Baidu Inc.: 1Q2020 Results Beat Street Forecasts By Wide Margin
Summary
- Solid 1Q20 results way ahead of consensus forecasts.
- Robust in-app traffic growth helped margin improvement.
- Positive 2Q20 guidance implies a continued recovery underway.
Baidu delivered better-than-expected 1Q results, with revenue 3% above consensus and adjusted operating margin 12 percentage points higher than the Street forecasts, supported by the improving efficiency of Baidu’s own ecosystem and stringent cost control.
Despite revenue having been negatively impacted by COVID-19, other KPIs – such as average DAU, in-app search queries, feed time, etc., continued to show strong growth momentum, implying the effectiveness of Baidu’s ongoing efforts to enhance its mobile ecosystem and user experience through building Baijiahao, smart mini programs, and managed page.
Advertisers in various sectors are now in the different stages of business resumption, some of which are slightly slower than previously expected. Meanwhile, management guided that Baidu will focus on optimizing profit growth amid intensified industry competition and current difficult market conditions.
On the monetization side, as offline activities are rebounding, management observed a nice recovery trend in various sectors – such as healthcare, franchising, auto and logistics, etc. The midpoint of 2Q revenue guidance is flat yoy and 3% ahead of consensus. Within that, Baidu Core is on track to recover sequentially, on the gradual pick-up in the above-mentioned sectors, while iQiyi will be under pressure, due to limited visibility in brand ads.
On the margin side, 1Q margin was better than expected, especially for Baidu Core, due to: 1) disciplined sales & marketing spending, and 2) lower traffic acquisition costs. However, I still expect yoy adjusted operating margin deterioration for Baidu Core (from 25.5% in FY19 to 23.4% in FY20), given soft top-line growth and Baidu gradually increasing investment in content cost and promoting its Mobile Baidu app. As revenue recovers, I forecast a low-teen increase in total expenses (COGS and operating) sequentially for the rest of FY20. I view Baidu’s 2Q guidance as positive, and expect a further recovery in 2H, as the offline business gets fully back to normal. The successful transition to in-app search will also likely bring improvement on monetization.
With Baidu benefiting from its search-plus-feed dual-engine strategy, management is confident in Baidu's near-term recovery, as well as its long-term growth, given that: 1) the enhanced Baidu mobile ecosystem leads to fast traffic growth, 2) user behavior is shifting from web search to in-app search, where the Baidu app has an advantage, and 3) SMEs are recovering at an encouraging pace, backed by supportive government policies.
Online marketing revenue was RMB14.2bn, down 19% yoy. Sectors including healthcare, travel, franchising and financial services were heavily hit during COVID-19, and Baidu expects healthcare, franchising, auto and logistics to recover quickly in the coming months. The growing momentum of CPM on the Baidu app since 2Q19 has been interrupted by the COVID-19 outbreak, but management has already seen the trend coming back.
I continue to see positive trends for the Baidu mobile ecosystem. As user behavior in China continues to shift from browser search to in-app search, Baidu apps became one of the fastest growing DAUs apps in February and March, even after the pandemic outbreak levelled off from the peak. Baidu app DAUs reached 222 million, up 28% yoy. In-app search users on Baidu app increased by 60% by the end of March, In-app queries grew 45% yoy and feed time spent was up 51% yoy.
Baidu took the pandemic outbreak as a chance to educate users on Baidu’s app features. Baijiahao accounts, Baidu smart mini-program, and managed pages make up the majority of Baidu’s mobile search results, leveraging Baidu’s information and knowledge centric capability and enabling Baidu to further expand into the mobile search space. With a search plus feed twin search engine, Baidu’s in-app search monetized better than the traditional browser searches and has successfully shifted user behavior from browser search to AI-powered In-app search by increasing user’s overall stickiness.
Specifically, the Baijiahao content network now hosts 3 million publisher accounts in 1Q20, up 44% yoy, the number of publishers providing original content increased 178% yoy in March. Baidu’s smart mini program also witnessed strong user growth with MAUs on Baidu’s apps reaching 354 million, increasing 96% yoy. The number of Baidu’s smart mini programs grew over 26x yoy and was up 35% sequentially in 1Q20. Also, Baidu managed page revenue takes up more than 20% of Baidu’s core marketing revenue. Rapid traffic growth, in turn, attracts content creators and developers to the Baidu mobile ecosystem, forming a virtuous circle.
Baidu Key Earnings Result Highlight:
Baidu reported 1Q20 total revenue of CNY22.5 billion, -7% Y⁄Y, 2.9% above Bloomberg consensus estimate of CNY21.9 billion.
- Marketing Revenues came in at CNY14.2 billion.
- Other Revenues were CNY8.3 billion.
Gross margin came in at 34.9% (versus 38.5% in 1Q19 and 46.3% in 4Q19), 2.8% higher than consensus estimate of 32%.
GAAP Operating margin was -1.9% (versus -3.9% in 1Q19 and 16.1% in 4Q19), versus consensus estimate of -4.9%.
Non-GAAP Net margin came in at 13.7% (versus 4.0% in 1Q19 and 31.8% in 4Q19), versus consensus estimate of 6.8%
Baidu Core total revenue came in at CNY15.3 billion (-13% yoy). Non-GAAP operating income was CNY3.3 billion (22% Non-GAAP operating margin).
Final Thought
Notwithstanding the company made positive progress on its mobile business, it is not clear yet as to who’s going to win mobile search business in China. Similar to the US, it is going to be a winner-takes-all market so the key point to monitor is if Baidu can grow its mobile business quickly and profitably enough to offset its declining web search business.
This article was written by
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