Baidu.com 4Q07 Earnings Preview

8/15/2019 Baidu.com 4Q07 Earnings Preview

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NASDAQ: BIDUPRICE: $115.00RATING: BUY

BIDU: PROVEN SCALABLE BUSINESS MODEL DESPITE SOFT Q1GUIDANCE

Stock Data Revenues

12-Month Price Target $130.00 FY ends December 2006A 2007E 2008E

52-Week Range $134.10 - 46.00 Revenue (MM) $105.9 $204.8 $331.0

10-Day Avg. Daily Volume 1,780,306 Previous Estimate (MM) - $211.0 $349.3Price/Revenue 37.7x 19.5x 19.5x

EV/Revenue 36.2x 18.7x 18.7x

Secular Growth Rate 50%

Capitalization Earnings Per Share*

Shares Outstanding (MM) 34.7 Q1 $0.16 $0.40 NE

Market Capitalization (MM) $3,991.9 Q2 $0.25 $0.48 NE

Enterprise Value (MM) $3,835.3 Q3 $0.37 $0.58 NE

Debt/Total Cap. (12/31/06) 0.0% Q4 $0.48 $0.65 NE

Cash (12/31/06) (MM) $156.5 Fiscal Year EPS $1.27 $2.11 $3.17

Cash/Share (12/31/06) $4.51 Previous Estimate - $2.00 $3.15

P/E 90.7x 54.4x 36.3x

*Earnings Per Share are calculated as diluted EPS excluding FAS 123R

NC indicates no change from current estimate. NE indicates no estimate. NM indicates not meaningful.Sources: WR Hambrecht + Co estimates and company reports

February 15, 2007

CHINA INTERNET ANDTECHNOLOGY

James [email protected]

Xiaofan [email protected]

WR HAMBRECHT + COwww.wrhambrecht.com

Please see theImportant DisclosuresSection at the end of this report.

Investment Conclusion: The company reported solid Q4 results, hitting the high-end of revenueguidance. EPS exceeded consensus by a wide margin, demonstrating the scalability of the paid search model. However, Q1:07 revenue guidance came in light, as management cited seasonality (weakest quarter of the year) and a late Chinese New Year (mid-February vs. late January) for aflattish Q1:07. We feel Q1:07 expectations are very achievable given the higher revenue visibility heading into the quarter (52% vs. 47%). In addition, we believe the main drivers of the businessremain intact for 2007. Finally, Baidu’s business has demonstrated significant operating leverage,which could continue providing EPS upside in 2007. With that in mind, we reiterate our Buy rating on Baidu shares despite soft Q1 guidance.

Key Points:

• Q4 at High-end of Guidance. Revenues came in at the high-end of the $34-35Mguidance, driven by a 9% Q/Q in average customer growth and 5% Q/Q in ASP. EPSoutperformed our estimate by ~30% (normalizing the one-time tax benefit) due to strongscalability in the paid search model. During Q4:06, Baidu continued to make significantprogress in key areas:

o On the product front, the company launched Baidu Favorites (online bookmarking)and Video Search, which served as nice complements to Baidu Postbar, Baidu Knows,and Baidu Space. These localized products, which were tailor-made for ChineseInternet users, have clearly differentiated Baidu from major competitor Google China,and enhanced user experience and loyalty.

o On the distribution front, the company became the provider of text-based ads oneBay China, MSN China, and China Telecom’s portal, which are three of the most

heavily trafficked Chinese websites.o On the content front, the company signed distribution agreements with MTV Networks

and EMI Music to monetize copyrighted music content through advertising-supporteddownload services. These content agreements indicate to us that Baidu has madeprogress in solving copyright issues related to its popular MP3 service.

o On the market front, the company has entered the Japanese market, which has beenthe first stop of overseas expansion for many Chinese technology companies. Webelieve the cultural and linguistic similarities between China and Japan, and the moredeveloped online advertising market environment in Japan, are the key positive factorssupporting Baidu’s Japanese initiative. The company plans to spend $15M in 2007 for this initiative.



Page 2 – February 15, 2007

• Q1 Revenue Guidance Light. Q1 revenue guidance came in light compared with theconsensus ($34.5M vs. $38.4M). Management attributed seasonality (weakest quarter of the year) and a late Chinese new year (mid-February vs. late January) as major factors for a flattish quarter. However, CEO Robin Li cited that the company has seen somecustomers starting to come back to the Baidu platform after being inactive or using other search engines. Revenue visibility heading into Q1 is good, as 52% of the revenueexpectations are already booked by customers (see Exhibit 1).

