Highlights from Baidu's (BIDU) Q2 Conference Call: Expects China's Internet User Population to Grow to 338M by End of Q2

July 24, 2009 1:49 PM EDT

Baidu (Nasdaq: BIDU) shares have surged more than 9% today following better than expected Q2 results last night. The Chinese search engine giant reported Q2 EPS of $1.71, up 42% from the same quarter last year and versus the analyst estimate of $1.44. Revenue for the quarter was $160.7 million, versus the consensus of $157.82 million. Baidu also issued Q3 sales guidance that came in better than what analysts had been expecting: $184-$180 million, versus the consensus of $182 million.

Below are some highlights from Baidu's Q2 conference call:

• recent initiatives which helped drive outperformance during the quarter: P4P platform, an increased focus on actively engaging customers to explore various marketing solutions that are detailed specifically to them, the launch of the Baidu online marketing professional edition, Project Aladdin and Phoenix Next.
  
• during the quarter, Baidu continued working closely with distributors to roll out a standard CRM sales system which has "significantly improved customer satisfaction and sales efficiency."
  
• "One of Baidu's key assets is our strong brand value and name reorganization, and we are committed to building upon our strong base through ongoing investment in marketing."
  
• Baidu estimates that China's internet user population will grow to 338 million by the end of Q2, or 26% of the total population.
  
• During the quarter, Baidu had approximately 203,000 active online marketing customers, a 12% increase from the corresponding period in '08 and a 10% increase from Q1.
  
• Revenue per online marketing customers was approximately 5,400, a 23% increase from both the corresponding period in '08 and the previous quarter.
  
• Traffic acquisition cost (TAC), as a component of cost of revenue, was $175 million or 16% of total revenue, as compared to 12.7% in the corresponding period in '08 and 15.3% in Q109. The slight sequential increase over Q1 reflects the continued fast growth of our Union business.
  
• Bandwidth cost and depreciation cost as a percent of revenue both continue to decrease in Q2 on a year-on-year basis. This demonstrates efficiency improvements, as well as increased scalability of investment in capital expenditure.
  
• Total head count as of June 30, 2009 was about 6,300, roughly 100 more than the previous quarter.
  
• (Q&A) When asked which advertising sectors are looking the strongest, CFO Jennifer Li, responded: "In general, the - our overall sector kind of has a normal pattern in terms of the relative behavior. We do see in the economic down cycles some B2C sectors like medical particularly are more resilient, education performs very strong in relative terms."
  
• Piper Jaffray's Gene Munster asked, "...in terms of the operating margin, almost 39% versus 34% a year ago. Can you give us some thoughts in terms of the sustainability of that higher margin?" The CFO answered with, "Our operating margin improved this quarter, as I mentioned earlier it's because of the continued leverage of our overall cost structure as well as efficiencyimprovement that we have been able to implement both on the equipment side aswell as the overall operating expense structure side. We have mentioned many times that this business model has inherent very strong margin capabilities, however what we need to be mindful is this kind of internet industry is still in its early stage and we need to make investment in important initiatives. We've mentioned a couple of important initiatives in the past such as Aladdin, such as Phoenix Nest such as some of the marketing and branding activities that we're putting more focus on. So going forward, you know, we do have a very disciplined approach to cost but we do not have a margin target per se."

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