Baidu Announces Second Quarter 2008 Results

BEIJING, July 24 /Xinhua-PRNewswire/ -- Baidu.com, Inc. (Nasdaq: BIDU), the leading Chinese language Internet search provider, today announced its unaudited financial results for the second quarter ended June 30, 2008. (1)

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(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 RMB 6.8591 to USD 1.00, the effective noon buying rate as of June 30, 2008 in The City of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York.

Second Quarter 2008 Highlights

-- Total revenues in the second quarter of 2008 increased to RMB802.6 million (US$117.0 million), representing a 100.0 % increase from the corresponding period in 2007.

-- Operating profit in the second quarter of 2008 increased to RMB276.3 million (US$40.3 million), representing a 114.3 % increase from the corresponding period in 2007.

-- Net income in the second quarter of 2008 increased to RMB265.0 million (US$38.6 million), representing an 86.7 % increase from the corresponding period in 2007.

-- Diluted earnings per share (“EPS”) for the second quarter of 2008 were RMB7.62 (US$1.11); diluted EPS excluding share-based compensation expenses (non-GAAP) for the second quarter of 2008 were RMB8.46 (US$1.23). Costs and expenses related to Baidu’s Japan operations, incurred in both Japan and China, in the second quarter of 2008 were RMB29.5 million (US$4.3 million), which reduced diluted EPS by RMB0.85 (US$0.12).

-- The number of active online marketing customers during the second quarter grew to over 181,000, an increase of 12.4 % from the previous quarter.

“This quarter saw impressive growth for Baidu,” said Robin Li, Baidu’s chairman and chief executive officer. “Our ability to make such progress was due to the appreciation of paid search by our loyal small and medium sized enterprise customers as well as a growing appreciation of search engine marketing by large enterprises in China. The scalability of our business, aided by increasing numbers of large enterprise customers, helped Baidu post record results this quarter, despite some impact from the devastating earthquake this past May.”

Jennifer Li, Baidu’s chief financial officer, said, “In the second quarter of 2008, we were able to produce steady increases in both the number of active online marketing customers and revenues per active online marketing customer. We are also pleased to report that our operating margin improved from previous quarters reflecting the scalability of our search business.”

In order to better serve customers’ needs, Baidu recently launched “My Marketing Center”, which is a customized platform integrating industry information, market trends and business and industry news and reports to aid existing customers in their sales and marketing efforts. The platform combines Baidu’s vast resources in online information search and aggregation to help customers make better use of search marketing tools to improve customer targeting, increase sales and enhance brand impact. From the inception of the company, Baidu’s objective has been to provide the best way for people to find information, My Marketing Center tailors this objective to serve the Chinese enterprises that participate in China’s vast and dynamic online business community.

Second Quarter 2008 Results

Baidu reported total revenues of RMB802.6 million (US$117.0 million) for the second quarter ended June 30, 2008, representing a 100.0 % increase from the corresponding period in 2007.

Online marketing revenues for the second quarter were RMB802.2 million (US$117.0 million), representing a 100.2 % increase from the second quarter of 2007. Growth was mainly driven by increases in both the number of active online marketing customers and revenue per customer. Baidu had more than 181,000 active online marketing customers in the second quarter of 2008, representing a sequential increase of 12.4% and an increase of 41.4% from the corresponding period in 2007. Revenue per active online marketing customer for the second quarter increased to approximately RMB4,400 (US$641), a sequential increase of 22.2% and an increase of 41.9% from the corresponding period in 2007.

Traffic acquisition costs (TAC) as a component of cost of revenues were RMB101.7 million (US$14.8 million), representing 12.7% of total revenues, compared to 11.2 % in the corresponding period in 2007. The increase in TAC as a percentage of total revenues primarily reflects the continued growth of revenue contribution from Baidu Union members.

Bandwidth costs as a component of cost of revenues were RMB43.0 million (US$6.3 million), representing 5.4% of total revenues, compared to 7.1% in the corresponding period in 2007. Depreciation costs as a component of cost of revenues were RMB57.8 million (US$8.4 million), representing 7.2% of total revenues, compared to 8.5% in the corresponding period in 2007.

Selling, general and administrative expenses were RMB174.2 million (US$25.4 million), representing an increase of 85.9% from the corresponding period in 2007, primarily due to expansion of the direct sales force and an increase in customer service staff.

Research and development expenses were RMB71.1 million (US$10.4 million), representing a 123.7 % increase from the corresponding period in 2007, primarily due to an increase in research and development staff.

