Sunday, May 13, 2012

Baidu Reports Strong Earnings But Is Slowing Growth Ahead?

Baidu ($BIDU) reported Q1 2012 financial results on April 24.

Baidu Q1 revenues were the second best ever reported and met, but did not beat, the outlook. The annual Q1 dip was just a tad deeper than the prior year plus in some metrics fell back to Q3 2011 levels. The prior quarter, Q4 2011, was an all-time record financial performance. The guidance for Q2 reveals a record quarter for revenues, but slowing growth. The Chinese stock star lost some luster with this report but is still shining brightly.

CEO Robin Li and CFO Jennifer Li are estimating record Q2 revenues of RMB5.335 billion ($847.2 million) to RMB5.460 billion ($867.0 million). This is an increase of 56% to 60% YoY, compared to the 8-quarter average of +82% and +75% for this current quarter. The problem here is YoY revenue growth is slowing.

Baidu is not exactly down and out for the count. The upside is still tremendous for the Google of China in the world's largest internet market. All is not lost, revenues can rebound.

The most fundamental issue I see is a downtrend in gross, operating, and net  margins. This has caused earnings per share growth YoY to drop faster than total revenues growth YoY. This is what could cause future problems for BIDU stock if the trend is not reversed. The PE ratio dropped over the past year and this could be the double whammy if the margin downtrend persists.

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

Baidu Summary Q1 2012 Baidu reported the second best quarter  ever for total revenues, net income, and cash flow per share. Earnings per share matched Q3 2011 as second best. Gross, operating, and net margins decreased. As expected, the current Q1 was a dip from the prior Q4, but the next quarter, Q2, is projected to to be a record for revenues. The power up continues. Financial position is strong and liquid. CEO Robin Li commented, "China's Internet landscape is evolving quickly and we are very excited about fast-emerging opportunities in areas such as mobile and Cloud Computing. We believe that Baidu is uniquely positioned to capture this immense growth potential in the Chinese online market."

Baidu Income Statement Q1 2012 Baidu financial performance was strong with total revenues of RMB4.26 billion, net income of RMB1.88 billion, and earnings per share of RMB5.38 ADS. From the prior record quarter Q4 2011 these were -5%, -8%, and -8%, respectively. From the prior year Q1 20101 YoY, these were +75%, +76%, and +76%, respectively. Gross margin dipped both QoQ and YoY to 71%. Operating and net margins dipped QoQ and were flat YoY at 49% and 44%, respectively. The operating expense ratio increased QoQ and YoY to 22%, but continues at a very profitable.

Baidu Balance Sheet Q1 2012 Total assets increased an astounding +101% YoY to a record high RMB25 billion. That is double the prior year quarter! The capital ratio is a solid 69%, but is below historical levels. Baidu is liquid with a current ratio of 70%, which is also below historical levels.  Baidu has over RMB16.1 billion in cash, cash equivalents, and short-term investments. Return on assets of 39% continues at astronomical levels, but has decreased the past 3 recent quarters due to a significant increase in goodwill, intangible assets, and other noncurrent assets.

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