• Promising Opportunities Going Forward. The company has recently received a licenseto offer news content, and plans on entering into the news portal business, similar to thatof Sina (SINA: Buy) and Sohu (SOHU: Buy) (and has been recruiting news editorial staff).This may possibly open up more inventory for its expanding banner ad programs. As areminder, news/info is one of the most potentially profitable contents on the web and ittypically appears on the home page of major websites like Sina and Sohu. Based on our estimate, the news/home page site contributed ~30% to 40% of revenues for the twolargest portals in China. Given Baidu’s, sizable traffic, we believe the company canpotentially add more than 25% to its revenue base if the search engine achieves the scaleof the major portal players. Separately, the company is already having early success inselling banner ads in its MP3 and Movie channels.

• Estimate Changes. We are lowering our Q1:07 revenue estimate to $34.9M from $41.1Mor down 15%. However, we are increasing our EPS estimate to $0.40 from $0.38 due tobetter-than-expected operating leverage. We are lowering our 2007 revenues modestlyfrom $211M to $205M, but increasing our EPS estimate by 5% to $2.11. Our estimatesreflect investments in infrastructure and Japan.

• We Like the Stock in the Long-term. Despite soft Q1 guidance, we believe the long-termdrivers remain intact, as we expect catalysts such as new banner programs for brandadvertisers, new inventory in MP3, Movie and News channels, and new affiliaterelationships with major portals and vertical sites will drive growth in the remainder of 2007.We remain convinced that Baidu is a core holding in the China Universe, with an expectedEPS growth rate of ~60% from 2006 to 2008E. Our PT remains $130, representing 40x2008E EPS (ex-option expenses) plus cash.

EXHIBIT 1: BAIDU.COM’S REVENUE VISIBILITY

1Q06 2Q06 3Q06 4Q06 1Q07E

BOP deposits 8.7 11.0 14.3 16.4 18.1

/Paid search revenues 16.5 23.6 30.1 34.6 34.7

= Revenue visibility 53% 46% 48% 47% 52%

Source: Company reports and WR Hambrecht + Co estimates

EXHIBIT 2: BAIDU.COM FINANCIALS – ACTUAL VS. WRH+CO ESTIMATES

Baidu 4Q06A 4Q06E Delta

4Q06 (In $mils)

Revenue 34.8 35.2 -1.2%Operating Incme 14.0 11.4 22.2%

EPS (ex-FAS123R) $0.48 $0.33 43.6%

Gross Margin 71% 69% 240 bps

Operating margin 40% 33% 770 bps





EXHIBIT 3: BAIDU.COM - FINANCIAL MODEL

Baidu.com, Inc. 2005 1Q06 2Q06 3Q06 4Q06 2006 1Q07E 2Q07E 3Q07E 4Q07E 2007E 2008E

Onl ine marketing services 35.3 16.5 23.6 30.1 34.6 104.8 34.7 43.6 57.9 67.8 204.0 330.3

Others 1.4 0.4 0.3 0.2 0.2 1.2 0.2 0.2 0.2 0.2 0.8 0.7

Net revenues 36.6 16.9 24.0 30.3 34.8 105.9 34.9 43.8 58.1 68.0 204.8 331.0

Cost of revenues 10.1 5.3 7.0 8.6 9.9 30.8 10.3 13.1 18.0 21.1 62.5 102.6

Gross Profit 26.5 11.6 16.9 21.7 24.8 75.1 24.6 30.6 40.1 46.9 142.3 228.4

Selling, general and administ rative 13.7 5.1 6.4 7.6 8.3 27.4 8.6 10.5 13.9 17.0 50.0 79.4

Research and development 4.2 1.5 1.8 2.4 2.6 8.3 2.8 3.5 4.9 5.8 17.0 26.5

Operating income 8.5 5.0 8.7 11.7 14.0 39.4 13.3 16.6 21.2 24.1 75.3 122.5

Interest income (expenses) 1.7 1.1 1.3 1.4 1.5 5.4 1.6 1.7 1.8 1.9 7.0 8.0

Other income (expenses) 0.0 0.1 0.1 (0.0) 0.4 0.5 0.0 0.0 0.0 0.0 0.0 0.0

EBT 10.2 6.1 10.1 13.1 15.9 45.3 14.9 18.3 23.0 26.0 82.3 130.5

Provision for income taxes 0.2 0.7 1.3 0.3 (0.8) 1.5 0.9 1.5 2.1 2.6 7.0 14.3

Di luted net income excluding FAS 123R 10.0 5.4 8.8 12.9 16.7 43.7 14.0 16.9 20.9 23.4 75.2 116.1

