Baidu Announces Third Quarter 2006 Results

Baidu.com, Inc.

2006-11-01 13:54 2537

Net Income Increased by Over 900% Year-Over-Year

BEIJING, Oct. 31 /Xinhua-PRNewswire/ -- Baidu.com, Inc. (Nasdaq: BIDU),

the leading Chinese language Internet search provider, today announced its

unaudited financial results for the quarter ended September 30, 2006(1).

(Logo: http://www.newscom.com/cgi-bin/prnh/20041011/BAIDULOGO )

Third Quarter 2006 Highlights

-- Total revenues increased by 24.9% sequentially or 169.1% year-over-year

to RMB239.3 million ($30.3 million).

-- Net income increased by 45.8% sequentially or 902.5% year-over-year to

RMB85.3 million ($10.8 million). Basic and diluted earnings per share

("EPS") were RMB2.54 ($0.32) and RMB2.46 ($0.31), respectively.

-- Net income excluding share-based compensation expenses (non-GAAP) was

RMB101.6 million ($12.9 million). Basic and diluted EPS excluding

share-based compensation expenses (non-GAAP) were RMB3.03 ($0.38) and

RMB2.94 ($0.37), respectively.

-- The number of active online marketing customers grew to more than

102,000, a 13.3% increase from the previous quarter.

"During the quarter, we continued to strengthen our position as the

leading provider of Chinese language search," said Robin Li, Baidu's Chairman

and CEO. "By focusing on enhancing and expanding both our core search

functionality and our suite of community-based search products, we continued

to achieve significant traffic growth and market share expansion(2)."

Mr. Li continued, "During the second quarter, we optimized our dynamic

bidding monetization algorithm, which rationalizes Baidu's key word bidding

system. Recently, we also introduced an intelligent ranking system, which

ensures better user experience and increased customer ROI by incorporating

relevancy into the ranking algorithm for sponsored listings. While these

initiatives may affect revenue growth in the near term, we believe they will

result in greater revenue growth over the long term."

The Company noted that Baidu Space, launched in the third quarter, along

with other community-based products, such as Baidu Knows and Baidu Post Bar,

continued to gain in popularity. Baidu enhanced its vertical search products,

including Legal Search, Baidu Index, University Search, Government Search and

Youth Search, to allow users to focus on specific subject areas. In addition,

Baidu expanded its range of products tailored for use on mobile phones and WAP

devices.

In October 2006, Baidu entered into a collaborative relationship with MTV

Networks to provide video entertainment and music content to China's internet

users. This collaboration allows Baidu to directly distribute authorized

content from MTV Networks, Nickelodeon and five music companies to its users.

"Our robust earnings results reflect the inherent scalability of our

business model," commented Shawn Wang, Baidu's CFO. "During the quarter, we

began to transition from serving customers via third-party distributors to

direct sales in the Beijing market and continued to help improve our

distributors' ability to serve our customers in other cities."

Mr. Wang added, "Our investment in monetization and search technology is

positioning us for long term growth. While our investment is bringing

immediate benefits to our users and customers, we are confident that it will

also create significant value for our shareholders over the long term."

Third Quarter 2006 Results

Baidu reported total revenues of RMB239.3 million ($30.3 million) for the

quarter ended September 30, 2006, representing a 24.9% increase from the

previous quarter and a 169.1% increase from the corresponding period in 2005.

Online marketing revenues for the third quarter were RMB237.6 million

($30.1 million), representing a 25.7% increase from the second quarter of 2006

and a 176.7% increase from the third quarter of 2005. The growth was driven by

the increase in the number of active online marketing customers, which

increased by 13.3% from the second quarter of 2006 to more than 102,000 for

the third quarter. Revenue per online marketing customer for the third quarter

increased to RMB2,330 ($294.8) from RMB2,081 in the second quarter, a

sequential increase of 12.0%.

Traffic acquisition cost (TAC) as a component of cost of revenues was

RMB21.6 million ($2.7 million), representing 9.0% of total revenues, compared

to 9.2% in the second quarter of 2006.

Selling, general and administrative expenses were RMB70.2 million ($8.9

million), representing a 19.5% increase from the previous quarter and a 90.0%

increase from the third quarter of 2005.

Research and development expenses were RMB24.5 million ($3.1 million),

representing a 34.2% sequential increase and a 66.9% increase from the

corresponding period in 2005, primarily due to headcount increases.

Share-based compensation expenses, which were allocated to related cost

and expense line items, increased in aggregate to RMB16.4 million ($2.1

million) in the third quarter of 2006 from RMB11.7 million in the previous

quarter. The increase in share-based compensation expenses primarily reflects

a change in accounting estimates of the forfeiture rate. The Company did not

grant a significant amount of options or restricted shares during the third

quarter.

