Baidu shares down despite solid Q2 results as Wall Street wary of firm's heavy investments

PUBLISHED : Tuesday, 28 July, 2015, 9:22am
UPDATED : Tuesday, 28 July, 2015, 9:22am

Baidu forecast third-quarter revenue below Wall Street expectations as the Chinese internet search giant continued to pursue major investments, sending its US-traded shares lower on Monday.

Nasdaq-listed Baidu posted a 3.3 per cent increase in net profit in the second quarter, but that was offset by higher operating expenses.

The Beijing-based company saw its shares decline 6.31 per cent to US$185.20 in recent after-hours trading. The stock closed down 4.16 per cent to US$197.68 in trading on Monday.

Alicia Yap, the head of China internet research at Barclays, said in a report that increased promotional campaigns for group-buying service Nuomi and its online-to-offline (O2O) business, as well as incremental marketing investment for online travel site operator Qunar resulted in additional selling, general and administrative expenses.

Baidu also announced last month that it will invest about US$3.2 billion over the next three years in Nuomi, which links online shoppers to brick-and-mortar retailers.

The company projected total revenue in the third quarter to range from 18.17 billion yuan to 18.58 billion yuan, representing a 34.4 per cent to 37.4 per cent year-on-year growth. That was below the 18.79 billion yuan average estimate made by market analysts surveyed by Thomson Reuters.

Robin Li Yanhong, the chairman and chief executive at Baidu, was unfazed by the company’s investment commitments as he reported solid financial results in the quarter ended June 30.

Net profit in the quarter rose to 3.662 billion yuan (US$590.6 million), from 3.547 billion yuan in the same period last year, on the back of greater mobile business.

Total revenue jumped 38.3 per cent in the second quarter to 16.575 billion yuan, up from 11.986 billion yuan a year ago.

Monthly active users of Baidu’s mobile search platform grew 24 per cent year on year to 629 million in June, while those using mobile maps increased 48 per cent year on year in the same period.

Baidu O2O services’ gross merchandise value — representing the total amount of merchandise sold by an e-commerce operation over a certain period before deducting fees and expenses — climbed 109 per cent to year on year to 40.5 billion yuan.

“With Baidu's cornerstone search business delivering solid growth and enjoying ample runway ahead, and with powerful mobile gateways to leverage, we are ideally positioned to capture the O2O e-commerce opportunity and build the 'Next Baidu’,” Li said.

Baidu had about 590,000 active online marketing customers in the second quarter. Revenue per online marketing customer in that period advanced 13.2 per cent year on year to 27,400 yuan.

The company, however, has had to spend more to further grow its business and more effectively compete against its main rivals Alibaba Group and Tencent Holdings, which have made bigger bets in mainland China and overseas.

Selling, general and administrative expenses for Baidu in the second quarter increased 81 per cent year on year to 3.89 billion yuan due to higher promotional spending for the company’s O2O business.

Research and development costs in the same period were up 56.2 per cent year on year to 2.713 billion yuan as the company hired more personnel in this field.

Content expenses last quarter reached 840.2 million yuan, representing 5.1 per cent of Baidu’s total revenue. That was higher compared to 3 per cent in the corresponding period last year. The increase was mainly due to increased content costs of online video service iQiyi.

“While the heavy investment in initiatives such as O2O, iQiyi and Qunar continues to drag on margins, we believe Baidu’s core search business remains healthy and highly profitable,” Barclays’ Yap said.

“We view Baidu’s investment in O2O as both defensive and reactive to the change of smartphone user behaviour, and necessary for Baidu to provide a comprehensive local search function.”