Expecting strong Q4 results. Chinese search engine operator Baidu (BIDU) will report 4Q10 results on January 31 after the market closes. For the quarter, I estimate Baidu generated $369.3 million revenue (up 10% Q/Q) and $0.46 GAAP EPS, above management guidance of $354.2-$364.7 million and consensus of $362.2 million. I attribute the strong growth in Q4 to two factors: First, the Phoenix Nest advertising program has continued increasing its penetration among advertisers. Second, Baidu has continued gaining market share gradually since Google (GOOG) adjusted its China mainland operations in late March 2010.
Sequential growth will slow down in 1Q11. For 1Q11, I forecast Baidu will generate $373 million revenue, slightly up quarter-over-quarter. The deceleration in sequential growth is mainly due to the weak seasonality during the Chinese New Year holidays. As a reference, Table 1 shows historically Baidu's sequential growth in Q1 was in the range of -10% to 18%, with an average of 3%. I believe 2007 and 2008 reflect the typical seasonality pattern for Q1, while in 2006 the typical seasonality was more than offset by the strong growth in Baidu's initial revenue ramp-up stage, and in 2009 the result was impacted by the one-time cleanup of medical ads by advertisers without proper licenses. Baidu's Q/Q growth will accelerate to the 35%-45% range in 2Q11, as advertisers ramp up spending after Chinese New Year holidays.
In 2011, I expect Phoenix Nest will become Baidu's single most important growth driver, while the impact of the "Google factor" declines gradually. Some investors are expecting Baidu's Box Computing platform to become a significant growth driver in 2011. In my view, Box Computing applications (such as browser-based games) have taken many highly profitable advertising slots which were previously occupied by Baidu's traditional pay-per-click ads. Therefore, revenues from Box Computing will cannibalize Baidu's pay-per-click revenues. Currently it's difficult to analyze the net effect of this trade-off, but I believe at least in 2011, Box Computing is still in its early stage, so investors should not expect too much from it this year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
