Tuesday, November 1, 2011

Baidu Quarterly Earnings Call (Review) "Another stellar quarter"

● Baidu Planet 

Baidu (BIDU) reported another record-breaking quarter on October 27, 2011
* Unless otherwise noted, currency amounts are in Chinese Renminbi (RMB) *

Baidu Reports Another Record-Breaking Quarter: EPS +15% QoQ & +79% YoY!

Baidu Summary Q3 2011 Baidu reported another record-breaking quarter. New record highs were reported for total revenues, operating income, net income, and earnings per share. Gross, operating, and net margins dipped slightly from the prior quarter. Return on assets continues at an astronomical level of 44.72%. As expected, the current Q3 exceeded prior Q2 and Q4 is expected to surpass the current Q3. The expectations continue sky high for Baidu in the world's largest Internet market. Financial position is strong and liquid. Robin Li, Chairman and CEO, attributed the stellar financial performance to "rapid growth in customer spending and user traffic". The currency translation at September 30, 2011 utilized by Baidu was RMB6.3780 to US$1.00.

Baidu Income Statement Q3 2011 Baidu financial performance was yet another record-breaking quarter with record total revenues RMB4.18 billion, record net income RMB1.88 billion, and record earnings per share RMB5.38 ADS. From the prior record setting quarter Q2 2011, QoQ, total revenues were up +22%, net income up +15%, and earnings per share up +15%. From the prior year Q3 2010, YoY, these were up +85%, +80%, and +79%, respectively. Gross, operating, and net margins dipped QoQ to 73.51%, 53.32%, and 44.92% compared to prior year Q3 2010 of 74.57%, 52.37%, and 46.40%, respectively.

Baidu Balance Sheet Q3 2011 Total assets increased an impressive +45% QoQ and an astounding +125% YoY to a record high RMB20.87 billion. The capital to assets ratio (total stockholders' equity divided by total assets) is a solid 62.95%, but a multi-year low. Baidu is liquid with a current ratio (current assets divided by total assets) of 66.42%, which is also a multi-year low.  Baidu has over RMB11.4+ billion in cash, cash equivalents, and short-term investments. Return on assets of 42.25% continues at astronomical levels, but slightly decreased QoQ.

Baidu Outlook Q4 2011 The Baidu outlook for Q4 2011 is strong, and record-breaking, total revenues of RMB4.41 billion to RMB4.535 billion, which would exceed the Q3 2011 quarterly record of RMB43.18 billion. If the gross and net margins can be sustained at the current very high levels, the next quarter looks outstanding. Baidu states, "Baidu currently expects to generate total revenues in an amount ranging from RMB4.410 billion($691.4 million) to RMB4.535 billion ($711.0 million) for the fourth quarter of 2011, representing a 79.9% to 85.0% 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.

Press Release
Robin Li, chairman and chief executive officer of Baidu commented, "Baidu recorded stellar results in the third quarter driven by rapid growth in customer spending and user traffic. In particular, spending by large customers significantly outperformed our expectations as we continued to build strong relationships with high quality companies. China's search industry is still in its early stages, and as the clear industry leader we see enormous room for continuing growth as users and online marketing customers become increasingly sophisticated."

"On the user front, during the third quarter we launched a personalized homepage feature which provides users with a Baidu experience uniquely tailored to their individual online behavior, as well as instant and centralized access to their online social activities," Mr. Li continued. "As we continue to create new ways for users to engage with the Internet, we believe that more and more people will rely on Baidu as their online gateway, further solidifying Baidu's position at the heart of China's Internet ecosystem."

Jennifer Li, Baidu's chief financial officer, commented, "We enjoyed another strong quarter of top and bottom line growth, while maintaining a robust level of investment in R&D, infrastructure development and new strategic opportunities to support our future growth."

"In this quarter, we completed the acquisition of Qunar, a leading travel search engine in China, and for the first time consolidated Qunar's financial results. In addition, to support the rapid growth of our online video service provider Qiyi, we made a $23 million cash contribution and incurred a chargebased on equity method accounting. Our EPADS would have been $0.91 without this charge associated with Qiyi."