For the full year 2006, Baidu expects share-based compensation expenses

for awards granted to employees prior to October 1, 2006 to be RMB46.6

million, assuming there is no material change in the forfeiture rate. This

amount does not include expenses to be recognized over the remainder of the

year related to awards granted to employees after October 1, 2006 or awards to

non-employees that have been or may be granted.

Operating profit was RMB76.2 million ($9.6 million), representing a 31.5%

increase from the previous quarter and a 1002.0% increase from the third

quarter of 2005. Operating profit excluding share-based compensation expenses

(non-GAAP) was RMB92.6 million ($11.7 million) for the third quarter of 2006,

a 32.8% increase from the previous quarter and a 422.5% increase from the

corresponding period in 2005.

Income tax expenses were RMB2.0 million ($0.3 million), representing a

80.5% decrease from the second quarter of 2006 and a 8.4% increase from the

third quarter of 2005. The sequential decrease was primarily due to tax

incentives newly granted to one of Baidu's PRC subsidiaries. As a result, the

tax expenses in the third quarter included a reversal of RMB6.0 million ($0.8

million) that was recognized in previous quarters.

Net income was RMB85.3 million ($10.8 million), representing a 45.8%

increase from the previous quarter and a 902.5% increase from the third

quarter of 2005. Basic and diluted EPS for the third quarter of 2006 amounted

to RMB2.54 ($0.32) and RMB2.46 ($0.31), respectively.

Net income excluding share-based compensation expenses (non-GAAP) was

RMB101.6 million ($12.9 million), a 44.8% increase from the previous quarter

and a 426.3% increase from the third quarter of 2005. Basic and diluted EPS

excluding share-based compensation expenses (non-GAAP) for the third quarter

of 2006 were RMB3.03 ($0.38) and RMB2.94 ($0.37), respectively.

As of September 30, 2006, the Company had cash, cash equivalents and

short-term investments of RMB1,083.3 million ($137.1 million). Net operating

cash flow and capital expenditures for the third quarter of 2006 were RMB131.1

million ($16.6 million) and RMB51.3 million ($6.5 million), respectively. The

increase in capital expenditures was primarily due to expenditures incurred to

support traffic growth during the quarter.

Adjusted EBITDA (non-GAAP), which is defined as earnings before interest,

taxes, depreciation, amortization, other non-operating net income, and share-

based compensation expenses, were RMB112.3 million ($14.2 million) for the

third quarter of 2006, representing a 32.2% increase from the previous quarter

and a 304.4% increase from the corresponding period in 2005.

CTO Resignation

Baidu announced on October 24, 2006 that its chief technology officer,

Jerry Liu, had submitted his resignation for personal reasons, effective on

December 19, 2006. Baidu's technology team, which consists of senior engineers

with extensive experience in all aspects of Baidu's technology infrastructure,

will continue to lead ongoing technology initiatives. The Company noted that

it is considering options for Mr. Liu's successor.

Outlook for Fourth Quarter 2006

Baidu currently expects to generate total revenues in an amount ranging

from RMB270 million ($34 million) to RMB280 million ($35 million) in the

fourth quarter of 2006, representing a 135% to 143% increase from the

corresponding period in 2005. This forecast reflects Baidu's current and

preliminary view, which is subject to change.

Conference Call Information

Baidu's management will hold an earnings conference call at 8 PM on

October 31, 2006 U.S. Eastern Standard Time (9 AM on November 1, 2006

Beijing/Hong Kong time).

Dial-in details for the earnings conference call are as follows:

US: 1 617 786 2961

UK: 44 207 365 8426

Hong Kong: 852 3002 1672

Passcode for all regions: 46025967

A replay of the conference call may be accessed by phone at the following

number until 11 PM on November 3, 2006 U.S. Eastern Standard Time.

International: 1 617 801 6888

Passcode: 92261904

Additionally, a live and archived webcast of this conference call will be

available at http://ir.baidu.com.

About Baidu

Baidu.com, Inc. is the leading Chinese language Internet search provider.

As a technology-based media company, Baidu aims to provide the best way for

people to find information. In addition to serving individual Internet search

users, Baidu provides an effective platform for businesses to reach potential

customers. Baidu's ADSs, each of which represents one Class A ordinary share,

currently trade on the NASDAQ Global Market under the symbol "BIDU".

