Baidu Inc. Earnings: Margins Matter

By Markets Fool.com

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Source: Baidu.

Growth is slowing atBaidu , but there's plenty of kick left in China's leading search engine. Baidu reported quarterly results after Wednesday's market close.

It was a mixed showing. Revenue climbed 34% to $2.053 billion for the first quarter, short of the 36% year-over-year spurt that analysts were projecting. Earnings went the other way -- declining 3% to $1.09 a share -- but that was slightly ahead of where the pros were perched. Irony alert: The top-line growth was the bad news, with the bottom-line decline stepping up as the good news.

The market still bumped the stock lower in initial after-hours trading on Wednesday night. It doesn't help that Baidu's guidance for the current quarter is calling for $2.64 billion to $2.7 billion in revenue for the current quarter. That suggests that top-line growth is accelerating -- up between 36.5% and 39.7% when pitted against last year's second quarter -- but analysts were already parked at the higher end of that range.

This isn't the first time earnings growth has failed to keep pace with the dot-com darling's heady revenue growth. Most of China's Web-fueled speedsters have seen margins shrink as usage migrates from desktops and laptops to smartphones and tablets. Monetization has been challenging on smaller screens, and expenses are mounting. Baidu has fared well in the migration, and it's now generating half of its revenue from mobile devices. The rub is that Baidu is spending more money to make mobile work.

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In another climate, it would be fatal to see a company whose income peaked at 46.9% in 2012 (accordingtoS&P Capital IQdata) and has now fallen all the way to 25.1% through the past four quarters.The market's been accepting of the situation, just as it has been forgiving of the margin crunch taking place at stateside Internet companies as they figure out mobile monetization.

Baidu is also in the margin-testing position of expanding aggressively into new areas that don't command the fat markups that it was able to command in paid search. It has spent the past couple of years acquiring or starting up app marketplaces, streaming video portals, and online travel hubs. These are moves that should pay off in time, but for now they're weighing on results.

The margin crunch isn't necessarily weighing on market sentiment. In fact, the market's initial after-hours reaction to the quarterly report was negative, but that was based on the two disappointments that materialized on the top line -- revenue growth that fell short of expectations and light revenue guidance. Baidu didn't hit it out on Wednesday night, but it didn't strike out, either.

The article Baidu Inc. Earnings: Margins Matter originally appeared on Fool.com.

Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Baidu. The Motley Fool owns shares of Baidu. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.