Growth is slowing at Baidu (BIDU 1.69%), and it's also taking a toll on its bottom line. The dot-com pioneer behind China's leading search engine posted mixed financial results after Thursday's market close, and the initial market reaction was to sell off the stock. Having a key executive step away from the company obviously didn't help.
Revenue clocked in at $3.59 billion for Baidu's first quarter, 15% ahead of where it was a year earlier. Back out the nonessential businesses that Baidu has unloaded over the past year and revenue would've climbed at a healthier 21% clip. The top-line performance isn't surprising. It's actually smack dab in the middle of the guidance it offered three months ago. The bottom line was another story.
Falling into a hole
There are plenty of moving parts at Baidu despite the divestitures, and they're not all heading in the same direction. Online marketing revenue -- accounting for the lion's share of Baidu's top line at 73% of total results -- rose just 3% as weakness in healthcare, online game services, and financial services kept gains in education, retail, and business services in check. The balance of Baidu's revenue, on the other hand, soared 73%.
Baidu Core -- its flagship online search business and other key businesses outside of its iQiyi (IQ -2.58%) spinoff -- rose 8% to $2.6 billion. Streaming video giant iQiyi helped push overall results higher with its 43% top-line surge.
Once again, we find things slipping and sliding away all the way down the income statement. High content costs at iQiyi and skyrocketing traffic acquisition costs including a successful but costly CCTV New Year's Gala marketing campaign obliterated margins. Baidu posted an operating loss and a deficit on the bottom line, and even on an adjusted basis earnings plummeted 80% to $144 million or $0.41 a share.
The rough bottom-line showing isn't the only thing weighing on investors. Baidu announced that Hailong Xiang -- its senior vice president of search -- tendered his resignation after a 14-year stint at the dot-com pioneer. Guidance was another pressure point.
Baidu sees revenue clocking in between a decline of 3% and a gain of 2% for the second quarter. Backing out the businesses it has sold, continuing operations are expected to inch just 1% to 6% higher. Decelerating growth, squeezed margins, and one executive moving on are all bad looks on Baidu's end. Trade tensions with the U.S. and China's slowing economy are bad looks on a broader scale.
Baidu headed into earnings season with its highest short interest in more than a year. A blowout quarter or even a decent one could've triggered a short squeeze, but instead it was margins -- and the bulls -- getting squeezed this time.