Baidu Inc (ADR) (NASDAQ:BIDU) announced its unaudited financial results for the second quarter ended June 30, 2017.

“In the second quarter, Baidu announced our new mission to make a complex world simpler through technology.” said Robin Li, Baidu’s Chairman and Chief Executive Officer. “To achieve our mission, we will execute on two strategic pillars: to strengthen our mobile foundation and lead in AI. We will use AI as a fundamental driver to elevate our current core business, specifically our core products of Mobile Baidu, search and feed. In parallel, we will continue to build out our newer AI-enabled initiatives through an open platform and ecosystem approach to capture long term economic opportunity.”

“We made big strides in the second quarter, as we reported solid financial performance and made meaningful progress in our core business and AI-enabled initiatives,” said Qi Lu, Baidu’s Vice Chairman, Group President and Chief Operating Officer. “Our Mobile Baidu App and our Feed product showed strong progress, and the solid increase of our online active customer base reaffirmed Baidu’s unique and compelling value proposition. At our inaugural Baidu Create AI Developer conference, we showcased our AI platform and eco-system leadership position and compelling long term economic opportunities. iQiyi also continued to solidify its lead in the online video industry.”

“We delivered solid results in the second quarter,” said Jennifer Li, CFO of Baidu. “We will continue to drive operational efficiency on our platform and invest in the core strength of technology and in our ecosystem. We will execute with discipline to fulfill our new mission in the AI era to generate long term shareholder value.”

Second Quarter 2017 Financial Highlights

  • Total revenues in the second quarter of 2017 were RMB20.874 billion ($3.079 billion), a 14.3% increase from the corresponding period in 2016. Mobile revenue represented 72% of total revenues for the second quarter of 2017, compared to 62% for the corresponding period in 2016.
  • Operating profit in the second quarter of 2017 was RMB4.210 billion ($621 million), a 46.9% increase from the corresponding period in 2016. iQiyi reduced non-GAAP operating margins by 11.5 percentage points for the second quarter of 2017.
  • Net income attributable to Baidu in the second quarter of 2017 was RMB4.415 billion ($651 million), an 82.9% increase from the corresponding period in 2016. Diluted earnings attributable to Baidu per ADS for the second quarter of 2017 were RMB11.31($1.67);non-GAAP net income attributable to Baidu[2] in the second quarter of 2017 was RMB5.571 billion ($822 million), a 98.4% increase from the corresponding period in 2016;non-GAAP diluted earnings per ADS[3]  for the second quarter of 2017 were RMB16.00 ($2.36).

In the following section, comparison and analysis are provided based on reported consolidated financial results.

Second Quarter 2017 Results

Baidu reported total revenues of RMB20.874 billion ($3.079 billion) for the second quarter of 2017, representing a 14.3% increase from the corresponding period in 2016.

Online marketing revenues for the second quarter of 2017 were RMB17.883 billion ($2.638 billion), representing a 5.6% increase from the corresponding period in 2016. Baidu had about 470,000 active online marketing customers[4] in the second quarter of 2017, representing a 20.9% decrease from the corresponding period in 2016. Revenue per online marketing customer for the second quarter of 2017 was approximately RMB37,500 ($5,532), a 32.0% increase from the corresponding period in 2016.

Traffic acquisition costs as a component of cost of revenues was RMB2.478 billion ($365 million), representing 11.9% of total revenues, compared to 15.9% in the corresponding period in 2016 and 12.9% in the first quarter of 2017.

Bandwidth costs as a component of cost of revenues were RMB1.382 billion ($204 million), representing 6.6% of total revenues, compared to 6.3% in the corresponding period in 2016.

Depreciation costs as a component of cost of revenues were RMB828 million ($122 million), representing 4.0% of total revenues, compared to 4.1% in the corresponding period in 2016.

Operational costs as a component of cost of revenues were RMB1.225 billion ($181 million), representing 5.9% of total revenues, compared to 5.4% in the corresponding period in 2016.

