Alibaba Group (BABA) Lags Q3 Earnings on High Expenses - Analyst Blog

Alibaba Group Holding Limited (BABA) reported third-quarter fiscal 2015 (ended Dec 31, 2014) earnings of 55 cents per share, which missed the Zacks Consensus Estimate of 62 cents due to increased investments in mobile, marketing and other new ventures. The adjusted earnings per share exclude one-time items but include stock-based compensation expense. Following the announcement, share price plunged 8.8%.

Revenues

Alibaba Group reported revenues of RMB26.2 billion (US$4.219 billion), surging 55.6% sequentially and 39.7% from the year-ago period. Revenues also beat the Zacks Consensus Estimate of $4.436 billion. The increase was mainly driven by growth in China commerce and retail business. The strong growth in mobile business and increasing user engagement aided revenue growth.

Principal Components of Revenues

Revenues from total China commerce business were RMB22.1 billion. The retail business recorded RMB21.3 billion (US$3.1 billion) as revenues, up 32% year over year, driven by growth in online marketing services revenues and commission revenues, while its wholesale business revenues were RMB860 million (US$139 million), up 41% year over year. The improvement was due to an increase in paying members and average revenue from paying members.

Revenues from total International commerce business were RMB1.8 billion. Its retail business revenues were RMB554 million (US$89 million), soaring 110% year over year driven by an increase in GMV transacted on AliExpress, while wholesale business revenues came in at RMB1.2 billion (US$195 million), up 21% year over year. The increase was due to higher number of paying members

Revenues from Cloud computing and Internet infrastructure were RMB362.0 million, soaring 85% from the year-ago quarter and contributing 1% to the total revenue.

Revenues from Others were RMB1.9 million, skyrocketing 266% from the year-ago quarter and accounting for 7% of total revenue.

Key Metrics

Gross Merchandise Value (GMV) – Total China retail marketplaces GMV came in at RMB787.0 billion (US$127.0 billion), up 49% year over year. Taobao Marketplace GMV was RMB494.0 billion (US$80.0 billion), up 43% from the year-ago period. Tmall GMV was RMB293.0 billion (US$47.0 billion), representing 60% year-over-year growth. The upside was primarily driven by an increase in the number of active buyers.

Mobile GMV – Mobile GMV was RMB327.0 billion (US$53.0 billion), surging 213% year over year. Mobile GMV accounted for 42% of total China retail marketplaces GMV versus 36% in the prior quarter and 20% in the year-ago quarter. The growth was primarily driven by higher Monthly Active Users (MAUs) accessing platforms through mobile devices and an increase in the level of their spending.

Annual Active Buyers– China retail marketplaces had 334 million annual active buyers in the 12 months ended Dec 31, up 8% sequentially and 44% year over year.

Mobile Monthly Active Users – Mobile MAUs grew to 265 million in the reported quarter, up 22% sequentially and soaring 95% year over year.

Margins

Reported gross margin was 71.3%, down 640 basis points (bps) from the year-ago quarter.

Alibaba reported total operating expenses (Product development + Sales and marketing + General and administrative expenses) of RMB8.5 billion, up 50.8% from RMB5.7 billion incurred in the year-ago quarter. All expenses, except general and administrative were up as a percentage of sales from the year-ago quarter. The net result was a GAAP operating margin of 35.7% compared with 47% in the year-ago quarter.

Adjusted EBITDA was RMB15.1 billion, up 34% from the year-ago quarter.

Net Income

On a GAAP basis, Alibaba generated net income of RMB6.0 billion(US$964 million) compared with RMB8.4 billion in the same quarter last year.

Alibaba generated adjusted net profit of RMB8.8 billion(US$1419 million) compared with RMB9.8 billionin the year-ago quarter. Pro-forma earnings came in at 55 cents per share as against 25 cents in the second quarter. Pro-forma earnings exclude charges related to amortization of intangible assets, gain/loss on deemed disposals/disposals/ revaluation of investments, amortization of excess value receivable arising from the restructuring of commercial arrangements with Ant Financial, but includes stock-based compensation expense.

Balance Sheet & Cash Flow

Alibaba exited the third quarter with cash, cash equivalents, restricted cash and short-term investments of approximately RMB130.7 billion versus RMB109.9 billion in the prior quarter.

Current bank borrowings were RMB4.8 billion versus RMB3.8 billion in the last quarter. Long-term bank borrowings were RMB1.3 billion versus RMB49.5 billion in the earlier quarter. Unsecured notes in the quarter were RMB48.8 billion.

Cash flow from operations was RMB19.4 billion (US$3.1 billion) versus RMB5.9 billion in the previous quarter. Capex was RMB1.2 billion versus RMB1.7 billion in the last quarter.

Our Take

The Chinese e-commerce goliath caters mainly to its native market. The company operates as a platform for third-party sellers and does not sell goods directly to merchants or hold inventory.

The company posted decent third-quarter results, with the top line surpassing the Zacks Consensus Estimate. However, the bottom line missed the same due to heavy expenditure on its e-commerce services through smartphones and tablets.

Also, increasing competition from Tencent Holdings Ltd. (700) and Baidu Inc. (BIDU) to attract more users to go online for movies, music, television shows and books, remains a concern.

Some of the current buoyancy surrounding the shares is related to Alibaba’s strong dominance in the mobile search market and its continuous efforts to develop new products. Moreover, Alibaba continues to gain market share. We believe that the company has significant growth potential in the mobile market over the long term.

Currently, Alibaba Group has a Zacks Rank #2 (Buy). Other stocks that are performing well at current levels include IAC/InterActiveCorp (IACI) and PetMed Express, Inc. (PETS), sporting a Zacks Rank #1 (Strong Buy).

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