April 26, 2018 / 8:49 PM / a month ago

China's Baidu beats forecasts as it sidesteps censors, boosts ad sales

BEIJING (Reuters) - Chinese internet search giant Baidu Inc blew past earnings estimates on Thursday, sending its U.S.-listed shares sharply higher in after-hours trading as investors cheered strong growth in its advertising business.

FILE PHOTO: Baidu's company logo is seen at its headquarters in Beijing December 17, 2014. REUTERS/Kim Kyung-Hoon/File Photo

The firm, which has had to bounce back from a bruising medical advertising scandal in 2016, said it was now taking extra measures to clean up content on its platforms amid a fierce online crackdown by China’s censors.

Baidu’s stock climbed 5.5 percent in late trading after marketing revenue grew 23 percent to 17.2 billion yuan ($2.71 billion), its second fastest quarterly rate in over two years. Net profit rose 23.4 percent versus forecasts of 19.5 percent.

Baidu said it now expects second-quarter revenues of between 24.91 billion yuan ($3.93 billion) and 26.19 billion yuan ($4.13 billion), indicating a 19.3-25.4 percent rise versus estimates of a 15.9 percent climb according to Thomson Reuters I/B/E/S.

The search firm’s news feed received an unexpected bump in the first quarter due to a crackdown by Chinese internet regulators on low-brow content, which saw several competing apps targeted during a key client-acquisition period.

Jinri Toutiao, one of China’s most popular news feed apps and a key Baidu rival, is among the apps to have been punished by censors this year. The news feed platform was temporarily removed from local app stores earlier this month.

“This is a one-off, but the timing is quite interesting. Baidu in its marketing can now assure clients that at least on the feed side it has safer content,” said Pacific Epoch analyst Raymond Feng, adding it made the firm “a more reliable choice”.

Analysts said the early year bump boded well for the rest of 2018, as advertisers tended to sign year-long contracts.

During a conference call with analysts on Friday, Chief Executive Robin Li said the company has employed artificial intelligence technology to target click-bait and inappropriate content. Baidu removed 20.2 billion malicious web pages in 2017.

“We proactively clean up indecent content and limit the volume of entertainment gossip news in one sweep... We use AI to identify and remove clickbait and vulgar content... We believe such a strategy will pay off in the long run,” said Li.

The helping hand from censors is in stark contrast to Baidu’s woes two years ago, when regulators cracked down on its advertising practices, gutting its marketing client base and bringing its revenue growth to a grinding halt.

The company has since sold or withdrawn from a number of businesses to focus on autonomous driving, AI and its news feed product, regaining momentum and investor confidence.

Baidu’s total revenue rose about 24 percent to 20.91 billion yuan in the three months to March 31, its slowest rate in three quarters despite topping analyst estimates.

The positive results also reflect lower-than-expected research and development expenses, which have sky-rocketed since Baidu’s pivot to AI due to steep costs hiring top talent.

Content costs linked to Baidu’s newly listed entertainment subsidiary iQiyi Inc are also expected to squeeze its margins for the foreseeable future, amid stiff competition in online content from rival Tencent Holdings Ltd.

Excluding one-time items, Baidu reported earnings of 16.30 yuan per American depositary share, above expectations of 10.57 yuan.

Baidu’s net income was also boosted by a new accounting standard that requires companies to report the value of their investments in private companies.

($1 = 6.3405 Chinese yuan renminbi)

Reporting by Cate Cadell in BEIJING; Additional reporting by Munsif Vengattil in BENGALURU; Editing by Sai Sachin Ravikumar and Christopher Cushing

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