) reported its earnings for Q3 2012 on October 29. The company had
a pretty good quarter as total revenues increased to $995 million,
growing almost 50% year-over-year. It also reported a 50%
year-over-year increase in operating profit to $525 million.
article, we had expressed our concerns regarding the increasing
competition that Baidu faces from players such as Qihoo (
), which launched a competing search engine during the third
quarter. We did not get many insights about the potential impact of
this new competition during the earnings call; however, looking at
the firm's financials, it seems to be minimal at present. Overall,
the company posted strong and encouraging numbers across its
businesses, which leave it in a good position to weather the
challenges of a competitive Internet landscape.
See our complete analysis of Baidu here.
Growth in Customers Encouraging
We had expected the increasing competition in the Chinese search
engine industry to have a downward impact on the firm's customer
growth and margins. However, Baidu impressed us with its customer
growth numbers for Q3. It had approximately 400,000 customers,
which was a 30% increase year-over-year and a 10% increase
The fact that Baidu did a good job of attracting new customers
during a quarter which, along with increasing competition, included
concerns about the Chinese economy, is a testament of the company's
capable sales force and its ability to handle a relatively
difficult landscape. The firm continued to invest heavily in
training and expansion of its sales team, evident by the 40%
increase in SG&A expenses. We will have to wait and see whether
or not these investments play out over the long term, but we think
Baidu's leadership in the market can be leveraged successfully by
its sales force.
Still Looking for Mobile Monetization
During this earnings call, we were looking for signs about
Baidu's mobile monetization. Earlier this year, Baidu had
approximately 35% market share in the Chinese mobile search market,
which is substantially lower than its 80% share in PCs and
desktops. We expect that much of Baidu's revenue growth will be
driven by mobile advertising, and we think this is a key platform
that Baidu must successfully monetize.
While we did not get any new insights on Baidu's mobile
monetization during the earnings call, management reiterated that
it expects mobile success to take time and materialize within the
next couple of years.
However, while monetization is a problem, the company did report
some encouraging mobile traffic metrics. Mobile search traffic was
up around 100% year-over-year and 25% quarter-over-quarter.
Additionally, the company's new HTML-5 based mobile browser had 10
million activations within weeks of launch, which is encouraging
since mobile users who use Baidu's browser are more likely to use
Baidu's search engine to conduct mobile searches.
iQiyi's Success Can Help Diversify Revenues
Currently, we think Baidu is overly reliant on search revenues,
a division that makes up approximately 60% of its value. While it
does have a dominant position in the Chinese search market with
approximately 84% market share, the entry of competitors such as
Qihoo could dent its prospects going forward.
This is why we were encouraged by the success of Baidu's Youtube
like service, iQiyi. It seems the product is now a major player in
the Chinese online video market and is a direct competitor to firms
such as Youku (
). iQiyi enjoys No. 1 spot in the Chinese online video space in
terms of time spent per user and No. 2 position in terms of total
time spent per month. According to management, monthly unique
visitors grew 62% quarter-over-quarter to 407 million.
We think that an increase in iQyi's user base can be a big
growth driver for the company's display ad division, which
currently makes up approximately 25% of its stock price. As users
engage more on the platform, Baidu can drive revenues from this
platform as Google (
) does from Youtube, which will provide diversification to the
firm's overall revenues.
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