer management revenue
    was driven primarily by increases in the average unit price per click,
    reflecting our ability to deliver highly relevant recommendations to
    consumers through personalization technology and the higher value that
    merchants put on such technology to reach the relevant users and
    increase conversion. The growth of commission revenue was primarily
    due to strong year-over-year growth of 34% in physical goods GMV
    (excluding unpaid orders) on Tmall. Other revenue was RMB7,159 million
    (US$1,082 million), a significant increase compared to RMB1,614
    million in the same quarter of 2017, primarily driven by our New
    Retail businesses, including contributions from Tmall Import, Hema and
    Intime.

    Annual active consumers Our China
    retail marketplaces had 576 million annual active consumers in the 12
    months ended June 30, 2018, compared to 552 million in the 12 months
    ended March 31, 2018, representing a net addition of 24 million from
    the prior quarter, and a 24% increase from 466 million in the 12
    months ended June 30, 2017. The increase in annual active consumers is
    primarily due to better new customer acquisition in lower tier cities.
    The longer consumers have been with our platform, the more they spend
    and the more orders they place across more product categories.

    Mobile
    MAUs –
    Mobile MAUs on our China retail marketplaces grew to 634
    million in June 2018, compared to 617 million in March 2018,
    representing a net addition of 17 million MAUs in the quarter and a
    20% increase from 529 million in June 2017.
  • China commerce wholesale business

    Revenue
    from our China commerce wholesale business in the quarter ended June
    30, 2018 was RMB2,250 million (US$340 million), an increase of 37%
    compared to RMB1,641 million in the same quarter of 2017. The increase
    was primarily due to an increase in the average revenue from paying
    members on our 1688.com platform.
  • International commerce retail business

    Revenue
    from our international commerce retail business in the quarter ended
    June 30, 2018 was RMB4,316 million (US$652 million), an increase of
    64% compared to RMB2,638 million in the same quarter of 2017. The
    increase was primarily due to the growth in revenue generated from
    Lazada and AliExpress.
  • International commerce wholesale business

    Revenue
    from our international commerce wholesale business in the quarter
    ended June 30, 2018 was RMB1,837 million (US$278 million), an increase
    of 14% compared to RMB1,609 million in the same quarter of 2017. The
    increase was primarily due to an increase in the number of paying
    members on our alibaba.com platform.
  • Cainiao logistics services

    Revenue from
    Cainiao logistics services represents revenue from the domestic and
    international one-stop-shop logistics services and supply chain
    management solutions provided by Cainiao Network, after elimination of
    inter-company transactions. We started to consolidate Cainiao Network
    in mid-October 2017.
  • Consumer services

    Revenue from consumer
    services represents revenues from platform commission, provision of
    food delivery services and other services provided by Ele.me. We
    started to consolidate Ele.me this quarter.

Cloud computing

Revenue from our cloud computing business in the quarter ended June 30,
2018 was RMB4,698 million (US$710 million), an increase of 93% compared
to RMB2,431 million in the same quarter of 2017, driven by both revenue
mix towards higher value-added products and services and robust growth
in paying customers.

Digital media and entertainment

Revenue from our digital media and entertainment business in the quarter
ended June 30, 2018 was RMB5,975 million (US$903 million), an increase
of 46% compared to RMB4,081 million in the same quarter of 2017. The
increase was primarily due to an increase in subscription revenue from
Youku and an increase in revenue from mobile value-added services
provided by UCWeb, such as mobile search and game publishing.

Innovation initiatives and others

Revenue from innovation initiatives and others in the quarter ended June
30, 2018 was RMB1,059 million (US$160 million), an increase of 64%
compared to RMB645 million in the same quarter of 2017. The increase was
mainly due to an increase in revenue from Tmall Genie.

Costs and Expenses

The following tables set forth a breakdown of our costs and expenses,
share-based compensation expense and costs and expenses excluding
share-based compensation expense by function for the periods indicated.

 
    Three months ended June 30,    

% of
Revenue
YoY
change

2017     2018
RMB    

% of
Revenue

RMB     US$    

% of
Revenue

(in millions, except percentages)
Costs and expenses:
Cost of revenue 17,460 35% 43,720 6,607 54% 19%
Product development expenses 4,696 9% 11,510 1,739 14% 5%
Sales and marketing expenses 4,850 10% 8,921 1,348 11% 1%
General and administrative expenses 3,679 7% 6,645 1,005 8% 1%
Amortization of intangible assets 1,986 4% 2,104 318 3% (1)%
Total costs and expenses 32,671 65% 72,900 11,017 90% 25%
 
Share-based compensation expense by function:
Cost of revenue 1,128 2% 3,816 576 4% 2%
Product development expenses 1,332 3% 6,512 984 8% 5%
Sales and marketing expenses 396 1% 2,063 312 3% 2%
General and administrative expenses 1,163 2% 3,987 603 5% 3%
Total share-based compensation expense 4,019 8% 16,378 2,475 20% 12%
 
Costs and expenses excluding share-based compensation expense:
Cost of revenue 16,332 33% 39,904 6,031 50% 17%
Product development expenses 3,364 6% 4,998 755 6% 0%
Sales and marketing expenses 4,454 9% 6,858 1,036 8% (1)%
General and administrative expenses 2,516 5% 2,658 402 3% (2)%
Amortization of intangible assets 1,986 4% 2,104 318 3% (1)%

Total costs and expenses excluding share-based compensation expense

28,652 57% 56,522 8,542 70% 13%
 

Cost of revenue – Cost of revenue in the quarter ended June 30,
2018 was RMB43,720 million (US$6,607 million), or 54% of revenue,
compared to RMB17,460 million, or 35% of revenue, in the same quarter of
2017. Without the effect of share-based compensation expense, cost of
revenue as a percentage of revenue would have increased from 33% in the
quarter ended June 30, 2017 to 50% in the quarter ended June 30, 2018.
The increase was primarily due to (1) our consolidation of Cainiao
Network and Ele.me, (2) inclusion of the cost of inventory and logistics
from our New Retail businesses and Lazada, (3) an increase in content
spending from Youku's original contents and World Cup, as well as (4)
our spending in growing user base and improving user experience.

