Here’s How Baidu Will Fuel Bottom Line Growth Through The Rest Of 2018
Baidu (NASDAQ:BIDU) recently announced its second quarter earnings, reporting a 24% increase in net revenue to ¥25.9 billion ($3.8 billion) for the quarter. Growth came from both Baidu Core segment (+18%) as well as iQiyi (64%). Strong revenue growth was complemented by a 23% increase in the company’s adjusted EBITDA to ¥7.4 billion ($1.1 billion), with its adjusted EBITDA margin compressing by around 30 basis points to 28.6%. However, Baidu’s net income and resulting earnings per ADS were up 55% to ¥7.4 billion ($1.1 billion) and ¥21.06 ($3.09), respectively, due to a ¥1.3 billion ($201 million) loss attributed to conversion of non-controlling preferred shares to ordinary shares after iQiyi’s IPO.
We forecast Baidu’s full year revenues to increase 17-18% to $15.5 billion. We have a conservative estimate for revenue growth for the company, which is slightly lower than consensus estimates. On the other hand, we expect margins to expand by almost 5 percentage points through 2018 to 27.4% for the year, leading to a 40% increase in its operating profit. We have summarized our full year estimates on our interactive full year earnings forecast dashboard for Baidu. You can modify our forecasts for segment revenues and margins to gauge how it would impact the company’s earnings for 2018.
Growth Metrics
The total number of active online marketing customers at Baidu rose to 511,000 by the end of June, up from 470,000 in the comparable prior year period. To complement the increase in marketing customers, the average revenue generated per customer was up 16% on a y-o-y basis to ¥41,200 ($6,200). This resulted in a 25% increase in advertising revenues to ¥21.2 billion ($3.2 billion). This represents revenues generated across both core services as well as marketing revenues on video streaming platform iQiyi.
Non-marketing revenues or other revenues (primarily from iQiyi subscriptions) were up 75% on a year-over-year basis to ¥4.9 billion ($742 million). Correspondingly, content surged by 68% over Q2’17 to ¥5.2 billion ($788 million) due to the company investing in creating new original content for iQiyi. In recent quarters, the increase in Baidu’s traffic acquisition costs have slowed down to single digits, representing organic growth in traffic on its platforms. This is a huge positive for the company going forward. Similarly, the increase in bandwidth cost has stabilized at 10-12%. This trend was also evident in the second quarter and is expected to continue through the end of the year. As a result, operating profit margin is expected to pick up by a few percentage points through the latter half of the year.
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