NEW YORK (TheStreet) -- Shares of Baidu (BIDU) - Get Report dropped sharply in Tuesday trading after the Chinese search company reported lackluster quarterly earnings and a weak outlook for the remaining year as it continues its transition online-to-offline.
Baidu expects third-quarter revenue to be between $2.9 billion and $3 billion. Analysts, however, were expecting Baidu to generate a solid $3 billion in revenue for its third quarter.
For the second quarter, Baidu earned 11.2 RMB per share or $1.80 per share, compared with the 10.6 RMB, or $1.70 per share, analysts were expecting. The company generated 16.58 billion RMB, or $2.7 billion, in revenue for the quarter, which was in-line with the 16.57 billion RMB in revenue Wall Street was expecting.
The decline in revenue resulted from the company's efforts to get away from its traditional search advertising business on PCs and focus on mobile users, which is less profitable, but also where the majority of users are headed.
In January, Baidu announced it would invest $3.2 billion over the next three years to bolster its offering of online-to-offline (O2O) services, such as buying movie tickets, getting restaurant deals and its Baidu Wallet Services.
Shares of Baidu were recently down nearly 16% to $166.80.
Analysts were hopeful about Baidu's future, as the company continues its O2O transition, but they were also cautious about the potential risks associated with the change -- particularly higher selling, general and administrative expenses and competition from other Chinese companies such as Alibaba (BABA) - Get Report.
Here's what a few of them had to say:
Barclays analyst Alicia Yap (Overweight, $240 PT)
"While we welcome additional disclosure on the margin impact from new businesses, we will seek more color on the soft 3Q15 revenues guidance and whether it is due to the weak macro environment or more related to structural reasons."
Morgan Stanley analyst Ben Lin (Overweight, $248 PT)
"Baidu's 2Q15 non-GAAP operating margin dropped 9ppts y-y to 24.8%, about 1 percentage point below our estimate. The margin decline was mainly driven by: 1) higher content cost mainly due to iQiyi's; 2) higher SG&A expenses, due to the heavier promotions for its O2O initiatives; 3) higher R&D cost, mainly due to higher staff costs. We note that the company has taken a positive step forward in disclosure, and provided the impact to margins from its investments in O2O, iQiyi as well as the GMV from its O2O initiatives."
Jefferies analyst Cynthia Meng (Hold, $210 PT)
"Management guided 80-90% quarter over quarter growth in selling, general and administration expenses which translates into 103% year over year growth from second quarter 2014 to second quarter 2015 and fiscal year 2015 SG&A spending of RMB19.5bn (USD3.1bn), +88% year over year, assuming mid-point of 85% increase. We expect to see aggressive spending in subsidy and promotional campaign as Baidu aims to grab market share from Meituan and Dianping in takeout delivery, movie ticket purchase and groupbuy."
Pacific Crest analyst Cheng Cheng (Sector weight, No PT)
"While a shift to O2O could eventually lead to higher monetization, we believe greater competition may inhibit significant monetization for years. Specifically, we see platforms like Meituan, Dianping, Alibaba, JD and Tencent as key competitors alongside a variety of smaller, vertical-specific players that are mostly private. We believe the quantity and quality of these competitors greatly increases risk for Baidu as the company shifts some of its user base from search to O2O."