Alibaba (BABA) Beats Q2 Earnings Estimates, Lags Revenues

Alibaba Group Holding Limited (NYSE:BABA) reported second-quarter fiscal 2019 earnings of $1.40 per share, surpassing the Zacks Consensus Estimate by 28 cents. Also, earnings increased 14.8% year over year.

It reported revenues of RMB85.15 billion (US$12.4 billion), up 54% from the prior-year quarter. The year-over-year revenue increase was driven by strength in the company’s China commerce retail business, the consolidation of Ele.me and Cainiao Network, as well as strong revenue growth of Alibaba Cloud.

However, its revenues missed the Zacks Consensus Estimate of US$12.65 billion.

Weaker-than-expected consumer spending impacted Alibaba’s core retail business, resulting in weak sales of durable items, especially consumer electronics.

Coming to price performance, shares of the company have lost 14.4% on a year-to-date basis against the industry’s growth of 2.9%.

Revenues by Segments

Alibaba has four reportable segments — Core Commerce, Cloud Computing, Digital Media and Entertainment, and Innovation Initiatives. The details of these segments are discussed below.

Core Commerce: This segment comprises marketplaces operating in retail and wholesale commerce in China, and international commerce. The segment’s revenues in the quarter were RMB72.5 billion (US$10.5 billion), reflecting an increase of 56% on a year-over-year basis.

China commerce retail business (64% of the total revenues) — The business vertical’s revenues in the quarter were RMB54.2 billion (US$7.9 billion), reflecting an increase of 37% year over year. The increase was driven by robust growth in the company’s New Retail businesses, mainly Tmall Import, Hema fresh food grocery business, Tmall Import and Intime Department Stores.

China commerce wholesale business (3% of the total revenues) — This business generated revenues of RMB2.5 billion (US$364 million), reflecting an increase of 46% from the year-ago quarter. The increase was due to a rise in average revenues from paying members.

International commerce retail business (5% of the total revenues) — Revenues in the quarter were RMB4.5 billion (US$650 million), increasing 55% year over year. The increase was driven by robust GMV growth in two marketplaces, namely Lazada and AliExpress.

International commerce wholesale business (2% of the total revenues) — This business generated revenues of RMB2 billion (US$294 million), increasing 22% from the prior-year quarter. The growth was due to an increase in the number of paying members on alibaba.com platform.

Cainiao logistics services (4% of the total revenues) — This business generated revenues of RMB3.2 billion (US$467 million). The segment represents revenues from domestic and cross-border fulfilment services provided by Cainiao Network, after elimination of inter-company transactions.

Consumer services (6% of the total revenues) — This business generated revenues of RMB5 billion (US$731 million).

Others business (1% of the total revenues) — This business generated revenues of RMB1.1 billion (US$162 million), reflecting an increase of 68% year over year.

Cloud Computing: This segment comprises Alibaba Cloud that offers a complete suite of cloud services. Revenues in the quarter were RMB5.7 billion (US$825 million), up 90% from the year-ago quarter, driven by an increase in the number of paying customers and improved revenue mix of higher value-added services.

Digital Media and Entertainment: The segment operates businesses through media properties that include UCWeb, Youku Tudou, OTT TV service, Alibaba Music and Alibaba Sports. Revenues were RMB5.9 billion (US$865 million), reflecting an increase of 24% on a year-over-year basis. The segment’s top-line growth was driven by an increase in revenues from mobile value-added services provided by UCWeb, such as news feeds and mobile search, along with subscription and advertising revenues from Youku Tudou.

Innovation Initiatives and Others: This segment includes businesses such as the YunOS operating system, AutoNavi, DingTalk enterprise messaging and others. Revenues in the quarter were RMB1.1 billion (US$155 million), up 20% year over year, driven by an increase in revenues from Tmall Genie.

Key Metrics

Mobile Monthly Active Users (MAUs) — Mobile MAUs were 666 million, improving 21% from the prior-year quarter and 5% sequentially. This improvement was caused by an increase in the adoption of mobile devices by consumers, as the primary method of accessing Alibaba’s platforms.

Annual Active Buyers — China retail marketplaces had 601 million annual active buyers in the 12-month period ended Sep 30, 2018, reflecting 23% year-over-year growth and 4.3% sequential improvement.

Operating Results

Pro-forma gross margin was 45.1%, down 1,500 basis points year over year.

Alibaba’s operating expenses (product development + sales and marketing + general and administrative) of RMB22.3 billion increased 50.5% from a year ago.

Adjusted EBITDA margin decreased to 31% from 45% in the year-ago quarter, primarily due to higher investments in New Retail and other expansion activities.

Balance Sheet

Alibaba exited fiscal second quarter with cash and cash equivalents, as well as short-term investments of approximately RMB171.9 billion (US$25 billion) compared with RMB177.3 billion (US$26.8 billion) in the first quarter of fiscal 2019.

Cash Flow/Share Repurchase

Net cash flow from operations was RMB31.4 billion (US$4.6 billion) while free cash flow was RMB16 billion (US$2.3 billion) in the fiscal second quarter.

Fiscal 2019 Guidance

Management lowered its fiscal 2019 revenue guidance by 4-6% to the range of RMB375 billion to RMB383 billion due to delayed monetization.

Management believes that the economic impact of a U.S.-China trade spat could lower the company’s revenues ahead of its top sale season.

Zacks Rank and Stocks to Consider

Currently, Alibaba Group has a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader technology sector are boohoo group plc (OTC:BHOOY) , IAC/InterActiveCorp (NASDAQ:IAC) and AMETEK, Inc. (NYSE:AME) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term earnings growth rate for boohoo group, IAC/InterActiveCorp and AMETEK is currently pegged at 25%, 15% and 10.97%, respectively.

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