Alibaba.com Profit Grew 28 Percent Year-on-Year in Second Quarter of 2011

Alibaba.com Limited (HKSE:1688) (1688.HK), the world’s leading small business e-commerce company, today announced unaudited interim financial results for the three months and half-year ended June 30, 2011. Alibaba.com’s results reflected the Company’s strategy to focus on creating more value for our existing customers with enhanced products, services, and trust and safety initiatives, rather than accelerating new customer acquisition. Half-year revenue grew 22 percent year-on-year, which drove a year-on-year diluted EPS growth of 38 percent. Profit attributable to equity owners in the first half of 2011 grew 32 percent year-on-year.

"In the first half of 2011, we went back to basics. We focused on improving the quality of suppliers, enhancing the online experiences of buyers, as well as helping increase efficiency and return on investment for our customers,” said Jonathan Lu, CEO and Executive Director of Alibaba.com. "Looking forward, we will continue to improve service for our existing members, and concentrate on building a trustworthy online business network where our members can find quality information and connect with each other. Since we stepped up our trust and safety efforts at the beginning of the year, the number of buyer complaints has significantly declined by 70 percent compared with the February 2011 level. In addition, we saw a year-on-year surge of 65 percent in the average daily traffic of our international marketplace as of the end of June. This demonstrated that our efforts to improve the quality of the suppliers and information on our platform started to bear fruit. We believe it is important to make sure our existing customers are satisfied with our service and get more value from our platform as the way to drive revenue growth."

Business highlights and review

As of June 30, 2011, we had 68.9 million registered users and 9.2 million storefronts on our international and China marketplaces. More than 102,000 paying members were added on both marketplaces compared with the end of the second quarter last year, making a total of 815,378. This represented a growth of 14.4 percent y-o-y but a slight decrease of 2.1 percent q-o-q as a result of the tightened trust and safety measures we have implemented.

International marketplace

• Registered users: We added 1,901,677 registered users in Q2 and increased to 21,625,081 as of the end of June, growing by 58.5 percent y-o-y, 9.6 percent q-o-q. The sustainable growth momentum of our user base continued to drive traffic and buyer activities on our marketplace.
• Storefronts: We had 1,867,452 storefronts as of the end of June, growing by 19.7 percent y-o-y, 5.1 percent q-o-q.
• Trust and Safety: We committed considerable resources to strengthen our trust and safety system and help quality suppliers to generate more business from our platform. The enforcement of our take-down policy was strengthened while the measures to monitor suspicious online activities were enhanced to prevent suppliers with high-risk characteristics from endangering the trust and safety of our platforms.
• Traffic: We continued to see strong support from international buyers who came to our platform to source products, leading to significant increase in overseas traffic. As of the end of June, average daily traffic of our international marketplace surged by 65 percent y-o-y. This demonstrated that our efforts to improve the quality of the suppliers and information on our platform started to bear fruit.
• Enhanced buyer experience: We stepped up efforts to collect user feedback and closely monitor customer satisfaction, with a view to innovating measures to make our platform more useful and valuable to our buyers and ultimately increasing traffic growth and user stickiness.
• China Gold Supplier: The total number of China Gold Supplier members as of the end of Q2 was 112,191, growing by 6.0 percent y-o-y but decreasing by 3.7 percent q-o-q. A sequential decline in the number in Q2 was expected, mainly due to our tightening of entry and renewal requirements in order to raise the overall quality of our paying members, plus the fact that membership fees were increased effective January 2011. The renewal rate remained steady in the first half of 2011.
• Global Gold Supplier: The total number of Global Gold Supplier members was 9,245 as of the end of June, which remained relatively stable since the end of March.
• VAS: Revenue contribution remained steady at a level exceeding 25 percent of China Gold Supplier revenue. Subsequent to the introduction of Ali-ADvance, a "pay-for-performance” model for keyword search in our international marketplace, in the first quarter of 2011, we have reviewed and rationalized our marketing-related VAS offerings for more effective monetization. We also started to extend comprehensive export-related services to our paying members through our subsidiary One-Touch.
• AliExpress: Compared with its peers, AliExpress topped the ranking in most of the metrics that measure traffic and user awareness, such as supplier and buyer base, product offerings, user experience and transaction volume. The average daily gross merchandise value (GMV) completed on AliExpress grew six times within a year, demonstrating the demand for a small-quantity wholesale platform serving a global market. AliExpress Premier, a new channel on AliExpress to help Chinese domestic brands tap the overseas market, was launched in Q2, bringing low-cost, high-quality merchandise to overseas buyers. In terms of payment options, PayPal was no longer available since August 3, 2011. Although we expect some temporary impact on the volume of transactions successfully concluded on AliExpress, AliExpress users still have more than 10 online payment solutions including Visa and MasterCard credit cards, the Moneybookers online payment system, Western Union cash payment and bank transfers.

