JD.Com Inc(ADR) (NASDAQ:JD) released Q1 FY2015 results which included a beat on the top-line (revenue of 36.6 billion RMB vs. 35.6 expected) but a miss on earnings (a loss of -0.02 USD per ADS vs. breakeven expected). Although the company did report a loss for the quarter, there were signs that the business was steadily improving. The company reported completed order volumes growing at a strong double-digit pace, and solid progress in terms of gross merchandise sales expanding at a nearly 100% pace YoY.

Financial results were helped by steady gross margins, which was about 12% during Q1, down slightly from Q4 last year, but an improvement vs. 10% a year ago. Stronger gross margins helped offset increased operating expenses (fulfillment and marketing), which resulted in operating margins in line with recent trends.

Management’s guidance for Q2 revenue was encouraging, which reflected YoY growth of about +54% YoY and a sequential increase of +20% QoQ. Expecting any changes in margins may be premature, however, as management signaled that it would continue opex trends related to marketing and promotion, while fulfillment costs may drag as the company developed capabilities in lower-tier cities.

Recent Quarterly Performance FY2015
(Millions) RMB Q1 Q2 Q3 Q4 Q1
Revenue 22,657 28,613 29,012 34,720 36,641
Gross profit 2,261 3,155 3,544 4,410 4,466
Operating profit -3,852 -788 -407 -756 -823
Net income -3,795 -583 -164 -454 -716
Earnings per ADS (GAAP) -6.20 -5.86 -0.12 -0.33 -0.52
Comparison YoY
Revenue 65% 64% 61% 73% 62%
Gross profit 53% 103% 100% 116% 98%
Operating profit n.a. n.a. n.a. n.a. n.a.
Net income n.a. n.a. n.a. n.a. n.a.
Earnings per share n.a. n.a. n.a. n.a. n.a.
Comparison QoQ
Revenue 13% 26% 1% 20% 6%
Gross profit 11% 40% 12% 24% 1%
Operating profit n.a. n.a. n.a. n.a. n.a.
Net income n.a. n.a. n.a. n.a. n.a.
Earnings per share n.a. n.a. n.a. n.a. n.a.
Margin analysis
GPM 10% 11% 12% 13% 12%
OPM -17% -3% -1% -2% -2%
NPM -17% -2% -1% -1% -2%
EBITDA n.a. n.a. 1% 0% -1%

The company generated operating cash flow of about 2.4 billion RMB, a strong improvement vs. the outflow of 1.2 billion RMB last quarter, and more than double the rate of Q1 last year. The main factor in the improvement QoQ was seasonal inventory sales after stocking up for Q4, however management did suggest on the Q1 call that improvements in working capital efficiency were expected going forward.

Investors may note that JD.com’s payables are significantly lower compared to some peers, but squeezing merchants on terms wasn’t the company’s preferred source of improving cash conversion. Instead of demanding more favorable terms from suppliers, the company’s goals included improving logistics, which it saw as a net positive for both customers, itself, and suppliers.

The first quarter balance sheet included highly liquid assets (cash and equivalents, short-term investments) of approximately 26 billion RMB, down slightly from 29 billion RMB last quarter. The company invested approximately 400 million USD (2.4 billion RMB) in BitAuto during the quarter, which could explain the lower cash balance.


The company’s Q2 FY2015 outlook included the following:

  • Revenue: approximately 44 billion RMB (+54% YoY, +20% QoQ)

Based on comments from management on the Q1 call, it seems like the bulk of revenue growth is expected from the ‘core’ JD business; new initiatives like cross-border sales, online finance, crowdfunding, etc. are too new and relatively small to have a significant impact.

With respect to principal vs. third-party sales, it sounds like the company is shifting its near-term development focus to its marketplace business. Management’s view was that developing its marketplace  business was a core driver for long-term growth due to the opportunity in those categories dwarfing what it could handle on a principal basis. When addressing why merchants would choose JD.com, management suggested that their customer profile was stronger than competitors (presumably higher spending) and that in-house logistics capability were both strong selling points.

When discussing the outlook for the business going forward, management mentioned that it expected fulfillment costs to remain relatively higher while it expanded its capabilities in lower tier cities. The company expects these early initiatives to ultimately pay off, however, as customers become more accustomed to using JD.com and order density improves. When discussing how logistics may differ from top-tier cities where labor intensity at the last-mile leg makes sense due to order density, management noted that current plans don’t include replicating the same level of service in lower-tier markets. For example, the company’s service level goal was for next day delivery in non-core markets vs. same-day service that it may provide in major markets like Beijing and Shanghai.

