Baidu Earnings Preview: iQiyi, Transaction Services To Continue Growth Spree
Baidu (NASDAQ:BIDU) is scheduled to announced its Q2 results on Thursday, July 27. [1] The company has witnessed strong growth in its transaction services and online video streaming businesses in recent quarters, while its core search services business has slowed down. Despite strong top line growth, Baidu’s margins have remained low and profits have suffered due to high cost of revenues. This trend is expected to continue in the near term, with cost of revenues expected to weigh on gross profit margins.
Guidance For Q2’17
Baidu’s management expects its June quarter revenues to be over 13% higher on a year-over-year basis to around RMB 20.7 billion. Strong growth is expected from the core business as well as smaller revenue streams including iQiyi and transaction services. [2] According to consensus estimates, Baidu’s net earnings per ADS could be around 40% higher on a y-o-y basis to RMB 9.25, as shown below.
Key Trends And Highlights
Baidu has witnessed strong growth in two of its smaller revenue streams over the the last 2-3 years — its online video streaming platform iQiyi and transaction services. iQiyi revenues have surged from $220 million (RMB 1.3 billion) in 2013 to $1.6 billion (RMB 11.1 billion) in 2016 at a CAGR of over 90%. Similarly, transaction services revenues have also grown from $216 million (RMB 1.3 billion) in 2013 to $695 million (RMB 4.8 billion) in 2016. The company has reported strong growth metrics in terms of gross merchandise value (GMV) for transaction services, the total number of Baidu Wallet users as well as monthly active users for Baidu Maps.
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Despite strong growth metrics, Baidu has operated its streaming video and transaction businesses at a loss over the past few years. The operating costs for these segments consist primarily of content acquisition costs, bandwidth costs, traffic acquisition costs and other SG&A and marketing expenses. Consolidated operating expenses for the iQiyi segment (adjusted for inter-segment expenses) have increased from $340 million in 2013 to almost $2 billion in 2016. Similarly, operating expenses for the transaction services (adjusted for inter-segment expenses) have increased from $480 million in 2013 to $2.5 billion in 2016. While the company has been operating this segment at a loss, the growth rate of operating expenses has been slower than the revenue growth. This should contribute positively to the company-wide EBITDA margin. As a result, our full year forecast for Baidu’s adjusted operating profit margin is around 450 basis points higher than previous year levels.
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More Trefis Research
- Baidu to Report Second Quarter 2017 Financial Results on July 27, 2017, Baidu Press Release, July 2017 [↩]
- Baidu Q1 2017 Earnings Call Transcript, Seeking Alpha, April 2017 [↩]