On Feb 13th, Alibaba reported strong quarterly earnings that top analyst expectations: Revenue grew 38% YoY (33% excluding Kaola) to RMB 161 billion, and non-GAAP net income grew 56% YoY to RMB 46.5 billion. The solid earnings were driven by robust profitability in “marketplace core-commerce”, which grew 22% YoY to RMB 66.3 billion, and less loss in other subsidies: -15.7 billion (FQ3'20) versus -17.7 billion (FQ3'19). 

Updates on coronavirus: social responsibility and near-term business impact

Immediately following the outbreak of coronavirus, Alibaba has taken steps to help local communities and support SMEs. Alibaba leveraged its platform to provide both physical medical goods and digital tools for local communities. For example, Cainiao Logistics delivered 26 million medial units to Hubei Province, Eleme/Freshippo remained open during the virus outbreak, and DingTalk introduced digital health check-in. Alibaba also provided a number of relief measures, including reductions of business operation costs and waive of interest payments to help SMEs get by.

Alibaba management expects the near-term impact of coronavirus to be significant across its subsidies, with eCommerce is affected by factory shutdown and limited delivery capacity (20% of availability), and Fliggy is affected by travel cancellation. Over the long-term, CEO Daniel Zhang expects the coronavirus will speed up the digitalization for both Chinese consumers and businesses.

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AliCloud: turning profitable in 2020?

During the quarter AliCloud grew its revenue by 62% YoY to RMB 10.7 billion, and adjusted EBITA margin also improved to -3%. At an annual run-rate of 42.8 billion RMB ($6.1 billion USD), AliCloud is close to AWS’s size in 2015. As AliCloud rolled out more and more higher-margin cloud-native services such as PolarDB and OceanDB etc., we think 2020 will be a critical year for AliCloud to achieve profitability.

DingTalk

According to the management, DingTalk has experienced explosive growth in DAU and the number of corporate users, as there are 200 million people working from home during the coronavirus outbreak. We reckon that the TAM for Chinese work-collaboration tools will be significant over time. Competitors such as Huawei and ByteDance are also aggressively promoting their own services, such as WeLink and Feishu. Our channel check suggests that Hauwei WeLink uses Zoom’s SDK. We also expect Chinese cloud providers and data-center colo companies to benefit from hosting work collaboration apps.

Local Services

The management commented several times during its earnings call that, despite the negative impact of coronavirus on food deliveries, the company will remain committed to growing local services. During 2019, Alibaba took a different approach to compete more effectively with Meituan, the leader of local services in China. Rather than spending heavily on subsidies through its Eleme platform, Alibaba integrates local services tightly into its ecosystem now. Alibaba's various business segments, such as eCommerce, financial services, new retail, and travel businesses, all allocate part of their traffic to promote local services. For example, Ele.me acquired 48% of its new customers from the Alipay app in FQ3'20. AliCloud also launched PaaS/SaaS functions to help offline companies transform digitally more easily. Ant Financial’s CEO was named Chairman of local services, in charge of implementing the overall strategy. In November 2019, Alibaba successfully completed its Hong Kong IPO, raising $12.9 billion. Ant Financial is expected to hold its IPO in 2020. With abundant funding and an integrated strategy, we think Alibaba can scale up its local services despite fierce competition.