Product development expenses – Product development expenses in
the quarter ended June 30, 2018 were RMB11,510 million (US$1,739
million), or 14% of revenue, compared to RMB4,696 million, or 9% of
revenue, in the same quarter of 2017. Without the effect of share-based
compensation expense, product development expenses as a percentage of
revenue would have remained stable at 6% in the quarter ended June 30,
2018 and the same quarter last year.

Sales and marketing expenses – Sales and marketing expenses in
the quarter ended June 30, 2018 were RMB8,921 million (US$1,348
million), or 11% of revenue, compared to RMB4,850 million, or 10% of
revenue, in the same quarter of 2017. Without the effect of share-based
compensation expense, sales and marketing expenses as a percentage of
revenue would have decreased from 9% in the quarter ended June 30, 2017
to 8% in the quarter ended June 30, 2018.

General and administrative expenses – General and administrative
expenses in the quarter ended June 30, 2018 were RMB6,645 million
(US$1,005 million), or 8% of revenue, compared to RMB3,679 million, or
7% of revenue, in the same quarter of 2017. Without the effect of
share-based compensation expense, general and administrative expenses as
a percentage of revenue would have decreased from 5% in the quarter
ended June 30, 2017 to 3% in the quarter ended June 30, 2018.

Share-based compensation expense – Total share-based compensation
expense included in the cost and expense items above in the quarter
ended June 30, 2018 was RMB16,378 million (US$2,475 million), an
increase of 308% compared to RMB4,019 million in the same quarter of
2017. Share-based compensation expense as a percentage of revenue
increased to 20% in the quarter ended June 30, 2018 from 8% in the same
quarter of 2017. The following table sets forth our analysis of
share-based compensation expense for the quarters indicated by type of
share-based awards:

 
    Three months ended        
June 30, 2017     March 31, 2018     June 30, 2018 % Change
    % of     % of         % of
RMB Revenue RMB Revenue RMB US$ Revenue YoY QoQ
(in millions, except percentages)
By type of awards:
Alibaba Group share-based awards granted to:

- Our employees

3,023 6% 4,176 7% 4,416 667 6% 46% 6%

- Ant Financial employees and other consultants(1)

452 1% 389 1% 168 25

 

0%

 

(63)%

 

(57)%

Ant Financial share-based awards granted to our employees(1) 297 1% 1,483 2% 11,477 1,735

 

14%

3,764%

 

674%

Others

247 0% 207 0% 317 48 0% 28% 53%
Total share-based compensation expense 4,019 8% 6,255 10% 16,378 2,475 20%

 

308%

 

162%

__________________

(1)     Awards subject to mark-to-market accounting treatment.

Share-based compensation expense related to Alibaba Group share-based
awards granted to our employees in this quarter remained relatively
stable as compared to the previous quarter. We expect that our
share-based compensation expense will continue to be affected by changes
in the fair value of our shares, our subsidiaries' share-based awards
and the quantity of awards we grant to our employees and consultants in
the future.

Share-based compensation expense related to Ant Financial share-based
awards granted to our employees increased significantly in this quarter
compared to the previous quarter, mainly due to the increase in fair
value of such awards as the valuation of Ant Financial increased
significantly. Furthermore, we expect that our share-based compensation
expense related to these awards will continue to be affected by future
increases in the valuation of Ant Financial, although any such increase
will be non-cash and will not result in any economic cost or equity
dilution to our shareholders.

Amortization of intangible assets – Amortization of intangible
assets in the quarter ended June 30, 2018 was RMB2,104 million (US$318
million), an increase of 6% from RMB1,986 million in the same quarter of
2017.

Income from operations and operating margin

Income from operations in the quarter ended June 30, 2018 was RMB8,020
million (US$1,212 million), or 10% of revenue, a decrease of 54%
compared to RMB17,513 million, or 35% of revenue, in the same quarter of
2017, primarily due to an increase of RMB11,180 million in share-based
compensation expenses related to Ant Financial share-based awards
granted to our employees as the fair value of such awards increased
significantly during the quarter ended June 30, 2018. Excluding Ant
Financial-related share-based compensation expense, our income from
operations would have increased by 9%.

Adjusted EBITDA and Adjusted EBITA

Adjusted EBITDA achieved growth of 17% to RMB29,359 million (US$4,437
million) in the quarter ended June 30, 2018, compared to RMB25,124
million in the same quarter of 2017, despite adjusted EBITDA margin
decreasing from 50% in the quarter ended June 30, 2017 to 36% in the
quarter ended June 30, 2018. Adjusted EBITA achieved growth of 13% to
RMB26,502 million (US$4,005 million) in the quarter ended June 30, 2018,
compared to RMB23,518 million in the same quarter of 2017, despite
adjusted EBITA margin decreasing from 47% in the quarter ended June 30,
2017 to 33% in the quarter ended June 30, 2018. Adjusted EBITDA and
EBITA margins are lower mainly because of strategic investments in New
Retail (revenue of which is primarily recorded on a gross basis), the
consolidation of Cainiao Network and Ele.me and investments in Lazada.
Reconciliations of net income to adjusted EBITDA and adjusted EBITA are
included at the end of this results announcement.

