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Alibaba's (BABA) Q3 Earnings Beat Estimates, Revenues Up Y/Y

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Alibaba Group Holding Limited (BABA - Free Report) reported third-quarter fiscal 2019 earnings of $1.77 per share, surpassing the Zacks Consensus Estimate by 14 cents. Also, earnings increased 15% year over year.

The company reported revenues of RMB117.27 billion ($17.06 billion), up 41% from the year-ago quarter. The 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 at Alibaba Cloud.

However, its revenues missed the Zacks Consensus Estimate of $17.26 billion.

Alibaba witnessed sluggish demand for white appliances due to China’s waning real estate market. Moreover, demand for mobile phones declined too due to inadequate technological innovations.

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 RMB102.84 billion ($14.96 billion), reflecting an increase of 40% on a year-over-year basis.

China commerce retail business (69% of total revenues) — The business vertical’s revenues in the quarter were RMB81.06 billion ($11.79 billion), reflecting an increase of 35% 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, and other direct sale businesses.

China commerce wholesale business (2% of the total revenues) — This business generated revenues of RMB2.7 billion ($392 million), reflecting an increase of 40% 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 RMB5.84 billion ($849 million), increasing 23% year over year. The increase was driven by the consolidation of Trendyol, Turkey’s leading e-commerce platform. However, Lazada’s growth lagged in the reported quarter due to a decline in revenues generated from Alibaba’s direct sales business.

International commerce wholesale business (2% of the total revenues) — This business generated revenues of RMB2.18 billion ($316 million), up 31% 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 RMB4.5 billion ($653 million). The segment represents revenues from domestic and cross-border fulfilment services provided by Cainiao Network, after elimination of inter-company transactions.

Consumer services (5% of the total revenues) — This business generated revenues of RMB5.16 billion ($750 million).

Others business (1% of the total revenues) — This business generated revenues of RMB1.44 billion ($209 million), reflecting an increase of 58% year over year.

Cloud Computing: This segment comprises Alibaba Cloud that offers a complete suite of cloud services. Revenues in the quarter were RMB6.61 billion ($962 million), up 84% from the year-ago quarter, driven by an increase in spending by enterprise customers.

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 RMB6.5 billion ($944 million), reflecting an increase of 20% 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 mobile search and game publishing, and an increase in subscription revenues from Youku.

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 RMB1.3 billion ($193 million), up 73% year over year, driven by an increase in revenues from Tmall Genie and Amap.

Alibaba Group Holding Limited Price, Consensus and EPS Surprise

Alibaba Group Holding Limited Price, Consensus and EPS Surprise | Alibaba Group Holding Limited Quote

Key Metrics

Mobile monthly active users (MAUs) on the company’s retail marketplace were 699 million, improving 21% from the prior-year quarter and 5% sequentially.

China retail marketplaces had 636 million annual active buyers in the 12-month period ended Dec 31, 2018, reflecting 23% year-over-year growth and 5.8% sequential improvement.

Notably, management stated that 70% of the increase in annual active consumers belonged to lower tier cities, which reflects the company’s success in catering to a broad base of users.

Operating Results

Cost of revenues in the reported quarter was RMB60.81 billion ($8.85 billion) compared with RMB 35.1 billion in the year-ago quarter. The increase in cost was primarily driven by the company’s consolidation of Ele.me, an increase in cost of inventory and logistics from Alibaba’s New Retail business and increase in content spending by Youku.

Alibaba’s operating expenses (product development + sales and marketing + general and administrative) of RMB26.85 billion ($8.9 billion) stayed flat year over year.

Adjusted EBITDA increased 13% from the year-ago quarter to RMB40.7 billion ($5.92 billion)

Adjusted EBITA for core commerce platform was RMB26.8 billion ($6.7 billion), increasing 20% year over year. Additionally, adjusted EBITA for marketplace-based core commerce platform was up 31% year over year to RMB54.3 billion ($7.98 billion)

However, adjusted EBITA margin for core commerce platform declined from 53% in the year-ago quarter to 45% in the reported quarter. This decline was attributed to aggressive investment in local consumer services and unfavorable revenue mix shift to Alibaba’s New Retail and direct import businesses.

The company believes that its adjusted EBITA margin for the core commerce platform will remain under pressure in the near term, driven by revenue mix shift and escalating investments.

Adjusted EBITA margin for Cloud Computing segment improved from negative 5% in the year-ago quarter to a negative 4%.

Adjusted EBITA margin for Digital Media segment declined to negative 93% from negative 41% in the year-ago quarter. Further, Innovation initiatives segment too witnessed an increase in adjusted EBITA loss due to investments in new business initiatives.

Balance Sheet & Cash Flow

Alibaba exited fiscal third quarter with cash and cash equivalents as well as short-term investments of approximately RMB192.32 billion ($27.97 billion) compared with RMB171.9 billion (US$25 billion) in the second quarter of fiscal 2019.

Cash flow from operation was RMB64.89 billion ($9.44 billion), which increased 17% from the year-ago quarter. Notably, free cash flow was recorded at RMB51.37 billion ($7.48 billion) in the reported quarter, up 11% year over year.

Alibaba repurchased 10.86 million of ADS worth $1.57 billion as of Jan 29, 2019.

Zacks Rank & Stocks to Consider

Alibaba currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader computer and technology sector include Xilinx, Inc. (XLNX - Free Report) , Twitter, Inc. (TWTR - Free Report) and Cloudera, Inc. (CLDR - Free Report) . All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

Expected long-term earnings growth rate for Xilinx, Twitter and Cloudera is 12%, 22.1% and 15%, respectively.

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