The company’s other main operating expense, marketing, was also likely to remain elevated vs. recent trends to support growth initiatives. In terms of concrete guidance, management expected marketing spend to exceed 3% of sales on a full-year basis.

Regarding profitability, management said that it was deliberately following a strategy to expand share and expand scale instead of focusing on near-term profits.

Operating Metrics

At the end of Q1, there were approximately 60,000 merchants using JD.com’s marketplace platform.

Mobile orders comprised approximately 42% of fulfilled orders in Q1 FY2015, which grew +329% YoY.

The company modified its operating metrics reporting beginning Q1 FY2015, and no longer provides quarterly active user statistics, instead favoring Annual Active Customers (those customers that have made a purchase in the trailing 12-month period). JD.com reported approximately 105.2 million annual active customers at the end of Q1 (+90% YoY), up from 96.6 million at the end of Q4 FY2014 (a +104% YoY growth rate).

JD’s GMV showed continued growth, however based on comments from the Q1 call, the QoQ change may somewhat understate actual progress achieved during the quarter.

Management noted that third-party merchandise sales were somewhat soft due to seasonality (the Chinese New Year), which was offset by strength in its JD Mall business (sales grew +94% YoY).

The company maintained its target of above-average sales growth rates.

On the Q1 call, management noted that there were a few factors in play affecting order metrics. The increased proportion of mobile orders (42% of fulfilled Q1 orders) had a negative impact on average order size (those transactions are usually smaller), however the suspension of online lottery sales had a positive effect on the average order calculation.

Although improving mobile order trends may have a dilutive effect on metrics, success here is critical for customer experience and retention.


Key Business Developments during Q1 FY2015

Investment in BitAuto (BITA) – the company invested approximately 400 million USD in BitAuto, which provides content and marketing services focused on China’s automotive sector, and would contribute 750 million USD of resources (exclusive access to some of JD’s channels and e-commerce sites and apps, as well as support). During discussion on the Q1 call, management framed the move as a way to improve execution in certain verticals, suggesting that specialist knowledge was the key to winning the category.

Cross-border sales – the company made multiple announcements during the quarter regarding its initiative to offer Chinese consumers access to imported goods. The new shopping channel wasn’t yet a major contributor, but represented a potential channel for future growth, and arguably a ‘must-have’ feature to maintain competitiveness. Regarding product selection, management commented that its current strategy was to source from distributors that it recruits, as well as multi-brand retailers, with the goal of eventually establishing a direct business with key brand owners.

Financial Performance

Income Statement FY2015
(Millions) RMB Q1 Q2 Q3 Q4 Q1
Online direct sales 21,781 27,018 27,369 32,381 34,549
Services, others 876 1,595 1,643 2,339 2,092
Total revenue, net 22,657 28,613 29,012 34,720 36,641
YoY 65% 64% 61% 73% 62%
Cost of revenues -20,396 -25,458 -25,468 -30,310 -32,175
Gross profit 2,261 3,155 3,544 4,410 4,466
YoY 53% 103% 100% 116% 98%
Gross profit margin 10.0% 11.0% 12.2% 12.7% 12.2%
Fulfillment -1,360 -2,002 -2,119 -2,585 -2,678
Marketing -594 -1,066 -880 -1,471 -1,426
Technology and content -285 -420 -512 -619 -704
General and administrative -3,874 -455 -439 -491 -480
Operating profit -3,852 -788 -407 -756 -823
YoY n.a. n.a. n.a. n.a. n.a.
Operating profit margin -17% -3% -1% -2% -2%
Interest income 98 155 198 187 155
Interest expense -5 -8 -8 -7 -1
Other income (expense) -39 59 59 137 -45
Pretax income (loss) -3,798 -582 -158 -439 -713
Income tax expense 3 0 -6 -15 -3
Net income (loss) -3,795 -583 -164 -454 -716
YoY n.a. n.a. n.a. n.a. n.a.
Net profit margin -17% -2% -1% -1% -2%
Preferred shares redemption value accretion -1,494 -6,464 0 0 0
Net income due common shareholders -5,289 -7,046 -164 -454 -716