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Baidu Monthly Traffic Tracker: July 2007

Topic: The first month of Q3 (July) has passed. What was Baidu's traffic growth rate QoQ (July vs. April)?

Data: Traffic to Baidu.com was up 7.5% QoQ in July (vs. April), according to our tracking of ~1,000 highly monetizable keywords on Baidu.com. The keywords we selected represent all the major industries including real estate, finance, IT, transportation, apparel, chemicals, machinery, sports, e-commerce, and so on. The appendix is the July and April data on a portion of the ~1,000 keywords tracked by China Analyst. To verify the accuracy of our tracking, please visit Baidu Index, where the company discloses search query data.

Analysis: We think the 7.5% growth in July vs. April was not bad for two reasons:

1. Traffic is not the only revenue driver. For a search engine, Paid Search Revenue = Total Searches (Traffic) x Click-through Rate (CTR) x Cost-per-Click (CPC). This shows traffic is not the only revenue driver for Baidu. In fact, in Q2 2007, Baidu's total revenue was up 47.6% QoQ while its traffic only increased 16.2%. This means the other two factors jointly contributed 27.0% QoQ growth, as shown in this equation: 147.6%=(1+16.2%)x(1+27.0%).

2. Implication for meeting Q3 guidance. Baidu's Q3 revenue guidance ($64.6M-$66.5M) implies a 23%-26% QoQ growth. For Baidu to meet the mid-point of this guidance (24.5% QoQ growth), the other two factors only need to jointly contribute 15.8% QoQ growth, as shown in this equation: 124.5%=(1+7.5%)*(1+15.8%). The assumption of this calculation is that for the remaining two months of Q3, QoQ traffic growth remains at the 7.5% level.

Our Baidu Monthly Traffic Tracker will continue to monitor the traffic pattern going forward. And we suggest that investors look into the July, April, and Q2 data for more information.

SINA 2Q07 (1): Historical Trading Pattern after Earnings

Summary of Q2 results. Sina just reported mixed Q2 2007 earnings with two "beats" and one "miss": Total revenue beat Wall Street consensus by 0.3%. Non-GAAP EPS beat the Street by 10.8%. The mid-point of next quarter (Q3) revenue guidance missed the consensus by 1.2%.

Trading pattern after earnings. As highlighted in the table below, from 4Q05 to 1Q07, SINA went up 4 out of 6 times in next-day trading. Below is our analysis on three next-day trading indicators:

1. Actual revenue beat Wall Street consensus every quarter. It correctly predicted next-day trading 4 out of 6 times (4Q05, 2Q06, 3Q06, 4Q06) with a 66.7% hit ratio.

2. Non-GAAP EPS beat consensus 5 out of 6 times - the only miss happened in 4Q05, the earliest period. This metric successfully predicted next-day trading 3 out of 6 times (2Q06, 3Q06, 4Q06) with a 50% hit ratio.

3. Next quarter revenue guidance beat the consensus 3 out of 6 times. It correctly predicted next-day trading 3 out of 6 times (1Q06, 2Q06, 3Q06) with a 50% hit ratio.

Conclusion. Based on the analysis above, actual revenue seems to be the best indicator of next-day price action, so the stock is more likely to go up tomorrow. However, the revenue just beat consensus by 0.3%, the smallest in the past six quarters (1Q06-2Q07). In addition, the mid-point of next quarter revenue guidance missed consensus by 1.2%. In our view, the market has expected too much from Sina in growing its revenues, so investors should be cautious before buying SINA. Sohu (SOHU) similarly delivered solid Q2 results and strong Q3 guidance, but it still dropped the next day, failing to repeat a 100%-correct historical trading pattern.

