Baidu Inc (ADR) (NASDAQ:BIDU) announced its unaudited financial results for the third quarter ended September 30, 2016.

“We saw further improvements in customer quality in the third quarter as we continued to implement stricter standards for online marketers,” said Robin Li, Chairman and CEO of Baidu. “During the quarter the growing popularity of our news feed product helped drive user stickiness in search and across the Baidu content ecosystem. We look forward to further innovating through initiatives such as our digital assistant Duer and autonomous cars, and to bringing new AI-based applications to market.”

“We continue to enhance user experience by taking proactive measures to raise customer quality and foster a healthier industry environment,” said Jennifer Li, CFO of Baidu. “Looking ahead, we will maintain this focus on delivering the best user experience, while investing in technology and infrastructure to drive long term growth.”

Third Quarter 2016 Operational Highlights

  • Mobile search monthly active users (MAUs) were 660 million for the month of September 2016, an increase of 3% year-over-year
  • Mobile maps MAUs were 348 million for the month of September 2016, an increase of 7% year-over-year
  • Gross merchandise value[2] (GMV) for Transaction Services totaled RMB19.4 billion ($2.9 billion) for the third quarter of 2016, an increase of 49% year-over-year
  • Baidu Wallet activated accounts reached 90 million at the end of September 2016, an increase of 99% year-over-year

Third Quarter 2016 Financial Highlights

  • Total revenues in the third quarter of 2016 were RMB18.253 billion ($2.737 billion), a 0.7% decrease from the corresponding period in 2015, and 6.7% year-over-year increase, excluding Qunar[3] in the third quarter of 2015. Mobile revenue represented 64% of total revenues for the third quarter of 2016, compared to 54% for the corresponding period in 2015.
  • Operating profit in the third quarter of 2016 was RMB2.787 billion ($417.9 million), an 11.0% increase from the corresponding period in 2015. Transaction Services reduced non-GAAP operating margins by 21.4 percentage points and iQiyi further reduced non-GAAP operating margins by 7.7 percentage points for the third quarter of 2016.
  • Net income attributable to Baidu in the third quarter of 2016 was RMB3.102 billion ($465.2 million), a 9.2% increase from the corresponding period in 2015. Diluted earnings attributable to Baidu per ADS for the third quarter of 2016 were RMB8.51($1.28); non-GAAP net income attributable to Baidu[4] in the third quarter of 2016 was RMB3.447 billion ($516.9 million), a 6.3% increase from the corresponding period in 2015; non-GAAP diluted earnings per ADS[5] for the third quarter of 2016 were RMB9.92 ($1.49).

In the following section, comparison and analysis are provided based on reported consolidated financial results. For ease of comparison, a table with apples-to-apples adjusted financials and metrics excluding Qunar can be found at the end of the following section.

Third Quarter 2016 Results

Baidu reported total revenues of RMB18.253 billion ($2.737 billion) for the third quarter of 2016, representing a 0.7% decrease from the corresponding period in 2015.

Online marketing revenues for the third quarter of 2016 were RMB16.490 billion ($2.473 billion), representing a 6.7% decrease from the corresponding period in 2015. Baidu had about 524,000 active online marketing customers[6] in the third quarter of 2016, representing a 15.9% decrease from the corresponding period in 2015.

Revenue per online marketing customer for the third quarter of 2016 was approximately RMB31, 300 ($4,694), a 10.6% increase from the corresponding period in 2015.

Traffic acquisition cost as a component of cost of revenues was RMB2.594 billion ($389.1 million), representing 14.2% of total revenues, as compared to 13.1% in the corresponding period in 2015 and 15.9% in the second quarter of 2016.

Bandwidth costs as a component of cost of revenues were RMB1.241 billion ($186.1 million), representing 6.8% of total revenues, compared to 5.3% in the corresponding period in 2015.

Depreciation costs as a component of cost of revenues were RMB802.3 million ($120.3 million), representing 4.4% of total revenues, compared to 3.6% in the corresponding period in 2015.

Operational costs as a component of cost of revenues were RMB1.159 billion ($173.7 million), representing 6.3% of total revenues, compared to 6.8% in the corresponding period in 2015.

