Baidu Announces Fourth Quarter and Full Year 2006 Results

Baidu.com, Inc.

2007-02-15 10:27 2684

2006 Annual Net Income Grows 534% Year-Over-Year

BEIJING, Feb. 14 /PRNewswire-FirstCall/ -- Baidu.com, Inc. (Nasdaq: BIDU),

the leading Chinese language Internet search provider, today announced its

unaudited financial results for the fourth quarter and fiscal year ended

December 31, 2006.(1)

(Logo: http://www.prnasia.com/sa/20061108200349-06.jpg )

Fourth Quarter and Fiscal Year 2006 Highlights

-- Total revenues in the fourth quarter 2006 increased to RMB271.3 million

($34.8 million), representing a 136.1% increase from the corresponding

period in 2005.

-- Total revenues in fiscal year 2006 increased to RMB837.8 million

($107.4 million), representing a 162.5% increase from 2005.

-- Net income in the fourth quarter 2006 increased to RMB122.8 million

($15.7 million), representing a 400.2% increase from the corresponding

period in 2005. Basic and diluted earnings per share ("EPS") for the

fourth quarter 2006 were RMB3.65 ($0.47) and RMB3.54 ($0.45),

respectively; basic and diluted EPS excluding share-based compensation

expenses (non-GAAP) for the fourth quarter of 2006 were RMB3.87 ($0.50)

and RMB3.75 ($0.48), respectively.

-- Net income in fiscal year 2006 increased to RMB301.8 million

($38.7 million), representing a 533.9% increase from 2005. Basic and

diluted EPS for 2006 were RMB9.06 ($1.16) and RMB8.75 ($1.12),

respectively; basic and diluted EPS excluding share-based compensation

expenses and cumulative effect of change in accounting principle (non-

GAAP) for 2006 were RMB10.38 ($1.33) and RMB10.01 ($1.28),

respectively.

-- The number of active online marketing customers during the fourth

quarter grew to over 108,000, an increase of 5.9% from the previous

quarter.

"We are pleased to deliver another quarter of robust results as our

rapidly growing brand recognition and our focus on providing the best user

experience allowed us to strengthen our leading position in Chinese search,"

said Robin Li, Baidu's Chairman and CEO.

Mr. Li added, "User traffic growth was driven by both our existing core

search and community-based products as well as by new products introduced

during the quarter."

Mr. Li noted that Baidu Space and Baidu Knows continued to attract a

rapidly growing base of loyal users, and new products including Baidu Blog

Search and Baidu Favorites have been well received.

"We achieved healthy revenue growth during the fourth quarter as we

continued the transition to our dynamic bidding and intelligent ranking

systems," said Shawn Wang, Baidu's CFO. "During the quarter, we expanded our

direct sales forces in key geographic markets and strengthened our focus on

customer service."

Mr. Wang added, "We are also pleased with the progress we have been making

on our Japanese language search technology. In the quarters ahead we will

continue to make investments in technology, network capacity and physical

infrastructure that position us for long-term growth."

Mr. Wang noted that Baidu continues to explore strategic partnerships with

media and Internet industry leaders which enhance user experience. During the

fourth quarter, the Company formed content partnerships with MTV Networks and

EMI as well as a strategic alliance with Microsoft for paid search services.

Fourth Quarter 2006 Results

Baidu reported total revenues of RMB271.3 million ($34.8 million) for the

fourth quarter ended December 31, 2006, representing a 136.1% increase from

the corresponding period in 2005.

Online marketing revenues for the fourth quarter were RMB269.8 million

($34.6 million), representing a 141.4% increase from the fourth quarter 2005.

The growth was driven by the increases in both the number of active online

marketing customers and revenue per customer. Baidu had more than 108,000

active online marketing customers in the fourth quarter of 2006, representing

a 5.9% increase from the previous quarter. Revenue per online marketing

customer for the fourth quarter increased to RMB2,500 ($320.3), a sequential

increase of 7.3% and an increase of 41.0% from the corresponding period in

2005.

Traffic acquisition cost (TAC) as a component of cost of revenues was

RMB23.6 million ($3.0 million), representing 8.7% of total revenues, compared

to 7.8% in the corresponding period in 2005.

Selling, general and administrative expenses were RMB71.0 million ($9.1

million), representing an increase of 43.8% from the corresponding period in

2005, primarily due to expansion of the direct sales force.

Research and development expenses were RMB20.9 million ($2.7 million),

representing a 46.2% increase from the corresponding period in 2005, primarily

due to headcount increases.

