Baidu beats estimates on cost cuts amid first revenue slide

[HONG KONG] Baidu Inc earnings beat analysts' estimates as the Chinese search giant pares spending to limit the impact of its first-ever decline in quarterly revenue.

Profit excluding some costs were US$1.49 per American depository share in the third quarter, compared with the average estimate for $1.08. Revenue fell year-on-year for the first time, dropping to 18.3 billion yuan (S$3.8 billion).

China has cracked down on online advertising after a scandal involving medical ads. Baidu has responded by slashing costs, including subsidies given to customers using its group-buying platform Nuomi. Chairman Robin Li said re-registering customers to comply with new rules could hurt revenue into next year as he forecast fourth-quarter sales below estimates.

"It's a little bit worse in the fourth quarter than we might have expected," said Kirk Boodry, an analyst at New Street Research. "But while you still have volatility to work through we are starting to see what's on the other side."

Mr Boodry said the new regulatory regime may mask a bigger change in the advertising market as revenue moves away from search engines and toward social media and other platforms such as Tencent Holdings Ltd's WeChat.

Baidu said sales in the fourth quarter will be between US$2.68 billion to US$2.76 billion, which compares with the US$2.89 billion average estimate. The new government rules were prompted by the death of a student who had sought an unconventional cancer treatment advertised on Baidu.

Once the re-registering of advertisers is complete, Mr Li expects a more stable pool of paying customers that would start to grow again from 2017. He also flagged new meaningful revenue from advertisers on its news feed service starting next year with more than 70 million users tapping its tailored feed each day.

"We expect the most pronounced impact on our business in the fourth quarter followed by recovery early next year," Mr Li said.

The company said it's open to giving up control of its business units as long as it could ensure a certain level of integration with its search engine. Mr Li pointed to Baidu's move to merge its Qunar travel website with rival Ctrip.com as a model for future deals.

Mr Boodry said this was the clearest indication yet that Baidu is prepared to sell out of loss-making businesses like Nuomi.

While Baidu is moving into the realms of artificial intelligence and self-driving cars, but those projects are unlikely to contribute to the business in the short run.

BLOOMBERG