With Baidu (BIDU -3.39%) hitting six-year lows heading into this week's earnings report, it's fair to say that expectations were ankle-high for the former dot-com darling on Monday. The Beijing-based company behind the world's most popular Chinese language search engine delivered financial results after the market closed that were far from perfect but at least near the high end of its earlier forecast.
Revenue clocked in at $3.84 billion for Baidu's second quarter, a mere 1% advance over the prior year's showing but a welcome relief for investors, as the midpoint of its guidance was calling for a slight decline. Baidu's outlook back in mid-May was for revenue growth to range between a decline of 3% and an uptick of 2%. Back out the impact of announced divestitures over the past year, and Baidu's top line would've climbed by 6%, the high end of its top-line range on that basis. The news was even better than expected on the bottom line, and Wall Street responded by initially pushing the shares higher on Monday night.
Success is relative
Wall Street wasn't impressed with Baidu's previous financial outing, as its first-quarter report was marred by decelerating growth, the resignation of a key executive, weak guidance, and its first reported deficit as a public company. It was going to be an easy act to follow, but Monday's report still has room for improvement.
Online marketing revenue -- Baidu's bread-and-butter business that accounts for 73% of the period's top-line mix -- declined 9% for the period. It was the balance of Baidu's business that soared 44% to lift overall results above the prior year's showing, as iQiyi (IQ 0.63%) membership services, cloud services, and smart devices served up heady gains.
A big problem with having iQiyi and other early-stage initiatives take the growth baton is that these tend to be lower-margin businesses than its original paid-search stronghold is. Content, traffic acquisition, bandwidth, G&A, and R&D costs all rose at double-digit clips, well ahead of the 6% revenue bump. The end result is that operating and net income contracted sharply, but at least Baidu stayed in the black this time on a reported basis. Adjusted earnings of $1.47 a share was less than half of what it earned a year earlier, but investors were braced for a much smaller profit on that basis.
Baidu may not have bottomed out here, as guidance suggests that business continues to slow into the current quarter. The $3.84 billion to $4.07 billion in revenue that Baidu is projecting for the third quarter is a 5% year-over-year decline on the low end and a 1% increase on the high end. Back out divestitures over the past year, and the range calls for revenue to land between a 1% decrease and a 5% increase.
The growing popularity of iQiyi's streaming video platform is helping keep the top line growth inching in the right direction, but it's weighing on bottom-line results. Investors are more forgiving now than they were when the stock was trading higher earlier this year, and for now that makes the second quarter a relative victory.