Baidu reported strong earnings on Tuesday evening, and the conference call provided an interesting insight into the firm’s outlook. Revenues of Renminbi 13.5bn represented a 52% increase year on year, and profits of RMB 3.9bn RMB represented 27% year-on-year growth. In my previous piece on Baidu, I discussed the five key points to watch for, and they were all discussed.
Mobile is proving to be the core driver of Baidu’s growth, accounting for 36% of total revenues this quarter. They also announced that mobile search traffic surpassed PC search traffic for the first time in the firm’s history. Whilst this seems impressive, there is a slight caveat. From the third quarter onwards, Baidu classified iPads and other tablets as mobile, instead of PC, and the only comparative metric given was that in the second quarter, mobile contributed 33% to total revenues, whilst excluding tablets, mobile contributed 30%. It is standard for Chinese firms to not give out mobile traffic data, so we’re unable to know whether mobile would have exceeded PC without tablets.
Mobile is proving to be the core driver of Baidu’s growth in China, accounting for 36% of total revenues. Photo Thinkstock
Bridging online and offline
The biggest opportunity in China’s internet industry is O2O, where Baidu’s dominant mobile platforms can be used to bridge online and offline. This can be done through location-based search, using the market leading search and map apps. The idea is that all of a user’s consumption decision up until the point of consumption can be done online. So for example, cinemas, restaurants, taxis and other services can be found and paid for online, either based on a specific location or based on the user’s current location. Mobile is key for this, because PC is limited by its inability to be used on-the-go, and hence why tablets are now classed as mobile.
In order to further monetise mobile search, Baidu announced the Baidu Connect service on September 3 which is designed to allow merchants to get a higher yield from Baidu’s search traffic. Baidu Connect allows users to log in to a variety of different websites using their Baidu account. This is convenient for users, because they don’t need to register on every new website they use. But as users allow Baidu to know which other sites they are using, Baidu learns more about each user, and can help merchants to effectively target new customers
The standard mobile search method is seen as suboptimal, because although merchants are seeing search traffic from ads, consumers aren’t buying as frequently as on PC. Therefore merchants are less willing bid for ads on mobile, and hence Baidu generates more revenue from PC search, despite growing slower than mobile. By allowing merchants to target specific user groups, Baidu will expect to generate incremental revenue from mobile, which will run in parallel to the existing keyword bidding system. Baidu Connect is still in the early stages of its rollout, but in the past few months, they have worked with over 40 third party service providers and have accumulated over 400,000 customer accounts.
There is strong demand for brick-and-mortar stores to work with internet firms, and Baidu is confident that Connect will continue to see this strong demand. Over 450,000 local merchants with nearly 2 million storefronts across more than 300 cities have worked with Baidu’s Group On-like Nuomi service to attract new customers.
Baidu reported strong earnings on Tuesday evening, and the conference call provided an interesting insight into the firm’s outlook. Revenues of Renminbi 13.5bn represented a 52% increase year on year, and profits of RMB 3.9bn RMB represented 27% year-on-year growth. In my previous piece on Baidu, I discussed the five key points to watch for, and they were all discussed.
Mobile is proving to be the core driver of Baidu’s growth, accounting for 36% of total revenues this quarter. They also announced that mobile search traffic surpassed PC search traffic for the first time in the firm’s history. Whilst this seems impressive, there is a slight caveat. From the third quarter onwards, Baidu classified iPads and other tablets as mobile, instead of PC, and the only comparative metric given was that in the second quarter, mobile contributed 33% to total revenues, whilst excluding tablets, mobile contributed 30%. It is standard for Chinese firms to not give out mobile traffic data, so we’re unable to know whether mobile would have exceeded PC without tablets.
Mobile is proving to be the core driver of Baidu’s growth in China, accounting for 36% of total revenues. Photo Thinkstock
Bridging online and offline
The biggest opportunity in China’s internet industry is O2O, where Baidu’s dominant mobile platforms can be used to bridge online and offline. This can be done through location-based search, using the market leading search and map apps. The idea is that all of a user’s consumption decision up until the point of consumption can be done online. So for example, cinemas, restaurants, taxis and other services can be found and paid for online, either based on a specific location or based on the user’s current location. Mobile is key for this, because PC is limited by its inability to be used on-the-go, and hence why tablets are now classed as mobile.
In order to further monetise mobile search, Baidu announced the Baidu Connect service on September 3 which is designed to allow merchants to get a higher yield from Baidu’s search traffic. Baidu Connect allows users to log in to a variety of different websites using their Baidu account. This is convenient for users, because they don’t need to register on every new website they use. But as users allow Baidu to know which other sites they are using, Baidu learns more about each user, and can help merchants to effectively target new customers The standard mobile search method is seen as suboptimal, because although merchants are seeing search traffic from ads, consumers aren’t buying as frequently as on PC. Therefore merchants are less willing bid for ads on mobile, and hence Baidu generates more revenue from PC search, despite growing slower than mobile. By allowing merchants to target specific user groups, Baidu will expect to generate incremental revenue from mobile, which will run in parallel to the existing keyword bidding system. Baidu Connect is still in the early stages of its rollout, but in the past few months, they have worked with over 40 third party service providers and have accumulated over 400,000 customer accounts.
There is strong demand for brick-and-mortar stores to work with internet firms, and Baidu is confident that Connect will continue to see this strong demand. Over 450,000 local merchants with nearly 2 million storefronts across more than 300 cities have worked with Baidu’s Group On-like Nuomi service to attract new customers.
Intensely competitive markets
A recurring theme across China’s tech industries is that every firm is diversifying their services in order to compete with rivals across a wide range of markets. I discussed on Wednesday that Baidu needs to control its costs as investors have a habit on turning bearish on firms that trade margins for further investment. Third quarter operating costs and expenses were RMB 3.92bn, which represents an increase of 17.4% increase year on year and 10.2% increase from the second quarter. This has caused operating margin to fall from 37.5% to 28.99% over the year. This fall in margin was addressed in the conference call, but chief financial officer Jennifer Li made no guarantee that margins would return in the near term, as investment opportunities continue to be worth the capital expenditure.
Baidu has a strong position across a variety of industries, and I expect to see costs continue to increase in the coming quarters. However, the firm will be hoping that this will be more than offset by its investment in Baidu Connect, and the increased monetisation of its growing mobile ecosystem.
A recurring theme across China’s tech industries is that every firm is diversifying their services in order to compete with rivals across a wide range of markets. I discussed on Wednesday that Baidu needs to control its costs as investors have a habit on turning bearish on firms that trade margins for further investment. Third quarter operating costs and expenses were RMB 3.92bn, which represents an increase of 17.4% increase year on year and 10.2% increase from the second quarter. This has caused operating margin to fall from 37.5% to 28.99% over the year. This fall in margin was addressed in the conference call, but chief financial officer Jennifer Li made no guarantee that margins would return in the near term, as investment opportunities continue to be worth the capital expenditure.Baidu has a strong position across a variety of industries, and I expect to see costs continue to increase in the coming quarters. However, the firm will be hoping that this will be more than offset by its investment in Baidu Connect, and the increased monetisation of its growing mobile ecosystem.
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