ALIBABA GROUP HOLDING LTD filed this 20-F on 06/15/2017
ALIBABA GROUP HOLDING LTD - 20-F - 20170615 - OPERATING_AND_FINANCIAL_REVIEW

ITEM 5    OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A.    Operating Results

        The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this annual report and in particular, "Item 4. Information on the Company — B. Business Overview." This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Item 3. Key Information — D. Risk Factors" and elsewhere in this annual report. We have prepared our financial statements in accordance with U.S. GAAP. Our fiscal year ends on March 31 and references to fiscal years 2015, 2016 and 2017 are to the fiscal years ended March 31, 2015, 2016 and 2017, respectively.

Overview

       We achieved significant growth and strong operating results in fiscal year 2017. Our total revenue increased by 33% from RMB76,204 million in fiscal year 2015 to RMB101,143 million in fiscal year 2016, and further increased by 56% to RMB158,273 million (US$22,994 million) in fiscal year 2017. Our net income increased by 193% from RMB24,320 million in fiscal year 2015 to RMB71,289 in fiscal year 2016, and decreased by 42% to RMB41,226 million (US$5,989 million) in fiscal year 2017. Our net income in fiscal year 2016 included a deemed disposal gain of RMB24,734 million arising from the deconsolidation of Alibaba Pictures and a gain of RMB18,603 million from the revaluation of our previously held equity interest in Alibaba Health when we obtained control over Alibaba Health in July 2015. Our non-GAAP net income, which excludes the effect of these non-recurring gains, share-based compensation and certain other items, increased by 35% from RMB42,791 million in fiscal year 2016 to RMB57,871 million (US$8,408 million) in fiscal year 2017. For further information on non-GAAP financial measures we use in evaluating our operating results and for financial and operational decision-making purposes, see "Item 3. Key Information — A. Selected Financial Data — Non-GAAP Measures."

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We believe our focus on long-term strategic priorities — globalization, rural expansion, and big data and cloud computing — has laid a strong foundation for future growth.

       We have experienced significant growth across various key metrics for our China retail marketplaces:

GRAPHIC   GRAPHIC

GRAPHIC

 

GRAPHIC

(1)
China commerce retail revenue per active buyer for each of the above periods is calculated by dividing the China commerce retail revenue for the previous 12-month period by the annual active buyers for the same 12-month period.

(2)
Mobile revenue per mobile MAU from China commerce retail, annualized is calculated by dividing mobile revenue from China commerce retail for the previous 12-month period by the mobile MAUs for the last month of the same period.

Our Operating Segments

       Starting from fiscal year 2017, we organize and report our business in four operating segments:

    Core commerce;

    Cloud computing;

    Digital media and entertainment; and

    Innovation initiatives and others.

       This new presentation reflects how we manage our business to maximize efficiency in allocating resources. This presentation also provides further transparency to our various businesses that are executing different phases of growth and operating leverage trajectories.

       We present segmental information after elimination of inter-company transactions. In general, revenue, cost of revenue and operating expenses are directly attributable, and are allocated, to each segment. We allocate costs and

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expenses that are not directly attributable to individual segments, such as those that support infrastructure across different operating segments, to different operating segments mainly on the basis of usage, revenue or headcount, depending on the nature of the relevant costs and expenses.

       In discussing the operating results of these four segments, we present each segment's revenue, income from operations and adjusted earnings before interest, taxes and amortization ("adjusted EBITA"). We also present revenue, income from operations and adjusted EBITA for prior periods for the corresponding businesses as if segment reporting had been adopted for those prior periods.

       Our reported segments are described below:

       Core commerce.     The core commerce segment is comprised of platforms operating in retail and wholesale commerce in China and international commerce. China commerce retail business primarily includes Taobao Marketplace, Tmall, Rural Taobao and commerce technologies and services. China commerce wholesale business includes 1688.com. International commerce retail business includes AliExpress and Lazada. International commerce wholesale business includes Alibaba.com.

       Cloud computing.     The cloud computing segment is comprised of Alibaba Cloud, which offers a complete suite of cloud services, including elastic computing, database, storage and content delivery network, or CDN, large scale computing, security, management and application services, big data analytics, a machine learning platform and other service offerings for enterprises of different sizes across various industries.

       Digital media and entertainment.     The digital media and entertainment segment operates businesses through our media properties, primarily including Youku Tudou and UCWeb.

       Innovation initiatives and others.     The innovation initiatives and others segment includes businesses such as YunOS, AutoNavi, DingTalk and others.

       The table below sets forth supplemental financial information of our reported segments for fiscal year 2017:

 
  Year ended March 31, 2017  
 
  Core
commerce
  Cloud
computing
  Digital media
and
entertainment
  Innovation
initiatives
and others
  Unallocated (1)   Consolidated  
 
  RMB   RMB   RMB   RMB   RMB   RMB   US$  
 
  (in millions, except percentages)
 

Revenue

    133,880     6,663     14,733     2,997         158,273     22,994  

Income (loss) from operations

    74,180     (1,681 )   (9,882 )   (6,798 )   (7,764 )   48,055     6,981  

Add: Share-based compensation expense

    5,994     1,201     1,454     3,017     4,329     15,995     2,324  

Add: Amortization of intangible assets

    2,258     4     1,886     656     318     5,122     744  

Adjusted EBITA

    82,432     (476 )   (6,542 )   (3,125 )   (3,117 )   69,172     10,049  

Adjusted EBITA margin

    62 %   (7 )%   (44 )%   (104 )%         44 %      

(1)
Unallocated expenses are primarily related to corporate administrative costs and other miscellaneous items that are not allocated to individual segments.

Our Monetization Model

       We derive revenue from our four business segments: core commerce, cloud computing, digital media and entertainment, and innovation initiatives and others. We derive most of our revenue from our core commerce segment, which accounted for 85% of our total revenue in fiscal year 2017, while cloud computing, digital media and entertainment, and innovation initiatives and others contributed 4%, 9% and 2%, respectively. We derive a substantial majority of our core commerce revenue from online marketing services. The revenue model of our

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online marketing services is primarily performance-based or impression-based. Performance-based marketing uses clicks or transactions as the measurement unit for performance. Impression-based marketing uses the number of impressions delivered to the user. The pricing of our marketing services is typically set by market-based bidding systems so that each marketer determines the price it is willing to pay for the services.

       The amount marketers are willing to pay for our online marketing services is a function of their expected return on investment from our value propositions, including the expected sales volume to be generated on our platforms, the expected lifetime value of online and offline customers acquired from our platforms, and the expected brand awareness and brand association, both online and offline, generated by marketing on our platforms.

Core Commerce

       Our core commerce segment is primarily comprised of our China and international commerce retail businesses and our China and international commerce wholesale businesses. The revenue we generate from our China and international commerce retail businesses is highly correlated with the number and engagement of the consumers on our platforms, and the various value propositions of branding, marketing, distribution and productivity enhancements we offer merchants and brands, through our data and technology capabilities. The revenue we generate from our China and international commerce wholesale businesses is largely driven by the number of paying members and the value of the wholesale marketplaces as distribution and marketing platforms.

       China Commerce Retail.     We generate revenue from our China commerce retail business primarily through the monetization models described below. In fiscal year 2017, approximately 72% of the GMV on our China retail marketplaces was settled through Alipay. In fiscal year 2017, we generated 68% and 30% of our China commerce retail revenue from online marketing services and commissions, respectively.

    Online marketing services.

       Online marketing services primarily consist of:

    P4P marketing services , where merchants primarily bid for keywords that match product or service listings appearing in search or browser results on a cost-per-click, or CPC, basis at prices established by our online auction system, which facilitates price discovery through a market-based bidding mechanism. P4P marketing services are provided both on our marketplaces as well as through third-party marketing affiliates; and

    Display marketing services , where merchants bid for display positions on the relevant marketplaces or through our third-party marketing affiliates at fixed prices or prices established by a bidding system on a cost-per-thousand impression, or CPM, basis.


    For both P4P marketing and display marketing services, we generate a portion of our revenue through third-party marketing affiliates. Revenue from P4P and display marketing services provided through third- party marketing affiliates represented 3%, 3% and 3% of our total revenue in fiscal years 2015, 2016 and 2017, respectively, and this revenue is recognized on a gross basis.

    Taobaoke program , where merchants on Taobao Marketplace and Tmall pay us commissions based on a percentage of transaction value generated from users sourced from third-party marketing affiliates. Commissions on Taobaoke are set by the merchants and depend on the amount the merchant is willing to pay to generate incremental sales through this channel. A significant portion of that commission is shared with our third-party marketing affiliates and we recognize the remaining portion as our revenue on a net basis. In certain situations where we are obligated to pay for website inventory costs in fixed amounts to third-party marketing affiliates, we recognize the commission revenue on a gross basis.

    Placement services , where Taobao Marketplace and Tmall merchants pay placement fees to purchase promotional slots on Juhuasuan for a specified period.

       Commissions on transactions.     In addition to purchasing online marketing services, merchants also pay a commission based on a percentage of transaction value generated on Tmall (including Juhuasuan). The

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commission percentages typically range from 0.4% to 5.0% depending on the product category. The commission rate we establish varies according to our estimate of the industry profit margins in specific product categories. For example, for categories that typically have lower gross margins, such as consumer electronics, we charge a lower commission rate, whereas for categories such as apparel, where gross margins are generally higher for the merchants, we charge a higher commission rate.

       Storefront fees.     Our revenue from storefront fees is primarily comprised of monthly subscription fees for Wangpu ( GRAPHIC ), our storefront software that includes a suite of tools that assist merchants in upgrading, decorating and managing their storefronts.

Purchaser of services:
  Taobao Marketplace   Tmall

Taobao Marketplace merchants

  •  P4P marketing fees
•  Display marketing fees
•  Taobaoke commissions
•  Storefront fees
•  Other fees (1)
  •  Juhuasuan commissions and placement fees

Tmall merchants

 

•  P4P marketing fees
•  Display marketing fees

 

•  Commissions
•  P4P marketing fees
•  Display marketing fees
•  Taobaoke commissions
•  Juhuasuan placement fees


(1)
Other fees primarily consist of online travel commissions and lottery commissions. We suspended our online lottery business in late February 2015 around the same time as the other major online lottery platforms in China in response to regulatory requirements. As of the date of this annual report, there is no clear indication on how long this suspension will last.

       China Commerce Wholesale.     We generate revenue from our China wholesale marketplace, 1688.com, primarily through:

    Memberships and value-added services.   Revenue from our China wholesale marketplace is primarily from the sale of China TrustPass memberships, which allow wholesalers to host premium storefronts, with access to basic data analytic applications, and upgraded storefront management tools, as well as from value-added services, such as premium data analytics. In fiscal year 2017, we generated 70% of our China commerce wholesale revenue from memberships and value-added services.

    Online marketing services.   Revenue from online marketing services on our China wholesale marketplace is primarily derived from P4P marketing services. In fiscal year 2017, 30% of our China commerce wholesale revenue was generated from online marketing services.

       International Commerce Retail.     We generate revenue from our international commerce retail businesses, AliExpress and Lazada, primarily through:

    Commissions and direct sales :  merchants pay a commission based on a percentage of the transaction value they generate on AliExpress. The commissions are typically 5% to 8% of the transaction value. In the twelve months ended March 31, 2017, transaction value on AliExpress was US$7.2 billion. We also generate revenue from Lazada primarily through direct sales of merchandise.

    Online marketing services :  We also generate revenue on AliExpress from merchants who participate in the third-party affiliate marketing program and those who purchase P4P marketing services.

       International Commerce Wholesale.     We generate revenue from our global wholesale marketplace, Alibaba.com, primarily through:

    Memberships and online marketing services.   Revenue from our global wholesale marketplace is primarily generated from the sale of our Gold Supplier memberships on Alibaba.com, which allow wholesalers to host

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      premium storefronts with product listings on the marketplace, as well as additional online marketing services, primarily P4P marketing services. In fiscal year 2017, 65% of our international commerce wholesale revenue was generated from memberships and online marketing services.

    Value-added services.   We generate revenues from providing import/export business solutions, such as custom clearance and VAT refunds, and other value-added services, such as product showcases. In fiscal year 2017, we generated 35% of our international commerce wholesale revenue from these value-added services.

Cloud Computing

       We generate revenue from cloud computing services primarily from the time- and usage-based provision of cloud computing services, such as elastic computing, database, storage and CDN, large scale computing, security, management and application services, big data analytics and a machine learning platform, as well as from web-hosting and domain name registration.

Digital Media and Entertainment

       We generate revenue from Youku Tudou and UCWeb primarily through P4P marketing services, display marketing services and subscriptions.

Innovation Initiatives and Others

       We generate revenue from businesses such as AutoNavi, YunOS and other innovation initiatives. Other revenue also includes annual fees payable by Ant Financial Services or its affiliates to us, calculated at 2.5% of the daily average book balance of the SME loans generated by the SME loan business we transferred to Ant Financial Services upon the completion of the restructuring of our relationship with Ant Financial Services in early February 2015. Prior to this sale, other revenue also included interest income generated by the SME loan business.

Factors Affecting Our Results of Operations

       Our Ability to Create Value for Our Users and Generate Revenue.     Our ability to create value for our users and generate revenue is driven by the factors described below:

    Number and engagement of consumers.   Consumers are attracted to our platforms by the breadth of personalized content and the interactive user experience these platforms offer. Our platforms include a comprehensive selection of product and service offerings as well as engaging content, such as news feeds on our Taobao App and UC Browser, entertainment content on Youku Tudou, music and sports. Consumers enjoy an engaging social experience by interacting with each other and with merchants and brands on our platforms. We leverage our big data insights to further optimize the relevance of this rich content we provide to our users. The engagement of consumers in our ecosystem is affected by our ability to continue to enhance and expand our product and service offerings and improve user experience.

    Broader value offered to merchants, brands and other businesses.   Merchants, brands and other businesses use our products and services to help them acquire and retain customers, build brand awareness and engagement, complete transactions, and enhance their operating efficiency. We offer merchants a complete suite of services and tools powered by our data insights, to help them effectively engage consumers and efficiently manage their operations. In addition, we empower businesses of different sizes across various industries through our comprehensive enterprise cloud service offerings.

    Empowering data and technology.   Our ability to engage consumers and empower merchants, brands and other businesses is affected by the breadth and depth of our data insights, such as the accuracy of our shopping recommendations and of our targeted marketing, and our technology capabilities and infrastructure, such as cloud computing, and our continued ability to develop scalable products and services that adapt to the quickly evolving industry trends and consumer preferences.

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       Operating Leverage of Our Business Model.     Our business model has significant operating leverage and our ecosystem enables us to realize structural cost savings. For example, Taobao Marketplace drives significant traffic to Tmall as Tmall product listings also appear on Taobao Marketplace search result pages. Further, the large number of consumers on our marketplaces attracts a large number of merchants, who become customers for our online marketing and storefront services. In addition, the vast consumer base of our ecosystem presents cross-selling opportunities to a variety of our platforms, such as our ability to promote our digital media and entertainment services, including Youku Tudou, to consumers on our marketplaces. These network effects allow for lower traffic acquisition costs and provide synergies across our businesses.

       Our Investment in User Base, Technology, People and Infrastructure.     We have made, and will continue to make, significant investments in our platforms and ecosystem to attract consumers and merchants, enhance user experience and expand the capabilities and scope of our platforms. We expect our investments will include expanding our core commerce offerings, enhancing our cloud computing business, content and user acquisition to further develop our digital media and entertainment business, new innovation initiatives and new technologies as well as executing our globalization strategy. Our operating leverage and margin levels enable us to continue to invest in our people, particularly engineers, scientists and product management personnel, as well as in our underlying technology capabilities and infrastructure. In addition, as a result of our financial strength, we expect to invest in the above mentioned new and existing businesses which will lower our margins but deliver overall long-term growth.

       Strategic Investments and Acquisitions.     We have made, and intend to make, strategic investments and acquisitions to increase user acquisition and engagement, improve customer experience and expand our product and service offerings. Our strategic investments and acquisitions may affect our future financial results, including our margins and our net income. For example, we expect that our acquisitions of Youku Tudou and a controlling stake in Lazada and our recent privatization of Intime will have a negative effect on our financial results, at least in the short term. In addition, some of our acquisitions and investments may not be successful. We have incurred impairment charges in the past and may incur impairment charges in the future.

Components of Results of Operations

Revenue

       The following table sets forth the principal components of our revenue for the periods indicated:

 
  Year ended March 31,  
 
  2015   2016   2017  
 
  RMB   % of
revenue
  RMB   % of
revenue
  RMB   US$   % of
revenue
 
 
  (in millions, except percentages)
 

Core commerce:

                                           

China commerce retail

    59,732     78 %   80,033     79 %   114,109     16,578     72 %

China commerce wholesale

    3,205     4 %   4,288     4 %   5,679     825     4 %

International commerce retail

    1,768     3 %   2,204     2 %   7,336     1,066     5 %

International commerce wholesale

    4,718     6 %   5,425     6 %   6,001     872     4 %

Others

    113     0 %   385     0 %   755     109     0 %

Total core commerce

    69,536     91 %   92,335     91 %   133,880     19,450     85 %

Cloud computing

    1,271     2 %   3,019     3 %   6,663     968     4 %

Digital media and entertainment

    2,191     3 %   3,972     4 %   14,733     2,141     9 %

Innovation initiatives and others

    3,206     4 %   1,817     2 %   2,997     435     2 %

Total

    76,204     100 %   101,143     100 %   158,273     22,994     100 %

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       We generate most of our revenue from our core commerce segment. We also earn revenue from services associated with our cloud computing segment, digital media and entertainment segment as well as innovation initiatives and others segment. A substantial majority of our revenue is attributable to our businesses in China. See "— Our Monetization Model" for additional information regarding our revenue.

