China's Baidu forecasts sales drop as regulation, trade fears bite

(Reuters) – Chinese search engine operator Baidu Inc on Wednesday forecast lower-than-expected sales for the rest of the year, citing looming economic uncertainty and tough new regulations that have impacted its ad clients.

The company said revenue for the fourth quarter of 2018 will likely be 25.48 billion to 26.72 billion yuan, below the 27.6 billion yuan average of 17 analyst estimates compiled by Refinitiv.

Baidu’s businesses “began to feel he impact of policy changes… as well as general uncertainties from a potential trade war,” Chief Financial Officer Herman Yu said on a call with analysts after the firm released its earnings results. “We expect this trend to continue.”

Baidu’s U.S.-listed stock was down 1.4 percent in after-hours trading. The stock has fallen more than 20 percent since the beginning of the year, mirroring similar losses at peers Alibaba Group Holding Ltd and Tencent Holdings Ltd.

China’s technology companies have suffered in 2018 amid a string of new regulations, which have led to a suspension in online game releases and further restricted the advertising industry.

Economic concern linked to trade tension between China and the U.S. has also caused advertisers to tighten their budgets, said Baidu executives, impacting spending in the real estate, finance and online commerce industries.

Baidu took a further hit earlier this year on news reports about Alphabet Inc’s Google working on plans to re-launch a search engine in China after it left the market almost seven years ago in protest of censorship restrictions.

Addressing analyst questions about Google, Baidu Chief Executive Officer Robin Li said, “It’s a very fast-growing, fast-changing market… I don’t think a non-China-based company has that kind of competence to compete.”

Baidu has undergone an internal transformation since 2016, when a damaging medical ad scandal led to new rules that significantly reduced the number of ad clients eligible to use its platform.

Company executives on Wednesday said efforts to clean up medical advertising on the platform were ongoing, and could continue to impact sales.

“A proactive effort to improve the structure of healthcare information may impact our ad revenue in the near future,” said CFO Yu.

Since 2016, Baidu has divested several large business units that compete directly with heavyweights Alibaba and Tencent, including its online food delivery business and finance unit. Meanwhile, it is continuing to invest heavily in artificial intelligence and autonomous driving.

Despite the weakened fourth-quarter sales forecast, Baidu posted slightly better-than-expected sales for its third quarter. Revenue was 28.2 billion yuan ($4.11 billion), beating the average estimate of 27.53 billion yuan.

Net income rose 56 percent from a year earlier to 12.4 billion yuan, also slightly above estimates, though its operating margin dropped to 16 percent from 21 percent as it invests in new technology.

Excluding gains from the recent divestiture of its financial services business, Baidu posted adjusted earnings per share of 19.01 yuan versus the 16.70 yuan estimate.

CEO Li said revenue gain in the third quarter was linked to improvement in its search platform and news feed using artificial intelligence.

Traffic growth on Baidu’s mobile app also helped drive third-quarter revenue.

Baidu has become one of China’s biggest names in AI, with its efforts endorsed by the government as well as international firms. This month, it became the first Chinese company to join an AI ethics group alongside members such as Google and Apple Inc.

Li said the impact of regulation and trade fears could extend beyond 2018, but that he is still positive about the company’s prospects both overseas and at home.

“The longer term, I’m still very optimistic about the future of Baidu and the future of China.”