Baidu Continues To Invest Heavily In iQiyi, Transaction Services Banking On Long-Term Growth
Baidu (NASDAQ:BIDU) announced its Q3 earnings on October 27, reporting a 1% year-over-year fall in net revenues to RMB 18.2 billion. [1] However, excluding the impact of the Qunar division which Baidu sold off last year, the company observed a 7% annual increase in revenues. The total cost of revenues surged 24% to RMB 9.3 billion with content acquisition costs (for iQiyi online video), traffic acquisition costs and bandwidth acquisition costs driving much of the growth. Cash operating expenses fell 26% to RMB 6.2 billion with a significant contribution from SG&A expenses, which fell 27% to RMB 3.6 billion.
Despite these positives, the strengthening of the U.S. dollar diluted the effect of the revenue growth and higher profits. The average exchange rate during the quarter stood at RMB 6.67 per $1 as compared to RMB 6.36 per $1 in the comparable previous year period. As a result, Baidu’s revenue growth in constant dollar terms (excluding the impact of Qunar) was only about 2% y-o-y to $2.7 billion.
Key Growth Metrics For Baidu
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. The company reported a solid 50% growth in the gross merchandise value (GMV) for its transaction services to RMB 19.4 billion in the September quarter. The total number of Baidu Wallet user accounts and mobile maps monthly active users (MAUs) continued to increase on a year-over-year basis as shown in the table below.
To fuel growth in the smaller revenue streams, Baidu has 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 also observed in the September quarter 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.
Outlook For Q4 & Full Year
Over the last two quarters, Baidu’s revenue growth has been 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] This trend is expected to continue through the December quarter as well, with the most steep impact expected in the coming quarter. [3]
Baidu’s management expects Q4 revenues to be around RMB 18.1 billion (or $2.7 billion at an exchange rate of RMB 6.67 per $1.00). As a result, full year revenues could be around RMB 70.4 billion or $10.7 billion, which is slightly lower than the Reuters’ consensus estimate of around RMB 71.4 billion. [4] 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 4% in constant dollar terms for Baidu.
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More Trefis Research
- Baidu Announces Third Quarter 2016 Results, Baidu Press Release, October 2016 [↩]
- Chinese regulators restrict Baidu healthcare advertising, PM Live, May 2016 [↩]
- Baidu Q3 2016 Earnings Call Transcript, Seeking Alpha, October 2016 [↩]
- Reuters’ Company Profile For Baidu, Reuters, October 2016 [↩]