Baidu's Guidance Cut Mainly Due To Healthcare Impact

Baidu Inc (ADR) BIDU reduced its 2Q revenue guidance by a greater-than-anticipated 11 percent.

Morgan Stanley’s Robert Lin maintains an Overweight rating on the company, while lowering the price target from $200 to $182.

Guidance Cut

Lin explained that the higher-than-expected guidance cut was driven by stricter advertising regulations for healthcare, as well as a decline in the ad load, especially on PC.

The company lowered its 2Q revenue guidance to Rmb18.1-Rmb18.2 billion, below the consensus expectations of Rmb20.1 billion.

“The negative revenue impact is mainly from healthcare and high quality medical customers who have reduced or delayed spending to be compliant with new regulations over time,” Lin mentioned.

Related Link: Citi Downgrades Baidu On Guidance Risk

Management Expectations

Baidu expects the spending from these customers to gradually recover. Management also mentioned that CPC had declined over the past month, driven by a decline in bidding density, although CTR continued to be robust.

“While we think CPC could recover after spending returns, we believe CTR could be the wild card given ad format changes,” Lin stated.

In addition, management stated that short-term costs were likely to largely remain unchanged, while maintaining the SG&A guidance for 2016 at Rmb20 billion.

The revenue and EPS estimates for FY16, FY17 and FY18 have been lowered to reflect the higher than expected impact of healthcare and ad load decline.