Share-based compensation 4.1 1.6 1.5 2.1 0.9 6.1 2.2 2.2 2.2 2.2 8.6 10.0

Cumulati ve effect of change in accounting 0.0 0.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0GAAP net income 5.9 4.4 7.3 10.8 15.7 37.7 11.8 14.7 18.8 21.3 66.6 106.1

Diluted shares outstanding 32.0 34.5 34.6 34.6 34.7 34.5 35.0 35.4 35.8 36.2 35.6 36.6

Di luted EPS excluding FAS 123R $0.31 $0.16 $0.25 $0.37 $0.48 $1.27 $0.40 $0.48 $0.58 $0.65 $2.11 $3.17

GAAP EPS $0.18 $0.13 $0.21 $0.31 $0.45 $1.09 $0.34 $0.42 $0.52 $0.59 $1.87 $2.90

Tax rate 2% 12% 13% 2% -5% 3% 6% 8% 9% 10% 9% 11%

Margin Analysis

Gross margin 72% 69% 71% 72% 71% 71% 71% 70% 69% 69% 69% 69%

EBITDA margin 15% 22% 30% 33% 34% 31% 33% 32% 31% 30% 31% 32%

Operating margin 23% 29% 36% 39% 40% 37% 38% 38% 37% 36% 37% 37%

Net margin 27% 32% 37% 42% 48% 41% 40% 39% 36% 34% 37% 35%

Common size

Onl ine marketing services 96% 97% 99% 99% 99% 99% 99% 100% 100% 100% 100% 100%

Others 4% 3% 1% 1% 1% 1% 1% 0% 0% 0% 0% 0%Total revenues 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Cost of revenues 28% 3 1% 29% 28% 29% 29% 30% 30% 31% 31% 31% 31%

Gross Margin 72% 69% 71% 72% 71% 71% 71% 70% 69% 69% 69% 69%

Selling, general and administrat ive 38% 30% 27% 25% 24% 26% 25% 24% 24% 25% 24% 24%

Research and development 12% 9% 8% 8% 7% 8% 8% 8% 9% 9% 8% 8%

Operating Income 23% 29% 36% 39% 40% 37% 38% 38% 37% 36% 37% 37%

YoY Growth

Online marketing services 189% 240% 214% 203% 167% 197% 111% 84% 93% 96% 95% 62%

Others 12% 47% -5% -39% -46% -13% -54% -38% -7% 1% -32% -13%

Net revenues 173% 228% 204% 194% 161% 189% 107% 83% 92% 96% 93% 62%

Operating income 156% 362% 298% 435% 357% 363% 168% 91% 81% 73% 91% 63%

GAAP EPS 255% 1159% 343% 876% 415% 496% 165% 97% 69% 30% 71% 55%

Di luted EPS excluding FAS 123R 155% 349% 252% 412% 283% 306% 154% 88% 58% 35% 67% 50%

Balance Sheet ItemsCash & cash equivalents 113.1 121.7 133.2 137.1 156.5 156.5 6.8 12.3 18.1 23.9 180.4 246.9

Long-term debt & capital leases 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net debt (113.1) (121.7) (133.2) (137.1) (156.5) (156.5) (6.8) (12.3) (18.1) (23.9) (180.4) (246.9)

Equity 125.7 131.6 140.4 153.2 173.9 173.9 187.9 204.8 225.7 249.1 249.1 365.2





EXHIBIT 4: BAIDU.COM - COMPARABLE COMPANY ANALYSIS

China Internet & Technology Comp Sheet (In $Mils except per share)

Segment

Company BIDU SINA SOHU FMCN TOMO KONG LTON HRAY NTES SNDA NCTY JOBS CTRP LONG GSOL

Rating Buy Buy Buy Buy Sell Sell Hold Hold NR NR NR NR NR NR NR

Price Target $130 $43 $28 $85 $11 $7 - - - - - - - - -

Price 115.00 36.10 24.48 79.62 13.01 7.94 4.20 5.37 19.61 24.07 39.18 17.78 61.82 12.50 17.92

Shares (F/D) 34.7 58.8 38.8 54.6 53.2 35.7 25.8 21.7 139.4 72.4 24.6 28.2 33.4 26.9 38.5

