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Baidu, Alibaba Grow on China’s Increasing Internet Usage

Posted on Friday, Mar 15th 2013

China continues to make strong progress in deepening their internet penetration rates. As of last year, 42% of the country’s population had access to the internet, compared with a mere 4.6% in 2002. According to the country’s Ministry of Industry and Information Technology (MIIT) China will continue to improve the user experience of the service by increasing the number of households with broadband access. By the end of the current year, more than 70% of China’s Internet users will have access to broadband service, adding nearly 35 million households this year. Last year, the number of households with broadband grew 49% to 94 million. Increasing access to faster Internet speeds ensures strong growth for the Internet players in the country.

Baidu’s Financials

Baidu’s (Nasdaq:BIDU) Q4 revenues grew 42% over the year to RMB6.335 billion (~$1.017 billion) driven by an increase in the online marketing revenues. The segment saw revenues grow 41% over the year to RMB6.288 billion (~$1.009 billion). At the end of the quarter, Baidu reported more than 406,000 active online marketing customers, recording growth of 31% over the year and 4% over the quarter. Baidu reported the quarter’s earnings at $1.28 per ADS.

The search engine continued to command leadership in China. As of December last year, Baidu commanded 71.76% of the market in China. Qihoo came in a distant second, with 10.39% market share. Google lagged behind at the fourth position, with a mere 5.07% of the market.

Baidu ended the year with revenues growing 54% over the year to RMB22.306 billion (~$3.580 billion). Online marketing revenues grew 54% to RMB22.246 billion (~$3.571 billion) as they increased the number of active online marketing customers and revenue per customer. Revenue per online marketing customer grew 26% over the year to RMB37,300 (~$5,987) for the year.

For the current quarter, Baidu expects revenues of RMB5.890 billion (~$945.4 million)-RMB6.080 billion (~$975.9 million). The Street projects revenues of $963.7 million for the quarter.

Baidu’s International Expansion

Baidu seems to be moving out of China into other international markets. While the service operates in 130 countries, it hasn’t made as much of an impact in these countries. But of late, Baidu has increased efforts to expand internationally. Keeping in line with the growing demand for mobile services, Baidu released their mobile developer tool in English a few weeks ago.

Earlier this month, they also entered into an agreement with France Telecom. As part of the deal, France Telecom will pre-install the Baidu browser on the mobile devices it sells in the Middle East and Africa. France Telecom’s Orange network is already the third largest operator in a fast-growing African market.

Within Asia, Baidu also increased their presence in Thailand and Japan. They launched a search engine service in Japan and an antivirus suite in both the Thai and English languages.

Their stock is trading at $86.33 with a market capitalization of $30.18 billion. It has taken a significant beating since it touched a 52-week high of $154.15 in March 2012. Despite the fact that as of December last year, Baidu’s mobile daily active user base grew to 80 million, and that over the past three years, these numbers have grown 11 times, the market has been disappointed with Baidu’s slow monetization of the growing mobile segment. Baidu has taken several measures to increase monetization such as releasing their mobile search browser and tying up with networks to sell pre-loaded mobile devices. But they are still to figure out the golden way that will help them improve monetization from these services.

Alibaba’s Financials

The recently privatized e-tail player, Alibaba, is also seeing strong growth. Since the company went private, they have not disclosed their financials. But analysts have estimated their performance based on the limited information available. They believe that Alibaba is currently worth $55 billion, with revenues growing 74% over the year in the last quarter. The company is estimated to have reported merchandise sales of $157 billion last year.

Alibaba’s Reorganization

Recently, Alibaba announced a major reorganization of their business structure to manage operations better. Alibaba will now be divided into 25 different units, each of which be led by a general manager. The latest reorganization is expected to help the group gain flexibility to adapt to the rapid changes in the e-commerce market.

But bigger news for Alibaba was the announcement that founder and CEO, Jack Ma, was stepping down from the position. Ma resigned in January from position of the CEO, citing concerns that at his age of 48 years, he was “no longer young for the Internet business.” Ma will, however, continue to guide Alibaba in his new position of the company’s executive chairman. During the year, Alibaba plans to retire all other people in this age group from the leadership and replace them with a younger generation who will lead the 25 new divisions.

Ma will be replaced by Jonathan Lu, who currently heads the Chief Data Office position with Alibaba. Lu has been with Alibaba for more 13 years and was responsible for the sales team, launching Alipay, and operating the e-commerce site, Taobao. He is expected to take on his new role in May of this year. Analysts believe that Lu will have tough shoes to fill as he leads Alibaba into international markets along with diversified offerings such as online insurance, securitisation and micro-lending. Surprisingly, at 43 years, he isn’t that young compared with Ma.

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