As many of our newly developed and acquired businesses have different
cost structures, we expect that our margin will continue to be
negatively impacted by these businesses and the accounting treatment of
revenue recorded on a gross basis.

Adjusted EBITA and adjusted EBITA margin by
segments

Adjusted EBITA and adjusted EBITA margin by segments are set forth in
the table below. See the section entitled "Information about Segments"
above for a reconciliation of income from operations to adjusted EBITA.

    Three months ended June 30,
2017     2018
    % of         % of
RMB Revenue RMB US$ Revenue
(in millions, except percentages)
 
Core commerce 26,970 63% 32,797 4,956 47%
Cloud computing (103) (4)% (488) (74) (10)%
Digital media and entertainment (1,748) (43)% (3,132) (473) (52)%
Innovation initiatives and others (634)

(98)%

(1,202) (182) (114)%
 

Core commerce segment – Adjusted EBITA increased by 22% to
RMB32,797 million (US$4,956 million) in the quarter ended June 30, 2018,
compared to RMB26,970 million in the same quarter of 2017, despite
adjusted EBITA margin decreasing from 63% in the quarter ended June 30,
2017 to 47% in the quarter ended June 30, 2018. Margin in our core
commerce segment was lower due to: (i) gradual revenue mix shift towards
self-operated New Retail businesses where revenue is recorded on a gross
basis including the cost of inventory, (ii) inclusion of the logistics
technology business of Cainiao Network in our consolidated financial
statements, (iii) aggressive investment in local services, such as
Ele.me, which was acquired and consolidated into our financial
statements this quarter and (iv) international expansion in regions such
as Southeast Asia. Excluding the effects of the above-mentioned
long-term investments, our adjusted EBITA margin in the core commerce
segment remained stable as compared to the same period last year.

Cloud computing segment – Adjusted EBITA in the quarter ended
June 30, 2018 was a loss of RMB488 million (US$74 million), compared to
a loss of RMB103 million in the same quarter of 2017. Adjusted EBITA
margin decreased to negative 10% in the quarter ended June 30, 2018 from
negative 4% in the quarter ended June 30, 2017, primarily due to our
commitment to investing in our technology infrastructure.

Digital media and entertainment segment – Adjusted EBITA in the
quarter ended June 30, 2018 was a loss of RMB3,132 million (US$473
million), compared to a loss of RMB1,748 million in the same quarter of
2017. Adjusted EBITA margin decreased to negative 52% in the quarter
ended June 30, 2018 from negative 43% in the quarter ended June 30,
2017, primarily due to our investments in the production of original
content, as well as the cost related to the rights for live streaming
the World Cup games in China.

Innovation initiatives and others segment – Adjusted EBITA in the
quarter ended June 30, 2018 was a loss of RMB1,202 million (US$182
million), compared to a loss of RMB634 million in the same quarter of
2017. Adjusted EBITA margin decreased to negative 114% in the quarter
ended June 30, 2018, compared to negative 98% in the quarter ended June
30, 2017, primarily due to investments in new business initiatives,
including Tmall Genie.

Interest and investment income, net

Interest and investment income, net in the quarter ended June 30, 2018
was RMB7,246 million (US$1,095 million), which mainly included a gain of
RMB1,657 million (US$250 million) from the revaluation of our previously
held equity interest in Ele.me when we obtained control over Ele.me this
quarter, as well as net gains arisen from the increase in fair value of
certain equity investments.

We adopted ASU 2016-01, "Financial Instruments — Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and Financial
Liabilities" beginning in the first quarter of fiscal year 2019. After
the adoption of this new accounting update, equity investments other
than those accounted for under the equity method or those that result in
the consolidation of the investee are required to be measured at fair
value, with subsequent changes in fair value recognized in the income
statement. We have adopted this new accounting update using the modified
retrospective method. For those investments without readily determinable
fair values, we elected the measurement alternative to measure at cost,
less impairment, with subsequent adjustments for observable price
changes.

The adoption of this new accounting update resulted in an increase of
RMB3,080 million (US$465 million) in interest and investment income, net
for the three months ended June 30, 2018. This gain is excluded from
non-GAAP net income.

Other income (loss), net

Other loss, net in the quarter ended June 30, 2018 was RMB83 million
(US$13 million), compared to other income, net of RMB1,887 million in
the same quarter of 2017. The loss was primarily due to an exchange loss
of RMB1,484 million (US$224 million) as RMB depreciated against the U.S.
Dollar during the quarter ended June 30, 2018. Royalty fees and software
technology service fees received from Ant Financial under our profit
sharing arrangement amounted to RMB910 million (US$138 million) in the
quarter ended June 30, 2018, compared to RMB1,966 million in the same
quarter of 2017. The decrease in the royalty fees and software
technology service fees from Ant Financial was the result of Ant
Financial's investments in user acquisition, product innovation and
international expansion.

Income tax expenses

Income tax expenses in the quarter ended June 30, 2018 were RMB5,665
million (US$856 million), compared to RMB4,653 million in the same
quarter of 2017.

