Alibaba Delivers Another Strong Quarter; Robust Growth Across Divisions

Alibaba (NYSE:BABA) announced its fiscal Q2 earnings on November 2, reporting a 55% year-over-year increase in revenues to RMB 34.3 billion. ^[1] The company reported similar growth in revenues in the March and June quarters, with Cloud Computing and Digital Media driving much of the growth. Digital Media and entertainment, which includes revenues from online video streaming Youku Tudou and mobile Internet services revenue from UCWeb, were up by over 300% to RMB 3.6 billion. This was primarily attributable to the Youku Tudou acquisition, which was completed in the first half of the year. Additionally, cloud computing and other ventures revenues were up by a massive 110% to RMB 2.2 billion. In terms of Alibaba’s core e-commerce business, the company witnessed solid growth both domestically (39%) as well as in the international retail and wholesale business (54%) as shown below. Growth in Alibaba’s international e-commerce business was boosted by the $1 billion acquisition of the Singaporean e-commerce giant Lazada in April this year. ^[2]

Alibaba’s largest division is the online retail business in China, which includes websites Taobao, Tmall and Juhuasuan. This segment has provided consistent growth for the company over the last few years, with revenues growing from RMB 24 billion in 2012 to RMB 75 billion in 2015. The growth spree has continued in 2016 thus far, with revenues growing by 35-40% through the March, June and September quarters.

In the September quarter, Alibaba’s online retail segment in China was boosted by an 18% increase in annual active buyers and a 39% increase in mobile monthly active users (MAUs) to 439 million and 450 million, respectively. Additionally, the revenue per buyer (particularly for mobile users) has also surged on a year-over-year basis as shown below.

In addition to the commerce revenues, Alibaba has witnessed strong growth in cloud computing revenues. The growth in revenues was largely due to a more than 100% increase in the total number of paying customers for cloud computing and internet infrastructure offerings from 313,000 customers in September quarter last year to 651,000 this year. ^[3] This number is expected to increase given the huge demand for internet infrastructure across China and other Asian markets. As a result, we expect a strong growth in Cloud Computing revenues for Alibaba in the coming years. (Read more: Where Will Alibaba’s Cloud Computing Growth Come From In The Next Five Years?)

In terms of operating profits, Alibaba’s adjusted EBITDA grew by 42% year-over-year to RMB 14.6 billion in the September quarter. The rate of growth of operating profit was slightly lower than revenue growth since the company invested heavily in its smaller non-commerce segments. For instance, Alibaba is spending a lot on developing platforms for cloud computing, acquiring traffic for the online video and music segments, and investing in content and production with a longer term view. As a result, the smaller divisions operate at a loss as shown in the table. On a positive note, the the profitability of the loss making divisions has improved for these divisions as shown below. However, it could take a year or two for these divisions to become profitable. As a result, the company-wide margins can improve in the long run given the relatively low variable costs, due to which its operating leverage will remain high.

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1. Alibaba Group Announces September Quarter 2016 Results, Alibaba Press Release, November 2016 [↩]
2. Alibaba Expands in Southeast Asia With $1 Billion Lazada Deal, Bloomberg, April 2016 [↩]
3. Alibaba Q2 FY 2017 Earnings Call Transcript, Seeking Alpha, November 2016 [↩]