China’s largest search engine, Baidu, Inc. (BIDU - Free Report) , reported adjusted fourth-quarter 2016 earnings of $1.60 per share, exceeding the Zacks Consensus Estimate of 93 cents supported by higher revenues. The adjusted earnings per share exclude one-time items but include stock-based compensation expense.
Following the fourth-quarter results, the share price was down more than 5% due to weaker-than-expected revenues in the quarter. Also, over the past one year, shares of Baidu underperformed the Zacks categorized Internet Services industry. While the industry gained 15.26%, the stock returned just 1.03%.
Baidu reported revenues of RMB18.2 billion ($2.62 billion), down 2.6% year over year. The decrease was due to regulatory backlash on the company’s healthcare advertising,following the death of a student who underwent an experimental cancer treatment using Baidu's search engine.
However, revenues were above the Zacks Consensus Estimate of $2.51 billion.
Mobile revenues accounted for 65% of Baidu’s total fourth-quarter revenue against 56% in the year-ago quarter.
Revenues from online marketing services were RMB16.2 billion, down 8.2% from the year-ago quarter, and accounted for 89% of total revenues. The downside stemmed from a 18.6% year-over-year decrease in active online marketing customers.
Revenue per online marketing customer was approximately RMB35,400 ($5,099), up 14.2% year over year.
Revenues from Other services were RMB2.04 billion, reflecting a 88% year-over-year surge, which contributed the remaining 11% to total revenue.
Reported gross margin was 46.6%, down 980 basis points (bps) from the year-ago quarter.
Baidu reported total operating expenses of RMB6.3 billion, down 10.1% from RMB7 billion incurred in the year-ago quarter. As a percentage of sales, selling, general & administrative expenses decreased while R&D expenses increased. The net result was a GAAP operating margin of 12% compared with 18.9% in the year-ago quarter.
Adjusted EBITDA was RMB3.86 billion, down 19.9% from fourth-quarter 2015.
Baidu generated fourth-quarter net income of RMB4.6 billion compared with RMB25.1 billion a year ago. Diluted earnings per ADS for the fourth quarter were RMB13.23 versus RMB72.24 in the year-ago quarter.
Balance Sheet & Cash Flow
Baidu exited the fourth quarter with cash, cash equivalents, restricted cash and short-term investments of approximately RMB90.2 billion compared with RMB78.5 billion in the prior quarter. Accounts receivables were RMB4.1 billion, down from RMB4.3 billion in the third quarter.
Cash flow from operations was RMB8.01 billion as against RMB2.95 billion in the previous quarter. Capex was RMB1.2 billion compared with RMB1.18 billion in the earlier quarter.
For the first quarter of 2017, Baidu expects total revenue in the range of RMB16.480 billion (or $2.374 billion) to RMB17.030 billion (or $2.453 billion), representing a year-over-year increase of 4.2–7.6%. Analysts polled by Zacks expect revenues of $2.36 billion.
Baidu provides Internet search services in China. It also offers a Chinese language search platform for businesses to reach their customers. The company posted decent fourth-quarter results with both the top line and the bottom line beating the respective Zacks Consensus Estimate.
Baidu’s revenue from healthcare ads has been under pressure due to new government compliance code. Therefore, in order to expand its revenue beyond search, the company is making efforts to venture into new markets namely artificial intelligence (AI). This is a big positive going forward.
Baidu’s increasing presence in the online video market will improve its competitive position. Some of the current buoyancy surrounding the shares is related to the company’s strong dominance in the mobile search market and its consistent product development efforts. Moreover, Baidu continues to gain market share. We believe that the company has significant growth potential in the mobile market in the long term.
However, higher promotional expenses, heavy spending on video and O2O, and increasing competition on its own search platform from the likes of Qihoo 360 Technology and Sohu’s Sogou search engine remain major concerns.
Currently, Baidu has a Zacks Rank #3 (Hold). Stocks worth considering in the industry include Texas Instruments (TXN - Free Report) , carrying a Zacks Rank #1 (Strong Buy) and Xcerra Corporation (XCRA - Free Report) and Internap Corporation (INAP - Free Report) , carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Texas Instruments delivered a positive earnings surprise of 7.09%, on average, in the trailing four quarters.
Xcerra Corporation delivered a positive earnings surprise of 187.5%, on average, in the trailing four quarters.
Internap Corporation delivered a positive earnings surprise of 4.56%, on average, in the trailing four quarters.
A Full-Blown Technological Breakthrough in the Making
Zacks’ Aggressive Growth Strategist Brian Bolan explores autonomous cars in our latest Special Report, Driverless Cars: Your Roadmap to Mega-Profits Today. In addition to who will be selling them and how the auto industry will be impacted, Brian reveals 8 stocks with tremendous gain potential to feed off this phenomenon. Click to see the stocks right now >>