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Baidu's Strong Results Are Tempered by Coronavirus Uncertainty

By Danny Vena - Mar 2, 2020 at 1:50PM

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The Chinese search leader topped expectations, but the outbreak weighed heavily on sentiment.

Baidu (BIDU -1.61%) reported its fourth-quarter earnings after the market close on Thursday. The company and its majority-owned subsidiary iQiyi (IQ -2.42%) had reported preliminary results in early February, so investors weren't expecting any big surprises along those lines, but were keenly interested in news of how the coronavirus outbreak which causes the disease COVID-19 was affecting the business and its prospects.

China's search leader reported revenue of 28.9 billion yuan ($4.15 billion), up 6% year over year and near the high end of its guidance from earlier this month. Investors had been pleasantly surprised, because this came in above the company's previous guidance, which topped out at 28.7 billion yuan ($4.12 billion). 

Baidu's Silicon Valley AI Lab building.

Baidu's Silicon Valley AI Lab building. Image source: Baidu.

Profits were even more unexpected, with non-GAAP net income of 9.19 billion yuan ($1.32 billion), more than double its performance from the prior-year quarter. This resulted in adjusted earnings per share (EPS) of 26.54 yuan ($3.81), more than doubling year over year, coming near the midpoint of management's revised guidance range, and surpassing analysts' expectations of $3.66 EPS.

Segment results show improvement

Baidu's core search segment -- which excludes iQiyi's much more volatile streaming business -- generated revenue of 21.7 billion yuan ($3.12 billion), up 6% year over year. Operating income soared 56% to 6.87 billion yuan, the result of easy comps, while adjusted net income of 9.95 billion yuan ($1.43 billion) climbed 53%.

iQiyi reported revenue of 7.5 billion yuan ($1.1 billion), up 7% year over year. The company continues to spend heavily on content to fortify its position in the streaming wars, so its bottom line was pressured. iQiyi reported a net loss of 2.5 billion yuan ($358 million), which was an improvement from the loss of 3.5 billion yuan in the prior-year quarter. This resulted in diluted loss per share of 3.43 yuan ($0.49), also improved from a per-share loss of 4.83 yuan in the year-ago quarter. 

The closely watched subscriber numbers continued to climb, with total subscribing members of 106.9 million, up 22% year over year. iQiyi said that 98.9% of its subscribers were paying customers, with the remainder on free trials.

Then there's the coronavirus...

As with many companies in recent weeks -- particularly those in China -- Baidu warned of an uncertain future. On the Q4 conference call, CFO Herman Yu said: "The novel coronavirus situation in China is evolving, and business visibility is very limited. These forecasts are current and preliminary view, which is subject to substantial uncertainty." He went on to provide some observations for context:

Most shops, restaurants, and malls across China were closed down and remain closed down ... Consequently, the rebound for online marketing after Chinese New Year has been slow this year.

Yu noted, however, that over the previous two weeks, "business activities have started to pick up as people return to work."

A young woman wearing a medical mask waiting to get on a train

Image source: Getty Images.

The news wasn't all bad, however. Yu pointed out that a "good portion" of the company's revenue was generated online, and some areas of the business might actually benefit from the situation, including online games, e-commerce, and online education, which were seeing an uptick. The time spent on Baidu's Feed jumped 100% year over year as consumers actively sought updates regarding COVID-19. Management believes that this might bode well for future engagement.

Baidu also developed a channel to provide users with updates about coronavirus, partnering with medical experts to publish authoritative information about the epidemic and address user concerns. The company reported users flocked to the site, eager to keep abreast of the quickly evolving situation.

A partly cloudy forecast

As a result of the high number of people still quarantined and the muted environment, Baidu expects business to contract during the first quarter. Management is guiding for revenue in a range of 21 billion yuan ($3 billion) to 22.9 billion ($3.3 billion), which would represent a decline of 5% to 13% year over year. The outlook also implies a decline in Baidu's Core business of between 10% and 18%.

Baidu expects things to get back to usual once the coronavirus outbreak subsides, but given the continued uncertainty surrounding Chinese stocks, investors should just put this stock away and check back next quarter.

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Stocks Mentioned

Baidu, Inc. Stock Quote
Baidu, Inc.
BIDU
$151.32 (-1.61%) $-2.47
iQIYI, Inc. Stock Quote
iQIYI, Inc.
IQ
$4.43 (-2.42%) $0.11

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