Safe Harbor Statement

This announcement contains forward-looking statements. These statements

are made under the "safe harbor" provisions of the U.S. Private Securities

Litigation Reform Act of 1995. These forward-looking statements can be

identified by terminology such as "will," "expects," "anticipates," "future,"

"intends," "plans," "believes," "estimates" and similar statements. Among

other things, the outlook for third quarter 2006 and quotations from

management in this announcement, as well as Baidu's strategic and operational

plans, contain forward-looking statements. Baidu may also make written or oral

forward-looking statements in its periodic reports to the U.S. Securities and

Exchange Commission in its annual report to shareholders, in press releases

and other written materials and in oral statements made by its officers,

directors or employees to third parties. Statements that are not historical

facts, including statements about Baidu's beliefs and expectations, are

forward-looking statements. Forward-looking statements involve inherent risks

and uncertainties. A number of factors could cause actual results to differ

materially from those contained in any forward-looking statement, including

but not limited to the following: our growth strategies; our future business

development, results of operations and financial condition; our ability to

attract and retain users and customers; competition in the Chinese language

Internet search market; competition for online marketing customers; changes in

our revenues and certain cost or expense items as a percentage of our

revenues; the outcome of ongoing, or any future, litigation or arbitration,

including those relating to copyright and other intellectual property rights;

the expected growth of the Chinese language Internet search market and the

number of Internet and broadband users in China; and Chinese governmental

policies relating to the Internet and Internet content providers. Further

information regarding these and other risks is included in our annual report

on Form 20-F and other documents filed with the Securities and Exchange

Commission. Baidu does not undertake any obligation to update any forward-

looking statement, except as required under applicable law. All information

provided in this press release and in the attachments is as of October 31,

2006, and Baidu undertakes no duty to update such information, except as

required under applicable law.

About Non-GAAP Financial Measures

To supplement Baidu's consolidated financial results presented in

accordance with GAAP, Baidu uses the following measures defined as non-GAAP

financial measures by the SEC: adjusted EBITDA, operating profit excluding

share-based compensation expenses, net income excluding share-based

compensation expenses, and basic and diluted EPS excluding share-based

compensation expenses. The presentation of these non-GAAP financial measures

is not intended to be considered in isolation or as a substitute for the

financial information prepared and presented in accordance with GAAP. For more

information on these non-GAAP financial measures, please see the tables

captioned "Reconciliations of non-GAAP results of operations measures to the

nearest comparable GAAP measures" and "Reconciliation from net cash provided

by operating activities to adjusted EBITDA" set forth at the end of this

release.

Baidu believes that these non-GAAP financial measures provide meaningful

supplemental information regarding its performance and liquidity by excluding

certain expenses and expenditures that may not be indicative of its operating

performance from a cash perspective. We believe that both management and

investors benefit from referring to these non-GAAP financial measures in

assessing our performance and when planning and forecasting future periods.

These non-GAAP financial measures also facilitate management's internal

comparisons to Baidu's historical performance and liquidity. Baidu computes

its non-GAAP financial measures using the same consistent method from quarter

to quarter, except that the non-GAAP measures for the quarter ended March 31,

2006 reflected the one-time cumulative effect of change in accounting

principle due to our adoption of SFAS 123(R) since January 1, 2006. We believe

these non-GAAP financial measures are useful to investors in allowing for

greater transparency with respect to supplemental information used by

management in its financial and operational decision making. A limitation of

using non-GAAP operating profit excluding share-based compensation expenses,

net income excluding share-based compensation expenses, and basic and diluted

EPS excluding share-based compensation expenses is that these non-GAAP

measures exclude share-based compensation charge that has been and will

continue to be for the foreseeable future a significant recurring expense in

our business. A limitation of using non-GAAP Adjusted EBITDA is that it does

not include all items that impact our net income for the period. Management

compensates for these limitations by providing specific information regarding

the GAAP amounts excluded from each non-GAAP measure. The accompanying tables

have more details on the reconciliations between GAAP financial measures that

are most directly comparable to non-GAAP financial measures.

Contacts

China

Lesley Zhang

Baidu.com, Inc. (Beijing)

Tel: +86 10 8262 1188 ext. 8239

ir@baidu.com

Rory Macpherson

Ogilvy Public Relations Worldwide (Beijing)

Tel: +86 10 8520 6553

rory.macpherson@ogilvy.com

U.S.

Thomas Smith

Ogilvy Public Relations Worldwide (New York)

Tel: +1 212 880 5269

thomas.smith@ogilvypr.com

(1) This announcement contains translations of certain RMB amounts into

U.S. dollars at specified rates solely for the convenience of the

reader. Unless otherwise noted, all translations from RMB to U.S.

dollars are made at a rate of RMB7.9040 to US$1.00, the effective noon

buying rate as of September 30, 2006 in The City of New York for cable

transfers of RMB as certified for customs purposes by the Federal

Reserve Bank of New York.

(2) The market share information is derived from CNNIC: 2006 China Search

Engine Market Survey.

Baidu.com, Inc.

