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Alibaba Group Announces June Quarter 2018 Results

August 23, 2018

HANGZHOU, China--(BUSINESS WIRE)--Aug 23, 2018--Alibaba Group Holding Limited (NYSE: BABA) today announced its financial results for the quarter ended June 30, 2018.

“Alibaba had another excellent quarter, with significant user expansion and even more robust engagement across our growing ecosystem. Our China retail marketplace business continues to gain share, with New Retail initiatives driving further revenue growth and enabling our retail partners to seamlessly serve customers. We are executing our plan of providing more value and choice to users along the consumption continuum, with digital entertainment and local service offerings that tap into big addressable markets beyond core commerce,” said Daniel Zhang, Chief Executive Officer of Alibaba Group. “We will continue to invest in strategic business opportunities and innovation to sustain our competitive advantage and for long-term growth.”

“We delivered another great quarter with 61% revenue growth as well as strong profit growth, excluding one-time items. We are pleased with the strength and rapid growth of our business at such significant scale,” said Maggie Wu, Chief Financial Officer of Alibaba Group. “The exceptional growth across our major segments of core commerce, cloud computing and digital media and entertainment validates our strategy of investing in customer experience, product, technology and infrastructure for the future. We remain confident in our ability to continue to gain market leadership by delivering unique value propositions to our business customers, partners and consumers.”

BUSINESS HIGHLIGHTS

In the quarter ended June 30, 2018:

Revenue was RMB80,920 million (US$12,229 million), an increase of 61% year-over-year. Revenue from core commerce increased 61% year-over-year to RMB69,188 million (US$10,456 million). Revenue from cloud computing increased 93% year-over-year to RMB4,698 million (US$710 million). Revenue from digital media and entertainment increased 46% year-over-year to RMB5,975 million (US$903 million). Revenue from innovation initiatives and others increased 64% year-over-year to RMB1,059 million (US$160 million). Annual active consumers on our China retail marketplaces reached 576 million, an increase of 24 million from the 12-month period ended March 31, 2018. Mobile MAUs on our China retail marketplaces reached 634 million in June 2018, an increase of 17 million over March 2018. Income from operations was RMB8,020 million (US$1,212 million), a decrease of 54% year-over-year due to a one-time increase in share-based compensation expense related to Ant Financial’s awards to our employees, which was the result of a significant increase in the valuation of Ant Financial in its most recent round of equity fundraising (see “Costs and Expenses – Shares-based Compensation Expense” and “Business and Strategic Updates—Updates on Ant Financial” below). Excluding Ant Financial-related share-based compensation expense, our income from operations would have increased by 9%. Adjusted EBITA increased 13% year-over-year to RMB26,502 million (US$4,005 million). Adjusted EBITA for core commerce was RMB32,797 million (US$4,956 million), an increase of 22% year-over-year, representing a margin of 47%. Margin in our core commerce segment has been and will continue to be influenced by several factors: (i) gradual revenue mix shift towards self-operated New Retail businesses where revenue is recorded on a gross basis including the cost of inventory, (ii) inclusion of the logistics technology business of Cainiao Network in our consolidated financial statements, (iii) aggressive investment in local services, such as Ele.me, which we acquired and consolidated into our financial statements this quarter and (iv) international expansion in regions such as Southeast Asia. Excluding the effects of the above-mentioned long-term investments, our adjusted EBITA margin in the core commerce segment remained stable as compared to the same period last year. Net income attributable to ordinary shareholders was RMB8,685 million (US$1,313 million), and net income was RMB7,650 million (US$1,156 million), representing a year-on-year decrease of 41% and 45%, respectively. However, this decrease was attributable to a one-time increase in share-based compensation expense of RMB11,180 million relating to Ant Financial’s awards to our employees discussed in “Income from operations” above. Excluding the effect of such Ant Financial-related share-based compensation expense, net income for the quarter would have increased by 33% on a year-on-year basis. Non-GAAP net income was RMB20,101 million (US$3,038 million). Diluted EPS was RMB3.30 (US$0.50) and non-GAAP diluted EPS was RMB8.04 (US$1.22). Net cash provided by operating activities was RMB36,117 million (US$5,458 million) and non-GAAP free cash flow was RMB26,358 million (US$3,983 million).

BUSINESS AND STRATEGIC UPDATES

Core Commerce

Taobao – robust engagement and user growth supported by strong business development. In June 2018, we continued to experience strong user activities on the Taobao App with quarterly net increase of 17 million MAUs on our China retail marketplaces to a total of 634 million MAUs. Ongoing improvements in search and personalized recommendations on the Taobao App supported the acceleration of Taobao paid GMV growth during the quarter. Annual active consumers increased 24 million from the 12 months ended March 31, 2018 to 576 million for the 12 months ended June 30, 2018. During the quarter, around 80% of the increase in annual active consumers were from lower tier cities as we broadened our offerings and services into those regions.

Taobao App provides a unique shopping experience with new, innovative content formats and intelligent personalized recommendations. Live-broadcast feature continues to be a fast growing consumer social media engagement medium on the Taobao App. In the quarter ended June 2018, live-broadcast MAUs have grown over 100% year-over-year. Formats such as curated posts, short-form videos and live-broadcast events continue to help brands engage with their customers on our platform, which in turn, drives purchase conversion and increases annual active consumers.