Cost of Revenue

       The principal components of our cost of revenue include: content acquisition costs paid to third parties for our online media properties; logistics costs relating to fulfillment services provided to us by our affiliate Cainiao Network, primarily related to Tmall Supermarket; traffic acquisition costs paid to third-party marketing affiliates either at a fixed price or on a revenue sharing basis; payment processing fees paid to Alipay or other financial institutions; cost of inventory; expenses associated with the operation of our websites, such as bandwidth and co-location fees, and depreciation and maintenance expenses for our computers, servers, call centers and other equipment; salary, bonuses, benefits and share-based compensation expense relating to customer service and web operation personnel and payment processing consultants; rebates and subsidies mainly relating to our new business initiatives; business taxes and related surcharges; and allowance for doubtful accounts in relation to the micro loans and VAT receivables.

Product Development Expenses

       Product development expenses primarily include salaries, bonuses, benefits and share-based compensation expense for our employees engaged in the development, maintenance and enhancement of the infrastructure, applications, operating systems, software, databases and networks for our marketplaces, mobile products and service platforms. In addition, product development expenses include royalty fees paid to Yahoo pursuant to the Yahoo TIPLA. This royalty fee arrangement was terminated upon completion of our initial public offering in September 2014. We expense all of our product development costs as they are incurred.

Sales and Marketing Expenses

       Sales and marketing expenses primarily consist of online and offline advertising expenses, promotion expenses, sales commissions paid for membership acquisition for our wholesale marketplaces, and salaries, bonuses, benefits and share-based compensation expense for our employees engaged in sales and marketing functions.

General and Administrative Expenses

       General and administrative expenses consist mainly of salaries, bonuses, benefits and share-based compensation expense for our management and administrative employees, professional services fees, office facilities, other support overhead costs and charitable contributions.

Interest and Investment Income, Net

       Interest and investment income, net consists of interest income, investment gain or loss related to our treasury management activities and gain or loss on deemed disposals, disposals and revaluation of our long term equity investments. Our interest and investment income, net was more significant in fiscal year 2016 as a result of a deemed disposal gain of RMB24,734 million arising from the deconsolidation of Alibaba Pictures and a gain of RMB18,603 million from the revaluation of our previously held equity interest in Alibaba Health.

Interest Expense

       Our interest expense is comprised of interest payments and amortization of upfront fees and incidental charges primarily associated with our unsecured senior notes issued in November 2014 to refinance our previous syndicated loan arrangements and the US$4.0 billion five-year term loan facility drawn down in fiscal year 2017. In addition, in April 2017, we replaced our US$3.0 billion revolving credit facility, which was not drawn, with a new US$5.15 billion revolving credit facility, which we have not yet drawn as of the date of this annual report.

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Other Income, Net

       Other income, net primarily consists of exchange gain or loss, royalty fees and software technology service fees paid by Alipay, as well as government grants. Exchange gain or loss, arising from our operations and treasury management activities, recognized in our income statement is largely a result of depreciation or appreciation of RMB, respectively. The amount is also partially affected by the currency movements on our hedging activities related to the portion that is deemed ineffective from an accounting perspective. Alipay pays us royalty fees and software technology service fees pursuant to an intellectual property and software technology services agreement, as amended in August 2014, or the amended Alipay IPLA. See "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Agreements and Transactions Related to Ant Financial Services and its Subsidiaries — Share and Asset Purchase Agreement — Alipay Intellectual Property License and Software Technology Services Agreement" for further information on the arrangements between us and Alipay. Government grants primarily relate to grants by central and local governments in connection with our contributions to technology development and investments in local business districts. These grants may not be recurring in nature, and we recognize the income when the grants are received and no further conditions need to be met.

Income Tax Expense

       Our income tax expense is comprised primarily of current tax expense, mainly attributable to certain profitable subsidiaries in China, and deferred tax expense, mainly including withholding tax on dividends to be distributed by our major subsidiaries operating in China.

Taxation

Cayman Islands Profits Tax

       Under Cayman Islands law, our company is not subject to income, corporation or capital gains tax, and no withholding tax is imposed upon the payment of dividends.

Hong Kong Profits Tax

       Our company's subsidiaries incorporated in Hong Kong were subject to Hong Kong profits tax rate of 16.5% in fiscal years 2015, 2016 and 2017.

PRC Income Tax

       Under the PRC Enterprise Income Tax Law, or EIT Law, the standard enterprise income tax rate is 25%. Entities qualifying as High and New Technology Enterprises enjoy a preferential tax rate of 15%. Entities recognized as Software Enterprises are exempt from the EIT for two years beginning from their first profitable calendar year and are entitled to a 50% reduction in EIT for the following three calendar years. Furthermore, entities recognized as key software enterprises within the PRC national plan enjoy a preferential EIT rate of 10%.

       Certain subsidiaries received the above preferential tax treatments during calendar years 2014, 2015, 2016 and 2017. One of our major subsidiaries in China, Zhejiang Tmall Technology Co. Ltd., which is a wholly foreign-owned enterprise primarily involved in the operation of Tmall was subject to an EIT rate of 12.5% (or 50% of the standard statutory rate) in calendar years 2014, 2015 and 2016, and is subject to an EIT rate of 15% thereafter for so long as the subsidiary continues to qualify as a High and New Technology Enterprise. Two of our subsidiaries in China, Taobao (China) Software Co. Ltd. and Alibaba (China) Technology Co. Ltd., which are also wholly foreign owned enterprises primarily involved in the operations of Taobao Marketplace and wholesale marketplaces respectively, were recognized as key software enterprises in calendar years of 2013, 2014 and 2015 and they were subject to an EIT rate of 10%. Key Software Enterprise status is subject to review by the relevant authorities every year and the timing of annual review and notification by the relevant authorities may vary from year to year. The annual review and notification relating to the renewal of the Key Software Enterprises status for the calendar years of 2016 and 2017 had not yet been obtained as of March 31, 2017. Accordingly Alibaba China and Taobao China

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continued to apply an EIT rate of 15% as High and New Technology Enterprises for the accounting of taxation during these periods. The related tax adjustments in relation to the change in applicable EIT rate will be accounted for in the period prospectively in which Key Software Enterprise status is recognized.

VAT and Other Levies

       Our major PRC subsidiaries are subject to VAT on revenue earned for our services under a national VAT reform program. In general, the applicable VAT rate on the revenue earned for services is 6% with companies entitled to credit VAT paid on certain purchases against VAT on sales. Revenue is recognized net of VAT in our consolidated income statement.

PRC Withholding Tax

       Pursuant to the EIT Law, a 10% withholding tax is generally levied on dividends declared by companies in China to their non-resident enterprise investors. A lower withholding tax rate of 5% is applicable for direct foreign investors incorporated in Hong Kong with at least a 25% equity interest in the PRC company and who meet the relevant conditions or requirements pursuant to the tax arrangement between the PRC and Hong Kong. As the equity holders of our major subsidiaries in China are qualified Hong Kong incorporated companies, our deferred tax liabilities for distributable earnings are calculated based on a 5% withholding tax. As of March 31, 2017, we have fully accrued the withholding tax on the earnings distributable by all of our subsidiaries in China, except for those being reserved for permanent reinvestment in China of RMB28.2 billion (US$4.1 billion).

Share-based Compensation

       We have various equity incentive plans pursuant to which the employees, consultants and directors of our company, our affiliates and certain other companies, such as Ant Financial Services, are granted options or awarded RSUs to acquire our ordinary shares. We believe share-based awards are vital to attract, incentivize and retain our employees and consultants. In addition to on-hire grants for new recruits above a specific job level, we also make performance grants on an annual basis and promotion grants on a semi-annual basis to our top performing employees. RSUs and share options granted in the above categories are generally subject to a four-year vesting schedule. Depending on the nature and the purpose of the grant, share options and RSUs generally vest 25% upon the first anniversary of the vesting commencement date or 50% upon the second anniversary of the vesting commencement date, and thereafter 25% every year. Starting in fiscal year 2015, RSUs and share options granted to our senior management members as performance grants were subject to a six-year pro rata vesting schedule. We believe share-based awards are the appropriate tool to align the interests of the grantees with those of our shareholders.

       In addition, Junhan, a major equity holder of Ant Financial Services, has granted certain share-based awards similar to share appreciation awards linked to the valuation of Ant Financial Services to a significant number of our employees. These share-based awards have vesting schedules that are conditioned upon the fulfillment of requisite services to us, and the awards will be settled in cash by Junhan upon disposal by our employees. We have no obligation to reimburse Junhan, Ant Financial Services or its subsidiaries for the cost associated with these awards. See "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transaction — Agreements and Transactions Related to Ant Financial Services and its Subsidiaries — Equity-based Award Arrangements."

       We recognized share-based compensation expense of RMB13,028 million, RMB16,082 million and RMB15,995 million (US$2,324 million) in fiscal years 2015, 2016 and 2017, respectively, representing 17%, 16%

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and 10% of our revenue in those respective periods. The following table sets forth an analysis of share-based compensation expense by function for the periods indicated.

 
  Year ended March 31,  
 
  2015   2016   2017  
 
  RMB   RMB   RMB   US$  
 
  (in millions)
 

Cost of revenue

    4,176     4,003     3,893     566  

Product development expenses

    3,876     5,703     5,712     830  

Sales and marketing expenses

    1,235     1,963     1,772     257  

General and administrative expenses

    3,741     4,413     4,618     671  

Total

    13,028     16,082     15,995     2,324  

       Share-based compensation expense increased in fiscal years 2016 and 2017 as compared to fiscal year 2015 due to the increase in average fair market value of the awards granted. In addition, as a result of "mark-to-market" accounting required under U.S. GAAP, the increase in share-based compensation expense also reflected the re-measurement charge relating to our share-based awards granted to the employees of Ant Financial Services and share-based awards of Ant Financial Services granted to our employees by Junhan. The following table sets forth an analysis of share-based compensation expense by type of awards:

 
  Year ended March 31,  
 
  2015   2016   2017  
 
  RMB   RMB   RMB   US$  
 
  (in millions)
 

Alibaba Group share-based awards granted to:

                         

— Our employees

    6,800     9,596     11,810     1,716  

— Ant Financial Services employees and other consultants (1)

    2,263     889     1,277     186  

Ant Financial Services share-based awards granted to our employees (1)

    3,788     5,506     2,188     318  

Others

    177     91     720     104  

Total share-based compensation expense

    13,028     16,082     15,995     2,324  

(1)
Awards subject to mark-to-market accounting treatment.

       The expense arising from Ant Financial Services' share-based awards granted to our employees represents a non-cash charge that will not result in any economic costs or equity dilution to our shareholders. It is the view of Jack Ma, our executive chairman, who controls Ant Financial Services, that the grant of these equity awards to our employees will benefit us because of the strategic importance of Ant Financial Services as a payment service provider to us and our significant participation in the profit and value accretion of Ant Financial Services through our agreements with Ant Financial Services.

       We expect that our share-based compensation expense will continue to be affected by the change in fair value of our shares, our subsidiaries' share-based awards and the quantity of awards we grant to our employees and consultants in the future. Furthermore, our share-based compensation expense will also be affected by the anticipated increase in fair value of share-based awards of Ant Financial Services. As a result of these factors, we expect that our share-based compensation expense will likely increase. See "— Critical Accounting Policies and Estimates — Share-based Compensation Expense and Valuation of the Underlying Awards" for additional information regarding our share-based compensation expense.

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Recent Investment, Acquisition and Strategic Alliance Activities

       In addition to organic growth, we have made, or have entered into agreements to make, strategic investments, acquisitions and alliances that are intended to further our strategic objectives. The financial results for these strategic transactions that were completed are reflected in our operating results beginning with the period of their respective completion. The investments in which we did not obtain control are accounted for under the equity method if we have significant influence over the investees through investment in common stock or in-substance common stock, or otherwise under the cost method or accounted for as investment securities based on our accounting policies over different categories of investments and merger and acquisition activities. For the details of our accounting policies for each category of our investments, see notes 2(d), 2(s) and 2(t) to our audited consolidated financial statements for the years ended March 31, 2015, 2016 and 2017 included elsewhere in this annual report.

       Our investment and acquisition strategy focuses on three objectives:

    increasing user acquisition and engagement;

    improving customer experience; and

    expanding our product and service offerings.

       We take a deliberate and staged approach to our investment and acquisition strategy. In some cases, we may begin with an initial minority investment followed by business cooperation. We have chosen to make minority investments in some circumstances instead of full acquisitions for one or more of the following reasons: (i) the investee has strong management, where we allow them to have operating independence and potential upside tied to their business in order to retain them; (ii) the investee does not fit within our core business operations but can generate strategic synergies through an equity relationship; and/or (iii) the investee demonstrates clear strategic value to us but capital or integration risk in the near term suggests a deliberate and phased-in approach. Where the business results, cooperation and the overall relationship established with the management of the investee company show increasing value to our ongoing business strategy, we may increase our investment or acquire the investee company completely. Examples of this type of approach include our investments in UCWeb, AutoNavi, Youku Tudou and Intime, where the period from initial investment to eventual acquisition spanned more than one fiscal year.

       We have funded our strategic acquisitions and investments primarily from cash generated from our operations and through debt and equity financing. Our debt financing primarily consists of unsecured senior notes and bank borrowings. We have issued an aggregate of US$8.0 billion unsecured senior notes. We have entered into a five-year term loan facility of US$4.0 billion, which was fully drawn down as of March 31, 2017. In addition, in April 2017, we replaced our US$3.0 billion revolving credit facility, which was not drawn, with a new US$5.15 billion revolving credit facility, which we have not yet drawn. Going forward, we expect to fund additional investments through cash generated from our operations and through debt and equity financing when opportunities arise in the future. Although we expect our margins to be negatively affected by acquisitions of target companies with lower or negative margins, such as our acquisitions of Youku Tudou and a controlling stake in Lazada and our recent privatization of Intime, we do not expect our investment activities to have any significant negative impact on our liquidity or operations. We believe acquired businesses operating at a loss do not detract from the total value of our company because they bring clear strategic value to us in the long run. However, there can be no assurance that our future financial results would not be materially and adversely affected if our strategic investments and acquisitions are not successful. See "Item 3. Key Information — D. Risk Factors — Risks Related to Our Business and Industry — Increased investments in our business, strategic acquisitions and investments as well as our focus on long-term performance and maintaining the health of our ecosystem may negatively affect our margins and our net income" and "Item 3. Key Information — D. Risk Factors — Risks Related to Our Business and Industry — We face risks relating to our acquisitions, investments and alliances."

       Our significant recent strategic investments and acquisitions (including those that are under definitive agreement but have not closed) in fiscal year 2017 and the period through the date of this annual report are set

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forth below. For those investments and acquisitions described below that have not yet closed, there can be no assurance that the closing conditions will be satisfied in a timely manner or at all.

Core Commerce and New Retail

        Intime Retail (Group) Company Limited, or Intime, a leading department store operator in China that was listed on the Hong Kong Stock Exchange. Pursuant to an initial investment in July 2014 and a conversion into equity of convertible debt securities in June 2016, we owned approximately 28% of the equity interest in Intime immediately before its privatization. In May 2017, we and Mr. Shen Guo Jun, the founder of Intime, completed the privatization of Intime. We paid a total cash consideration of approximately HK$12.6 billion (US$1.6 billion) in the privatization. Upon the completion of the privatization, we increased our shareholding in the company to approximately 74% and became the controlling shareholder. We expect Intime to support our strategy to transform conventional retail by leveraging our substantial consumer reach, rich data and technology.

        Sanjiang Shopping Club Co. , or Sanjiang, one of the leading neighborhood grocery chains in Zhejiang province that is listed on the Shanghai Stock Exchange. In November 2016, we agreed to invest RMB2.1 billion (US$0.3 billion) to acquire existing ordinary shares from, and exchangeable bonds issued by, the controlling shareholder of Sanjiang, as well as to subscribe for newly issued ordinary shares, representing an approximately 35% equity interest in Sanjiang. We completed the acquisition of existing ordinary shares in January 2017, representing an approximately 9% equity interest in Sanjiang, at a consideration of RMB439 million (US$64 million). The completion of the subscription of newly issued ordinary shares and the exchangeable bonds is subject to a number of customary closing conditions. Enabled by our technology solutions, Sanjiang plans to pilot a new shopping format at its local grocery stores to enhance the shopping experience for fresh and perishable products.

Local Services

        Koubei Holding Limited , or Koubei, a joint venture that we set up together with Ant Financial Services during fiscal year 2016. Koubei integrates the convenience aspects of mobile commerce and big data to provide consumers with information and promotional benefits from local establishments in China. We have invested a total cash amount of RMB3.0 billion and also injected certain related businesses into Koubei. In January 2017, Koubei completed a US$1.1 billion equity financing through issuance of convertible preferred shares to investors led by Silver Lake, CDH Investments, Yunfeng Capital and Primavera Capital. This transaction provides Koubei with a strong capital base to execute on its aggressive growth strategy. As of the date of this annual report, we held an approximately 38% equity interest in Koubei on a fully diluted basis. Through Koubei, we participate in the local establishment sector in a "closed loop" manner, which is characterized by the "online-to-offline" interaction of users obtaining information and receiving promotional offers, mostly through a mobile device, and then visiting the physical establishment to enjoy the services while making on-location payment with Alipay.

