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Baidu’s Gross Profit Triples, Placing Heavy Bets on Artificial Intelligence

May 5, 2018 by Yun Nie
Baidu’s Gross Profit Triples, Placing Heavy Bets on Artificial Intelligence

It is time for Baidu to reinforce its reputation. The company’s Q1 2018 unaudited financial statements suggested an exciting result that beat analysts' expectations – revenue grew 31% to CNY 20.9 billion (approximately USD 3.33 billion) and gross profit increased 227% to CNY 6.7 billion (around USD 1.1 billion).

The achievement was a direct result of Lu Qi’s strategic plan to promote artificial intelligence (AI) as its pet project while laying emphasis on rising gross profit by cutting expenses. A year ago, when the new chief operating officer, Lu Qi took over the reins of the company, one of the most obvious shifts was the sharp decrease in hiring new employees. In Baidu’s terms, “slow hiring of new staff and integrating existing resources” is a primary recruitment principle, besides spinning off peripheral services, such as games and food delivery.

Baidu consequently showed a 277% increase in gross profit based on these cost-reducing strategies. The company can now sow the seeds for its future growth in autonomous driving and conversational AI.

Triple gross profit in Q1 2018

On April 27, Baidu announced its unaudited results of Q1 2018, which reflected its gross profit jump of 227% to CNY 6.7 billion (about USD 1.1 billion). Mobile business remained the core, which accounted for 78% of the total revenue, up 70% from the previous year.

Prior to the financial statements, 12 experts at Wall Street analyzed Baidu’s business under US GAAP. Here is how the company fared as compared to Wall Street’s expectations: (1) Earnings per share - RMB 14.90 (USD 2.29) vs. RMB 13.38 expected, in a Thomson Reuters survey of analysts. (2) Revenue - CNY 23.56 billion (USD 3.62 billion) vs. RMB 23.053 billion expected in the Thomson Reuters survey. Expectedly, Baidu’s shares climbed over 4%.

Li Yanhong, the chairman and CEO of Baidu, said, “core newsfeed and search engine have shown a powerful commercializing capability through sustained innovations”. The number of DuerOS hardware partners increased and Apollo is leaning towards being the global technology leader.

Core newsfeed business

Baidu has branched into core newsfeed business since the end of 2016,. The following year, Li Yanhong stated that the company’s core service was still to distribute content. In 2017, Baidu invested heavily in smartphones, Feed, Baojiahao, Haokan Video, Phone browser and other businesses.

Bank of America expressed curiosity about how Baidu managed commercialization across the information industry, even as the company’s newsfeed, eCPM steadily gained thanks to advertising revenue.

In response, Lu Qi revealed that newsfeed services were a natural extension of Baidu’s search engine platform. Newsfeed-centric content rely on pre-existing technology and customers to grow. Newsfeed business, in return, improved the venture’s online advertisements since user experience is of supreme importance in users’ advertising consumption. Baidu put immense effort in diversifying its revenue streams including advertising products.

“Advertising effects is actually an economic transformation that AI and a variety of data resources will promote through transformation rate and CPM.” Lu Qi said, “I saw a bright future in our advertising business based on that.”

The trend of artificial intelligence

Before Baidu announced its financial statement, Wall Street upgraded evaluation of the company; Credit Suisse Group ranked it as “Outperform”; Barclays boosted Baidu’s share value to USD 260 per share, increasing its rating to “Market Weight”; Zacks Investment Research raised its grade to “Buy”, assuming a USD 257 per share value; and Wells Fargo gave the company an “Outperform” rating, lifting target price to USD 300 per share.

The reason behind Wall Street’s high evaluation is Baidu’s AI project. According to the financial report, the company has released over 90 products to install DuerOS, covering mobile telecommunication, smart home, clothing, vehicles, etc. In March, DuerOS responded to over 200 million search requests, even as hardware manufactures like Haier, TCL, Midea, Skyworth, XGIMI and Okii used DuerOS as an entry port to intelligent hardware.

On April 19, Baidu released Apollo 2.5 version, a new autonomous driving system in an open-source software platform that provided several new functions to customers. Prior to that, the company had thrown its hat into the ring by striking up relationships with Ford, ON Semiconductor and BlackBerry to develop self-driving technology. Its autonomous cars were permitted by Beijing, Chongqing, and the Fujian governments after a series of tests. In many traditional businesses, AI enhanced Baidu’s strengths as the powerhouse in search engines and providing information. For example, AI technology will bring high-quality user experience and reinforce advertisement effects via a customizing service based on users’ preferences. Furthermore, thanks to AI, Baidu’s core business steadily improved - daily active users surpassed 137 million in March, a 18% jump as compared to last year, and average daily use-time increased 30%.

Pan development on short clips and long videos

Baidu’s video content distribution services accounted for 48% of its core business. Last November, the venture’s original brand, Haokan Video, was viewed 1 billion times in a day. In April 2018, Baidu announced its partnership with Pear Video, a new digital platform for sharing short clips.

Li Yanhong said in an e-meeting, “in the long term, our video business may catch up with our search engine business. However, our search engine is still heavily reliant on online advertisements. Different from long videos, advertisements in the form of short clips allowed us to operate on diverse platforms, among which iQiyi represented an unparalleled distribution capacity.”

Based on research, Baidu’s massive video streaming platform iQiyi (NASDAQ: IQ), which went public sometime ago, was a significant boost to Baidu’s market shares. After going public, iQiyi’s market share rose from USD 12.72 billion to USD 13.98 billion, and its fundraising scale reached USD 2.25 billion. Besides that, Baidu’s shares climbed more than 3.15% after its financial reporting.

The next issue encountered by the company will be a revenue bottleneck in its conventional business. But whether the AI project can keep Baidu competitive against strong rivals still remains a question as internet giants, Alibaba and Tencent, who each run video streaming platforms of their own, battle for a share of the same cake.

Yun Nie

Yun Nie is a New York-based tech reporter. She focuses on India-China financial market, global IT giants and technology-centric market trends. She can be reached at Yunnie@thepassage.cc.

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