Table: SINA Next-day Price Action vs. Earnings Results

Source: Company reports and Yahoo! Finance

Related:

SOHU 2Q07 (1): Historical Trading Pattern after Earnings

BIDU 2Q07 (1): Traffic Lead Maintained

BIDU 2Q07 (2): Traffic Up 16.2% QoQ

BIDU 2Q07 (3): Revenue Share Up 1.1% to 58.1%

BIDU 2Q07 (4): Historical Patterns Reveal Key Metrics to Watch

BIDU 2Q07 (5): Strong Results; Expect Positive Next-day Trading

Q2 Earnings Schedule and Conf. Call Links for U.S.-Listed Chinese Stocks

SOHU 2Q07 (1): Historical Pattern Indicates Positive Price Action Tomorrow

Sohu just reported Q2 2007 earnings. Next quarter revenue guidance is $45-$47M, whose mid-point ($46M) is 11% than Wall Street's average estimate ($41.6M). We believe the stock will go up tomorrow based on the following historical trading pattern:

As highlighted in the table below, from 1Q06 to 1Q07, next Q revenue guidance correctly predicted SOHU's next-day price action with a 100% hit ratio. When the next Q revenue guidance beat the consensus in 1Q06 and 3Q06, the stock went up on the next trading day. When the next Q revenue guidance missed the consensus in 2Q06, 4Q06, and 1Q07, the stock declined the next day.

Table: Sohu Next Quarter Revenue Guidance vs. Next-day Price Action

Source: Company reports and Yahoo! Finance

Related:

Q2 Earnings Schedule and Conf. Call Links for U.S.-Listed Chinese Stocks

BIDU 2Q07 (1): Traffic Lead Maintained

BIDU 2Q07 (2): Traffic Up 16.2% QoQ

BIDU 2Q07 (3): Revenue Share Up 1.1% to 58.1%

BIDU 2Q07 (4): Historical Patterns Reveal Key Metrics to Watch

BIDU 2Q07 (5): Strong Results; Expect Positive Next-day Trading

BIDU 2Q07 (5): Strong Results; Expect Positive Next-day Trading

Topic: How will BIDU trade on Thursday, July 26th?

Data: Baidu (BIDU) reported strong results, beating all the three major metrics: Q2 revenue (7%), Q3 revenue guidance (9.9%), and EPS (22.1%). The table below is a historical review of BIDU's price action vs. earnings results.

Analysis: As we mentioned in the 4th article of our "BIDU 2Q07" series, next quarter revenue guidance is the key metric to watch in Baidu's earnings report. The company's Q3 revenue guidance beat Wall Street consensus by 9.9%, while the other less important metrics, revenue and EPS, also beat consensus. Operating metrics were also strong with a 14.3% QoQ growth in customer counts and a 24% QoQ growth in average spending per customer. Therefore, we believe the stock will definitely surge at least 10% in the Thursday (July 26th) trading session.

Table: BIDU Historical Next-day Price Action vs. Earnings Performance

 

Source: Yahoo! Finance, Reuters, and company reports

Related:

BIDU 2Q07 (1): Traffic Lead Maintained

BIDU 2Q07 (2): Traffic Up 16.2% QoQ

BIDU 2Q07 (3): Revenue Share Up 1.1% to 58.1%

BIDU 2Q07 (4): Historical Patterns Reveal Key Metrics to Watch

Q2 Earnings Schedule and Conf. Call Links for U.S.-Listed Chinese Stocks

BIDU 2Q07 (4): Historical Patterns Reveal Key Metrics to Watch

Topic: What metrics should be investors' focus when reading Baidu's Q2 report? Are there any historical patterns?

Data: Below is Baidu's earnings history since its IPO. The following items (highlighted rows) deserve special attention: 1. By how much did actual revenue beat or miss the Wall Street consensus?  2. By how much did next quarter guidance beat or miss the consensus? 3. Price action on the trading day following the earnings announcement.

Table: Baidu (BIDU) Earnings History Since IPO

Source: Yahoo! Finance, Reuters, and company reports

Analysis: Based on the data above, we found the following patterns:

1. Next Quarter Revenue Guidance Is the Key. This metric shows Baidu's business outlook for the next quarter. When the next Q revenue guidance beat the Wall Street consensus (3Q05, 4Q05, 1Q06, 2Q06, 1Q07), the stock went up the next day 3 out of 5 times. When the next Q guidance missed the consensus (3Q06, 4Q06), the stock declined both times. We believe this metric is the BEST indicator for next-day performance with a 71% hit ratio (=5/7). And we suggest that investors pay most attention to this metric, which will be located in the "Outlook for Third Quarter 2007" section of the earnings press release.