        Rajax Holding , or Ele.me ( GRAPHIC ), one of the largest mobile food ordering and delivery services platforms in China, covering over 1,500 districts and counties as of March 31, 2017. In August 2016, we and Ant Financial Services completed a subscription for newly issued preferred shares in Ele.me for a total combined investment amount of US$1,250 million, of which our total investment was US$900 million. In April 2017, we and Ant Financial Services further subscribed for newly issued preferred shares in Ele.me for a total combined investment amount of US$400 million, of which our investment was US$288 million. As of the date of this annual report, our effective equity interest in Ele.me was approximately 23% on a fully-diluted basis. Ele.me complements our investment in Koubei in local services, focusing on food ordering and delivery characterized by high-frequency usage and last-mile logistics within a city.

        Xiaoju Kuaizhi Inc ., or Didi Chuxing, the leading transportation network company that provides vehicles and taxis for hire in China via smartphone applications. In June 2016, we completed a US$200 million investment in the preferred shares of Didi Chuxing. As of the date of this annual report, we owned an approximately 6% equity interest in Didi Chuxing on a fully-diluted basis, for a total investment cost of US$645 million. We have a

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cooperation agreement with Didi Chuxing relating to the adoption of navigation and map services provided by AutoNavi to the riders and drivers of Didi Chuxing's services, which is aimed at further increasing the user base and usage of AutoNavi's services.

Digital Media and Entertainment

        Youku Tudou, Inc. , or Youku Tudou, a leading multi-screen entertainment and media company in China that was previously listed on the New York Stock Exchange. In May 2014, we, through a holding company, invested US$1,090 million to purchase Class A ordinary shares of Youku Tudou, representing an effective equity interest of 16.5% on a fully diluted basis. We made this investment together with a Yunfeng Fund, which invested US$132 million for an approximately 2% equity interest on the same terms. In April 2016, we completed the privatization of Youku Tudou for total cash consideration of US$4.4 billion and Youku Tudou became our consolidated subsidiary, with a Yunfeng Fund holding an approximately 2% minority interest. Subsequent to the completion of the privatization and as a resolution to negotiations with certain former members of management and shareholders of Youku Tudou with respect to an option to purchase up to 15% of its equity, we issued our ordinary shares and RSUs to certain former members of management and shareholders in April 2017. In November 2016, we consolidated our digital media and entertainment businesses, including Youku Tudou, under a single management team to realize greater synergies within the segment and with our other businesses. Youku Tudou is a core part of our strategy to offer digital entertainment to consumers in our ecosystem, thereby strengthening user engagement and loyalty as well as enabling a new marketing channel for the merchants and brands in our ecosystem.

        Weibo Corporation , or Weibo, a leading social media platform in China that is listed on the Nasdaq Global Select Market. In April 2013, we invested US$586 million to purchase preferred and ordinary shares representing an approximately 18% equity interest in Weibo on a fully-diluted basis. In connection with Weibo's initial public offering in April 2014, we acquired additional shares of Weibo for an aggregate purchase price of US$449 million pursuant to our option to increase our equity interest in Weibo to approximately 30% on a fully-diluted basis. All of the preferred shares we held in Weibo were automatically converted into ordinary shares of Weibo upon completion of Weibo's initial public offering. In September 2016, we acquired additional shares of Weibo from certain existing shareholders of Weibo for an aggregate purchase price of US$135 million. We currently hold an approximately 31% equity interest in Weibo, representing approximately 16% of its voting power. Weibo's powerful and influential social media platform increases user acquisition and engagement on our China retail marketplaces.

        Pony Media Holdings Inc., or Damai, a leading online ticketing platform for live events such as concerts and theater shows in China. In July 2014, we subscribed for preferred shares representing an approximately 32% equity interest on a fully-diluted basis in Damai for a total consideration of US$133 million. In March 2017, we acquired all of the issued and outstanding shares of Damai that we did not already own for a total consideration of US$393 million, and Damai became our wholly-owned subsidiary. Damai forms a strategic part of the value chain in our digital media and entertainment business, providing distribution and marketing opportunities for live content.

Healthcare

        Alibaba Health Information Technology Limited , or Alibaba Health, a pharmaceutical e-commerce business operator and healthcare network service provider that is listed on the Hong Kong Stock Exchange. Its principal activities consist of pharmaceutical e-commerce, a medical services network business and the operation of product tracking platforms in China. It also provides outsourced services for product categories related to Tmall's online pharmacy business pursuant to a services agreement between us and Alibaba Health. Pursuant to an agreement with a Yunfeng Fund, we currently control the holding company that holds approximately 54% of the equity interest in Alibaba Health (including a 38% effective equity interest in Alibaba Health held by the holding company that is attributable to us). In May 2017, we agreed to transfer our business relating to certain regulated health food products on Tmall to Alibaba Health for an aggregate consideration of HK$3.8 billion (US$489 million), which will be paid through the issuance of approximately 1.2 billion newly issued ordinary shares of Alibaba Health. The transaction is subject to customary closing conditions, including approval by the independent

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shareholders of Alibaba Health. Upon the closing of this transaction, our effective equity ownership of Alibaba Health will increase to approximately 46%. Alibaba Health is the flagship vehicle for us to execute our data-driven healthcare strategy.

Logistics

       We have made investments in a number of logistics-related companies as part of our strategy to enhance the consumer experience in our core commerce business through predictable, speedy and high quality logistics services. Below is a description of the major investments in this area in fiscal year 2017 and the period through the date of this annual report.

        Qingdao Goodaymart Logistics Co., Ltd. , or RRS, a subsidiary of Haier Electronics Group Co., Ltd., or Haier, a company listed on the Hong Kong Stock Exchange. In March 2014, as part of our strategy for providing better delivery and installation services to consumers, we paid a total purchase price of HK$2,821 million to acquire a 9.9% equity interest in RRS and an approximately 2% equity interest in Haier, as well as a convertible and exchangeable bond, which we exchanged for an approximately 24% effective equity interest in RRS in January 2017. In May 2017, we participated in a new financing round of RRS and paid a cash consideration of RMB340 million (US$49 million). As of the date of this annual report, we own an approximately 34% equity interest in RRS. Our investments in Haier and RRS have enabled our China retail marketplaces to gain a competitive advantage in the large home appliance category through high quality delivery, installation and after-sale services.

        YTO Express Group Co., Ltd , or YTO Express, one of the leading express courier companies in China. In May 2015, we invested RMB1,500 million in YTO Express, representing an equity interest of 12% in the company. YTO Express became listed on the Shanghai Stock Exchange in September 2016 as a result of a reverse takeover. Concurrent with its listing, we subscribed for newly issued shares of YTO Express for cash consideration of RMB420 million (US$61 million). As of the date of this annual report, we held an approximately 11% equity interest in YTO Express. YTO Express is one of the fifteen strategic express courier partners participating in the data platform of Cainiao Network to fulfill the logistics needs of businesses, including our core commerce business. We invested in YTO Express so that we can leverage our shareholding relationship to establish delivery service standards and new service offerings for online shopping. Once implemented and tested, these standards and offerings may be rolled out to other delivery partners of Cainiao Network, enhancing the overall consumer experience in retail commerce.

        Singapore Post Limited , or SingPost, the national postal service provider in Singapore and a leading provider of e-commerce and logistics solutions in the Asia-Pacific region that is listed on the Singapore Stock Exchange. In January 2017, we completed our subscription for newly issued ordinary shares of SingPost for cash consideration of approximately S$187 million (US$134 million), after which our equity interest in SingPost increased to approximately 14%. We also invested S$86 million (US$62 million) for a 34% equity interest in a wholly-owned subsidiary of SingPost in October 2016, which provides end-to-end e-commerce logistics and fulfillment services across the Asia-Pacific region.

International Expansion

        Lazada Group S.A ., or Lazada, a company that operates e-commerce platforms in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam, with local language websites and mobile apps in each of the six markets. In April 2016, we completed an acquisition of a controlling stake in Lazada for total cash consideration of US$1.0 billion. Lazada offers third-party brands and merchants a marketplace solution with simple and direct access to consumers in these six countries through one retail channel. Lazada also sells products owned by its retail operations. It has developed its own logistics infrastructure with warehouses and a last-mile delivery fleet to offer quick and reliable delivery to its customers. We intend that Lazada will be our vehicle for expansion into the Southeast Asia consumer market, including potential cross-border opportunities introducing Chinese merchants and international brands to Southeast Asian consumers.

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        One97 Communications Limited, or Paytm, the largest mobile payment platform in India in 2016 in terms of market share, according to PayNXT360. As of the date of this annual report, we owned an approximately 9% equity interest in Paytm. In March 2017, Paytm completed the spin-off of its e-commerce business, Paytm E-Commerce Private Limited, or Paytm Mall, to the shareholders of Paytm. Upon the establishment of Paytm Mall, we subscribed for an approximately 8% equity interest at par value. In March 2017, we subscribed for newly issued preferred shares in Paytm Mall for total cash consideration of US$177 million, which brought our total equity interest in Paytm Mall to approximately 36% on a fully-diluted basis. The investments in Paytm and Paytm Mall are part of our strategy of expansion into India. Ant Financial Services is also a shareholder of both Paytm and Paytm Mall.

Others

        AGTech Holdings Limited , or AGTech, an integrated lottery technology and services company in China that is listed on the Hong Kong Growth Enterprise Market. In August 2016, we and Ant Financial Services completed the subscription for newly issued ordinary shares and convertible bonds of AGTech for a total investment amount of HK$2,388 million (US$307 million), of which our total investment is HK$1,433 million (US$184 million). Upon the completion of the transaction, AGTech became our consolidated subsidiary. In March 2017, we converted a portion of the convertible bonds into ordinary shares of AGTech. As of the date of this annual report, we owned an approximately 55% equity interest in AGTech. We intend that AGTech will be our vehicle for participating in the lottery business in China.

Acquired Intangible Assets and Goodwill

       When we make an acquisition, consideration that exceeds the book value of the acquired assets and liabilities is allocated to acquired intangible assets and goodwill. We have and will continue to incur amortization expenses as we amortize acquired intangible assets over their estimated useful life on a straight-line basis. We do not amortize our goodwill. We test intangible assets and goodwill periodically for impairment, and any impairment may materially and adversely affect our financial condition and results of operations. Some of our acquisitions and investments may not be successful, and we may incur impairment charges in the future. For additional information, see "— Critical Accounting Policies and Estimates — Impairment Assessment on Goodwill and Intangible Assets" and "Item 3. Key Information — D. Risk Factors — Risks Related to Our Business and Industry — We face risks relating to our acquisitions, investments and alliances."

Key Financial Information of Selected Equity Method Investees

       Our investments in the following companies are accounted for under the equity method. Consistent with our accounting policies for investments in equity method investees, we record our share of results of the following companies on a one quarter in arrears basis within share of results of equity investees in the consolidated income statements.

Cainiao Network

       In May 2013, we established a joint venture, Cainiao Network Technology Co., Ltd., a company incorporated in China, together with other parties with significant operational experience in logistics, retail and real estate in China. In March 2016, Cainiao Network Technology Co., Ltd. completed a restructuring process to establish a new holding company in the Cayman Islands, and as a result became a wholly-owned subsidiary of Cainiao Network. As of March 31, 2017, we own an approximately 47% equity interest in Cainiao Network. The following table is a summary of key unaudited financial information of Cainiao Network. The financial data presented for periods prior to the restructuring process represents the unaudited financial information of Cainiao Network Technology Co., Ltd. See note 4(x) to the audited consolidated financial statements included elsewhere in this annual report for further details.

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Income statement data:

 
  Twelve months ended
December 31,
 
 
  2014   2015   2016  
 
  RMB   RMB   RMB  
 
  (in millions)
 

Revenue

    941     3,099     9,349  

Net loss

    (183 )   (617 )   (2,242 )

Balance sheet data:

 
  As of
December 31,
 
 
  2015   2016  
 
  RMB   RMB  
 
  (in millions)
 

Total assets

    5,929     20,925  

Total liabilities

    1,761     7,565  

Total equity

    4,168     13,360  

       We recorded our share of the net loss of Cainiao Network of RMB90 million, RMB295 million and RMB1,056 million (US$153 million) in fiscal years 2015, 2016 and 2017, respectively. We also have commercial arrangements conducted on an arm's length basis with Cainiao Network to receive certain logistics services, primarily related to Tmall Supermarket, which are recorded in our cost of revenue. For additional details of the related party transactions with Cainiao Network, see "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Transactions with Cainiao Network." Our logistics service costs paid or payable to Cainiao Network accounted for approximately 43% of its revenue for the twelve months ended December 31, 2016.

Koubei

       The following table is a summary of key unaudited financial information of Koubei:

Income statement data:

 
  From the date of
incorporation to
December 31,
  Twelve months
ended
December 31,
 
 
  2015   2016  
 
  RMB   RMB  
 
  (in millions)
 

Revenue

    31     313  

Net loss

    (1,735 )   (2,312 )

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Balance sheet data:

 
  As of
December 31,
 
 
  2015   2016  
 
  RMB   RMB  
 
  (in millions)
 

Total assets

    1,731     3,971  

Total liabilities

    445     1,068  

Total equity

    1,286     2,903  

       We recorded our share of the net loss of Koubei of RMB867 million and RMB990 million (US$144 million) in fiscal years 2016 and 2017, respectively.

Alibaba Pictures

       The following table is a summary of key unaudited financial information of Alibaba Pictures:

Income statement data:

 
  From the date of
deconsolidation to
December 31,
  For the twelve
months ended
December 31,
 
 
  2015   2016  
 
  RMB   RMB  
 
  (in millions)
 

Revenue

    254     905  

Net income/(loss)

    544     (976 )

Balance sheet data:

 
  As of
December 31,
 
 
  2015   2016  
 
  RMB   RMB  
 
  (in millions)
 

Total assets

    18,976     19,563  

Total liabilities

    2,782     2,431  

Total equity

    16,194     17,132  

       We recorded our share of the net income of Alibaba Pictures of RMB268 million and our share of the net loss of RMB482 million (US$70 million) in fiscal years 2016 and 2017, respectively. We also disposed of our online movie ticketing business and financing and investment platform for production of movie and other media content to Alibaba Pictures during fiscal year 2016 at a cash consideration of US$350 million (RMB2,259 million) plus certain reimbursement amounts. We recognized a disposal gain of RMB2,214 million (US$343 million) in interest and investment income, net in our audited consolidated income statement for fiscal year 2016.

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Results of Operations

       The following table sets out our consolidated results of operations for the periods indicated:

 
  Year ended March 31,  
 
  2015   2016   2017  
 
  RMB   RMB   RMB   US$  
 
  (in millions, except per share data)
 

Revenue

                         

Core commerce

    69,536     92,335     133,880     19,450  

Cloud computing

    1,271     3,019     6,663     968  

Digital media and entertainment

    2,191     3,972     14,733     2,141  

Innovation initiatives and others

    3,206     1,817     2,997     435  

Total

    76,204     101,143     158,273     22,994  

Cost of revenue

    (23,834 )   (34,355 )   (59,483 )   (8,642 )

Product development expenses

    (10,658 )   (13,788 )   (17,060 )   (2,479 )

Sales and marketing expenses

    (8,513 )   (11,307 )   (16,314 )   (2,370 )

General and administrative expenses

    (7,800 )   (9,205 )   (12,239 )   (1,778 )

Amortization of intangible assets

    (2,089 )   (2,931 )   (5,122 )   (744 )

Impairment of goodwill

    (175 )   (455 )      
 

Income from operations

    23,135     29,102     48,055     6,981  

Interest and investment income, net

    9,455     52,254     8,559     1,244  

Interest expense

    (2,750 )   (1,946 )   (2,671 )   (388 )

Other income, net

    2,486     2,058     6,086     884  

Income before income tax and share of results of equity investees

    32,326     81,468     60,029     8,721  

Income tax expenses

    (6,416 )   (8,449 )   (13,776 )   (2,002 )

Share of results of equity investees

    (1,590 )   (1,730 )   (5,027 )   (730 )

Net income

    24,320     71,289     41,226     5,989  

Net (income) loss attributable to noncontrolling interests

    (59 )   171     2,449     356  

Net income attributable to Alibaba Group Holding Limited

    24,261     71,460     43,675     6,345  

Accretion of convertible preference shares

    (15 )            

Dividends accrued on convertible preference shares

    (97 )          
 

Net income attributable to ordinary shareholders

    24,149     71,460     43,675     6,345  

Earnings per share/ADS attributable to ordinary shareholders:

                         

Basic

    10.33     29.07     17.52     2.55  

Diluted

    9.70     27.89     16.97     2.47  

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  Year ended
March 31,
 
 
  2015   2016   2017  
 
  %
  %
  %
 
 
  (as percentage of
revenue)

 

Revenue

                   

Core commerce

    91     91     85  

Cloud computing

    2     3     4  

Digital media and entertainment

    3     4     9  

Innovation initiatives and others

    4     2     2  

Total

    100     100     100  

Cost of revenue

    (31 )   (34 )   (38 )

Product development expenses

    (14 )   (14 )   (11 )

Sales and marketing expenses

    (11 )   (11 )   (10 )

General and administrative expenses

    (10 )   (9 )   (8 )

Amortization of intangible assets

    (3 )   (3 )   (3 )

Impairment of goodwill

    (1 )      
 

