Sunday, August 21, 2011

Baidu Earnings Call Q2 2011 (Review) *Positioned at the center of China's Internet ecosystem*

● Baidu Planet 

Baidu (BIDU) reported record-crushing Q2 2011 financial results on Monday, July 25, 2011

* Unless otherwise noted, currency amounts are in Chinese Renminbi (RMB) *

Baidu Reports Record-Crushing Earnings!: Astonishing acceleration of EPS +52% QoQ & +95% YoY!

Baidu Summary Q2 2011 Baidu not only reported record-crushing financial results, but is apparently crushing the competition in China. New record highs were total revenues, operating income, net income, earnings per share, operating margin, and net margin. Return on assets is an astronomical 44.72%! As expected, the prior Q1 was the seasonal and cyclical annual "bottom" for Baidu, but the acceleration of financial performance was astonishing in Q2. Q3 and Q4 should each set the bar even higher. The expectations continue sky high for Baidu in the world's largest Internet market. Financial position is very strong and very liquid. Robin Li, Chairman and CEO, attributed the financial performance to "strong traffic growth and improved monetization". The currency translation at June 30, 2011 utilized by Baidu was RMB6.4635 to US$1.00.

Baidu Income Statement Q2 2011 Baidu financial performance was an astonishing acceleration with total revenues RMB3.42 billion, net income RMB1.63 billion, earnings per share RMB4.67 ADS. From the prior near-record setting quarter Q1 2011, QoQ, total revenues were up +40%, net income up +53%, and earnings per share up +52%. From the prior year Q2 2010, YoY, these were up +78%, +95%, and +95%, respectively. Gross, operating, and net margins increased QoQ to 74.22%, 54.42%, and 47.81% compared to Q1 2011 of 72.51%, 49.04%, and 43.94%, respectively. All 3 improved YoY compared to Q2 2010. All of this data is summarized in the charts below.

Baidu Balance Sheet Q2 2011 Total assets increased an impressive +16% QoQ and an astounding +85% YoY to a record high RMB14.37 billion. The capital to assets ratio (total stockholders' equity divided by total assets) is a very solid 77.82%. Baidu is incredibly liquid with a current ratio (current assets divided by total assets) of 77.86%.  Baidu has over RMB10.2+ billion in cash, cash equivalents, and short-term investments. Return on assets continues at astronomical levels and increased again to 44.72%.

Baidu Outlook Q3 2011 The Baidu outlook for Q3 2011 is very strong, and record-breaking, total revenues of RMB3.95 billion to RMB4.05 billion, which would exceed the Q2 2011 quarterly record of RMB3.42 billion. If the gross and net margins can be sustained at the current very high levels, the remainder of 2011 looks outstanding. Baidu states, "Baidu currently expects to generate total revenues in an amount ranging from RMB3.950 billion($611.1 million) to RMB4.050 billion ($626.6 million) for the third quarter of 2011, representing a 75.1% to 79.5% year-over-year increase. This forecast reflects Baidu's current and preliminary view, which is subject to change." Baidu may provide additional information on their outlook in the earnings conference call, which is not reviewed here.

Baidu Q2 2011 Earnings Conference Call

Baidu Management Robin Li, Co-Founder, Chairman, and CEO and Jennifer Li, Chief Financial Officer, were present at the earnings call.

Press Release "Baidu had another excellent quarter, as we benefited from strong traffic growth and improved monetization," said Robin Li, chairman and chief executive officer of Baidu. "We were especially encouraged with the strong spending from large customers, highlighting the increased value they saw from their marketing spend on Baidu." "We continued to see strong momentum and product integration from our Box Computing open data and application platforms during the quarter," Mr. Li continued. "Our position at the center of China's Internet ecosystem enables Baidu to benefit from key trends such as the growth of e-commerce. Looking ahead, I am confident that Baidu's emphasis on innovation and execution will help us continue to attract and retain users and customers." Jennifer Li, Baidu's chief financial officer, commented, "Our top and bottom line results grew strongly again this quarter, with healthy increases in overall traffic and paid click growth. We will continue to accelerate our investments in strategic areas, R&D, network infrastructure and bringing new talents on board to drive long term growth."