Baidu Q3 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.

CEO Robin Li "Another stellar quarter" CEO Li opened the earnings conference call, "Looking at our results, another stellar quarter for Baidu. Revenue is accelerating 85% year-on-year. In particular, we see three main factors underpinning robust revenue growth in Q3. First, traffic growth maintained its strong momentum in the quarter. Second, we made solid progress on monetization. The third factor influencing our strong revenue growth was increasing spending by our large accounts, which has been a priority for Baidu." Li continued, "Because of our central position in China’s internet ecosystem, we can always benefit enormously from emerging growth areas. While it is difficult to predict the future of any single industry category, the overall online marketing spending trajectory for our large accounts remained very positive."

Personalized Home Page CEO Li noted, "Baidu’s new personalized homepage feature went online in the beginning of September. The personalized homepage represents the next step in the evolution of Baidu. From simple web search to open data, to open applications, and now to personalized and direct feeds that instantly meet the users need. This new feature give users who sign into Baidu a more personalized experience based on their historical search behavior. Another important thing about our personalized homepage is that users don’t have to do anything and the intelligent recommendation engine customizes their homepage for them based on their behavior and social interactions. This means that the success of the homepage does not depend on users being proactive. These features will ensure that Baidu is the logical starting point for more and more Internet users and will keep users on our sites longer."

Mobile Strategy CEO Li explained, "We’ve made important progress. First, we are extending our partnerships with mobile phone makers. Baidu is now the default search engine on over 80% of branded handsets using the Android operating system built in China so far this year. As a result, we have made tremendous progress in ensuring that Baidu is the gateway to the Internet for Chinese users, whether they are going online on PCs or on mobile devices. Last quarter, we announced our new E-mobile platform, designed to provide Baidu services to users on the go. We have an incredible suite of products and we want Baidu users to be able to use them anywhere, anytime. All of these features will be currently integrated with Baidu’s evolving cloud computing offering and we have plenty more exciting features in the pipeline."

Strategic Investments CEO Li updated, "I’d like to update our strategic investments. Our online leading platform Qiyi Media continues to grow at a very encouraging rate. During Q3 monthly unique visitor jumped to 191 million from 160 million in Q2. High quality travel-related information from Qunar has been further integrated into Baidu search in areas like hotels, airlines and train information. Baidu’s strategic investment combined with our robust organic growth and new innovated products, solidifying our position as a heart of Chinese Internet ecosystem. We have every reason for confidence in our prospects for the future."

CFO Jennifer Li "Q3 was another solid quarter that exceeded expectations. This was driven by traffic growth, monetization improvement and strong spending by large account. In order to ensure that Baidu continues to stay ahead of the curve, we maintain investment in critical areas, R&D, infrastructure and strategic initiatives. Going forward, aggressive investment will remain central to our long-term growth strategy and driving topline growth."

Financial Statements CFO Li then reviewed the financial results, which are reviewed on the Baidu Financial Performance page.

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.

Baidu's Business
(CEO) Baidu’s business is largely consumer and domestic consumption oriented. The large cities, still contribute super majority of our revenue and the growth rate is also higher.
Mobile Search
(CEO) Mobile search is a little bit different from the PC search. It’s kind of hard to compare on an apple-to-apple basis, each mobile page is generally much shorter than PC page, so number of page views on the mobile site is different from the number page views on the PC side. We’re still trying to optimize the mobile search experience. We have not been very aggressive monetizing the mobile yet. So mobile is growing faster than PC, but it’s still a relatively small part, from the page view point of view, and even smaller part from the revenue point of view.
Market Share
(CEO) We have the largest user base and we have the most sophisticated search technology, so we are quite confident users will increasingly rely upon Baidu for all types of information needs. This is also true for e-commerce related information needs. Like I mentioned before, virtually all of the large B2C e-commerce sites advertise on us, that’s because we can drive traffic, we can drive very quick quality traffic to the site end users.

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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