Our effective tax rate was 41% in the quarter ended June 30, 2018,
compared to 23% in the same quarter of 2017. Excluding share-based
compensation expense, investment gain/loss and impairment of
investments, our effective tax rate would have been 24% in the quarter
ended June 30, 2018, compared to 20% in the same quarter of 2017. The
increase in effective tax rate was primarily due to operating losses
incurred by Ele.me, Cainiao Network, Youku and Lazada which under
Chinese tax law cannot be used to offset the pre-tax profits of our
other subsidiaries.

Share of results of equity investees

Share of results of equity investees in the quarter ended June 30, 2018
was a loss of RMB655 million (US$99 million), compared to a loss of
RMB1,388 million in the same quarter of 2017. We record our share of
results of equity investees one quarter in arrears. Share of results of
equity investees in the quarter ended June 30, 2018 and the comparative
periods consisted of the following:

 
    Three months ended
June 30, 2017     March 31, 2018     June 30, 2018
RMB RMB RMB     US$
(in millions)
Share of (loss) profit of equity investees:

- Koubei(1)

(391)

- Cainiao Network(2)

(245)

- Other equity investees

(311) 480 (66) (10)
Dilution loss (29) (75) (108) (16)
Others(3) (412) (475) (481) (73)
Total (1,388) (70) (655) (99)

__________________

(1)     We have ceased to recognize our share of losses of Koubei as our
cumulative share of losses exceeded our investment in Koubei.
(2) We started to consolidate Cainiao Network in mid-October 2017 after
obtaining control over Cainiao Network.
(3) Others mainly include amortization of intangible assets of equity
investees and share-based compensation expense.

Net income and Non-GAAP net income

Our net income in the quarter ended June 30, 2018 was RMB7,650 million
(US$1,156 million), a decrease of 45% compared to RMB14,031 million in
the same quarter of 2017. The year-over-year decrease was primarily due
to a one-time increase of RMB11,180 million in share-based compensation
expenses related to Ant Financial share-based awards granted to our
employees as the fair value of such awards increased significantly.
Excluding the effect of such Ant Financial-related share-based
compensation expense, net income for the quarter would have increased by
33% on a year-on-year basis.

Excluding share-based compensation expense, non-recurring disposal gains
and certain other items, non-GAAP net income in the quarter ended June
30, 2018 remained flat at RMB20,101 million (US$3,038 million), compared
to RMB20,019 million in the same quarter of 2017, primarily due to a
decrease in profit sharing from Ant Financial and an increase in
exchange loss. A reconciliation of net income to non-GAAP net income is
included at the end of this results announcement.

Net income attributable to ordinary shareholders

Net income attributable to ordinary shareholders in the quarter ended
June 30, 2018 was RMB8,685 million (US$1,313 million), a decrease of 41%
compared to RMB14,683 million in the same quarter of 2017. The
year-over-year decrease was primarily due to (1) an increase in
share-based compensation expenses related to Ant Financial share-based
awards granted to our employees by RMB11,180 million as the fair value
of such awards increased significantly, (2) a decrease in profit sharing
from Ant Financial and (3) an increase in exchange loss.

Diluted EPS and non-GAAP diluted EPS

Diluted EPS in the quarter ended June 30, 2018 was RMB3.30 (US$0.50) on
a weighted average of 2,627 million diluted shares outstanding during
the quarter, a decrease of 42% compared to RMB5.65 on a weighted average
of 2,599 million diluted shares outstanding during the same quarter of
2017. Excluding share-based compensation expense, non-recurring disposal
gains and certain other items, non-GAAP diluted EPS in the quarter ended
June 30, 2018 was RMB8.04 (US$1.22), an increase of 1% compared to
RMB7.95 in the same quarter of 2017. A reconciliation of diluted EPS to
non-GAAP diluted EPS is included at the end of this results announcement.

Cash, cash equivalents and short-term
investments

As of June 30, 2018, cash, cash equivalents and short-term investments
were RMB177,283 million (US$26,792 million), compared to RMB205,395
million as of March 31, 2018. The decrease in cash, cash equivalents and
short-term investments during the quarter ended June 30, 2018 was
primarily due to cash used in investing activities, including
investments in Ele.me and ZTO Express, partly offset by free cash flow
generated from operations of RMB26,358 million (US$3,983 million).

Cash flow from operating activities and free
cash flow

Net cash provided by operating activities in the quarter ended June 30,
2018 was RMB36,117 million (US$5,458 million), an increase of 40%
compared to RMB25,873 million in the same quarter of 2017. Free cash
flow, a non-GAAP measurement of liquidity, in the quarter ended June 30,
2018 was RMB26,358 million (US$3,983 million), compared to RMB22,711
million in the same quarter of 2017. A reconciliation of net cash
provided by operating activities to free cash flow is included at the
end of this results announcement.

Net cash used in investing activities

During the quarter ended June 30, 2018, net cash used in investing
activities of RMB71,670 million (US$10,831 million) primarily reflected
cash outflow of RMB61,671 million (US$9,320 million) for investment and
acquisition activities, including investments in Ele.me and ZTO Express,
as well as capital expenditures and acquisition of intangible assets
and licensed copyrights of RMB11,205 million (US$1,693 million), which
included cash outflow for acquisition of land use rights and
construction in progress relating to office campus of RMB1,446 million
(US$218 million).

Employees

As of June 30, 2018, we had a total of 86,833 employees, compared to
66,421 as of March 31, 2018. The number of employees as of June 30, 2018
increased by 20,412 from March 31, 2018, primarily due to the
consolidation of Ele.me.

WEBCAST AND CONFERENCE CALL INFORMATION

Alibaba Group's management will hold a conference call to discuss the
financial result at 7:30 a.m. U.S. Eastern Time (7:30 p.m. Hong Kong
Time) on August 23, 2018.