Share-based compensation expenses, which were allocated to related

operating cost and expense line items, decreased in aggregate to RMB7.4

million ($0.9 million) in the fourth quarter of 2006 from RMB10.5 million in

the corresponding period in 2005. The decrease in share-based compensation

expenses primarily reflects reduced options grants during the quarter,

decelerated amortization of existing options granted before 2006 and change in

actual and estimated option forfeiture rate.

Operating profit was RMB101.7 million ($13.0 million), representing a

615.3% increase from the corresponding period in 2005. Operating profit

excluding share-based compensation expenses (non-GAAP) was RMB109.1 million

($14.0 million) for the fourth quarter of 2006, a 342.1% increase from the

corresponding period in 2005.

Income tax benefit was RMB6.0 million ($0.8 million). During the fourth

quarter, one of Baidu's PRC subsidiaries qualified for preferential enterprise

income tax treatment for 2006 and the following two years. As a result, the

income tax benefit in the fourth quarter included a reversal of RMB7.2 million

($0.9 million) that was provided in previous quarters.

Net income was RMB122.8 million ($15.7 million), representing a 400.2%

increase from the corresponding period in 2005. Basic and diluted EPS for the

fourth quarter of 2006 amounted to RMB3.65 ($0.47) and RMB3.54 ($0.45),

respectively.

Net income excluding share-based compensation expenses (non-GAAP) was

RMB130.2 million ($16.7 million), a 271.9% increase from the corresponding

period in 2005. Basic and diluted EPS excluding share-based compensation

expenses (non-GAAP) for the fourth quarter of 2006 were RMB3.87 ($0.50) and

RMB3.75 ($0.48), respectively.

As of December 31, 2006, the Company had cash, cash equivalents and short-

term investments of RMB1.2 billion ($156.5 million). Net operating cash flow

and capital expenditures for the fourth quarter of 2006 were RMB170.8 million

($21.9 million) and RMB22.8 million ($2.9 million), respectively.

Adjusted EBITDA (non-GAAP), which is defined in this announcement as

earnings before interest, taxes, depreciation, amortization, other non-

operating income and share-based compensation expenses, were RMB132.1 million

($16.9 million) for the fourth quarter of 2006, representing a 261.1% increase

from the corresponding period in 2005.

Fiscal Year 2006 Results

Total revenues in 2006 were RMB837.8 million ($107.4 million),

representing a 162.5% increase from 2005.

Online marketing revenues in 2006 were RMB828.5 million ($106.2 million),

representing a 169.5% increase from 2005.

Traffic acquisition costs in 2006 were RMB75.2 million ($9.6 million),

representing 9.0% of total revenues compared to 6.6% in 2005. The increase in

traffic acquisition costs as a percentage of total revenues primarily reflects

an increase in revenue contribution by Baidu Union properties.

Selling, general and administrative expenses in 2006 were RMB250.2 million

($32.1 million), representing an increase of 85.7% from the previous year,

mainly due to expansion of the direct sales force and strengthening of the

distributor network.

Research and development expenses totaled RMB79.2 million ($10.2 million)

in 2006, representing a 79.3% increase from 2005 primarily due to an increase

in research and development staff.

Operating profit in 2006 was RMB262.9 million ($33.7 million), a 633.4%

increase from 2005. Operating profit excluding share-based compensation

expenses (non-GAAP) in 2006 was RMB311.2 million ($39.9 million), representing

a 348.3% increase from 2005.

Net income in 2006 was RMB301.8 million ($38.7 million), representing a

533.9% increase from 2005. Basic and diluted EPS for 2006 amounted to RMB9.06

($1.16) and RMB8.75 ($1.12), respectively.

Net income excluding share-based compensation expenses and cumulative

effect of change in accounting principle (non-GAAP) in 2006 was RMB345.4

million ($44.3 million), reflecting a 325.5% increase from 2005. Basic and

diluted EPS excluding share-based compensation expenses and cumulative effect

of change in accounting principle (non-GAAP) in 2006 were RMB10.38 ($1.33) and

RMB10.01 ($1.28), respectively.

Full year net operating cash flow and capital expenditures were RMB526.1

million ($67.4 million) and RMB127.5 million ($16.3 million), respectively.

Adjusted EBITDA (non-GAAP) in 2006 was RMB381.6 million ($48.9 million) in

2006, representing a 269.7% increase from 2005.

