Baidu Feels The Pinch Of More Competition As Mobile Monetization Needed

by Trefis Team
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    Quick Take
  • While Baidu’s top-line grew by 40% in Q1 2013, the growth rate has slowed down as compared to previous years.
  • Operating margin fell during the quarter on higher R&D and SG&A expenses. Baidu’s focus on improving its mobile platform resulted in higher R&D expenses while increased marketing efforts to fuel mobile product adoption led to a rise in SG&A expenses.
  • We think these higher expenses were partially necessary as they will help Baidu accelerate its revenue growth in the future.

Baidu (NASDAQ:BIDU), a leading Chinese online search provider, posted revenue of $961 million in Q1 2013, a y-o-y increase of 40%. While impressive, the top-line growth rate has slowed down considerably from 75% in Q1 2012 and 88.3% in Q1 2011. Operating margin also dropped to 37% from 49% in Q1 2012. Rising competition from new entrants such as Qihoo and the ramp up of Baidu’s mobile strategy resulted in higher selling, general and administrative (SG&A) and research and development (R&D) expenses. This is in line with our previous expectations that Baidu’s profits could be impacted by increasing competition. The consolidation of ITE (its online video platform) also impacted the operating margin negatively.

Investors reacted negatively to the earnings results with the stock falling by 7% at the time of writing this article. While the decline in profitability is discouraging, we think these higher expenses are partially justified. We think it is necessary for Baidu to focus on R&D and marketing to differentiate itself from its competitors, and these efforts could boost its revenue growth in the long run.

See our complete analysis of Baidu here

Baidu Is Focusing On Mobile To Drive Future Growth

Baidu is focusing on improving its mobile product portfolio to leverage the rising adoption of mobile Internet in China. It made some improvements to Baidu mobile search with better speed and improved location-based and Maps services during the quarter. Further, it is bolstering its mobile search with advanced image and voice-search features. Using these technologies, the company aims to differentiate its product portfolio amid rising competition. It has achieved some success with this strategy as the daily active users of Baidu mobile search rose by 25% at the end of 2012 to more than 100 million in Q1 2013.

However, these activities resulted in higher R&D expenses, which rose by 83% y-o-y during the quarter. The company expects R&D expenses to stay at higher levels for the rest of 2013. The share-based compensation expenses which grew by more than three-fold annually in Q1 2013 could also stay high in the near future as the company continues to incentivize its R&D personnel.

Enhanced Marketing Efforts

Baidu has stepped up its marketing efforts to deepen its relationship with customers. It has also increased its promotional activities to drive higher usage of its mobile product portfolio. In the earnings call, the company talked about a nationwide search engine marketing campaign to help connect with its customers, educate them about its mobile strategy and increase its advertising business. We think these efforts could help Baidu achieve higher mobile monetization in the long run.

SG&A expenses grew by 77% annually in Q1 2013. We think these expenses will stay high during the rest of 2013 as Baidu continues to invest in promotional activities to achieve higher mobile product adoption.

Guidance

- Second quarter revenue in the range of RMB 7.37 – 7.55 billion ($1.187 – 1.216 billion), representing annual growth of 35.1%- 38.4%.

We have a price estimate of $115 for Baidu’s stock and are in the process of revising the price  based on the Q1 results.

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