Jack Ma Co-founding and leading Alibaba Group (Photo : alibabagroup)

Alibaba Group Announces 2Q2019 Financial Results

Alibaba Group Holding Limited (NYSE: BABA) today announced its financial results for the quarter ended June 30, 2019.

“Alibaba had a great quarter, expanding our user base to 674 million annual active consumers, demonstrating our superior user experience,” said Daniel Zhang, Chief Executive Officer of Alibaba Group. “We will continue to expand our customer base, increase operating efficiency and deliver robust growth. With strong cash flow from our core commerce business, we will continue to invest in technology and bring digital transformation to millions of businesses globally.”

“We had a strong quarter to start our fiscal year, with revenue growing 42% and adjusted EBITDA growing 34% year-over-year,” said Maggie Wu, Chief Financial Officer of Alibaba Group. “We are pleased to see sustained user engagement and consumer spending across our platforms. We continue to invest for long-term growth while at the same time gaining cost efficiencies in our investment areas.”

BUSINESS HIGHLIGHTS

In the quarter ended June 30, 2019:

  • Revenue was RMB114,924 million (US$16,741 million), an increase of 42% year-over-year.
  • Annual active consumers on our China retail marketplaces reached 674 million, an increase of 20 million from the 12-month period ended March 31, 2019.
  • Mobile MAUs on our China retail marketplaces reached 755 million in June 2019, an increase of 34 million over March 2019.
  • Income from operations was RMB24,375 million (US$3,551 million), an increase of 204% year-over-year. The increase would have been 27% excluding share-based compensation expense resulting from Ant Financial’s awards to our employees. This expense was significantly higher in the quarter ended June 30, 2018 because during the quarter Ant Financial completed an equity financing at a higher valuation, which required us to recognize the increase in value of these awards. Adjusted EBITDA increased 34% year-over-year to RMB39,238 million (US$5,716 million).
  • Adjusted EBITA for core commerce was RMB41,025 million (US$5,976 million), an increase of 25% year-over-year. Our marketplace-based core commerce adjusted EBITA, a non-GAAP measurement, increased 27% year-over-year to RMB46,800 million (US$6,817 million).
  • Net income attributable to ordinary shareholders was RMB21,252 million (US$3,096 million), and net income was RMB19,122 million (US$2,785 million). Non-GAAP net income was RMB30,949 million (US$4,508 million), an increase of 54% year-over-year.
  • Diluted earnings per ADS was RMB8.06 (US$1.17) and non-GAAP diluted earnings per ADS was RMB12.55 (US$1.83), an increase of 56% year-over-year.
  • Net cash provided by operating activities was RMB34,612 million (US$5,042 million) and non-GAAP free cash flow was RMB26,361 million (US$3,840 million).

BUSINESS AND STRATEGIC UPDATES

Core Commerce

In June 2019, our China retail marketplaces had 755 million mobile MAUs, representing a quarterly net increase of 34 million. Annual active consumers on our China retail marketplaces was 674 million for the 12 months ended June 30, 2019, compared to 654 million for the 12 months ended March 31, 2019.

Taobao – fast-growing consumer community, adding users and strengthening engagement in less developed areas. The increase in annual active consumers reflects strong user acquisition programs, such as referrals through the Alipay app and another record-breaking 6.18 Mid-Year Shopping Festival, which deepened our penetration into less developed areas.

During the quarter, over 70% of the increase in annual active consumers was from less developed areas, demonstrating the success of our initiatives to cater to a broader base of users, such as using simpler interfaces for first-time or less-frequent users.

Tmall – the leading consumer engagement and distribution platform for brands in China. Tmall continues to gain wallet share and grow faster than the sector average. Physical goods GMV, excluding unpaid orders, grew 34% year-over-year in the quarter ended June 30, 2019. The growth in physical goods GMV was driven by both increases in the number of users and average spend, reflecting strength in fast-moving consumer goods (FMCG), apparel, consumer electronics and home furnishing categories.

In June 2019, our China retail marketplaces achieved our largest ever 6.18 Mid-Year Shopping Festival in scale and reach. During the promotional period from June 1 to June 18, Tmall physical goods GMV, excluding unpaid orders, was up 38% year-over-year.

The successful promotional event saw robust consumption demand that supported solid sales and greater penetration into less developed areas for brands and merchants, as over 120 brands each generated more than RMB100 million in GMV.

New Retail – digital transformation of brick-and-mortar retailing. Through digitizing all aspects of store-based retail operations using our solutions such as consumer insight technology, on-demand delivery, inventory tracking, supply chain management and mobile payment, we enable traditional retailers to deliver an unrivaled consumer experience and improve their operating efficiencies.

