Baidu Asks Investors to Keep the Faith After Outlook Disappoints

Updated on
  • China tightened web controls around Communist Party congress
  • Spending on artificial intelligence surged 24 percent

The Baidu Technology Park in Beijing.

Photographer: Qilai Shen/Bloomberg

Baidu Inc. is asking investors for patience, after forecasting lower-than-expected revenue and warning that its driverless car platform won’t yield earnings in the near future.

China’s biggest search giant predicted sales of 22.23 billion yuan to 23.41 billion yuan ($3.34 billion to $3.52 billion) in the December quarter, falling short of the 24.8 billion yuan projected. That stemmed in part from self-imposed ad and content curbs around a politically-sensitive gathering of China’s Communist Party leadership in October. Shares tumbled as much as 15 percent.

The miss comes at a critical time for Baidu, which is attempting to turn around its business after a difficult 2016. Profits fell for the first time since the company listed thanks to heavy spending on services like food deliveries, rising competition from the likes of Alibaba Group Holding Ltd., and a health-care ad scandal that slashed its pool of advertisers. Rivals Tencent Holdings Ltd. and Sohu.com Inc.’s Sogou are also angling for a greater share of search advertising.

While Baidu’s been telling investors that the worst is behind it, the total number of active online marketing customers fell 7 percent to 486,000 in the third quarter.

“We are seeing a secular change in the market where revenue is going from search engines to social media,” said Kirk Boodry, an analyst with New Street Research. “Leadership in AI isn’t really driving revenue improvements. We’re hearing on one hand there’s really strong capability in AI and it’s just amazing, and on the other hand the financial results just don’t support it.”

Baidu Group President Qi Lu called on investors to look beyond short-term pain as the search giant streamlines its business to focus on artificial intelligence. The company has recently sold several revenue-generating units like food delivery and gaming, dumping loss-makers with few prospects of being improved with AI.

“We’re probably in the second or third innings,” he told analysts on a conference call, referring to Baidu’s progress in using AI to boost and monetize the business. “There’s a long trajectory ahead of us.”

Baidu’s fourth quarter forecast comes days after the wrap of the 19th National Congress of the Communist Party of China, a tightly managed affair held in Beijing every five years. Chinese political gatherings can cause ripples throughout the economy from factory closures to dampened spending with advertising restrictions encompassing both the number and types that can be displayed. Chief Financial Officer Herman Yu said both Baidu and its video streaming subsidiary cut certain types of ads and content “to show our respect” for the event.

Since former Microsoft Corp. executive Lu took the helm in January, Baidu has sold its food delivery unit Waimai to Alibaba-backed rival Ele.me, and opened up its driverless car technology to dozens of industry partners. IQiyi, its Netflix-like streaming video service, is targeting a U.S. listing, people familiar with the matter have said. 

Baidu is now fighting to convince disillusioned shareholders to back its costly long-term investments in AI and autonomous vehicles. Spending on research and development rose 24 percent to 3.2 billion yuan from a year earlier. Content costs also sky-rocketed in the quarter, rising 76 percent to 3.9 billion yuan thanks mostly to iQiyi. But Yu told investors not to expect gains from its Apollo autonomous car platform or voice assistant DuerOS in the near future.

Baidu reported net income of 7.9 billion yuan during the three months that ended September, compared with the 3.88 billion yuan projected. Sales hit 23.5 billion yuan, matching analysts’ estimates. Its U.S. shares slid to as low as $221 in extended trading, after closing at $260.62 in New York. 

“A big part of Baidu’s investments today is in the new market opportunities presented by AI that will not have material revenues in the near future,” Yu said.

— With assistance by David Ramli

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