Income from operations

    30     29     30  

Interest and investment income, net

    13     52     6  

Interest expense

    (4 )   (2 )   (2 )

Other income, net

    3     2     4  

Income before income tax and share of results of equity investees

    42     81     38  

Income tax expenses

    (8 )   (8 )   (9 )

Share of results of equity investees

    (2 )   (2 )   (3 )

Net income

    32     71     26  

Net income attributable to noncontrolling interests

            2  

Net income attributable to Alibaba Group Holding Limited

    32     71     28  

Accretion of convertible preference shares

             

Dividends accrued on convertible preference shares

           
 

Net income attributable to ordinary shareholders

    32     71     28  

Segment Information for Fiscal Years 2015, 2016 and 2017

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

 
  Year ended March 31, 2017  
 
  Core
commerce
  Cloud
computing
  Digital media
and
entertainment
  Innovation
initiatives
and others
  Unallocated (1)   Consolidated  
 
  RMB   RMB   RMB   RMB   RMB   RMB   US$  
 
  (in millions, except percentages)
 

Revenue

    133,880     6,663     14,733     2,997         158,273     22,994  

Income (loss) from operations

   
74,180
   
(1,681

)
 
(9,882

)
 
(6,798

)
 
(7,764

)
 
48,055
   
6,981
 

Add: Share-based compensation expense

    5,994     1,201     1,454     3,017     4,329     15,995     2,324  

Add: Amortization of intangible assets

    2,258     4     1,886     656     318     5,122     744  

Adjusted EBITA

    82,432     (476 )   (6,542 )   (3,125 )   (3,117 )   69,172     10,049  

Adjusted EBITA margin

    62 %   (7 )%   (44 )%   (104 )%         44 %      

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  Year ended March 31, 2016  
 
  Core
commerce
  Cloud
computing
  Digital media
and
entertainment
  Innovation
initiatives
and others
  Unallocated (1)   Consolidated  
 
  RMB   RMB   RMB   RMB   RMB   RMB  
 
  (in millions, except percentages)
 

Revenue

    92,335     3,019     3,972     1,817         101,143  

Income (loss) from operations

   
51,153
   
(2,605

)
 
(4,112

)
 
(7,216

)
 
(8,118

)
 
29,102
 

Add: Share-based compensation expense

    6,224     1,349     981     3,092     4,436     16,082  

Add: Amortization of intangible assets

    659     4     1,321     657     290     2,931  

Add: Impairment of goodwill

                    455     455  

Adjusted EBITA

    58,036     (1,252 )   (1,810 )   (3,467 )   (2,937 )   48,570  

Adjusted EBITA margin

    63 %   (41 )%   (46 )%   (191 )%         48 %

 

 
  Year ended March 31, 2015  
 
  Core
commerce
  Cloud
computing
  Digital media
and
entertainment
  Innovation
initiatives
and others
  Unallocated (1)   Consolidated  
 
  RMB   RMB   RMB   RMB   RMB   RMB  
 
  (in millions, except percentages)
 

Revenue

    69,536     1,271     2,191     3,206         76,204  

Income (loss) from operations

   
40,194
   
(1,923

)
 
(2,993

)
 
(5,549

)
 
(6,594

)
 
23,135
 

Add: Share-based compensation expense

    4,391     813     425     3,460     3,939     13,028  

Add: Amortization of intangible assets

    279     20     1,107     472     211     2,089  

Add: Impairment of goodwill

                    175     175  

Adjusted EBITA

    44,864     (1,090 )   (1,461 )   (1,617 )   (2,269 )   38,427  

Adjusted EBITA margin

    65 %   (86 )%   (67 )%   (50 )%         50 %

(1)
Unallocated expenses are primarily related to corporate administrative costs and other miscellaneous items that are not allocated to individual segments.

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Comparison of Fiscal Years 2016 and 2017

Revenue

 
  Year ended
March 31,
   
 
 
  2016   2017    
 
 
  RMB   RMB   US$   % Change  
 
  (in millions, except percentages)
 

Core commerce:

                         

China commerce retail

    80,033     114,109     16,578     43%  

China commerce wholesale

    4,288     5,679     825     32%  

International commerce retail

    2,204     7,336     1,066     233%  

International commerce wholesale

    5,425     6,001     872     11%  

Others

    385     755     109     96%  

Total core commerce

    92,335     133,880     19,450     45%  

Cloud computing

    3,019     6,663     968     121%  

Digital media and entertainment

    3,972     14,733     2,141     271%  

Innovation initiatives and others

    1,817     2,997     435     65%  

Total revenue

    101,143     158,273     22,994     56%  

       Total revenue increased by 56% from RMB101,143 million in fiscal year 2016 to RMB158,273 million (US$22,994 million) in fiscal year 2017. The increase was mainly driven by the continued rapid growth of our China commerce retail business, Alibaba Cloud as well as the consolidation of newly acquired businesses, mainly Youku Tudou and Lazada.

Core commerce segment

    China commerce retail business

 
  Year ended
March 31,
   
 
 
  2016   2017    
 
 
  RMB   RMB   US$   % Change  
 
  (in millions, except percentages)
 

Revenue

                         

China commerce retail business

                         

Online marketing services

    52,396     77,530     11,264     48%  

Commission

    25,829     34,066     4,949     32%  

Others (1)

    1,808     2,513     365     39%  

Total

    80,033     114,109     16,578     43%  

(1)
Primarily consists of storefront fees.

       Revenue from our China commerce retail business increased by 43% from RMB80,033 million in fiscal year 2016 to RMB114,109 million (US$16,578 million) in fiscal year 2017, primarily driven by an increase of 48% in online marketing services revenue and an increase of 32% in commission revenue.

       Online marketing services revenue increased by 48% from RMB52,396 million in fiscal year 2016 to RMB77,530 million (US$11,264 million) in fiscal year 2017. The growth was primarily driven by our ability to deliver more relevant content to consumers through our improved data technology, which resulted in higher spending on our marketing services by an increasing number of brands and merchants, leading to a 47% increase in the number of clicks attributable to our P4P marketing services, and a 1% increase in the cost-per-click paid by

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our merchants. The growth also reflected the full effect of online marketing inventory we added in May and September 2015.

       Commission revenue increased by 32% from RMB25,829 million in fiscal year 2016 to RMB34,066 million (US$4,949 million) in fiscal year 2017, primarily driven by an increase of 29% in Tmall GMV.

       Mobile revenue from our China commerce retail business increased by 80% from RMB50,337 million in fiscal year 2016 to RMB90,731 million (US$13,182 million) in fiscal year 2017, representing 80% of our China commerce retail business revenue in fiscal year 2017, compared to 63% in fiscal year 2016. Mobile monetization rate improved to 3.04% in fiscal year 2017 from 2.51% in fiscal year 2016.

       GMV transacted on Taobao Marketplace increased by 17% from RMB1,877 billion in fiscal year 2016 to RMB2,202 billion (US$320 billion) in fiscal year 2017, and GMV transacted on Tmall increased by 29% from RMB1,215 billion in fiscal year 2016 to RMB1,565 billion (US$227 billion) in fiscal year 2017. The overall increase in total GMV transacted on these marketplaces was primarily driven by a 14% increase in the average level of their spending and a 7% increase in the number of annual active buyers.

    China commerce wholesale business

       Revenue from our China commerce wholesale business increased by 32% from RMB4,288 million in fiscal year 2016 to RMB5,679 million (US$825 million) in fiscal year 2017. The increase was due to an increase in average revenue from paying members and an increase in paying members.

    International commerce retail business

       Revenue from our international commerce retail business increased by 233% from RMB2,204 million in fiscal year 2016 to RMB7,336 million (US$1,066 million) in fiscal year 2017. The increase was primarily due to the consolidation of Lazada and an increase in GMV transacted on AliExpress.

    International commerce wholesale business

       Revenue from our international commerce wholesale business increased by 11% from RMB5,425 million in fiscal year 2016, of which 67% was from membership fees and online marketing services and 33% was from value-added services, to RMB6,001 million (US$872 million) in fiscal year 2017, of which 65% was from membership fees and online marketing services and 35% was from value-added services. The increase in revenue was primarily due to growth in revenue generated by import/export related services, and to a lesser extent, to an increase in online marketing service revenue from China wholesale suppliers.

Cloud Computing segment

       Revenue from our cloud computing business in fiscal year 2017 was RMB6,663 million (US$968 million), an increase of 121% compared to RMB3,019 million in fiscal year 2016, primarily driven by an increase in the number of paying customers to 874,000, representing a year-over-year increase of 70%, and also an increase in their usage of and spending on our cloud computing services including more complex offerings, such as our content delivery network and database services.

Digital media and entertainment segment

       Revenue from our digital media and entertainment business in fiscal year 2017 was RMB14,733 million (US$2,141 million), an increase of 271% compared to RMB3,972 million in fiscal year 2016. The increase was primarily due to the consolidation of Youku Tudou, and also to an increase in revenue from mobile value-added services provided by UCWeb, such as mobile search, news feeds and game publishing.

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Innovation initiatives and others segment

       Revenue from innovation initiatives and others in fiscal year 2017 was RMB2,997 million (US$435 million), an increase of 65% compared to RMB1,817 million in fiscal year 2016, primarily due to an increase in revenue from YunOS and other new initiatives.

Cost of Revenue

 
  Year ended March 31,    
 
 
  2016   2017    
 
 
  RMB   RMB   US$   % Change  
 
  (in millions, except percentages)
 

Cost of revenue

    34,355     59,483     8,642     73 %

Percentage of revenue

    34 %   38 %            

Share-based compensation expense included in cost of revenue

   
4,003
   
3,893
   
566
   
(3

)%

Percentage of revenue

    4 %   2 %            

Cost of revenue excluding share-based compensation expense

   
30,352
   
55,590
   
8,076
   
83

%

Percentage of revenue

    30 %   36 %            

       Our cost of revenue increased by 73% from RMB34,355 million in fiscal year 2016 to RMB59,483 million (US$8,642 million) in fiscal year 2017. This increase was primarily due to an increase of RMB6,986 million in content acquisition costs for online media properties as a result of the consolidation of Youku Tudou, an increase of RMB4,432 million in bandwidth and co-location fees and depreciation expenses as a result of our consolidation of Youku Tudou and investments in our cloud computing business and our data platform, an increase of RMB3,239 million in costs of inventory as a result of our consolidation of Lazada, an increase of RMB3,526 million in logistics costs mainly relating to fulfillment services provided to us by our affiliate Cainiao Network, which amounted to RMB4,444 million (US$646 million), or 3% of our revenue, in fiscal year 2017, primarily related to Tmall Supermarket. Without the effect of share-based compensation expense, cost of revenue as a percentage of revenue would have increased from 30% in fiscal year 2016 to 36% in fiscal year 2017, primarily due to an increase in content acquisition costs by Youku Tudou, cost of inventory by Lazada and logistics costs relating to fulfillment services provided to Tmall Supermarket by our affiliate Cainiao Network, as discussed above. As we continue to invest in new and acquired businesses, customer service initiatives and infrastructure, we expect our cost of revenue will increase in absolute dollar amounts and will likely increase as a percentage of revenues.

Product Development Expenses

 
  Year ended March 31,    
 
 
  2016   2017    
 
 
  RMB   RMB   US$   % Change  
 
  (in millions, except percentages)
 

Product of development expenses

    13,788     17,060     2,479     24 %

Percentage of revenue

    14 %   11 %            

Share-based compensation expense included in product development expenses

   
5,703
   
5,712
   
830
   
0

%

Percentage of revenue

    6 %   4 %            

Product development expenses excluding share-based compensation expense

   
8,085
   
11,348
   
1,649
   
40

%

Percentage of revenue

    8 %   7 %            

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       Our product development expenses increased by 24% from RMB13,788 million in fiscal year 2016 to RMB17,060 million (US$2,479 million) in fiscal year 2017. The increase was largely due to an increase of RMB2,881 million in payroll and benefits expenses. Without the effect of share-based compensation expense, product development expenses as a percentage of revenue would have decreased from 8% in fiscal year 2016 to 7% in fiscal year 2017, due to operating leverage. We expect our product development expenses will increase in absolute amounts and may over time increase as a percentage of revenues.

Sales and Marketing Expenses

 
  Year ended March 31,    
 
 
  2016   2017    
 
 
  RMB   RMB   US$   % Change  
 
  (in millions, except percentages)
 

Sales and marketing expenses

    11,307     16,314     2,370     44 %

Percentage of revenue

    11 %   10 %            

Share-based compensation expense included in sales and marketing expenses

   
1,963
   
1,772
   
257
   
(10

)%

Percentage of revenue

    2 %   1 %            

Sales and marketing expenses excluding share-based compensation expense

   
9,344
   
14,542
   
2,113
   
56

%

Percentage of revenue

    9 %   9 %            

       Our sales and marketing expenses increased by 44% from RMB11,307 million in fiscal year 2016 to RMB16,314 million (US$2,370 million) in fiscal year 2017. The increase was due primarily to the consolidation of Youku Tudou and Lazada, as well as an increase in advertising and promotional spending mainly to promote our business initiatives, such as Tmall Supermarket and UCWeb during fiscal year 2017 and an increase of RMB1,222 million in payroll and benefit expenses. Without the effect of share-based compensation expense, sales and marketing expenses as a percentage of revenue would have remained stable at 9% in fiscal year 2016 and fiscal year 2017. We expect our sales and marketing expenses will increase in absolute amounts and may increase as a percentage of revenues as we continue to invest in marketing and promotion.

General and Administrative Expenses

 
  Year ended March 31,    
 
 
  2016   2017    
 
 
  RMB   RMB   US$   % Change  
 
  (in millions, except percentages)
 

General and administrative expenses

    9,205     12,239     1,778     33 %

Percentage of revenue

    9 %   8 %            

Share-based compensation expense included in general and administrative expenses

   
4,413
   
4,618
   
671
   
5

%

Percentage of revenue

    4 %   3 %            

General and administrative excluding share-based compensation expense

   
4,792
   
7,621
   
1,107
   
59

%

Percentage of revenue

    5 %   5 %            

       Our general and administrative expenses increased by 33% from RMB9,205 million in fiscal year 2016 to RMB12,239 million (US$1,778 million) in fiscal year 2017. The increase was primarily due to a significant increase of RMB1,358 million in payroll and benefits expenses, as well as an increase in depreciation and other administrative expenses. Without the effect of share-based compensation expense, general and administrative

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expenses as a percentage of revenue in fiscal year 2017 would have remained stable at 5% in both fiscal year 2016 and 2017.

Amortization of Intangible Assets

 
  Year ended March 31,    
 
 
  2016   2017    
 
 
  RMB   RMB   US$   % Change  
 
  (in millions, except percentages)
 

Amortization of intangible assets

    2,931     5,122     744     75 %

Percentage of revenue

    3 %   3 %            

       Amortization of intangible assets increased by 75% from RMB2,931 million in fiscal year 2016 to RMB5,122 million (US$744 million) in fiscal year 2017. This increase was due to an increase in intangible assets recognized arising from our strategic acquisitions and investments, including Youku Tudou and Lazada. As we consolidate newly acquired businesses, we expect that our amortization of intangible assets will increase in the future.

Income from Operations and Operating Margin

 
  Year ended March 31,    
 
 
  2016   2017    
 
 
  RMB   RMB   US$   % Change  
 
  (in millions, except percentages)
 

Income from operations

    29,102     48,055     6,981     65 %

Percentage of revenue

    29 %   30 %            

Share-based compensation expense included in income from operations

   
16,082
   
15,995
   
2,324
   
(1

)%

Percentage of revenue

    16 %   10 %            

Income from operations excluding share-based compensation expense

   
45,184
   
64,050
   
9,305
   
42

%

Percentage of revenue

    45 %   40 %            

       Our income from operations increased by 65% from RMB29,102 million, or 29% of revenue, in fiscal year 2016 to RMB48,055 million (US$6,981 million), or 30% of revenue, in fiscal year 2017. Without the effect of share-based compensation expense, our operating margin would have decreased from 45% in fiscal year 2016 to 40% in fiscal year 2017, primarily attributable to our consolidation of Youku Tudou and Lazada, partially offset by operating leverage.

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Adjusted EBITA and adjusted EBITA margin

       Adjusted EBITA and adjusted EBITA margin by segments are set forth in the table below. See the section entitled "— Segment Information for Fiscal Years 2015, 2016 and 2017" above for a reconciliation of income from operations to adjusted EBITA.

 
  Year ended March 31,    
 
 
  2016   2017    
 
 
  RMB   % of
Segment
Revenue
  RMB   US$   % of
Segment
Revenue
  %
Change
 
 
  (in millions, except percentages)
 

Core commerce

    58,036     63 %   82,432     11,976     62 %   42 %

Cloud computing

    (1,252 )   (41 )%   (476 )   (69 )   (7 )%   (62 )%

Digital media and entertainment

    (1,810 )   (46 )%   (6,542 )   (951 )   (44 )%   261 %

Innovation initiatives and others

    (3,467 )   (191 )%   (3,125 )   (454 )   (104 )%   (10 )%

    Core commerce segment

       Adjusted EBITA increased by 42% to RMB82,432 million (US$11,976 million) in fiscal year 2017, compared to RMB58,036 million in fiscal year 2016. Adjusted EBITA margin decreased to 62% in fiscal year 2017 from 63% in fiscal year 2016, primarily due to the consolidation of Lazada and investment in Tmall Supermarket, partially offset by operating leverage.

