Baidu ( BIDU ) 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.
In the pre-earnings article, we had expressed our concerns regarding the increasing competition that Baidu faces from players such as Qihoo ( QIHU ), 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.
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 quarter-over-quarter.
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 ( YOKU ). 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 ( GOOG ) does from Youtube, which will provide diversification to the firm's overall revenues.
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