Baidu Inc (ADR) (BIDU) Reports Worst Profit Slump: Stock Declines 5%

Tight Internet regulations pushed the profits to a 11-year low, says Baidu.

Baidu Inc (ADR) (BIDU) Reports Worst Profit Slump: Stock Declines 5%

By: Abdullah Saeed Qureshi Published:

Tight Internet regulations pushed the profits to a 11-year low, says Baidu

Baidu Inc (NASDAQ:BIDU), said on Friday that its net profit for the second quarter fiscal year 2016 had seen the worst ever plunge since its initial public offering (IPO) 11 years ago. The Chinese search giant reported $363.2 million (2.414 billion yuan) in net profit, a massive 34.1% decrease compared to the same period last year.

The company’s stock was down 4.60% at $158 in real time trading on the New York Stock Exchange. In the past one year Baidu’s stock has faced a significant decline of more 16%, causing serious concerns to both, investors and the company itself.

Baidu said the decline was primarily attributable to tight internet regulations, which massively hurt the company’s ads revenue business. Earnings per share (EPS) for the quarter came in at $1.22 (8.08 yuan), surpassing consensus estimate of $1.210 ($8.078 yuan).

Robin Li, Baidu CEO, said during a conference call, “Baidu faced a challenging second quarter, with heightened regulation in the healthcare sector and on internet advertising, impacting [indiscernible] and operations.” Mr. Li also asserted that the new regulations and stricter standards would bring long term benefits to the company, and would help in improving the company’s profit position in the future. However, he cautioned that the implication would take time, and this might suppress Baidu’s revenue for the upcoming quarters.

Revenue for the quarter came in at $2.748 billion (18.264 billion yuan), representing a 10.2% surge year-over-year (YoY), primarily driven by exceptional performance of Baidu’s mobile platform. “Mobile revenue represented 62% of total revenues for the second quarter of 2016, compared to 50% for the corresponding period in 2015,” the company said during an earnings call.

Back in June 2016, Chinese regulatory authorities put a limit on the number of medical ads advertised on Baidu’s search engine, after a 21-year-old Chinese student, Wei Zexi, who was suffering from a rare form of cancer, died using medical treatment from one of the paid advertisement links on Baidu’s online portal. Zexi used Baidu’s online portal to treat himself for synovial sarcoma, a rare form of tissue cancer.

The company, which is also known as China’s Google and holds more than 80% of the market, received severe criticism from both, Chinese users and the outside world. As amends, Mr. Li decided to sacrifice a significant amount of revenue, and asserted: “Baidu is keen to assist in the development of a healthy, safe, and trustworthy online and offline ecosystem.” He also highlighted that his company had assured full compliance with the new rules, although the implementation could take place over a prolonged period of time.

In addition, Baidu’s mobile search monthly active users (MAUs), for June 2016 surged 6% YoY to 667 million. Similarly, the company’s mobile maps MAUs also saw a significant 13% YoY incline. For the month of June, mobile maps MAUs stood at 343 million.

Moreover, Baidu’s Wallet, the company’s mobile payment application also gained strength during the quarter. In 2QFY16, Baidu Wallet's active users reached 80 million from 65 million reported in the previous quarter. On a YoY basis, this represents a massive 131% leap.

Mr. Li said that Baidu was expanding in financial services such as wealth management and credit loans, and had also struck a deal with leading insurance companies and banks, including Allianz and Citic Bank. He also added, “Baidu Wallet will function as a foundation for all of these endeavors because we need a strong user account, we need an account that users can deposit money, can borrow money, can pay, can trust us to do transactions.”

Apart from this, the company’s strategy regarding would remain unchanged, according to Mr. Li. Recently, a group led by Mr. Li withdrew its offer worth $2.3 billion to acquire the video streaming unit of Baidu amid disagreement over its purchase price. IQiyi had more than 20 million paid subscribers as of June, which makes it China’s top online video site. 86Research, a Shanghai–based firm, valued the online video site at $5.8 billion.

“While we are experiencing some short-term hiccups, Baidu’s value proposition remains robust,” Mr. Li said during an earnings call. The company has a lot to improve upon and if the Chinese internet giant wants to regain investors' confidence, it needs to provide a friendlier ecosystem to its users and business clients.