Our self-owned-and-operated grocery retail chain Freshippo (known as “Hema” in Chinese) continues to achieve robust same-store sales growth, expand its footprint, optimize its stores and introduce new initiatives to improve the customer experience. As of June 30, 2019, there were 150 self-operated Freshippo stores in China in 17 cities.

Local consumer services – Food delivery business enjoys improving operating efficiency and robust GMV growth. During the quarter, we achieved strong growth in daily on-demand GMV driven by robust order growth and increasing average order size. We will continue to focus on delivering value to restaurants and other local service merchants through digitization enabled by our technology, as well as extending the coverage of our products and services to less developed areas.

Cainiao Network – robust international and cross-border fulfillment and last-mile solutions. Cainiao Network has developed robust import fulfilment solutions for Tmall Global utilizing a combination of bonded warehouses in China and direct shipment from foreign countries. In June 2019, Cainiao Network’s import fulfilment solutions served over 97% of Tmall Global’s packages.

During the 6.18 Mid-Year Shopping Festival, Cainiao’s bonded warehouse facilitated the shipment of tens of millions of packages imported by Tmall Global, representing year-over-year growth of over 60%.

Cainiao Network continued to focus on providing consumers with comprehensive last-mile solutions, including neighborhood and campus pick-up stations and self-pickup lockers. Consumers also benefit from Cainiao’s Guoguo app, which offers on-demand pick-up and delivery services that allow consumers to send packages from the comfort of their homes, thereby facilitating returns.

International – Strong order growth in Southeast Asia. Lazada showed solid operational improvement after strengthening its third-party marketplace business, management team and technology infrastructure. For the third consecutive quarter, Lazada achieved over 100% year-over-year order growth, reflecting our operational focus on user loyalty and purchase frequency.

Lazada continues to focus on maintaining strong user growth and user engagement. During the quarter, Lazada executed effective user acquisition programs with mobile DAUs doubling year-over-year.

Cloud Computing

Cloud computing revenue grew 66% year-over-year to RMB7,787 million (US$1,134 million) during the June 2019 quarter, primarily driven by an increase in average revenue per customer. During the June 2019 quarter, Alibaba Cloud launched over 300 new products and features, including those related to core cloud offerings, security, data intelligence and AI applications.

We are focusing on delivering high value-added services while rationalizing our offerings of commodity products and services. We will continue to execute a strategy of expanding our market leadership, increasing investments in talent and technology infrastructure and developing new value-added products and features.

We are focusing on expanding SaaS offerings by working with SaaS partners to build an ecosystem to better serve our enterprise customers. During the June 2019 quarter, we announced the Alibaba Cloud SaaS Accelerator, a solution that helps SaaS partners to build, launch and commercialize their offerings at scale within the Alibaba Cloud SaaS marketplace.

Alibaba Cloud offers these partners proprietary technologies such as AI applications, data analytics and software and development operations tools in order for them to deploy solutions for enterprise customers in various industries. The SaaS Accelerator enables seamless integration of SaaS offerings of different vendors on the Alibaba Cloud platform.

Digital Media and Entertainment

Digital media and entertainment segment revenue for the June quarter grew 6% year-over-year as the industry undergoes rationalization and tighter regulatory scrutiny on content. Youku continued to focus on delivering a superior user experience and driving increased paying subscribers.

During the quarter, Youku’s average daily subscribers increased 40% year-over-year. While we continue to invest in original content production capabilities, which gives us better control over content quality, format and scheduling, we are also taking systematic analytical measures to ensure content cost efficiencies and return on investment. These measures have been reflected in reduced losses year-over-year during the quarter.

Cash Flow from Operating Activities and Free Cash Flow

In the quarter ended June 30, 2019, net cash provided by operating activities was RMB34,612 million (US$5,042 million), a decrease of 4% compared to RMB36,117 million in the same quarter of 2018, which was mainly due to a decrease in annual payment of royalty fees and software technology service fees from Ant Financial and payment of a US$250 million cash settlement of a U.S. federal class action lawsuit that we agreed last quarter.

Free cash flow, a non-GAAP measurement of liquidity, in the quarter ended June 30, 2019 was RMB26,361 million (US$3,840 million) compared to RMB26,358 million in the same quarter of 2018, which, in addition to the factors affecting net cash provided by operating activities, also reflected a RMB2,359 million decrease in spending to acquire licensed copyrights and other intangible assets.

A reconciliation of net cash provided by operating activities to free cash flow is included at the end of this results announcement.

New Share Repurchase Program

In May 2019, our board of directors authorized to refresh our share repurchase program for an amount of up to US$6.0 billion over a period of two years.

Altaba Inc. Sales of our ADSs

As publicly disclosed by Altaba, since commencing sales on May 20, 2019, Altaba has disposed 261 million of our ADSs. As of August 9, 2019, the latest date of publicly available information, Altaba held approximately 22 million of our ADSs.

