Baidu (NASDAQ:BIDU), the leading online search provider in China, reported better-than-expected results in the second quarter of 2013. Its revenue grew by 38.6% annually to $1.23 billion, and the company expects the revenue growth to accelerate in the third quarter. Investors reacted positively to the results and the company’s stock price rose by around 13% in after-hours trading.
As expected, Baidu’s operating margin slumped from 51.6% in Q2 2012 to 38.4% in Q2 2013. Also, its net income declined by 4.5% annually to $430.8 million. The company’s investments to bolster its mobile ecosystem and drive its adoption contributed to increased costs during the quarter. SG&A expenses rose by 83.5% owing to increased promotional activity to drive its mobile adoption. R&D expenses grew by 72.6% due to addition of staff, and other costs also rose due to increased infrastructure capacity and consolidation of its online video platform. We expect the profitability to stay under pressure during 2013 as Baidu continues to invest in infrastructure and mobile strategy.
In our previous article, we had outlined that Baidu is taking the right steps by investing heavily on mobile strategy and its results are so far encouraging. This better-than-expected revenue growth and mobile monetization indicate that Baidu’s initiatives are beginning to pay off.
Baidu’s management’s stated that it will continue to make investments to fuel its growth in areas such as search, location-based services, mobile app distribution and online video. Alongside, it will continue to pursue acquisitions to bolster its growth.  We believe that the strategy of increasing investments in the relevant areas is necessary to position Baidu among the leading players in the Chinese Internet market.
Mobile Monetization Is Picking Up
In an encouraging sign, Baidu reported rising monetization from the mobile platform in the second quarter. Revenue from mobile devices contributed more than 10% to the company’s total revenue in the second quarter.  We believe that increasing mobile monetization can accelerate Baidu’s growth in the long term.
Baidu introduced an integrated PC and mobile bidding system during the quarter, which contributed to increased advertising on the mobile platform. In addition, the company is also assisting its customers in optimizing their websites for better mobile experience. A nationwide search engine marketing campaign with heightened focus on mobile was also undertaken by the company to bolster its mobile adoption.
At the same, Baidu continued to make investments to enhance its mobile portfolio. During the quarter, it added new functionality to its mobile search and maps application to increase their popularity among customers. Baidu’s mobile offerings continue to gain traction in the market and this is contributing towards increased mobile monetization. Recently, the company signed an agreement to acquire 91 Wireless Websoft (an app distribution platform) for $1.9 billion, which is expected to strengthen Baidu’s market position in China. Since the deal is still being finalized, Baidu did not offer more details regarding this acquisition.
Strong growth in online customers bodes well for Baidu’s outlook
During the second quarter, Baidu added 58,000 active online marketing customers, representing the highest increase of customers in a quarter. This brought the number of active online marketing customers to 468,000 in Q2 2013, a growth of 33% y-o-y and 14.1% q-o-q. We believe that this record increase allays some of the fears related to rising competition from Qihoo. Various investors have been concerned that Baidu will lose some of its market share in the Chinese online search market to Qihoo. However, the increase in the number of customers signals strength in Baidu’s platform and indicates that its marketing activities are yielding positive results.
Interestingly, revenue per online marketing customer also increased to $2,623 in Q2 2013, representing an increase of 3.9% y-o-y and 11% q-o-q. This indicates that rising competition has not yet had an impact on Baidu’s pricing power.
Guidance for Q3 2013
- Revenue in the range of RMB8.73 - 8.96 billion ($1.422 billion to $1.46 billion), representing a yo-y increase of 39.7% to 43.3%
We are in the process of updating our price estimate for Baidu’s stock.Notes:
- Baidu.com, Inc. (ADR) (BIDU) CEO Discusses Q2 2013 Results – Earnings Call Transcript, Seeking Alpha, July 25, 2013 [↩] [↩]