China marketplace

• Registered users: We added 1,964,347 registered users in Q2 and increased to 47,275,197 as of the end of June, growing by 18.8 percent y-o-y, 4.3 percent q-o-q.
• Storefronts: We had 7,328,311 storefronts as of the end of June, growing by 17.2 percent y-o-y, 3.7 percent q-o-q.
• China TrustPass: The total number of China TrustPass members was 693,942 as of the end of June, increasing 16.9 percent y-o-y and decreasing 1.8 percent q-o-q. The quarterly drop was mainly due to the Company’s proactive strategy of tightening entry requirements to screen out risk-prone segments. We stopped offering China TrustPass individual edition to new members in Q2 to enhance trust and safety of our platform, resulting in slower customer growth as expected. The membership renewal rate remained stable in the first half of 2011.
• VAS: Revenue contribution remained stable at a level exceeding 20 percent of China TrustPass revenue. Ali-ADvance and premium placement continued to be the main sources of revenue.
• Wu Ming Liang Pin (to be rebranded as Liang Wu Xian ???): The new B2C platform, launched in January 2011, is designed to enable manufacturers to more easily tap into China’s booming domestic consumer demand. To build consumer trust, we only allow on the platform suppliers that have passed a rigorous selection process. Wu Ming Liang Pin is positioned not simply as a transaction platform that provides reliable suppliers and quality products, but also an in-depth service that helps our suppliers better access and serve consumers. Currently, Wu Ming Liang Pin is charging a transaction fee, which is shared between Alibaba.com and Taobao, based on the transaction value.

HiChina

• Membership remained steady despite a reduction in the number of channel partners. Going forward, HiChina will commit more resources to further develop its own sales team.
• Collaborating with Alibaba Cloud Computing, HiChina is developing cloud-related services including cloud hosting, cloud storage, cloud data center and cloud email, among which cloud hosting and cloud email are currently in service.

Financial results

We maintained steady growth in the first half of 2011.

Revenue:

• Total GAAP revenue in the first half of 2011 was RMB3,155.5 million (US$485.5 million), representing a 22.0 percent y-o-y growth; while that of Q2 was RMB1,623.8 million (US$249.8 million), growing 18.8 percent y-o-y and 6.0 percent q-o-q.
• International marketplace: Revenue was RMB1,859.5 million (US$286.1 million) in the first half of 2011, representing a 23.1 percent increase from the same period in 2010. The growth was due to an increase in revenue from VAS as well as contributions from new businesses, including Vendio, Auctiva and One-Touch, which were acquired in the latter half of 2010 and the first half of 2011, and an increase in transaction-based revenue from AliExpress. Revenue from the international marketplace in Q2 was RMB949.0 million (US$146.0 million), growing by 20.0 percent y-o-y and 4.2 percent q-o-q.
• China marketplace: Revenue increased to RMB1,067.5 million (US$164.2 million) in the first half of 2011, representing a 21.7 percent increase from the same period in 2010, mainly due to the increase in revenue from Ali-ADvance and premium placements as well as from an increase in membership. Revenue from China marketplace in Q2 was RMB552.4 million (US$85.0 million), growing by 17.3 percent y-o-y and 7.2 percent q-o-q.
• Other revenue, mainly attributable to HiChina, was RMB228.5 million (US$35.2 million) in the first half of 2011, representing a 14.3 percent increase from the same period last year. Other revenue in Q2 was RMB122.4 million (US$18.8 million), growing by 17.2 percent y-o-y and 15.4 percent q-o-q.