KEY OPERATIONAL METRICS*

June 30,

March 31,

June 30,

Net adds

2018

2019

2019

YoY

QoQ

China Commerce Retail:

Annual active consumers(1) (in millions)

576

654

674

98

20

Mobile monthly active users (MAUs)(2) (in millions)

634

721

755

121

34

_______________

*

For definitions of terms used but not defined in this results announcement, please refer to our annual report on Form 20-F for the fiscal year ended March 31, 2019.

(1)

For the twelve months ended on the respective dates.

(2)

For the month ended on the respective dates.

JUNE QUARTER SUMMARY FINANCIAL RESULTS

Three months ended June 30,

2018

2019

YoY %

RMB

RMB

US$(1)

Change

(in millions, except percentages and per share amounts)

Revenue

80,920

114,924

16,741

42

%

Income from operations

8,020

24,375

3,551

204%(3)

Operating margin

10

%

21

%

Adjusted EBITDA(2)

29,359

39,238

5,716

34

%

Adjusted EBITDA margin(2)

36

%

34

%

Adjusted EBITA(2)

26,502

34,556

5,034

30

%

Adjusted EBITA margin(2)

33

%

30

%

Net income

7,650

19,122

2,785

150%(3)

Net income attributable to ordinary shareholders

8,685

21,252

3,096

145% (3)

Non-GAAP net income(2)

20,101

30,949

4,508

54

%

Diluted earnings per share(4)

0.41

1.01

0.15

146%(3)

Diluted earnings per ADS(4)

3.30

8.06

1.17

144%(3)

Non-GAAP diluted earnings per share(2)(4)

1.01

1.57

0.23

55

%

Non-GAAP diluted earnings per ADS(2)(4)

8.04

12.55

1.83

56

%

(1)

This results announcement contains translations of certain Renminbi (“RMB”) amounts into U.S. dollars (“US$”) for the convenience of the reader. Unless otherwise stated, all translations of RMB into US$ were made at RMB6.8650 to US$1.00, the exchange rate on June 28, 2019 as set forth in the H.10 statistical release of the Federal Reserve Board. The percentages stated in this announcement are calculated based on the RMB amounts and there may be minor differences due to rounding.

(2)

See the sections entitled “Information about Segments,” “Non-GAAP Financial Measures” and “Reconciliations of Non-GAAP Measures to the Nearest Comparable GAAP Measures” for more information about the non-GAAP measures referred to within this results announcement.

(3)

The year-over-year increase of income from operations, net income, net income attributable to ordinary shareholders, diluted earnings per share and diluted earnings per ADS would have been 27%, 2%, 7%, 6% and 7%, respectively excluding share-based compensation expense resulting from Ant Financial’s awards to our employees. This expense was significantly higher in the quarter ended June 30, 2018 because during the quarter Ant Financial completed an equity financing at a higher valuation, which required us to recognize the increase in value of these awards.

(4)

Each ADS represents eight ordinary shares. See the section entitled “Share Subdivision and ADS Ratio Change” for more information.

JUNE QUARTER INFORMATION BY SEGMENTS

The table below sets forth selected financial information of our operating segments for the periods indicated:

Three months ended June 30, 2019

Digital media

Innovation

Core

Cloud

and

initiatives

commerce

computing

entertainment

and others

Unallocated(1)

Consolidated

RMB

RMB

RMB

RMB

RMB

RMB

US$

(in millions, except percentages)

Revenue

99,544

7,787

6,312

1,281

114,924

16,741

Income (loss) from operations

35,049

(1,509

)

(3,159

)

(3,000

)

(3,006

)

24,375

3,551

Add: Share-based compensation expense

3,310

1,147

596

1,015

1,047

7,115

1,036

Add: Amortization of intangible assets

2,666

4

330

20

46

3,066

447

Adjusted EBITA

41,025 (2

)

(358

)

(2,233

)

(1,965

)

(1,913

)

34,556

5,034

Adjusted EBITA margin

41

%

(5

)%

(35

)%

(153

)%

30

%

Three months ended June 30, 2018

Digital media

Innovation

Core

Cloud

and

initiatives

commerce

computing

entertainment

and others

Unallocated(1)

Consolidated

RMB

RMB

RMB

RMB

RMB

RMB

(in millions, except percentages)

Revenue

69,188

4,698

5,975

1,059

80,920

Income (loss) from operations

23,022

(2,074

)

(4,290

)

(3,775

)

(4,863

)

8,020

Add: Share-based compensation expense

8,095

1,581

818

2,564

3,320

16,378

Add: Amortization of intangible assets

1,680

5

340

9

70

2,104

Adjusted EBITA

32,797

(488

)

(3,132

)

(1,202

)

(1,473

)

26,502

Adjusted EBITA margin

47

%

(10

)%

(52

)%

(114

)%

33

%

___________________

(1)

Unallocated expenses are primarily related to corporate administrative costs and other miscellaneous items that are not allocated to individual segments.

