Chinese search engine giant Baidu said last month that it was expecting below-consensus revenue for the first quarter of 2015. Baidu guided revenue between $2-$2.10 billion compared to the consensus estimate of $2.22 billion. The search engine giant’s Q1 revenue was affected by the Chinese New Year last month. But UBS analysts Erica Poon Werkun and Angela Xu see something more than the New Year that would impact its earnings.
Baidu’s operating expenses to go up
In a research note to investors on Tuesday, UBS Securities slashed its price target from $254 to $248. Analysts see higher operating expenses in the first quarter. UBS expects Baidu to keep investing in content production and acquisition of quality content for its iQiyi online video platform. As a result, Werkun and Xu raised their content cost estimate for the first quarter from 750 million yuan to 900 million yuan.
Further, the research firm said traffic acquisition cost is also expected to go up from 13.5% of revenue to 14.1% of total revenue in Q1, 2015. The SG&A costs will also increase as Baidu leads the offline campaign efforts to promote its products and services like Nuomi, Baidu Wallet, Baidu Connect and food delivery.
Putian’s threat unlikely to have much impact on Baidu
Last week, Putian, China’s largest private hospital union, asked its member hospitals to stop advertising on Baidu. It raised eyebrows because medical advertising makes up about a third of Baidu’s total ad revenue. And more than 80% of China’s private hospitals are members of Putian. However, UBS analysts are not concerned about Putian’s statements because private hospitals cannot afford to stop online advertising altogether.
UBS said it was not the first time Putian-based hospitals attacked Baidu for charging too much for search results. Such types of actions from hospitals could be a tactic during contract negotiations. Baidu signs a master contract with private hospitals every year, and asks them to increase their ad spending by 30% to 40%. But private hospitals cannot increase their ad spending by 40% forever. Putian’s threat may be a signal that private hospitals would no longer commit to the 30% to 40% ad budget growth.
Baidu shares fell 0.22% to $210.08 in pre-market trading Tuesday.