Baidu Inc. Earnings: Sales Surge, but Heavy Spending Dents Profits

Image source: Baidu.

Chinese Internet search giantBaidu , in its third-quarter results posted Oct. 29, delivered strong revenue growth, but its profits continued to be hampered by the company's heavy investments in its online-to-offline initiatives.

Operating resultsThird-quarter revenuesurged 36% year over year to $2.892 billion, with online marketing revenueincreasing 31.7% to $2.782 billion. Baidu benefited from solid growth in activeonline marketing customers, which rose 20.7% to 623,000, as well as a 9.3% increase in revenue per online marketing customer to $4,453.

Importantly, Baidu continues to make progress with its mobile initiatives, with mobile search monthly active users, or MAUs, for September increasing 26% year over year to 643 million and mobile maps MAUsjumping 34% to 326 million. That helped mobile revenue increase to 54% of Baidu's total revenues, up from 37% in the third quarter of 2014.

"With mobile accounting for nearly two-thirds ofBaidu'ssearch traffic andChinasquarely in a mobile age,Baiduis pioneering and redefining the mobile experience for users inChina," saidChairman and CEO Robin Li in a press release. "We further extended the reach of our platform by deeply integrating and connecting search and maps with transaction services."

To Li's point, gross merchandise value(GMV)for transaction servicesleaped 119% to$9.5 billion in the third quarter of 2015. That growth came a cost, however, with management noting that increased promotional spending for transaction services was the primary cause of an 111% jump in selling, general, and administrative expenses during the quarter. Third-quarter research and development expenses also grew significantly faster than revenue, increasing 47%.

These heavy investments, along with the losses generated by Baidu's non-search businesses, took a toll on Baidu's margins, with operating margin declining to 13.7%, down from 29% in the third quarter of 2014. That led to a 35.9% year-over-year decrease in operating profit to $395.2 million.

Net income and earnings per share also fell sharply, declining 26.7% to $447.0 million and 30.2% to $1.25, respectively.

Cash, cash flow, and capital returnAs ofSept. 30, 2015, Baidu had more than$11 billion in cash and investments versus less than $6 billion in debt.Third-quarter operating cash flow was $759.2 million and free cash flow totaled $463.9 million.This balance sheet strength and solid cash flow generation has allowed Baidu to return cash to its shareholders. The company completed the $1 billion share repurchase program it announced in July during the third quarter, and announced a new $2 billion repurchase program to be completed over the next two years.

Looking aheadManagement issued a fourth-quarter revenue forecast in the range of $2.864 billion to $2.950 billion, representing a 29.5% to 33.4% year-over-year increase.

Investors should also expect Baidu's heavy spending to continue in the quarters ahead, which management believes will ultimately create long-term value.

"The momentum in transaction services gives us the confidence to continue investing, said CFO Jennifer Li. "We will invest in ways that leverage and buttress our competitive advantage."

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