(2)

Marketplace-based core commerce adjusted EBITA increased 27% year-over-year to RMB46,800 million (US$6,817 million).

JUNE QUARTER OPERATIONAL AND FINANCIAL RESULTS

Revenue

Revenue for the quarter ended June 30, 2019 was RMB114,924 million (US$16,741 million), an increase of 42% compared to RMB80,920 million in the same quarter of 2018. The increase was mainly driven by the robust revenue growth of our China commerce retail business, Ele.me (which we consolidated in May 2018) and Alibaba Cloud.

The following table sets forth a breakdown of our revenue by segment for the periods indicated:

Three months ended June 30,

2018

2019

% of

% of

YoY %

RMB

Revenue

RMB

US$

Revenue

Change

(in millions, except percentages)

Core commerce:

China commerce retail

– Customer management

33,053

41%

41,954

6,111

37%

27%

– Commission

13,756

17%

16,902

2,462

15%

23%

– Others*

7,159

9%

16,745

2,440

14%

134%

53,968

67%

75,601

11,013

66%

40%

China commerce wholesale

2,250

3%

2,992

436

3%

33%

International commerce retail

4,316

6%

5,567

811

5%

29%

International commerce wholesale

1,837

2%

2,245

327

2%

22%

Cainiao logistics services

3,327

4%

5,005

729

4%

50%

Local consumer services

2,612

3%

6,180

900

5%

137%

Others

878

1%

1,954

284

2%

123%

Total core commerce

69,188

86%

99,544

14,500

87%

44%

Cloud computing

4,698

6%

7,787

1,134

7%

66%

Digital media and entertainment

5,975

7%

6,312

920

5%

6%

Innovation initiatives and others

1,059

1%

1,281

187

1%

21%

Total

80,920

100%

114,924

16,741

100%

42%

___________________

*

“Others” revenue under China commerce retail is primarily generated by our New Retail and direct sales businesses, mainly Freshippo, Tmall Supermarket, Tmall Direct Import and Intime.

Core commerce

  • China commerce retail business

    Revenue  Revenue from our China commerce retail business in the quarter ended June 30, 2019 was RMB75,601 million (US$11,013 million), an increase of 40% compared to RMB53,968 million in the same quarter of 2018. Revenue from our China retail marketplaces continued to see strong growth. Combined customer management and commission revenues grew 26% year-over-year, which represents an increase of 27% in customer management revenue and an increase of 23% in commission revenue.

    The growth of customer management revenue was primarily the result of increases in the volume of paid clicks due to user growth and more relevant listings driven by better algorithms, which resulted in better consumer experience. The growth of commission revenue was primarily due to the strong 34% year-over-year growth of Tmall physical goods GMV (excluding unpaid orders), partly offset by the revenue mix shift within Tmall Supermarket from commission-based revenue towards direct sales, which is classified as “Others” revenue under China commerce retail business.

    “Others” revenue under China commerce retail business was RMB16,745 million (US$2,440 million), a significant increase compared to RMB7,159 million in the same quarter of 2018, primarily driven by contributions from direct sales businesses, including Tmall Supermarket and Freshippo.

  • China commerce wholesale business

    Revenue from our China commerce wholesale business in the quarter ended June 30, 2019 was RMB2,992 million (US$436 million), an increase of 33% compared to RMB2,250 million in the same quarter of 2018. The increase was primarily due to an increase in the average revenue from paying members on 1688.com, our domestic wholesale marketplace.

  • International commerce retail business

    Revenue from our international commerce retail business in the quarter ended June 30, 2019 was RMB5,567 million (US$811 million), an increase of 29% compared to RMB4,316 million in the same quarter of 2018. The increase was primarily due to our consolidation of Trendyol, Turkey’s leading e-commerce platform, and an increase in revenue from AliExpress.

  • International commerce wholesale business

    Revenue from our international commerce wholesale business in the quarter ended June 30, 2019 was RMB2,245 million (US$327 million), an increase of 22% compared to RMB1,837 million in the same quarter of 2018. The increase was primarily due to increases in the average revenue from paying members and the number of paying members on Alibaba.com, our global wholesale marketplace.

  • Cainiao logistics services

    Revenue from Cainiao logistics services, which represents revenue from the domestic and international one-stop-shop logistics services and supply chain management solutions provided by Cainiao Network, after elimination of inter-company transactions, was RMB5,005 million (US$729 million) in the quarter ended June 30, 2019, an increase of 50% compared to RMB3,327 million in the same quarter of 2018, mainly due to the increase in the volume of orders fulfilled.

