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Morningstar | Baidu Expects Weak 2Q Revenue Growth; FVE Under Review

First-quarter revenue at wide-moat Baidu was CNY 24.1 billion, increasing 21% year over year excluding the divested businesses, versus guidance of 18%-24%. Core revenue was up 8.2% year over year, similar to the 7.4% growth in the fourth quarter. The weak revenue growth was due to regulatory pressure on Baidu's customers' industries and the company's self-directed healthcare initiative. Baidu required healthcare marketing customers to move their ad landing pages onto its platform, causing disruptions, and will require other selected industries' customers to follow suit. This is intended to drive higher conversion and ad revenue growth in the long run but will put pressure on revenue growth in the near term.

Baidu has turned more bearish on the online marketing business, guiding that core revenue will range from negative 2% to positive 4% year over year and total revenue will range from negative 3% to positive 2% (versus our full-year estimate of 19% growth) or 1%-6% excluding the spin-off. Reasons for the weak guidance include the full-quarter impact of moving customers' landing pages to Baidu's, the impact of a weak macro environment since the end of March, rising ad inventory (Tencent will release a third ad on per user per day on  WeChat Moments ), and tighter regulations on Baidu's customers' industries. Baidu will focus on operational efficiency but will continue to strengthen its mobile business and make necessary investments for long-term growth. Management plans to limit the sequential increase in cost to no more than CNY 1 billion each quarter for the rest of this year. We are putting our fair value estimate under review.

Core generated operating income of CNY 1.1 billion in the first quarter of 2019 versus CNY 4.6 billion in the first quarter of 2018. Adding back share-based compensation and amortization of intangible assets, non-GAAP operating income was CNY 401 million, still a 93% decline year over year, driven by higher promotions of Baidu's apps (for example, the CNY 1 billion CCTV Chinese New Year Eve Gala marketing campaign), higher content costs for iQiyi, higher traffic acquisition costs, and so on. Traffic acquisition costs rose and Baidu will need to spend more marketing dollars up front for app installation and cultivating app usage, although revenue generated from the users will occur during the lifetime of the users. In the near term, we expect marketing expenses as a percentage of sales to increase.

In March, Baidu app daily active users were 174 million, an increase of 28% year over year; Haokan short video daily active users were 22 million, up 768% compared with the same period last year; and Baidu's Smart Mini Program monthly active users were 181 million.