JD.com's Q2 Report Shows 35% Sales Growth but Huge Net Losses

Chinese e-commerce giant JD.com (NASDAQ: JD) reported results for the second quarter on Thursday morning. The company's unadjusted net losses ballooned while revenue surged 35% compared to the year-ago period.

JD's second-quarter results: The raw numbers

What happened with JD this quarter?

• The JD Mall online shopping business saw sales rising 30% year over year in constant currencies, while operating profits in this segment jumped 41%. This core division collected 97% of JD's total revenue in the second quarter.
• JD's technology and content expenses -- roughly equivalent to what most companies would call research and development -- rose 80% year over year. The company is making heavy investments into a more advanced supply chain and logistics operation, which include paying top dollar for high-quality research staffers. This surge accounted for roughly $400 million of the increased operating costs.
• The rising technology expenses were largely allocated to JD's "new businesses" segment, where revenues nearly tripled but operating losses grew fivefold.
• Backing out share-based compensation from the bottom-line figures above also makes a huge difference. Noncash compensation for JD's employees accounted for $142 million of this quarter's operating costs, up from $110 million in the year-ago period.
• Free cash flow from continuing operations fell 34%, landing at $1.99 billion. Noncash expenses play a large part in JD's slim or negative bottom-line margins.
• Alphabet's Google subsidiary invested $550 million in JD near the end of the second quarter. The two companies struck an agreement to develop an international shopping platform and are also exploring joint research ideas in fields such as artificial intelligence and virtual reality.
• Chinese digital entertainment specialist iQiyi started its own JD partnership in April. The two companies now offer bundled membership packages that give Chinese consumers access to both iQiyi's and JD's premium services at a discount.

What management had to say

The emphasis on technology upgrades is here to stay, according to JD CEO Richard Liu.

"We will continue to prioritize technology innovation to empower our partners with enhanced capabilities and improved efficiency, helping us to realize our 'Retail as a Service' strategy, and driving our next phase of growth," Liu said in a prepared statement.

In an earnings call with financial analysts, the company's chief strategy officer, Jianwen Liao, came back to this theme often. JD is widening its horizons from a pure play on its own online retail operations, providing infrastructure services to other Chinese e-tailers. Liao admitted that this is a challenging ambition, but one worth pursuing.

"We believe that we have a clear vision, determination, and a capability to achieve our goals," Liao said according to a transcript compiled by Seeking Alpha. "At the end of the day, delivering trust to our consumers, partners, investors, employees and broader society is something that sets us apart from our competitors."

Looking ahead

For the third quarter, JD expects top-line revenue to rise between 25% and 30% on a year-over-year basis. That's below the second-quarter growth pace, mainly due to seasonal effects. An unusually strong July in 2017 also makes the upcoming year-over-year comparison a bit tougher.

In the longer term, JD's technology investments will continue to weigh on the company's bottom line with the aim of accelerating top-line growth. The fledgling logistics business will show lumpy results in the early years, making it difficult to set realistic profit goals from one quarter to the next.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Anders Bylund owns shares of Alphabet (A shares). The Motley Fool owns shares of and recommends Alphabet (A and C shares), and JD.com. The Motley Fool also recommends iQiyi. The Motley Fool has a disclosure policy.