Outlook for First Quarter 2007

Baidu currently expects to generate total revenues in an amount ranging

from RMB265 million ($34 million) to RMB275 million ($35 million) for the

first quarter of 2007, representing a 95% to 103% increase from the

corresponding period in 2006. This forecast reflects Baidu's current and

preliminary view, which is subject to change.

Conference Call Information

Baidu's management will hold an earnings conference call at 8 PM on

February 14, 2007 U.S. Eastern Standard Time (9 AM on February 15, 2007

Beijing/Hong Kong time).

Dial-in details for the conference call are as follows:

US: +1 617 786 2964

UK: +44 207 365 8426

Hong Kong: +852 3002 1672

Passcode for all regions: 18273456

A replay of the conference call may be accessed by phone at the following

number until 10 PM on February 21, 2007 U.S. Eastern Standard Time.

International: +1 617 801 6888

Passcode: 36765439

Additionally, a live and archived webcast of this conference call will be

available at http://ir.baidu.com.

About Baidu

Baidu.com, Inc. is the leading Chinese language Internet search provider.

As a technology-based media company, Baidu aims to provide the best way for

people to find information. In addition to serving individual Internet search

users, Baidu provides an effective platform for businesses to reach potential

customers. Baidu's ADSs, each of which represents one Class A ordinary share,

currently trade on the NASDAQ Global Market under the symbol "BIDU".

Safe Harbor Statement

This announcement contains forward-looking statements. These statements

are made under the "safe harbor" provisions of the U.S. Private Securities

Litigation Reform Act of 1995. These forward-looking statements can be

identified by terminology such as "will," "expects," "anticipates," "future,"

"intends," "plans," "believes," "estimates" and similar statements. Among

other things, the outlook for first quarter 2007 and quotations from

management in this announcement, as well as Baidu's strategic and operational

plans, contain forward-looking statements. Baidu may also make written or oral

forward-looking statements in its periodic reports to the U.S. Securities and

Exchange Commission in its annual report to shareholders, in press releases

and other written materials and in oral statements made by its officers,

directors or employees to third parties. Statements that are not historical

facts, including statements about Baidu's beliefs and expectations, are

forward-looking statements. Forward-looking statements involve inherent risks

and uncertainties. A number of factors could cause actual results to differ

materially from those contained in any forward-looking statement, including

but not limited to the following: our growth strategies; our future business

development, results of operations and financial condition; our ability to

attract and retain users and customers; competition in the Chinese language

Internet search market; competition for online marketing customers; changes in

our revenues and certain cost or expense items as a percentage of our

revenues; the outcome of ongoing, or any future, litigation or arbitration,

including those relating to copyright and other intellectual property rights;

the expected growth of the Chinese language Internet search market and the

number of Internet and broadband users in China; and Chinese governmental

policies relating to the Internet and Internet content providers. Further

information regarding these and other risks is included in our annual report

on Form 20-F and other documents filed with the Securities and Exchange

Commission. Baidu does not undertake any obligation to update any forward-

looking statement, except as required under applicable law. All information

provided in this press release and in the attachments is as of February 14,

2007, and Baidu undertakes no duty to update such information, except as

required under applicable law.

About Non-GAAP Financial Measures

To supplement Baidu's consolidated financial results presented in

accordance with GAAP, Baidu uses the following measures defined as non-GAAP

financial measures by the SEC: adjusted EBITDA, operating profit excluding

share-based compensation expenses, net income excluding share-based

compensation expenses, and basic and diluted EPS excluding share-based

compensation expenses. The presentation of these non-GAAP financial measures

is not intended to be considered in isolation or as a substitute for the

financial information prepared and presented in accordance with GAAP. For more

information on these non-GAAP financial measures, please see the tables

captioned "Reconciliations of non-GAAP results of operations measures to the

nearest comparable GAAP measures" and "Reconciliation from net cash provided

by operating activities to adjusted EBITDA" set forth at the end of this

release.

Baidu believes that these non-GAAP financial measures provide meaningful

supplemental information regarding its performance and liquidity by excluding

certain expenses and expenditures that may not be indicative of its operating

performance from a cash perspective. We believe that both management and

investors benefit from referring to these non-GAAP financial measures in

assessing our performance and when planning and forecasting future periods.

