Baidu Sales Beat Analysts' Estimates on Mobile Search Growth

  • Revenue grows 33 percent with rise of mobile advertising
  • Shares climb as much as 14 percent in U.S. after-hours trade

Baidu Inc. posted revenue that topped analysts’ estimates as the Chinese Internet search provider’s investments in mobile begin to bear fruit and attract advertising, buoying its shares in U.S. trading.

Sales rose 33 percent to 18.7 billion yuan ($2.9 billion) in the December quarter from a year earlier, the Beijing-based company said in a statement. That beat the average analyst estimate of 18.5 billion yuan, according to data compiled by Bloomberg. Mobile revenue made up 56 percent of total sales in the quarter from 42 percent a year earlier.

The company’s dominance in search as more users shift to using mobile devices is helping offset the impact of a Chinese economy growing at its slowest pace in 25 years. Chairman Robin Li is also investing in services such as home delivery and online video to drive growth beyond advertising and help Baidu compete with Alibaba Group Holding Ltd. and Tencent Holdings Ltd.

“Baidu still holds an upper hand when it comes to attracting advertisements compared with the smaller players,” Marie Sun, a Shenzhen-based analyst at Morningstar Investment Service, said. “Its development in mobile search also shows it’s hard to be replaced.”

Online marketing revenue jumped 27 percent to 17.6 billion yuan in the final three months of 2015. Baidu’s American depositary receipts rose as much as 14 percent to $179.90 in extended U.S. trading after the results were released.

Costly Rivalry

Robin Li said Baidu’s ability to earn revenue from mobile advertising could surpass that on computers because it’s more effective.

“On mobile we can be more targeted. We know more about the user, we know the location of the user and we can enable all kinds of user actions," he told analysts on an earnings call. “The nature of the queries on mobile are more toward local services, which inherently have more commercial value.”

In the longer term, China’s three largest Internet companies are spending heavily to try and grab a slice of an on-demand economy expected to grow to 7.2 trillion yuan by 2017, according to IResearch. The rising cost of competing has prompted Alibaba and Tencent to back alliances and mergers. Li sought to end losses from Baidu’s travel business by combining unit Qunar Cayman Islands Ltd. with larger rival Ctrip International Ltd.

Internet Supremacy

The company forecast first quarter revenue of between 15.4 billion yuan and 16 billion yuan, trailing estimates of 16.3 billion yuan. It reported more than a seven-fold rise in fourth quarter net income to 24.7 billion yuan, though much of that came from gains recognized as a result of Baidu’s exchange of Qunar shares with Ctrip.

Investors will keep a close eye on Baidu’s margins. Tencent, Alibaba and Baidu are now vying for supremacy in an on-demand services industry primed for growth as more people turn to their smartphones or the Web to order food, schedule beauty treatments or hire helpers. Users of such services could rise 29 percent to 400 million by next year, according to Shanghai-based IResearch.

The rising cost of competing in online services is spurring consolidation, including the combinations last year of fashion sites Meilishuo and Mogujie, travel-site operators Ctrip and Qunar, and group-buying startups Meituan.com and Dianping.com.

Chairman Li and another executive this month offered to buy Baidu’s entire 80.5 percent stake in the IQiyi video-streaming business, a deal that will shore up the search giant’s margins while setting up a potential initial public offering for the unit. Selling IQiyi could expand Baidu’s operating margins to 26 percent this year from 20 percent, even while unabated spending on on-demand services erases about 30 percentage points of profitability, HSBC Securities analysts led by Chi Tsang estimated. Spending on content rose too 7.4 percent of revenue in the quarter, from 4.4 percent a year ago.

“In 2016, we also expect a step-up investment in content cost, but at a slightly more moderate pace than 2015," Chief Financial Officer Jennifer Li said.

The company also invests heavily on research and development. Baidu is exploring a sub-field of artificial intelligence known as deep learning, which aims to improve search results by training computers to work more like the human brain, and is researching autonomous driving. In 2014, the company hired Andrew Ng, a renowned robotics and machine-learning specialist to the post of chief scientist.

“Self-driving cars can become a commercial product in the next five years,” Robin Li said. “That is very dependent on our machine learning and artificial intelligence capabilities.”

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