Baidu Continues Its Good Run In 2014 Into The Third Quarter
Chinese Internet search pioneer Baidu (NASDAQ: BIDU) continued its good run into Q3 2014 by posting a very healthy set of numbers. It met the Bloomberg Businessweek analysts consensus estimate of $ 2.2 billion in quarterly revenues. On the earnings per share (EPS) front, it out did expectations by reporting EPS of $1.79 per share for the quarter, 12 cents higher than the Businessweek analysts consensus and a 6 cents improvement over the second quarter of this year. [1] This quarter also marks the overtaking of PC traffic by mobile traffic on Baidu’s network.
We have a $225 per share valuation of Baidu’s stock, which is at par with the market price.
Robust Revenue Growth
Revenue had followed a high growth path for Baidu in the previous quarter as well. In Q2 2014, average revenue per online marketing customer was 50.3% higher than its corresponding figure in Q2 2013. This increase is what had led to revenue growth as the increase in number of customers was absymal in comparison, which increased only 4.3% between the second quarters of 2013 and 2014. The low rate of increase in the number of customers was the consequence of the company tightening its criteria in terms of customers.
During the second quarter earnings call, the company’s CEO had suggested that most of this selectivity in customer acquisition was over and that customer acquisition should pick up going ahead. In the third quarter, the company delivered on this promise and the number of active online marketing customers increased 6% over Q2. Revenue per customer continued its historically strong trend and increased 7% over the previous quarter. [2]
Rising Costs
The main component of Baidu’s expense structure is Traffic Acquisition Costs (TAC). These are the costs related to sourcing and managing internet traffic through Baidu’s search engine and network. In Q2 2014, this figure was 12.7% of revenues, which represents a ~1% increase year on year. The increase was explained by the CFO of the company, which was the result of increased contribution from contextual and mobile services. Promotional activity associated with one of Baidu’s websites (Hao123), an online listings directory that is also the fifteenth most popular website in the world, also added to these costs. [1] In the third quarter, TAC increased marginally to 12.9% of revenues.The reasons for the increase were however the same as contextual and mobile adds added tot the TAC as before. Promotion of Hao 123 continued to add to TAC. The company suggested that going ahead there will yet be more increases in the TAC because of Baidu’s objective to grow contextual ads, which is one of the contributors to TAC. [2]
SG&A expenses had nearly doubled in Q2 on a year on year basis, to reach $346 billion. This was on account of the increase in promotional activity for mobile products. It continued a similar trend in this quarter, rising 95% year on year. Apart from the same reason as in the previous quarter, this time around development of sales channel and branding also played important roles. Going ahead, the Online-to-Offline(O2O) businesses such as group buying, where the service/product delivery is through brick and mortar channels, is expected to make this shoot up even further. [2]
While R&D costs increased ~85% year-on-year in Q2 2014, in the third quarter it slowed down to 68% year on year. As with the last quarter, the rise in R&D costs was on account of increase in the number of personnel employed. Other smaller contributors to the costs, such as content, bandwidth and depreciation costs showed modest increases this quarter, not unlike the previous quarter. [2]
Fourth Quarter Guidance And Estimates
Baidu gave a guidance of between $2.25 and $2.32 billion for its fourth quarter revenues. As per our model, Baidu 2014 revenues have been forecast to $7.62 billion. Bloomberg Businessweek analysts consensus estimate for Q4 and full year 2014 revenues are $2.3 billion and $ 7.9 billion respectively. [3]
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Notes:- Baidu Q3 Earnings Release Preview [↩] [↩]
- Baidu Q3 Earnings Release Conference Transcript, seekingaplha.com [↩] [↩] [↩] [↩]
- Businessweek Page For Baidu [↩]