Details of the conference call are as follows:
International: +65
6713 5090
U.S.: +1 845 675 0437
U.K.: +44 203 621 4779
Hong
Kong: +852 3018 6771
Conference ID: 5096826

A live webcast of the earnings conference call can be accessed at http://www.alibabagroup.com/en/ir/earnings.
An archived webcast will be available through the same link following
the call. A replay of the conference call will be available for one week
(dial-in number: +61 2 8199 0299; conference ID: 5096826).

Our results announcement and accompanying slides are available at
Alibaba Group's Investor Relations website at http://www.alibabagroup.com/en/ir/home
on August 23, 2018.

ABOUT ALIBABA GROUP

Alibaba Group's mission is to make it easy to do business anywhere. The
company aims to build the future infrastructure of commerce. It
envisions that its customers will meet, work and live at Alibaba, and
that it will be a company that lasts at least 102 years.

SAFE HARBOR STATEMENTS

This announcement contains forward-looking statements. These statements
are made under the "safe harbor" provisions of the U.S. Private
Securities Litigation Reform Act of 1995. These forward-looking
statements can be identified by terminology such as "will," "expects,"
"anticipates," "future," "intends," "plans," "believes," "estimates,"
"potential," "continue," "ongoing," "targets," "guidance" and similar
statements. Among other things, the estimated material one-off
revaluation gain upon our expected consolidation of Koubei as disclosed
in this announcement represents our current estimate and constitutes a
forward-looking statement, and the actual amount may differ
significantly from our current estimate. In addition, statements that
are not historical facts, including statements about Alibaba's
strategies and business plans, Alibaba's beliefs and expectations
regarding the growth of its business and its revenue, the business
outlook and quotations from management in this announcement, as well as
Alibaba's strategic and operational plans, are or contain
forward-looking statements. Alibaba may also make forward-looking
statements in its periodic reports to the U.S. Securities and Exchange
Commission (the "SEC"), in press releases and other written materials
and in oral statements made by its officers, directors or employees to
third parties. Forward-looking statements involve inherent risks and
uncertainties. A number of factors could cause actual results to differ
materially from those contained in any forward-looking statement,
including but not limited to the following: Alibaba's expected revenue
growth; Alibaba's goals and strategies; Alibaba's future business
development; Alibaba's ability to maintain the trusted status of its
ecosystem, reputation and brand; risks associated with increased
investments in Alibaba's business and new business initiatives; risks
associated with strategic acquisitions and investments; Alibaba's
ability to retain or increase engagement of consumers, merchants and
other participants in its ecosystem and enable new offerings; Alibaba's
ability to maintain or grow its revenue or business; risks associated
with limitation or restriction of services provided by Alipay; changes
in laws, regulations and regulatory environment that affect Alibaba's
business operations; privacy and regulatory concerns; competition;
security breaches; the continued growth of the e-commerce market in
China and globally; risks associated with the performance of our
business partners, including but not limited to Ant Financial; and
fluctuations in general economic and business conditions in China and
globally and assumptions underlying or related to any of the foregoing.
Further information regarding these and other risks is included in
Alibaba's filings with the SEC. All information provided in this results
announcement is as of the date of this results announcement and are
based on assumptions that we believe to be reasonable as of this date,
and Alibaba does not undertake any obligation to update any
forward-looking statement, except as required under applicable law.

NON-GAAP FINANCIAL MEASURES

To supplement our consolidated financial statements, which are prepared
and presented in accordance with GAAP, we use the following non-GAAP
financial measures: for our consolidated results, adjusted EBITDA
(including adjusted EBITDA margin), adjusted EBITA (including adjusted
EBITA margin), non-GAAP net income, non-GAAP diluted EPS and free cash
flow. For more information on these non-GAAP financial measures, please
refer to the section entitled "Information about Segments" and the table
captioned "Reconciliations of Non-GAAP Measures to the Nearest
Comparable GAAP Measures" in this results announcement.

We believe that adjusted EBITDA, adjusted EBITA, non-GAAP net income and
non-GAAP diluted EPS help identify underlying trends in our business
that could otherwise be distorted by the effect of certain income or
expenses that we include in income from operations, net income and
diluted EPS. We believe that adjusted EBITDA, adjusted EBITA, non-GAAP
net income and non-GAAP diluted EPS provide useful information about our
core operating results, enhance the overall understanding of our past
performance and future prospects and allow for greater visibility with
respect to key metrics used by our management in our financial and
operational decision-making. We consider free cash flow to be a
liquidity measure that provides useful information to management and
investors about the amount of cash generated by our business that can be
used for strategic corporate transactions, including investing in our
new business initiatives, making strategic investments and acquisitions
and strengthening our balance sheet. Adjusted EBITDA, adjusted EBITA,
non-GAAP net income, non-GAAP diluted EPS and free cash flow should not
be considered in isolation or construed as an alternative to income from
operations, net income, diluted EPS, cash flows or any other measure of
performance or as an indicator of our operating performance. These
non-GAAP financial measures presented here may not be comparable to
similarly titled measures presented by other companies. Other companies
may calculate similarly titled measures differently, limiting their
usefulness as comparative measures to our data.

Adjusted EBITDA represents net income before (i) interest and
investment income, net, interest expense, other income (loss), net,
income tax expenses and share of results of equity investees, and (ii)
certain non-cash expenses, consisting of share-based compensation
expense, amortization and depreciation, which we do not believe are
reflective of our core operating performance during the periods
presented.

