China Stock Research

About the Author China Stock Research

Several years experience as an analyst in the hedge fund world. Investment knowledge includes long/short equities, credit, macro, arbitrage, distressed debt, and special situations. Previous research publication experience includes Japanese small cap research distributed to institutional investors. Education credentials include BS in Computer Science, MBA in Finance, and CFA Charter. Follow on Twitter @ChinaStockRsrch Follow on StockTwits @ChinaStockResearch

Baidu Q4 FY2014 Results


Baidu Inc. (NASDAQ:BIDU) released Q4 FY2014 results, which included revenue of 14.1 billion RMB (in line with management guidance) and net income of 2.8 billion RMB. Fourth quarter revenues met consensus estimates, but missed the consensus non-GAAP EPADS estimate of 9.95 RMB. The company reported a +16% YoY increase in advertising customers, but with mobile revenue growing to 42% of the total, up from 36% in Q3, the monetization gap was a drag on results. Management acknowledged the monetization challenges in the mobile business in its prepared remarks, and shared its expectation for a gradual improvement in the year ahead.

First quarter revenue guidance of about 12.9 billion RMB was significantly lower than the 13.6 billion RMB consensus estimate, which management explained reflect timing of the Chinese New Year and effects of the growing contribution of mobile.

Recent Quarterly Performance FY2014
(000) RMB Q4 Q1 Q2 Q3 Q4
Revenue 9,522,913 9,496,552 11,985,782 13,519,756 14,050,229
Gross profit 5,866,424 5,659,212 7,444,360 8,451,419 8,611,878
Operating profit 2,739,623 2,373,672 3,558,270 3,919,821 2,952,001
Net income 2,694,393 2,410,312 3,331,881 3,587,885 2,913,293
Earnings per share 7.90 7.21 10.09 11.00 9.01
Comparison YoY
Revenue 50% 59% 59% 52% 48%
Gross profit 35% 46% 51% 45% 47%
Operating profit -4% 7% 23% 17% 8%
Net income -3% 20% 26% 19% 8%
Earnings per share -1% 23% 34% 27% 14%
Comparison QoQ
Revenue 7% 0% 26% 13% 4%
Gross profit 1% -4% 32% 14% 2%
Operating profit -18% -13% 50% 10% -25%
Net income -11% -11% 38% 8% -19%
Earnings per share -8% -9% 40% 9% -18%
Margin analysis
GPM 62% 60% 62% 63% 61%
OPM 29% 25% 30% 29% 21%
NPM 28% 25% 28% 27% 21%
EBITDA 38% 36% 38% 36% 30%

Baidu generated about 5.3 billion RMB of operating cash flow in Q4, and spent about 1.5 billion RMB on capital expenditures.

The fourth quarter balance sheet remained strong, with about 58 billion RMB of highly liquid assets (cash and cash equivalents, short-term investments), easily exceeding total short-term and long-term liabilities.

Outlook

Baidu’s Q1 FY2015 outlook included the following:

  • Revenue: between 12.65 billion to 13.07 billion RMB (+35% YoY, -9% QoQ)

The first quarter outlook reflects both the timing of the Chinese New Year (relatively late in 2015), as well as the estimated impact of changes in the mix between PC and mobile revenues. Mobile monetization is not as strong as PC, something the management has been trying to fix, hence what appears to be a revenue slowdown when looking at figures alone.

When considering the unmistakable trend of mobile devices becoming the platform of choice for many Chinese Internet users, Baidu has little choice to focus its business development efforts in this area. For shareholders, the likely near-term implications include top-line pressure and tighter margins, but if the company can establish and defend a dominant position in mobile like it has in PC, the results could be worth the cost to achieve them.

Operating Metrics

Management noted that in December 2014, mobile search revenue exceeded PC for the first time.

The rising trend in revenue per customer suggests that prior efforts to focus on key clients are delivering results.

In earlier conference calls, CEO Li explained that mobile was also a driver for average spend, as customers were broadening their use of online advertising services.

Growth in the number of online marketing customers is a clear positive for Baidu, underscoring its competitive position as the “go-to” provider of search advertising.

The slowing pace of new customers in Q4 can be influenced by seasonality, but the +16% YoY change also reflects management discontinuing business with some clients in 2H FY2013 to help improve user experience.

Financial Performance

Baidu Inc. Income Statement FY2014
(000) RMB Q4 Q1 Q2 Q3 Q4
Online marketing services 9,462,202 9,378,318 11,836,858 13,427,179 13,844,607
Other services 60,711 118,234 148,924 92,577 205,622
Total revenues 9,522,913 9,496,552 11,985,782 13,519,756 14,050,229
YoY 50% 59% 59% 52% 48%
Cost of revenues -3,656,489 -3,837,340 -4,541,422 -5,068,337 -5,438,351
Gross profit 5,866,424 5,659,212 7,444,360 8,451,419 8,611,878
YoY 35% 46% 51% 45% 47%
Gross margin 62% 60% 62% 63% 61%
Operating expenses
Selling, general, and administrative -1,862,966 -2,008,890 -2,148,874 -2,700,008 -3,524,371
Research and development -1,263,835 -1,276,650 -1,737,216 -1,831,590 -2,135,506
Operating profit 2,739,623 2,373,672 3,558,270 3,919,821 2,952,001
YoY -4% 7% 23% 17% 8%
Operating profit margin 29% 25% 30% 29% 21%
Non-operating items
Interest income 367,922 419,495 463,802 536,367 573,154
Interest expense -148,207 -121,784 -146,045 -177,168 -183,575
Foreign exchange gain/loss, net -40,861 97,302 81 -44,476 22,873
Income/loss from equity method investments -651 -5,603 -5,501 -9,982 -5,867
Other income, net 115,399 77,526 66,888 20,091 93,200
Pretax profit 3,033,225 2,840,608 3,937,495 4,244,653 3,451,786
Pretax margin 32% 30% 33% 31% 25%
Income tax expense -338,832 -430,296 -605,614 -656,768 -538,493
Net income 2,694,393 2,410,312 3,331,881 3,587,885 2,913,293
YoY -3% 20% 26% 19% 8%
Net profit margin 28% 25% 28% 27% 21%
Net income/loss due noncontrolling interests -89,870 -124,880 -214,815 -288,227 -315,776
Net income due Baidu, Inc. 2,784,263 2,535,192 3,546,696 3,876,112 3,229,069

Stay Ahead of Everyone Else

Get The Latest Stock News Alerts