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What Are Baidu’s Top Priorities?

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Part 5
What Are Baidu’s Top Priorities? PART 5 OF 6

Is Baidu’s Efficiency Drive Going Anywhere?

Expenses are growing

One of the key priorities that Baidu (BIDU) has identified is operational efficiency. The company’s CFO, Jennifer Li, said this priority would help create long-term shareholder value.

The company’s expenses have been on the rise in recent years. For example, operating expenses for 2016 were 60.5 billion yuan, up from 54.7 billion yuan in the prior year. Operating expenses for 2Q17 rose to 16.7 billion yuan from 14.9 billion yuan in the prior quarter and 13.4 billion yuan in the year-ago quarter.

Is Baidu’s Efficiency Drive Going Anywhere?

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High cost of content drives cost of revenue

The above chart illustrates the trend line of Baidu’s operating expenses over the last five quarters. The fact that Baidu’s operating expenses have been rising steadily raises the question about whether the company’s efficiency drive has paid off.

Baidu’s cost leaders in 2Q17 were cost of revenue and R&D (research and development) expenses. Investment in innovation in fields such as artificial intelligence (QQQ) (XLK) is driving up Baidu’s R&D budgets. Higher cost of content pushed up Baidu’s cost of revenue, a development that can be linked to increasing competition for quality video content. In 2Q17, cost of content was 14.9% of total revenue, up from 9.3% a year earlier.

The company operates a leading Chinese (MCHI) online video site called iQiyi, a service that is akin to Alphabet’s (GOOGL) YouTube. Netflix (NFLX) is among Baidu’s video partners.

Spotlighting Baidu’s cost controls

While Baidu’s overall expenses have continued to rise, the company’s efficiency drive remains alive. This can be seen by the sharp decrease in SG&A (selling, general and administrative) expenses. Baidu said its SG&A expenses fell more than 30% in 2Q17 to $443 million. Baidu appears to see low-hanging fruits in SG&A expenses in terms of cost controls.

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