Alibaba Profit Lags Estimates on Tax as Sales Defy Slowdown

Updated on
  • Chinese e-commerce giant authorizes a $6 billion share buyback
  • Online consumption bucked the Chinese economy’s deceleration

Costs Bite Into Alibaba's Margins

Alibaba Group Holding Ltd.’s earnings lagged estimates after it swallowed a higher tax bill and splurged on the entertainment and cloud computing businesses that are fueling revenue growth. The shares dropped the most in almost a year.

China’s biggest e-commerce company posted adjusted earnings-per-share of 4.35 yuan, missing the 4.51 yuan average of estimates compiled by Bloomberg. That came even as revenue rose at a faster-than-expected 60 percent to 38.6 billion yuan ($5.6 billion).

While Chinese consumption remains strong, the world’s second largest economy showed signs of cooling as retail sales and industrial output growth sputtered in April with regulators cracking down on swelling financial leverage. Alibaba has expanded into new areas in response to the deceleration, buying control of Lazada Group SA to gain a Southeast Asian foothold and waging a price-based war with Tencent Holdings Ltd. in cloud computing services.

“The March quarter is usually a slow season for e-commerce so margins usually come down a bit,” said Ray Zhao, a Shenzhen-based analyst at Guotai Junan Securities Co. “Alibaba is spending a lot to drive growth in video and entertainment.”

The shares fell as much as 5.6 percent to $114 in New York, the biggest intraday drop since June. The stock was down 3.1 percent at 9:44 a.m.

It’s also trying to appeal to a growing middle class demanding premium products from Alaskan salmon to New Zealand milk. Growing Chinese affluence is propelling billionaire founder Jack Ma’s international expansion, which include helping a million American businesses tap Chinese consumers and reaching foreign shoppers through AliExpress.

Income tax expenses soared 149 percent to 4.6 billion yuan in the March quarter. Its effective tax rate climbed to 29 percent from 23 percent a year earlier, when the company set aside a portion of its earnings as non-taxable reinvestment capital. Alibaba said it also incurred additional taxes from the sale of certain unspecified investments. The company Thursday green-lit a $6 billion share buyback program over two years.

The strength of its e-commerce business is helping Alibaba weather losses in newer businesses of cloud computing and digital entertainment. While revenue in those nascent divisions is surging, they are yet to make money and costs are soaring as Tencent and Baidu Inc. vie with Alibaba for licensed content.

“Over time the market will become more rational, although in the near term there’s still going to be pretty fierce competition,” Vice Chairman Joseph Tsai told analysts on a conference call. Alibaba is “working with talent and directors on proprietary content, so over time the cost should come down.”

Core commerce revenue surged 47 percent to 31.57 billion yuan with the business delivering operating income of 16.5 billion yuan, the company said.

While cloud unit revenue doubled in the March quarter to 2.2 billion yuan, the business had an operating loss of 505 million yuan as it slashes prices to snatch market share from Inc. and Tencent. It’s ratcheting up the division to support billions of dollars in daily transactions, help merchants target shoppers, and anchor fast-growing video streaming.

“Discount offers are necessary to expand Alibaba’s cloud market share,” Ella Ji, an analyst at China Renaissance Securities U.S. Inc. wrote in an April report. Alibaba will need “further spending to fill out its original content offerings.”

Revenue from digital entertainment more than tripled to 3.9 billion yuan with an operating loss of 2.6 billion yuan as it spends on content for video site Youku Tudou and other platforms. Losses in digital entertainment should narrow this year, Chief Financial Officer Maggie Wu said.

— With assistance by David Ramli, and Selina Wang

(Updates with shares in the fifth paragraph.)
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