    Cloud computing segment

       Adjusted EBITA in fiscal year 2017 was a loss of RMB476 million (US$69 million), compared to a loss of RMB1,252 million in fiscal year 2016. Adjusted EBITA margin improved to negative 7% in fiscal year 2017 from negative 41% in fiscal year 2016, primarily due to robust growth in revenue and economies of scale.

    Digital media and entertainment segment

       Adjusted EBITA in fiscal year 2017 was a loss of RMB6,542 million (US$951 million), compared to a loss of RMB1,810 million in fiscal year 2016. Adjusted EBITA margin improved to negative 44% in fiscal year 2017 from negative 46% in fiscal year 2016, primarily due to improved margins at UCWeb driven by an increase in revenue from mobile value-added services, partially offset by the consolidation of Youku Tudou.

    Innovation initiatives and others segment

       Adjusted EBITA in fiscal year 2017 was a loss of RMB3,125 million (US$454 million), compared to a loss of RMB3,467 million in fiscal year 2016. Adjusted EBITA margin improved to negative 104% in fiscal year 2017 from negative 191% in fiscal year 2016, primarily due to an increase in revenue from new business initiatives.

Interest and Investment Income, Net

       Our net interest and investment income decreased from RMB52,254 million in fiscal year 2016 to RMB8,559 million (US$1,244 million) in fiscal year 2017. Interest and investment income in fiscal year 2016 included a deemed disposal gain of RMB24,734 million arising from the deconsolidation of Alibaba Pictures, a gain of RMB18,603 million from the revaluation of our previously held equity interest in Alibaba Health when we obtained control over Alibaba Health in July 2015, as well as gains arising from disposal of certain investments and businesses.

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Interest Expense

       Our interest expense increased by 37% from RMB1,946 million in fiscal year 2016 to RMB2,671 million (US$388 million) in fiscal year 2017. The increase in interest expense was primarily due to an increase in average debt outstanding, including an additional US$4.0 billion five-year term loan facility drawn down in fiscal year 2017.

Other Income, Net

       Our other income, net increased by 196% from RMB2,058 million in fiscal year 2016 to RMB6,086 million (US$884 million) in fiscal year 2017. The increase was primarily due to an increase in exchange gains and income recognized in respect of royalty fees and software technology services fees from Ant Financial, which increased from RMB1,122 million in fiscal year 2016 to RMB2,086 million (US$303 million) in fiscal year 2017.

Income Tax Expenses

       Our income tax expenses increased by 63% from RMB8,449 million in fiscal year 2016 to RMB13,776 million (US$2,002 million) in fiscal year 2017. The increase in income tax expenses was primarily due to the increase in taxable income from our operations in China. Our effective tax rate increased to 23% in fiscal year 2017 from 10% in fiscal year 2016. Profit before income tax in fiscal year 2016 included a deemed disposal gain of RMB24,734 million arising from the deconsolidation of Alibaba Pictures and a gain of RMB18,603 million from the revaluation of our previously held equity interest in Alibaba Health, which were non-taxable, leading to a lower effective tax rate in fiscal year 2016. Excluding share-based compensation expense, impairment of goodwill, intangible assets and investments, as well as other unrealized investment gain/loss, our effective tax rate would have been 18% in fiscal year 2017, compared to 15% in fiscal year 2016, primarily due to the consolidation of Youku Tudou and Lazada, which are both loss-making.

Share of Results of Equity Investees

       Share of losses of equity investees in fiscal year 2017 was RMB5,027 million (US$730 million), an increase of 191% compared to RMB1,730 million in fiscal year 2016. Share of results of equity investee in fiscal years 2016 and 2017 consisted of the following:

 
  Year ended March 31,  
 
  2016   2017  
 
  RMB   RMB   US$  
 
  (in millions)
 

Share of profit (loss) of equity investees:

                   

Koubei

    (867 )   (990 )   (144 )

Youku Tudou

    (391 )        

Cainiao Network

    (295 )   (1,056 )   (153 )

Others

    62     (838 )   (122 )

Impairment loss

        (245 )   (35 )

Dilution gains (losses)

    827     (336 )   (49 )

Others

    (1,066 )   (1,562 )   (227 )

    (1,730 )   (5,027 )   (730 )

       The increase in share of losses of equity investees in fiscal year 2017 compared to fiscal year 2016 was primarily due to an increase in our share of losses of Cainiao Network and other equity investees, as well as an accounting loss related to the dilution of our ownership interest in Weibo in fiscal year 2017, which resulted from Weibo's issuance of share-based compensation, as compared to accounting gains related the dilution of our ownership interests in Cainiao Network and Evergrande FC, as these investees each raised capital at a higher valuation in fiscal year 2016.

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Net Income

       As a result of the foregoing, our net income decreased by 42% from RMB71,289 million in fiscal year 2016 to RMB41,226 million (US$5,989 million) in fiscal year 2017.

Comparison of Fiscal Years 2015 and 2016

Revenue

 
  Year ended
March 31,
   
 
 
  2015   2016    
 
 
  RMB   RMB   % Change  
 
  (in millions, except percentages)
 

Core commerce

                   

China commerce retail

    59,732     80,033     34 %

China commerce wholesale

    3,205     4,288     34 %

International commerce retail

    1,768     2,204     25 %

International commerce wholesale

    4,718     5,425     15 %

Others

    113     385     241 %

Total core commerce

    69,536     92,335     33 %

Cloud computing

    1,271     3,019     138 %

Digital media and entertainment

    2,191     3,972     81 %

Innovation initiatives and others

    3,206     1,817     (43 )%

Total revenue

    76,204     101,143     33 %

       Total revenue increased by 33%, from RMB76,204 million in fiscal year 2015 to RMB101,143 million in fiscal year 2016. The increase was mainly driven by the continued rapid growth of our China commerce retail business.

Core commerce segment

    China commerce retail business

 
  Year ended
March 31,
   
 
 
  2015   2016    
 
 
  RMB   RMB   % Change  
 
  (in millions, except percentages)
 

Revenue

                   

China commerce retail business

                   

Online marketing services

    37,509     52,396     40 %

Commission

    21,201     25,829     22 %

Others (1)

    1,022     1,808     77 %

Total

    59,732     80,033     34 %

(1)
Primarily consists of storefront fees.

       Revenue from our China commerce retail business increased by 34% from RMB59,732 million in fiscal year 2015 to RMB80,033 million in fiscal year 2016.

       Revenue growth during this period reflected an increase of 27% in GMV transacted on our China retail marketplaces and an increase in the monetization rate. GMV transacted on Taobao Marketplace increased by 18% from RMB1,597 billion in fiscal year 2015 to RMB1,877 billion in fiscal year 2016 and GMV transacted on Tmall

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increased by 43% from RMB847 billion in fiscal year 2015 to RMB1,215 billion in fiscal year 2016. The overall increase in total GMV transacted on these marketplaces was primarily driven by a 21% increase in the number of buyers and, to a lesser extent, by a moderate increase in the average level of their spending. The growth in GMV transacted on Tmall in particular was attributable to the increase in the number of buyers making purchases on Tmall, reflecting consumer preferences for branded products and a premium shopping experience and the beneficial impact of promotional events, and increases in the average level of spending of buyers. Our monetization rate during this period increased from 2.44% in fiscal year 2015 to 2.59% in fiscal year 2016, mainly as a result of the accelerated growth of our online marketing services revenue.

       Online marketing services revenue increased by 40% from RMB37,509 million in fiscal year 2015 to RMB52,396 million in fiscal year 2016. The growth was primarily driven by our focus on high-quality merchants and on delivering a broader value proposition to our merchants. This resulted in higher marketing spend by our merchants as we optimized online marketing efficiency and added new online marketing inventory on both mobile and PC interfaces, leading to a 44% increase in the number of clicks attributable to our P4P marketing services, and a 1% increase in the cost-per-click paid by our merchants. To a lesser extent, our online marketing services revenue during this period was also positively impacted by an increase in the CPM of our display marketing services, partially offset by a decrease in the number of impressions displayed.

       Commission revenue increased by 22% from RMB21,201 million in fiscal year 2015 to RMB25,829 million in fiscal year 2016. The lower year-over-year commission revenue growth relative to the 43% increase in GMV transacted on Tmall during the same period was mainly a result of (i) suspension of our online lottery business on Taobao Marketplace (which had a higher monetization rate than our overall monetization rate) in late February 2015 in response to regulatory requirements, (ii) a decrease in the pricing charged on Juhuasuan as an investment to acquire more high-quality merchants and (iii) impact from changes in category mix. Excluding the effect of the online lottery business, our revenue would have increased by 31% in fiscal year 2016 from fiscal year 2015. Due to the ongoing shift of user engagement toward mobile devices, categories such as virtual goods on which we charge a lower commission rate, are seeing higher growth than other categories. As a result of the above, commission revenue increased at a lower rate than the Tmall GMV.

       Mobile revenue from our China commerce retail business increased by 182% from RMB17,840 million in fiscal year 2015 to RMB50,337 million in fiscal year 2016, representing 63% of our China commerce retail business revenue in fiscal year 2016, compared to 30% in fiscal year 2015. The increase in mobile revenue from our China commerce retail business was primarily due to an increase in GMV generated and better monetization of traffic on mobile devices. Mobile monetization rate improved to 2.51% in fiscal year 2016 from 1.79% in fiscal year 2015.

    China commerce wholesale business

       Revenue from our China commerce wholesale business increased by 34% from RMB3,205 million in fiscal year 2015 to RMB4,288 million in fiscal year 2016. The increase in revenue was due to an increase in average revenue from paying members and an increase in paying members.

    International commerce retail business

       Revenue from our international commerce retail business increased by 25% from RMB1,768 million in fiscal year 2015 to RMB2,204 million in fiscal year 2016. The main reason for this increase was an increase in GMV transacted on AliExpress, primarily due to the increasing number of consumers, particularly in Russia, Spain, the United States and France.

    International commerce wholesale business

       Revenue from our international commerce wholesale business increased by 15% from RMB4,718 million in fiscal year 2015, of which 69% was from membership fees and online marketing services and 31% was from value-added services, to RMB5,425 million in fiscal year 2016, of which 67% was from membership fees and online marketing services and 33% was from value-added services. The increase in revenue was due to growth in revenue

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generated by the import/export related services and, to a lesser extent, an increase in online marketing service revenue from China wholesale suppliers.

Cloud computing segment

       Revenue from our cloud computing business in fiscal year 2016 was RMB3,019 million, an increase of 138% compared to RMB1,271 million in fiscal year 2015, driven by the continued growth of our cloud computing business. The growth was primarily due to an increase in the number of paying customers and also to an increase in their usage of and spending on our cloud computing services including more complex offerings, such as our content delivery network and database services.

Digital media and entertainment segment

       Revenue from our digital media and entertainment business in fiscal year 2016 was RMB3,972 million, an increase of 81% compared to RMB2,191 million in fiscal year 2015. The increase was primarily due to an increase in revenue from mobile value-added services provided by UCWeb, such as mobile search, news feeds and game publishing.

Innovation initiatives and others segment

       Revenue from innovation initiatives and others in fiscal year 2016 was RMB1,817 million, a decrease of 43% compared to RMB3,206 million in fiscal year 2015. This result included the effect of a decrease in revenue related to the SME loan business that we transferred to Ant Financial Services in February 2015 and an increase in revenue from AutoNavi and YunOS. Revenue from AutoNavi and YunOS increased by 74% year-over-year.

Cost of Revenue

 
  Year ended
March 31,
   
 
 
  2015   2016    
 
 
  RMB   RMB   % Change  
 
  (in millions, except percentages)
 

Cost of revenue

    23,834     34,355     44 %

Percentage of revenue

    31 %   34 %      

Share-based compensation expense included in cost of revenue

   
4,176
   
4,003
   
(4

)%

Percentage of revenue

    5 %   4 %      

Cost of revenue excluding share-based compensation expense

   
19,658
   
30,352
   
54

%

Percentage of revenue

    26 %   30 %      

       Our cost of revenue increased by 44% from RMB23,834 million in fiscal year 2015 to RMB34,355 million in fiscal year 2016. This increase was primarily due to an increase of RMB2,278 million in bandwidth and co-location fees and depreciation expenses as a result of our investments in our cloud computing business and our data platform, increases of RMB2,146 million in costs associated with our new business initiatives (mainly our mobile operating system, over-the-top TV services and entertainment), an increase of RMB1,865 million in traffic acquisition costs as a result of the expansion of our third-party affiliate marketing ecosystem and an increase of RMB1,564 million in logistics costs mainly relating to fulfillment services provided to us by our affiliate Cainiao Network, which amounted to RMB2,370 million, or 2% of our revenue, in fiscal year 2016, primarily related to Tmall Supermarket. Without the effect of share-based compensation expense, cost of revenue as a percentage of revenue would have increased from 26% in fiscal year 2015 to 30% in fiscal year 2016, primarily due to increase in costs associated with our new business initiatives and an increase in logistics costs, as discussed above.

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Product Development Expenses

 
  Year ended
March 31,
   
 
 
  2015   2016    
 
 
  RMB   RMB   % Change  
 
  (in millions, except percentages)
 

Product of development expenses

    10,658     13,788     29 %

Percentage of revenue

    14 %   14 %      

Share-based compensation expense included in product development expenses

    3,876     5,703     47 %

Percentage of revenue

    5 %   6 %      

Product development expenses excluding share-based compensation expense

    6,782     8,085     19 %

Percentage of revenue

    9 %   8 %      

       Our product development expenses increased by 29% from RMB10,658 million in fiscal year 2015 to RMB13,788 million in fiscal year 2016. The increase was largely due to an increase of RMB3,114 million in payroll and benefits expenses including share-based compensation expense (an effect that we expect will continue, as discussed in "Share-based Compensation" above), partially offset by a decrease in the royalty fee paid to Yahoo, which terminated by contract upon the completion of our initial public offering in September 2014. Without the effect of share-based compensation expense, product development expenses as a percentage of revenue would have decreased from 9% in fiscal year 2015 to 8% in fiscal year 2016 due to a decrease in royalty fees paid to Yahoo.

Sales and Marketing Expenses

 
  Year ended
March 31,
   
 
 
  2015   2016    
 
 
  RMB   RMB   % Change  
 
  (in millions, except percentages)
 

Sales and marketing expenses

    8,513     11,307     33 %

Percentage of revenue

    11 %   11 %      

Share-based compensation expense included in sales and marketing expenses

    1,235     1,963     59 %

Percentage of revenue

    2 %   2 %      

Sales and marketing expenses excluding share-based compensation expense

    7,278     9,344     28 %

Percentage of revenue

    9 %   9 %      

       Our sales and marketing expenses increased by 33% from RMB8,513 million in fiscal year 2015 to RMB11,307 million in fiscal year 2016. The increase was due primarily to an increase in advertising and promotional spending mainly focused on strengthening consumer connection to our Taobao and Tmall brands, especially in top tier cities, as well as to promote our new businesses initiatives, such as Fliggy and DingTalk, during fiscal year 2016. The increase was also due to an increase in share-based compensation expense (an effect that we expect will continue, as discussed in "Share-based Compensation" above). Without the effect of share-based compensation expense, sales and marketing expenses as a percentage of revenue would have remained stable at 9% in both fiscal year 2015 and fiscal year 2016.

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General and Administrative Expenses

 
  Year ended
March 31,
   
 
 
  2015   2016    
 
 
  RMB   RMB   % Change  
 
  (in millions, except percentages)
 

General and administrative expenses

    7,800     9,205     18 %

Percentage of revenue

    10 %   9 %      

Share-based compensation expense included in general and administrative expenses

    3,741     4,413     18 %

Percentage of revenue

    5 %   4 %      

General and administrative excluding share-based compensation expense

    4,059     4,792     18 %

Percentage of revenue

    5 %   5 %      

       Our general and administrative expenses increased by 18% from RMB7,800 million in fiscal year 2015 to RMB9,205 million in fiscal year 2016. The increase was primarily due to a significant increase in share-based compensation expense (an effect that we expect will continue, as discussed in "Share-based Compensation" above), as well as an increase of RMB353 million in professional services fees. Without the effect of share-based compensation expense, general and administrative expenses as a percentage of revenue in fiscal year 2016 would have remained stable at 5% in both fiscal year 2015 and fiscal year 2016.

Amortization of Intangible Assets

 
  Year ended
March 31,
   
 
 
  2015   2016    
 
 
  RMB   RMB   % Change  
 
  (in millions, except percentages)
 

Amortization of intangible assets

    2,089     2,931     40 %

Percentage of revenue

    3 %   3 %      

       Amortization of intangible assets increased by 40% from RMB2,089 million in fiscal year 2015 to RMB2,931 million in fiscal year 2016. This increase was due to an increase in intangible assets recognized arising from our strategic acquisitions and investments. Because of the recent major acquisitions we will consolidate, such as Youku Tudou and our controlling stake in Lazada, we expect that our amortization of intangible assets will increase in the future.

Income from Operations and Operating Margin

 
  Year ended
March 31,
   
 
 
  2015   2016    
 
 
  RMB   RMB   % Change  
 
  (in millions, except percentages)
 

Income from operations

    23,135     29,102     26 %

Percentage of revenue

    30 %   29 %      

       Our income from operations increased by 26% from RMB23,135 million, or 30% of revenue in fiscal year 2015 to RMB29,102 million, or 29% of revenue, in fiscal year 2016. The decrease in our operating margin was primarily attributable to investments in new business initiatives, such as our mobile operating systems, over-the-top TV services and entertainment, and also to an increase in logistics costs, as discussed above.

