Alibaba Earnings: Strong Revenue Growth Across Segments Leads To A Profitable Quarter

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Alibaba Group

Alibaba (NYSE:BABA) announced its fiscal Q4 fiscal 2017 earnings on May 18, reporting a 60% year-over-year increase in revenues to RMB 38.6 billion. [1] Alibaba has reported similar revenue growth over the past few quarters, owing to strength in the core businesses as well as new acquisitions driving top line growth. Alibaba acquired online video streaming platform Youku Tudou in November 2015 and Singaporean e-commerce giant Lazada in April 2016, which drove Digital Media and International Retail Commerce revenues, respectively. Additionally, Alibaba’s core commerce cloud business continued to grow at a strong pace through the March quarter – similar to the trend observed all year.

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Robust Growth Across Segments

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As shown in the table below, Digital Media and Entertainment revenues combined were up 204% to RMB 5.2 billion with Youku Tudou largely driving revenue growth. Similarly, international e-commerce revenues were boosted by the addition of Lazada to Alibaba’s Southeast Asian operations. Additionally, Alibaba reported a massive 103% annual increase in Cloud Computing revenues to RMB 2.2 billion for the March quarter. As a result, Alibaba Cloud revenues for the fiscal year ended March were up 121% y-o-y to RMB 6.7 billion. The growth in revenues was largely due to a 70% increase in the total number of paying customers for cloud computing and internet infrastructure offerings from 513,000 customers in March of last year to 874,000 this year. [2] This number is expected to increase given the huge demand for internet infrastructure across China and other Asian markets. As a result, we expect strong growth in Cloud Computing revenues for Alibaba in the coming years.

baba_q4_e1

Alibaba’s core e-commerce business in China includes websites Taobao, Tmall and Juhuasua, and has provided consistent growth for the company over the last few years, with revenues growing from RMB 24 billion in 2012 to over RMB 110 billion in 2016. This segment witnessed a sustained period of growth, with March quarter revenues rising by 40% y-o-y to RMB 27.3 billion.

In the March quarter, Alibaba’s online retail segment in China was boosted by a 7% increase in annual active buyers and a 24% increase in mobile monthly active users (MAUs) to 454million and 507 million, respectively. Additionally, the revenue per buyer (particularly for mobile users) has also surged on a year-over-year basis, as shown below.

baba_q4_e2

In terms of operating profits, Alibaba’s adjusted EBITDA grew by 44% year-over-year to RMB 16.6 billion for the year. The rate of growth in operating profit was slightly lower than revenue growth since the company invested heavily in its smaller non-commerce segments. This trend has been evident over the past few quarters, as evidenced in the full year table below.

The key reason for comparatively lower margins has been the additional operating expenses incurred by Alibaba to develop platforms for cloud computing, acquire traffic for the online video and music segments, and to invest in content and production with a longer term view. As a result, the smaller divisions operate at a loss. While the margins of the loss-making divisions have improved, 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 the company’s operating leverage will remain high.

Despite a slight dip in EBITDA margins for the quarter and fiscal year, Alibaba’s diluted non-GAAP EPS was around 95% and 40% higher at RMB 4.12 for the quarter and RMB 23.44 for the full year, respectively.baba_q4_e3

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Notes:
  1. Alibaba Group Announces March Quarter 2016 Results, Alibaba Press Release, May 2017 []
  2. Alibaba Q4 FY 2017 Earnings Call Transcript, Seeking Alpha, May 2017 []