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Baidu’s Earnings Surprise On the Upside: What’s Next?

On Monday, the Chinese internet search giant Baidu Inc (NASDAQ: BIDU) reported its Q1 2020 earnings.

The Chinese tech company reported revenues of US$3.18 billion during the quarter, a 7% decline from the same quarter last year.

On a sequential basis, Baidu’s revenues saw a 22% decline. Markets were expecting a steeper fall in revenues to US$3.1 billion.

The company’s profitability improved during the quarter with earnings before interest, taxes, depreciation, and amortisation (EBITDA) coming in at US$403 million, a 61% jump over the same period in 2019.

Meanwhile, non-GAAP net income jumped by 220% to US$435 million. This translates to a net income of US$1.25 per ADR.  Wall Street analysts were expecting a net income of US$0.54  per ADR.

Baidu ADRs closed up 7.7% on Monday on the Nasdaq. Here are some of the key points from Baidu’s earnings that investors should be aware of.ere

iQIYI continues to burn cash

In the first quarter of 2020, Baidu reported US$233 million in free cash flow. The core business generated US$327 million in free cash.

However, Baidu’s video platform iQIYI weighed on it as it burned US$94 million during the quarter.

Baidu is focusing on mobile

With consumer preferences shifting to mobile, Baidu is trying to be a mobile-centered platform.

During the first quarter, Baidu’s daily active users saw a 28% rise to 222 million. In-app search queries also saw a 45% jump.

Some of the growth in users and in-app search queries appear to be an outcome of lockdowns. As people spent a long time at home, they used the company’s platform to seek out information.

On a path to recovery? 

Baidu is quintessentially a Chinese company. The first quarter was tough for China as lockdowns and supply chain disruptions hampered the economy.

China’s economy, as measured by GDP, contracted for the first time in 28 years during the first quarter of 2020.

Life in China is now getting back to normal. Baidu management said during the conference call that malls and shops are now opening across China. The company said that its marketing services segment has been witnessing growth every week since February.

Robin Li, co-founder and CEO of Baidu commented that:

“With the pandemic coming under control in China, offline activities are rebounding and Baidu stands to benefit from a restart of the Chinese economy.” 

The guidance

However, Baidu’s second-quarter guidance is not all rosy. The company is expecting second-quarter revenues to be between US$3.5-3.9 billion, or a 4-5% drop year-on-year.

Moreover, margins could remain under pressure as the costs are expected to rise in 2Q. Herman Yu, Baidu’s Chief Financial Officer said that:

We typically have our wage adjustments in Q2, because Covid-19 in China seems to be rather under control, so we’re going to start hiring more and so forth, so you should expect sequentially that this number (operating expenses) will grow 10%, probably even in the teens.” 

Foolish conclusion 

Baidu surprised the markets with its Q1 2020 results. However, there is much more that the company needs to do to get back to its former glory. For investors, the next few quarters will determine if the company indeed can.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Mayur Sontakke doesn't own shares of any of the companies mentioned.