Share-based compensation expenses, which were allocated to related operating cost and expense line items, increased in aggregate by 229.9% to RMB29.3 million (US$4.3 million) in the second quarter of 2008 from RMB8.9 million in the corresponding period in 2007. The increase in share-based compensation reflects a change in estimated forfeiture rate and increased grants to employees.

Operating profit was RMB276.3 million (US$40.3 million), representing a 114.3% increase from the corresponding period in 2007. Operating profit excluding share-based compensation expenses (non-GAAP) was RMB305.6 million (US$44.6 million) for the second quarter of 2008, a 121.7% increase from the corresponding period in 2007.

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 RMB376.8 million (US$54.9 million) for the second quarter of 2008, representing a 110.0 % increase from the corresponding period in 2007.

Income tax expense was RMB28.6 million (US$4.2 million), compared to an income tax expense of RMB1.8 million in the second quarter of 2007. The increase in tax expenses over last year is due to higher tax rates applicable to some PRC-based subsidiaries as their tax holidays either expired or partially elapsed.

Net income was RMB265.0 million (US$38.6 million), representing an 86.7% increase from the corresponding period in 2007. Basic and diluted EPS for the second quarter of 2008 amounted to RMB7.74 (US$1.13) and RMB7.62 (US$1.11), respectively.

Net income excluding share-based compensation expenses (non-GAAP) was RMB294.3 million (US$42.9 million), a 95.2% increase from the corresponding period in 2007. Basic and diluted EPS excluding share-based compensation expenses (non-GAAP) for the second quarter of 2008 were RMB8.60 (US$1.25) and RMB8.46 (US$1.23), respectively.

As of June 30, 2008, Baidu’s cash, cash equivalents and short-term investments amounted to RMB 1.9 billion (US$280.3 million). Net operating cash inflow and capital expenditures for the second quarter of 2008 were RMB403.4 million (US$58.8 million) and RMB112.9 million (US$16.5 million), respectively. A portion of capital expenditure was associated with the construction of Baidu’s new campus facility.

Outlook for Third Quarter 2008

Baidu currently expects to generate total revenues in an amount ranging from RMB905 million (US$132 million) to RMB935 million (US$136 million) for the third quarter of 2008, representing a 82 % to 88 % increase from the corresponding period in 2007 and a 13 % to 16% increase from the second quarter of 2008. This reflects our anticipation of temporarily altered user behavior during the Beijing Summer Olympic Games. We believe the event will have long term beneficial effect on the internet industry as more and more people will appreciate the Internet as an effective tool to find information. This third quarter 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 on July 23, 2008 at 8:00 PM U.S. Eastern Standard Time (8:00 AM, July 24, Beijing/Hong Kong time).

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

US: +1 617.786.2963

UK: +44.207.365.8426

Hong Kong: +852.3002.1672

Passcode for all regions: 14473564

A replay of the conference call may be accessed by phone at the following number until 07/30/2008:

International: +1 617.801.6888

Passcode: 63806335

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 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 Select 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 the third quarter of 2008 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 and Japanese language Internet search markets; 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 and Japanese language Internet search markets 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 July 24, 2008, 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.

Baidu.com, Inc.

Condensed Consolidated Balance Sheets

June 30 December 31,

(in RMB thousands) 2008 2007

Unaudited Audited

ASSETS

Current assets:

Cash and cash equivalents 1,791,003 1,350,600

Short-term investments 131,823 242,037

Accounts receivable, net 82,336 64,274

Prepaid expenses and other current

assets 79,973 65,996

Deferred tax assets, net 2,587 2,587

Total current assets 2,087,722 1,725,494

Non-current assets:

Fixed assets, net 760,483 678,886

Land use right, net 95,496 96,472

Intangible assets, net 36,370 40,460

Goodwill 51,083 51,093

Investments, net 25,831 15,439

Deferred tax assets, net 24,537 15,716

Other non-current assets 75,666 32,348

Total non-current assets 1,069,466 930,414

TOTAL ASSETS 3,157,188 2,655,908

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accrued expenses and other

liabilities 372,050 359,310

Customers’ deposits 309,887 257,577

Deferred revenue 18,883 11,832

Deferred income 1,054 2,485

Total current liabilities 701,874 631,204

Non-current liabilities:

Long-term payable -- 3,000

Deferred income -- 332

Total non-current liabilities -- 3,332

Total liabilities 701,874 634,536

Shareholders’ equity

Class A Ordinary Shares, Par value

US$0.00005 per share, 825,000,000

shares authorized, and 25,136,147

shares and 25,363,476 shares issued

and outstanding as of December 31,

2007 and June 30, 2008 11 10

Class B Ordinary Shares, Par value

US$0.00005 per share, 35,400,000

shares authorized, and 8,996,842

shares and 8,876,881 shares issued

and outstanding as of December 31,

2007 and June 30, 2008 4 4

Additional paid-in capital 1,233,773 1,171,575

Accumulated other comprehensive loss (121,793) (81,953)

Retained earnings 1,343,319 931,736

Total shareholders’ equity 2,455,314 2,021,372

TOTAL LIABILITIES AND SHAREHOLDERS’

EQUITY 3,157,188 2,655,908

Baidu.com, Inc.

