Baidu Posts Robust Top-line Growth Helped By Its Growing Mobile Presence

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Until mid-2013, there were concerns surrounding Baidu’s (NASDAQ:BIDU) mobile monetization capabilities. However, the company grew organically as well as inorganically to overcome these problems. It worked towards building a better mobile ecosystem by diversifying into new sectors, integrating more services, and increasing its app distribution strength. On the back of these developments, Baidu registered strong top-line growth in Q2 2014 with a 58.5% year-on-year increase in revenues, topping $1.9 billion. Mobile accounted for approximately 30% of the company’s revenues, as compared to 20% in the final quarter of 2013. [1]

While Baidu was able to boost its top line, investments in enhancing its mobile capabilities and supporting growth at its newly acquired subsidiaries—91 Wireless, PPS and Nuomi—weighed on the company’s profits. The operating profit margin declined to 29.6% from 38.4% in the year-ago quarter. Baidu has more new products in its pipeline for mobile, and will therefore continue to invest heavily on driving installations and usage of these mobile products. For this reason, the company does not expect absolute growth in profits this year.

We are in the process of updating our $205 price estimate for Baidu’s stock based on the recently announced quarterly results.

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See our complete analysis of Baidu here


Growth in Customer Base Re-accelerates

The number of customers actively availing online marketing services from Baidu had been on a sequential decline in the last few quarters. Baidu had about 446,000 active online marketing customers in Q1 2014, lower compared to 464,000 in Q3 2013. The drop was the result of the company’s +V verified account program that was rolled out across the majority of customers. The program aims to improve the quality of customers by verifying their legitimacy. Only verified businesses can do business with Baidu. A better quality customer base helps Baidu to increase ARPU (average revenue per user). [2]

Baidu’s customer base regained its sequential momentum in Q2 as the roll out of the +V program approached completion. The number of active online marketing customers increased to 488,000, registering sequential growth of 9%. We expect the customer base to maintain this momentum, helped by the company’s city level bidding initiative that allows marketing customers to bid at city level rather than province level. Over one-fourth of the company’s customers have already signed up for city level bidding. [3]

Nuomi and iQiyi Play Important Roles in Baidu’s Diversification Strategy

Baidu acquired a 59% stake in Nuomi last year for $160 million. It bought out the remaining stake from Renren in January this year. Nuomi is increasingly becoming an important part of Baidu’s location-based service offerings through Baidu Maps because Baidu is focused on providing a comprehensive experience to users from answering search queries to delivering services. Nuomi is leveraging Baidu’s web traffic resources and extensive sales force infrastructure to scale up its operations. The gross merchandise volume on Nuomi’s mobile platform has nearly tripled while the number of users has doubled since the company was acquired by Baidu. [3]

The acquisition of PPS, an online video service, has strengthened Baidu’s position in the online video market. Baidu acquired PPS last year in May and merged it with its online mobile video platform, iQiyi, to become the largest online video platform in China with 358 million monthly users. iQiyi now ranks in first place based on monthly and daily unique visitors on PC. It is also number one by monthly time spent on both PC and mobile. We think that Baidu’s strategy for online video is a good long-term bet because the online video market in China will grow at a compounded rate of over 30% from $12.8 billion in 2013 to $36.6 billion by 2017, according to iResearch. [4]

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Notes:
  1. Baidu Announces Second Quarter 2014 Results, Baidu earnings release, July 2014 []
  2. Baidu’s CEO Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, April 2014 []
  3. Baidu’s (BIDU) CEO Robin Li on Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, July 2014 [] []
  4. China Online Video Market Snapshot in Q4 2013, China Internet Watch, March 2014 []