Chinese search industry leader Baidu (BIDU 1.02%), is slated to report the results of its recently completed fourth quarter and fiscal year tomorrow. It's been a busy few months, so investors will be looking for insight into the performance of several key areas of the business. Here's what investors will be focusing on.
Baidu is set to report earnings. Image source: Baidu, Inc.
Regulatory headaches
Investors may recall that last year, the Chinese government enacted sweeping changes to the country's advertising laws; they took effect in September. The purpose was to address rampant issues of false and misleading advertising, especially in the areas of tobacco and medicine. Baidu found it necessary to overhaul how it screens its advertisers and weed out those engaging in questionable business practices, and expected that it would complete a self-imposed verification of its customers in the fourth quarter.
It indicated that compliance with the new stricter regulations would weigh most heavily on its results in the fourth quarter, with a recovery beginning early in 2017. Investors could get a look tomorrow at how heavy the costs were and should look for indications from Baidu's management that the expected recovery is under way.
Spiraling costs
Baidu has been pursuing several growth areas that have been a drag its results. Large investments in the area of online-to-offline, which connects people who are searching online with local merchants, have also been weighing on growth. In its last reported quarter, the company indicated that it was shifting from a transaction-based model to an advertising-based model. Investors will be looking for an update on progress in that area.
Baidu has also been investing heavily in content for its iQiyi subscription video on demand (SVOD) service, spending $332 million -- 12% of its revenue -- in its most recent quarter. iQiyi subcribers numbered 520 million monthly active users at last count, though only about 20 million of those were paying customers. Baidu believes that the key to monetizing the remainder is with high-quality content, which precipitated the spending. Investors will be eager to learn if the number of paying subscribers is increasing as result of its investment in content.
Data source: Baidu, Inc. Chart by author.
Investments in AI
Another area of interest is that of artificial intelligence (AI). Baidu has been increasingly devoting talent and resources to its efforts in the field. It recently hired AI expert Qi Lu as its chief operating officer. Just last week, Baidu acquired AI start-up Raven Tech, and will be creating a separate business unit for its Duer digital assistant and related products.
These moves should come as no surprise, as the company has been pursuing an AI-centric agenda, focused on deep learning, for some time. Baidu's chief scientist, Andrew Ng, is an adjunct professor in AI at Stanford University and developed the Baidu Brain AI project. The company recently announced the creation of a voice activated robot, "Little Fish," for the home smart-speaker market. It is also currently testing autonomous vehicles and plans to begin small-scale production of its driverless cars by 2018. Investors will be looking for updates on these developments.
Baidu's Little Fish voice-controlled robotic assistant. Image source: Baidu, Inc.http://www.prnewswire.com/news-releases/chinese-search-giant-baidu-and-ainemo-inc-introduce-the-ai-powered-family robot-300386178.html
Return to growth?
The biggest question for investors will likely be regarding progress in revenue growth. In its most recently reported quarter, Baidu reported revenue that fell 0.7% from the prior-year quarter, an ongoing trend for the last several years. While the number of mobile users has been growing, they are more difficult to monetize and therefore less lucrative than their desktop counterparts. This was a contributor to the year-over-year revenue decline. Investors will be looking for an update on how Baidu is addressing this disconcerting trend.
BIDU Revenue (Quarterly YoY Growth) data by YCharts
Investors should have no illusions. Given that management said in October that the most pronounced impact from complying with the new advertising regulations would be felt in the just-completed quarter, the quarterly results likely won't be pretty. However, Baidu has a history of making the right moves for success and I have no reason to think that has changed. Over the long term, my money is on Baidu.