Condensed Consolidated Balance Sheets

September 30, December 31,

(in RMB thousands) 2006 2005

Unaudited Audited

ASSETS

Current assets:

Cash, cash equivalents and short-term

investments 1,083,334 900,593

Accounts receivable, net of

allowance 25,205 22,353

Prepaid expenses and other current

assets 49,155 10,957

Deferred tax asset, net of

valuation allowance 1,490 1,449

Total current assets 1,159,184 935,352

Non-current assets:

Fixed assets, net 160,195 96,420

Prepayment for land use rights 92,400 77,200

Intangible assets, net 46,902 13,303

Goodwill 44,183 9,287

Investments - 2,018

Deferred tax asset, net of

valuation allowance 6,085 2,843

Other 3,746 -

Total non-current assets 353,511 201,071

TOTAL ASSETS 1,512,695 1,136,423

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Accrued expenses and other liabilities 131,213 53,137

Customers' deposits 129,530 70,327

Deferred revenue 3,874 7,658

Deferred income 4,090 124

Total current liabilities 268,707 131,246

Non-current liabilities:

Long-term payable 7,000 -

Deferred income 3,839 124

Total non-current liabilities 10,839 124

Total liabilities 279,546 131,370

Shareholders' equity

Class A ordinary shares, par value

US$0.00005 per share, 825,000,000

shares authorized and 21,205,328

shares issued and outstanding as

at September 30, 2006 and 9,460,426

shares as at December 31, 2005 9 4

Class B Ordinary Shares, par value

US$0.00005 per share, 35,400,000 shares

authorized and 12,433,670 shares issued

and outstanding as at September 30,

2006 and 23,485,336 shares as at

December 31, 2005 5 10

Additional paid-in capital 1,076,004 1,009,488

Foreign currency translation adjustment (22,834) (5,451)

Retained earnings 179,965 1,002

Total shareholders' equity 1,233,149 1,005,053

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,512,695 1,136,423

Baidu.com, Inc.

Condensed Consolidated Statements of Income

For the Three Months Ended

September September June

30, 30, 30,

(in RMB thousands except for share, 2006 2005 2006

per share information) Unaudited Unaudited Unaudited

Revenues:

Online marketing services 237,625 85,884 189,053

Others 1,706 3,052 2,574

Total revenues 239,331 88,936 191,627

Operating costs and expenses:

Cost of revenues (note 1, 2) (68,399) (30,385) (56,644)

Selling, general and administrative

(note 2) (70,184) (36,942) (58,728)

Research and development (note 2) (24,520) (14,692) (18,268)

Total operating costs and expenses (163,103) (82,019) (133,640)

Operating profit 76,228 6,917 57,987

Other income

Interest income, net 11,337 3,721 10,161

Foreign exchange loss, net - (550) -

Other, net (286) 285 702

Total other income 11,051 3,456 10,863

Income before income tax 87,279 10,373 68,850

Income tax expense (2,026) (1,869) (10,380)

Net income 85,253 8,504 58,470

Earnings per share for Class A and

Class B ordinary shares:

Basic EPS 2.54 0.35 1.76

Diluted EPS 2.46 0.26 1.69

Weighted average aggregate number of

Class A and Class B ordinary shares

outstanding:

Basic 33,500,948 24,010,660 33,295,391

Diluted 34,628,611 32,904,458 34,597,580

Pro forma earnings per share for Class

A and Class B ordinary shares (2):

Basic 2.54 0.27 1.76

Diluted 2.46 0.26 1.69

Pro forma weighted average aggregate

number of Class A and Class B

ordinary shares outstanding

on an as converted basis for Class A

and Class B ordinary shares:

Basic 33,500,948 31,249,302 33,295,391

Diluted 34,628,611 32,904,458 34,597,580

(Note 1) Cost of revenues are

detailed as follows:

Business tax and surcharges (14,891) (5,723) (12,185)

Traffic acquisition costs (21,640) (5,660) (17,611)

Bandwidth costs (10,503) (6,693) (9,239)

Depreciation and amortization

costs (14,053) (7,711) (12,339)

Operational costs (6,723) (4,255) (4,940)

Share-based compensation expenses (589) (343) (330)

Total cost of revenues (68,399) (30,385) (56,644)

(Note 2) Includes share-based compensation

expenses are allocated as follows:

Cost of revenues (589) (343) (330)

Selling, general and

administrative (10,014) (6,776) (7,705)

Research and development (5,779) (3,688) (3,696)

Total share-based compensation

expenses (16,382) (10,807) (11,731)

(2) Pro forma basic and diluted earnings per share are computed by

dividing net income by weighted average number of ordinary shares

outstanding for the period plus the number of ordinary shares

resulting from the assumed conversion of all the outstanding

redeemable convertible preferred share upon closing of the initial

public offering as if the conversion had occurred at the beginning of

the period, or when the preferred shares were issued, if later.

Reconciliations of non-GAAP results of operations measures to the nearest

comparable GAAP measures (*) (in RMB thousands, unaudited)

Three months ended September 30, 2005