2. Revenue Is Somewhat Useful. For the first three quarters (3Q05, 4Q05, 1Q06) after IPO, Baidu's revenue easily beat the consensus by at least 10%. The stock was up 2 out of 3 times after earnings. In the next three quarters (2Q06, 3Q06, 4Q06), Baidu barely beat or met consensus (1.9%, 0.5%, 0.0%). As a result, the stock dropped next day in all these three quarters. In 1Q07, Baidu reversed the tide a little bit, beating consensus by 3.7%. The stock climbed on the following trading day.

3. EPS Is Less Important. For 5 out of 7 quarters, Baidu handily beat EPS consensus. For the two quarters (1Q06 and 1Q07) it failed to do this, the stock actually went up (37% and 14%) after earnings report. The implication is that BIDU is generally not impacted by whether or not it beats EPS consensus. An explanation for this is: China's paid search market is still in its early, high-growth stage. Therefore, growing revenue market share is the priority for both Baidu and investors.

Related:

BIDU 2Q07 (1): Traffic Lead Maintained

BIDU 2Q07 (2): Traffic Up 16.2% QoQ

BIDU 2Q07 (3): Revenue Share Up 1.1% to 58.1%

Q2 Earnings Schedule and Conf. Call Links for U.S.-Listed Chinese Stocks

BIDU 2Q07 (3): Revenue Share Up 1.1% to 58.1%

Topic: How was Baidu doing in 2Q07 in terms of revenue?

Data: According to consulting firm Analysys International, Baidu's revenue market share in China was 58.1% in Q2 2007, up 1.1 percentage points. Google China's market share increased 4.1 percentage points to 22.8%. Yahoo China's market share declined 2.0 percentage points to 11.6%. The appendix is a table showing revenue market shares of Baidu and its competitors from 1Q06 to 2Q07. Analysys International also estimates total revenues of all Chinese search engines were $86.34M in Q2.

Analysis: Based on the estimated total market size ($86.34M) and Baidu's market share (58.1%), Baidu's total revenue in 2Q07 was $50.2M (=$86.34M x 58.1%). On average, Wall Street analysts estimate Baidu generated $49.25M in revenues in Q2. Baidu's official Q2 guidance is $48.9M to $50.2M. This means Baidu's revenue in Q2 will beat Wall Street consensus and reach the high end of guidance.

Note: The analysis above is based on the assumption that Analysys International was right on their estimates. We suggest that investors do some research on this consulting firm's track record, before believing their estimates.

In the next article of our "BIDU 2Q07" series, we will outline the key points to watch from Baidu's 2Q07 reports.

Related:

BIDU 2Q07 (1): Traffic Lead Maintained

BIDU 2Q07 (2): Traffic Up 16.2% QoQ

BIDU 2Q07 (2): Traffic Up 16.2% QoQ

Topic: How was Baidu doing in Q2 in terms of traffic? Did total searches increase or decrease, and by how much?

Data: Traffic to Baidu.com was up 16.2% in Q2 vs. Q1, according to our tracking of ~1,000 highly monetizable keywords on Baidu.com. The keywords we selected represent all the major industries including real estate, finance, IT, transportation, apparel, chemicals, machinery, sports, e-commerce, and so on. The appendix is the Q2 and Q1 data on a portion of the 1,000 keywords tracked by China Analyst. To verify the accuracy of our tracking, please visit Baidu Index, where the company discloses search query data.

Analysis: The 16.2% QoQ traffic growth looks good, but Wall Street and Baidu itself expect a much higher revenue growth rate: On average, Wall Street analysts estimate Baidu generated $49.25M in revenues in Q2, implying a 38.0% QoQ growth vs. $35.7M in Q1. Baidu's official Q2 guidance is $48.9M to $50.2M, implying a 37.0%-40.6% QoQ growth. These numbers are a lot higher than the 16.2% traffic growth.