These non-GAAP financial measures also facilitate management's internal

comparisons to Baidu's historical performance and liquidity. Baidu computes

its non-GAAP financial measures using the same consistent method from quarter

to quarter, except that the non-GAAP measures for the quarter ended March 31,

2006 reflected the one-time cumulative effect of change in accounting

principle due to our adoption of SFAS 123(R) since January 1, 2006. We believe

these non-GAAP financial measures are useful to investors in allowing for

greater transparency with respect to supplemental information used by

management in its financial and operational decision making. A limitation of

using non-GAAP operating profit excluding share-based compensation expenses,

net income excluding share-based compensation expenses, and basic and diluted

EPS excluding share-based compensation expenses is that these non-GAAP

measures exclude share-based compensation charge that has been and will

continue to be for the foreseeable future a significant recurring expense in

our business. A limitation of using non-GAAP Adjusted EBITDA is that it does

not include all items that impact our net income for the period. Management

compensates for these limitations by providing specific information regarding

the GAAP amounts excluded from each non-GAAP measure. The accompanying tables

have more details on the reconciliations between GAAP financial measures that

are most directly comparable to non-GAAP financial measures.

(1) This announcement contains translations of certain RMB amounts into

U.S. dollars at specified rates solely for the convenience of the

reader. Unless otherwise noted, all translations from RMB to U.S.

dollars are made at a rate of RMB7.8041 to US$1.00, the effective noon

buying rate as of December 31, 2006 in The City of New York for cable

transfers of RMB as certified for customs purposes by the Federal

Reserve Bank of New York.

Baidu.com, Inc.

Condensed Consolidated Balance Sheets

December 31, September 30, December 31,

(in RMB thousands) 2006 2006 2005

Unaudited Unaudited Audited

ASSETS

Current assets:

Cash, cash equivalents and

short-term investments 1,221,613 1,083,334 900,593

Accounts receivable, net 23,051 25,205 22,353

Prepaid expenses and other

current assets 32,339 49,155 10,957

Deferred tax asset, net 1,734 1,490 1,449

Total current assets 1,278,737 1,159,184 935,352

Non-current assets:

Fixed assets, net 191,734 160,195 96,420

Prepayment for land use

rights 92,400 92,400 77,200

Intangible assets, net 44,386 46,902 13,303

Goodwill 47,316 44,183 9,287

Investments - - 2,018

Deferred tax asset, net 5,802 6,085 2,843

Others 7,702 3,746 -

Total non-current assets 389,340 353,511 201,071

TOTAL ASSETS 1,668,077 1,512,695 1,136,423

LIABILITIES AND SHAREHOLDERS'

EQUITY

Current liabilities:

Accrued expenses and other

liabilities 153,141 131,213 53,137

Customers' deposits 141,185 129,530 70,327

Deferred revenue 2,583 3,874 7,658

Deferred income 4,090 4,090 124

Total current liabilities 300,999 268,707 131,246

Non-current liabilities:

Long-term payable for

acquisition 7,000 7,000 -

Deferred income 2,817 3,839 124

Total non-current liabilities 9,817 10,839 124

Total liabilities 310,816 279,546 131,370

Shareholders' equity

Class A ordinary shares, par value

US$0.00005 per share, 825,000,000

shares authorized and 22,574,381

shares issued and outstanding as

at December 31, 2006 and 9,460,426

shares as at December 31, 2005 9 9 4

Class B Ordinary Shares, par value

US$0.00005 per share, 35,400,000

shares authorized and 11,130,018

shares issued and outstanding as

at December 31, 2006 and

23,485,336 shares as at

December 31, 2005 5 5 10

Additional paid-in capital 1,088,176 1,076,004 1,009,488

Accumulated other

comprehensive loss (33,697) (22,834) (5,451)

Retained earnings 302,768 179,965 1,002

Total shareholders' equity 1,357,261 1,233,149 1,005,053

TOTAL LIABILITIES AND

SHAREHOLDERS' EQUITY 1,668,077 1,512,695 1,136,423

Baidu.com, Inc.

Condensed Consolidated Statements of Income

For the Three Months Ended

(in RMB thousands except for December 31, December 31, September 30,

share, per share information) 2006 2005 2006

Unaudited Unaudited Unaudited

Revenues:

Online marketing services 269,754 111,739 237,625

Others 1,552 3,161 1,706

Total revenues 271,306 114,900 239,331

Operating costs and expenses:

Cost of revenues (note 1, 2) (77,669) (37,022) (68,399)

Selling, general and

administrative (note 2) (70,999) (49,359) (70,184)

Research and

development (note 2) (20,899) (14,296) (24,520)

Total operating costs and

expenses (169,567) (100,677) (163,103)

Operating profit 101,739 14,223 76,228

Other income

Interest income, net 12,016 8,162 11,337

Foreign exchange loss, net - (109) -

Other, net 3,048 125 (286)

