Baidu (BIDU) Beats on Q4 Earnings and Revenue Estimates

China’s largest search engine, Baidu, Inc. BIDU, reported adjusted fourth-quarter 2015 earnings of $11.00 per share, which exceeded the Zacks Consensus Estimate of 86 cents supported by higher revenues. The adjusted earnings per share exclude one-time items but include stock-based compensation expense.

Revenues

Baidu reported revenues of RMB18.7 billion ($2.89 billion), up 33.1% year over year which beat the Zacks Consensus Estimate of $2.73 billion.

Mobile revenues accounted for 56% of Baidu’s total fourth-quarter revenue as against 42% in the year-ago quarter.

Revenue Sources

Revenues from Online marketing services were RMB17.6 billion, up 27.2% from the year-ago quarter, and accounted for 94.2% of total revenue. The upside came on the back of 6.1% year-over-year increase in active online marketing customers. However, the number declined 10.9% sequentially to 555,000.

Revenue per online marketing customer was approximately RMB31,000 ($4,786), up 17.4% year over year and 9.5% sequentially.

Revenues from Other services were RMB1.1 billion, a 429.3% year-over-year surge, which contributed the remaining 5.8% to total revenue.

Margins

Reported gross margin was 56.4%, down 490 basis points (bps) from the year-ago quarter.

Baidu reported total operating expenses of RMB7.0 billion, up 23.9% from RMB5.7 billion incurred in the year-ago quarter. Both selling, general & administrative and R&D expenses were down year over year, as a percentage of sales. The net result was a GAAP operating margin of 18.9% compared with 21.0% in the year-ago quarter.

Adjusted EBITDA was RMB4.8 billion, up 16.7% from fourth-quarter 2014.

Net Income

Baidu generated fourth-quarter net income of RMB24.6 billion compared with RMB2.9 billion a year ago. Diluted earnings per ADS for the fourth quarter were RMB71.10 (or $10.98).

Balance Sheet & Cash Flow

Baidu exited the fourth quarter with cash, cash equivalents, restricted cash and short-term investments of approximately RMB68.03 billion compared with RMB72.11 billion in the prior quarter. Accounts receivables were RMB3.93 billion, down from RMB4.18 billion in the third quarter.

Cash flow from operations was RMB5.3 billion as against RMB4.9 billion in the previous quarter. Capex was RMB1.5 billion compared with RMB1.4 billion in the earlier quarter.

Guidance

For the first quarter of 2016, Baidu expects total revenue in the range of RMB15.410 billion (or $2.379 billion) to RMB15.970 billion (or $2.465 billion), representing a year-over-year increase of 21.1–25.5%. Analysts polled by Zacks expect revenues of $2.429 billion.  

Our Take

Baidu provides Internet search services in China. It also offers a Chinese language search platform for businesses to reach their customers. The company posted decent fourth-quarter results, with both the top-line and the bottom-line numbers beating the respective Zacks Consensus Estimate.

Baidu’s increasing presence in the online video market will improve its competitive position. Some of the current buoyancy surrounding the shares is related to the company’s strong dominance in the mobile search market and its consistent product development efforts. Moreover, Baidu continues to gain market share. We believe that the company has significant growth potential in the mobile market over the long term.

However, higher promotional expenses, heavy spending on video and O2O, and increasing competition on its own search platform from the likes of Qihoo 360 Technology and Sohu’s Sogou search engine remain concerns.

Currently, Baidu has a Zacks Rank #3 (Hold). Some stocks in the same space that are performing well are Etsy, Inc. ETSY, Limelight Networks, Inc. LLNW and MeetMe, Inc. MEET. All these stocks sport a Zacks Rank #1 (Strong Buy).

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