For Baidu to meet these revenue expectations, where can the remaining growth of 21.8% (=38%-16.2%) come from? The answer is in the following formula:

Paid Search Revenue = Total Searches x Click-through Rate x Cost-per-Click

Total searches on Baidu were up 16.2% in Q2. This means the remaining portion of the growth (21.8%) has to come from the other two factors: click-through rate and cost-per-click. In the future articles of our "BIDU 2Q07" series, we will discuss these two factors in detail.

Related:

BIDU 2Q07 (1): Traffic Lead Maintained

BIDU 2Q07 (1): Traffic Lead Maintained

How was Baidu (BIDU) doing in Q2 2007? In the "BIDU 2Q07" series, we will publish information from various sources and analysis from different angles.

Concern: Some investors worry that Baidu may have lost traffic market share in Q2 as a result of several strategic moves by Google.

Background: Recently, Google China has been aggressive in growing its traffic: It has partnered with No.1 Chinese portal Sina, acquired No.2 Chinese directory website 265.com, and obtained an ICP license to clear the hurdle in setting up more servers in China.

Data: Below is the market shares of major Chinese search engines based on total number of search queries, estimated by consulting firm iResearch.

Table 1: Market Shares of Chinese Search Engines Based on Queries

Search Engine	Dec-06	Jan-07	Feb-07	Mar-07	Apr-07	May-07
Baidu	69%	71%	76%	75%	74%	75%
Google China	9%	10%	10%	12%	13%	13%
Yahoo China	6%	7%	6%	6%	6%	5%
Tencent Soso	9%	6%	3%	3%	3%	3%
Sohu Sogou	2%	2%	2%	1%	2%	2%
Sina iAsk	1%	1%	1%	1%	1%	1%
Other	3%	3%	2%	2%	2%	2%
Total	100%	100%	100%	100%	100%	100%

Source: iResearch

Conclusion: Investors do not need to worry too much about Baidu losing traffic to Google in Q2. As the data indicate, we believe Baidu maintained its traffic lead over other search engines in China during 2Q07. It is still the dominant Chinese language search engine serving 75% of total queries.

In the second article of the "BIDU 2Q07" series, we will provide data and analysis on Baidu's traffic growth in Q2.

Baidu Lost Market Share in Q1 2007

Baidu had a decent 1Q07 (revenue: $35.7M; EPS: $0.32) and provided a bullish revenue guidance for 2Q07 (37%-41% QoQ growth. However, in 1Q07, Baidu lost market share against Google China and Yahoo China, based on the table below. Key observations:

1. Baidu's market share in 1Q07 decreased one percentage point to 57% from 58% in 4Q06.

2. As highlighted in yellow, during 1Q07, Google China and Yahoo China gained market share at the expense of Baidu.

3. Despite a slower growth, Baidu still dominates China's paid search market by a large margin.

Company Presentations at the 10th Credit Suisse Asian Investment Conference: BIDU, EDU, MR, SINA. STP

Many U.S.-listed Chinese companies made presentations to Wall Street institutional investors during the 10th Credit Suisse Asian Investment Conference, from March 27 to March 30, 2007. Five of these companies have generously allowed individual investors to listen to replays of their presentations over the internet. They are: BIDU, EDU, MR, SINA, and STP. The table below includes webcast links to these replays. Registration is quick and free.

What's the importance of these presentations? They are very different from quarterly earnings conference calls because presentations during investment conferences (such as this Credit Suisse one) typically include more comprehensive information about the featured companies. Executives of these public companies try hard to impress potential institutional investors by presenting their companies in a concise and clear format. For investors who are looking for a quick and comprehensive overview of a company, these presentations are actually better than quarterly conference calls.

We encourage investors to listen to these presenations, and we will provide our opinions in future articles.

Company	Ticker	Presenter	Webcast Link
Baidu.com	BIDU	Shawn Wang, CFO	Click here
New Oriental Education	EDU	Louis T. Hsieh, CFO	Click here
Mindray Medical	MR	Joyce Hsu, CFO	Click here
Sina Corp.	SINA	Charles Chao, CEO	Click here
Suntech Power	STP	Zhengrong Shi, CEO	Click here

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