Traditional Business Declines, Baidu Ventures Face Uphill Battle
Baidu, a pioneer in the AI revolution back in 2010 with its ambitious declaration of being "all in AI," continues to push forward in the field of artificial intelligence, showcasing notable advancements recently. The company's latest undertaking was the establishment of an AI education training center in Hong Kong, a partnership with the tech firm Qianfan Technology designed to inspire and train the next generation of AI enthusiasts in the region.
This center, located in Cyberport, Hong Kong, marks a significant step towards enhancing AI literacy and training among local youth. Baidu plans to invite research teams to conduct numerous courses and educational activities starting in 2025, in collaboration with various universities across Hong Kong. The initiative aims to benefit as many as a thousand young people annually by providing them with hands-on experiences and knowledge in AI.
Furthermore, Baidu has submitted an application to the Hong Kong Transport Department for a pilot license for autonomous vehicle testing. Their ride-hailing platform, "Luobo Kuaipao," is set to commence trial operations in Hong Kong, with the first phase of testing expected at the airport by the end of this year. These efforts highlight Baidu's commitment to leading the charge in autonomous driving technology.
Encouraged by these developments, Baidu's stock has shown a positive trend, increasing from a low of HKD 75.2 after November 22 to HKD 82.9 by December 2, raising the company's market capitalization to HKD 197.1 billion. However, the financial landscape remains complicated.
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Despite initiating a vision centered on artificial intelligence over a decade ago, Baidu has struggled to make AI a substantial source of revenue, even as its conventional business segments have been declining. According to Baidu's latest financial report, their third-quarter revenue for 2024 reached RMB 33.557 billion, a decrease of 3% year-over-year. While net profits according to GAAP rose by 14% to RMB 7.632 billion, the Non-GAAP measure resulted in a startling 19% drop to RMB 5.89 billion, showcasing a complex financial scenario.
The breakdown of revenue composition still heavily relies on its core business and iQIYI, with Baidu's core revenue accounting for RMB 26.5 billion, holding steady year-over-year, while iQIYI saw a decline of 10% to RMB 7.2 billion, heavily contributing to the overall revenue slump.
The core business is divided into online and non-online marketing revenues. Online marketing revenue, primarily from advertising services, amounted to RMB 18.8 billion, down 4%, constituting 71% of total core revenue. In contrast, non-online marketing revenues—which encompass Baidu Cloud and its autonomous driving sector—increased by 12%, amounting to USD 7.7 billion, attributed to the burgeoning smart cloud business.
The picture painted is of a company where more than 70% of its income derives from online advertising, a traditional revenue stream that has now plateaued. This revenue stream, which saw a 2% dip in Q2, widened to a 4% decline in Q3, leading to overall revenue falling by 3%—the steepest decline in nearly two years.
During an earnings call, Baidu's co-founder and CEO, Robin Li, attributed the drop in online marketing revenue to macroeconomic challenges, the ongoing shift to an AI-driven search model, and the changing landscape of internet content. The company's advertising business is highly sensitive to economic conditions, with sectors like real estate and healthcare struggling despite recent stimulus attempts by the government.
Additionally, Baidu is rapidly integrating AI into its search functionalities, with 20% of search results now generated by AI. This shift has led to 70% of monthly active users of the Baidu app engaging with AI-generated content. However, this transformation poses potential threats to the existing advertising business, as it diminishes ad exposure by providing users direct answers generated via AI.
"Our focus on cost control has laid a solid foundation for the Q3 performance," Baidu's acting CFO asserted, emphasizing successful optimization initiatives that maintained the operational profit margin steady.
New Business on the Horizon
Li indicated the challenges faced in their online marketing sector are being counterbalanced by the growth of their smart cloud business, underscoring the growing recognition of their AI capabilities. The escalating use of their Wenxin series of models stands testament to this recognition.
According to the earnings report, Baidu expanded its Wenxin series with two enhanced lightweight models, Speed Pro and Lite Pro, adding richness to the suite. By November, the Baidu PaddlePaddle and Wenxin ecosystem collectively included 18.1 million developers, with daily API calls for Wenxin models reaching 1.5 billion—an impressive spike from the 600 million calls recorded in August.
In terms of autonomous driving, Baidu's "Luobo Kuaipao" saw 988,000 automated driving orders in Q3, an increase of 20% year-on-year. By the same period, fully autonomous driving orders constituted over 70% of total orders, a figure that climbed to 80% by October, with the release of their sixth-generation self-driving vehicle, the RT6, already operating in multiple cities.
Li also expressed optimism about expanding their autonomous driving operations in cities like Wuhan and Chongqing, while actively pursuing international expansion opportunities.
Of the RMB 7.7 billion generated non-online marketing revenues, Li reported that Baidu's smart cloud business achieved RMB 4.9 billion, marking an impressive 11% growth year-on-year, despite a slowdown from the previous quarter's 14% growth. Importantly, revenue driven by generative AI has emerged as a significant growth engine, accounting for 11% of cloud revenue, up from 9% in Q2.
Nonetheless, while the growth in AI-related business is encouraging, the overall figures remain lackluster, representing less than 20% of Baidu's total revenue for the quarter. "Despite facing short-term pressures, we are firmly committed to an AI-centric strategy and remain optimistic about our long-term growth trajectory," Li stated. "As we further scale our AI capabilities, we endeavor to explore how AI can drive innovation and add value for consumers, businesses, and society at large."
The Long Road Ahead for AI
Public records suggest that Baidu's longstanding investment strategy in AI, dating back to 2010, has rounded up to over RMB 170 billion in investments across its AI, autonomous driving, and smart cloud sectors. However, after a decade, the company has noticeably struggled in finding a definitive avenue for AI commercialization.
"Encouraging early results have been seen in several verticals, including legal, education, and B2B services," noted Luo Rong during an earnings call. "For instance, the Wenxin Yiyan intelligent assistant aimed at advertisers has successfully generated a boost in effective sales leads, enhancing advertiser value while improving overall user experience. As foundational models continue to evolve, these intelligent assistants are expected to unlock even greater revenue opportunities."
However, Luo cautioned that Baidu remains in the early stages of exploring commercial monetization opportunities in AI search. The company is approaching this transition cautiously, prioritizing user experience enhancements over immediate commercial gains.
From the executive perspective, the journey of product transformation at Baidu reflects a strategic inclination to prioritize long-term value creation over short-term profits. Given the challenges they face in traditional business areas, Baidu is now tasked with navigating through the complexities of nurturing new ventures capable of sustaining growth in the future.