Baidu Earnings Preview: Could The Company Outperform Expectations This Quarter?
All eyes will be on Baidu (NASDAQ:BIDU), the Chinese Internet heavyweight, on Monday, July 27th, when the company reports its financial results for the second quarter of 2015. [1] We expect the company to report that growth was driven by a sharp increase in mobile revenues during the quarter. This was likely fueled by user growth on mobile search, as well as a rise in mobile monetization (which continues to be lower as compared to that on PC devices). At the same time, we expect that Baidu faced continued margin-related pressure in the second quarter, as its recent initiatives have led to an increase in both SG&A and R&D costs.
See our complete analysis of Baidu here
Top-Line Growth Will Be The Key Highlight Of The Earnings
The chief factor which caused Baidu’s stock to fall in the wake of Q1 earnings release was under-performance on top-line growth. Not only did the first quarter revenue came in lower than consensus estimates, the outlook for Q2 also dampened market expectations. With annual revenue growth pegged in the range of 36.5% to 39.7% for Q2, we believe revenue growth will again be a critical factor in the Q2 earnings report.
Baidu’s revenue growth has slackened in the recent past, also due to the low monetization rate on mobile devices as compared to PC devices. This is even as the mobile platform now contributes for over half of the company’s revenues. The monthly active users for Baidu’s mobile search increased rapidly from 540 million in Q4 2014 to 600 million in Q1 2015. We expect to see a sharp growth in this figure for the second quarter as well. The monetization rates on mobile devices are forecasted to increase and reach closer to desktop levels in the long-run, as the platform provides access to location-data and records higher engagement levels.
Since Baidu’s revenue per online marketing customer decreased by 9.8% on top of flat growth in customer base during Q1 2015 (both in quarter-over-quarter terms), we are also interested to track these metrics in the Q2 2015 results.
Margins Could Continue To Decrease In Q2
Baidu’s margins have come under increased pressure in recent quarters, owing to high growth in expenses associated with product development and marketing activities for mobile products. During Q1 2015, the company’s SG&A and R&D expenses grew by 47.2% and 79.1% annually respectively. We expect a similar story to play out in terms of profitability during the second quarter as well.
Information On Other Growth Strategies And Risks Will Also Be Tracked
Apart from the above factors, we are also keen to get an update on Baidu’s growth strategies in the online to offline (O2O) space, and in several key verticals such as education, financial services and healthcare. These long-term growth opportunities could help accelerate the revenue growth at Baidu, and hence we are keen to assess the revenue and volume gains in these segments. In addition, Baidu is facing increased competitive pressure in the Chinese online search market from companies such as Qihoo 360 and Sohu, on both PC and mobile devices. We are thus keen to get a commentary from the management as to how they plan to tackle these risks in the coming future.
We have a price estimate of $213 for Baidu, which is marginally below the current market price.
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Notes:- Baidu to Report Second Quarter 2015 Financial Results on July 27, 2015, Baidu Investor Relations, July 8, 2015 [↩]