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Baidu Earnings Review Q2 2014

Baidu Earnings Review Q2 2014

posted by Vikram Nagarkar | published by Amigobulls on
  • Baidu delivered a solid quarter with strong growth and profitability.
  • Baidu beat EPS estimates by a whopping 26%.
  • Baidu is attractive at its current valuations for long term investment.



 
Chinese search giant Baidu (NASDAQ:BIDU) delivered yet another strong quarter as it stomped past estimates with its earnings for Q2 2014. The company’s revenue growth remained solid and marginally beat estimates. The big surprise numbers this quarter were Baidu’s profit margins, which rebounded to higher levels even as analysts expected margins to contract further from Q1 levels. Baidu also registered progress on many metrics including mobile revenue and user growth across platforms/businesses. The company’s revenue guidance remained healthy for Q3 2014. To summarize, Q2 was a great quarter for Baidu with improvements on all counts. We continue to find Baidu attractive at its current valuations.
 

Baidu Q2 2014 Actuals vs Estimates

Baidu registered a revenue of RMB 11.986 billion ($1.932 billion) to reach slightly higher than the midpoint of its revenue guidance for the quarter. Revenue for the quarter surpassed estimates marginally while EPS actuals surpassed estimates by a whopping 26%.
 

Estimates

Actuals

Beat

Revenue (RMB billion)

11.93

11.99

0.5%

EPS RMB

8

10.09

26.1%

Revenue (USD billion)

1.92

1.93

0.6%

EPS $

1.29

1.63

26.4%

 

Baidu Revenue Growth

In Q2 2014, Baidu clocked a solid growth of 58.5% YoY and 26% in sequential terms. The company generated almost all of its revenue from online marketing (98.8%). Baidu saw a 50.3% YoY jump in its revenue/customer reaching RMB 24,200 ($3,901) in Q2.
 
The highlight on the revenue front was that Baidu earned 30% of its revenue on mobile platforms, marking a 50% jump from Q4 2013 when mobile accounted for about 20% of its total revenue.
 
Mobile revenue was driven largely by mobile search. Interestingly, most of Baidu’s mobile search traffic originates from its search app as opposed to mobile web browsers. Why that’s important is because it gets tougher for competitors who run popular browsers to edge out Baidu by simply picking another search engine as the default option on their browsers. But of course, it only gets tougher and not impossible. Evidently, that’s partly what Qihoo has done, and it appears, quite successfully.
 
This turf war will get more interesting as it progresses with Alibaba/UC Web, Tencent/Sogou and Qihoo trying to bite into Baidu’s market share. For this quarter though, mobile traffic clocked 500 million monthly active users, drove search traffic and even surpassed desktop traffic on a few occasions, a positive sign.
 

Baidu Profitability

Baidu recorded operating and net profit margins of 29.7% and 29.6% respectively. The company reported an operating income of RMB 3.55 billion (USD 573 million) and net income of RMB 3.54 billion (USD 571 million).
 
Given that Baidu’s management wasn’t expecting an absolute growth in profits for the year, its latest quarterly performance is quite exceptional.
 
Baidu’s Traffic Acquisition Costs (TAC) rose to 12.7% of total revenue continuing its gradual uptrend. As per the company’s management, TAC will continue to trend higher in the quarters to come.
 
One of the major contributors to the higher margins was a decline in marketing expenses, as spends on app pre-installations declined from higher levels prevalent in the previous quarters.
 
Given the increased competition in search and Baidu’s expansion plans, both in geography and in businesses, profit margins are unlikely to move higher from current levels.
 

Baidu Cash Flows

Baidu’s operating cash flow for the quarter was RMB 4.128 billion ($665 million).
 
Baidu ended the quarter with cash, equivalents and short term investments of RMB 48.66 billion ($7.84 billion) up from RMB 39.68 billion ($6.38 billion) in Q1 2014.
 

Baidu Business Metrics

Baidu maintained its leadership position in search, app distribution, maps and online video streaming (iQiyi). As we mentioned earlier, Baidu’s search app has been a strength in internet search. In Q2 the search app clocked daily traffic of 70 million active users. Baidu has integrated its group buying and local deals business (Nuomi), Maps and its payments service (Baidu Wallet) into its search app and added the capability to complete purchase transactions within the app. The move will aid mobile user monetization rates for Baidu.
 
Here are a few additional metrics pertaining to Baidu’s non-core businesses.
 

  • Maps – 200 million monthly active users vs 190 million in Q1 2014
  • App Distribution – 130 million daily app downloads vs 100 million in Q1 2014
  • Cloud Services – 200 Mn registered users vs 160 million in Q1 2014
  • Nuomi tripled its GMV and doubled user numbers over Q4 2014.
  • iQiyi maintained its top spot for time spent on PC and mobile.

 

Baidu Q3 2014 Revenue Guidance

Baidu’s revenue guidance for the next quarter pegs revenue at RMB 13.42 – 13.78 billion (USD 2.16 – 2.22 billion) representing a YoY growth of 50.9% to 55%. Lately, Baidu’s focus is clearly on mobile platforms. This could be one of the reasons for slower growth rates given that the share of revenue from mobile platforms is increasing. Mobile traffic monetization rates are typically lower than desktop monetization rates.
 

Baidu Valuation

Baidu currently trades at a stock price of $204 a share. Here’s a look at Baidu’s valuations.
 

  • Baidu PE Ratio – 40.2
  • Baidu Price to Sales Ratio – 12.41

 
Baidu currently trades at premium valuations when compared with peers like Google and Yandex. However, as we had discussed in Baidu’s Q2 2014 Earnings Preview, we think Baidu is attractive at these valuations given its superior growth and profitability. Baidu has been a part of Amigobulls’ top stock picks since April 10 2014 and has returned over 35% since. In line with our Baidu stock analysis, we maintain our ‘buy’ rating on the stock with a long term view.

Disclaimer: We do not hold any stake in the aforesaid stocks. Please read our detailed disclaimer.

About the author

Vikram Nagarkar
Vikram Nagarkar is a Financial Analyst at Amigobulls. An MBA in Finance, Vikram has a penchant for macro economics, fiscal and monetary policy, apart from the innovative new-age businesses that we cover at Amigobulls. He loves biking, photography, traveling and exploring different cuisines. Connect with him at vikram.nagarkar AT amigobulls.com
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