Revenue growth rate slipped to below 50% for the first time since 2010.
Baidu released its Q3 2012 Financial Report on 30th Oct. 2012. The Report shows that Baidu’s total revenue for Q3 2012 reached 6.251 billion Yuan (about 994.6 million US dollars), up 14.6% QoQ, and 49.7% YoY. It is for the first time that Baidu’s revenue growth rate dropped to below 50% in the past 11 quarters. Yet the figure is higher than 44.1%, the overall growth rate of search market, and remains at a high level in the industry.
iResearch believes that the decline in Baidu’s Q3 revenue growth rate is mainly attributable to the following factors: 1) the continued downturn in the economy, resulting in cuts in budgets of small and medium-sized advertisers; 2) the launch of a search engine by 360, which intercepted browser and navigation, causing a drop in Baidu’s traffic; 3) the rapid growth of mobile search market which diverted search traffic from PC and the current weaker monetization of Baidu’s mobile search as compared with that of its PC search, which led to a slower rate of revenue growth.
Net profit grew by 60% with a rise in traffic and R&D costs.
The net profit of Baidu for Q3 hit 3.008 billion Yuan (about 478.6 million US dollars), up 8.6% QoQ. Influenced by the decline in revenue growth rate, the net profit of Baidu for Q3 rose by 59.8% YoY, lower than Q2’s figure of 69.6%, yet it maintains strong momentum for growth.
The proportion of TAC of Baidu for Q3 is on the rise as compared with that in Q2. The proportion of TAC for Q2 is 8.3% and the figure for Q3 reached 8.6%.
iResearch thinks that losing the traffic from 360 browser and navigation may prompt Baidu to lay more emphasis on ad networks and force Baidu to expand other channels and push up their values, which will result in a continued increase in Baidu’s TAC proportion in Q4.
The proportions of Baidu’s R&D costs for Q2 and Q3 are also on the rise. The figure for Q1 is 13.8% and rose to 15.5% in Q2 and 15.8% in Q3.
iResearch thinks that mobile Internet and cloud computing will be the strategic focus of Baidu’s future development. Moves such as establishing LBS Business Unit and enhancing Baidu Cloud Platform indicates that Baidu is accelerating its strategic layout. It is estimated that in a certain period of time to come Baidu will continue to increase capital investment in the R&D of cloud computing and mobile Internet technology to improve its share in the emerging market.
ARPU growth slowed down and the number of active users soared.
Baidu’s ARPU value rose from 15,500 Yuan in Q2 to 16,000 Yuan in Q3, up 16.8% YoY. The growth rate declined as compared with that of the previous quarter. The number of clients jumped from 0.352 million to o.39 million, achieving a substantial growth rate of 28.3%.
iResearch believes that the influence of 360 Search on the marketing spending of Baidu clients has yet to be fully felt. Small and medium-sized advertisers have limited sensitivity towards the trends in search market industry. Therefore, the change in traffic will not incur immediate change in revenue. iResearch thinks that the decline in traffic may be reflected in ARPU in the future. As a result, increasing the number of clients will become an important means for Baidu to offset the influence of declining traffic and maintain revenue growth rate.
With limited influence of traffic decline, Baidu accelerates its mobile layout.
On 16th August, 360 launched its search service, and soon afterwards set 360 Search as the default search for 360 browser and navigation, which impacted on the traffic of Baidu to some extent. According to iUserTracker data, the share of Web search traffic of Baidu dropped to some degree after the launch of 360 Search, and stabilized between 78% and 80%.
iResearch thinks that 360 browser and navigation are important source for search traffic and that losing the channel will exert significant influence on Baidu’s traffic in the short run. However, in the long run, its brand effect which has been built over time and search technology which has been developed on the basis of extensive R&D experience can be hardly surpassed by competitors including 360. In addition, Baidu’s own UGCs such as Baidu Knows, Baidu Post Bar, and Baidu Encyclopedia are effective supplements to Baidu search results, an advantage unique to Baidu. iResearch believes that Baidu will continue to maintain an absolute leading position in China search market. Extending brand recognition, enhancing search quality and expanding cooperation channels will be possible directions for Baidu to increase its traffic share.
360 Search is not the sole factor affecting Baidu’s traffic. According to iUserTracker data based on the long-term measurement of online behavior of 400 thousand household and office (excluding public Internet cafes) samples, the overall Web search request volume of PC search market has experienced decline for four consecutive quarters since Q4 2011, and similar trend of development is observed in Baidu. The relevance of Baidu’s revenue growth trend to the development of Web search request volume has been gradually weakened.
According to iResearch, the decreasing influence of traffic on Baidu’s revenue is attributable to the following factors: 1)Baidu is actively expanding brand zone, thus increasing the number of key accounts and brand advertising budgets; 2) Baidu is vigorously promoting sales, giving rise to fast growth in the number of quarterly active users; 3) Mobile search traffic is developing rapidly and the monetization of mobile search has been improved to some extent.
iResearch believes that along with the rapid growth of mobile search market, it has become the general trend for traffic to shift from PC search to mobile search. The traffic of PC search market has reached saturation and will continue to decline slowly in the future. By contrast, mobile search traffic ,excluding the traffic shifted from PC search, is still on the rise. The overall search market traffic still has large room for growth. According to iResearch, the decline in PC client traffic may lead to a slowdown in Baidu’s revenue growth in the short run, but will not impact the overall revenue of Baidu in the future.
iResearch believes that the pressure from the decline in PC traffic forces Baidu to find new growth points in fast developing emerging fields including mobile Internet and accelerate its strategic layout in other fields. Since the layout in cloud computing and mobile Internet requires substantial investment in R&D, and the commercialization of cloud computing and mobile Internet is relatively slow, the growth rate of net profits of Baidu will be affected in the short run. However, in the long run, cloud computing and mobile Internet are still blue oceans and are the general trends of development of the entire Internet industry. In the current stage, Baidu is accelerating its layout of cloud computing and mobile Internet, which is conducive to capturing the market and cultivating habits of users. Once a suitable business model is found, the traffic from these fields will generate more value.
Estimated growth slows down.
iResearch believes that Baidu will remain as the major marketing channel for small and medium-sized advertisers due to the precise effect of search ads and relatively high ROI. There is room for growth in the number of clients and a considerable growth rate is estimated for Q4 revenue. However, under the influence of continued downturn in the economy, the decline in traffic caused by 360 Search and mobile search, and the constraint of monetization of mobile clients, revenue growth of Baidu for Q4 is estimated to further slow down.