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Baidu Inc. Earnings Plummet 34%

Image source: Baidu.com.

Baidu (NASDAQ: BIDU) reported second-quarter results on July 28. The Chinese internet giant saw its revenue and earnings severely impacted by changes brought about by the tragic death of search user Wei Zexi, which led to a crackdown.

Second-quarter revenue rose 10.2% year over year to $2.7 billion, and 16.3% after adjusting for Baidu's divestiture of online travel business Qunar in October. That's a substantial deceleration from the 31.2% surge in revenue Baidu delivered in the first quarter.

Online marketing revenue rose only 4.4% to $2.5 billion as active online marketing customers inched up 0.7% to 594,000 in the second quarter, while revenue per online marketing customer increased 3.6% to $4,273.

Baidu's results appear to have been significantly impacted by the company's recent modifications to its paid-search practices, brought about by the aftermath of the death of a cancer patient who received treatment from a medical center that he allegedly found from a sponsored listing on Baidu. Chinese regulators placed Baidu under investigation after the story went viral, and they have since implemented stricter advertising regulations for medical organizations. This, in turn, has led to a reduction in advertiser spending from Baidu's medical customers. 

"While we experienced a tough second quarter, our value proposition to our users remains solid," said CFO Jennifer Li in a press release. "Delivering a superior user experience and building a trusted platform are the pillars that will drive our long term sustainability."

Despite these challenges, Baidu continues to make progress with its mobile initiatives, with mobile search monthly active users, or MAUs, for June increasing 6% year over year to 667 million, and mobile maps MAUs rising 13% to 343 million. That helped mobile revenue increase to 62% of Baidu's total revenues, up from 50% in Q2 2015.

Baidu is also seeing strong growth in its transaction services segment, with gross merchandise value (GMV) jumping 166% to $2.7 billion. This growth continues to come at a cost, though, with management noting that Baidu's transaction services business reduced the company's non-GAAP operating margins by 25.4 percentage points in the second quarter.

All told, net income plunged 34.1% to $363.2 million, or 30.1% when excluding share-based compensation, and adjusted earnings per share fell 32.6% to $1.22.

Looking ahead

Baidu expects third-quarter revenue to be between $2.714 billion and $2.796 billion, which would represent a year-over-year decrease of 1.9% at the low end of the range, or an increase of 5.4% to 8.6% after adjusting for the Qunar divestiture.

"The challenges Baidu faced in the second quarter served as a healthy reminder to stay focused on the key drivers of growth, sustainability and leadership: delivering the best user experience and staying at the forefront of technology," said Chairman and CEO Robin Li. "As we enter the next chapter of the Internet, led by artificial intelligence, Baidu has never been better positioned to serve our users and work with our customers and partners, and change the world through technology."

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Joe Tenebruso has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Baidu. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.