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Adjusted EBITA and adjusted EBITA margin

       Adjusted EBITA and adjusted EBITA margin by segments are set forth in the table below. See the table under the heading "Segment Information for Fiscal Years 2015, 2016 and 2017" above for a reconciliation of income from operations to adjusted EBITA.

 
  Year ended March 31,  
 
  2015   2016  
 
  RMB   % of Segment
Revenue
  RMB   % of Segment
Revenue
  %
Change
 
 
  (in millions, except percentages)
 

Core commerce

    44,864     65 %   58,036     63 %   29 %

Cloud computing

    (1,090 )   (86 )%   (1,252 )   (41 )%   15 %

Digital media and entertainment

    (1,461 )   (67 )%   (1,810 )   (46 )%   24 %

Innovation initiatives and others

    (1,617 )   (50 )%   (3,467 )   (191 )%   114 %

    Core commerce segment

       Adjusted EBITA increased by 29% to RMB58,036 million in fiscal year 2016, compared to RMB44,864 million in fiscal year 2015. Adjusted EBITA margin decreased to 63% in fiscal year 2016 from 65% in fiscal year 2015, primarily due to an increase in logistics costs related to the fulfillment services provided by Cainiao Network for Tmall Supermarket.

    Cloud computing segment

       Adjusted EBITA in fiscal year 2016 was a loss of RMB1,252 million, compared to a loss of RMB1,090 million in fiscal year 2015. Adjusted EBITA margin improved to negative 41% in fiscal year 2016 from negative 86% in fiscal year 2015, primarily due to robust growth in revenue and economies of scale.

    Digital media and entertainment segment

       Adjusted EBITA in the fiscal year 2016 was a loss of RMB1,810 million, compared to a loss of RMB1,461 million in fiscal year 2015. Adjusted EBITA margin improved to negative 46% in fiscal year 2016 from negative 67% in fiscal year 2015, primarily due to improved margins at UCWeb driven by the increase in revenue from mobile value-added services.

    Innovation initiatives and others segment

       Adjusted EBITA in fiscal year 2016 was a loss of RMB3,467 million, compared to a loss of RMB1,617 million in fiscal year 2015. Adjusted EBITA margin decreased to negative 191% in fiscal year 2016, compared to negative 50% in fiscal year 2015, primarily due to our investments in new business initiatives, such as our mobile operating systems and DingTalk.

Interest and Investment Income, Net

       Our net interest and investment income increased significantly from RMB9,455 million in fiscal year 2015 to RMB52,254 million in fiscal year 2016. The increase was primarily due to a non-cash deemed disposal gain of RMB24,734 million arising from the deconsolidation of Alibaba Pictures, a non-cash gain of RMB18,603 million from the revaluation of our previously held equity interest in Alibaba Health when we obtained control over Alibaba Health in fiscal year 2016, as well as gains arising from disposals of certain investments and businesses. See note 4 to our audited consolidated financial statements for the years ended March 31, 2015, 2016 and 2017 included elsewhere in this annual report for further information.

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Interest Expense

       Our interest expense decreased by 29% from RMB2,750 million in fiscal year 2015 to RMB1,946 million in fiscal year 2016. Interest expense in fiscal year 2015 included a non-recurring charge for financing-related fees of RMB830 million as a result of the early repayment of our US$8.0 billion bank borrowings with proceeds from our issuance of US$8.0 billion senior unsecured notes.

Other Income, Net

       Our other income, net decreased by 17% from RMB2,486 million in fiscal year 2015 to RMB2,058 million in fiscal year 2016. The decrease was primarily due to a decrease in income recognized in respect of royalty fees and software technology services fees from Ant Financial Services, which were RMB1,122 million in fiscal year 2016, compared to RMB1,667 million in fiscal year 2015. The decrease in income recognized primarily resulted from increased marketing and promotion activities of Ant Financial Services to drive its user growth and engagement, causing a decrease in its consolidated pre-tax income.

Income Tax Expenses

       Our income tax expenses increased by 32% from RMB6,416 million in fiscal year 2015 to RMB8,449 million in fiscal year 2016. The increase in income tax expenses was primarily due to the increase in taxable income from our operations in China. Our effective tax rate decreased to 10% in fiscal year 2016 from 20% in fiscal year 2015, primarily due to the non-cash gains relating to the deconsolidation of Alibaba Pictures and consolidation of Alibaba Health, as discussed in "Interest and Investment Income, Net" above, which are not taxable for income tax purposes. Excluding the above gains and other non-taxable or non-deductible items, our effective tax rate remains stable.

Share of Results of Equity Investees

       Share of losses of equity investees in fiscal year 2016 was RMB1,730 million, an increase of 9% compared to RMB1,590 million in fiscal year 2015. Share of results of equity investee in fiscal year 2016 consisted of the following:

 
  Year ended
March 31,
 
 
  2015   2016  
 
  RMB   RMB  
 
  (in millions)
 

Share of results of equity investees:

             

Koubei

        (867 )

Youku Tudou

    (99 )   (391 )

Cainiao Network

    (90 )   (295 )

Others

    (275 )   62  

Dilution gains

        827  

Impairment

    (438 )    

Others

    (688 )   (1,066 )

    (1,590 )   (1,730 )

       The increase in share of losses of equity investees in fiscal year 2016 compared to fiscal year 2015 was primarily due to our share of losses of Koubei, Youku Tudou and Cainiao Network, partially offset by accounting gains related to dilution of our ownership interest in Cainiao Network and Evergrande FC, as these investees each raised capital at a higher valuation in fiscal year 2016. We established Koubei as a joint venture with Ant Financial Services in September 2015. Our share of Koubei's loss in fiscal year 2016 represents Koubei's high investments and promotional spending during its start-up stage. We expect our share of losses of equity investees to decrease in the future.

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Net Income

       As a result of the foregoing, our net income increased by 193% from RMB24,320 million in fiscal year 2015 to RMB71,289 million in fiscal year 2016.

B.    Liquidity and Capital Resources

       We fund our operations and strategic investments from cash generated from our operations and through debt and equity financing. We generated RMB41,217 million, RMB56,836 million, RMB80,326 million (US$11,670 million) of cash from operating activities for fiscal years 2015, 2016 and 2017, respectively. As of March 31, 2017, we had cash and cash equivalents and short-term investments of RMB143,736 million (US$20,882 million) and RMB3,011 million (US$437 million), respectively. Short-term investments consist primarily of investments in fixed deposits with maturities between three months and one year and investments in money market funds or other investments whereby we have the intention to redeem within one year.

       In November 2014, we issued unsecured senior notes, including floating rate and fixed rate notes, with varying maturities for an aggregate principal amount of US$8.0 billion. Interest on the unsecured senior notes are payable in arrears, quarterly for the floating rate notes and semiannually for the fixed-rate notes. We used the proceeds from the issuance of the unsecured senior notes to refinance our previous syndicated loan arrangements in the same amount. We are not subject to any financial covenant or other significant covenants or restrictions under the unsecured senior notes. In December 2015, we completed an exchange offer to exchange our outstanding unsecured senior notes for unsecured senior notes that have been registered under the Securities Act. See note 20 to our audited consolidated financial statements for the years ended March 31, 2015, 2016 and 2017 included elsewhere in this annual report for further information.

       In March 2016, we signed a five-year US$3.0 billion syndicated loan agreement with a group of eight lead arrangers which was subsequently drawn down in April 2016. The loan was upsized from US$3.0 billion to US$4.0 billion in May 2016 through a general syndication and the upsized portion was subsequently drawn down in August 2016. The loan has a five-year bullet maturity and is priced at 110 basis points over LIBOR. The use of proceeds of the loan is for general corporate and working capital purposes (including funding our acquisitions).

       In April 2017, we entered into a revolving credit facility agreement with certain financial institutions for an amount of US$5.15 billion which has not yet been drawn down, to replace our US$3.0 billion undrawn revolving credit facility. The interest rate for this credit facility is calculated based on LIBOR plus 95 basis points. This loan facility is reserved for future general corporate and working capital purposes (including funding our acquisitions).

       As of March 31, 2017, we also had other bank borrowings of RMB9,561 million (US$1,389 million), primarily used for the construction of corporate campuses and office facilities and other working capital purposes. See note 19 to our audited consolidated financial statements for the years ended March 31, 2015, 2016 and 2017 included elsewhere in this annual report for further information.

       The following table sets out a summary of our cash flows for the periods indicated.

 
  Year ended March 31,  
 
  2015   2016   2017  
 
  RMB   RMB   RMB   US$  
 
  (in millions)
 

Net cash provided by operating activities

    41,217     56,836     80,326     11,670  

Net cash used in investing activities

    (53,454 )   (42,831 )   (78,364 )   (11,385 )

Net cash provided by (used in) financing activities

    87,497     (15,846 )   32,914     4,782  

       We believe that our current levels of cash and cash flows from operations will be sufficient to meet our anticipated cash needs for at least the next twelve months. However, we may need additional cash resources in the future if we find and wish to pursue opportunities for investment, acquisition, strategic cooperation or other similar actions, which may include investing in technology, our underlying technical infrastructure, including data management and analytics solutions, or related talent. If we determine that our cash requirements exceed our

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amounts of cash on hand or if we decide to further optimize our capital structure, we may seek to issue additional debt or equity securities or obtain credit facilities or other sources of funding.

Cash Provided by Operating Activities

       Cash provided by operating activities in fiscal year 2017 was RMB80,326 million (US$11,670 million) and primarily consisted of net income of RMB41,226 million (US$5,989 million), as adjusted for non-cash items and the effects of changes in working capital and other activities. Adjustments for non-cash items primarily included RMB15,995 million (US$2,324 million) of share-based compensation expense, RMB9,008 million (US$1,309 million) of amortization of intangible assets and licensed copyrights of video content, realized and unrealized gain of RMB5,488 million (US$797 million) related to investment securities, RMB5,284 million (US$768 million) of depreciation and amortization of property and equipment and land use rights and RMB5,027 million (US$730 million) of share of results of equity investees. Changes in working capital and other activities primarily consisted of an increase of RMB5,312 million (US$772 million) in accrued expenses, accounts payable and other current liabilities as a result of the growth of our business, an increase of RMB4,698 million (US$683 million) in income tax payable and an increase of RMB4,611 million (US$670 million) in deferred revenue and customer advances, partially offset by an increase of RMB8,237 million (US$1,197 million) in prepayment, receivables and other assets.

       Cash provided by operating activities in fiscal year 2016 was RMB56,836 million and primarily consisted of net income of RMB71,289 million, as adjusted for non-cash items and the effects of changes in working capital and other activities. Adjustments for non-cash items primarily included a deemed disposal gain of RMB24,734 million arising from the deconsolidation of Alibaba Pictures, a gain of RMB18,603 million from the revaluation of our previously held equity interest related to Alibaba Health, RMB16,082 million of share-based compensation expense, RMB3,770 million of depreciation and amortization of property and equipment and land use rights, RMB3,278 million of amortization of intangible assets and licensed copyrights of video content and a gain of RMB3,089 million from disposals of equity investees. Changes in working capital and other activities primarily consisted of an increase of RMB7,757 million in accrued expenses, accounts payable and other current liabilities as a result of the growth of our business and an increase of RMB2,350 million in deferred revenue and customer advances, partially offset by an increase of RMB4,504 million in prepayment, receivables and other assets.

       Cash provided by operating activities in fiscal year 2015 was RMB41,217 million and primarily consisted of net income of RMB24,320 million, as adjusted for non-cash items and the effects of changes in working capital and other activities. Adjustments for non-cash items primarily included RMB13,028 million of share-based compensation expense, a net gain from our step acquisitions arising from revaluation of previously held equity interests totaling RMB6,535 million, RMB2,326 million of depreciation and amortization of property and equipment and land use rights, RMB2,173 million of amortization of intangible assets and licensed copyrights of video content and RMB1,659 million of deferred income taxes. Changes in working capital and other activities primarily consisted of an increase of RMB10,494 million in accrued expenses, accounts payable and other current liabilities as a result of the growth of our business and an increase of RMB2,490 million in merchant deposits, which relate to merchants operating on Tmall, partially offset by an increase of RMB14,138 million in prepayments, receivables and other assets, as a result of the increase in loan receivables relating to the SME loan business before we transferred this business to Ant Financial Services. See "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Agreements and Transactions Related to Ant Financial Services and its Subsidiaries — 2014 Restructuring of Our Relationship with Ant Financial Services and Alipay."

Cash Used in Investing Activities

       Cash used in investing activities was RMB78,364 million (US$11,385 million) in fiscal year 2017 and was primarily attributable to RMB77,552 million (US$11,267 million) in acquisition of available-for-sale securities, held-to-maturity securities and equity investments mainly held for strategic purposes, including Suning, Ele.me, Didi Chuxing, Paytm and Weibo, and cash paid for business combinations, net of cash acquired, including Youku

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Tudou and Lazada, acquisition of equipment, intangible assets and construction in progress of RMB17,546 million (US$2,549 million) primarily in connection with the purchase of computer equipment, intangible assets and licensed copyrights of video content, as well as the continued expansion of our corporate campuses, partially offset by proceeds from disposal of subsidiaries, equity investees, available-for-sale securities and held-to-maturity securities of RMB9,545 million (US$1,387 million) and net decrease in short-term investments of RMB5,761 million (US$836 million).

       Cash used in investing activities was RMB42,831 million in fiscal year 2016 and was primarily attributable to RMB54,483 million in acquisition of available-for-sale securities, held-to-maturity securities and equity investments mainly held for strategic purposes, including Ele.me, Koubei, Magic Leap, CMC and Cainiao Network, and cash paid for business combinations, net of cash acquired, acquisition of equipment, intangible assets and construction in progress of RMB10,845 million primarily in connection with the purchase of computer equipment and the continued expansion of our corporate campuses, partially offset by proceeds from disposal of subsidiaries, equity investees, available-for-sale securities and held-to-maturity securities of RMB17,088 million and net decrease in short-term investments of RMB4,619 million.

       Cash used in investing activities was RMB53,454 million in fiscal year 2015 and was primarily attributable to RMB35,231 million in acquisition of available-for-sale securities, held-to-maturity securities and equity investments mainly held for strategic purposes, including Youku Tudou, Intime, Meizu, Weibo and SingPost, RMB10,255 million in cash paid for business combinations, net of cash acquired, including AutoNavi, UCWeb and OneTouch and acquisitions of equipment, intangible assets and construction in progress of RMB7,705 million primarily in connection with the purchase of computer equipment and the continued expansion of our corporate campus.

Cash Provided by (Used in) Financing Activities

       Cash provided by financing activities was RMB32,914 million (US$4,782 million) in fiscal year 2017, and was primarily attributable to net proceeds from borrowings of RMB29,333 million (US$4,262 million) and proceeds from issuance of ordinary shares of RMB14,607 million (US$2,122 million), primarily representing shares issued to Suning, partially offset by cash used in share repurchase of RMB13,182 million (US$1,915 million). See "Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers" for further information.

       Cash used in financing activities was RMB15,846 million in fiscal year 2016, and was primarily attributable to cash used in share repurchase of RMB19,795 million, partially offset by net proceeds from borrowings of RMB2,478 million.

       Cash provided by financing activities was RMB87,497 million in fiscal year 2015, and was primarily attributable to the issuance of ordinary shares of RMB61,831 million in connection with our initial public offering in September 2014 and the additional drawdown of US$3.0 billion under our previous syndicated loan arrangement in April 2014, which was refinanced with the proceeds from the US$8.0 billion unsecured senior notes issued in November 2014.

Capital Expenditures

       Our capital expenditures have been incurred primarily in relation to (1) the acquisition of land use rights and construction of corporate campuses and office facilities in Hangzhou, Beijing, Guangzhou and Shenzhen; and (2) the acquisition of computer equipment relating to the operation of our websites, furniture and office equipment and leasehold improvements for our office facilities. In fiscal years 2015, 2016 and 2017, our capital expenditures totaled RMB7,705 million, RMB10,845 million and RMB17,546 million (US$2,549 million), respectively.

Holding Company Structure

       We are a holding company with no operation other than ownership of operating subsidiaries in Hong Kong, China and elsewhere that own and operate our marketplaces and other businesses as well as a portfolio of

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intellectual property rights. As a result, we rely on dividends and other distributions paid by our operating subsidiaries, including funds to pay dividends to our shareholders or to service our outstanding debts. If our operating subsidiaries incur additional debt on their own behalf in the future, the instruments governing the debt may restrict the ability of our operating subsidiaries to pay dividends or make other distributions to us. In addition, applicable PRC law permits payment of dividends to us by our operating subsidiaries in China only out of their net income, if any, determined in accordance with PRC accounting standards and regulations. Moreover, our operating subsidiaries in China are also required to set aside a portion of their net income, if any, each year to fund general reserves for appropriations until this reserve has reached 50% of the related subsidiary's registered capital. These reserves are not distributable as cash dividends. In addition, registered share capital and capital reserve accounts are also restricted from withdrawal in the PRC, up to the amount of net assets held in each operating subsidiary. As of March 31, 2017, these restricted net assets totaled RMB45,472 million (US$6,606 million). See note 23 to our audited consolidated financial statements for the years ended March 31, 2015, 2016 and 2017 included elsewhere in this annual report.

