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Five things to watch as Baidu reveals earnings

Shaky ad business raises the stakes in AI and other fields

Baidu is rushing to find new ways to grow, including AI and autonomous driving technology.   © Reuters

HONG KONG -- Chinese search engine company Baidu is poised to release its latest earnings on Thursday evening U.S. time, and after a difficult year, the heat is on management to show better days are ahead.

Shares of the Nasdaq-listed giant have dropped nearly 40% in the past year, amid a broader sell-off of Chinese technology stocks. Baidu disappointed investors in October, when it said fourth-quarter revenue growth would be lower than expected, despite delivering a 56% increase in net income for the third quarter.

Now, the search company is expected to post another quarterly fall in operating margins when it reports, after declines in the second and third periods.

As the numbers come in, here are five areas analysts will be watching closely for positive changes or red flags.

Advertising revenue

Online advertising still accounts for the lion's share of Baidu's revenue. Few expect this to change anytime soon, but there are real questions about whether ad sales can keep driving the company's growth.

Baidu's ad business registered lackluster growth for the third quarter, hit by the U.S.-China trade conflict and Beijing's freeze on game licenses. While the trade truce reached in December and the restart of game approvals may have helped steer the segment back in the right direction, worries persist. Earlier this week, local media reported that Chinese regulators had paused new applications to monetize game titles while they clear a backlog.

Meanwhile, the company is still smarting from recent criticism that it abuses its dominant market position to promote its own sites rather than providing the best search results. The backlash sent Baidu's stock falling about 6% in a single day and has cast doubt on the future of its sponsored content.

Artificial intelligence

While Baidu made its name as the "Google of China," the company has bet its future on artificial intelligence. Since it announced its "All in AI" strategy in 2017, it has made notable progress, deploying its technology in sectors ranging from agriculture to health care and construction.

Baidu is also promoting its AI to Chinese municipal governments. So far, three cities -- Beijing, Shanghai, and Baoding -- have teamed up with the company to streamline their urban management systems.

This puts Baidu in a strong position to cash in on China's push for smarter cities. But it also faces fierce competition in the market from Alibaba Group Holding and other players.

Autonomous driving

Baidu has also made headway in autonomous driving.

A potentially big break came in January, at the Consumer Electronics Show in Las Vegas. A California company called Udelv announced it would use self-driving delivery vans built on Baidu's open-source Apollo platform to provide logistics for Walmart in the state of Arizona. This marks the entry of Baidu's autonomous technology into the U.S.

Back home, Baidu CEO Robin Li said in November that a small number of autonomous cars developed with Chinese automaker FAW Group will hit the road in 2019. If all goes well, FAW would start mass production in 2020.

By the end of the next decade, China is expected to have 30 million driverless cars. So while there may be few immediate financial benefits, progress on this front has major implications for Baidu's long-term fortunes.


Market watchers will be looking for updates on Baidu's venture into the entertainment business.

In November, the company led a $600 million investment round in NetEase Cloud Music, China's fourth-largest online music streaming app. Some analysts think the deal will lead to a marriage of NetEase Music with Baidu's voice-command AI operating system DuerOS, giving listeners easy access to their favorite songs and helping the search company build an OS user base.

Baidu also produces its own line of smart speakers, which could play a role in these plans. It hopes to commercialize DuerOS by 2020.


CEO Li has warned employees that China's economic downturn poses a severe threat. To help Baidu withstand the pressure, he implored them in an email earlier this year to seek new opportunities in helping other businesses improve efficiency.

Such sentiments are common at China's powerful internet companies. Tencent Holdings, the country's leading gaming developer and the operator of popular messaging app WeChat, introduced a restructuring plan last year to "become a digital assistant of all industries." E-commerce heavyweight Alibaba, for its part, has moved to promote cloud services and produce AI chips.

Investors will want to know how Baidu -- one of China's online Big Three alongside Alibaba and Tencent -- intends to grow beyond its core business.

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