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Why Baidu’s 3Q16 Fall in Revenue Could Be a Blessing

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Baidu’s revenue falls for the first time

Baidu (BIDU) released its 3Q16 results on October 27, 2016. It reported that its quarterly revenue fell for the first time. But the fall in revenue could be a blessing for the company and its shareholders since the challenge behind its top-line pressure is temporary. Once the problem is fixed, the company will be left with high-quality advertisers it can rely on for long-term growth.

Baidu’s 3Q16 revenue of 18.3 billion yuan, or $2.7 billion, was a 0.70% fall YoY (year-over-year). The top line in the latest quarter was dragged down by a 6.7% YoY fall in online marketing revenue, thanks to a new advertising law in China that bans advertising of tobacco and prescription medications. The heightened scrutiny of advertisements led to a 16.0% fall in the number of advertisers on Baidu’s platform.

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Baidu is guiding for a fall in its 4Q16 top line

The above graph shows Baidu’s revenue for the last five quarters to 3Q16.

Baidu expects the hit on its top line to be short-lived. It predicts that its revenue will start rising next year after another slump in 4Q16, the current quarter. For 4Q16, the company is guiding revenue of 17.8 billion–18.4 billion yuan, indicating a 1.7% fall YoY in its top line.

Earnings rise despite top-line pressure

Despite the fall in revenue, Baidu still managed to post higher profits for the latest quarter. Profits rose to 3.1 billion yuan from 2.8 billion yuan in the same period last year. Cost-cutting at Baidu supported its bottom-line improvement.

Future growth catalysts

Baidu is looking at new business opportunities for future growth. Its Internet search business is trying to mature amid tough competition from the likes of Tencent Holdings (TCTZF), Sina (SINA), and Alibaba (BABA) in the domestic market. For instance, Baidu has entered the food delivery market through Baidu Delivery. The company has also joined Alphabet (GOOGL) in developing self-driving cars as it seeks to diversify its revenue stream.

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