Gross profit increased to RMB2,559.4 million (US$393.8 million) in the first half of 2011, up 18.2 percent from RMB2,165.3 million (US$318.4 million) in the first half of 2010. Gross profit in Q2 grew 14.9 percent y-o-y to RMB1,308.7 million (US$201.3 million), growing by 4.6 percent q-o-q.

Gross profit margin for the first half of 2011 declined slightly to 81.1 percent, compared with 83.7 percent in the first half of 2010 mainly due to the relatively higher contribution from Vendio, Auctiva and AliExpress, which have lower gross profit margins.

Total operating expenses were RMB1,673.0 million (US$257.4 million) in the first half of 2011, representing a 14.7% increase from RMB1,459.0 million (US$214.6 million) in the same period last year, mainly due to the increase in product development expenses and general and administrative expenses as a result of our business expansion and the consolidation of expenses incurred by Vendio and Auctiva.

EBITA (non-GAAP) was RMB996.1 million (US$153.0 million) for the first half of 2011, a 27.9 percent increase from RMB778.9 million (US$114.5 million) in the same period of 2010. EBITA margin (non-GAAP) was 31.6 percent for the period, as compared with 30.1 percent in the same period of 2010. EBITA margin before share-based compensation expense (non-GAAP) was 37.1 percent in the period, an increase from 35.1 percent in the same period last year. The increase in EBITA margin before share-based compensation expense was mainly due to lower sales and marketing expenses as a percentage of revenue as well as a higher margin contribution from VAS revenue, partly offset by the increase in product development and general and administrative expenses. EBITA (non-GAAP) was RMB486.3 million for Q2, a 20.3 percent increase y-o-y and a 4.6 percent decrease q-o-q.

Profit attributable to equity owners was RMB917.0 million (US$141.1 million) in the first half of 2011, an increase of 32.3 percent from the same period in 2010, while that of Q2 was RMB464.5 million (US$71.5 million), growing by 28.0 percent y-o-y and 2.7 percent q-o-q.

Earnings per share ("EPS”) for the first half of 2011, basic and diluted, were 21.6 Hong Kong cents and 21.5 Hong Kong cents, respectively, compared to 15.7 Hong Kong cents and 15.6 Hong Kong cents, respectively in the same period of 2010. Diluted EPS before share-based compensation expense (non-GAAP), was 25.6 Hong Kong cents in the period, compared to 18.5 Hong Kong cents in the same period in 2010.

Deferred revenue and customer advances were RMB4,059.7 million (US$624.6 million) as of the end of June, representing a 9.1 percent increase y-o-y but a 3.6 percent decrease q-o-q due to a slowdown in membership growth.

Recurring free cash flow (non-GAAP) in the first half of year was RMB610.0 million (US$93.8 million), representing a 33.8 percent decrease y-o-y. The decrease was mainly due to a slowdown in the growth of paying members.

Cash and bank balances as of the end of June remained strong at RMB10.1 billion (US$1,555.6 million), representing a 29.8 percent increase y-o-y and 7.4 percent increase q-o-q.

Note: All U.S. dollar conversions are based on an exchange rate of US$1.00=HK$7.80 and US$1.00=RMB 6.50.

About Alibaba.com Limited

Alibaba.com (HKSE: 1688) (1688.HK) is the global leader in e-commerce for small businesses and the flagship company of Alibaba Group. Founded in 1999 in Hangzhou, China, Alibaba.com makes it easy for millions of buyers and suppliers around the world to do business online mainly through three marketplaces: a global trade platform (www.alibaba.com) for importers and exporters; a Chinese platform (www.1688.com) for domestic trade in China; and a transaction-based wholesale platform on the global site (www.aliexpress.com) geared for smaller buyers seeking fast shipment of small quantities of goods. Together, these marketplaces form a community of close to 69 million registered users in more than 240 countries and regions. As part of its strategy to transition into a holistic platform where small companies can build and manage their online business more easily, Alibaba.com also offers Chinese traders a wide array of business management software, Internet infrastructure services and export-related services directly or through companies it has acquired including HiChina and One-Touch, as well as educational services to incubate enterprise management and e-commerce professionals. Alibaba.com also owns Vendio and Auctiva, leading providers of third-party e-commerce solutions for online merchants. Alibaba.com has offices in more than 70 cities across Greater China, India, Japan, Korea, Europe and the United States.

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