       Our holding company structure differs from some of our peers in that we hold our material assets and operations, except for ICP and other licenses for regulated activities as well as certain equity investments in restricted businesses, in our wholly-foreign owned enterprises and most of our revenue is generated directly by the wholly-foreign owned enterprises. As revenue is generated directly by our wholly-foreign owned enterprises, the wholly-foreign owned enterprises directly capture the profits and associated cash flow from operations, without having to rely on contractual arrangements to transfer cash flow from the variable interest entities to the wholly-foreign owned enterprises. In fiscal years 2015, 2016 and 2017, the significant majority of our revenues were generated by our wholly-foreign owned enterprises in China. See "Item 4. Information on the Company — C. Organizational Structure" for a description of these contractual arrangements and the structure of our company.

Inflation

       Inflation in China has not materially impacted our results of operations in recent years. According to the National Bureau of Statistics of China, the year-over-year increase in the consumer price index in calendar years 2014, 2015 and 2016 was 2.0%, 1.4% and 2.0%, respectively. Although we have not been materially affected by inflation in the past, we can provide no assurance that we will not be affected in the future by higher inflation rates in China.

Critical Accounting Policies and Estimates

       Our significant accounting policies are set forth in note 2 to our audited consolidated financial statements included elsewhere in this annual report. The preparation of our consolidated financial statements requires our management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. These estimates and assumptions are periodically re-evaluated by management and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ significantly from those estimates and assumptions. We have identified the following accounting policies as the most critical to an understanding of our financial position and results of operations, because the application of these policies requires significant and complex management estimates, assumptions and judgment, and the reporting of materially different amounts could result if different estimates or assumptions were used or different judgments were made.

Principles of Consolidation

       A subsidiary is an entity in which (i) we directly or indirectly control more than 50% of the voting power; or (ii) we have the power to appoint or remove the majority of the members of the board of directors or to cast a majority of votes at the meetings of the board of directors or to govern the financial and operating policies of the investee pursuant to a statute or under an agreement among the shareholders or equity holders. However, there are situations in which consolidation is required even though these usual conditions of consolidation do not apply. Generally, this occurs when an entity holds an interest in another business enterprise that was achieved through arrangements that do not involve voting interests, which results in a disproportionate relationship between the

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entity's voting interests in, and its exposure to the economic risks and potential rewards of, the other business enterprise. This disproportionate relationship results in what is known as a variable interest, and the entity in which we have the variable interest is referred to as a "VIE." We consolidate a VIE if we are determined to be the primary beneficiary of the VIE. The primary beneficiary has both (i) the power to direct the activities of the VIE that most significantly impact the entity's economic performance, and (ii) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

       For the entities that we invested in or are associated with but in which the usual conditions of consolidation mentioned above do not apply, we continuously reassess whether these entities possess any of the characteristic of a VIE and whether we are the primary beneficiary.

       We consolidate our subsidiaries and the VIEs of which we are the primary beneficiary. On a periodic basis, we reconsider the initial determination of whether a legal entity is a consolidated entity upon the occurrence of certain events listed in ASC 810-10-35-4. We also continuously reconsider whether we are the primary beneficiary of our affiliated entities as facts and circumstances change.

Recognition of Revenue

       Revenue is principally comprised of online marketing services revenue, commissions on transactions, membership and storefront fees and cloud computing services revenue. Revenue represents the fair value of the consideration received or receivable for the provision of services in the ordinary course of our activities and is recorded net of VAT. Consistent with the criteria of ASC 605 "Revenue Recognition," we recognize revenue when the following four revenue recognition criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been provided, (iii) the selling price is fixed or determinable, and (iv) collectability is reasonably assured.

       The application of various accounting principles related to the measurement and recognition of revenue requires us to make judgments and estimates. Specifically, complex arrangements with non-standard terms and conditions may require significant contract interpretation to determine the appropriate accounting treatment, including whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting. Other significant judgments include determining whether we are acting as the principal or the agent from an accounting perspective in a transaction.

       For multiple element arrangements with customers, which primarily relate to the sale of membership packages and online marketing services on our wholesale marketplaces and Youku Tudou's platforms, the arrangement consideration is allocated at the inception of the arrangement to each element based on their relative fair values for revenue recognition purposes. The consideration is allocated to each element using vendor-specific objective evidence or third-party evidence of the standalone selling price for each deliverable, or if neither type of evidence is available, using management's best estimate of selling price. Significant judgment is required in assessing the fair values of these elements by considering standalone selling price and other observable data. Changes in the estimated fair values may cause the revenue recognized for each element to change but not the total amount of revenue allocated within a contract. We periodically re-assess the fair value of the elements as a result of changes in market conditions. These multiple element arrangements are currently not significant to our operations. Revenue recognition for P4P marketing service and display marketing on our retail marketplaces does not require our management to exercise significant judgment or estimate.

       For other arrangements, we apply significant judgment in determining whether we are acting as the principal or agent in a transaction; we record P4P marketing services revenue and display marketing revenue generated through third-party marketing affiliate programs on a gross basis; and revenue relating to the Taobaoke program generated through third-party marketing affiliate partners' websites where we do not take inventory risks on a net basis. In addition, revenue generated from certain platforms in which we operate as a primary obligor is reported on a gross basis while this revenue was insignificant for each of the periods presented. Generally, when we are primarily obligated in a transaction and are subject to inventory risk or have latitude in establishing prices, or have several but not all of these indicators, we record revenue on a gross basis. We record the net amount as revenue

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earned if we are not primarily obligated and do not have inventory risk or latitude in establishing prices and selecting suppliers. These judgments could have significant implications on the amount of revenue we recognize.

Share-based Compensation Expense and Valuation of the Underlying Awards

    Granting of share options, restricted shares and RSUs relating to our ordinary shares

       We account for various types of share-based awards granted to the employees, consultants and directors of our company, our affiliates and certain other companies, such as Ant Financial Services, in accordance with the authoritative guidance on share-based compensation expense. Under the fair value recognition provision of this guidance, compensation for share-based awards granted, including share options, restricted shares and RSUs, is measured at the grant date, or at future vesting date in the case of consultants or other non-employee grantees, based on the fair value of the awards and is recognized as expense over the requisite service period, which is generally the vesting period of the respective award, on an accelerated attribution method. In the case of share-based awards to non-employees, the fair value of the unvested portion is re-measured each period, with the resulting difference, if any, recognized as expense during the period the related services are rendered. Under the accelerated attribution method, each vesting installment of a graded vesting award is treated as a separate share-based award, and accordingly each vesting installment is separately measured and attributed to expense, resulting in accelerated recognition of share-based compensation expense.

       Share-based compensation expense is recorded net of estimated forfeitures in our consolidated income statements and as such is recorded for only those share-based awards that we expect to vest. We estimate the forfeiture rate based on historical forfeitures of equity awards and adjust the rate to reflect changes in facts and circumstances, if any. We revise our estimated forfeiture rate if actual forfeitures significantly differ from our initial estimates.

       Determining the fair value of share-based awards requires significant judgment. We estimated the fair value of our share options using the Black-Scholes option-valuation model, which requires inputs such as the fair value of our ordinary shares, risk-free interest rate, expected dividend yield, expected life and expected volatility on the following assumptions:

    Fair value of our ordinary shares — prior to our initial public offering in September 2014, the fair value was determined based on management estimates, as discussed in the paragraphs below. Subsequent to our initial public offering, the market price of our publicly traded ADSs is used as an indicator of fair value for our ordinary shares.

    Risk free interest rate — the risk free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected life of the share options.

    Expected dividend yield — we have never declared or paid any cash dividends on our ordinary shares and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.

    Expected life — the expected term was estimated based on the average between the vesting period and the contractual term.

    Expected volatility — as we have a short period of trading history for our ordinary shares, the expected volatility for our ordinary shares was estimated by taking the average historical price volatility for our industry peers based on the price fluctuations of their shares over a period equivalent to the expected term of the share options granted. Industry peers consist of several public companies in the technology industry similar in size, which are engaged in similar business sectors in China and worldwide. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own ordinary share price becomes available, or unless circumstances change such that the identified companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation.

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       The fair value of restricted shares and RSUs is determined based on the fair value of our ordinary shares.

       Prior to our initial public offering in September 2014, in the absence of a public trading market, the determination of the fair value of our ordinary shares by the administrators was made with reference to the price at which we had recently sold our ordinary shares to third-party investors, or other representative private share sale transactions entered into on an arms-length basis known to us. If references were not available, the valuations of our ordinary shares were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants' Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, and with the assistance of an independent appraisal firm from time to time. The assumptions we use in the valuation model to determine the fair value of our ordinary shares are based on future expectations combined with management judgment, with inputs of numerous objective and subjective factors such as our operating and financial performance, expected growth rates, expected profit margins and the market performance of industry peers.

       In order to determine the fair value of our ordinary shares underlying each share-based award grant, we first determined our business enterprise value, or BEV, and then allocated the BEV to each element of our capital structure (convertible preference shares and ordinary shares) using a hybrid method comprising the probability-weighted expected return method and the option pricing method. In our case, two scenarios were assumed, namely: (i) the redemption scenario, in which the option pricing method was adopted to allocate the value between convertible preference shares and ordinary shares, and (ii) the mandatory conversion scenario, in which equity value was allocated to convertible preference shares and ordinary shares on an as-if converted basis. Increasing probability was assigned to the mandatory conversion scenario in light of preparations for our initial public offering.

       Before April 2014, our BEV was estimated using a combination of two generally accepted approaches: the market approach using the guideline company method, or GCM, and the income approach using the discounted cash flow method, or DCF. The market approach considers valuation metrics based on trading multiples of a selected industry peer group of companies. The DCF method estimates enterprise value based on the estimated present value of future net cash flows that the business is expected to generate over a forecasted period and an estimate of the present value of cash flows beyond that period, which is referred to as terminal value. The estimated present value is calculated using a discount rate based on the guideline companies' weighted average cost of capital, which accounts for the time value of money and the appropriate degree of risks inherent in the business. The GCM and DCF methods are then weighted equally in determining our BEV.

       In addition to the GCM and DCF methods, starting from April 2014, the market transaction method, or MTM, was also adopted. MTM considers recent transactions of secondary shares by our existing shareholders, which indicate the equity value of the underlying business being evaluated. We assigned a 50% weight to MTM and the remaining 50% weight equally to GCM and DCF.

       Subsequent to our initial public offering in September 2014, the market price of our publicly traded ADSs is used as an indicator of fair value of our ordinary shares.

       If the fair value of the underlying equity and any of the assumptions used in the Black-Scholes model changes significantly, share-based compensation expense for future awards may differ materially compared with the awards granted previously.

    Subscription for rights to acquire our restricted shares

       We offered selected members of the Alibaba Partnership and they have subscribed for rights to acquire our restricted shares. The rights offered before 2016 were not subject to any vesting conditions and entitled the holders to purchase restricted shares at a price of US$14.50 per share during a four-year period. Upon the exercise of these rights, the underlying ordinary shares may not be transferred for a period of eight years from the date of subscription of the relevant rights. The rights offered in 2016 and the underlying restricted shares are subject to certain service provisions that are not related to employment, and the holders are entitled to purchase restricted

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shares at a price of US$23.00 per share over a period of ten years from the vesting commencement date. The fair value of the rights was determined by the Black-Scholes option-valuation model. For the rights offered before 2016, a discount for post-vesting sales restriction was applied to arrive at the estimated value of the restricted shares. We recorded share-based compensation expense equivalent to the entire fair value of these rights less the initial subscription price in the period of subscription. For the rights offered in 2016, we will recognize share-based compensation expense equivalent to the entire fair value of these rights over the requisite service period.

    Share-based awards relating to Ant Financial Services

       Junhan made grants of certain share-based awards similar to share appreciation awards linked to the valuation of Ant Financial Services to a substantial number of our employees. The vesting of these awards is conditional upon the fulfillment of requisite services to us, and these awards will be settled in cash by Junhan upon their disposal by the holders. Junhan has the right to repurchase the vested awards from the holders upon an initial public offering of Ant Financial Services or the termination of the employment of the employees with us at a price to be determined based on the then fair market value of Ant Financial Services. We have no obligation to reimburse Junhan, Ant Financial Services or its subsidiaries for the cost associated with these awards. The cost relating to the share-based awards is recognized by us as a shareholder contribution as the awards will ultimately be settled in cash by Junhan. The awards meet the definition of a financial derivative and are initially measured at their fair value, and the related share-based compensation expense will be recognized over the requisite service period. Subsequent changes in the fair value of the awards are recorded in the consolidated income statements through the date on which the underlying awards are settled by Junhan. See note 8(d) to our audited consolidated financial statements for the years ended March 31, 2015, 2016 and 2017 included elsewhere in this annual report. The fair values of the underlying equity are primarily determined by reference to the BEV of Ant Financial Services which is based on the contemporaneous valuation reports or recent financing transactions. Given that the determination of the BEV of Ant Financial Services requires the judgments and is beyond our control, the magnitude of the related accounting impact is unpredictable and may affect our consolidated income statements significantly.

       As of March 31, 2017, the total unamortized share-based compensation expense related to (i) ordinary shares of us and our subsidiaries and (ii) awards linked to the valuation of Ant Financial Services that we expect to recognize was RMB13,958 million (US$2,028 million) and RMB1,039 million (US$151 million), respectively, with a weighted-average remaining requisite service period of 2.1 years and 1.6 years, respectively. To the extent the actual forfeiture rate is different from what we have anticipated, share-based compensation expense related to these awards will be different. Furthermore, share-based compensation expense will be affected by changes in the fair value of our shares, as certain share-based awards were granted to non-employees where the unvested portions of the awards are re-measured at each reporting date through the vesting dates in the future. As of March 31, 2017, 347,513 outstanding share options and 4,594,874 outstanding RSUs were held by non-employees, who consist primarily of employees of Ant Financial Services. In addition, share-based compensation expense will also be affected by changes in the fair value of awards granted to our employees by Junhan, which is controlled by Jack Ma. Ant Financial Services has informed us that they expect Junhan will also issue additional share-based awards to our employees from time to time in the future. See "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transaction — Agreements and Transactions Related to Ant Financial Services and its Subsidiaries — Ownership of Ant Financial Services and Alipay." The expenses associated with these awards will be recognized across the functions in which the award recipients are employed and may continue to be significant in future periods.

Recognition of Income Taxes and Deferred Tax Assets/Liabilities

       We are mainly subject to income tax in China, but are also subject to taxation on profit arising in or derived from the tax jurisdiction where our subsidiaries are domiciled and operate outside China. Income taxes are assessed and determined on an entity basis. There are transactions (including entitlement to preferential tax treatment and deductibility of expenses) where the ultimate tax determination is uncertain until the final tax

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position is confirmed by relevant tax authorities. In addition, we recognize liabilities for anticipated tax audit issues based on estimates of whether additional taxes could be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, the differences will impact the income tax and deferred tax provisions in the period in which the determination is made.

       Deferred income tax is recognized for all temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available in the future against which the temporary differences, the carry forward of unused tax credits and unused tax losses could be utilized. Deferred income tax is provided in full, using the liability method. The deferred tax assets recognized are mainly related to the temporary differences arising from amortization of licensed copyrights of video content and accrued expenses which are not deductible until paid under the applicable PRC tax laws. We have also recognized deferred tax liabilities on the undistributed earnings generated by our subsidiaries in China, which are subject to withholding taxes when they resolve to distribute dividends to us. As of March 31, 2017, we have fully accrued the withholding tax on the earnings distributable by all of our subsidiaries in China, except for those undistributed earnings that we intend to invest indefinitely in China. If our intent changes or if these funds are in fact distributed outside China, we would be required to accrue or pay the withholding tax on some or all of these undistributed earnings and our effective tax rate would be adversely affected.

Fair Value Determination Related to the Accounting for Business Combinations

       A component of our growth strategy has been to acquire and integrate complementary businesses into our ecosystem. We complete business combinations from time to time which require us to perform purchase price allocations. In order to recognize the fair value of assets acquired and liabilities assumed, mainly consisting of intangible assets and goodwill, as well as the fair value of any contingent consideration to be recognized, we use valuation techniques such as discounted cash flow analysis and ratio analysis in comparison to comparable companies in similar industries under the income approach, market approach and cost approach. Major factors considered include historical financial results and assumptions including future growth rates, an estimate of weighted average cost of capital and the effect of expected changes in regulation. Most of the valuations of our acquired businesses have been performed by independent valuation specialists under our management's supervision. We believe that the estimated fair value assigned to the assets acquired and liabilities assumed are based on reasonable assumptions and estimates that market participants would use. However, these assumptions are inherently uncertain and actual results could differ from those estimates.

Fair Value Determination Related to Financial Instruments Accounted for at Fair Value

       We have a significant amount of investments and liabilities that are classified as Level 2 and Level 3 according to ASC 820 "Fair Value Measurement." The valuations for the investments and liabilities classified as Level 2 relating to financial derivatives, interest rate swaps and forward exchange contracts are provided by independent third parties such as the custodian banks. The valuations for the investments and liabilities classified as Level 3 relating to investment securities accounted for under the fair value option and contingent consideration in relation to investments and acquisitions are determined based on unobservable inputs, such as historical financial results and assumptions about future growth rates, which require significant judgment to determine the future outcome of these contingencies.

Impairment Assessment on Goodwill and Intangible Assets

       We test annually, or whenever events or circumstances indicate that the carrying value of assets exceeds the recoverable amounts, whether goodwill and intangible assets have suffered any impairment in accordance with the accounting policy stated in note 2 to our audited consolidated financial statements included elsewhere in this annual report. For the impairment assessment on goodwill, we have elected to perform a qualitative assessment to determine whether the two-step impairment testing of goodwill is necessary. In this assessment, we consider primary factors such as industry and market considerations, overall financial performance of the reporting unit, and other specific information related to the operations. Based on the qualitative assessment, if it is more likely than

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not that the fair value of each reporting unit is less than the carrying amount, the quantitative impairment test is performed.

