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5 Important Takeaways From Baidu's Q2 Earnings Report

Danny Vena, The Motley Fool

It's been a tough year for investors in Baidu (NASDAQ: BIDU). The Chinese search leader has been hit by slowing growth, more intense competition, and the trade war with the U.S. This combination of factors has weighed heavily on the company, causing the stock to fall more than 60% since hitting all-time highs in mid-2018.

With the bar set appropriately low, investors were relieved when Baidu reported better-than-expected second-quarter results, and suggested that the worst might be over -- causing the stock to soar as much as 10% in the wake of the company's earnings, though it's lately up about 6%.

Here are five notable conclusions from the second quarter.

The Baidu logon at the top of a building with flowers out front.

Image source: Baidu.

1. Revenue may be on the upswing

Baidu's struggling growth continued to slow. The company reported revenue of 26.3 billion yuan ($3.83 billion), up 1% year over year, or 6% excluding divested businesses. The results topped analysts' consensus estimates, which called for revenue of $3.77 billion, and was near the high end of management's guidance for revenue in a range of 25.1 billion to 26.6 billion yuan. 

This marked the fourth consecutive quarter of decelerating revenue, which grew 27%, 22%, and 15% year over year during the third and fourth quarters of 2018 and first quarter of 2019, respectively.

On a more positive note, the results increased 9% sequentially from the first quarter, suggesting that the falling results may be on the verge of a long-awaited turnaround.

Revenue from the company's core search and advertising business declined to 19.5 billion yuan ($2.85 billion), down 2% year over year, but up 3% excluding divestitures. The results also increased quarter over quarter, by 12%.

2. It swung from a loss to a profit

During the first quarter, Baidu posted its first loss since debuting on U.S. markets more than 13 years ago, but profits were back on the upswing in the second quarter. Net income of 6.4 billion yuan fell a whopping 62% year over year, resulting in adjusted earnings per share of $1.47, soaring past expectations of $0.94. 

A combination of factors led to the earnings decline, including content costs, traffic acquisition, and bandwidth costs that all outpaced revenue growth.

3. Streaming users are soaring, but so are losses

Baidu spun off its streaming unit iQiyi (NASDAQ: IQ) early last year, but is still the majority shareholder. The company reported paid subscribers soared 50% year over year, growing to 100.5 million users.

iQiyi's total revenue grew to 7.1 billion yuan, up 15% year over year. Losses continued to mount at the streaming segment, climbing to 2.3 billion yuan ($339 million), 10% worse than the prior-year quarter. Revenue from membership services grew 38% year over year, while online advertising declined 16% compared with the prior-year quarter. 

Three young children sitting on a couch looking at a tablet.

Image source: Getty Images.

4. User metrics are growing

Baidu noted several metrics that point to a growing base of regular users, which it believes will eventually result in greater revenue and profits. Daily active users of the Baidu app reached 188 million, up 27% year over year, while in-app queries grew 20%. Its Smart Mini Program's monthly active users increased to 270 million, up 49% over the preceding three months.

The installed base of products using Baidu's DuerOS voice assistant continued to climb, surpassing 400 million devices, up 350% year over year, pushing the number of monthly queries to 3.6 billion, an increase of 650% compared with the prior-year quarter.

5. Closing the gap on expectations

Part of what spooked investors last quarter was the disconnect between Wall Street and Baidu regarding expectations for the second quarter. That seems much less pronounced this quarter, as estimates fall within the scope of management's forecast.

For the upcoming third quarter, Baidu is guiding for revenue in a range of 26.9 billion to 28.5 billion yuan ($3.84 billion to $4.07 billion), which would represent a range from a loss of 5% to a gain of 1% year over year, or a loss of 1% and gain of 5% excluding divestitures, which produced revenue of 1 billion yuan in Q3 2018.

To put that into the perspective of Wall Street's expectations, analysts' consensus estimates were calling for revenue of $3.97 billion, near the midpoint of management's guidance, resulting in earnings per share of $1.19.

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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.

This article was originally published on Fool.com