- Mobile search is the most important area for investors to watch. The most important operating metric in this area is daily active mobile search users.
- Profit margins are the second most important area. It will be a positive sign for Baidu's stock if net margin in Q2 '14 comes in higher than 23.8%.
- Baidu's Consumer Products business is the third most important area deserving investors' attention. This emerging business line includes games, music, online literature and social.
Baidu (NASDAQ:BIDU) will report Q2 2014 earnings on July 24 after the market's close. In this article, I discuss the key areas investors need to look for when reading Baidu's earnings release and listening to its conference call.
On the Q1 '14 earnings call, CEO Robin Li listed "search" and "mobile and cloud" as Baidu's top two strategic areas, and expected mobile traffic to surpass PC traffic sometime this year. CFO Jennifer Li specifically highlighted "mobile" as the stronger and fastest growing revenue driver. During the call, Baidu disclosed three positive data points on its mobile business: First, its daily active mobile search users reached 160 million in Q1, up 23% from 130 million in Q3 '13. Second, monthly active users on Baidu Maps for Mobile grew to nearly 190 million, up 30% quarter-over-quarter (QoQ). Third, the number of transactions on Baidu's location-based services platform grew by over 80% QoQ. Investors should specifically look for updates on these metrics from the Q2 '14 earnings release and conference call. Among all the mobile-related metrics, the most important one is daily active mobile search users. If this metric achieves a healthy double-digit quarter-over-quarter growth rate in Q2 '14, then it means Baidu's mobile business has sustained its momentum, which bodes well for the second half of 2014.
On the 1Q '14 earnings call, Baidu management reiterated its previous forecast that revenue growth will accelerate in 2014 but there will be no growth in absolute profits for the year. Based on this guidance, if we assume Baidu will generate RMB10.519 billion net income in 2014, the same as in 2013, and divide it by current analyst revenue consensus of RMB48.40 billion for 2014, we can reach a net profit margin of 21.7% for 2014, which is 11.2 percentage points lower than the 32.9% net profit margin reported for 2013. This means Baidu's guidance implies net profit margin will shrink by 11.2 percentage points in 2014. When Baidu reports Q2 earnings, investors should compare Q2 '14 net profit margin with the 35.0% net profit margin reported for Q2 '13. It will be a positive sign for Baidu's stock if net margin in Q2 '14 comes in higher than 23.8% (=35.0%-11.2%), which indicates Baidu has managed its cost structure better than expected.
In addition to mobile search and margins, Baidu's Consumer Products business is the third most important area deserving investors' attention. This emerging business line includes games, music, online literature and social, according to CEO Robin Li's remarks during the 4Q '13 earnings call. Consumer Products is also one of the top five strategic areas announced by Baidu management during the past two earnings calls. Specifically, on the 1Q '14 call, CEO Robin Li mentioned that Baidu's gaming business was growing quickly and expected its contribution to grow more meaningfully in quarters ahead. He also mentioned that Baidu added more high-quality content to its online literature operations in 1Q '14, after acquiring Zongheng.com, a major Chinese literature site in December 2013. When Baidu reports 2Q '14 earnings, if the company highlights specific data points on its gaming or online literature businesses, it will be a sign that Baidu is making solid progress in growing its consumer-oriented business.