Article / 08 May 2015 at 5:35 GMT

Earnings review: Alibaba impresses on back of mobile

China Watcher / Shanghai
  • Alibaba beat consensus forecast for Q4 revenue and earnings
  • Mobile surpassed expectations and made up or over half of all transactions
  • Alibaba plans to diversify into the cloud computing business and media content

By Neil Flynn

In my earnings preview, (Alibaba under pressure to perform), I discussed how investors would be looking for a return to normality, where the e-commerce giant posts solid results and there are no further issues with counterfeit goods. Alibaba duly obliged by beating both revenue and earnings consensus, although expectations were rather low. Nevertheless the most impressive news was the growth of mobile during the quarter, which surpassed all expectations, and looks set to reach 70% of total transactions by next year. 

After being in decline for several months, the share price reacted positively to the earnings release, and ended the day up 7.5%, closing at $86.00. These are the major points from the earnings release and subsequent conference call.


Listed e-commerce giant Alibaba will target rural areas as part of its development strategy for building its online shopping business throughout China. Photo: iStock


Headline results impress

Alibaba reported revenues of $2.81 billion that beat consensus of $2.78 bn, and non-GAAP diluted EPS of $0.48, beating analysts’ consensus of $0.42. Despite relatively low expectations after a disappointing fiscal third quarter, it was essential for Alibaba to beat consensus, and investors will be looking for the firm to build on this performance throughout the rest of the calendar and fiscal year.

Total revenues grew 44.83% annually, which is in line with growth seen over the past two years. The China commerce business unit, predominantly made up of the Taobao and Tmall shopping platforms, grew 39.44% annually to $2.24bn, with annual active buyers growing 4.79% sequentially to 350 millipon and mobile monthly active users growing 9.06% sequentially to 289m.  

Alibaba Total Revenues

Source: Alibaba Group Investor Relations 

Mobile surpasses expectations

Mobile beat all expectations by accounting for 50.67% of GMV during the quarter. This was the biggest surprise of the earnings release, because even considering the seasonally weak fourth quarter and the late timing of the Chinese New Year, mobile continued its exponential quarterly growth.

Alibaba Mobile GMV

Source: Alibaba Group Investor Relations

As I discussed in my earnings preview, the downside of growing mobile contribution to transactions is that the blended monetisation rate declines, as it converges away from the PC monetization rate and towards the mobile monetisation rate.

PC is the traditional means of business for Alibaba, and hence its monetisation methods have been developed and perfected over the past decade. Mobile is relatively new and has only become the core strategy for Chinese firms over the past two years. Therefore as firms focused on building their mobile user base and mobile ecosystem, they have delayed the increase of mobile monetisation, because in times of mobile land grabbing, building a user base is more important. Mobile will likely have a monetisation rate higher than that of PC within the next few years, because mobile is able to collect much more user behavior data than PC, which can be monetised through targeted advertising.

Alibaba has improved its mobile platforms, in order to capitalise on the impulsive nature of mobile shopping. In addition, merchants can now conduct their business through mobile without the need to have a PC or notebook . Throughout the fiscal year, we should see further developments to the mobile platforms, which will boost mobile monetisation.

Monetisation rate (equal to Revenue / Value of transactions, or GMV )
Alibaba Monetisation Rate

Source: Alibaba Group Investor Relations

Monetisation rates declined during the quarter, although this is common in the fiscal fourth quarter after a strong third quarter. However it was reassuring to see that investors weren’t overly concerned by the growing mobile contribution to GMV and its effect on the blended monetisation rate, because along with the State Administration for Industry and Commerce report on counterfeit goods, this was a major concern for investors during the third quarter.

Throughout the rest of the year, we should mobile continue to contribute more to total GMV, and as mobile monetisation increases, we should the blended monetisation rate above 2.5% by the end of the fiscal year.

Tmall promotions boost GMV

The late timing of the Chinese New Year had an effect on the firm’s C2C shopping platform Taobao, whilst the effect on the B2C shopping platform Tmall was very small. Taobao GMV during the quarter was 381bn yuan, growing 29.12% annually, down from the fiscal third quarter annual growth of 42.89%. Tmall GMV grew 62.22% annually to 219bn yuan, increasing from the fiscal third quarter annual growth of 60.11%.

Taobao is heavily reliant on small third party merchants and couriers, and during the Chinese New Year, these merchants and couriers took time off to return to their hometowns for the annual festival. So GMV through Taobao during the Chinese New Year was very low, and this caused the notable decline for the quarter.

Tmall has a different business model because it relies on larger third party merchants and direct brands, who can afford to work during the festival, because either their China operations are large enough to sustain it, or they have operations in nearby countries. Because of this, Alibaba held a Chinese New Year promotion on Tmall to replace the lost GMV on Taobao, and this is why we have seen the 62.22% annual GMV growth in the quarter.

Alibaba's Marketplace Business

Source: Alibaba Group Investor Relations 

Management sets out fiscal year strategy

The three major strategies for the coming fiscal year are expanding and upgrading the existing platform services, developing new businesses, and people development. The first branch of this development strategy will see the firm building its online shopping business throughout China, particularly in the more rural areas of the country. We have seen both Alibaba and investing heavily in their respective logistics infrastructure, not only to access Western China, but to improve their food and grocery delivery service on the wealthier east coast.

