China’s largest search engine, Baidu, Inc. (BIDU - Snapshot Report) reported adjusted third-quarter 2014 earnings of $1.79 per share, exceeding the Zacks Consensus Estimate of $1.62 due to higher volumes. The adjusted earnings per share exclude one-time items but include stock-based compensation expense.

Revenues

Baidu reported revenues of RMB13.5 billion ($2.2 billion) in the third quarter, up 13% sequentially and 52% from the year-ago period. Third-quarter revenues exceeded the Zacks Consensus Estimate of $2.124 billion due to solid growth in mobile business. Mobile revenues accounted for 36% of Baidu’s total third-quarter revenue.

Revenue Sources

Revenues from Online marketing services were RMB13.4 billion, up 51.8% from the year-ago quarter and represented 99.3% of total revenue. The upside was attributable to active online marketing customers, which increased to 516,000 in the quarter, up 11.2% year over year and 5.7% sequentially.

Revenue per online marketing customer was approximately RMB25,900 ($4,220), up 35.6% from the year-ago quarter and 7% sequentially, primarily due to an increase in paid clicks.

Revenues from Other services were RMB92.6 million, soaring 112% from the year-ago quarter and represented 0.7% of total revenue.

Margins

Reported gross margin for the quarter was 62.5%, up 40 basis points (bps) sequentially but down 290 bps from the year-ago quarter.

Baidu reported total operating expenses of RMB4.5 billion, up significantly from RMB2.5 billion incurred in the year-ago quarter. Both selling, general & administrative and research & development expenses were up as a percentage of sales from the year-ago quarter. The net result was a GAAP operating margin of 29% compared with 37.5% in the year-ago quarter.

Adjusted EBITDA in the third quarter was RMB4.9 billion, up 23% from the year-ago quarter.

Net Income

Baidu generated third-quarter net income of RMB3.9 billion compared with RMB3.0 billion in the same quarter last year. There were no one-time items in the last quarter. Therefore, GAAP EPS was the same as pro-forma EPS of RMB11.0 or $1.79 per share compared with RMB10.09 or $1.63 per share in the prior quarter.

Balance Sheet & Cash Flow

Baidu exited the third quarter with cash, cash equivalents, restricted cash and short-term investments of approximately RMB51.80 billion versus RMB49.02 billion in the prior quarter. Accounts receivables were RMB3.55 billion, up from RMB2.91 billion in the prior quarter.

Cash flow from operations was RMB4.9 billion versus RMB4.1 billion in the prior quarter. Capex was RMB1.4 billion versus RMB863.7 million in the prior quarter.

Guidance

For the fourth quarter of 2014, Baidu expects total revenue in the range of RMB13.850 ($2.256 billion) to RMB14.250 billion ($2.322 billion), representing a year-over-year increase of 45.4–49.6%. Analysts polled by Zacks expect revenues of $2.253 billion. 

Our Take

Baidu provides Internet search services in Chinese. It also offers a Chinese language search platform for businesses to reach their customers. The company posted decent third-quarter results, with both top- as well as bottom-line figures surpassing the Zacks Consensus Estimate.

Also, the company projected strong guidance for the fourth quarter, indicating increasing revenue contribution from mobile in the near future. Moreover, Baidu’s increasing presence in the online video market will improve its competitive position.

Some of the current buoyancy surrounding the shares is related to Baidu’s strong dominance in the mobile search market and its continuous efforts to develop new products. Moreover, Baidu continues to gain market share. We believe the company has significant growth potential in the mobile market over the long term.

However, increasing competition on its own search platform from the likes of Qihoo 360 Technology and Sohu’s Sogou search engine remain a matter of concern.

Currently, Baidu has a Zacks Rank #3 (Hold). Other stocks that are performing well at current levels include Internet Initiative Japan Inc (IIJI - Snapshot Report), Inuvo, Inc. (INUV - Snapshot Report) and include NeoPhotonics Corporation (NPTN -Snapshot Report). All these stocks sport a Zacks Rank #2 (Buy).

Get the full Snapshot Report on BIDU - FREE

Get the full Snapshot Report on NPTN - FREE

Get the full Snapshot Report on INUV - FREE

Get the full Snapshot Report on IIJI - FREE