  • Local consumer services

    Revenue from local consumer services, which primarily represents platform commissions, fees from provision of delivery services and other services provided by our on-demand delivery and local services platform Ele.me, was RMB6,180 million (US$900 million) in the quarter ended June 30, 2019, an increase of 137% compared to RMB2,612 million in the same quarter of 2018. We started to consolidate Ele.me in May 2018 and Koubei in December 2018.

Cloud computing

Revenue from our cloud computing business in the quarter ended June 30, 2019 was RMB7,787 million (US$1,134 million), an increase of 66% compared to RMB4,698 million in the same quarter of 2018, primarily driven by an increase in average revenue per customer.

Digital media and entertainment

Revenue from our digital media and entertainment business in the quarter ended June 30, 2019 was RMB6,312 million (US$920 million), an increase of 6% compared to RMB5,975 million in the same quarter of 2018. The increase was primarily due to our consolidation of Alibaba Pictures.

Innovation initiatives and others

Revenue from innovation initiatives and others in the quarter ended June 30, 2019 was RMB1,281 million (US$187 million), an increase of 21% compared to RMB1,059 million in the same quarter of 2018. The increase was mainly due to an increase in revenue from Amap.

Costs and Expenses

The following tables set forth a breakdown of our costs and expenses, share-based compensation expense and costs and expenses excluding share-based compensation expense by function for the periods indicated.

Three months ended June 30,

% of
Revenue
YoY
change

2018

2019

RMB

% of
Revenue

RMB

US$

% of
Revenue

(in millions, except percentages)

Costs and expenses:

Cost of revenue

43,720

54%

59,987

8,738

53%

(1)%

Product development expenses

11,510

14%

10,478

1,526

9%

(5)%

Sales and marketing expenses

8,921

11%

10,698

1,558

9%

(2)%

General and administrative expenses

6,645

8%

6,320

921

5%

(3)%

Amortization of intangible assets

2,104

3%

3,066

447

3%

0%

Total costs and expenses

72,900

90%

90,549

13,190

79%

(11)%

Share-based compensation expense by function:

Cost of revenue

3,816

4%

1,747

254

2%

(2)%

Product development expenses

6,512

8%

3,009

438

2%

(6)%

Sales and marketing expenses

2,063

3%

862

126

1%

(2)%

General and administrative expenses

3,987

5%

1,497

218

1%

(4)%

Total share-based compensation expense

16,378

20%

7,115

1,036

6%

(14)%

Costs and expenses excluding share-based compensation expense:

Cost of revenue

39,904

50%

58,240

8,484

51%

1%

Product development expenses

4,998

6%

7,469

1,088

7%

1%

Sales and marketing expenses

6,858

8%

9,836

1,432

8%

0%

General and administrative expenses

2,658

3%

4,823

703

4%

1%

Amortization of intangible assets

2,104

3%

3,066

447

3%

0%

Total costs and expenses excluding share-based compensation expense

56,522

70%

83,434

12,154

73%

3%

Cost of revenue – Cost of revenue in the quarter ended June 30, 2019 was RMB59,987 million (US$8,738 million), or 53% of revenue, compared to RMB43,720 million, or 54% of revenue, in the same quarter of 2018. Without the effect of share-based compensation expense, cost of revenue as a percentage of revenue would have increased from 50% in the quarter ended June 30, 2018 to 51% in the quarter ended June 30, 2019.

The increase was primarily due to an increase in the cost of inventory from our direct sales and New Retail businesses, as well as an increase in logistics cost from our on-demand delivery service by Ele.me, partly offset by a decrease in content spending by Youku.

Product development expenses – Product development expenses in the quarter ended June 30, 2019 were RMB10,478 million (US$1,526 million), or 9% of revenue, compared to RMB11,510 million, or 14% of revenue, in the same quarter of 2018. Without the effect of share-based compensation expense, product development expenses as a percentage of revenue would have increased from 6% in the quarter ended June 30, 2018 to 7% in the quarter ended June 30, 2019.

Sales and marketing expenses – Sales and marketing expenses in the quarter ended June 30, 2019 were RMB10,698 million (US$1,558 million), or 9% of revenue, compared to RMB8,921 million, or 11% of revenue, in the same quarter of 2018. Without the effect of share-based compensation expense, sales and marketing expenses as a percentage of revenue would have remained stable at 8% in the quarter ended June 30, 2019 and the same quarter last year.

General and administrative expenses – General and administrative expenses in the quarter ended June 30, 2019 were RMB6,320 million (US$921 million), or 5% of revenue, compared to RMB6,645 million, or 8% of revenue, in the same quarter of 2018. Without the effect of share-based compensation expense, general and administrative expenses as a percentage of revenue would have increased from 3% in the quarter ended June 30, 2018 to 4% in the quarter ended June 30, 2019.

