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4 Key Takeaways From Baidu's Earnings Report

Danny Vena, The Motley Fool

Chinese search leader Baidu (NASDAQ: BIDU) released its first-quarter financial report after the market close on Thursday, and to say the market didn't like the results would be an understatement. Revenue growth decelerated for the third consecutive quarter, and to make matters worse, the company posted its first loss since going public in 2005. Baidu's stock fell more than 10% in after-hours trading in the wake of its report.

There was a lot going on at Baidu. Let's dig into the results to uncover the most important takeaways from the earnings report and get management's take on what happened.

Baidu's AI lab in Silicon Valley.

Image source: Baidu.

1. Growth continues to slow

The search giant generated revenue of $3.59 billion, up 15% year over year, exceeding the high end of the company's forecast of $3.42 billion and ahead of analysts' consensus estimates of $3.52 billion. Excluding the divesting business, revenue was up 21%. Unfortunately, it marked the third consecutive quarter of decelerating revenue growth. For the second, third, and fourth quarters, Baidu's revenue grew by 32%, 27%, and 22%, respectively, year over year. 

Baidu relies primarily on advertising from its search platform to generate revenue. As more and more search has moved to mobile (which monetizes at a lower rate), Baidu has been working to generate additional revenue streams. With the economy of China slowing and the trade war in full swing, merchants have been cutting back on advertising, stunting Baidu's growth.

2. First loss in more than 13 years

The slowing revenue growth had a heavy impact on the bottom line, as Baidu reported its first loss since debuting on U.S. markets in Aug. 2005. The company reported a loss per share of $0.15, compared to earnings per share of $2.98 in the prior-year quarter. The results weren't much better on an adjusted basis, either, with adjusted earnings per share of $0.41, compared to $2.60 in the year-ago quarter.

Baidu laid part of the blame on an ad campaign: "[Our] margins were dampened by our successful CCTV New Year Eve Gala marketing campaign, which accelerated the traffic of Baidu family of apps and highlighted better in-app search user experience," according to Baidu's CFO, Herman Yu.

3. Weak guidance

For the upcoming second quarter, Baidu is forecasting revenue in a range of 25.1 billion yuan ($3.74 billion) and 26.6 billion yuan ($3.96 billion). This would represent a range of a 3% decline to a 2% increase year over year, or a slightly better 1% to 6% increase excluding the impact of announced divestitures.

To put that into the perspective of Wall Street sentiment, analysts' consensus estimates were calling for much more ambitious revenue of $4.27 billion, an increase of 14% year over year, which shows a serious disconnect between Baidu's management and investor expectations.

A statement by Yu only added fuel to the fire: "Despite government policies to improve the market condition for SMEs [small and medium-sized enterprises], we anticipate online marketing in the near term to face a challenging environment."

4. A massive stock buyback

Baidu must have seen the writing on the wall, as the board of directors authorized a new share-repurchase program that will allow the company to buy back up to $1 billion of its shares.

With Baidu's share price at its lowest level in more than three years, management is hoping this would act as a show of confidence by the company in its future. The stock's precipitous decline following the report shows that Wall Street has its doubts.

Now what?

While it doesn't seem like there's much good news, Baidu has been investing heavily in a host of areas it believes will fuel future growth, like cloud computing, artificial intelligence (AI), streaming video via its wholly-owned subsidiary iQiyi, its DuerOS voice assistant and smart speakers, and self-driving cars with its Apollo project.

The lackluster revenue growth is likely a by-product of the slowing economy in China, which, combined with its continued heavy investment in future opportunities, have conspired to hammer Baidu's bottom line.

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Danny Vena owns shares of Baidu and iQiyi. The Motley Fool owns shares of and recommends Baidu. The Motley Fool recommends iQiyi. The Motley Fool has a disclosure policy.