China’s largest search engine, Baidu, Inc. (BIDU) reported adjusted fourth-quarter 2014 earnings of $1.45 per share, missing the Zacks Consensus Estimate of $1.60 on higher operating expenses and poor operating performance. The adjusted earnings per share exclude one-time items but include stock-based compensation expense.
Shares were down approximately 10% in afterhours trading, primarily impacted by the earnings miss and tepid first quarter guidance.
Revenues
Baidu reported revenues of RMB14.1 billion ($2.3 billion) in the fourth quarter, up 3.9% sequentially and 47.5% from the year-ago period. Fourth-quarter revenues exceeded the Zacks Consensus Estimate of $2.2 billion due to solid growth in mobile business. Mobile revenues accounted for 42% of Baidu’s total fourth-quarter revenues, up from 36% reported in the previous quarter.
Revenue Sources
Revenues from Online marketing services were RMB13.8 billion ($2.2 billion), up 46.3% from the year-ago quarter and represented 98.5% of total revenue. The upside was attributable to active online marketing customers, up 16% year over year and 1.4% sequentially to 523,000.
Revenue per online marketing customer was approximately RMB26,400 ($4,255), up 26.3% from the year-ago quarter and 1.9% sequentially.
Revenues from Other services were RMB205.6million, soaring 238.7% from the year-ago quarter and represented 1.5% of total revenue.
Margins
Gross margin for the quarter was 61.3%, down 122 basis points (bps) sequentially and 31 bps from the year-ago quarter.
Baidu reported total operating expenses of RMB5.7 billion, up significantly from RMB3.1 billion in the year-ago quarter. Both selling, general & administrative and research & development expenses were up as a percentage of sales from the year-ago quarter. The net result was a GAAP operating margin of 21.0% compared with 28.8% in the year-ago quarter.
Adjusted EBITDA in the fourth quarter was RMB4.1 billion ($664.8 million), up 15.8% from the year-ago quarter.
Net Income
Baidu generated fourth-quarter net income of RMB3.2 billion compared with RMB2.8 billion in the same quarter last year. There were no one-time items in the last quarter. Therefore, GAAP EPS was the same as pro-forma EPS of RMB9.0 or $1.45 per share compared with RMB11.0 or $1.79 per share in the prior quarter.
Balance Sheet & Cash Flow
Baidu exited the fourth quarter with cash, cash equivalents, restricted cash and short-term investments of approximately RMB58.1 billion versus RMB51.8 billion in the prior quarter. Accounts receivables were RMB3.7 billion, up from RMB3.6 billion in the prior quarter.
Cash flow from operations was RMB5.3 billion versus RMB4.9 billion in the prior quarter. Capex was RMB1.5 billion versus RMB1.4 million in the prior quarter.
Guidance
For the first quarter of 2015, Baidu expects total revenue in the range of RMB12.6 ($2.0 billion) to RMB13.1 billion ($2.1 billion), representing a year-over-year increase of 33.2-37.6%. Analysts polled by Zacks expect revenues of $2.2 billion.
Our Take
Baidu provides Internet search services in Chinese. It also offers a Chinese language search platform for businesses to reach their customers. The company posted mixed fourth-quarter results, with the top line surpassing the Zacks Consensus Estimate but the bottom line missing the same.
Also, the company provided a tepid guidance for the first quarter of fiscal 2015. However, the company expects increasing revenue contribution from mobile in the near future. Moreover, 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 Baidu’s strong dominance in the mobile search market and its continuous efforts to develop new products. Moreover, Baidu continues to gain market share. We believe the company has significant growth potential in the mobile market over the long term.
However, increasing competition from the likes of Qihoo 360 Technology (QIHU) and Sohu’s (SOHU) Sogou search engine remains a matter of concern.
Currently, Baidu has a Zacks Rank #3 (Hold). A better-ranked stock is Borderfree, Inc. (BRDR) carrying a Zacks Rank #2 (Buy).
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