       For the quantitative assessment of goodwill impairment, we identify the reporting units and compare the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit's goodwill.

       For intangible assets other than licensed copyrights of video content, we perform an impairment assessment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. These assessments primarily use cash flow projections based on financial forecasts prepared by management and an estimated terminal value. The expected growth in revenues and operating margin, timing of future capital expenditures, an estimate of weighted average cost of capital and terminal growth rate are based on actual and prior year performance and market development expectations. The periods of the financial forecasts generally range from three to five years or a longer period if necessary. Judgment is required to determine key assumptions adopted in the cash flow projections and changes to key assumptions can significantly affect these cash flow projections and the results of the impairment tests.

Impairment Assessment on Licensed Copyrights of Video Content

       We evaluate the program usefulness of licensed copyrights of video content pursuant to the guidance in ASC 920 "Entertainment — Broadcasters" which provides that the rights be reported at the lower of unamortized cost or estimated net realizable value. When there is a change in the expected usage of licensed copyrights of video content, we estimate net realizable value of licensed copyrights of video content to determine if any impairment exists. The net realizable value of licensed copyrights of video content is determined by estimating the expected cash flows from advertising, less any direct costs, over the remaining useful lives of the licensed copyrights. We monetize our licensed copyrights with branding customers based on the different content channels available on our entertainment distribution platforms. Therefore, we estimate advertising cash flows for each category of content separately, such as movies, television series, variety shows, animations and other video content. Estimates that impact advertising cash flows include anticipated levels of demand for our advertising services and the expected selling prices of advertisements. Judgment is required to determine the key assumptions adopted in the cash flow projections and changes to key assumptions can significantly affect these cash flow projections and the results of the impairment tests.

Impairment Assessment on Investments in Equity Investees

       We continually review our investments in equity investees to determine whether a decline in fair value below the carrying value is "other-than-temporary." The primary factors that we consider include:

    the severity and length of time that the fair value of the investment is below its carrying value;

    the stage of development, the business plan, the financial condition, the sufficiency of funding and the operating performance of the investee companies; strategic collaboration with and the prospects of the investee companies;

    the geographic region, market and industry in which the investee companies operate; and

    other entity specific information such as recent financing rounds completed by the investee companies and post balance sheet date fair value of the investment.

       Fair value of the listed securities is subject to volatility and may be materially affected by market fluctuations. Judgment is required to determine the weighting and impact of the aforementioned factors and changes to such determination can significantly affect the results of the impairment tests.

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       The market value of our investment in Alibaba Pictures has remained below its carrying value based on its quoted market prices since July 2015. Our original investment amount in Alibaba Pictures was RMB4,955 million, which was paid in June 2014. As a result of the placement of newly issued ordinary shares to third-party investors by Alibaba Pictures which diluted our equity interest to 49.5%, we de-consolidated the financial results of Alibaba Pictures in June 2015, and recognized a significant accounting gain of RMB24,734 million based on a revaluation of our remaining equity interest in Alibaba Pictures in accordance with ASC 810 under U.S. GAAP, together with a corresponding significant increase to the carrying value of our investment in Alibaba Pictures. As of March 31, 2017, the carrying value of our investment in Alibaba Pictures was RMB30,102 million (US$4,373 million) and the difference between the market value and the carrying value amounted to RMB14,487 million (US$2,105 million).

       We believe the decline is temporary on the basis that:

    Alibaba Pictures is currently in the early stage of business development in a high growth industry and has sufficient funding to execute its business plans for the foreseeable future;

    it has been growing its business according to its business plan, more than doubling its revenue for its fiscal year ended December 31, 2016 as compared to the prior year while reducing net loss by approximately 50% as compared to the original forecast;

    it has established a leading position in the online movie ticketing market in China; and

    we expect a stronger business performance by Alibaba Pictures as well as closer business collaboration with us under its newly appointed senior management.

       We have also considered the implied market value of Alibaba Pictures with reference to price-to-earnings ratios of comparable companies and the results of a valuation conducted by an independent valuer.

       We believe that the decline in market price of Alibaba Pictures is primarily due to its loss position and limited awareness among investors of its long term business prospects. After assessing relevant positive and negative evidence, and considering that we have both the ability and intent to hold this investment, we determined that the decline in market value against its carrying amount was not "other-than-temporary."

Depreciation and Amortization

       The costs of property and equipment and intangible assets are charged ratably as depreciation and amortization expenses, respectively, over the estimated useful lives of the respective assets using the straight-line method. We periodically review changes in technology and industry conditions, asset retirement activity and residual values to determine adjustments to estimated remaining useful lives and depreciation and amortization rates. Actual economic lives may differ from estimated useful lives. Periodic reviews could result in a change in estimated useful lives and therefore depreciation and amortization expenses in future periods.

Allowance for Doubtful Accounts Relating to VAT Receivables

       VAT receivables mainly represent receivables from relevant PRC tax authorities in relation to OneTouch's VAT refund service. We record allowances for doubtful accounts primarily on VAT receivables according to our best estimate of the losses inherent in the outstanding portfolio of VAT receivables. The collection periods for the VAT receivables generally range from three to six months. We estimate the allowances by multiplying pre-determined percentages to the outstanding VAT receivable amounts based on the aging of the VAT receivables or any events that may affect the collectability of the VAT receivables. We monitor the aging of the VAT receivables and assess the collectability of these VAT receivables. Judgment is required to determine the percentages used to determine the allowance amounts and whether the amounts are adequate to cover potential bad debts, and periodic reviews are performed to ensure the percentages continue to reflect our best estimate of the inherent losses based on our assessment of the merchants' ability to repay the loans or the collectability of the VAT receivables.

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Recent Accounting Pronouncements

       In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2014-09, "Revenue from Contracts with Customers (Topic 606)" and issued subsequent amendments to the initial guidance or implementation guidance between August 2015 and December 2016 within ASU 2015-04, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 (collectively, including ASU 2014-09, "ASC 606"). ASC 606 supersedes the revenue recognition requirements in ASC 605 and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance is effective retrospectively for us for the year ending March 31, 2019 and interim reporting periods during the year ending March 31, 2019, with early application permitted only for the annual reporting period ending March 31, 2018 and interim reporting periods during the year ending March 31, 2018. The new guidance is required to be applied either retrospectively to each prior reporting period presented (the "full retrospective method") or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the "modified retrospective method"). We are currently evaluating whether we will apply the full retrospective method or the modified retrospective method. We are also evaluating the existing revenue recognition policies and currently we believe that the identification of performance obligations may have an impact on the timing and measurement of certain fees paid by merchants under ASC 606.

       In November 2015, the FASB issued ASU 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes," which simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities be classified as non-current on the consolidated balance sheet. The new guidance is effective for us for the year ending March 31, 2018 and interim reporting periods during the year ending March 31, 2018. Early adoption is permitted. The new guidance may be applied either prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented. We are evaluating the effects, if any, of the adoption of this revised guidance on our financial position, results of operations or cash flows. At this time, we do not expect this accounting standard update to have a material impact on the consolidated financial statements.

       In January 2016, the FASB issued ASU 2016-01, "Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which amends various aspects of the recognition, measurement, presentation, and disclosure for financial instruments. With respect to our consolidated financial statements, the most significant impact relates to the accounting for equity investments (except for those accounted for under the equity method or those that result in the consolidation of the investee). Under the new guidance, equity investments are required to be measured at fair value with changes in fair value recognized in net income, except for investments that do not have readily determinable fair values. The new guidance also simplifies the impairment assessment and enhances the disclosure requirements of equity investments. The new guidance is effective for us for the year ending March 31, 2019 and interim reporting periods during the year ending March 31, 2019. Early adoption is permitted only for certain provisions. We are evaluating the effects, if any, of the adoption of this revised guidance on our financial position, results of operations or cash flows.

       In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the consolidated balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 creates a new topic in ASC 842 "Leases" to replace the current topic in ASC 840 "Leases." ASU 2016-02 affects both lessees and lessors, although for the latter the provisions are similar to the current model, but are updated to align with certain changes to the lessee model and also the new revenue recognition provisions contained in ASC 606. The new guidance is effective for us for the year ending March 31, 2020 and interim reporting periods during the year ending March 31, 2020. Early adoption is permitted. We are evaluating the effects, if any, of the adoption of this revised guidance on our financial position, results of operations or cash flows.

       In March 2016, the FASB issued ASU 2016-07, "Investments — Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting," to simplify the accounting for equity method investments, which eliminates the requirement in ASC 323 "Investments — Equity method and Joint

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Ventures" that an entity retroactively adopts the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendments require that the equity method investor adds the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopts the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The new guidance is effective for us for the year ending March 31, 2018 and interim reporting periods during the year ending March 31, 2018. We early adopted this new guidance prospectively in the year ended March 31, 2017.

       In March 2016, the FASB issued ASU 2016-09, "Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," to simplify the accounting for employee share-based payment transactions, including the income tax consequences, classification of excess tax benefits on the statement of cash flows, introduction of accounting policy election on forfeitures, and the change of the threshold of share withholding by the employer for settlement of employees' tax without causing the award to be classified as a liability. The new guidance is effective for us for the year ending March 31, 2018 and interim reporting periods during the year ending March 31, 2018. Early adoption is permitted. We are evaluating the effects, if any, of the adoption of this revised guidance on our financial position, results of operations or cash flows.

       In June 2016, the FASB issued ASU 2016-13, "Financial Instruments — Credit Losses (Topic 326): Measurement on Credit Losses on Financial Instruments," which introduces new guidance for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade and other receivables, held-to-maturity debt securities, loans and net investments in leases. The new guidance also modifies the impairment model for available-for-sale debt securities and requires entities to determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. The new guidance also indicates that entities may not use the length of time a security has been in an unrealized loss position as a factor in concluding whether a credit loss exists. The new guidance is effective for us for the year ending March 31, 2021 and interim reporting periods during the year ending March 31, 2021. Early adoption is permitted for us for the year ending March 31, 2020 and interim reporting periods during the year ending March 31, 2020. We are evaluating the effects, if any, of the adoption of this guidance on our financial position, results of operations and cash flows.

       In June 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The new guidance is effective for us for the year ending March 31, 2019 and interim reporting periods during the year ending March 31, 2019. Early adoption is permitted. The guidance requires application using a retrospective transition method. We are evaluating the effects, if any, of the adoption of this guidance on our consolidated statements of cash flows.

       In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory" which amends the accounting for income taxes. The new guidance requires recognition of income tax consequences of an intra-entity asset transfer, other than transfers of inventory, when the transfer occurs. For intra-entity transfers of inventory, the income tax effects will continue to be deferred until the inventory has been sold to a third party. The new guidance is effective for us for the year ending March 31, 2019 and interim reporting periods during the year ending March 31, 2019. Early adoption is permitted. The new guidance is required to be applied on a modified retrospective basis through a cumulative-effect adjustment directly recorded to retained earnings as of the beginning of the period of adoption. We are evaluating the effects, if any, of the adoption of this guidance on our financial position, results of operations and cash flows.

       In October 2016, the FASB issued ASU 2016-17, "Consolidation (Topic 810): Interests held through Related Parties That Are Under Common Control" to amend the consolidation guidance on how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The new guidance is effective for us for the year ending March 31, 2018 and interim reporting periods during the year ending March 31, 2018. Early adoption is permitted. When the new guidance is adopted, it is required to

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be applied retrospectively for us for the year ended March 31, 2017 and interim reporting periods during the year ended March 31, 2017. We are evaluating the effects, if any, of the adoption of this guidance on our financial position, results of operations and cash flows.

       In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash," which requires the amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new guidance is effective for us for the year ending March 31, 2019 and interim reporting periods during the year ending March 31, 2019. Early adoption is permitted. The guidance requires application using a retrospective transition method. We are evaluating the effects, if any, of the adoption of this guidance on our consolidated statements of cash flows.

       In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business," which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new guidance is effective prospectively for us for the year ending March 31, 2019 and interim reporting periods during the year ending March 31, 2019. Early adoption is permitted for transactions for which the transaction date occurs before the issuance date or effective date of this new guidance, only when the transaction has not been reported in the financial statements that have been issued or made available for issuance. We are evaluating the effects, if any, of the adoption of this guidance on our financial position, results of operations and cash flows.

       In January 2017, the FASB issued ASU 2017-04, "Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which simplifies how an entity is required to test goodwill for impairment by eliminating step two from the goodwill impairment test. Step two of the goodwill impairment measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with its carrying amount. The new guidance is effective prospectively for us for the year ending March 31, 2021 and interim reporting periods during the year ending March 31, 2021. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are evaluating the effects, if any, of the adoption of this guidance on our financial position, results of operations and cash flows.

       In May 2017, the FASB issued ASU 2017-09, "Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting," which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC 718. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The new guidance is effective prospectively for us for the year ending March 31, 2019 and interim reporting periods during the year ending March 31, 2019. Early adoption is permitted. We are evaluating the effects, if any, of the adoption of this guidance on our financial position, results of operations and cash flows.

C.    Research and Development, Patents and Licenses, etc.

Research and Development

       We have built our core technology for our e-commerce and cloud computing businesses in-house. As of March 31, 2017, we employed over 22,000 research and development personnel engaged in building our technology platform and developing new online and mobile products. We recruit top and experienced talent locally and oversea, and we have advanced training programs designed specifically for new campus hires.

Intellectual Property

       We believe the protection of our trademarks, copyrights, domain names, trade names, trade secrets, patents and other proprietary rights is critical to our business. We rely on a combination of trademark, fair trade practice, copyright and trade secret protection laws and patent protection in China and other jurisdictions, as well as

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confidentiality procedures and contractual provisions to protect our intellectual property and our trademarks. We also enter into confidentiality and invention assignment agreements with all of our employees, and we rigorously control access to our proprietary technology and information. As of March 31, 2017, we had 2,832 issued patents and 6,658 publicly filed patent applications in China and 1,883 issued patents and 4,082 publicly filed patent applications in various countries and jurisdictions internationally. We do not know whether any of our pending patent applications will result in the issuance of patents or whether the examination process will require us to narrow our claims.

D.    Trend Information

       Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the current fiscal year that are reasonably likely to have a material effect on our net revenues, income, profitability, liquidity or capital reserves, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

E.    Off-Balance Sheet Arrangements

       We did not have any material off-balance sheet arrangements in fiscal years 2015, 2016 or 2017.

F.     Contractual Obligations

       The following table sets forth our contractual obligations and commercial commitments as of March 31, 2017:

 
  Payment due by period  
 
  Total   Less than
1 Year
  1 – 3
Years
  3 – 5
Years
  More than
5 Years
 
 
  (in millions of RMB)
 

Contractual Obligations

                               

Short-term borrowings (1)

    5,948     5,948              

Long-term borrowings (2)

    3,613         2,688     258     667  

US$4.0 billion syndicated loan denominated in US$ (3)

    27,346             27,346      

Unsecured senior notes (4)

    55,123     8,957     15,503     10,336     20,327  

Contractual Commitments

   
 
   
 
   
 
   
 
   
 
 

Purchase of property and equipment

    1,771     1,766     5          

Construction in progress

    2,838     1,378     991     469      

Leases for office facility and transportation equipment

    3,289     862     1,022     571     834  

Co-location, bandwidth fees and marketing expenses

    14,135     3,777     3,694     2,986     3,678  

Investment commitments (5)

    17,495     17,495              

Acquisition of license and copyrights

    8,431     4,518     3,462     451    
 

Total

    139,989     44,701     27,365     42,417     25,506  

(1)
Excluding estimated interest payments of RMB48 million assuming the applicable interest rates in effect as of March 31, 2017. The majority of the borrowings are subject to floating interest rates.
(2)
Excluding estimated interest payments of RMB736 million in total (RMB168 million, RMB227 million, RMB63 million and RMB278 million over the periods of less than one year, one to three years, three to five years and more than five years from April 1, 2017, respectively), assuming the applicable interest rates in effect as of March 31, 2017. Substantially all of the borrowings are subject to floating interest rates.
(3)
Excluding estimated interest payments of RMB2,338 million in total (RMB571 million, RMB1,143 million and RMB624 million over the periods of less than one year, one to three years and three to five years from April 1, 2017, respectively), assuming the applicable interest rate in effect as of March 31, 2017. The syndicated loan is subject to a floating interest rate.
(4)
Excluding estimated interest payments of RMB10,732 million in total (RMB1,581 million, RMB2,839 million, RMB2,081 million and RMB4,231 million over the periods of less than one year, one to three years, three to five years and more than five years from April 1, 2017, respectively), assuming the applicable interest rates in effect as of March 31, 2017. Aggregate principal amount of fixed rate notes and floating rate notes were US$7.7 billion and US$300 million respectively.
(5)
Including the consideration for the privatization of Intime of HK$12.6 billion, which we completed in May 2017.

       In addition, according to our partnership arrangement with the International Olympic Committee, we will provide at least US$815 million worth of cash, cloud infrastructure services and cloud computing services, as well as marketing and media support through 2028, in connection with various Olympic initiatives, events and activities, including the Olympic Games and the Winter Olympic Games. As of March 31, 2017, the aggregate amount of cash to be paid and value of services to be provided in the future is approximately US$800 million.

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G.    Safe Harbor

       See "Forward-Looking Statements."