Baidu 2017 Q1 Earnings: AI And IQIYI The Next Focus?

摘要: Baidu announced its unaudited 2017 Q1 Earnings. The report shows Baidu had acquired a revenue of ¥16.891 billion ($2.454 billion) in Q1 with a year-on-year growth of 6.8%. Its first quarter net quarter hit ¥1.777 billion ($258.1 million), a 10.6% drop year on year

(Chinese Version)

Baidu announced its unaudited 2017 Q1 Earnings. The report shows Baidu had acquired a revenue of ¥16.891 billion ($2.454 billion) in Q1 with a year-on-year growth of 6.8%. Its first quarter net profit hit ¥1.777 billion ($258.1 million), a 10.6% drop year on year

The details show Baidu’s operating revenue in Q1 was ¥2.006 billion ($291.4 million), which is a 9.3% slump compared with last year. The transaction service in Q1 causes a 16.8% decrease in operating revenue as the company did not apply US GAAP.

Furthermore, the earnings report also reveals two important facts: One is that Baidu has finished repurchasing its $200 million shares; Another is that Baidu’s CFO Jennifer Li will be appointed as Baidu Capital’s CEO and leave the CFO position, which is the first adjustment Jennifer Li has encountered after nine years at Baidu.

After the Wei Zexi incident Baidu’s marketing business starts declining

Relevant policy adjustments, such as the Temporary Regulation on Online Advertising implemented on September 1st, came after the Wei Zexi incident had created immense impact on Baidu’s search engine service and online advertising business in the previous two quarters.

The earnings report show the revenue from online marketing business fell by 1.3% compared with the same period last year, registering a total cash of $2.141 billion. In 2017 Q1, Baidu had 451,000 active online marketing clients, a year-on-year drop of 23.2%. Baidu’s average revenue from each client has been $4.678 in the first quarter, grew by 26.8% year-on-year.

In the last quarter, Baidu cashed in ¥16.166 billion from online marketing, showing a year-on-year slump of 8.2%, which is the lowest since Baidu’s listing.

During the phone meeting after the earnings report was released, Baidu’s CFO Jennifer Li stated that Baidu’s core business currently relies on the search engine business and that the company is still recovering from the incident last year, slowing gaining growth in search business.

In general, the numbers of the advertising clients always look plain. In the upcoming quarters, the number of advertising clients will rise as the company’s inventory grows and the promotion activities intensify.
Jennifer Li claimed that Baidu’s platform can provide users with information they are interested in and the company is positively developing information applications. Baidu’s data flow and user retention rate is continuing to grow, she said.

The cost of content and R&D rises, will IQIYI and AI be Baidu’s next focus?

Li Yanhong mentioned in his new year speech that Baidu’s priority will shift to content distribution. Earlier this year Baidu also successfully poached AI expert Lu Qi, who is now Baidu’s president. This suggests Baidu’s focus is shift to IQIYI and AI.

The earnings report also mentions that the TAC in Q1 was $317.5 million, accounting for 12.9% of the total revenue while last year during the same period it was 14.1%. The number in last quarter was 14.5%.

The bandwidth cost was $194 million, taking up 7.9% of the total revenue. Last year the number was 6.9%. The cost of depreciation had been $119.6 million, accounting for 4.9% of the revenue. In comparison it was only 4.5% last year.

The content cost was $382.9 million, 15.6% of the revenue, a big jump from last year’s 8.7%. Baidu’s content cost continues to rise due to the increase of IQIYI’s content cost.

The R&D cost was $411.8 million, with a 34.9% year-on-year growth, which was mainly driven by cost generated by the R&D staff.

The cost increase mentioned above is mainly related to AI. Li Yanhong has stated clearly in the earnings report that Baidu’s current priority is AI. With that comes great cost as current AI-related projects, from hardware like GPU, to software, are all costly.

Lu Qi said during the earnings report phone meeting that at present Chinese Internet users are still using key words to search information, and that AI innovative technologies can further improve the search experience, helping Baidu gain data flow growth. Innovative search methods like voice and image search etc. can enable users to find more information.

“Baidu will apply AI technology to allow the company’s search service better understand users’ search demands, and provide better advertising products for our clients,” Lu Qi said.

The content cost is mostly generated by IQIYI. Despite that, IQIYI’s development is promising in Baidu’s eyes. Recently, IQIYI has reached a cooperation with Netflix on content ecosystem.

Last year IQIYI was able to garner large growth and made very great contribution to the company, Jennifer said. IQIYI is an important part of Baidu’s business, whose growth is driven by the growing number of paying users.

Despite surpassing the estimates, Baidu’s share price encountered big slump. Shares of Baidu ended lower by $7.63 per share or down 4.1% at $180.23 per share despite beating the estimates.

According to the earnings report, Baidu said revenues would come in between $2.974 billion and $3.048 billion, a year-on-year growth of 12.1% and 14.9%.

However, according to Thomson Reuters’s analysts, the Wall Street estimates that Baidu would cash in ¥20.84 billion in Q2.

Jennifer Li commented on the estimates that Baidu’s revenue forecast on Q2 mainly covers IQIYI and the company’s main businesses.

Baidu’s information flow business also made major progress in user acquisition and is gradually making profits. However, it’s not providing obvious thrust to the growth of revenue. The expansion of search business makes it possible for more users and clients to enjoy Baidu’s service.

In accordance with Baidu’s 20-F document, IQIYI had a strong growth last year and provided great driving force for Baidu. In Q2 all business lines had convincing growth, as well as IQYI’s advertising business and its membership business.

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Translated by Garrett Lee (Senior Translator at PAGE TO PAGE), working for TMTpost.

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