Alibaba profits plunge as Beijing's bans – and beefy competitors – bite

Investors are going to have to put up with growth of merely 22 per cent, not the promised 29 or more


Beijing's tech regulation blitz has bitten Alibaba on the bottom line, as the tech giant reported net profit has sunk cut and lowered revenue guidance for the year.

The bad news came as the company announced its Q2 results, at the same time as CEO Daniel Zhang told investors to expect revenue growth of merely 22 or 23 per cent – down from previous predictions of 29.5 per cent growth.

"The adjustment primarily reflects lowering of commerce revenues that include both direct sales and customer management revenue," Zhang said.

The CEO outlined several other factors he feels have dented profitability, including more rivals with deep enough pockets to compete with Alibaba. As for Alibaba's merchants, Zhang said they had "strong transaction growth and high user retention rate, setting a strong foundation to compete for the long term".

Zhang also said the tech giant was growing its international commerce biz and its cloud contender is about to take off, now that digitalization is here to stay. These two efforts promise Alibaba a chance to go into new markets.

As for other numbers, adjusted EBITDA for Q2 was down 32 per cent year-on-year to ¥28 billion ($4.4B). Net income had a massive fall year-on-year from ¥26.5 billion ($4.15B) to ¥3.38 billion ($530M) representing a decrease of more than 87 per cent.

Cloud computing did better. Revenue came in at ¥20 billion, an increase of 33 per cent year-over-year.

"The decline of ¥13.2 billion year-over-year in total adjusted EBITA is a result of our investment in strategic areas and merchant support," reasoned CFO Maggie Wu. According to Wu, the commerce adjusted EBITDA decline "reflects ¥12.6 billion year-over-year increase in combined losses of key strategic areas, such as Taobao Deals, local consumer service, community marketplaces, and Lazada within commerce".

Alibaba's US-listed shares fell by 11.1 per cent after the results were announced.

China's economy as a whole has recently slowed, so it's not hard to see how the tech industry – already riddled by antitrust, data protection and other regulations from Beijing in addition to the economic slowdown – would be affected.

"Looking forward, we remain confident in development of China consumption," cheerled Zhang, despite the call being peppered with details of international expansion to offset slowdown. Revenue growth outside the Middle Kingdom was reported at 34 per cent year-on-year during the quarter while domestic revenue growth was reported at 30 per cent year-on-year.

Alibaba, alongside other tech giants, has faced a barrage of government regulations under Xi Jinping's drive to create a new "network society". In September, the e-commerce giant was among those ordered to stop blocking links to rivals' e-tail services. The multi-pronged behemoth's financial services biz Ant Group was forced to restructure after having its IPO blocked, and the company as a whole has been ordered to rectify naughty data collection behavior. ®

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