After this morning’s earnings and news that the company would buy a 33% equity stake in Ant Financial, shares of Chinese e-commerce giant Alibaba (BABA 196.11, -8.18 -4.00%) trade modestly lower.
To the first point, Alibaba Group Holding Limited and Ant Small and Micro Financial Services Group Co., Ltd. (“Ant Financial”) announced that pursuant to 2014 transaction agreements, Alibaba will acquire a 33% equity interest in Ant Financial. The deal is an amendment to the current deal whereby Ant Financial pays royalty and technology service fees in an amount equal to 37.5% of its pre-tax profits to Alibaba. For those who may not be familiar, Ant Financial is the finance arm of Alibaba which operates Alipay.
In relation, during the quarter Ant Financial successfully executed an aggressive user growth plan that resulted in substantial new user additions and increased user engagement. As a result of the user growth initiatives, in December 2017, Alipay Wallet’s daily active users more than doubled on a year-over-year basis. Alibaba expects that Ant Financial will continue to invest to expand its market leadership in digital payment, develop new technologies for inclusive financial services, and accelerate its globalization strategy.
To the latter, Alibaba reported modestly worse than expected Q3 earnings of $1.63 per share on revenue growth of 56% year-over-year to $12.76 billion. By segment, core commerce grew 57% year-over-year to $11.26 billion, cloud computing was up 104% to $553 million, digital media and entertainment saw growth of 33% to $832 million and innovation initiatives and others dipped about 9% to $119 million.
Alibaba’s key metrics also remained healthy. Annual active consumers on China retail marketplaces reached 515 million, up 16% year-over-year. Mobile active users on the China retail marketplace topped 580 million and operating margins were 31%.
Breaking it down a bit, Alibaba’s robust revenue growth includes the growth of its New Retail initiatives in the China commerce retail business, including Intime Department Stores, import, and fresh food grocery Hema. In addition, revenues from Alibaba’s China retail marketplaces (mainly comprised of Taobao and Tmall) continued to see strong growth.
Specifically, commission revenue, representing 27% of China commerce retail revenue in the quarter ended December 31, 2017, grew by 34% year-over-year, mostly due to strong 43% year-over-year growth in physical goods GMV on Tmall.
Additionally, in its first quarter being included Alibaba’s Cainiao Network continued to bring greater efficiency for merchants and logistics partners and improve the consumer experience. In all, the business saw revenues of $600 million in the quarter.
Also, Alibaba’s Hema expanded its fresh grocery footprint by adding five new stores in Shanghai, Beijing, Ningbo and Suzhou, bringing the total number of Hema stores to 25 as of December 31, 2017.
As for guidance, Alibaba announced that given the strong performance and clear visibility in the approach to the end of the fiscal year, the company takes up their 2018 fiscal year revenue guidance to 55% to 56%, which is an increase over the top end of the range of 53% that they communicated last quarter.
All told, Alibaba’s exchange for certain intellectual property rights to Ant Financial for the 33% equity stake ends the profit-sharing agreement between the two parties. Earnings weren’t too bad, and revenue growth kept going. Guidance was raised as well, and yet shares come off yesterday’s $206.20 all-time highs. Shares then are likely weaker on a shallow US broader market and a tepid finish to trading in the Shanghai Composite (-1.0%) and the Hang Seng (-0.8%) overnight.