CEO Robin Li "Our top and bottom line results as well as our margins were all extremely strong" CEO Li opened the earnings conference call, "I'm pleased to tell you that our top and bottom line results as well as our margins were all extremely strong in the second quarter. Baidu is at the center of China's increasingly sophisticated Internet market, and our efforts to foster an ecosystem around that are paying off." Mr. Li then reviewed the product line, include Box Computing, "At the heart of this ecosystem strategy is Box Computing, which constantly improves user experience by incorporating dynamic data, content and applications directly into the search results. Specifically, our Open Applications platform is progressing well. I am proud to report that there are many developers seeking advantage of this platform. We now generate about 20 million clicks per day in less than one year of the platform's launch." He also reviewed the social search feature, Baidu post bar, Baidu Knows, and Baidu Ting, the social product for music.

Microsoft Bing Partnership CEO Li noted, "We announced a new partnership with Microsoft Bing for English-language search. And last week, we began displaying Bing's top organic results on our pages for most of the English queries we get." See review here, Baidu: Microsoft Bing Will Power Its English Language Search "Will further strengthen dominance in China".

eCommerce  CEO Li explained, "We also benefited from strong momentum in ecommerce. First, the online retail sector continued to see triple-digit growth. Second, spending by group mining sites increased rapidly in the past quarter. This was a main driver for our outperforming guidance this past quarter. Having said that, we are seeing broad-based healthy revenue contributions across all industry verticals."

Management and Organization Restructure CEO Li discussed the recent management and organization restructure, "Looking to our second decade, our organization is far larger and more complex than ever. In response, we have defined a new corporate structure. Our four new functions consolidate the reporting lines. This will create greater efficiencies and drive more innovation. This structure will ask for new technologies and products that will foster our growth in the years ahead. We will continue to invest heavily in all functions for our management to succeed." See review here, Baidu Announces Management & Organization Restructure "Spur development, create efficiencies, enhance synergies".

CFO Jennifer Li "We achieved excellent result in the second quarter" CFO Li began, "We achieved excellent result in the second quarter with AP and customer growth driving overall growth. Investment in R&D, our talent pool and network infrastructure will continue to be priority. We plan to invest even more aggressively in these areas in the second half of the year. These investments will drive growth and innovation, and ultimately deliver long-term returns."

Financial Statements CFO Li then reviewed the financial results, "Online marketing revenue for the second quarter of 2011 were RMB3.4 billion, a 78% increase year-over-over. Baidu had around 298,000 active online marketing customers in the second quarter of 2011, a 17% increase from the corresponding period in 2010, and a 9% increase from the previous quarter." Further, "Traffic acquisition costs, as a component of cost of revenue was RMB269 million, a 7.9% of total revenues as compared to 9.7% in the corresponding period in 2010 and 8.2% in the first quarter of 2011. This decrease reflects traffic mix, driven by stronger organic traffic growth."

Question and Answer Session

Robin Li, Co-Founder, Chairman, and CEO and Jennifer Li, Chief Financial Officer, were present for the Q and A session.

