Friday, April 25, 2008

Analyst take on Q1 08 - JP Morgan

Baidu reported 1Q08 revenue of Rmb 574.4M (up
0.6% QoQ, 108% YoY). In US$, revenue is US$ 81.9M
(up 5% QoQ, 130% YoY). This is ahead of our
forecast of flat growth, and consensus of
US$75.4M. GAAP EPS of US$0.60 (down 31% QoQ,
up 88% YoY) is inline with consensus (US$0.60)
but below our forecast of US$0.63. 2Q08 guidance
of US$111M – US$114M surprised on the upside,
ahead of consensus forecast of US$100.6M.

Raising 08 & 09 revenue forecast by ~8%, but we
kept 08 GAAP EPS flat and revised down 09 EPS
by 2%, to US$4.25 & US$6.74, respectively, due
to higher TAC (traffic acquisition cost) and tax
rate assumptions. However, we are not overly
concerned about TAC increases, as operating
margin as % of net revenue (excl. TAC) is still
inline with historic seasonality.

Maintain Dec-08 PT of US$380, implies 89.5x 2008E,
56.3x 2009E, and 37.0x 2010E diluted GAAP P/E (or
84.6x 2008E, 54.4x 2009E, and 36.2x 2010E diluted
adjusted P/E). Despite only ~10% upside to our PT,
we maintain OW rating on Baidu. We believe Baidu
can likely leverage its leading search traffic
and offer new profit opportunities – latest being
online games.

Share price drivers are: (1) margins improvements
in 2H08 on better leverage & launch of C2C service,
(2) potential earnings upside.

Strong 2Q08 guidance:
Baidu guides 2Q08 revenue of Rmb 780M to Rmb 800M
(US$111M to US$ 114M), or up 35.8% to 39.3% QoQ.
Guidance is ahead of our forecast of US$104M and
consensus of US$99.2M.

Operating Stats:
No. of active online marketing customers was 161k,
up from 155k in 4Q07 and 112k in 1Q07 (up 3.9%QoQ
and 43.8% YoY). We believe the good growth is
driven by increased sales and marketing efforts
during the quarter.

Average spending per customers was Rmb 3,557,
down 3.2% QoQ, but up 45.1% YoY.

Costs and Margins:
TAC: 1Q08 Traffic acquisition costs was 13.3% of
total revenue - above our estimates of 12.8%.
This compares to 10.3% in 1Q07 and 12.7% in 4Q07.
Depreciation expense: was 9.3% of total revenue,
above 8.2% level in 2H07.
Adj. gross margin (excluding share base comps): is
60.4% down from 62.3% in 4Q07 and 63.1% in 1Q07.
This is mainly due to increase in server depreciation
expense and TAC as % of revenue.

SG&A expense were Rmb 147M (or US$21M). This includes
Japan related expense of Rmb 30.1M (or US$4.3M) - this
compares to company full year Japan spending of
US$20M - US$25M. Adj. operating margin(excluding share
base comps): is 28.5% down from 33.2% in 4Q07 and
31.2% in 1Q07. Operating margin decline is inline with
expectation, as revenue base growth was slow in 1Q08.

Tax rate: Tax rate was 6.9% in 1Q08, ahead of our
forecast of 3%. On the other hand, long-term deferred
tax asset increased from Rmb 15.7M in 4Q07 to Rmb 20.5M
in 1Q08. We look for management guidance on tax rates
and impacts on new tax rules at the call.

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