Content costs as a component of cost of revenues were RMB3.112 billion ($459 million), representing 14.9% of total revenues, compared to 9.3% in the corresponding period in 2016. The year-over-year increase was mainly due to iQiyi’s increased content costs.

Selling, general and administrative expenses were RMB2.934 billion ($433 million), representing a decrease of 30.1% from the corresponding period in 2016, primarily due to a decrease in promotional spending

Research and development expenses were RMB3.148 billion ($464 million), representing a 27.7% increase from the corresponding period in 2016. The increase was primarily due to the growth of research and development personnel-related costs.

Share-based compensation expenses, which were allocated to related operating costs and expense line items, were RMB796 million ($117 million) in the second quarter of 2017, compared to RMB401 million in the corresponding period in 2016.

Operating profit was RMB4.210 billion ($621 million), representing a 46.9% increase from the corresponding period in 2016. Non-GAAP operating profit was RMB5.006 billion ($738 million), representing a 53.2% increase from the corresponding period in 2016.

Income tax expense was RMB564 million ($83 million), compared to RMB793 million in the corresponding period in 2016. The effective tax rate for the second quarter of 2017 was 11.3% as compared to 24.8% for the corresponding period in 2016. The decrease in the effective tax rate was due to the preferential tax status that was granted to certain PRC subsidiaries in the second quarter of 2017.

Net income attributable to Baidu was RMB4.415 billion ($651 million), representing an 82.9% increase from the corresponding period in 2016.Basic and diluted earnings per ADS[5] for the second quarter of 2017 amounted to RMB11.36 ($1.68) and RMB11.31($1.67), respectively.

Non-GAAP net income attributable to Baidu was RMB5.571 billion ($822 million), a 98.4% increase from the corresponding period in 2016. Non-GAAP diluted earnings per ADS for the second quarter of 2017 amounted to RMB16.00 ($2.36).

As of June 30, 2017, the Company had cash, cash equivalents and short-term investments of RMB92.152 billion ($13.593 billion).  Net operating cash inflow for the second quarter of 2017 was RMB6.626 billion ($977 million). Capital expenditures for the second quarter of 2017 were RMB1.125 billion ($166 million).

Adjusted EBITDA was RMB6.008 billion ($886 million) for the second quarter of 2017, representing a 41.4% increase from the corresponding period in 2016.

Outlook for Third Quarter 2017

Baidu currently expects to generate total revenues in an amount ranging from RMB23.130 billion ($3.412 billion) to RMB23.750 billion($3.503 billion) for the third quarter of 2017, representing an annual increase of 26.7% to 30.1%. On an apples-to-apples basis, excluding mobile games from Baidu’s financials, the guidance represents a 29.1% to 32.6% year-over-year increase. This forecast reflects Baidu’s current and preliminary view, which is subject to change.

Shares of Baidu are up nearly 6.5% to $214.00 in after-hours trading Thursday. BIDU has a 1-year high of $205.60 and a 1-year low of $156.23. The stock’s 50-day moving average is $183.76 and its 200-day moving average is $179.98.

On the ratings front, BIDU has been the subject of a number of recent research reports. In a report issued on July 14, Bernstein Research analyst Bhavtosh Vajpayee reiterated a Sell rating on BIDU, with a price target of $152, which implies a downside of 24% from current levels. On July 11, Stifel Nicolaus’ Keith Gay reiterated a Buy rating on the stock and has a price target of $220.

According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Bhavtosh Vajpayee and Keith Gay have a yearly average loss of -12.2% and a return of 2.0% respectively. Vajpayee has a success rate of 25% and is ranked #3591 out of 4160 analysts, while Gay has a success rate of 69% and is ranked #2006.

Overall, one research analyst has rated the stock with a Sell rating, 2 research analysts have assigned a Hold rating and 4 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 $190.33 which is -5.3% under where the stock opened today.

Baidu 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.