Traffic Acquisition Costs; lower, but forecasted higher
(CFO) Decrease reflects basically the traffic mix driven by especially strong organic traffic growth. It's a very healthy trend and we're happy to see this as a normal fluctuation. I did mention that the contextual ad business is an important initiative for us and we are making a lot of efforts on that front and developing partners to be part of the whole business. The contextual ad business itself does require higher payout. So to the extent the business tracks very well, you should expect the traffic acquisition cost to increase as a percent of total revenue.
Box Computing
(CEO) Box Computing is generating benefits both in terms of user experience or traffic retention as well as certain kind of revenue potential. You can basically view the Box Computing as a better way of displaying when thinking about revenue. It's a better way of displaying ads, all kinds of different ways of displaying Box Computing results.
Music Licenses and Agreements
(CFO) We will be paying the record label companies some fee to incorporate their assets in our services. The amount itself is not significantly going to affect the cost picture, and any fee that we are paying them will go through the operational cost line item as part of the cost of revenue.
Top Advertising Sectors
(CFO) Medical, machinery and equipment, education, travel, and business service. And all these five top sectors account a little over 50% of the total revenue.
(CFO) Aggressive investment will continue to be our priorities, particularly in the areas of R&D, talent, network infrastructure and frankly office space as we need to accommodate more people. We are also investing very aggressively in the strategic partnership side. If you look at our historical margin patterns, second half of the year is typically expense-heavy. R&D expenses will be more heavily concentrated in the second half of the year. And if you look at near term, in Q3, we'll have marketing events such as Baidu World. We'll also re-double our efforts in campus brand building coming to the recruiting season. So expense will be particularly heavy in the second half of the year.
Baidu Browser
(CEO) Once a user installs a browser controlled by us, then we'll able to generate more search traffic. This is true both on the PC side and also on the mobile side. On the mobile side, we also have a mobile browser for our users. In general, we just view the client-side software as a way of distributing Baidu services.
Overseas Plan
(CEO) We are going to expand into many other markets in the years to come. We are internally developing a better infrastructure that will support more languages and when it's ready, we'll be able to launch more languages simultaneously. And around that time, we'll be able to setup overseas offices. But right now, we are not ready to say, which country we are going into and how aggressive we will become.
Social Networking
(CEO) We have added a lot of social features in our existing products. We would like to perfectly combine the people relationship with content relationship.

About Baidu
Baidu, Inc. is the leading Chinese language Internet search provider. As a technology-based media company, Baidu aims to provide the best way for people to find information. In addition to serving Internet search users, Baidu provides an effective platform for businesses to reach potential customers. Baidu's ADSs, each of which represents one Class A ordinary share, currently trade on the NASDAQ Global Select Market under the symbol "BIDU".

The Baidu Story
Many people have asked about the meaning of our name. "Baidu" was inspired by a poem written more than 800 years ago during the Song Dynasty. The poem compares the search for a retreating beauty amid chaotic glamour with the search for one's dream while confronted by life's many obstacles. "…hundreds and thousands of times, for her I searched in chaos, suddenly, I turned by chance, to where the lights were waning, and there she stood." Baidu, whose literal meaning is hundreds of times, represents persistent search for the ideal.

Baidu chose a poetic Chinese name because it wants the world to remember its heritage. As a native speaker of the Chinese language and a talented engineer, Baidu focuses on what it knows best - Chinese language search. Applying avant-garde technology to the world's most ancient and complex language is as challenging as it is exciting. At least people here at Baidu think so. As having diligently disclosed in the Prospectus of our recent Initial Public Offering, we believe there are at least 38 ways of saying "I" in Chinese. It is important that we master all the ways of addressing oneself in Chinese because our users depend on us to address every one of their daily queries. And trust us, pin pointing queries in the Chinese language is an art rather than a science.

Our mission is to provide the best way for people to find information. To do this we listen carefully to our users' needs and wants. Have we collected all the Chinese web pages they want to see? Are the pages current and up to date? Are the search results closely related to their queries? Did we return those search results instantly? To improve user experience, we constantly make improvements to our products and services. For example, we introduced "phonetic" or "pin-yin" search which allows our users to type in Chinese keywords using English alphabets. This feature is designed to skip the switching from English inputting to Chinese inputting and for when the user is not sure of the written form of a keyword. Our users definitely notice the many little things that we do differently to ensure a simple and reliable search experience every time. 

In addition to serving individual users, we also serve as a media platform for online marketing customers. We not only provide our customers easy access to one of the largest online audiences in China but also targeted groups with defined interests as indicated by queries. Unlike traditional online advertising services which charge by flat fee, our marketing products and services are performance based. Our Pay for Performance model has taken the market by storm because it is cost effective and measurable.

We know that a lot of interesting things are going on in the Internet space, but we don't want to lose focus. China's Internet search industry is only a newly discovered territory. We see vast untapped grounds in our home base and we believe there are still plenty of prizes to be claimed by the best players.

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