Baidu Delivers A Strong Quarter Driven By iQiyi, Transaction Services

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Baidu (NASDAQ:BIDU) announced its Q2 2017 earnings on Thursday, July 27, reporting a 14% year-over-year increase in net revenues to RMB 20.9 billion. Strong revenue growth was complemented by a significant improvement in the company’s operating income, as shown below. Operating profit (GAAP) was up 47% on a y-o-y basis to RMB 4.2 billion, leading to a massive 83% increase in Baidu’s net income for the quarter. The company’s earnings per ADS was up 72% y-o-y to RMB 11.31 per ADS for the quarter.

Strong Operating Metrics Help Drive Earnings

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Baidu has witnessed strong growth in its online video streaming platform iQiyi, as well as its transaction services business, over the the last few years. At the end of the previous quarter, Netflix and Baidu signed an agreement which would allow Netflix to stream some of its programs in China pending regulatory approval. This could further fuel revenue growth in Baidu’s online video business.

Strong revenue growth in these segments has been complemented by high cost of revenues and operating expenditures in these businesses. Baidu has made significant expenditures for content acquisition and bandwidth costs for the video business, traffic acquisition for transaction services, as well as marketing and promotions. As a result, Baidu has operated its streaming video and transaction services businesses at a loss over the past few years.

Baidu’s total cost of revenues remained high during the quarter at RMB 10.6 billion, which was over 20% higher than the prior year period. Within cost of revenues, Baidu successfully reduced traffic acquisition costs from RMB 2.9 billion in Q2’16 to under RMB 2.5 billion in Q2’17. Additionally, Baidu’s total operating expenses were down 9% to RMB 6.1 billion, as shown below, mainly due to a 30% reduction in SG&A expenses to under RMB 3 billion. SG&A expenses were lower due to a decrease in promotional spending by the company. As a result of healthy operating metrics, Baidu’s company-wide operating profit margin expanded by 450 basis points to just over 20% for the quarter.

Positive Outlook For Q3 & Full Year

Baidu’s management expects its September quarter revenues to be over 28% higher on a year-over-year basis to around RMB 28.4 billion. Strong growth is expected from the core business as well as smaller revenue streams including iQiyi and transaction services. According to Reuters’ consensus estimates, Baidu’s net earnings per ADS could be over 35% higher on a y-o-y basis to RMB 9.34 as shown below.

For the full year, we forecast the company to register 20% growth in revenues driven by strong performance from its non-core businesses including iQiyi and transaction services. In addition, we expect Baidu to continue to improve its operating efficiency, which would help the company report healthier margins. We forecast the company’s adjusted EBITDA margin to expand by around 450 basis points over 2016 levels to around 21%.

See our complete analysis for Baidu

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