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Alibaba Earnings Growth Slows as Entertainment Losses Deepen

Chinese e-commerce giant Alibaba on Wednesday unveiled revenue of $17 billion in the last three months of 2018, with net profits of $4.5 billion, up 33% from the same period the year before. But growth was dragged down by the company’s worsening performance in the entertainment sector, with losses of over $890 million, including a more than $400 million write-off of dud entertainment projects.

Ahead of Wednesday’s earnings call, investment analysts were focused on Alibaba’s revenue, which had enjoyed 10 consecutive quarters of more than 50% growth. But traders sought to tamp down expectations for the company’s third quarter, with a Yahoo Finance poll of analysts finding expectations of $17.7 billion in revenue, or 38% growth, and earnings of $1.68 per share.

The company fell slightly short of the revenue figure, with $17 billion, but beat the earnings expectation, reporting non-GAAP earnings per share of $1.77.

Stock watchers had taken their cue from comments earlier this month by Alibaba President Michael Evans about the slowing Chinese economy. They also noted that Alibaba’s Singles Day shopping event in November (China’s equivalent of Black Friday) saw business grow by only 27%.

Traders looked for signs of success in Alibaba’s international expansion – previously, it earned 93% of its revenues within China – and with its diversification into new business areas beyond e-commerce. Cloud computing may have offered some solace, but entertainment and media offered little.

Data for the company’s digital media and entertainment segment show revenue rising 20% to  RMB6.49 billion in the latest quarter, compared to RMB5.41 billion during the same period the year before. But net losses also grew to RMB6.03 billion, compared to RMB2.21 billion the previous year, according to adjusted earnings before interest, taxation and amortization (EBITA). At current exchange rates, that’s an $893 million loss on revenues of $961 million.

In a regulatory filing, Alibaba said that entertainment revenue growth came largely “from mobile value-added services provided by UCWeb, such as mobile search and game publishing, and an increase in subscription revenue from (streaming video platform) Youku.” The number of daily users of Youku, which has free and subscription tiers, increased by 64% year on year.

The filing blamed the higher entertainment costs on investment in original content and on $407 million (RMB2.8 billion) in “impairment charges on licensed copyrights” following an evaluation of programming that did not generate expected returns.

On a conference call with analysts, finance director Maggie Wu said that the digital media management team had been changed. Its strategy is now to seek greater synergy with the rest of the group.

Daniel Zhang, Alibaba’s CEO, also addressed the entertainment losses. After the upcoming Chinese New Year holidays, “we will stress greater group synergies,” Zhang said. “We aim to provide a wide range of services to our consumers. We regard (digital entertainment) as very important for the prosperity of our ecosystem.”

Similarly, vice chairman Joe Tsai said there were no separate performance indicators for digital entertainment. “Good content increases value in other sectors,” he said instead.

Management ducked an analyst question about the impact of the Fan Bingbing scandal on the entertainment sector.

During the last quarter, Alibaba proposed increasing its stake in separately traded Alibaba Pictures Group. The measure, which has not yet been completed, will return Alibaba’s holding to a majority position, with 51%.

Alibaba shares, traded in ADR form in New York, closed at $156.88 on Tuesday. In pre-opening trade on Wednesday, they indicated an opening around $161.

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