In early August, we launched “88VIP,” a new loyalty membership program to enhance consumer engagement and loyalty. The subscription-based program offers the most comprehensive set of benefits of commerce, entertainment and local services in China. The exclusive membership offerings and privileges across the Alibaba ecosystem include discount savings on Tmall Supermarket, Tmall Global and brand stores on Tmall, coupons for consumer electronics, subscriptions to our video-streaming platform Youku and music-streaming platform Xiami, online movie tickets on Taopiaopiao, and on-demand delivery service from Ele.me.

Tmall – B2C market share gains. Tmall continued to gain wallet share and expand our B2C market leadership. Excluding unpaid orders, physical goods GMV grew 34% year-over-year in the quarter ended June 30, 2018. The robust growth was driven by continued increases in conversion rates and average consumer spending with strong performance from FMCG, consumer electronics, apparel and home goods categories.

During the quarter, Tmall gained further mindshare among domestic and international brands as the leading brand-building and distribution platform that is capturing increasing consumer exposure and spending by users in China. During the quarter, international brands such as MCM, Moschino and Giuseppe Zanotti launched flagship stores on Tmall and joined the Luxury Pavilion, our customized and premium shopping experience for consumers.

New Retail – capturing consumption patterns of the future. Execution of our New Retail strategy is driving a substantial transformation of the traditional retail industry by digitizing store-based operations, with a focus on in-store technology, on-demand delivery, inventory tracking, supply chain management, consumer insights and mobile payments.

Hema, our proprietary grocery retail format, continues to expand its store network, introduce new initiatives to enhance consumer experience and enable its retail partners to accelerate their digital transformation. As of June 30, 2018, there were 45 self-operated Hema stores in thirteen cities in China, primarily located in Tier 1 and Tier 2 cities.

Alibaba Group’s cooperation with Sun Art (in which we hold an approximately 31% effective equity interest) continues to deepen as Sun Art stores adopt Hema’s technologies and services including on-demand delivery, joint procurement and supply chain management of fresh food offerings. During the quarter, Hema and RT-Mart (a business unit of Sun Art) established “Hexiaoma” (a.k.a Small Hema) to jointly explore multi-format store expansion in the lower tier cities leveraging RT-Mart’s strong supply chain capability and Alibaba’s data technology platform.

In August 2018, Alibaba Group and Starbucks Coffee Company jointly announced a comprehensive strategic “New Retail” partnership that will enable a seamless Starbucks Experience and enhance the way customers enjoy their coffee. Under the partnership, Alibaba will begin to deliver Starbucks coffee to customers through our food delivery unit Ele.me, launch new “Starbucks Delivery Kitchens” dedicated for delivery order fulfillment with Hema, and co-create a virtual Starbucks store presence on multiple Internet platforms operated by Alibaba to deliver a personalized online Starbucks Experience for Chinese customers. The strategic partnership with Starbucks is proof of our New Retail model at scale and showcases how Alibaba can help our brand partners more deeply and innovatively engage with their customers in China.

Local services – aggressive investment for market share gains. In May 2018, we completed the acquisition of Ele.me, one of the leading online food delivery platforms in China. Ele.me and Koubei, a leading local services platform focused on in-store consumption in China, work together to provide a comprehensive local services offering that is core to Alibaba. Our plan is to aggressively invest in these businesses to gain market share and execute deep integration into the ecosystem of Alibaba service offerings, such as incorporating local services users into our new 88VIP, as well as delivery support to mom-and-pop convenience store operators on Alibaba’s Lingshoutong (LST) platform and Hema supermarket stores.

We have established a company to hold Ele.me and Koubei as our combined flagship local services vehicle, which we plan to separately capitalize with investments from Alibaba, Ant Financial and third-party investors. As of the time of this announcement, we have received over US$3 billion in new investment commitments, including from Alibaba and SoftBank. As a result of this reorganization, subject to closing conditions, we will consolidate Koubei, which would result in a material one-off revaluation gain when the transaction closes.

Cainiao Network – building and enabling a smart global logistics network through partnerships. As part of our eWTP initiative, Cainiao is cooperating with the Malaysian customs at the regional e-commerce hub near the Kuala Lumpur airport, the first eWTP hub outside of China, and has improved the customs clearance capability.

In addition, Cainiao announced in June 2018 that it will lead a joint venture with China National Aviation Corporation (Group) Limited and YTO Express that will invest approximately US$1.5 billion to build a world-class digital logistics center at Hong Kong International Airport. This landmark property, leveraging leading technologies such as automated warehousing and temperature control solutions, will be a connection and routing point for ground transportation in the Pearl River Delta, one of the most important regions in China.

In May 2018, Alibaba and Cainiao led a US$1.38 billion investment for an approximate 10% equity stake in ZTO Express, a leading and fast-growing express delivery company in China. In connection with this investment, Cainiao and ZTO will deepen their collaboration in the transformation of China’s logistics industry amid the growth of New Retail.

