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China’s largest search engine, Baidu, Inc. (BIDU - Snapshot Report) reported adjusted fourth-quarter 2013 earnings of $1.29 per share missing the Zacks Consensus Estimate of $1.38 due to heavy expenditure made on various investments. The adjusted earnings per share exclude one-time items but include stock-based compensation expense.

Following the earnings results, stock surged 8.2% in afterhours trading based on strong revenue outlook and solid growth in the mobile business.

Revenues

Baidu reported revenues of RMB9.52 billion ($1.573 billion) in the fourth quarter, up 7.1% sequentially and 50.3% from the year-ago period. Fourth-quarter revenues exceeded the Zacks Consensus Estimate of $1.403 billion due to solid growth in mobile business.

Revenue Sources

Revenues from Online marketing services were RMB9.462 billion, up 50.5% increase from the year-ago quarter and represented 99.4% of the total revenue. The upside was attributable to active online marketing customers, which increased to 451,000 in the quarter, up 11.1% year over year but down 2.8% sequentially.

Revenue per online marketing customer was approximately RMB20,900 ($3,452), up 34.8% from the year-ago quarter and 9.4% sequentially, primarily due to increase in paid clicks.

Revenues from Other services were RMB60.7 million, up 27.0% increase from the year-ago quarter and represented 0.6% of total revenue.

Margins

Reported gross margin for the quarter was 61.6%, down 380 basis points (bps) sequentially and 690 bps from the year-ago quarter.

Baidu reported total operating expenses of RMB3.13 billion, up significantly from RMB1.49 billion incurred in the year-ago quarter. Both selling general & administrative and research & development expenses were up as a percentage of sales from the year-ago quarter. The net result was a GAAP operating margin of 28.8% compared with 45.0% in the year-ago quarter.

Adjusted EBITDA in the fourth quarter was RMB3.563 billion, up 7.2% from the year-ago quarter.

Net Income

Baidu generated fourth-quarter net income of RMB2.78 billion compared to RMB2.80 billion in the same quarter last year. There were no one-time items in the last quarter. Therefore, GAAP EPS was the same as pro-forma EPS of RMB7.90 or $1.29 per share compared to RMB7.99 or $1.28 per share in the year-ago quarter.

Balance Sheet & Cash Flow

Baidu exited the first quarter with cash, cash equivalents, restricted cash and short-term investments of approximately RMB38.69 billion versus RMB43.77 billion in the prior quarter. Accounts receivables were RMB2.22 billion, up from RMB2.18 billion in the prior quarter.

Cash flow from operations was RMB4.11 billion versus RMB4.30 billion in the prior quarter. Capex was RMB961.0 million versus RMB779.6 million in the prior quarter.

Guidance

For the first quarter of 2014, Baidu expects total revenue in the range of RMB9.240 ($1.526 billion) to RMB9.520 billion ($1.573 billion), representing a year-over-year increase of 54.8–59.5%. Analysts polled by Zacks expect revenues of $1.306 billion, well below the guided range. 

Our Take

Baidu, Inc. provides Internet search services in Chinese. It also offers a Chinese language search platform for businesses to reach their customers. Though the company’s fourth-quarter earnings missed the Zacks Consensus Estimate, top-line results increased 50.3% from the year-ago quarter due to solid growth in mobile search business.

Also, the company projected a strong guidance for the first quarter, indicating increasing revenue contribution from mobile in the near future. Moreover, Baidu’s increasing presence in the online video market will improve its competitive position. Recently, China’s largest Internet search engine operator signed an online video deal with Viki Inc. to offer more movies and television shows.

Some of the current buoyancy surrounding the shares is related to Baidu’s strong dominance in the mobile search market and its continuous efforts to develop new products. Moreover, Baidu continues to gain market share. We believe the company has significant growth potential in the mobile market over the long term.

Currently, Baidu has a Zacks Rank #1 (Strong Buy). Other stocks that are performing well at current levels include Facebook (FB - Analyst Report), Akamai Technologies, Inc. (AKAM - Analyst Report) and Conversant Inc. (CNVR - Snapshot Report). All these stocks sport a Zacks Rank #2 (Buy).

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