Baidu Earnings: Online Video, Transaction Services To Provide Long-Term Growth

July 29th, 2016 by Trefis Team
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Baidu (NASDAQ:BIDU) announced its Q2 earnings after market Thursday, July 28, reporting a 10% year-over-year rise in revenues to RMB 18.3 billion. [1] However, the company suffered due to the strengthening of the U.S. dollar, with the average exchange rate during the quarter standing at RMB 6.64 per $1 as compared to the RMB 6.2 per $1 in the year-ago period. As a result, Baidu’s revenue growth in constant dollar terms was only about 3% y-o-y to just under $2.8 billion.

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Baidu has witnessed solid revenue growth in its smaller revenue streams – online video streaming (iQiyi) and transaction services – over the the last 2-3 years. Both segments witnessed 76-77% revenue growth in 2015, which was slightly lower than the triple digit growth in the previous year. To fuel revenue growth in these segments, Baidu has pumped in money to develop the infrastructure for its video streaming and transaction services platforms, which has led to a corresponding increase in cost of revenues. This trend was visible in Q2 results as well, with its cost of revenues rising by 40% y-o-y to RMB 8.7 billion.

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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 high marketing expenses for both. This has led to  operating losses for both divisions over the last few years – a trend which was consistent in the Q2 results. These divisions are likely to be operating at a loss over next couple of years as well. As a result, we forecast the operating profits for both these divisions to be be negative over the next few years.

Despite operating at a loss, Baidu has witnessed strong growth in demand for its non-search services revenue streams. The company reported a 13% annual increase in the number of monthly active accounts for its Maps services through the quarter, while the total number of mobile accounts was up by 6% y-o-y to 667 million accounts. The total number of Baidu Wallet accounts was up by over 130% to 80 million. Moreover, the gross merchandise volume for all transactions was up by a massive 166% y-o-y to RMB 18 billion.

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In terms of revenue growth, Baidu’s top line growth in Q2 was hindered by a revision in regulatory policy that drove down marketing revenues 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] 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.

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Notes:
  1. Baidu Announces Second Quarter 2016 Results, Baidu Press Release, July 2016 [↩]
  2. Chinese regulators restrict Baidu healthcare advertising, PM Live, May 2016 [↩]