Condensed Consolidated Statements of Income

For the Three Months Ended

(in RMB thousands except for share, June 30, June 30, March 31,

per share information) 2008 2007 2008

Unaudited Unaudited Unaudited

Revenues:

Online marketing services 802,183 400,647 572,710

Other services 428 606 1,686

Total revenues 802,611 401,253 574,396

Operating costs and expenses:

Cost of revenues (note 1, 2) (280,980) (146,795) (228,592)

Selling, general and administrative

(note 2) (174,213) (93,728) (147,031)

Research and development (note 2) (71,078) (31,770) (51,406)

Total operating costs and expenses (526,271) (272,293) (427,029)

Operating profit 276,340 128,960 147,367

Other income:

Interest income 10,378 11,574 10,604

Exchange loss, net (204) 18 (1,708)

Other income, net 7,032 3,186 1,194

Total other income 17,206 14,778 10,090

Income before income taxes 293,546 143,738 157,457

Income taxes (28,561) (1,839) (10,859)

Net income 264,985 141,899 146,598

Earnings per share for Class A and

Class B ordinary shares:

Basic 7.74 4.19 4.29

Diluted 7.62 4.09 4.22

Weighted average aggregate number of

Class A and Class B ordinary shares

outstanding:

Basic 34,217,081 33,877,358 34,154,776

Diluted 34,786,342 34,709,957 34,765,164

(1) Cost of revenues are detailed as

follows:

Business tax and surcharges (49,511) (24,857) (35,071)

Traffic acquisition costs (101,693) (44,892) (76,632)

Bandwidth costs (43,012) (28,320) (38,365)

Depreciation costs (57,790) (33,941) (53,194)

Operational costs (27,795) (14,433) (24,415)

Share-based compensation expenses (1,179) (352) (915)

Total cost of revenues (280,980) (146,795) (228,592)

(2) Includes share-based compensation

expenses as follows:

Cost of revenues (1,179) (352) (915)

Selling, general and administrative (16,484) (3,442) (8,014)

Research and development (11,618) (5,083) (7,252)

Total share-based compensation

expenses (29,281) (8,877) (16,181)

Reconciliations of non-GAAP results of operations measures to the nearest comparable GAAP measures (*) (in RMB thousands, unaudited)

Three months ended June 30, 2007

GAAP Adjustment Non-GAAP

Result Result

Operating profit 128,960 8,877 137,837

Three months ended June 30, 2007

GAAP Adjustment Non-GAAP

Result Result

Net income

141,899 8,877 150,776

Three months ended March 31, 2008

GAAP Adjustment Non-GAAP

Result Result

Operating profit

147,367 16,181 163,548

Three months ended March 31, 2008

GAAP Adjustment Non-GAAP

Result Result

Net income

146,598 16,181 162,779

Three months ended June 30, 2008

GAAP Adjustment Non-GAAP

Result Result

Operating profit 276,340 29,281 305,621

Three months ended June 30, 2008

GAAP Adjustment Non-GAAP

Result Result

Net income

264,985 29,281 294,266

(*) The adjustment is only for share-based compensation.

Reconciliation from net cash provided by operating activities to adjusted EBITDA(*) (in RMB thousands, unaudited)

Three As a Three As a Three As a

months % of months % of months % of

ended total ended total ended total

June 30, revenues March 31, revenues June 30, revenues

2007 2008 2008

Net cash

provided by

operating 276,963 69% 248,876 43% 403,378 50%

activities

Changes in

assets and

liabilities,

net of

effects of

acquisitions (84,538) -21% (21,273) -4% (37,893) -5%

Income taxes

expenses 1,839 0% 10,859 2% 28,561 4%

Interest

income and

other, net (14,778) -4% (10,090) -2% (17,206) -2%

Adjusted EBITDA 179,486 44% 228,372 39% 376,840 47%

(*) Definition of adjusted EBITDA: earnings before interest, taxes,

depreciation, amortization, other non-operating income, and share-

based compensation expenses.