Alibaba Posts 54% Revenue Increase, But Net Profit Falls Below Expectations

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Alibaba beat already high expectations for revenue growth in its first quarterly earnings report since its record-setting $25 billion initial public offering on the New York Stock Exchange in September, but missed its profit forecast. The company reported earnings per share of $0.45 on revenue of $2.74 billion for the quarter, a 54 percent increase. This exceeded analysts’ expectations for revenue of $2.61 billion. But its net income fell below expectations, rising 15.5 percent to $1.11 billion, compared to the $1.17 billion analysts predicted. [Note: A previous version of this article mistakenly compared Alibaba’s GAAP net income of $494 million, a decrease of 38.6 percent year-over-year, to to the non-GAAP net income of $1.17 billion expected by analysts].

In its earnings release, Alibaba Group attributed the drop in its GAAP net income to a significant increase in share-based compensation expense and amortization of intangible assets during the quarter. This was due to the re-measurement at the end of the quarter to the fair value of share-based awards granted to the employees of Ant Financial, an Alibaba Group affiliate, and “an increase in co-location, bandwidth and depreciation expenses” as a result of Alibaba Group’s investments in its cloud computing business and data platform.

On the upside, Alibaba Group’s mobile revenue grew an impressive 1,020 percent to $606 million, up from $54 million a year ago. CFO Maggie Wu said that China retail monetization rates are stable at 2.3 percent of transaction volume, while the mobile take rate was 1.8 percent, up from 1.5 percent last quarter.

Investors have been keeping a close eye on how Alibaba Group’s mobile apps perform because in the quarter ended in July, Alibaba’s operating margins fell to 43.4 percent from 50.3 percent a year earlier, due to spending on its mobile e-commerce services.

Alibaba Group CEO Jonathan Lu said that gross merchandise volume (GMV) for the quarter in the company’s China retail marketplaces increased 49 percent year-over-year, while annual active buyers increased 52 percent. Total GMV was 555.7 million RMB, up from 373 million RMB from the same quarter a year ago. Mobile GMV accounted for 35.8 percent of the total, up significantly from 14.7 percent a year ago.

In September, Alibaba Group’s mobile commerce apps had 217 million monthly active users and made $95 billion in gross merchandise volume in the preceding 12 month period. “We are encouraged by continued improvement of mobile monetization which demonstrates the strong commercial intent of our users,” said Lu.

Most revenue is reinvested in C2C marketplace Taobao, which makes money through advertising instead of charging merchant fees, and online shopping mall Tmall.

In its earnings call, Alibaba CEO Jonathan Lu said the company’s most important mobile app is Taobao, a C2C marketplace.

“Taobao marketplace grew faster year on year than in the prior three quarters, a clear acceleration of a very large business,” said Lu. “Due to factors including product changes to improve buyer experience, including a new recommendation engine based on data, search results are now more personalized, which increase conversion rates, and now we promote new categories that are growing fast including furniture and decor, car accessories, sports gear, and baby and maternity.”

But Tmall’s revenue growth grew even faster than Taobao, which is a good sign because Alibaba Group has more ways of monetizing Tmall (an online mall for major brands), including fees, commissions, and ads. Tmall GMV grew 78 percent, compared to 38 percent for Taobao.

“With more than one-third of our China retail business on mobile, Alibaba is very much a mobile company,” said executive vice-chairman Joe Tsai. Alibaba Group’s mobile products can help grow revenue with location-based services and targeted product recommendations to individual consumers.

Furthermore, more buyers from small Chinese cities are starting to use Alibaba’s marketplaces every year and though their individual purchases are smaller than ones placed by buyers from first-tier cities, Alibaba Group believes this will be an important growth driver.

Earnings forecast for the quarter through December should be boosted by “Singles Day,” an all-day shopping event on November 11 that is promoted by online retail companies as an excuse for single people to buy something nice for themselves. Last year’s Singles Day scored Alibaba about $5.8 billion in transactions. Alibaba Group says it will expand the scope of this year’s event to cross-border retail, in response to increasing demand among Chinese shoppers for imported goods.