Adjusted EBITA represents net income before (i) interest and
investment income, net, interest expense, other income (loss), net,
income tax expenses and share of results of equity investees, and (ii)
certain non-cash expenses, consisting of share-based compensation
expense and amortization, which we do not believe are reflective of our
core operating performance during the periods presented.

Non-GAAP net income represents net income before share-based
compensation expense, amortization, impairment of investments, gain or
loss on deemed disposals/disposals/revaluation of investments,
amortization of excess value receivable arising from the restructuring
of commercial arrangements with Ant Financial, immediate recognition of
unamortized professional fees and upfront fees upon termination of bank
borrowings and others, as adjusted for the tax effects on non-GAAP
adjustments.

Non-GAAP diluted EPS represents non-GAAP net income attributable
to ordinary shareholders divided by the weighted average number of
shares outstanding during the periods on a diluted basis, including
accounting for the effects of the assumed conversion of convertible
preference shares.

Free cash flow represents net cash provided by operating
activities as presented in our consolidated cash flow statement less
purchases of property and equipment, intangible assets and licensed
copyrights (excluding acquisition of land use rights and construction in
progress relating to office campus).

The section entitled "Information about Segments" and the table
captioned "Reconciliations of Non-GAAP Measures to the Nearest
Comparable GAAP Measures" in this results announcement have more details
on the non-GAAP financial measures that are most directly comparable to
GAAP financial measures and the related reconciliations between these
financial measures.

 

ALIBABA GROUP HOLDING LIMITED

UNAUDITED CONSOLIDATED INCOME STATEMENTS

 
    Three months ended June 30,
2017     2018
RMB RMB     US$
(in millions, except per share data)

Revenue

50,184 80,920 12,229
Cost of revenue (17,460) (43,720) (6,607)
Product development expenses (4,696) (11,510) (1,739)
Sales and marketing expenses (4,850) (8,921) (1,348)
General and administrative expenses (3,679) (6,645) (1,005)
Amortization of intangible assets (1,986) (2,104) (318)
 
Income from operations 17,513 8,020 1,212
Interest and investment income, net 1,472 7,246 1,095
Interest expense (800) (1,213) (183)
Other income (loss), net 1,887 (83) (13)
 
Income before income tax and share of results of equity investees 20,072 13,970 2,111
Income tax expenses (4,653) (5,665) (856)
Share of results of equity investees (1,388) (655) (99)
 
Net income 14,031 7,650 1,156
Net loss attributable to noncontrolling interests 652 1,070 162
 
Net income attributable to Alibaba Group Holding Limited 14,683 8,720 1,318
 
Accretion of mezzanine equity (35) (5)
Net income attributable to ordinary shareholders 14,683 8,685 1,313
 
Earnings per share attributable to ordinary shareholders
Basic 5.77 3.36 0.51
Diluted 5.65 3.30 0.50
 
Weighted average number of share used in calculating net income
per ordinary share
Basic 2,543 2,581
Diluted 2,599 2,627

 

 
ALIBABA GROUP HOLDING LIMITED
REVENUE
 

The following table sets forth our revenue by segments for the
periods indicated:

 
    Three months ended June 30,
2017     2018
RMB RMB     US$
(in millions)
Core commerce(1) 43,027 69,188 10,456
Cloud computing(2) 2,431 4,698 710
Digital media and entertainment(3) 4,081 5,975 903
Innovation initiatives and others(4) 645 1,059 160
 
Total 50,184 80,920 12,229

___________________________

(1)     Revenue from core commerce is primarily generated from our China
retail marketplaces, 1688.com, AliExpress, Alibaba.com, Lazada.com,
Cainiao logistics services and consumer services.
(2)

Revenue from cloud computing is primarily generated from the
provision of services, such as elastic computing, database,
storage, network virtualization services, large scale computing,
security, management and application services, big data analytics,
a machine learning platform and IoT services.

(3)

Revenue from digital media and entertainment is primarily
generated from Youku and UCWeb.

(4)

Revenue from innovation initiatives and others is primarily
generated from businesses such as AutoNavi, Tmall Genie and other
innovation initiatives. Other revenue also includes SME annual fee
received from Ant Financial and its affiliates.

ALIBABA GROUP HOLDING LIMITED
INFORMATION ABOUT SEGMENTS

The following table sets forth our income (loss) from operations by
segments for the periods indicated:

 
    Three months ended June 30,
2017     2018
RMB RMB     US$
(in millions)
Core commerce 24,808 23,022 3,479
Cloud computing (532) (2,074) (313)
Digital media and entertainment (3,388) (4,290) (648)
Innovation initiatives and others (1,612) (3,775) (571)
Unallocated (1,763) (4,863) (735)
 
Total 17,513 8,020 1,212
 

The following table sets forth our adjusted EBITA by segments for the
periods indicated:

 
    Three months ended June 30,
2017     2018
RMB RMB     US$
(in millions)
Core commerce 26,970 32,797 4,956
Cloud computing (103) (488) (74)
Digital media and entertainment (1,748) (3,132) (473)
Innovation initiatives and others (634) (1,202) (182)
Unallocated (967) (1,473) (222)
 
Total 23,518 26,502 4,005
 
 
ALIBABA GROUP HOLDING LIMITED
UNAUDITED CONSOLIDATED BALANCE SHEETS
 
   

As of March 31,

   

As of June 30,

2018

2018

RMB

RMB

   

US$

 

(in millions)

