Company Update (NASDAQ:BIDU): Baidu Inc (ADR) Reports 4Q and Fiscal Year 2016 Financial Results


Baidu Inc (ADR) (NASDAQ:BIDU) announced its unaudited financial results for the fourth quarter and fiscal year ended December 31, 2016.

“AI is an enormous opportunity that will revolutionize the Internet and traditional industries. Baidu, in particular, is well positioned to lead the AI wave in China, with our unique combination of technology, data and talent,” said Robin Li, Chairman and CEO of Baidu. “Our existing platform, including our search and newsfeed products, are enhanced by AI and enriched by our content and services ecosystem. We are thrilled by the opportunities that our existing platform has opened up and are excited to build the next generation of AI-enabled businesses.”

“During the fourth quarter we largely completed our initiative to ensure that new and existing customers meet our stringent quality requirements,” said Jennifer Li, CFO of Baidu. “We believe that the impact of these initiatives is mostly behind us and we look forward to 2017 as a time of recovery and growth. As always, we will stay focused on creating the best possible experience for users, while maintaining investment in key AI-enabled initiatives such as financial services, cloud and autonomous driving.”

Fourth Quarter and Fiscal Year 2016 Operational Highlights

  • Mobile search monthly active users (MAUs) were 665 million for the month of December 2016, an increase of 2% year-over-year
  • Mobile maps MAUs were 341 million for the month of December 2016, an increase of 13% year-over-year
  • Gross merchandise value (GMV) for Transaction Services totaled RMB18.1 billion ($2.6 billion) for the fourth quarter of 2016, an increase of 23% year-over-year
  • Baidu Wallet activated accounts reached 100 million at the end of December 2016, an increase of 88% year-over-year

Changes to Board Composition

Effective on February 26, 2017:

  • Dr. Qi Lu, Baidu’s Group President and Chief Operating Officer, has been appointed as a director and the vice chairman of the board of directors of the Company.
  • Mr. Greg Penner, who has served as a board member since July 2004, will step down from the board and all the committees on the board.
  • Mr. Yuanqing Yang has been appointed as a member of the audit committee and as a member of the corporate governance and nominating committee of the board of directors of the Company.

Fourth Quarter and Fiscal Year 2016 Financial Highlights

  • Total revenues in the fourth quarter of 2016 were RMB18.212 billion ($2.623 billion), a 2.6% decrease from the corresponding period in 2015, and flat year-over-year, excluding Qunar in the fourth quarter of 2015. Mobile revenue represented 65% of total revenues for the fourth quarter of 2016, compared to 56% for the corresponding period in 2015.
  • Total revenues in fiscal year 2016 were RMB70.549 billion ($10.161 billion), a 6.3% increase and 11.9% year-over-year increase excluding Qunar from 2015. Mobile revenue represented 63% of total revenues in 2016, compared to 53% in 2015.
  • Operating profit in the fourth quarter of 2016 was RMB2.185 billion ($314.7 million), a 38.2% decrease from the corresponding period in 2015. Transaction Services reduced non-GAAP operating margins by 22.9 percentage points and iQiyi further reduced non-GAAP operating margins by 9.8 percentage points for the fourth quarter of 2016.
  • Operating profit in fiscal year 2016 was RMB10.049 billion ($1.447 billion), a 13.9% decrease from 2015. Transaction Services reduced non-GAAP operating margins by 23.8 percentage points and iQiyi further reduced non-GAAP operating margins by 7.9 percentage points for the fiscal year 2016.
  • Net income attributable to Baidu in the fourth quarter of 2016 was RMB4.129 billion ($594.7 million). Diluted earnings attributable to Baidu per ADS for the fourth quarter of 2016 were RMB11.40 ($1.64); non-GAAP net income attributable to Baidu in the fourth quarter of 2016 were RMB4.606 billion ($663.4 million); non-GAAP diluted earnings per ADS in the fourth quarter of 2016 were RMB13.23 ($1.91); diluted earnings attributable to Baidu per ADS excluding net gain recognized as a result of Baidu’s exchange of Uber China shares with Didi for the fourth quarter of 2016 were RMB6.49($0.93).
  • Net income attributable to Baidu in fiscal year 2016 was RMB11.632 billion ($1.675 billion). Diluted earnings attributable to Baidu per ADS for the fiscal year 2016 were RMB31.86 ($4.59); non-GAAP net income attributable to Baidu in fiscal year 2016 were RMB13.219 billion ($1.904 billion); non-GAAP diluted earnings per ADS in fiscal year 2016 were RMB38.03($5.48); diluted earnings attributable to Baidu per ADS excluding net gain recognized as a result of Baidu’s exchange of Uber China shares with Didi in fiscal year 2016 were RMB26.94 ($3.88).

