There was a lot to like when Baidu (BIDU +0.84%) reported its second-quarter financial results on July 31. The company reported consensus-beating revenue and profitability, putting to rest any remaining questions about its return to growth.
Revenue of $3.93 billion increased 32% year over year, and adjusted earnings per share of $3.18 climbed 35%. Online advertising was robust, up 25% year over year to $3.18 billion, and online marketing customers grew 9% compared to the prior-year quarter. Existing customers spent more, with revenue per online marketing customer increasing 16% year over year.
While the financial metrics impressed, there was a wealth of other information for investors on the conference call to discuss the results with analysts. Read on to find out what Baidu's management had to say about recent divestitures, its streaming video service, and how it plans to profit from self-driving cars.
Image source: Baidu.
Let's get back to the core
A recurring theme from Baidu lately has been the company's divestiture of several non-core businesses. Baidu has increasingly focused on a couple of areas it sees as key to its future success: mobile, search and news feed, video streaming, and artificial intelligence (AI), all of which are complementary and linked.
To focus on these core technologies, Baidu began spinning off non-core businesses late last year. The company's mobile healthcare segment, its online-to-offline (O2O) business, and its takeout food delivery businesses were among the first revenue streams to go. That trend continued into this year, as Baidu sold off its financial services arm, as well as its global ad tools business.
Herman Yu, Baidu's chief financial officer, said the company anticipated that the divesting of Du Xiaoman (its financial services business) and Global DU (its ad tools segment) "together will generate approximately $1.8 billion in cash, which [we] plan to repurpose for better return on capital." The divestments will also allow Baidu's management to better focus on the company's most promising businesses.
iQiyi and chill
Baidu also provided insight into iQiyi (IQ 0.83%), its recently spun-off streaming video business. Even though iQiyi recently completed its IPO, Baidu still owns a controlling interest in the streaming video company -- at about 59% -- so expect to continue to receive updates from Baidu.
iQiyi had its own expectation-beating quarter, and Baidu executives sounded very much like proud parents, with CEO Robin Lee saying, "We see iQiyi's award-winning content production, coupled with Baidu's huge traffic and technology as a powerful combination in online entertainment." Baidu's other revenue -- which includes iQiyi -- increased 75% year over year, "mainly resulting from the robust growth in iQiyi membership." Total iQiyi subscribers grew to 67 million, including a record 29 million subscribers added over the past year.
Cast members from iQiyi's smash hit Hot-Blood Dance Crew. Image source: iQiyi.
Car payment
One of the questions that has long been on the minds of Baidu investors is how the company plans to monetize its self-driving-car technology. Early last year, Baidu launched the Apollo project and released its autonomous driving software to open source in an effort to become the Android of self-driving cars. It's reasonable for investors to wonder how Baidu will get paid if it's giving its platform away for free.
In response to an analyst question, Li reminded listeners that the business was "in its very early stage," and observed the following:
[The] Apollo ecosystem is a very comprehensive one. We will be selling simulation software. We will be selling HD maps. We'll be selling ACU, which is Apollo Computing Unit consisting of both hardware and software. We will have solutions for valet parking. And we have a broad spectrum of services offering to our partners.
He also stated that if anyone could generate meaningful revenue from the technology, "[we] will be the first one to achieve that goal."
The common thread
If there's a common thread among these discussions, it's the degree to which Baidu is going to focus on the few things it does very well and jettison those things it sees as a distraction. Baidu is the search leader in China and is widely considered to have the most advanced AI and self-driving-car technology in the Middle Kingdom. It's also jockeying for first place in the streaming video arena, using its world-class AI to achieve an edge.
Considering how far the company has come in the past two years, I'd say the sky's the limit to what it can achieve in the future.