Total other income 15,064 8,178 11,051

Income before income taxes and

cumulative effect of change in

accounting principle 116,803 22,401 87,279

Income taxes 6,000 2,148 (2,026)

Cumulative effect of change in

accounting principle

Net income 122,803 24,549 85,253

Earnings per share for Class A

and Class B ordinary shares:

Basic 3.65 0.75 2.54

Diluted 3.54 0.71 2.46

Weighted average aggregate number

of Class A and Class B ordinary

shares outstanding:

Basic 33,666,239 32,945,046 33,500,948

Diluted 34,711,753 34,584,637 34,628,611

Pro forma earnings per share for

Class A and Class B ordinary

shares(2):

Basic 3.65 0.75 2.54

Diluted 3.54 0.71 2.46

Pro forma weighted average

aggregate number of Class A

and Class B ordinary shares

outstanding on an as

converted basis for Class A

and Class B ordinary shares:

Basic 33,666,239 32,945,046 33,500,948

Diluted 34,711,753 34,584,637 34,628,611

(Note 1) Cost of revenues are

detailed as follows:

Business tax and surcharges (16,357) (7,470) (14,891)

Traffic acquisition costs (23,631) (8,943) (21,640)

Bandwidth costs (12,656) (6,728) (10,503)

Depreciation and

amortization costs (16,898) (9,117) (14,053)

Operational costs (7,931) (4,594) (6,723)

Share-based

compensation expenses (196) (170) (589)

Total cost of revenues (77,669) (37,022) (68,399)

(Note 2) Includes share-based

compensation expenses are

allocated as follows:

Cost of revenues (196) (170) (589)

Selling, general and

administrative (6,166) (6,981) (10,014)

Research and development (992) (3,302) (5,779)

Total share-based

compensation expenses (7,354) (10,453) (16,382)

Twelve Months Ended

December 31, December 31,

2006 2005

Unaudited Audited

Revenues:

Online marketing services 828,484 307,363

Others 9,354 11,852

Total revenues 837,838 319,215

Operating costs and expenses:

Cost of revenues (note 1, 2) (245,489) (104,401)

Selling, general and

administrative (note 2) (250,240) (134,771)

Research and

development (note 2) (79,231) (44,200)

Total operating costs and

expenses (574,960) (283,372)

Operating profit 262,878 35,843

Other income

Interest income, net 42,443 13,580

Foreign exchange loss, net (89) (659)

Other, net 4,187 752

Total other income 46,541 13,673

Income before income taxes and

cumulative effect of change in

accounting principle 309,419 49,516

Income taxes (12,256) (1,911)

Cumulative effect of change in

accounting principle 4,603

Net income 301,766 47,605

Earnings per share for Class A

and Class B ordinary shares:

Basic 9.06 2.40

Diluted 8.75 1.49

Weighted average aggregate

number of Class A and Class B

ordinary shares outstanding:

Basic 33,290,696 19,808,058

Diluted 34,506,594 32,043,888

Pro forma earnings per share

for Class A and Class B

ordinary shares(2):

Basic 9.06 1.58

Diluted 8.75 1.49

Pro forma weighted average

aggregate number of Class A

and Class B ordinary shares

outstanding on an as converted

basis for Class A and Class B

ordinary shares:

Basic 33,290,696 30,213,606

Diluted 34,506,594 32,043,888

(Note 1) Cost of revenues are

detailed as follows:

Business tax and surcharges (51,833) (20,770)

Traffic acquisition costs (75,180) (21,212)

Bandwidth costs (40,005) (21,274)

Depreciation and

amortization costs (53,491) (25,259)

Operational costs (23,564) (14,912)

Share-based compensation

expenses (1,416) (974)

Total cost of revenues (245,489) (104,401)

(Note 2) Includes share-based

compensation expenses are

allocated as follows:

Cost of revenues (1,416) (974)

Selling, general and

administrative (32,970) (22,804)

Research and

development (13,894) (9,793)

Total share-based

compensation expenses (48,280) (33,571)

(2) Pro forma basic and diluted earnings per share are computed by

dividing net income by weighted average number of ordinary shares

outstanding for the period plus the number of ordinary shares

resulting from the assumed conversion of all the outstanding

redeemable convertible preferred share upon closing of the initial

public offering as if the conversion had occurred at the beginning of

the period, or when the preferred shares were issued, if later.

Reconciliations of non-GAAP results of operations measures to the nearest

comparable GAAP measures (*) (in RMB thousands, unaudited)

Three months ended December 31, 2005