The second branch will focus on the cloud computing business and media content. This will help the firm to diversify away from its online shopping business, which contributed 79.74% to total revenues during the quarter. The firm remains the number one cloud service provider in China, and will expand its presence throughout the country. Their client base ranges from start-ups and government bodies, and although the business unit only contributed 2.23% to total revenues during the quarter, and the firm will target growth in this unit. Media and entertainment will be a key part of the firm’s expansion into the smart home ecosystem, and investors should expect further investment in overseas content. The upcoming earnings of Youku Tudou should also give an indication into Alibaba's media strategy, as it owns a stake in the video platform firm.

The third branch is the development of human capital and the organisation’s culture. Management stated that Jack Ma’s previous comments about a hiring freeze have been taken out of context, because the firm only plans to hire new staff when a current employee leaves, in addition to the new members of staff that have already been offered positions. This was a recruitment policy that was enacted in 2012, and the firm enjoyed 62% in GMV growth to reach 1 trillion yuan in transactions during the 2013 fiscal year.

There continues to be large demand from Chinese consumers for high quality foreign products, and investors should see further growth in the number of foreign brands that open stores on Tmall Global. This is a standard growth strategy in the industry, as we have seen rival opening the ‘French Mall’ and ‘Korean Mall’ in order to offer imported goods to Chinese consumers.

The firm is looking to take minority stakes in overseas firms that offer the opportunity to transfer its business model into new countries. Emerging markets will be key for Alibaba in the coming years, and I fully expect that we will see the firm taking minorities stakes in companies in the key markets of southeast Asia, India and Russia.

CEO Jonathan Lu replaced

Alibaba announced that its outgoing CEO Jonathan Lu is to be replaced by COO Daniel Zhang, effective next month. This comes after the recent appointments of a new head of the B2C platform Tmall and a new head of online marketing unit Alimama. Management explained that this is a way to bring younger executives into senior positions.

I expect that the timing of these appointments has allowed the current management to recover from the difficulties of the SAIC counterfeit goods report, and the busy third quarter shopping events, and allow the younger management team to take over their respective positions in the seasonally quiet fiscal fourth quarter.

Final thoughts

This earnings report is exactly what Alibaba needed to arrest the perpetual slump that the share price has experienced since the start of the year. Despite low expectations, the firm posted good results, with investors seemingly accepting that that growth in mobile will decrease the monetization rate in the short term, but it will be a long term revenue driver. With the seasonally slow fourth quarter over, investors will be hoping that the new management team can maintain momentum into the fiscal first quarter.

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– Edited by Robert Ryan

Neil Flynn is a portfolio manager at Alcuin Asset Management. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform.

moat888 moat888
Thank you for your timely write-ups and charts of Alibaba. This quarter you are the only one on the Internet doing these charts in a timely manner.

Maybe margins will expand in the next few quarters as management implement hiring freeze and mobile take-rate improves? Would be amazing if mobile take-rate can surpass PC take-rate in the future.

Net margins is already at 45.9%, how high can it possibly reach? It's really strange to see how crazy high its margins are, but it does swing up/down a lot (non-GAAP net margins past four years: 32%, 40%, 54%, 46%), because management has said they don't manage by margin targets.

Hope you will continue to write about BABA, JD, VIPS, etc. Keep up the good work!
Neil_Flynn Neil_Flynn
The pleasure is all mine, thanks a lot for reading my research.

The mobile take rate will surpass PC within 2 years. There is a much larger scope of data that can be collected on mobile, which is yet to be monetised.

The biggest problem for these big Chinese firms is that they keep spending in order to compete with each other, and in order to build a closed loop ecosystem of services. However, we should see this slow down by next year.

VIPS is the next big Chinese firm to report earnings, and i'll be writing an earnings preview on Wednesday. Let me know what you think when you've read it. Cheers
moat888 moat888
When you write, please keep this in mind: Given that you are in Shanghai and you read and write Chinese, your readers will be interested in what you are observing in terms of competition among them (BABA, JD, VIPS, etc). Thank you.
moat888 moat888
BTW, one thing you should correct. In all your charts above, you need to shift the time by one year. Given BABA's FY ends in March, you might want to label them F15Q1, F15Q2, F15Q3, F15Q4 (or use C14Q2, C14Q3, C14Q4, C15Q1)

I really appreciate the charts you put together above, they are very informative. Everyone is watching the take-rate trend very carefully. FQ3 2.70% vs. 3.05% y/y was not good, but FQ4 2.17% vs. 2.18% y/y was reassuring. They need to deliver 2.52 or better this Q (F16Q1). If this number trends up with the hiring freeze in place, EPS will surprise to the upside.
moat888 moat888
I just finished Porter Erisman's new book "Alibaba's World". IMO it's very well written, gives reader a good feel from inside the company, the kind of person Jack Ma is, and the culture of the company.

He mentioned eBay's take rate is around 8.5% vs. BABA's 2.5% (eBay charges % fee, Taobao is free). eBay can do this because it has no competition in the USA. Because of this I think BABA will not be interested in buying eBay. eBay's sellers hate eBay because of their high fees.

Someone should do to eBay-USA what Taobao did to eBay-China in 2003 and kill eBay-USA. In fact, I don't understand why it hasn't happened yet. Seems to me eBay's business model is vulnerable.
Neil_Flynn Neil_Flynn
Ah, i'll check that out. Thanks a lot


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