Share-based compensation expense – Total share-based compensation expense included in the cost and expense items above in the quarter ended June 30, 2019 was RMB7,115 million (US$1,036 million), a decrease of 57% compared to RMB16,378 million in the same quarter of 2018.

Share-based compensation expense as a percentage of revenue decreased to 6% in the quarter ended June 30, 2019, as compared to 20% in the same quarter last year. The following table sets forth our analysis of share-based compensation expense for the quarters indicated by type of share-based awards:

Three months ended

June 30,

March 31,

June 30,

2018

2019

2019

% Change

RMB

% of
Revenue

RMB

% of
Revenue

RMB

US$

% of
Revenue

YoY

QoQ

(in millions, except percentages)

By type of awards:

Alibaba Group share-based awards(1)

4,584

6

%

6,099

7

%

5,898

859

5

%

29

%

(3

)%

Ant Financial share-based awards granted to our employees(2)

11,477

14

%

435

0

%

352

51

0

%

(97

)%

(19

)%

Others(3)

317

0

%

576

1

%

865

126

1

%

173

%

50

%

Total share-based compensation expense

16,378

20

%

7,110

8

%

7,115

1,036

6

%

(57

)%

0

%

___________________

(1)

This includes awards granted to our employees, Ant Financial employees and other consultants. Awards granted to nonemployees were subject to mark-to-market accounting treatment until March 31, 2019. Beginning on April 1, 2019, we adopted ASU 2018-07, “Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” under US GAAP. As a result of adopting this new accounting update, these awards are no longer subject to mark-to-market accounting treatment.

(2)

Awards subject to mark-to-market accounting treatment.

(3)

Others primarily relate to share-based awards underlying the equity of our subsidiaries.

Share-based compensation expense related to Alibaba Group share-based awards remained stable in this quarter compared to the previous quarter.

Share-based compensation expense resulting from Ant Financial share-based awards granted to our employees decreased significantly in this quarter compared to the quarter ended June 30, 2018. This expense was significantly higher in the quarter ended June 30, 2018 because during the quarter Ant Financial completed an equity financing at a higher valuation, which required us to recognize the increase in value of these awards.

We expect that our share-based compensation expense will continue to be affected by changes in the fair value of our shares, our subsidiaries’ share-based awards and the quantity of awards that we grant in the future. Furthermore, we expect that our share-based compensation expense will continue to be affected by future changes in the valuation of Ant Financial, although any such changes will be non-cash and will not result in any economic cost or equity dilution to our shareholders.

Amortization of intangible assets – Amortization of intangible assets in the quarter ended June 30, 2019 was RMB3,066 million (US$447 million), an increase of 46% from RMB2,104 million in the same quarter of 2018, primarily due to an increase in amortization of intangible assets acquired from business combinations of Koubei.

Income from operations and operating margin

Income from operations in the quarter ended June 30, 2019 was RMB24,375 million (US$3,551 million), or 21% of revenue, an increase of 204% compared to RMB8,020 million, or 10% of revenue, in the same quarter of 2018. The increase would have been 27% excluding share-based compensation expense resulting from Ant Financial’s awards to our employees. This expense was significantly higher in the quarter ended June 30, 2018 because during the quarter Ant Financial completed an equity financing at a higher valuation, which required us to recognize the increase in value of these awards.

Adjusted EBITDA and Adjusted EBITA

Adjusted EBITDA increased 34% year-over-year to RMB39,238 million (US$5,716 million) in the quarter ended June 30, 2019, compared to RMB29,359 million in the same quarter of 2018. Adjusted EBITA increased 30% year-over-year to RMB34,556 million (US$5,034 million) in the quarter ended June 30, 2019, compared to RMB26,502 million in the same quarter of 2018. Reconciliations of net income to adjusted EBITDA and adjusted EBITA are included at the end of this results announcement.

Adjusted EBITA and adjusted EBITA margin by segments

Adjusted EBITA and adjusted EBITA margin by segments are set forth in the table below. See the section entitled “Information about Segments” above for a reconciliation of income from operations to adjusted EBITA.

Three months ended June 30,

2018

2019

RMB

% of
Revenue

RMB

US$

% of
Revenue

(in millions, except percentages)

Core commerce

32,797

47

%

41,025

5,976

41

%

Cloud computing

(488

)

(10

)%

(358

)

(52

)

(5

)%

Digital media and entertainment

(3,132

)

(52

)%

(2,233

)

(325

)

(35

)%

Innovation initiatives and others

(1,202

)

(114

)%

(1,965

)

(286

)

(153

)%

Core commerce segment – Adjusted EBITA increased by 25% to RMB41,025 million (US$5,976 million) in the quarter ended June 30, 2019, compared to RMB32,797 million in the same quarter of 2018. Marketplace-based core commerce adjusted EBITA increased 27% year-over-year to RMB46,800 million (US$6,817 million). Adjusted EBITA margin decreased from 47% in the quarter ended June 30, 2018 to 41% in the quarter ended June 30, 2019 due to strategic investments, primarily including aggressive investment in local consumer services and gradual revenue mix shift towards self-operated New Retail and direct sales businesses where revenue is recorded on a gross basis including the cost of inventory. A reconciliation of adjusted EBITA for core commerce to marketplace-based core commerce adjusted EBITA is included at the end of this results announcement.

