Baidu Inc. Earnings: Sales Surge, but Heavy Spending Dents Profits

Investments helped fuel a 36% jump in revenue, but rising costs pummeled margins.

Joe Tenebruso
Joe Tenebruso
Oct 31, 2015 at 2:20PM
Technology and Telecom

Image source: Baidu.

Chinese Internet search giant Baidu (NASDAQ:BIDU), in its third-quarter results posted Oct. 29, delivered strong revenue growth, but its profits continued to be hampered by the company's heavy investments in its online-to-offline initiatives.

Operating results 
Third-quarter revenue surged 36% year over year to $2.892 billion, with online marketing revenue increasing 31.7% to $2.782 billion. Baidu benefited from solid growth in active online marketing customers, which rose 20.7% to 623,000, as well as a 9.3% increase in revenue per online marketing customer to $4,453.

Importantly, Baidu continues to make progress with its mobile initiatives, with mobile search monthly active users, or MAUs, for September increasing 26% year over year to 643 million and mobile maps MAUs jumping 34% to 326 million. That helped mobile revenue increase to 54% of Baidu's total revenues, up from 37% in the third quarter of 2014.

"With mobile accounting for nearly two-thirds of Baidu's search traffic and China squarely in a mobile age, Baidu is pioneering and redefining the mobile experience for users in China," said Chairman and CEO Robin Li in a press release. "We further extended the reach of our platform by deeply integrating and connecting search and maps with transaction services."

To Li's point, gross merchandise value (GMV) for transaction services leaped 119% to $9.5 billion in the third quarter of 2015. That growth came a cost, however, with management noting that increased promotional spending for transaction services was the primary cause of an 111% jump in selling, general, and administrative expenses during the quarter. Third-quarter research and development expenses also grew significantly faster than revenue, increasing 47%.

These heavy investments, along with the losses generated by Baidu's non-search businesses, took a toll on Baidu's margins, with operating margin declining to 13.7%, down from 29% in the third quarter of 2014. That led to a 35.9% year-over-year decrease in operating profit to $395.2 million.

Net income and earnings per share also fell sharply, declining 26.7% to $447.0 million and 30.2% to $1.25, respectively.

Cash, cash flow, and capital return
As of Sept. 30, 2015, Baidu had more than $11 billion in cash and investments versus less than $6 billion in debt. Third-quarter operating cash flow was $759.2 million and free cash flow totaled $463.9 million. This balance sheet strength and solid cash flow generation has allowed Baidu to return cash to its shareholders. The company completed the $1 billion share repurchase program it announced in July during the third quarter, and announced a new $2 billion repurchase program to be completed over the next two years.

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Looking ahead
Management issued a fourth-quarter revenue forecast in the range of $2.864 billion to $2.950 billion, representing a 29.5% to 33.4% year-over-year increase.

Investors should also expect Baidu's heavy spending to continue in the quarters ahead, which management believes will ultimately create long-term value.

"The momentum in transaction services gives us the confidence to continue investing, said CFO Jennifer Li. "We will invest in ways that leverage and buttress our competitive advantage."