Market Cap 3,992 2,122 949 4,351 693 283 108 117 2,734 1,742 964 502 2,063 337 690

Net Debt (157) (263) (69.9) (127.0) (135.6) (118.6) (46.9) (73.4) (377.3) (128.0) (96.4) (104.5) (96.1) (142.2) (145.4)

Enterprise Value 3,835 1,859 879.4 4,224.4 560.3 164.6 61.4 46.5 2,356.7 1,616.8 868.1 397.1 1,967.3 194.6 552.2

Net Cash per Share 4.51 4.47 1.80 2.32 2.55 3.33 1.82 3.38 2.71 1.77 3.92 3.70 2.88 5.28 3.78

Estimates

Revenue 2006 105.9 212.9 660.2 214.0 173.0 103.7 79.8 70.5 272.7 207.5 123.5 91.4 98.5 35.7 154.4

Revenue 2007 204.8 248.3 153.3 336.8 158.4 92.3 74.2 77.6 296.7 263.8 177.8 105.9 140.5 47.3 184.4

Revenue 2008 331.0 345.7 204.6 485.8 186.4 106.2 85.3 89.6 383.4 314.8 243.9 130.1 187.4 69.9 204.0

Growth '06-'08 77% 27% -44% 51% 4% 1% 3% 13% 19% 23% 41% 19% 38% 40% 15%

EBITDA 2006 32.6 56.1 39.0 108.3 39.1 24.6 10.0 7.1 170.8 60.3 50.0 21.5 35.4 0.0 23.6

EBITDA 2007 63.1 70.0 45.9 173.1 30.6 16.4 9.6 8.1 174.7 96.4 68.1 26.1 51.6 7.5 36.9

EBITDA 2008 105.9 93.5 66.2 261.6 37.4 19.3 11.3 9.9 196.8 114.9 91.3 34.8 75.9 19.0 NA

Growth '06-'08 80% 29% 30% 55% -2% -11% 6% 18% 7% 38% 35% 27% 46% NM NA

EPS 2006 1.27 0.84 0.83 1.86 0.66 0.72 0.32 0.24 1.12 0.77 1.42 0.47 0.93 0.07 0.53

EPS 2007 2.11 1.00 0.97 2.75 0.45 0.44 0.27 0.28 1.09 0.96 1.84 0.59 1.27 0.24 0.70

EPS 2008 3.17 1.38 1.35 3.70 0.55 0.49 0.32 0.35 1.29 1.10 2.69 0.83 1.91 0.61 0.98

Growth '06-'08 58% 28% 27% 41% -9% -17% 0% 19% 7% 19% 38% 33% 43% 195% 37%

Operating Margin

2006 37% 21% 5% 42% 19% 19% 10% 5% 58% 21% 26% 19% 34% -5% 12%

2007 37% 22% 25% 44% 15% 11% 10% 6% 55% 28% 26% 21% 35% 9% 16%

2008 37% 23% 27% 48% 16% 11% 11% 7% 50% 29% 26% 24% 39% 24% 19%

Valuation

EV/Sales 2006 36.2 8.7 1.3 19.7 3.2 1.6 0.8 0.7 8.6 7.8 7.0 4.3 20.0 5.4 3.6

EV/Sales 2007 18.7 7.5 5.7 12.5 3.5 1.8 0.8 0.6 7.9 6.1 4.9 3.7 14.0 4.1 3.0

EV/Sales 2008 11.6 5.4 4.3 8.7 3.0 1.6 0.7 0.5 6.1 5.1 3.6 3.1 10.5 2.8 2.7

EV/EBITDA 2006 117.7 33.1 22.5 39.0 14.3 6.7 6.1 6.6 13.8 26.8 17.4 18.5 55.6 NM 23.4

EV/EBITDA 2007 60.7 26.6 19.2 24.4 18.3 10.0 6.4 5.7 13.5 16.8 12.7 15.2 38.1 26.0 15.0

EV/EBITDA 2008 36.2 19.9 13.3 16.1 15.0 8.5 5.4 4.7 12.0 14.1 9.5 11.4 25.9 10.2 NA

P/E 2006 90.7 42.8 29.3 42.9 19.7 11.1 13.0 22.0 17.4 31.1 27.6 38.0 66.7 178.6 34.1

P/E 2007 54.4 36.2 25.3 28.9 29.2 17.9 15.7 19.4 18.0 25.2 21.3 30.4 48.7 51.5 25.6

P/E 2008 36.3 26.1 18.2 21.5 23.8 16.1 12.9 15.5 15.3 21.9 14.6 21.4 32.4 20.5 18.3

Cash-adj.P/E 2006 87.2 37.5 27.2 41.6 15.9 6.5 7.4 8.8 15.0 28.9 24.8 30.1 63.6 103.2 27.3