We expect that our core commerce adjusted EBITA margin will continue to be affected by the pace of our investments in new businesses and revenue mix shift to self-operated New Retail and direct sales businesses.

Cloud computing segment – Adjusted EBITA in the quarter ended June 30, 2019 was a loss of RMB358 million (US$52 million), compared to a loss of RMB488 million in the same quarter of 2018. Adjusted EBITA margin improved to negative 5% in the quarter ended June 30, 2019 from negative 10% in the quarter ended June 30, 2018, primarily due to economies of scale.

Digital media and entertainment segment – Adjusted EBITA in the quarter ended June 30, 2019 was a loss of RMB2,233 million (US$325 million), compared to a loss of RMB3,132 million in the same quarter of 2018. Adjusted EBITA margin improved to negative 35% in the quarter ended June 30, 2019 from negative 52% in the quarter ended June 30, 2018, primarily due to the decrease of content spending by Youku.

Innovation initiatives and others segment – Adjusted EBITA in the quarter ended June 30, 2019 was a loss of RMB1,965 million (US$286 million), compared to a loss of RMB1,202 million in the same quarter of 2018. The increase in adjusted EBITA loss was primarily due to our investments in technological research and innovation, as well as investments in other business initiatives.

Interest and investment income, net

Interest and investment income, net in the quarter ended June 30, 2019 was RMB187 million (US$27 million), compared to RMB7,246 million in the same quarter of 2018, which was primarily due to net losses arising from changes in fair value of our equity investments in the quarter ended June 30, 2019 as opposed to net gains in the same quarter of 2018. The above-mentioned net gains/losses arising from changes in fair value of equity investments were excluded from our non-GAAP net income.

Other income, net

Other income, net in the quarter ended June 30, 2019 was RMB2,101 million (US$306 million), compared to other loss, net of RMB83 million in the same quarter of 2018. The increase in other income was primarily due to a decrease in exchange loss and an increase in royalty fees and software technology service fees from Ant Financial. Royalty fees and software technology service fees under our profit sharing arrangement with Ant Financial amounted to RMB1,627 million (US$237 million) in the quarter ended June 30, 2019, compared to RMB910 million in the same quarter of 2018.

Income tax expenses

Income tax expenses in the quarter ended June 30, 2019 were RMB6,712 million (US$978 million), compared to RMB5,665 million in the same quarter of 2018.

Our effective tax rate was 27% in the quarter ended June 30, 2019, compared to 41% in the same quarter of 2018. Excluding share-based compensation expense, revaluation gains/losses and impairment of investments, our effective tax rate would have been 20% in the quarter ended June 30, 2019.

Share of results of equity investees

Share of results of equity investees in the quarter ended June 30, 2019 was a profit of RMB517 million (US$75 million), compared to a loss of RMB655 million in the same quarter of 2018, mainly due to the general improvements in the financial performance of our equity investees, as well as the cessation of equity pick-up from Alibaba Pictures upon our consolidation in March 2019. We record our share of results of equity investees one quarter in arrears. Share of results of equity investees in the quarter ended June 30, 2019 and the comparative periods consisted of the following:

Three months ended

June 30, 2018

March 31, 2019

June 30, 2019

RMB

RMB

RMB

US$

(in millions)

Share of (loss) profit of equity investees

(66

)

1,306

941

137

Dilution loss

(108

)

(62

)

(5

)

(1

)

Others(1)

(481

)

(416

)

(419

)

(61

)

Total

(655

)

828

517

75

___________________

(1)

Others mainly include amortization of intangible assets of equity investees and share-based compensation expense.

Net income and Non-GAAP net income

Our net income in the quarter ended June 30, 2019 was RMB19,122 million (US$2,785 million), an increase of 150% compared to RMB7,650 million in the same quarter of 2018.

Excluding share-based compensation expense, revaluation gains/losses and impairment of investments and certain other items, non-GAAP net income in the quarter ended June 30, 2019 was RMB30,949 million (US$4,508 million), an increase of 54% compared to RMB20,101 million in the same quarter of 2018. A reconciliation of net income to non-GAAP net income is included at the end of this results announcement.

Net income attributable to ordinary shareholders

Net income attributable to ordinary shareholders in the quarter ended June 30, 2019 was RMB21,252 million (US$3,096 million), an increase of 145% compared to RMB8,685 million in the same quarter of 2018.

