Earnings Review: Baidu

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 |  Includes: BIDU, GOOG
by: Xiaofan Zhang

Strong Q1 results and Q2 guidance

As I expected, Baidu (NASDAQ:BIDU) reported strong 1Q10 earnings on Wednesday. In Q1, Baidu generated $189.6 million in revenue, significantly above management guidance of $176-181 million and my estimates of $183 million. The outperformance was mainly due to better-than-expected performance of Phoenix Nest system. For 2Q10, Baidu guided revenue to grow 41%-45% Q/Q to $268.1-274.0 million. The midpoint of this Q2 guidance is 13% higher than Wall Street's consensus estimate of $240 million prior to the earnings release. I believe this is why Baidu shares are up more than 14% today.

Baidu's actual Q2 results will easily exceed the guidance, in my opinion. Historically, Baidu has grown 35%-53% Q/Q in Q2 (Table 1). The 41%-45% Q/Q growth guidance for 2Q10 is within this range. This means the guidance merely reflects typical positive seasonality; it has not included Baidu's gains in revenue market share after Google exited China mainland in late March. In addition, I believe Phoenix Nest will continue to gain popularity and contribute to earnings growth. Therefore, I forecast Baidu's Q2 revenue will grow 48% Q/Q to $280 million, driven by positive seasonality, higher revenue market share, and Phoenix Nest's momentum.

Where will Baidu go from here? In my view, with its dominance in the search market poised to strengthen, Baidu will launch more free services to expand its user base and create more advertising inventory. This strategy has been successfully implemented by Google (NASDAQ:GOOG) in the past several years. A good example is Baidu Wenku (wenku.baidu.com), a free online document-sharing platform (similar to Scribd.com and Docstoc.com in the U.S.). Since its launch last November, Baidu Wenku has seen explosive traffic growth and quickly accumulated 1.3 million uploaded documents. I estimate active users of this service have reached 4 milllion, and will surpass 10 million by the end of 2010. I expect Baidu to monetize Wenku through contextual ads in the future. The latest example is Baidu's recently launched free video site Qiyi.com, which learns from Hulu.com's success and provides ad-supported high-quality copyrighted movies, drama series, documentaries, and entertainment shows.
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Disclosure: No positions