Baidu, Inc. BIDU recently reported adjusted third-quarter 2015 earnings of $1.25 per share, which exceeded the Zacks Consensus Estimate of $1.20 backed by higher revenues. Adjusted earnings per share exclude one-time items but include stock-based compensation expense.
Revenues
Baidu reported revenues of RMB18.4 billion ($2.89 billion), up 10.9% sequentially and 36% year over year which beat the Zacks Consensus Estimate of $2.72 billion.
Mobile revenues accounted for 54% of total third-quarter revenue as against 37% in the year-ago quarter.
Revenue Sources
Revenues from Online marketing services were RMB17.7 billion, up 31.7% from the year-ago quarter and accounted for 96.2% of total revenue. The upside was attributable to active online marketing customers that increased 20.7% year over year and 5.6% sequentially to 623,000.
Revenue per online marketing customer was nearly RMB28,300 ($4,453), up 9.3% year over year and 3.3% sequentially.
Revenues from Other services were RMB702.7 million, a 659.1% year-over-year surge, which contributed the remaining 3.8% to the total revenue.
Margins
Reported gross margin was 59.3%, down 150 basis points (bps) sequentially and 320 bps year over year.
Baidu reported total operating expenses of RMB8.4 billion, up 85.2% from RMB4.5 billion incurred in the year-ago quarter. Both selling, general & administrative and R&D expenses were up as a percentage of sales from the year-ago period. The net result was a GAAP operating margin of 13.7% compared with 29.0% last year.
Adjusted EBITDA in the reported quarter was RMB3.8 billion, up 21.9% from third-quarter 2014.
Net Income
Baidu generated net income of RMB2.8 billion compared with RMB3.9 billion a year ago. There were no one-time items in this quarter. Therefore, GAAP EPS was the same as pro-forma EPS of RMB7.9 or $1.25 compared with RMB11.0 in the prior quarter.
Balance Sheet & Cash Flow
Baidu exited the third quarter with cash, cash equivalents, restricted cash and short-term investments of approximately RMB72.11 billion compared with RMB75.61 billion in the prior quarter. Accounts receivables were RMB4.18 billion, up from RMB3.80 billion in the second quarter.
Cash flow from operations was RMB4.9 billion as against RMB4.1 billion in the past quarter. Capex was RMB1.4 billion compared with RMB0.86 billion in the earlier quarter.
In the third quarter, Baidu completed its share repurchase program, under which roughly 6 million ADS were purchased for approximately $1 billion. The company also authorized a new program to buy back up to $2 billion shares over the next 24 months.
Guidance
For the fourth quarter of 2015, Baidu expects total revenue in the range of RMB18.200 billion ($2.864 billion) to RMB18.750 billion ($2.950 billion), representing a year-over-year increase of 29.5–33.4%. Analysts polled by Zacks expect revenues of $2.806 billion.
Our Take
Baidu, the largest search engine in China, offers a Chinese language search platform for businesses to reach their customers. The company posted decent third-quarter results with both the top line and the bottom line outperforming the respective Zacks Consensus Estimate.
Baidu’s increasing presence in the online video market will strengthen 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 continuous efforts to develop products. Moreover, Baidu continues to gain market traction. 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 Online-to-Offline (O2O), and increasing competition on its own search platform from the likes of Qihoo 360 Technology and Sohu’s Sogou search engine remain the concerns.
Currently, Baidu has a Zacks Rank #3 (Hold). Some stocks in the same space that are performing well are Facebook Inc. FB, IZEA, Inc. IZEA and MeetMe, Inc. MEET. All these stocks sport a Zacks Rank #1 (Strong Buy).
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