Assets
Current assets:
Cash and cash equivalents 199,309 167,895 25,373
Short-term investments 6,086 9,388 1,419
Restricted cash and escrow receivables 3,417 6,342 958
Investment securities 4,815 7,868 1,189
Prepayments, receivables and other assets 43,228 45,501 6,876
Total current assets 256,855 236,994 35,815
 
Investment securities (1) 38,192 115,286 17,422
Prepayments, receivables and other assets 26,274 23,931 3,617
Investment in equity investees (1) 139,700 82,553 12,476
Property and equipment, net 66,489 78,659 11,887
Intangible assets, net 27,465 51,866 7,838
Goodwill 162,149 207,373 31,339
Total assets 717,124 796,662 120,394
 
Liabilities, Mezzanine Equity and Shareholders' Equity
Current liabilities:
Current bank borrowings 6,028 13,693 2,069
Income tax payable 13,689 14,247 2,153
Escrow money payable 3,053 5,372 812
Accrued expenses, accounts payable and other liabilities 81,165 97,264 14,699
Merchant deposits 9,578 9,184 1,388
Deferred revenue and customer advances 22,297 24,436 3,693
Total current liabilities 135,810 164,196 24,814
 
ALIBABA GROUP HOLDING LIMITED
UNAUDITED CONSOLIDATED BALANCE SHEETS (CONTINUED)
 
   

As of March 31,

   

As of June 30,

2018

2018

RMB

RMB     US$
(in millions)
 
Deferred revenue 993 1,093 165
Deferred tax liabilities 19,312 26,041 3,935
Non-current bank borrowings 34,153 34,188 5,167
Non-current unsecured senior notes 85,372 90,212 13,633
Other liabilities 2,045 5,183 783
Total liabilities 277,685 320,913 48,497
 
Commitments and contingencies

Mezzanine equity

3,001 3,155 477

Shareholders' equity:

Ordinary shares 1 1
Additional paid-in capital 186,764 203,367 30,734
Treasury shares at cost (2,233) (1,412) (213)
Restructuring reserve (361) (295) (45)
Subscription receivables (163) (172) (26)
Statutory reserves 4,378 4,528 684

Accumulated other comprehensive income (loss) (1)

5,083 (2,047) (309)
Retained earnings (1) 172,353 189,119 28,580
 
Total shareholders' equity 365,822 393,089 59,405
Noncontrolling interests 70,616 79,505 12,015
 
Total equity 436,438 472,594 71,420
 
Total liabilities, mezzanine equity and equity 717,124 796,662 120,394

___________________________

(1)     We adopted ASU 2016-01, "Financial Instruments — Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and
Financial Liabilities" beginning in the first quarter of fiscal year
2019. After the adoption of this new accounting update, equity
investments other than those accounted for under the equity method
or those that result in the consolidation of the investee are
required to be measured at fair value, with subsequent changes in
fair value recognized in the income statement. We have adopted this
new accounting update using the modified retrospective method. For
available-for-sale securities, RMB8,196 million in unrealized gains,
net of tax recorded in accumulated other comprehensive income as of
March 31, 2018 was reclassified into retained earnings upon the
initial adoption as of April 1, 2018. Investments measured under the
cost method of RMB59,942 million as of March 31, 2018 was
reclassified into investment securities as of April 1, 2018. The
consolidated balance sheets as of March 31, 2018 was not
retrospectively adjusted.
 
ALIBABA GROUP HOLDING LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
    Three months ended June 30,
2017       2018
RMB RMB     US$
(in millions)
 

Net cash provided by operating activities (1)

25,873 36,117 5,458

Net cash used in investing activities (1)

(13,923 ) (71,670 ) (10,831 )
Net cash (used in) provided by financing activities (8,894 ) 4,281 647

Effect of exchange rate changes on cash and cash equivalents,
restricted cash and escrow receivables (1)

(1,092 ) 2,783   420  
 
Increase (decrease) in cash and cash equivalents, restricted cash
and escrow receivables
1,964 (28,489 ) (4,306 )
Cash and cash equivalents, restricted cash and escrow receivables at
beginning of period
146,391   202,726   30,637  
 
Cash and cash equivalents, restricted cash and escrow receivables at
end of period
148,355   174,237   26,331  

___________________________

(1)    

We adopted ASU 2016-18, "Statement of Cash Flows (Topic 230):
Restricted Cash," beginning in the first quarter of fiscal year
2019. As a result of adopting this new accounting update, the
consolidated statements of cash flows were retrospectively
adjusted to include restricted cash and escrow receivables in cash
and cash equivalents when reconciling the beginning-of-period and
end-of-period total amounts shown on the consolidated statements
of cash flows. The impact of the retrospective reclassification on
cash flows from operating activities, investing activities and
effect of exchange rate changes for the three months ended June
30, 2017 was an increase of RMB562 million, a decrease of RMB11
million and an increase of RMB5 million, respectively.