Content costs as a component of cost of revenues were RMB2.211 billion ($331.6 million), representing 12.1% of total revenues, compared to 5.0% in the corresponding period in 2015. The increase was mainly due to iQiyi’s increased content costs.

Selling, general and administrative expenses were RMB3.596 billion ($539.2 million), representing a decrease of 36.9% from the corresponding period in 2015. The year-over-year decrease was primarily due to a decrease in promotional spending for transaction services.

Research and development expenses were RMB2.614 billion ($391.9 million), a 2.8% decrease from the corresponding period in 2015.

Share-based compensation expenses, which were allocated to related operating costs and expense line items, were RMB418.1 million ($62.7 million) in the third quarter of 2016, compared to RMB400.3 million in the corresponding period in 2015.

Operating profit was RMB2.787 billion ($417.9 million), representing an 11.0% increase from the corresponding period in 2015.Non-GAAP operating profit was RMB3.205 billion ($480.6 million), a 10.1% increase from the corresponding period in 2015.

Income tax expense was RMB1.045 billion ($156.7 million), compared to RMB590.5 million in the corresponding period in 2015. The effective tax rate for the third quarter of 2016 was 25.3% as compared to 19.4% for the corresponding period in 2015. The increase of effective tax rate for the third quarter of 2016 reflects that some loss-generating entities in the group cannot be consolidated for tax purposes under PRC tax law.

Net income attributable to Baidu was RMB3.102 billion ($465.2 million), representing a 9.2% increase from the corresponding period in 2015. Basic and diluted earnings per ADS for the third quarter of 2016 amounted to RMB8.53 ($1.28) and RMB8.51($1.28), respectively.

Non-GAAP net income attributable to Baidu was RMB3.447 billion ($516.9 million), a 6.3% increase from the corresponding period in 2015. Non-GAAP diluted earnings per ADS for the third quarter of 2016 amounted to RMB9.92 ($1.49).

As of September 30, 2016, the Company had cash, cash equivalents and short-term investments of RMB78.362 billion($11.751 billion). Net operating cash inflow for the third quarter of 2016 was RMB2.953 billion ($442.9 million). Capital expenditures for the third quarter of 2016 were RMB1.183 billion ($177.3 million).

Adjusted EBITDA was RMB4.230 billion ($634.3 million) for the third quarter of 2016, representing a 10.1% increase from the corresponding period in 2015. On an apples-to-apples basis, excluding Qunar from Baidu’s financials, the adjusted EBITDA represents a 3.1% year-over-year decrease.

Outlook for Fourth Quarter 2016

Baidu currently expects to generate total revenues in an amount ranging from RMB17.840 billion ($2.675 billion) to RMB18.380 billion ($2.756 billion) for the fourth quarter of 2016, representing a 4.6% to 1.7% year-over-year decrease. On an apples-to-apples basis, excluding Qunar from Baidu’s financials, the guidance represents a decrease of 2.0% to an increase of 0.9%, year-over-year. This forecast reflects Baidu’s current and preliminary view, which is subject to change. (Original Source)

Shares of Baidu are down nearly 2% to $170.99 in after-hours trading. BIDU has a 1-year high of $217.97 and a 1-year low of $139.61. The stock’s 50-day moving average is $183.50 and its 200-day moving average is $174.23.

On the ratings front, Baidu has been the subject of a number of recent research reports. In a report issued on October 25, Brean Capital analyst Fawne Jiang reiterated a Buy rating on BIDU. Separately, on October 20, Barclays’ Alicia Yap maintained a Hold rating on the stock and has a price target of $196.

According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Fawne Jiang and Alicia Yap have a yearly average return of 8.2% and 18.7% respectively. Jiang has a success rate of 57% and is ranked #157 out of 4188 analysts, while Yap has a success rate of 59% and is ranked #368.

Overall, one research analyst has rated the stock with a Sell rating, 3 research analysts have assigned a Hold rating and 5 research analysts have given a Buy rating to the stock. When considering if perhaps the stock is under or overvalued, the average price target is $181.71 which is 4% above where the stock opened today.

Baidu, Inc. operates as an internet search provider, which offers internet search solutions and online marketing solutions. It operates as an e-commerce platform with an online payment tool, develops and markets web application software, and provides human resource related services. The company operates through the following segments: Search Services, Transaction Services and iQiyi.