Baidu Earnings Preview: Non-Search Revenues To Drive Top Line Growth

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Baidu (NASDAQ:BIDU) is scheduled to announced its Q2 earnings on Thursday, October 27th. [1] The company has witnessed strong growth in its transaction services and online video streaming businesses in the year thus far. Baidu’s top line growth in recent months has been hindered by a revision in regulatory policy that drove down marketing revenue through the quarter. According to the latest Chinese laws, online ads and marketing practices for medical, pharmaceutical, and healthcare products and services on online platforms have to go through mandatory regulatory approvals. [2] Despite that, the company has reported strong growth metrics in the year this far, as shown below.

bidu_q2e2

Additionally, the company has suffered through the first half of the year due to the strengthening of the U.S. dollar, with the average exchange rate in the most recent quarter standing at RMB 6.64 per $1.00 as compared to the RMB 6.2 per $1.00 in the year-ago period. For the full year, we expect the smaller revenue streams to drive most of the company’s revenue growth. We forecast full year revenue growth of around 22% for Baidu.

bidu_q1ep4

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Baidu has witnessed solid revenue growth in two of its smaller revenue streams over the the last 2-3 years — its online video streaming platform iQiyi, which is similar to Netflix (NASDAQ:NFLX), and transaction services. Both segments witnessed over 70% revenue growth in 2015, which was slightly lower than the triple digit growth in the previous year. Baidu has further pumped in money in these divisions to develop the infrastructure for its video streaming and transaction services platforms to fuel growth. Furthermore, Baidu has also invested heavily in content acquisition costs, bandwidth costs for the video business and traffic acquisition costs for the transaction business, in addition to absorbing high marketing expenses for both. As a result, the revenue surge in these segments is complemented by operating losses. These divisions are likely to be operating at a loss over next couple of years as well. As a result, we forecast the operating losses for both these divisions over the next few years.

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Notes:
  1. Baidu to Report Third Quarter 2016 Financial Results on October 27, 2016, Baidu Press Release, October 2016 []
  2. Chinese regulators restrict Baidu healthcare advertising, PM Live, May 2016 []