Chinese search leader Baidu, Inc. (BIDU -2.01%) reported earnings for its just-ended quarter, and results were better than expected. Its revenue of $2.45 billion was up 6.8% over the prior-year quarter and was largely in line with expectations. Earnings of $258.1 million were 10.6% lower year over year, but they beat expectations by a wide margin. While online advertising customers were down 23%, the ones that remained spent 27% more as the company works to improve the quality of its advertisers.
This marked the continuation of its recovery as the company moved to clean up its advertisers, as well as marking a period of significant investment in the nascent field of artificial intelligence. Though things were better than expected overall, the stock fell 4% on the news. What's going on? Two things conspired to push the stock lower in the short term.
Stock down on better results?
First, Jennifer Li, Baidu's long time chief financial officer, will be leaving her position to assume leadership of Baidu Capital, the company's investment arm, which will invest in late-stage, venture-backed companies focused on emerging technology. Baidu established this $3 billion fund late last year in a move that will help the company discover new technologies that will fit with its own. This latest personnel change comes on the heels of the addition of Dr. Qi Lu, who assumed the role of chief operating officer and the departure of Andrew Ng, who ran Baidu's AI efforts. The company also recently lost Wang Jin, who headed Baidu's autonomous driving business.
Second, the company provided guidance that fell squarely in the range of analyst's expectations for the current quarter, but the market was hoping for more. This marks the third consecutive quarter of falling revenue, and investors had been hoping for signs of a return to growth.
Clawing its way back
Baidu began the process last year of weeding out dubious advertisers making false or misleading claims -- particularly related to medicine and tobacco. This had been largely unregulated in the past, but it recently came to the attention of government officials who instituted additional oversight. Over the long term, this is a net positive for the company, but it makes for tough comparison in the meantime.
Baidu also announced that it was revising the grouping of some of its business segments to better represent its evolving ecosystem of services. Its Yelp clone and group buying service Nuomi will be consolidated into its core business going forward, rather than reported separately. This comes after the surprise last quarter that Baidu would monetize Nuomi through advertising rather than charging for each transaction.
Baidu continues to invest heavily in several areas that it believes represent significant future opportunities: artificial intelligence and content. The company has stated that it is moving from "mobile first" to "AI first" and increased its R&D budget 35% over the prior-year period to capitalize on what CEO Robin Li calls "a once in a generation opportunity."
Baidu has been using AI to drive incremental improvements in its flagship search and news feed, while aggressively adding video. News feed daily active users reached 83 million this month, and users are spending more time on its platform. Baidu has also been encouraging content creation on its site, and those users have surpassed 450,000.
Taking a page from other tech giants
Baidu also noted that its news feed added incrementally to its advertising revenue, with exhibitors seeing significant uptake from news feed traffic. This could result in a significant additional source of future revenue.
Baidu announced a deal to add content from American cousin Netflix, Inc. (NFLX 0.39%), though the terms of the deal were not disclosed. Baidu reported improved metrics for its iQiyi streaming video service, partially validating its decision to spend heavily on content. That spending reached over $1 billion in 2016 and $383 million in the quarter, doubling what it spent year over year and equaling nearly 16% of revenue.
At the end of the current quarter, iQiyi sported 129 million daily active users and 490 million monthly active users, and they had consumed 5.7 billion hours of content. By increasing content spending, the company plans to move more users from the ad-supported model to the paying subscriber segment.
The best is yet to come
Baidu has been making all the right moves, from cleaning up its advertisers to investing in an AI-centric world. It continues to build out its ecosystem of complementary products and services and focus on the long term. I like to see management less focused on the quarter and instead have a vision for the future.