Baidu Earnings Preview: iQiyi To Fuel Top Line Growth

October 25th, 2017 by Trefis Team
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Baidu (NASDAQ:BIDU) is scheduled to announced its Q3 results on October 26. 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 and investments in new ventures expected to weigh on margins.

Guidance For Q3’17 and Full Year

Baidu’s management expects its September quarter revenues to be over 28% higher on a year-over-year basis to around RMB 23.4 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.

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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%.

Key Trends And Highlights

Baidu has witnessed strong growth at its online video streaming platform iQiyi, as well as its transaction services business, over the last few years. iQiyi revenues have surged from $220 million (RMB 1.3 billion) in 2013 to $1.6 billion (RMB 11.1 billion) in 2016, a CAGR of over 90%. More recently, 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. Additionally, Baidu’s management has explored the idea of having an IPO for iQiyi in 2018, with the company seeking a valuation of $8-10 billion.

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. During the quarter, Baidu disposed off its food-delivery subsidiary, which could lower GMV on a y-o-y basis.

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. 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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