 
ALIBABA GROUP HOLDING LIMITED
RECONCILIATIONS OF NON-GAAP MEASURES TO THE NEAREST COMPARABLE
GAAP MEASURES
 
The table below sets forth a reconciliation of our net income to
adjusted EBITA and adjusted EBITDA for the periods indicated:
   
Three months ended June 30,
2017     2018
RMB RMB     US$
(in millions)
Net income 14,031 7,650 1,156
Less: Interest and investment income, net (1,472) (7,246) (1,095)
Add: Interest expense 800 1,213 183
Less: Other income (loss), net (1,887) 83 13
Add: Income tax expenses 4,653 5,665 856
Add: Share of results of equity investees 1,388 655 99
Income from operations 17,513 8,020 1,212
Add: Share-based compensation expense 4,019 16,378 2,475
Add: Amortization of intangible assets 1,986 2,104 318
Adjusted EBITA 23,518 26,502 4,005
Add: Depreciation and amortization of property and equipment and
land use rights
1,606 2,857 432
Adjusted EBITDA 25,124 29,359 4,437
 
 
ALIBABA GROUP HOLDING LIMITED
RECONCILIATIONS OF NON-GAAP MEASURES TO THE NEAREST COMPARABLE
GAAP MEASURES (CONTINUED)
 
The table below sets forth a reconciliation of our net income to
non-GAAP net income for the periods indicated:
 
    Three months ended June 30,
2017     2018
RMB RMB     US$
(in millions)
 
Net income 14,031 7,650 1,156
Add: Share-based compensation expense 4,019 16,378 2,475
Add: Amortization of intangible assets 1,986 2,104 318
Add: Impairment of investments 952
Less: Gain on deemed disposals/disposals/revaluation of investments
and others
(1,089) (5,408) (817)
Add: Amortization of excess value receivable arising from the
restructuring of commercial arrangements with Ant Financial
67 66 10
Add: Immediate recognition of unamortized professional fees and
upfront fees upon termination of bank borrowings
92
Adjusted for tax effects on non-GAAP adjustments(1) (39) (689) (104)
 
Non-GAAP net income 20,019 20,101 3,038

_____________________

(1)     Tax effects on non-GAAP adjustments comprise of tax provisions on
the amortization of intangible assets and certain gains on disposal
of investments, as well as tax benefits from share-based awards.
 
ALIBABA GROUP HOLDING LIMITED
RECONCILIATIONS OF NON-GAAP MEASURES TO THE NEAREST COMPARABLE
GAAP MEASURES (CONTINUED)
 
The table below sets forth a reconciliation of our diluted EPS to
non-GAAP diluted EPS for the periods indicated:
    Three months ended June 30,
2017     2018
RMB RMB     US$
(in millions, except per share data)
 
Net income attributable to ordinary shareholders – basic 14,683 8,685 1,313
Dilution effect on earnings arising from option plans operated by an
equity investee
(3) (3) (1)
Net income attributable to ordinary shareholders – diluted 14,680 8,682 1,312
Add: Non-GAAP adjustments to net income(1) 5,988 12,451 1,882
 
Non-GAAP net income attributable to ordinary shareholders
for computing non-GAAP diluted EPS
20,668 21,133 3,194
 
Weighted average number of shares on a diluted basis 2,599 2,627
Diluted EPS(2) 5.65 3.30 0.50
Add: Non-GAAP adjustments to net income per share(3) 2.30 4.74 0.72
 
Non-GAAP diluted EPS(4) 7.95 8.04 1.22

 

_____________________

(1)     See the table above for the reconciliation of net income to non-GAAP
net income for more information of these non-GAAP adjustments.
(2) Diluted EPS is derived from net income attributable to ordinary
shareholders for computing diluted EPS divided by weighted average
number of shares on a diluted basis.
(3) Non-GAAP adjustments to net income per share is derived from
non-GAAP adjustments to net income divided by weighted average
number of shares on a diluted basis.
(4) Non-GAAP diluted EPS is derived from non-GAAP net income
attributable to ordinary shareholders for computing non-GAAP diluted
EPS divided by weighted average number of shares on a diluted basis.
 
ALIBABA GROUP HOLDING LIMITED
RECONCILIATIONS OF NON-GAAP MEASURES TO THE NEAREST COMPARABLE
GAAP MEASURES (CONTINUED)
 

The table below sets forth a reconciliation of net cash provided
by operating activities to free cash flow for the periods
indicated:

 
    Three months ended June 30,
2017     2018
RMB RMB     US$
(in millions)
Net cash provided by operating activities(1) 25,873 36,117 5,458
Less: Purchase of property and equipment, intangible assets and
licensed copyrights (excluding land use rights and construction in
progress relating to office campus)
(3,162) (9,759) (1,475)
 
Free cash flow 22,711 26,358 3,983

__________________

(1)    

We adopted ASU2016-18, "Statement of Cash Flows (Topic 230):
Restricted Cash," beginning in the first quarter of fiscal year
2019. As a result of adopting this new accounting update, the
consolidated statements of cash flows were retrospectively
adjusted to include restricted cash and escrow receivables in cash
and cash equivalents when reconciling the beginning-of-period and
end-of-period total amounts shown on the consolidated statements
of cash flows. The impact of the retrospective reclassification on
cash flows from operating activities for the three months ended
June 30, 2017 was an increase of RMB562 million.

ALIBABA GROUP HOLDING LIMITED
SELECTED OPERATING DATA

Annual active consumers

The table below sets forth the number of active consumers on our China
retail marketplaces for the periods indicated:

   
Twelve months ended
Sep 30,     Dec 31,     Mar 31,     Jun 30,     Sep 30,     Dec 31,     Mar 31,     Jun 30,
2016 2016 2017 2017 2017 2017 2018 2018
(in millions)
Annual active consumers 439 443 454 466 488 515 552 576
 

Mobile

The table below sets forth the mobile MAUs on our China retail
marketplaces for the periods indicated:

 
    The month ended
Sep 30,     Dec 31,     Mar 31,     Jun 30,     Sep 30,     Dec 31,     Mar 31,     Jun 30,
2016 2016 2017 2017 2017 2017 2018 2018
(in millions)
Mobile MAUs 450 493 507 529 549 580 617 634
 

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