Cash-adj.P/E 2007 52.3 31.7 23.4 28.1 23.6 10.4 8.9 7.7 15.5 23.4 19.1 24.0 46.5 29.8 20.5

Cash-adj.P/E 2008 34.8 22.9 16.8 20.9 19.3 9.3 7.3 6.2 13.2 20.3 13.1 16.9 30.9 11.8 14.6

Search/Portal/New Media Mobile Content Online Gaming e-Commerce

Source: Company reports, First Call, and WR Hambrecht + Co estimates




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MARKET MAKING AND INVESTMENT BANKING DISCLOSURES

At the time this report was published, WR Hambrecht + Co made a market in the securities of Baidu (BIDU),Focus Media Holding Ltd. (FMCN), Google (GOOG), Sina Corporation (SINA), Sohu.com, Inc. (SOHU), andYahoo!, Inc. (YHOO).

STOCK RATING SYSTEM

The WR Hambrecht + Co stock ratings system reflects the investment decisions our clients face every day, andis meant to assist clients in making these decisions by recommending a specific action to take with each stockwe cover. All of the ratings correspond to a specific investment action that we recommend taking on the datethe research is published. Thus, "Buy" ratings are reserved only for stocks that we would be actively buying atthe time the research is published. "Hold" ratings are reserved for stocks that we recommend holding. "Sell"ratings are assigned to stocks where the analyst anticipates stock price declines for any reason. None of our ratings are qualitative in nature (e.g., "Strong Buy") because these recommendations do not correspond to aninvestment action (investors cannot "Strong Buy" a stock). Please note also that the price expectations thatdetermine the rating are in absolute dollar terms, not in terms of relative performance to a sector or an index.Therefore, analysts will not use the Buy rating for stocks that are expected to perform well relative to their sector but only for stocks that are expected to appreciate in actual dollar returns.

WR Hambrecht + Co uses the following rating system (last updated January 9, 2007):

RatingDefinition

% of companiesunder coveragewith this rating

% for whichInvestment

Banking serviceshave been

provided in theprevious twelve

months

BUY

Stocks rated Buy are those werecommend actively buying; these stocksare expected in absolute dollar terms toappreciate at least 10% over the next 6months.

59 11

HOLD

Stocks rated Hold are those stocks wewould continue to hold in our portfolio;these stocks are expected to appreciate or depreciate in absolute dollar terms lessthan 10% over the next 6 months.

37 7

SELL

Stocks rated Sell are those we would beactively selling; these stocks are expectedto depreciate in absolute dollar terms atleast 10% over the next 6 months.

4 0

PRICE TARGET RISKS

Investment risks associated with the achievement of the price target include, but are not limited to, thecompany's f ailure to achieve our earnings and revenue estimates, unforeseen macroeconomic and/or industry

events that adversely impact demand for the company's products or services, product obsolescence, changesin investor sentiment regarding the specific company or industry, intense and rapidly changing competitivepressures, the continuing development of industry standards, the company's ability to recruit and retaincompetent personnel, and adverse market conditions. For a complete discussion of the risk factors that couldaffect the market price of the company’s shares, refer to the most recent form 10-Q or 10-K that the companyhas filed with the SEC.




VALUATION METHODS TO DETERMINE PRICE TARGET

Our Baidu.com, Inc. (BIDU) price target of $130 is based on 40x our 2008 EPS estimate (ex-option expenses)plus cash.

OBTAINING CURRENT DISCLOSURES

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1 (877) 828-5200

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IMPORTANT NOTE

The information contained herein about the companies under research coverage is based on sources believedto be reliable but is neither all-inclusive nor guaranteed by WR Hambrecht + Co, LLC (“WRH+Co”). Theinformation contained herein relative to WRH+Co's and the analyst's involvement with the issuer is accurate.Any opinions expressed in this report reflect our judgment at this time, are subject to change without notice, andmay differ or be contrary to opinions expressed by other business areas or groups of WRH+Co as a result of using different assumptions and criteria. WRH+Co does not undertake to advise you of changes in its opinion or information. Most of the companies WRH+Co follows are emerging growth companies whose securities typicallyinvolve a higher degree of risk and more volatility than the securities of more established companies. The

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Baidu.com 4Q07 Earnings Preview