Moody's Investors Service says that Baidu Inc.'s (Nasdaq: BIDU) 1H2014 results support its A3 issuer and senior unsecured debt ratings.

The ratings outlook remains stable.

"Baidu's robust year-on-year revenue growth of 59% in 1H2014 to RMB 19.9 billion slightly exceeds Moody's expectations," says Lina Choi, a Moody's Vice President and Senior Analyst.

"This strong revenue growth reflects Baidu's success in monetizing its mobile-search products and improving overall click-through rates," adds Choi, who is also the Lead Analyst for Baidu. "Revenue per online market customers also recorded a 50% year-on-year increase to RMB 24,200 and mobile comprises 30% of total revenue in 2Q2014."

Looking ahead, Moody's expects the company's mobile contribution will exceed 35% in the next 12 -- 18 months, and that it will strengthen its competitiveness across all Internet devices, including computers and mobile platforms.

Moody's further notes that although operating margin has declined from pre-2013 levels -- due to investments and marketing activities associated with mobile products -- the absolute amount for its operating cash flow was stable, as the company's revenue base grew.

Baidu's quarterly operating margin declined to the 31%-32% level, down from the pre-2013 levels of 40%-44%. Given continued internet traffic migration from personal computers to mobile terminals, Moody's expects Baidu will further grow its mobile platform, and enrich its applications and products.

Investment in and marketing of these products will help to slow the decline in profitability in the next 12-18 months. As a result, Moody's expects Baidu will maintain operating margin at around 26-28% in FY2014.

Baidu's liquidity remains strong, driven by stable operating cash flow. Baidu had a net cash position of RMB24.7 billion at end-June 2014. Its strong liquidity position enables it to make acquisitions to strengthen its franchise without raising much debt. It has also allowed the company to maintain credit metrics appropriate for its A3 rating.

Baidu's gross debt/EBITDA stood at 1.8x and debt to capital was below 35% at end-June 2014. Both ratios are acceptable for its current A3 rating because its liquidity position was enhanced by its US$1 billion bond issuance in June 2014.

The principal methodology used in this rating was the Global Business & Consumer Service Industry Rating Methodology published in October 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.