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Alibaba Group (BABA) Lags Q2 Earnings on High Expenses - Analyst Blog

Alibaba Group Holding Limited ( BABA ) reported second-quarter fiscal 2015 (ended Sep 30, 2014) earnings of 25 cents per share, missing the Zacks Consensus Estimate of 37 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.

Revenues

Alibaba Group reported revenues of RMB16.8 billion (US$2.742 billion as reported by the company) in the second quarter, up 53.7% from the year-ago period. Second-quarter revenues also beat the Zacks Consensus Estimate of $2.597 billion. The increase was mainly driven by the continuing rapid growth of China commerce retail business. The strong growth in mobile business and increasing user engagement aided the revenue growth.

Principal Components of Revenues

Revenues from total China commerce business in the second quarter were RMB13.6 billion. Its retail business recorded RMB12.8 billion (US$2.1 billion) as revenues, up 47.7% year over year driven by the growth in online marketing services revenues and commission revenues, while its wholesale business was RMB790 million (US$129 million), up 39.1% year over year. The improvement was due to increase in paying members and average revenue from paying members.

Revenues from total International commerce business in the second quarter were RMB1.6 billion. Its retail business revenues were RMB419 million (US$68 million), surging 99.5% driven by an increase in GMV transacted on AliExpress, while wholesale business revenues came in at RMB1.2 billion (US$195 million), up 24% year over year. The increase was due to higher number of paying members

Revenues from Cloud computing and Internet infrastructure were RMB285.0 million, soaring 50% from the year-ago quarter and represented 1.7% of total revenue.

Revenues from Others were RMB1.4 million, skyrocketing 268.7% from the year-ago quarter and represented 8.1% of total revenue.

Key Metrics

Gross Merchandise Value (GMV) - Total China retail marketplaces GMV in the quarter was RMB555.7 billion (US$90.5 billion), up 48.7% year over year. Taobao Marketplace GMV was RMB379.8 billion (US$61.9 billion), up 38.2% year over year. Tmall GMV was RMB175.8 billion (US$28.6 billion), improving 77.8% year over year. The growth was primarily driven by an increase in the number of active buyers.

Mobile GMV - Mobile GMV in the quarter was RMB199.01 billion (US$32.4 billion), or 35.8% of total China retail marketplaces GMV versus 32.8% in the prior quarter and 14.7% in the year-ago quarter. The growth was primarily driven by increases in the monthly active users accessing platforms through mobile devices.

Annual Active Buyers - China retail marketplaces had 307 million annual active buyers in the 12 months ended Sep 30, up 10% sequentially and 52% year over year.

Mobile Monthly Active Users (MAUs) - Mobile MAUs grew to 217 million in the second quarter, up 15.4% sequentially and soaring 138.5% year over year.

Margins

Reported gross margin for the quarter was 66.7%, down 590 basis points (bps) from the year-ago quarter.

Alibaba reported total operating expenses (Product development + Sales and marketing + General and administrative expenses) of RMB6.9 billion, up significantly from RMB2.7 billion incurred in the year-ago quarter. All three expenses were up as a percentage of sales from the year-ago quarter. The net result was a GAAP operating margin of 25.8% compared with 47.9% in the year-ago quarter.

Adjusted EBITDA in the second quarter was RMB8.5 billion, up 30.6% from the year-ago quarter.

Net Income

On a GAAP basis, Alibaba generated net income of RMB3.0 billion (US$494 million) compared with RMB4.9 billion in the same quarter last year.

Alibaba generated adjusted net profit of RMB3.0 billion (US$619 million) compared with RMB3.9 billion in the year-ago quarter. Pro-forma earnings came in at 25 cents per share in the second quarter. Pro-forma earnings excludes 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 second quarter with cash, cash equivalents, restricted cash and short-term investments of approximately RMB5109.9 billion versus RMB57.88 billion in the prior quarter.

Current bank borrowings were RMB3.8 billion versus RMB4.2 billion in the prior quarter. Long-term bank borrowings were RMB49.5 billion versus RMB49.0 billion in the earlier quarter.

Cash flow from operations was RMB5.9 billion (US$955 million) versus RMB10.18 billion in the preceding quarter. Capex was RMB3.4 billion versus RMB1.2 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 parties and does not sell goods directly to merchants or hold inventory.

The company posted decent second-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.

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 the company has significant growth potential in the mobile market over the long term.

However, increasing competition from Tencent Holdings Ltd. (700) and Baidu Inc. to attract more users to go online for movies, music, television shows and book, remain a matter of concern.

Currently, Alibaba Group has a Zacks Rank #3 (Hold). Other stocks that are performing well at current levels include Autobytel Inc. ( ABTL ), Mercadolibre, Inc. ( MELI ) and zulily, Inc. ( ZU ). All these stocks sport a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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