Personal Finance

Baidu Found the Growth It Was Searching for

Baidu's Silicon Valley AI Lab.

Chinese search giant Baidu (NASDAQ: BIDU) , fresh from spinning off its streaming video unit iQIYI (NASDAQ: IQ) , reported results after the market close on Thursday. Investors were looking for the company to cap off several recent quarters of consistent growth -- and they were not disappointed.

For the just completed first quarter, Baidu reported revenue of $3.33 billion, up 31% year over year and exceeding analysts' consensus estimates of $3.26 billion. Results also topped the high end of the company's forecast of a range of $3.05 billion and $3.22 billion. Operating margins soared to 22% for the quarter, up from 13% in the prior-year quarter, resulting in net income of $1.1 billion, and diluted earnings per share of $2.98. On an adjusted basis, earnings of $2.60 per share beat analysts' expectations for $1.73 per share.

Baidu's Silicon Valley AI Lab.

Baidu's growth accelerates on solid search results. Image source: Baidu.

The numbers

Metric Q1 2018 Q1 2017 Year-Over-Year Change
Revenue $3.33 billion $2.45 billion 31%
Non-GAAP operating income $852 million $347 million 103%
Adjusted earnings per share $2.60 $1.00 133%

Data source: Baidu's First Quarter Financial Report . Differences due to exchange rates. Chart by author.

Baidu is finally getting its groove back after making significant internal changes to comply with new government regulations aimed at online advertisers. The company has since sold a number of non-core businesses and is focusing its efforts on search and artificial intelligence (AI).

Online advertising still continues to pay the the bills, with revenue increasing to $2.74 billion, up 23% year over year. Baidu's active online marketing customers increased to 475,000, up 5% over the prior-year quarter. The company now has several successive quarters under its belt where the number of advertisers has grown.

Those customers are spending more, too, at about $5,800 each, up 19% year over year. Revenue from Baidu's core business provided $2.57 billion of the total, while iQIYI contributed $781 million to the total.

Content costs to support iQIYI's insatiable programming appetite grew to $669 million, up 59% over the prior-year quarter. Baidu recently spun off its video streaming unit but remains the majority shareholder. The recent IPO netted the company $2.25 billion, much of which will go toward accruing content to entice additional paying subscribers.

Traffic acquisition costs of $360 million were up 3% compared to the year-ago quarter, while bandwidth costs of $235 million increased 10% year over year.

The cutting edge

Baidu is China's leader in advanced technologies like artificial intelligence and autonomous driving. The company spent $525 million on research and development, an increase of 16% year over year, to maintain its technological edge.

The company was recognized by MIT Technology Review for its work in near-real-time translation, and it was cited as a key player in the field.

The company's Apollo self-driving car segment received government approval and the necessary licenses to begin public testing of its autonomous vehicles in the cities of Beijing and Chongqing, as well as in Fujian province.

Baidu's Apollo self-driving car.

Baidu continues to invest in cutting-edge technologies. Image source: Baidu.

Baidu also has entered into several strategic partnerships to advance self-driving technology, and it expects commercial production of numerous level 3 autonomous vehicles by 2020. During the recent Chinese Spring Festival Gala, one of the most watched TV shows in China, the company showcased its level 4 technology, with more than a dozen Apollo-powered vehicles making their way across the Hong Kong-Zhuhai-Macau Bridge, driving in a "choreographed swerving formation, depicting a robotic parade."

The company is also expanding its DuerOS voice-activated assistant, partnering with major electronics manufacturers to include voice controls in a growing list of products, including smart speakers, smart TVs, projectors, home appliances, and wearables.

Looking ahead

For the second quarter, Baidu expects revenue in a range between $3.97 billion and $4.17 billion, which would represent an increase of 26% to 33% over the prior-year quarter. Excluding the mobile gaming and delivery segments the company divested last year, this would represent between 28% and 34% growth year over year.

Baidu has made a remarkable comeback over the past couple of years, and long-term investors have been rewarded for their patience. The company continues to invest in the future. Expect more great things from the Chinese search leader going forward.

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Danny Vena owns shares of Baidu. The Motley Fool owns shares of and recommends Baidu. The Motley Fool recommends iQiyi. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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