Chinese search giant Baidu beats on ad sales but streaming costs surge

Chinese search engine operator Baidu Inc beat market estimates for fourth-quarter revenue and profit on Thursday, as its core online marketing business stayed resilient and revenue surged in its Netflix-like streaming service iQiyi.

Baidu is betting its focus on streaming and new areas such as artificial intelligence (AI) will boost revenue and offset lower ad sales from real estate, finance and other sectors impacted by China’s economic slowdown.

The company, which is trying to cut its dependence on its core search business, spent heavily on content for iQiyi and promotions to attract new customers last year as its online ad business showed signs of pressure.

“We have entered a new stage for the Chinese internet,” Baidu Chief Executive Robin Li said in a conference call with analysts, warning that the market has saturated.

“New growth will be driven by technological innovation, and for our core search and news feed we continue to see a lot of room to grow.”

Baidu will begin expanding its AI capabilities, such as smart speakers and autonomous driving, to enterprise and government customers to boost profits, executives said.

The company’s key online marketing business, which includes search, news feeds and a video app and accounts for more than three quarters of the company’s revenue, grew 10 percent to 21.2 billion yuan ($3.15 billion) in the quarter ended Dec. 31.

But revenue from the business rose 10 percent in the December quarter, the slowest pace in six quarters, while spending per customer slipped 4 percent.

Revenue from iQiyi, in contrast, jumped 55 percent to 7 billion yuan. Content costs however nearly doubled to 7.3 billion yuan, mostly for iQiyi, and the company expects such expenses to rise in 2019.

“We made a huge promotion around Chinese new year. So we have to consider that cost,” Chief Financial Officer Herman Yu said, referring to a campaign run in cooperation with state broadcaster CCTV.

iQiyi, which competes fiercely with Alibaba Group Holding Ltd service Youku. The service gained 36.6 million subscribers last year.

Baidu’s U.S.-listed shares rose 3.8 percent in extended trading following the results.

Baidu, which had previously flagged a hit from stricter Chinese regulations and the Sino-U.S. trade war, forecast first-quarter revenue between 23.5 billion yuan and 24.7 billion yuan, in line with market expectations.

Fourth-quarter revenue rose 22 percent to 27.2 billion yuan, beating estimates of 26.3 billion yuan, according to I/B/E/S estimates from Refinitiv.

Net income attributable to the company fell to 2.08 billion yuan in the quarter, from 4.16 billion yuan a year earlier.

Excluding items, the company earned 13.18 yuan per American depositary share, beating estimates of 11.83 yuan per ADS.