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.

Fourth Quarter 2016 Results

Baidu reported total revenues of RMB18.212 billion ($2.623 billion) for the fourth quarter of 2016, representing a 2.6% decrease from the corresponding period in 2015.

Online marketing revenues for the fourth quarter of 2016 were RMB16.166 billion ($2.328 billion), representing an 8.2% decrease from the corresponding period in 2015. Baidu had about 452,000 active online marketing customers in the fourth quarter of 2016, representing an 18.6% decrease from the corresponding period in 2015. Revenue per online marketing customer for the fourth quarter of 2016 was approximately RMB35,400 ($5,099), a 14.2% increase from the corresponding period in 2015.

Traffic acquisition cost as a component of cost of revenues was RMB2.636 billion ($379.7 million), representing 14.5% of total revenues, as compared to 14.0% in the corresponding period in 2015 and 14.2% in the third quarter of 2016.

Bandwidth costs as a component of cost of revenues were RMB1.235 billion ($177.9 million), representing 6.8% of total revenues, compared to 5.4% in the corresponding period in 2015.   

Depreciation costs as a component of cost of revenues were RMB811.5 million ($116.9 million), representing 4.5% of total revenues, compared to 3.7% in the corresponding period in 2015.

Operational costs as a component of cost of revenues were RMB1.186 billion ($170.9 million), representing 6.5% of total revenues, compared to 6.3% in the corresponding period in 2015.

Content costs as a component of cost of revenues were RMB2.571 billion ($370.3 million), representing 14.1% of total revenues, compared to 7.4% in the corresponding period in 2015. The year-over-year increase was mainly due to iQiyi’s increased content costs.

Selling, general and administrative expenses were RMB3.334 billion ($480.2 million), representing a decrease of 26.4% from the corresponding period in 2015, primarily due to a decrease in promotional spending for transaction services.

Research and development expenses were RMB2.971 billion ($428.0 million), a 19.5% increase from the corresponding period in 2015. The increase was primarily due to the growth of research and development personnel-related cost.

Share-based compensation expenses, which were allocated to related operating costs and expense line items, were RMB631.9 million ($91.0 million) in the fourth quarter of 2016, compared to RMB341.0 million in the corresponding period in 2015.

Operating profit was RMB2.185 billion ($314.7 million), representing a 38.2% decrease from the corresponding period in 2015. Non-GAAP operating profit was RMB2.817 billion ($405.7 million), a 27.3% decrease from the corresponding period in 2015.

Other income, net was RMB1.796 billion ($258.6 million) in the fourth quarter of 2016, which mainly consisted of the investment gain recognized as a result of Baidu’s exchange of Uber China shares with Didi. Other income, net was RMB24.294 billion in the corresponding period of 2015, which mainly consisted of the investment gain recognized as a result of Baidu’s exchange of Qunar shares with Ctrip.

Income tax expense was RMB400.9 million ($57.7 million), compared to income tax expense of RMB3.580 billion in the corresponding period in 2015. The effective tax rate for the fourth quarter of 2016 was 8.9% as compared to 12.7% for the corresponding period in 2015. The decrease in the effective tax rate was due to the newly granted preferential tax licenses for certain PRC subsidiaries.

Net income attributable to Baidu was RMB4.129 billion ($594.7 million). Basic and diluted earnings per ADS for the fourth quarter of 2016 amounted to RMB11.43 ($1.65) and RMB11.40 ($1.64), respectively.

Non-GAAP net income attributable to Baidu was RMB4.606 billion ($663.4 million). Non-GAAP diluted earnings per ADS for the fourth quarter of 2016 amounted to RMB13.23 ($1.91).

As of December 31, 2016, the Company had cash, cash equivalents and short-term investments of RMB89.842 billion ($12.940 billion). Net operating cash inflow for the fourth quarter of 2016 was RMB8.011 billion ($1.154 billion). Capital expenditures for the fourth quarter of 2016 were RMB1.201 billion ($173.0 million).

Adjusted EBITDA was RMB3.855 billion ($555.2 million) for the fourth quarter of 2016, representing a 19.9% decrease from the corresponding period in 2015. On an apples-to-apples basis, excluding Qunar from Baidu’s financials, the adjusted EBITDA represents a 21.4% year-over-year decrease.

Fiscal Year 2016 Results

Total revenues in 2016 were RMB70.549 billion ($10.161 billion), representing a 6.3% increase from 2015.

Online marketing revenues in 2016 were RMB64.525 billion ($9.294 billion), representing a 0.8% increase from 2015. Baidu had about 982,000 active online marketing customers in 2016, representing a 6.4% decrease from 2015. Revenue per online marketing customer for 2016 was RMB65,300 ($9,405), an increase of 7.9% from 2015.

