Baidu Sees Hit From China Slowdown as Forecast Trails Estimates

(Bloomberg) -- Baidu Inc. predicted sales below analyst estimates as the Chinese search giant warned about a potential hit from regulatory changes, a slowing economy and the overhaul of its medical ads business.

Revenue will be as high as 26.72 billion yuan ($3.8 billion) in the December quarter, the Beijing-based company said Tuesday, falling short of the 27.8 billion yuan average of estimates compiled in the past four weeks. Baidu said the impact could last for the next few quarters as it ramps up spending on video content.

While Baidu dominates desktop search in China, questions hang over the ad outlook as businesses adopt a more cautious approach to spending with U.S. trade tensions escalating. Recent restrictions on video game licenses have forced many key customers to pull back advertising as they wait for permission to make money from their titles. Growth is also being eroded by increasingly tough competition from relative newcomers like Bytedance Ltd. and its suite of hugely popular content aggregation apps.

“There have been various policy changes in China. Gaming will probably be one of the industries that would be impacted but there's several other ones - we could be impacted from real estate, interior design, some from lifestyle and some from online commerce and so forth," Chief Financial Officer Herman Yu said on an earnings call. "Added together they caused us to grow not as fast as we'd like in Q4."

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Baidu will increasingly shift away from automatically generated search results and toward curation, particularly for health care queries. Users looking for medical information will no longer be taken directly to the advertisers, a move designed to improve the quality and authenticity of results.

The change is expected to hurt sales as people get used to the new arrangement but Yu said it would eventually garner more conversions and improve the confidence of users. Some other categories will also be shifted to the new model, but the company declined to add more specifics.

The overhaul of medical advertising, one of its biggest businesses, is the latest action by the company since it was engulfed in a scandal in 2016 over ads for controversial treatments.

The changes, along with falling confidence in the economy and the regulatory impacts, cut 800 million yuan from Baidu's forecast, Yu said.

While confidence levels in the private sector and among users isn't high, Chief Executive Officer Robin Li said he doesn't think “the fundamental fabric of the Chinese economy is in question.”

Li has pledged to continue investing in creating better artificial intelligence systems and creating a so-called super app. That would enable Baidu to host other products and services, a strategy successfully used by Tencent Holdings Ltd.'s WeChat. The company's DuerOS AI system will start making material revenue from 2020, it said.

Content costs at Baidu surged 73 percent thanks largely to iQiyi Inc., its Netflix-like video streaming service. The subsidiary also issued forecasts that fell short of estimates, blaming regulatory impacts and reduced ad spending after the 2018 FIFA World Cup.

“Ad budget tends to get impacted amid weak macro environment,” CICC analyst Natalie Wu said in a note to clients before the earnings, pointing to slowdowns during prior periods of economic strife. “We see a chance of deceleration and missing expectations for search & feed ads going forward.”

The Beijing-based company is set to hold its Baidu World Conference in the capital on Thursday to discuss its artificial intelligence advancements and unveil new products.

--With assistance from Ian King.

To contact Bloomberg News staff for this story: David Ramli in Beijing at dramli1@bloomberg.net

To contact the editors responsible for this story: Robert Fenner at rfenner@bloomberg.net, Edwin Chan

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