Search and artificial intelligence (AI) giant Baidu has reported a quarterly net loss for the first time since listing in 2005, as the company grapples with China’s slowing economy and increased competition while spending on promotional activities skyrocketed.

Baidu lost nearly RMB 330 million (around $48 million) in the first three months of 2019. This compares to the company’s net income of RMB 6.7 billion during the first quarter of 2018. Baidu shares fell around 9% in aftermarket trading following the release of its results.

Baidu attributed its losses to increased spending on content, most notably iQiyi, as well as promotional activities in which Baidu gave away hongbao, or red packets, as part of an alliance with national broadcaster China Central Television over Chinese New Year.

The company also accelerated spending on traffic acquisition, while other costs of revenue, including depreciation and operational spending, expanded by 75% year over year, which Baidu said was “mainly due to higher depreciation expense and the growth in sales of first-party smart devices.”

In an internal memo to employees on Friday obtained by TechNode, Baidu CEO Robin Li acknowledged that the company is facing a “grim situation,” but said that 2019 holds great opportunities.

Meanwhile, Baidu said that Xiang Hailong, senior vice president of the company’s search business, resigned after joining in 2005. Shen Dou, previously head of Baidu’s mobile products, will take Xiang’s place.

Baidu is now putting increased focus on this area. Company CFO Herman Yu said during an earnings call on Friday morning that Baidu’s priority is to strengthen its mobile foundations, which includes growing its search and feed apps, and new AI businesses.

Baidu’s revenue reached RMB 24 billion, a year-on-year increase of 15%. The company saw its online marketing revenue grow by just 3% as it deals with competition from younger players like Bytedance, which operates competing video and news feed products. Baidu has attempted to keep up with its own short video apps including Haokan, which reached 22 million daily active users in March 2019. The company also said that users of its Baidu App grew by nearly 28% year on year.

Baidu expects challenges to its advertising business to continue. “Online marketing in the near term will face a more challenging environment,” Yu said on the earnings call. He attributed this to macro conditions, tighter government scrutiny of content, and investment cutbacks from the venture capital community.

To combat slowing advertising revenue, Baidu has been increasing its focus on cloud computing, artificial intelligence, and autonomous vehicles. The company has also started to recalibrate its business to focus more on enterprise customers. Amid concerns of slowing growth, Baidu this week shut down its education business unit and moved from consumer-facing education services to cloud-based business solutions.

Yu warned that Baidu’s pursuits in cloud computing, autonomous driving, among others, may result in the company sacrificing short term profits. He made similar comments in Baidu’s last earnings release, cautioning investors that Baidu’s diversification would require “heavy investments.”

Christopher Udemans is TechNode's former Shanghai-based data and graphics reporter. He covered Chinese artificial intelligence, mobility, cleantech, and cybersecurity.

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