Traffic acquisition costs in 2016 were RMB10.373 billion ($1.494 billion), representing 14.7% of total revenues, compared to 13.3% in 2015.

Bandwidth costs as a component of cost of revenues were RMB4.716 billion ($679.3 million), representing 6.7% of total revenues, compared to 5.6% in 2015.

Depreciation costs as a component of cost of revenues were RMB3.075 billion ($442.9 million), representing 4.4% of total revenues, compared to 3.9% in 2015.

Operational costs as a component of cost of revenues were RMB4.430 billion ($638.0 million), representing 6.3% of total revenues, compared to 5.8% in 2015.

Content costs as a component of cost of revenues were RMB7.864 billion ($1.133 billion), representing 11.1% of total revenues, compared to 5.6% in 2015. The year-over-year increase was mainly due to iQiyi’s increased content costs.

Selling, general and administrative expenses in 2016 were RMB15.071 billion ($2.171 billion), representing a decrease of 11.7% from the previous year, primarily due to a decrease in promotional spending for transaction services.

Research and development expenses totaled RMB10.150 billion ($1.462 billion) in 2016, representing a 0.2% decrease from 2015.

Share-based compensation expenses, which were allocated to related operating cost and expense line items, were RMB1.760 billion ($253.5 million) in 2016, compared to RMB1.387 billion in 2015.

Operating profit in 2016 was RMB10.049 billion ($1.447 billion), a 13.9% decrease from 2015. Non-GAAP operating profit in 2016 was RMB11.809 billion ($1.701 billion), representing a 9.6% decrease from 2015.

Other income, net was RMB3.793 billion ($546.4 million) in 2016, which mainly consisted of the investment gain recognized as a result of Baidu’s exchange of Uber China shares with Didi. Other income, net was RMB24.728 billion in 2015, which mainly consisted of the investment gain recognized as a result of Baidu’s exchange of Qunar shares with Ctrip.

Income tax expense was RMB2.914 billion ($419.6 million), compared to an income tax expense of RMB5.474 billion in 2015. The effective tax rate for 2016 was 20.1% as compared to 14.4% in 2015. Excluding the share exchange transactions impact for the past two years, the effective tax rate was flat year over year.

Net income attributable to Baidu in 2016 was RMB11.632 billion ($1.675 billion). Basic and diluted earnings attributable to Baidu per ADS for 2016 amounted to RMB31.95 ($4.60) and RMB31.86 ($4.59), respectively.

Non-GAAP net income attributable to Baidu in 2016 was RMB13.219 billion ($1.904 billion). Non-GAAP diluted earnings per ADS in 2016 was RMB38.03 ($5.48).

Net operating cash inflow in 2016 was RMB22.258 billion ($3.206 billion). Capital expenditures in 2016 were RMB4.189 billion ($603.4 million).

Adjusted EBITDA was RMB15.792 billion ($2.275 billion) in 2016, representing a 5.2% decrease from 2015.

Outlook for First Quarter 2017

Baidu currently expects to generate total revenues in an amount ranging from RMB16.480 billion ($2.374 billion) to RMB17.030 billion ($2.453 billion) for the first quarter of 2017, representing a 4.2% to 7.6% year-over-year increase. This forecast reflects Baidu’s current and preliminary view, which is subject to change.

Shares of Baidu are up nearly 2% to $188.50 in after-hours trading Wednesday. BIDU has a 1-year high of $201 and a 1-year low of $155.28. The stock’s 50-day moving average is $178.38 and its 200-day moving average is $174.85.

On the ratings front, BIDU has been the subject of a number of recent research reports. In a report issued on February 21, Credit Suisse analyst Evan Zhou maintained a Hold rating on BIDU, with a price target of $180, which represents a slight downside potential from current levels. On February 1, Evercore ISI’s Ken Sena reiterated a Hold rating on the stock and has a price target of $200.

According to TipRanks, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Evan Zhou and Ken Sena have a yearly average loss of -18.6% and a return of 9.5% respectively. Zhou has a success rate of 50% and is ranked #3722 out of 4494 analysts, while Sena has a success rate of 60% and is ranked #521.

Overall, one research analyst has rated the stock with a Sell rating, 4 research analysts have assigned a Hold rating and 3 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 $193.00 which is 4.5% 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. The Search Services segment includes the traditional search engine related businesses such as auction-based P4P services and display-based online advertising services. The Transaction Services segment includes the newly developed internet businesses such as services provided by Baidu Nuomi, takeout delivery services and other online-to-offline services. The iQiyi segment engages in the online video business.