Diluted earnings per ADS and non-GAAP diluted earnings per ADS

Diluted earnings per ADS in the quarter ended June 30, 2019 was RMB8.06 (US$1.17) on a weighted average of 21,075 million diluted shares outstanding during the quarter, an increase of 144% compared to RMB3.30 on a weighted average of 21,014 million diluted shares outstanding during the same quarter of 2018. Excluding share-based compensation expense, revaluation gains/losses and impairment of investments and certain other items, non-GAAP diluted earnings per ADS in the quarter ended June 30, 2019 was RMB12.55 (US$1.83), an increase of 56% compared to RMB8.04 in the same quarter of 2018. A reconciliation of diluted earnings per ADS to non-GAAP diluted earnings per ADS is included at the end of this results announcement. Each ADS represents eight ordinary shares. See the section entitled “Share Subdivision and ADS Ratio Change” for more information.

Cash, cash equivalents and short-term investments

As of June 30, 2019, cash, cash equivalents and short-term investments were RMB212,189 million (US$30,909 million), compared to RMB193,238 million as of March 31, 2019. The increase in cash, cash equivalents and short-term investments during the quarter ended June 30, 2019 was primarily due to free cash flow generated from operations of RMB26,361 million (US$3,840 million), partly offset by net cash used in investment and acquisition activities of RMB14,037 million (US$2,045 million).

Cash flow from operating activities and free cash flow

Net cash provided by operating activities in the quarter ended June 30, 2019 was RMB34,612 million (US$5,042 million), a decrease of 4% compared to RMB36,117 million in the same quarter of 2018, which was mainly due to a decrease in annual payment of royalty fees and software technology service fees from Ant Financial and payment of a US$250 million cash settlement of a U.S. federal class action lawsuit that we agreed last quarter.

Free cash flow, a non-GAAP measurement of liquidity, in the quarter ended June 30, 2019 was RMB26,361 million (US$3,840 million) compared to RMB26,358 million in the same quarter of 2018, which, in addition to the factors affecting net cash provided by operating activities, also reflected a RMB2,359 million decrease in spending to acquire licensed copyrights and other intangible assets.

A reconciliation of net cash provided by operating activities to free cash flow is included at the end of this results announcement.

Net cash used in investing activities

During the quarter ended June 30, 2019, net cash used in investing activities of RMB21,136 million (US$3,079 million) primarily reflected (i) cash outflow of RMB18,146 million (US$2,643 million) for investment and acquisition activities, including those relating to Red Star Macalline and China TransInfo, (ii) capital expenditures of RMB6,382 million (US$930 million), which included cash outflow for acquisition of land use rights and construction in progress relating to office campus of RMB526 million (US$77 million), as well as (iii) acquisition of licensed copyrights and other intangible assets of RMB2,395 million (US$349 million). These cash outflows were partly offset by cash inflow of RMB4,109 million (US$598 million) from disposal of various investments.

Employees of  Alibaba

As of June 30, 2019, we had a total of 103,699 employees, compared to 101,958 as of March 31, 2019.

Share Subdivision and ADS Ratio Change

On July 30, 2019, we effected a 1-to-8 share subdivision, as a result of which each ordinary share was subdivided into eight ordinary shares (the “Share Subdivision”). On the same day, we changed our ordinary share-to-ADS ratio. Following the ADS ratio change, each ADS now represents eight ordinary shares. Because the ADS ratio change was exactly proportionate to the Share Subdivision, no new ADSs were issued to any ADS holder and the total number of our outstanding ADSs remains unchanged.

The table below sets forth the pre- and post-share subdivision earnings per share/ADS attributable to ordinary shareholders and weighted average number of shares used in calculating earnings per ordinary share for the periods indicated.

Three months ended June 30,

2018

2019

Pre-Share

Post-Share

Pre-Share

Post-Share

Subdivision

Subdivision

Subdivision

Subdivision

RMB

RMB

RMB

US$

RMB

US$

(except share data)

Earnings per share attributable to ordinary shareholders

Basic

3.36

0.42

8.18

1.19

1.02

0.15

Diluted

3.30

0.41

8.06

1.17

1.01

0.15

Non-GAAP diluted

8.04

1.01

12.55

1.83

1.57

0.23

Earnings per ADS attributable to ordinary shareholders

Basic

3.36

3.36

8.18

1.19

8.18

1.19

Diluted

3.30

3.30

8.06

1.17

8.06

1.17

Non-GAAP diluted

8.04

8.04

12.55

1.83

12.55

1.83

Weighted average number of shares used in calculating earnings per ordinary share (million shares)

Basic

2,581

20,648

2,597

20,776

Diluted

2,627

21,014

2,634

21,075