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Youku (NYSE:YOKU) reports Q3 results on Nov. 29.

The Street expects:

  • Revenue: $467 million
  • EPS: $0.53 loss per share
  • Q4 revenue guide: $541 million

Heading into the earnings, investors should focus on Youku-Tudou's post-merger financial results, top-line growth, and rising competition.

Youku completed its acquisition of Tudou in late August. The completion of this merger allowed Youku to:

  1. Neutralize its biggest competitor in the online video space
  2. Expand its market leadership and pricing power
  3. Mitigate cost pressure from bandwidth, contents, and sales and marketing

While the merger is a long-term positive, I am concerned with the short-term financials in that Youku will likely to consolidate Tudou's financials starting this quarter. Prior to the merger, Youku was expected to achieve breakeven by year-end on a pro-forma basis. However, such a scenario is becoming increasingly unlikely given that Tudou was in a worse financial position than Youku. That said, I believe that Youku may achieve breakeven in Q4 2013 or early 2014.

Youku's top-line growth is decelerating due to the weak macro environment in China.

In addition, Youku's cost is growing faster than that of the revenue. I note that in Q2, cost of goods sold increased 115% year over year compared with a 96% year-over-year increase in revenue. Continued weakness in the advertisers' sentiment and higher cost pressure will continue to hinder Youku's profitability.

Finally, Youku and Tudou have been losing market share to rival iQiyi, which is owned by Baidu (NASDAQ:BIDU). According to data from iResearch, Youku and Tudou saw their market share decline from 32.3% to 25.6% and from 12.8% to 12.2% from December 2011 to July, respectively, while iQiyi increased its market share from 12%-15% to 18.4% over the same period.

Source: Youku Q3 Earnings Preview: Post-Merger Financial Results In Focus, Baidu An Emerging Threat