Before Baidu (NASDAQ:BIDU) reported earnings on July 24, it was clear that the pressure was on. The stock had enjoyed an 80% run-up in the 12 months leading up to the release, and a 25% run-up in the three preceding months. But, despite the pressure, Baidu delivered. Shares shot up about 10% on Baidu's excellent second quarter, and have held their ground since.
Sure, the market optimism for the stock following earnings may have something to do with the fact that the company matched revenue estimates and beat earnings expectations. But there are deeper storylines investors should be watching. And they were all discussed in the company's second-quarter conference call.
Here are the five most important quotes from the call that everyone following Baidu should see.
Mobile revenue is soaring
Chairman and CEO Robin Li:
This quarter, mobile monetization again progressed very well, with mobile revenue -- which is largely comprised of mobile search revenue -- accounting for 30% of our total revenue. The healthy mobile search monetization ramp is a testament to search as a proven business model with vast potential.
As mobile browsing becomes increasingly more important in China, Baidu investors want to see signs the company is transitioning to this key environment successfully. Fortunately, this statement from Li continues to shed light on a positive mobile story for the company. Mobile revenue at 30% of total revenue was surprisingly high, up from 20% just two quarters ago.
Baidu should continue to see a rapid and successful transition to mobile. Not only are increasingly more Chinese citizens accessing the Internet from smartphones, but Baidu is still the leader in the three most important mobile markets: search, maps, and app distribution.
Search is firing on all cylinders
In our core search business, we remain the clear, dominant, cross-channel search leader. Mobile search traffic, again, drove overall traffic growth. In the second quarter, for the first time in history, during some holidays and weekends -- when people were out and about -- mobile traffic exceeded the traffic of desktop search.
Baidu's dominance of online search in China is the crux for the long-term thesis for owning the stock. With an estimated 75.7% share of search engine queries in the first quarter of 2014, according to Bloomberg Intelligence, it won't be easy for competitors to take away from the company's mindshare among consumers.
But can the company dominate mobile the same way? This reference by Li to mobile traffic driving growth in total search traffic offers early signs that Baidu has the potential to be a major player in mobile too.
Marketers are happy
Baidu continues to be an online marketer's preferred platform to capture leads on a large scale and generate the best ROI. It's been a little over a year since we implemented our integrated PC and mobile bidding system, and the feedback continues to be overwhelmingly positive.
While it's no surprise that marketers are flocking to Baidu given its size, it's reassuring to hear that large-scale marketers still view the platform as the best place to get the highest return on investment on their digital marketing spending. ROI is ultimately the key driver for any digital marketer platform's value proposition.
Marketers are spending more
If growth in the number of marketers were the only driver for Baidu's revenue growth, the company's second quarter would have been incredibly disappointing. Its 488,000 base of active online marketing customers only grew single digits from both the year-ago quarter and the quarter before.
But, fortunately, there is another source of revenue growth: increasing marketing revenue per marketer. On this front, Baidu is performing exceptionally well.
Baidu CFO Jennifer Li: "Revenue per online marketing customer for the second quarter was RMB24,200, a 50% increase from the corresponding period in 2013, and an increase of 16% from the previous quarter."
There are challenges in mobile
While Baidu may benefit from more engagement in mobile as it makes the important shift, traffic also comes at a higher cost, evidenced by the company's rising traffic acquisition costs as a portion of total revenue.
Jennifer Li: "Traffic acquisition cost as a component of cost of revenues in Q2 were RMB1.5 billion, or 12.7% of total revenues, compared to 11.6% in the corresponding period in 2013 and 12.4% in the first quarter."
Baidu cites mobile specifically as one of the reasons for the rising costs to attracting traffic. But the challenges in mobile extend beyond higher traffic acquisition costs. The amount advertisers are paying Baidu per click on mobile is lower than desktop. Fortunately, however, the trend for mobile CPC continues to be upwards, Li said during the call.
Mobile may present a unique growth opportunity for Baidu, but it also comes with its own challenges.