(Bloomberg) -- Baidu Inc.’s quarterly revenue shrank 1% and its projections suggest sales could slide again, as rivals like ByteDance Ltd. continue to chip away at its core advertising business.China’s leading search engine forecast sales of 26.3 billion yuan ($3.8 billion) to 28.7 billion yuan for the September quarter, compared with estimates for 27.62 billion yuan. Its shares slipped as much as 8% in extended trading after Netflix-style subsidiary iQiyi Inc. disclosed it was cooperating with a U.S. regulatory inquiry into allegations by Wolfpack Research that it inflated user numbers. Shares in iQiyi fell as much as 19%.Read more: Baidu-Backed Iqiyi Tumbles After Disclosing SEC Probe of RecordsBaidu is riding a gradual post-Covid 19 recovery in its home market but, at the same time, is trying to ward off increasingly aggressive competition in media and advertising from the likes of Tencent Holdings Ltd. and ByteDance. The company is diversifying ad revenue sources and investing in content for its Netflix-style iQiyi Inc. to keep users and marketers from migrating to hotter formats like ByteDance’s news app Toutiao and Douyin, TikTok’s local equivalent. On Thursday, Baidu said it will step up investment in technology and content.“If we look at the budget allocation from advertisers, it looks like Douyin and Toutiao are the most attractive to them starting from about two years ago,” said Raymond Feng, a Shanghai-based analyst with Pacific Epoch. “With the increased investment in Baijiahao, Baidu is trying to catch up on that front, creating more content that’s more welcomed by users, that’s necessary for Baidu to do so.”What Bloomberg Intelligence SaysBaidu’s 2Q online marketing sales could contract less than 1Q’s 19% drop as the company emerges from the worst of China’s coronavirus outbreak. The second quarter has been seasonally strong for advertising in the past, and this time Baidu will benefit from the rebound in offline business activity and improved advertiser sentiment.\- Vey-Sern Ling and Tiffany Tam, analystsClick here for the research.Baidu reported sales of 26.03 billion yuan ($3.75 billion) in the June quarter, versus an average forecast for 25.7 billion yuan. Net income was 3.58 billion yuan, versus the 2 billion yuan projected. Its board also approved an increase of its share-repurchase program to $3 billion from $1 billion, effective through 2022.Once the runaway leader in desktop search, Baidu is trying to adapt its business to the mobile era but losing ground piecemeal to rivals such as ByteDance. To compete, To compete, Baidu’s core mobile search service is morphing into a platform hosting a wide array of content from articles on its Baijiaohao publisher accounts to videos and live-streaming, not unlike Tencent’s super-app WeChat.Longer term, the search giant is investing in artificial intelligence technology, and betting on the commercialization of that through smart speakers and self-driving cars. Revenue from new AI businesses including cloud and smart devices grew by a double-digit percentage in the second quarter, the company said.Rising geopolitical tensions are another source of concern. Baidu’s apps were among dozens of Chinese services targeted in India’s sweeping ban last month, while U.S. entities will soon be blocked from dealing with TikTok and Tencent’s WeChat. The U.S. Congress is moving closer to passing legislation that could effectively bar Chinese companies from trading on U.S. exchanges. Billionaire Baidu founder Robin Li told state media earlier this year that the company is considering relisting in regions including Hong Kong.Chief Financial Officer Herman Yu told analysts on a call that geopolitical tension “doesn’t have a meaningful impact” on Baidu’s business because of its limited overseas exposure.“These positive moves forward, coupled with some temporary setbacks, leave us cautiously optimistic about the business climate into the second half,” Li said. “While COVID-19, geopolitical tension and other phenomenon plaguing the economy may continue to bring about hiccups, the opportunities that AI has presented us are getting more exciting.”For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg Opinion) -- Even if China's consumers are still willing to buy some products, companies lack confidence to shell out cash marketing to them. Take a look at Baidu Inc. which just reported second-quarter numbers. The results were bad. But more than anything, they highlight how this disconnect is playing out in the technology sector. China’s biggest search-engine operator posted a 3% drop in revenue at its core business — chiefly search advertising. Some analysts and reporters saw that as a win, having played into a classic sandbag and spin strategy — lower expectations, then when bad numbers come in, pretend they’re actually good. So let me reiterate: Baidu’s numbers are not good. And they’re about to get worse with third-quarter revenue forecast to decline once more. Set that against NetEase Inc., which also reported overnight. Like Tencent Holdings Ltd., its bread and butter is gaming, which saw solid growth during the June period. Its revenue in that category climbed 21%, not as good as Tencent’s 40%, but quite decent in the middle of an economic slump. There is growth outside gaming, too. Lenovo Group Ltd., which reported Thursday, managed a 17% rise in China sales, driven by demand for PCs and servers (to play games, perhaps?). Smartphones slumped, however, with various research firms noting a double-digit decline in shipments. Interestingly though, Huawei Technologies Co. and Apple Inc. posted solid growth — which is significant because these two brands tend to offer some of the highest-priced models in the market.One easy explanation is nesting: People just want to stay home and spend money on activities there. But I think over the next few months we’ll see that this doesn’t tell the whole story.NetEase, Tencent and Lenovo benefit from having something that they can sell directly to the consumer — and in the second quarter it was clear there were people willing to buy at least some categories of products. Baidu and others in the ad business, meanwhile, rely on brands having the confidence to spend money, believing that sales will roll in later. Tencent highlights this split with revenue from media advertising — placed on its content platforms — slumping 25% for a fifth straight decline.Baidu itself cut its own marketing budget. At iQiyi Inc., its video-streaming subsidiary, membership revenue grew 19% (showing that there’s more eyeballs on the platform) but ad sales dropped 28%.As we continue through earnings season, investors may want to keep an eye out for which companies have a direct relationship with consumers, and which merely rely on brands having the confidence to spend money and pitch to them.This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
IQIYI fraud allegations first raised by short seller Wolfpack Research being probed by securities regulators.