Baidu Catches a Tax Break


Baidu's (NAS: BIDU) letting the world know why it's a dot-com rock star.

China's leading search engine posted resilient quarterly results tonight. Revenue soared 60% to $858.8 million, comfortably ahead of the $850.8 million the pros were targeting. Net income soared 70% to $436 million -- or $1.24 a share. Analysts were only forecasting a profit of $1.12 a share.

This would seem to indicate a blowout quarter, and the market's initial reaction was to send the shares markedly higher. You don't even need a calculator to realize that $436 million in earnings is slightly more than half of the $858.8 million that it scored as revenue. Yes, net margins topped 50%!

However, the storybook margins begin to come undone on closer scrutiny. Operating profits, after all, only rose 52%. Traffic acquisition costs, R&D expenses, and bandwidth costs all rose faster than revenue.

Why is the bottom line so tasty? Well, it's largely a taxing situation. Baidu's effective tax rate was a mere 7.9% after a reversal of an earlier tax provision that Baidu had booked. China's corporate tax structure is kind to tech, but 7.9% is a far cry from last year's more realistic 14.9% effective tax rate.

This doesn't mean investors need to start worrying about Baidu. The Internet speedster is still growing at a stellar rate. The midpoint of Baidu's fresh revenue guidance for the quarter -- calling for its top line to clock in between $983 million and $1.009 billion -- is heartier than the $988 million that analysts were projecting.

Yes, we could be knee-deep in Baidu's first $1 billion quarter.

Baidu's paid-search platform is also showing no signs of slowing. The average advertising customer is spending 35% more to get noticed on Baidu than a year earlier.

China's been a bit of a minefield lately. Fallen darlings SINA (NAS: SINA) and (NAS: SOHU) are expected to earn far less this year than they did a year earlier on costly growth initiatives. Baidu didn't do itself any favors last week when New Oriental Education (NYS: EDU) took a hit on accounting fraud suggestions, a material victim since Baidu CEO Robin Li has been on its board since 2006.

However, regardless of whether you side with the 52% pop in operating margins or the tax rate-assisted 70% surge in reported earnings, Baidu's still growing a lot faster than global search leader Google (NAS: GOOG) and most Internet companies of its size.

The 60% top-line growth -- and surprisingly robust outlook for the current quarter -- just can't be ignored for a proven Internet leader trading at just 17 times next year's profit targets.

Bullish on Baidu
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