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Baidu Inc (BIDU) Q1 FY2015 Results

Baidu Inc (ADR) (NASDAQ:BIDU) recorded revenue of 12.7 billion RMB, barely missing consensus expectations, and non-GAAP EPADS of 7.58 RMB, ahead of the 6.61 RMB street estimate. Management’s Q2 revenue guidance was approximately 16.6 billion RMB, close to the average of published estimates, which equated to annual growth of about +39% YoY.

Key highlights on the Q1 call included the company’s continued progress building out its mobile business, which included improving monetization capabilities as well as expanding products and services for users and customers. Management noted that some of its key mobile initiatives beyond Maps and Search were performing well, and would be a continued focus in the near term, as well as other O2O and related areas.

When discussing monetization of mobile, an important challenge for Baidu, management seemed to suggest that near-term focus would be on share acquisition and driving total transaction volumes through its ecosystem instead of a near-term focus on the bottom line. The trend toward mobile in China seems inexorable, and management favoring long-term sustainability of its mobile ecosystem over near-term results may ultimately prove to be a sound strategy.

Recent Quarterly Performance FY2015
(000) RMB Q1 Q2 Q3 Q4 Q1
Revenue 9,496,552 11,985,782 13,519,756 14,050,229 12,724,616
Gross profit 5,659,212 7,444,360 8,451,419 8,611,878 7,398,513
Operating profit 2,373,672 3,558,270 3,919,821 2,952,001 2,155,313
Net income 2,410,312 3,331,881 3,587,885 2,913,293 2,068,286
Earnings per share (diluted, non-GAAP) 7.69 10.72 11.67 9.97 7.58
Comparison YoY
Revenue 59% 59% 52% 48% 34%
Gross profit 46% 51% 45% 47% 31%
Operating profit 7% 23% 17% 8% -9%
Net income 20% 26% 19% 8% -14%
Earnings per share 24% 38% 29% 19% -1%
Comparison QoQ
Revenue 0% 26% 13% 4% -9%
Gross profit -4% 32% 14% 2% -14%
Operating profit -13% 50% 10% -25% -27%
Net income -11% 38% 8% -19% -29%
Earnings per share -8% 39% 9% -15% -24%
Margin analysis
GPM 60% 62% 63% 61% 58%
OPM 25% 30% 29% 21% 17%
NPM 25% 28% 27% 21% 16%
EBITDA 31% 34% 33% 26% 22%

 

Baidu generated about 2.8 billion RMB of operating cash flow in the quarter, largely a function of net income (working capital was flat QoQ). The company’s balance sheet included ample liquidity of about 58 billion RMB, similar to the previous quarter.

 

Outlook

The company’s Q2 FY2015 outlook included the following:

  • Revenue: between 16.4 and 16.8 billion RMB, representing growth of about +37% YoY and +30% QoQ

The substantial ramp-up QoQ implied by the Q2 outlook is in part due to seasonal effects in Q1 due to the timing of the Chinese New Year. Although the Q2 growth seems striking, there are several factors which may make it seem relatively more attainable. The first factor worth noting is the company’s annual sales drive for its search engine marketing, which CEO Li noted was the company’s largest yet, and was aimed at SMEs and lower-tier cities.

Noting that the company increased online marketing customers by about +17% YoY in Q1, stepping up the pace to about +20% could help make the revenue goal less of a stretch. Average merchant spend was about 24,000 RMB in Q1, and assuming a more normalized pace of about 26,000 RMB (achieved in 2H FY2014), the top-line target gets closer still.

Ways the company could reach those operating metrics include marginal contributions from video portal iQiYi, which has seen notable content investment to draw viewers, as well as incremental gains in mobile monetization. Baidu’s O2O initiatives are likely to continue being a small contributor, based on management’s comments in Q1 that it was still early for those services, however continued promotional spending could help drive improvements.

In terms of costs, management hinted that it would continue relatively more aggressive SG&A spending than was typical of the company, mostly marketing and promotion for growth drivers, and also hinted that R&D costs would stabilize somewhat. Stepped-up SG&A spending comes with a caveat; comments from the CFO seemed to imply that spending would be lumpy, so the earlier spend guidance may be more appropriate on a full-year basis vs. quarterly.

Based on the above revenue and cost assumptions, operating margins could be in the low 20% range, lower than FY2014 due to higher SG&A and R&D, which could put Q2 earnings per share at about 9.7 RMB per ADS.

 

Operating Metrics

On the Q1 call, management noted that mobile search exceeded 50% in the quarter, and had become the major driver of incremental growth for Baidu.

 

The drop in revenue per online marketing customer appears mainly due to seasonality; the number of customers was flat QoQ.

 

Whether or not the mobile traffic mix is having a significant impact on online marketing revenue remains to be seen. On the Q1 call, CEO Li noted that during holidays like the Chinese New Year, mobile device usage increases, possibly suggesting revenue pressure ahead.

Although Q1 is seasonally slow, the number of online marketing customers was nearly unchanged QoQ, a positive sign for Baidu.

 

An increase in the number of online marketing customers could potentially help offset lower monetization rates from mobile services, a topic for the company.

 

Financial Performance

Baidu Inc. Income Statement FY2015
(000) RMB Q1 Q2 Q3 Q4 Q1
Online marketing services 9,378,318 11,836,858 13,427,179 13,844,607 12,518,757
Other services 118,234 148,924 92,577 205,622 205,859
Total revenues 9,496,552 11,985,782 13,519,756 14,050,229 12,724,616
YoY 59% 59% 52% 48% 34%
Cost of revenues -3,837,340 -4,541,422 -5,068,337 -5,438,351 -5,326,103
Gross profit 5,659,212 7,444,360 8,451,419 8,611,878 7,398,513
YoY 46% 51% 45% 47% 31%
Gross margin 60% 62% 63% 61% 58%
Operating expenses
Selling, general, and administrative -2,008,890 -2,148,874 -2,700,008 -3,524,371 -2,956,867
Research and development -1,276,650 -1,737,216 -1,831,590 -2,135,506 -2,286,333
Operating profit 2,373,672 3,558,270 3,919,821 2,952,001 2,155,313
YoY 7% 23% 17% 8% -9%
Operating profit margin 25% 30% 29% 21% 17%
Non-operating items
Interest income 419,495 463,802 536,367 573,154 561,213
Interest expense -121,784 -146,045 -177,168 -183,575 -199,128
Foreign exchange gain/loss, net 97,302 81 -44,476 22,873 8,992
Income/loss from equity method investments -5,603 -5,501 -9,982 -5,867 -7,979
Other income, net 77,526 66,888 20,091 93,200 90,875
Pretax profit 2,840,608 3,937,495 4,244,653 3,451,786 2,609,286
Income tax expense -430,296 -605,614 -656,768 -538,493 -541,000
Net income 2,410,312 3,331,881 3,587,885 2,913,293 2,068,286
YoY 20% 26% 19% 8% -14%
Net profit margin 25% 28% 27% 21% 16%
Net income/loss due noncontrolling interests -124,880 -214,815 -288,227 -315,776 -380,994
Net income due Baidu, Inc. 2,535,192 3,546,696 3,876,112 3,229,069 2,449,280