Alibaba revenue rises, but investments in growth take toll

Dive Brief:

Alibaba Group Holding Limited on Thursday announced that revenue in the quarter ending March 31 rose 60% to RMB 38.6 billion (US $5.6 billion). Revenue from core commerce in the quarter rose 47% year-over-year to RMB 31.6 billion (US $4.6 billion). The company reported adjusted earnings of RMB 4.35 per share, missing the RMB 4.51 average analyst forecast from Bloomberg.
As with Amazon, Alibaba's cloud computing operations continue to be a bulwark, with quarterly revenue rising 103% year-over-year to RMB 163 million (US $314 million). Revenue from digital media and entertainment in the quarter rose 234% year-over-year to RMB 3.93 billion (US $571 million).
For the full fiscal year, which also ended March 31, net income was RMB 9.9 billion (US $1.43 billion), income from operations was RMB 9.53 billion (US $1.4 billion) and adjusted earnings before interest, tax, depreciation and amortization was RMB 16.6 billion (US $2.41 billion).

Dive Insight:

Alibaba runs a formable e-commerce operation, aided by China’s huge population and the country's comfort level with shopping online, especially on mobile. Annual active buyers on the company’s China retail marketplaces reached 454 million, an increase of 11 million from the 12-month period ending in December 2016, the company said. The number of mobile mobile active users on those marketplaces reached 507 million in March, an increase of 14 million over December 2016.

But that dominance comes with a cost. There may not be a better player demonstrating how winning in e-commerce also requires major capital outlays. Amazon has similarly plowed profits back into its forays into new ventures as well as its video and music entertainment services. Apple, too, has recently begun to focus on services.

“The March quarter is usually a slow season for e-commerce so margins usually come down a bit,” Ray Zhao, a Shenzhen-based analyst at Guotai Junan Securities Co., told Bloomberg. “Alibaba is spending a lot to drive growth in video and entertainment.”

The company’s income tax expenses in the quarter rose 149% from the year-ago period to RMB 4.6 billion (US $662 million), and Alibaba’s effective tax rate was 29% in the quarter, compared to 23% in the same period last year.

The Chinese economy is cooling somewhat as it matures, and Alibaba appears to be trying to boost its cloud computing and entertainment divisions as avenues to future growth. Over the long term, though, the shift to a consumption-based economy provides Alibaba with opportunities, according to Alibaba Group Executive Vice Chairman Joe Tsai.

There’s “an important secular trend …underway as Chinese consumers drive the shift of the Chinese economy from one that is export- and investment-led to one that is consumption-led,” Tsai told analysts Thursday, according to excerpts of his remarks emailed to Retail Dive. “The potential levering up of the Chinese consumer—especially among the younger Chinese population—will provide a powerful driver of consumption for many years into the future. The strength of the Chinese consumer is reflected in the 10.4% retail sales growth rate for the country last year, which outpaced GDP growth.”

Underpinning that is the company’s strength in its core businesses as well as its assertiveness to expand geographically and in terms of products and services, according to Alibaba Group CFO Maggie Wu.

“We reported another excellent quarter, with revenue growth accelerating to 60%, the highest growth rate we’ve achieved since our IPO. We also reported very strong fiscal year revenue growth of 56% with annual non-GAAP free cash flow of approximately US$10 billion,” Wu said in a statement. “Our robust results demonstrate the strength of our core businesses, as well as the positive momentum of our emerging businesses, including cloud computing, where we continue to see strong growth and market leadership.”

Shares sagged nearly 4% in early trading Thursday before lifting again.