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5 Key Takeaways from Baidu’s Second Quarter

By Leo Sun – Updated Aug 2, 2018 at 10:08AM

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The Chinese tech giant beats expectations with double-digit sales and earnings growth.

Chinese tech giant Baidu (BIDU -2.74%) recently posted solid second quarter numbers that topped analyst expectations. Its revenue rose 32% annually to 26 billion RMB ($3.93 billion), beating estimates by $40 million.

Baidu's non-GAAP net income grew 33% to 7.4 billion RMB ($1.12 billion), or $3.18 per ADS, which topped expectations by $0.56. On a GAAP basis, its net income rose 45% to 6.4 billion RMB ($967 million), or $2.74 per ADS.

A group of young people use their smartphones.

Image source: Getty Images.

Baidu expects its third quarter revenues to rise 23% to 30% annually on a RMB basis, which matches analyst expectations. Excluding the impact of several divestments, including its Global DU ad tools and Du Xiaoman financial services, Baidu expects its revenues to rise 26% to 33%.

Baidu's growth looks solid, but can its stock break out of its year-long rut? Let's take a look at the five key takeaways from Baidu's second quarter report to find out.

1. Robust growth in advertising revenues

Baidu's online marketing revenues rose 25% annually to 21.1 billion RMB ($3.18 billion) during the quarter. Its number of active online marketing customers grew 9% to 511,000 as its revenue per online marketing customer grew 16% to 41,200 RMB ($6,200).

Its revenue and customer growth rates accelerated from the previous quarter, when Baidu's online marketing revenues rose 23% and its active customer count grew 5%. This indicates that Baidu remains the 800-pound gorilla of China's internet advertising market, despite the growth of rivals like Tencent's (TCEHY -0.53%) WeChat.

2. Low traffic acquisition costs

Baidu's traffic acquisition costs (TAC) rose 9% annually to 2.7 billion RMB ($408 million), representing 10% of its total revenues. That represents a drop from 11% in the first quarter and 12% in the year ago quarter, and indicates that Baidu doesn't need to spend too much money to maintain its position as China's leading search engine.

Baidu controls nearly 70% of China's search market according to StatCounter. Its closest competitors are Alibaba's Shenma, with a 20% share, and Tencent-backed Sogou (SOGO), which has a 5% share. Those rivals are spending lots of money to keep pace with Baidu. Sogou, for example, saw its TAC surge 91% annually and gobble up 45% of its revenues last quarter.

A young woman uses her smartphone.

Image source: Getty Images.

3. A healthy mobile presence

Mobile revenues accounted for 77% of Baidu's total revenues, compared to 78% in the first quarter and 72% in the prior year quarter. Baidu plans to expand its mobile ecosystem with "mini programs" that are directly integrated into Baidu's core apps.

This strategy will allow Baidu to bypass mobile app stores, generate its own app revenues, and lock in users with mini programs for deliveries, payments, and other services. This strategy isn't an original one: Tencent launched mini programs for WeChat in early 2017, and over a million mini programs have already appeared on the messaging platform.

Baidu stated that daily active users (DAUs) on its Baidu App hit 148 million in June, representing 17% growth from a year earlier. But the app is still dwarfed by WeChat, which has over 900 million DAUs and more than a billion monthly active users (MAUs).

4. The growth of iQiyi as an investment

Baidu still generates most of its revenue from ads, but its "other" revenues also jumped 75% to 4.9 billion RMB ($742 million) thanks to the growth of its streaming video platform iQiyi (IQ -3.18%).

Baidu spun off iQiyi earlier this year, but retained a majority stake in the company. Turning iQiyi from an integrated business unit into an investment removed the video platform's losses from its bottom line, but still allowed Baidu to profit from its growth.

5. Improving operating margins

Baidu's divestments and spin-offs of non-core businesses, along with its well-controlled costs, are boosting its operating margins. That's why the non-GAAP operating margin of Baidu's "core" businesses, excluding iQiyi in both periods, expanded from 38% to 39% between the second quarters of 2017 and 2018.

Where Baidu stands going forward

Baidu's second quarter report proves that it's still a market leader in the Chinese internet sector, and that its stock still has room to run. Concerns about trade tensions between the US and China may throttle Baidu's short-term returns, but I think the stock remains a solid long-term buy.

Leo Sun owns shares of Baidu and Tencent Holdings. The Motley Fool owns shares of and recommends Baidu and Tencent Holdings. The Motley Fool recommends iQiyi. The Motley Fool has a disclosure policy.

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