International – further investments for long-term growth. Our cross-border and international retail businesses continue to show promising growth. Revenue from our international commerce retail business reached RMB4,316 million (US$652 million) in the quarter ended June 30, 2018, representing 64% year-on-year growth.

Lazada has developed a clear plan to position its business into three segments: C2C marketplace, branded flagship store mall (LazMall) and cross-border e-commerce (LazGlobal). Launched in June and July in most of the countries where Lazada operates, LazMall is a new platform tailored for brands’ official and / or certified stores that offer premium services and guarantee product authenticity. LazGlobal will connect consumers in Southeast Asia with Taobao Collection businesses and sellers from other countries where Lazada does not currently have a presence. We believe the deepened integration with the Alibaba ecosystem will drive enhanced customer satisfaction and market leadership in the future. We are highly committed to the Southeast Asian market and will continue to invest in Lazada’s growth and customer reach.

Cloud Computing

Cloud computing revenue grew 93% year-over-year to RMB4,698 million (US$710 million), driven by both revenue mix towards higher value-added products and services and robust growth in paying customers.

In the June 2018 quarter, Alibaba Cloud’s product innovation focused on big data analytics, artificial intelligence, security and Internet-of-Things applications. As part of deepening our relationship with customers, we have launched products that enable customers to achieve fast, cost effective and secure data migration from on premise data centers onto the public cloud. For example, enterprises can leverage Lightning Cube, our cloud migration solution that enables uninterrupted migration of petabytes-scale data.

For the June 2018 quarter, Alibaba Cloud continues to deepen cooperation with customers in a variety of industries. Selected large enterprise customers and major partnerships include:

Minsheng Bank is the first major bank in China to successfully adopt a financial cloud with distributed core account architecture that is equipped with a disaster recovery system. Four months since launch of the new financial cloud, it has improved processing efficiency that is three times higher than that of the original core system. China Communications Construction Group (CCCG), one of the largest engineering and construction companies in China, is leveraging our middleware and public cloud services to improve its supply chain management efficiency in design, construction and operation of infrastructure assets such as highways, high-speed rail, airports, and marine ports. By working with CCCG, we have further penetrated into the industrial and construction sector. IHG® (InterContinental Hotels Group) is leveraging Alibaba Cloud’s hybrid cloud solution, compliance and security services to provide on-demand room booking and related business for its global guests in Greater China.

Digital Media and Entertainment

We are executing our strategy to integrate entertainment elements into our overall offerings to consumers beyond commerce. The synergy between our commerce and entertainment businesses delivers a superior user experience while increasing customer loyalty and subscription revenue, as well as return on investment for advertisers.

During the quarter, Youku partnered with China Central Television (CCTV) to stream all 2018 FIFA World Cup games to hundreds of millions of fans in China. During the tournament, Youku users accessed 180 million unique devices, including mobile devices and smart TVs, to watch the games. Alibaba Group delivered unique consumer experience by integrating a broad range of service offerings from our ecosystem, including red packet promotions from Taobao and Alipay as well as late night delivery services from Hema and Ele.me. Alibaba Cloud’s proprietary technologies delivered high resolution and low latency livestreaming of World Cup games on Youku, with peak concurrent viewers exceeding that of the most watched program during Chinese New Year. During the quarter, our World Cup programming and ongoing improvement of video content offerings led to daily average subscriber growth of 200% year-over-year for Youku.

Innovation Initiatives & Technology Development

Tmall Genie, our AI-powered voice assistant, achieved sales of 5 million units since its official launch just a year ago. Tmall Genie connects our customers with services offered by Alibaba ecosystem in an interactive way. We have focused on educational and entertainment content for families to widen user base and increase level of engagement with the device. Tmall Genie is our gateway to link customers with new services and experiences to be generated by IoTs and Smart Homes.

Updates on Equity Investees and Others

Focus Media – In July 2018, we announced our agreement to invest RMB9.63 billion (US$1.46 billion) to acquire a 6.62% equity stake in Focus Media, which operates the largest advertising screens network in China that can be seen in elevators, on the streets, in subways and in office buildings across 300 cities. In connection with this investment, we and Focus Media will jointly explore innovative digital marketing initiatives tied to our New Retail strategy. The strategic partnership with Focus Media allows us to extend our digital advertising network to the traditional offline environment, leveraging our consumer insight and data technology.

Updates on Ant Financial

In June, Ant Financial completed its Series C equity financing totaling approximately US$14 billion, which reflected a significant increase in Ant Financial’s valuation.

Cash Flow from Operating Activities and Free Cash Flow

Net cash provided by operating activities in the quarter ended June 30, 2018 was RMB36,117 million (US$5,458 million), an increase of 40% compared to RMB25,873 million in the same quarter of 2017. Free cash flow, a non-GAAP measurement of liquidity, in the quarter ended June 30, 2018 increased by 16% to RMB26,358 million (US$3,983 million), from RMB22,711 million in the same quarter of 2017, primarily due to our increase in purchase of property and equipment, intangible assets and licensed copyrights by RMB6,597 million. A reconciliation of net cash provided by operating activities to free cash flow is included at the end of this results announcement.

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