Baidu hit by new regulations, expects to bottom out in fourth quarter

Baidu on Friday reported lower-than-expected revenue of 18.25 billion yuan ($2.74 billion), a dip of 0.7% from the same period a year earlier. Much of that decline came from a 6.7% drop in online marketing revenue, as the number of advertisers plunged by 16%.

Chief executive Robin Li said the smaller customer base was a result of two forces: a tougher vetting process for advertisers, which led the company to remove a portion of them, and the aftermath of a new advertising law that went into effect in September. The law prohibits online promotions of products such as prescription medication and tobacco.

The new industrywide advertising restrictions come on the heels of other changes the government required Baidu to make this spring after a college student suffering from a rare form of cancer underwent a treatment he found on the search engine and later died.

Medical advertising had been prominent on the Baidu site, and last quarter Baidu had warned investors to expect suppressed revenue for two to three quarters.

Chief financial officer Jennifer Li announced Baidu’s top-line guidance for the fourth quarter of 17.8 billion yuan to 18.4 billion yuan, which would reflect a year over year decrease of at least 1.7%. She said it was a “challenging transition period” that would result in a higher-quality customer base of advertisers and a better environment in the longer term.

“Next year we will focus on building the business again,” Ms. Li said. “Q4 is what we anticipate to be kind of the bottom.”

Despite the drop in revenue, the search giant managed to boost profit to 3.1 billion yuan, up from 2.8 billion yuan in the third quarter of 2015. It did so partly by cutting costs, including promotional spending on newer services such as its group-buying platform Nuomi.

The company’s American depositary receipts fell 1.5% in after-hours trading in the U.S. late Thursday.

Mobile search traffic growth also slowed this quarter, with monthly active users increasing 3% year over year compared with last quarter’s 6% increase. That was because internet penetration in mobile search had already reached about 50% of the population, Mr. Li said.

Looking to future growth drivers, Baidu executives played up the prospects of products enhanced by artificial intelligence, including its delivery service, which is now more effective and punctual.

Mr. Li said Baidu Delivery, which now includes groceries and on-demand logistics in addition to restaurants, had year-over-year growth of 150% in gross merchandise volume. That key metric helps investors determine the growth rate of a business.

Its average delivery time is now 32 minutes with a 98% punctuality rate, thanks to artificial intelligence that has helped Baidu know how long it takes a restaurant to cook food and the best route for a delivery person to take based on current traffic.

Baidu is also using its technology to help develop self-driving cars. It is now testing 40 cars in China and California, and is still on track for small-scale production by the end of 2018, with mass production targeted for 2021. Mr. Li said Baidu was talking to a “number of potential partners” to supply it with cars and related technology.


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