Baidu set for strong quarterly earnings as AI push intensifies

Internet giant Baidu is expected to report solid second-quarter financial results in line with consensus market estimates, as mainland China’s largest online search engine operator steps up its transformation into a global powerhouse in artificial intelligence (AI).

Analysts anticipate Nasdaq-listed Baidu to provide on Thursday in the United States further details about its AI strategy, following the State Council’s announcement last week of an ambitious national AI development plan.

“Laying out a road map for AI is a very encouraging sign of support from the government,” said Jefferies equity analyst Karen Chan.

Baidu is forecast to post a 21 per cent year-on-year increase in net profit to 3.4 billion yuan (US$503 million) in the three months ended June 30, according to a Bloomberg survey of analysts’ estimates.

That gain was attributed by Jefferies to a rise in average spending per online advertising customer and Baidu’s efforts in controlling its traffic acquisition cost.

Revenue is estimated to be up 14 per cent year-on-year to 20.7 billion yuan. It would represent the mid-point of Baidu’s second-quarter revenue guidance, ranging from 20.5 billion yuan to 20.9 billion yuan.

Investors this week will likely focus on Baidu’s search recovery outlook, mobile newsfeed advertising traction, content investment, and sales and marketing spending, according to Jefferies’ Chan.

In the first quarter, Baidu maintained its lead in terms of total search revenue on the mainland with a 75.9 per cent market share, according to data from Analysys International and Jefferies.

Google China seized a 10.2 per cent share, while Sohu subsidiary Sogou had an 8.4 per cent share in the same period.

A regulatory filing made by Baidu last month disclosed that its first-quarter search revenue fell 6 per cent year on year, following its rigid customer verification process last year to remove low-quality advertisers.

“We see the elimination of unqualified advertisers resulted in decreased bidding intensity for keywords in certain industries, such as ‘health care’,” Daiwa Capital Markets analyst John Choi said in a report.

Jefferies’ Chan expected Baidu to add 3 billion yuan this year to its annual research and development budget of about 10 billion yuan. The incremental increase will be mostly spent on AI initiatives, she said.

Daiwa’s Choi said Baidu already leads the mainland’s internet sector in AI spending.

Mainland China’s total investments in AI enterprises reached US$2.6 billion last year, according to domestic think tank Wuzhen Institute. The US topped that list with US$17.9 billion in investments in the same period.

“Search is one of the first applications of AI where search works to understand humans,” said Robin Li Yanhong, the co-founder, chairman and chief executive of Baidu during a conference call in April.

“As the leading search engine in China, we have been fortunate to amass vast amounts of rich, valuable data in a market with over 700 million internet users who speak the same language, have the same culture, and abide by the same laws.”

Earlier this month, Li stressed the importance of opening up the company’s AI platform to developers.

That approach would help Baidu’s DuerOS, a conversation-based AI technology, to become the Android operating system for the AI era. DuerOS is targeted for use in smart home appliances, cars and wearable devices.

Baidu recently launched its Apollo 1.0 autonomous driving platform with more than 50 industry partners, including major car makers and automotive component suppliers.

“While we applaud Baidu’s commitment to open up its AI technology platform ... we are not too sure about what the ultimate business model would be,” said Alicia Yap, the head of regional internet research at Citi Research in Hong Kong.