- Buyback follows $1 billion repurchase announced in July
- Spending kept in check amid transition to new services
Baidu Inc. reported a third-quarter profit that topped projections and announced its second buyback in three months after curbing growth in spending on services like online shopping and travel.
China’s leading search provider posted adjusted earnings per ADS of $1.43 a share, exceeding the $1.28 average of analysts’ projections, according to data compiled by Bloomberg. Baidu may buy back as much as $2 billion of stock over the next two years, the company said in a Friday statement outlining its largest buyback program on record.
Chairman and founder Robin Li is boosting spending to compete with Alibaba Group Holding Ltd. and Tencent Holdings Ltd. in online services from restaurant bookings to movie tickets, to drive growth beyond search advertising. China’s three largest Internet companies are vying for a slice of an “O2O” or online-to-offline market expected to grow to 7.2 trillion yuan ($1.1 trillion) by 2017, according to IResearch.
On Friday, Baidu re-named its core business “search services” while rebranding the O2O unit “transaction services.”
“Transaction services is the biggest bet we’re doing right now. It does not give us much revenue, it’s losing a lot of money,” Li told analysts on a conference call. “Going forward it will become more and more important.”
Revenue climbed 36 percent to 18.4 billion yuan. While third-quarter net income fell 27 percent to 2.84 billion yuan, it beat analysts’ estimates for 2.43 billion yuan. Baidu’s shares rose 11 percent to $187.47 at the close Friday in New York. The stock has dropped slid 18 percent this year, putting it on track for its worst annual decline since 2008.
“People were afraid costs would be out of control, but the results show margins were better than expected,” said Bloomberg Intelligence analyst Michelle Ma. “There’s signs that there could be margin expansion and less subsidies in future, yet the fourth-quarter could still see spending rise again.”
Baidu’s three major new businesses, video service iQiyi, online commerce site Nuomi and travel site Qunar, remain loss-making, dragging on profit generated by its core search advertising business. Nuomi, the main platform for many of its newer services, saw the gross value of transactions jump more than four-fold in the third quarter, Li said.
On Friday, the company forecast fourth-quarter revenue of 18.2 billion yuan to 18.8 billion yuan. Chief Financial Officer Jennifer Li reiterated her forecast that sales, general and administrative expenses will rise 80 percent to 90 percent this half from the first half as it lays out subsidies and marketing to lure new users.
The rising cost of competing in online services is spurring consolidation across the Internet industry. Baidu said this week its Qunar travel site will form an alliance and swap shares with rival Ctrip.com International Ltd. Alibaba and Tencent have backed similar mergers to try and curb competition, such as the tie-up between Meituan.com with Dianping.com announced this month.
By taking a 25 percent stake in Ctrip, in return for 45 percent of Qunar, Baidu intends to cut costs and benefit from reduced competition. That deal also means Baidu gives up voting control of Qunar, which accounted for 6 percent to 7 percent of revenue previously and will no longer be incorporated into the company’s sales.
“Finding a strategic solution for one of the three loss-making businesses is a positive catalyst for Baidu,” Cynthia Meng, an analyst at Jefferies Group LLC, wrote in a report after the Oct. 26 Qunar deal.