Baidu 2Q12 Earnings: Strong Growth Despite Macro Headwinds
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Baidu (NASDAQ: BIDU) reported solid 2Q12 earnings with non-GAAP EPS of $1.27 vs. consensus estimates of $1.13, particularly due to lower taxes and higher income from Other services. Total revenues of $858.8 million increased 63% YoY and 27% QoQ, 0.2% ahead of consensus estimates.
Key Takeaways
1) Active advertising customers reached 352,000, an increase of 18% YoY and 10% QoQ vs. 17% YoY and 3% QoQ in 1Q. Net customer additions totaled 31,000 in Q2 compared to 10,000 in Q1. ARPU of $2,438 increased 16.5% QoQ.
2) Other services revenue of $0.7 million increased from $0.5 million in 1Q12 and $0.1 million in 2Q11.
3) Gross margin was 72.4% in Q2 compared to 70.7% in 1Q12 and 74.3% 2Q11.
4) Operating expenses of $178.8 million represented 20.8% of total revenues in Q2 compared to 21.6% in 1Q and 19.9% in 2Q11 due to increased expenses in R&D and marketing.
5) Traffic acquisition cost (TAC) increased to 8.3% vs. 7.9% in 2Q11 and 7.8% in 1Q12
6) 3Q12 Guidance was better than expected as revenues were guided to $.983-1.009 billion, 2.3% above consensus estimates at the midpoint.
Analysis
Baidu posted solid earnings considering the macroeconomic factors and the uncertain market conditions of China. The main driver for Q2 growth was the resilient and diversified sector of SME customers, which was in line with our previous analysis (See: Baidu: A Good Near And Long Term Buy). Large customers experienced cautiousness on ad spending due to the uncertain Chinese economy. We expect such caution to disappear in the coming quarters, resulting in an upside to revenues. Baidu is trying hard to improve user traction on mobile apps and Baidu's mobile browser, as it reaffirmed the importance of investment in mobile and Cloud computing. We believe that the success and monetization of mobile products could lead to high incremental revenues for Baidu in the long term. Q2 saw growth in TAC’s, which could mainly be attributed to the improvement in contextual ads business. We believe that this contextual ads business could help Baidu generate more active advertising customers and high ARPU’s in the long term given its better targeting and high ROI for both small and large enterprises. In Q2, ARPU for Baidu increased 35.3% YoY to $2,440. The ARPU improvement was mainly driven by ad budgets shifting from offline to online. We believe that there is an increased likelihood of ARPU’s expanding further as the demand for mobile search marketing grows.
Going Forward
Baidu enjoys a leadership position in the Chinese search advertising market with a market cap of around $37.42 billion well ahead of its closest competitor Sohu (NASDAQ: SOHU), which has a market cap of $1.29 billion. With continued internet growth, search advertising adoption in China, and growing mobile usage, Baidu is well positioned in the unsaturated Chinese market. We believe that the gradual ramp up of contextual ads would help Baidu to generate incremental revenues in the online advertising market. As the current valuation looks attractive to us, we maintain a buy rating on Baidu.
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