Baidu Flags More Spending on Cars After Profit Beats Estimates

The Takeaways From Baidu's 1st-Qtr Earnings Beat
  • Chinese search leader expects to mass-produce cars by 2020
  • Chairman Robin Li anticipates aggressive spending on R&D

Baidu Inc.’s quarterly profit beat expectations thanks to a rise in mobile search users, and Chairman Robin Li flagged more investments in robot cars and on-demand services over the next five years.

China’s biggest search engine provider also forecast better-than-anticipated revenue as advertising goes mobile and online. Baidu said it expects second-quarter revenue of $3.12 billion to $3.19 billion compared with estimates for $3.1 billion. That helped push the company’s shares up more than 3 percent in after-hours trading.

The results demonstrate the strength of Baidu’s core business, allowing the company to spend billions delving into new areas from artificial intelligence and self-driving cars to on-demand services like food-delivery. It expects to mass-produce autonomous vehicles by 2020, two years after its cars first hit the road. That’s despite the lack of a business plan or specific target markets beyond China, Li said.

“We are aggressively beefing up research and development in this area both here in China and our U.S. R&D center in Silicon Valley,” Li told analysts on a post-earnings conference call. “We will worry about the business model later on.”

Total revenue for the first quarter rose 24 percent to 15.82 billion yuan ($2.4 billion) compared with estimates for 15.86 billion yuan. Net income was 1.99 billion yuan compared with the 1.91 billion yuan that analysts had predicted.

“China doesn’t seem like it’s rolling over,” Jin Yoon, an analyst with Mizuho Securities Asia Ltd., told Bloomberg Television. “We’re looking at digital ad spending growing 30-35 percent this year and search growing at 25-30 percent this year.”

“We’re seeing single-digit declines in TV and radio and print, so all that money is shifting online.”

While first-quarter net income beat expectations, it was at its lowest in four years. Spending on the so-called online-to-offline sector has squeezed profitability because of the generous subsidies needed to win customers in a battle with Alibaba Group Holding Ltd. and Tencent Holdings Ltd. The search giant is “right in the middle” of the investment cycle for on-demand services while heavy spending on driverless cars was yet to come, Baidu Chief Financial Officer Jennifer Li said. 

Total costs during the quarter hit 13.6 billion yuan, up from 10.57 billion yuan during the same period last year. Yoon said Baidu simply had to explore new businesses.

“They have already 80 percent market share in the core search business and they’re not going to be going outside of China when Google is already there,” he said. “So to expand their business horizons, O2O is the natural next step because everybody is on mobile.”

Baidu’s food delivery business recently closed a funding round that valued the venture at $2.5 billion, while 200,000 merchants had signed up for its Local Express division as of March, CEO Li said. Its group-buying site Nuomi captured 20 percent of the market in the first quarter and has continued to gain share.

The company is considering other ways to boost profitability, including hiving off its loss-making video-streaming division. In February, the CEO and another executive offered to buy the company’s 80.5 percent stake in video service, a move that would improve the search giant’s margins while setting up the video player for a potential IPO.

The offer remains under consideration by a special committee, working with financial advisers and lawyers, CFO Li said.

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