Slump in 3rd-quarter profit will not affect long-term growth forecast, say experts
Despite a slump in third-quarter profit, Baidu Inc, China's biggest Internet search company, is likely to convert its short-term pain into long-term gains due to the rapid growth of its heavily invested online-to-offline business.
The Beijing-based company reported an operating profit of 2.51 billion yuan ($395.2 million) on Friday, a 35.9 percent fall from the same period a year earlier, largely due to investments made to move away from the traditional search advertising business.
However, Baidu's investments have not been in vain. The company said its O2O service transactions from group-buying site Baidu Nuomi, takeaway delivery site Baidu Waimai and online travel agency Qunar Cayman Islands Ltd surged to 60.2 billion yuan in the third quarter, compared with 40.5 billion yuan in the previous quarter.
Jennifer Li, chief executive officer of Baidu, termed the quarter a "solid" one.
"The momentum in transaction services gives us the confidence to continue investing," she said, adding they will invest in ways that leverage and buttress the company's competitive advantage.
Yin Sheng, an independent analyst who specializes in Internet research, said though Baidu's profits have been hit due to its transformation into an O2O business, it is still one of the fastest-growing Internet companies in China.
The Nasdaq-listed Baidu said in June that it would invest 20 billion yuan on its group-buying site Nuomi to transform itself into an O2O service platform, on which mobile Internet users can book or buy nearby offline services, such as cinema tickets, taxi bookings or meals at restaurants.
The company's total revenue in the third quarter rose 36 percent year-on-year to 18.4 billion yuan, Yin said, adding that Baidu is well on its way to make the business transformation.
The financial report came days after Baidu announced a deal, which saw it take a 25 percent stake in online travel agency Ctrip.com International Ltd. The deal makes the Nasdaq-listed company the biggest player in China's online travel industry, an important sector for O2O services.
Analysts expect the deal to cut Baidu's costs in supporting Nuomi's still-in-red online travel business.
Yan Honghui, an analyst with Beijing-based Internet consultancy Analysys International, said Baidu is expected to benefit from the Ctrip, Qunar deal.
"The O2O sector is a cash-burning sector with investors pouring money to offer incentives to get users," she said, adding the deal is expected to boost Baidu's profitability in the next quarter.
The O2O sector that provides people with location-based services is expected to be a 10 trillion yuan market in China in the future.
Yan said the decision to transform into an O2O business comes from Baidu's desire to achieve stronger growth in the future as its traditional search advertising business has seen signs of flattening.
"Baidu used to be a company that matched information with search requests. Now it wants to get closer to end users by matching services directly with search requests," she said, adding the transformation can also leverage the strength of Baidu's existing businesses, such as its map and payment services.
Though many of China's O2O companies, especially the smaller ones, have become bankrupt due to fierce competition, unclear business models and huge investment programs, it seems Baidu remains on strong ground.
Statistics from Analysys International showed that Nuomi's market share in the group-buying industry has grown from less than 10 percent in the first quarter to about 20 percent in the third quarter.