Baidu (NASDAQ:BIDU) was once one of the most widely followed and successful Chinese stocks before the company was hit by a combination of increasing competition and a lackluster economy on its home turf. Those problems exacted a heavy toll on Baidu, resulting in slowing revenue growth and the company's first loss since going public in the U.S. in 2005.
The Chinese search leader appeared to turn the corner last quarter, giving shareholders hope that the worst was behind them. Expectations were muted going into Baidu's third-quarter financial report Wednesday night, but as evidence of a rebound mounted, investors cheered, driving the stock up as much as 6% in pre-market trading Thursday morning.
Let's take a look at a few of the biggest takeaways from Baidu's earnings report.
1. The revenue turnaround continues
One of the biggest concerns for Baidu investors in recent years has been the company's slumping revenue. For the second quarter running, things have been better than expected. Baidu delivered Q3 revenue of 28.08 billion yuan ($3.93 billion), which was essentially flat with the prior-year quarter.
While that may not seem like reason to celebrate, when excluding revenue from business segments Baidu sold off last year, revenue grew by 3% year over year and an even more impressive 7% sequentially. It was also better than analysts' consensus estimates of $3.88 billion.
2. Another quarter of profits, sort of...
Baidu suffered a devastating blow in the first quarter, posting its first loss in more than 13 years. That turned around last quarter and investors were hoping for more of the same -- and they got it, but with an asterisk.
The company reported a net loss of 6.37 billion yuan (about $892 million), resulting in a loss per share of 18.37 yuan ($2.57). However, adjusting for a one-time, non-cash charge -- more on that in a moment -- the company generated net income of 4.4 billion yuan ($616 million), or adjusted earnings per share of $1.77 -- far better than expectations of $1.11.
3. A one-time $1.33 billion hit
Part of the uninspiring bottom-line performance had nothing to do with Baidu's business.
In late 2015, Baidu swapped its majority stake in travel platform Qunar and in return received a 25% stake in Chinese online travel agent Ctrip.com (NASDAQ:TCOM). With the exchange, Qunar became part of Ctrip.
The past couple of years have not been easy ones for Ctrip, and the value of Baidu's investment in the company has fallen. In September, Baidu announced that it planned to unload an estimated 30% of its investment in Ctrip, lowering its stake from 19% to about 12%, and raising about $1 billion in the process.
As a result of the persistent price decline of Ctrip's shares, Baidu said it took a one-time non-cash impairment charge in Q3 of 8.9 billion yuan ($1.245 billion), lowering the book value of its investment. When combined with other unspecified writedowns, the total reached 9.5 billion yuan (about $1.33 billion).
4. iQiyi: gaining viewers but losing money
iQiyi (NASDAQ:IQ) was spun off last year, but Baidu is still the company's majority shareholder. The streaming platform reported subscribers of 105.8 million, up 31% from the prior-year quarter.
Revenue grew to 7.4 billion yuan (about $1 billion), up 7% year over year, driven by membership revenue that increased 30%, which in turn was partially offset by advertising revenue that declined 14%. The losses continued, to 3.7 billion yuan ($516 million), resulting in a loss per share of 5.04 yuan ($0.70).
Content continued to account for the lion's share of costs at 8.2 billion yuan ($1.1 billion), up 7% year over year. iQiyi continues to spend more than it takes in as the company builds out its library of content in an increasingly competitive streaming video market.
5. Baidu's forecast is promising
Baidu's financial guidance was mostly positive, helping increase investor confidence that the worst may be over. The company is forecasting revenue in a range of 27.1 billion yuan ($3.78 billion) and 28.7 billion yuan ($4.02 billion), which would represent a loss of 1% to a gain of 6% year over year.
To put that into the perspective of expectations, analysts' consensus estimates were calling for revenue of $3.88 billion and earnings per share of $1.15.
While it may be some time before Baidu returns to its former glory, the company has taken several steps in the right direction.