Baidu Tweaks Q2 Guidance On Advertising Cuts, Stock Slides

Beijing-based Internet search company, Baidu, Inc. (NASDAQ:BIDU) lowered its revenue guidance for the second quarter of 2016. Following the news, the company’s shares fell more than 5% in after-hours trading to $163.55.

The Internet giant now expects second-quarter sales in the range of RMB18.100 billion ($2.807 billion) to RMB18.200 billion ($2.823 billion), down from its earlier view of RMB20.110 billion ($3.119 billion) to RMB20.580 billion ($3.192 billion).

Reasons Cited for Revenue Decline

Management said that the guidance cut was on account of two reasons. First, increased scrutiny into healthcare and related ads by regulatory authorities has led to a reduction or delay in spend from a large number of Baidu’s medical customers. This will likely impact its sales in the near term.

Baidu said, "Regulatory authorities continue to review the online marketing practices of medical, pharmaceutical, healthcare and other similar businesses, and have also implemented stricter advertising regulations for medical organizations."

However, the company expects these new regulations to bring in more transparency and build trust among Baidu users, thus increasing profits in the long run.

Second, Baidu has reduced the number of sponsored links across the platform, which will definitely hurt its advertising revenue and thereby impact total revenue over the short term. However, better standards related to customer requirements and sponsored links will enhance user experience and benefit Baidu going forward.

BAIDU INC Price

Earnings Numbers

In the first quarter, Baidu’s earnings of 91 cents per share exceeded the Zacks Consensus Estimate of 78 cents, supported by higher revenues. Revenues of $2.42 billion increased 17.8% year over year and beat the Zacks Consensus Estimate of $2.05 billion. Mobile revenues accounted for 60% of Baidu’s revenues against 50% in the year-ago quarter.

The company is slated to report second-quarter 2016 earnings on Jun 13.

Bottom Line

Baidu provides Internet search services in China. It also offers a Chinese language search platform for businesses to reach their customers. Baidu’s increasing presence in the healthcare space, online video and mobile search markets will improve its competitive position.

Though China's aging population, the increase of age-related illness and a growing Internet user base will drive the company’s health-related search revenue, new regulations on online marketing by health-care companies will definitely impact Baidu’s sales in the near term.

At present, Baidu has a Zacks Rank #4 (Sell). Some well-placed stocks in the technology space are Facebook (NASDAQ:FB) , DST Systems Inc. (NYSE:YRD) and Manhattan Associates, Inc. (NASDAQ:MANH) , each sporting a Zacks Rank #1 (Strong Buy).