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Alibaba reports strong earnings with new income sources emerging

Jane Xu

Research Analyst

Retail 24.08.2017 / 11:04

Alibaba Group logo full

Alibaba reports Q1 revenue grows 56% from a year ago, while net income nearly doubles. Kantar Retail analyses the emerging direction of Alibaba’s structural change for future.

Alibaba has recently published the financial results for the quarter ending June 30. Its revenue jumped by 56.1% from a year ago to 50.18 billion yuan (US$7.4 billion), while the net income hit 14.03 billion yuan, which was 96% higher than a year ago.

CN Q1 Financial Data

New growth engines emerging for Alibaba Group

CN Growth Rates

Alibaba Group managed to keep significant revenue growth (+56%). It is true that e-commerce was still the largest milk cow for the group as China Retail Marketplace, including Taobao, Tmall and new retail formats, contributed 86% of Alibaba’s total revenue.

But it is equally important to notice that Cloud Computing was showing much stronger growth than e-commerce – the revenue from this segment jumped by 95.6% from a year ago to 2.43 billion yuan. Its share in the group’s total revenue has also increased.

The Digital Media and Entertainment segment has managed to expand its revenue to 4.08 billion yuan and now accounts for 8% of total revenue.

In the future, we can expect Alibaba’s revenue source will keep diversifying.

CN Income Structure

From the profitability perspective, we can see adjusted EBITA for e-commerce segment improved by 2 percentage points from a year ago to 63%. The EBITA loss for Cloud Computer narrowed to 103 million yuan in the quarter and the loss margin was only 4%, compared to 13% a year ago. We can expect this segment to kick in as a new profit source for Alibaba in the short future.

Due to continuous investment in Media and Entertainment, its adjusted EBITA loss rate expanded to 43% from 32% a year ago. Losses from other businesses have narrowed.

CN Division Profits 

Stable and significant growth in core e-commerce

The overall new Internet user growth has slowed down in China, but we can still see Alibaba’s core e-commerce managed to keep strong growth momentum. This quarter Alibaba’s core e-Commerce revenue hit 43.02 billion yuan, an increase of 58.6% from a year ago. It indicates that Alibaba has strong connection with its paid users.

More big brands joining

The financial report showed that Tmall posted a 49% year-on-year growth for physical goods gross merchandise volume (GMV) in this quarter. This was compared to 29% in last quarter. This quarter Tmall managed to attract more internationally famous brands -- Moet Hennessy, Victoria’s Secret, Roland and Abercrombie & Fitch established Tmall flagship stores during this period. We could see that Tmall has continuously invested to improve its user experience and attract both consumers and brands onto itself.

Content becomes key for future growth

CN Slower Mobile Growth 

The e-commerce has become an increasingly crowded battlefield with many new business models invented and disrupters crashing the party. Content-based e-commerce platforms, such as Xiaohongshu and Gegejia, have managed to divert shoppers away from existing players and posed a potential challenge to market leaders. With the explosion of mobile Internet and fast-rising content-based economy, online/mobile communities have become a new trend of e-commerce options and are threatening the existing market order.

CN E -Commerce Landscape

Now almost everyone is online, not much growth could be expected from the sheer growth of first-time Internet users. This, in combination of more fierce competition in the overall e-commerce market, has forced Alibaba to find the Next Big Thing to shore up its future growth. In fact, we have noticed that through recent equity investment and strategic restructuring, the future of e-commerce does not lie in product offerings, but in content offering. Customers can be obtained through high-quality contents and then converted into actual buyers. Content is at the heart of Alibaba’s strategy to acquire new users for its various businesses and maximize the commercial value of existing users.

Assets connected seamlessly throughout Alibaba ecosystem

The leveraging of Alibaba’s contents could be seen throughout business units across its ecosystem. Alibaba has invested and built an entertainment and media world outside of its shopping sites and apps so to acquire new traffic to its sales platforms. For example, Youku, one of the largest video platforms in China which Alibaba bought in October, 2015, has partnered with Tmall to launch a programme “Cheer up, smile and drink!” (举杯呵呵喝). The programme was in fact launched to drive traffic to Tmall’s alcohol sales “festival”.

CN Cheers 

During this year’s annual forum of Alimama, the marketing technology platform of Alibaba which enables merchants and brands place marketing materials across Alibaba’s marketplaces, its CEO Zhu Yanshun said Alibaba will strengthen its big data capability. The company is trying to integrate the log-in digital footprints of 500 million Chinese Internet users across Alibaba’s ecosystem to establish a Uni ID system which can identify every user and build high-definition user profile. This will generate a powerful system for brands to manage their consumer relations. Alimama will connect data silos across its Youku (online video), UC Browser (mobile surfing), Taobao (e-commerce), Amap (navigation) and AliMusic (entertainment) platforms to offer an integrated and accurate targeted marketing solution to advertisers. This new system will also give more options to brands to enhance their multi-touchpoint engagement with consumers because it will be able to track the complete purchasing path of consumers from awareness, preference to purchasing and loyalty.

Alibaba also in this quarter’s financial report specifically described its development of “New Retail” segment. We can expect Alibaba will expand its “New Retail” in large scale. Another front that Alibaba is becoming more aggressive is overseas expansion. We can expect Alibaba to pour more resources in these two areas.  

Summary

The overall revenue of Alibaba Group is still growing very stably at a fast pace. At the same time, we can see new revenue source emerging from its Cloud Computing business unit. The company starts to receive the benefit of operating as an ecosystem rather than a one-trick pony. However, the highly competitive e-commerce market and increasingly sophisticated needs of Chinese consumers mean Alibaba has to keep renovating itself to stay ahead.

We expect Alibaba to strengthen its “New Retail” projects and embrace the omni-channel shopping trend. It will also spend more money in research and development to optimize user shopping experience, integrate the business units further to maximize the synergy and expand aggressively globally.

Source: Kantar Retail

Editor's notes

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