After releasing its Q2 financial report, the capital market seems not to buy into Baidu's (NASDAQ: BIDU/09888.HK) narrative. On the day of the U.S. stock market opening, Baidu's share price fell, at one point dropping by more than 5%, with the decline narrowing later on, and ultimately closing with a 4.4% drop. As of the midday break on August 23, Baidu's Hong Kong stock price had plummeted by 5.38%.
On the evening of August 22, Baidu released its Q2 financial report, showing that in Q2 2024, it achieved a revenue of 33.931 billion yuan, which was flat year-on-year; the net profit attributable to Baidu was 5.488 billion yuan, a year-on-year increase of 5%. Baidu's core revenue was 26.687 billion yuan, a year-on-year increase of 1%, and the net profit attributable to Baidu's core was 5.462 billion yuan, a year-on-year increase of 9%.
In Q2, Baidu's online revenue was 19.2 billion yuan, a year-on-year decrease of 2%, while Baidu's Intelligent Cloud revenue reached 5.1 billion yuan, a year-on-year increase of 14%. As of June, the number of developers in the PaddlePaddle Wenxin community had reached 14.65 million. Public data shows that Baidu's Intelligent Cloud Qianfan large model platform has served a cumulative total of 150,000 customers, helping users to fine-tune a cumulative total of 21,000 large models.
In terms of intelligent driving, RoboTaxi has provided 100% fully autonomous taxi services in almost the entire city of Wuhan. At the same time, Baidu has begun large-scale fully autonomous road testing of the latest RT6 vehicle.
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It can be seen that in the second year of fully sprinting towards generative AI, Baidu, which prioritizes artificial intelligence, is moving forward with all its might. However, there are still hidden concerns that must be paid attention to on the road ahead.AI-Driven Smart Cloud Business Growth, Decline in Advertising Pillar Business Growth Rate
AI has always been seen by Baidu as a trump card for turning the tide, with increasing expectations placed upon it.
"In the second quarter, with the acceleration of the AI-native transformation of our products, we have optimized operational efficiency and maintained a healthy profit margin. In particular, the smart cloud business is expected to continue its strong growth momentum," said Baidu's CFO, Luo Rong.
During the earnings call on the evening of August 22, Baidu's Chairman and CEO, Robin Li, stated that the application-driven approach has further expanded Baidu's competitive and differentiated advantages. Currently, the daily usage and daily processed Tokens of the Wenxin Large Model are the highest in the country: the daily usage of the Wenxin Large Model exceeds 600 million times, and the daily processed Tokens text exceeds 1 trillion. Compared to the 50 million daily usage announced in Q4 of 2023, the growth in half a year has exceeded 10 times.
However, it cannot be denied that online marketing is still the pillar of Baidu's revenue, and the advertising business remains its main source of income. In the second quarter of 2024, Baidu's online marketing revenue was 19.2 billion yuan, a year-on-year decrease of 2%, accounting for 71.9% of the core revenue and 56.6% of the total revenue. This is the first decline for Baidu since the economic restart and rebound of the advertising business in the first quarter of 2023. In contrast, driven by the Video Account, Mini Programs, Public Accounts, and Search, Tencent's advertising business revenue reached 29.9 billion yuan in the second quarter, with a growth rate as high as 19%."Real estate, franchise operations, automobiles, and other key offline business formats are still sluggish," Li Yanhong stated during the conference call, attributing the decline in online advertising revenue to challenges from the macro environment and competition, as well as Baidu's more aggressive integration of AI into its search engine. On the other hand, Li Yanhong emphasized that the incremental revenue from generative AI and large models for advertising is continuously increasing.
In the second quarter, Baidu's non-online marketing revenue, including Baidu Cloud and intelligent driving, reached 7.5 billion yuan, a year-on-year increase of 10%. Li Yanhong revealed during the call that Baidu's intelligent cloud revenue for the quarter reached 5.1 billion yuan, a year-on-year increase of 14%, and continued to achieve profitability (Non-GAAP). At the same time, the proportion of revenue contributed by AI was further increased to 9%, which implies that the revenue generated by generative AI for Baidu Cloud in that quarter was approximately 459 million yuan.
This year, domestic giants have been "quickly iterating" large AI models. According to incomplete statistics, the number of domestic large models has now exceeded 200, covering various industries such as new energy vehicles, mobile phones, and industrial digitalization. When asked whether Baidu would lose its first-mover advantage in large models, Li Yanhong responded, "The competition in the next 2 to 3 years will be fierce; whoever can make money is the one who will ultimately survive."
As the competition in the large model industry accelerates, whether Baidu's AI business monetization can continue to offset the decline in online advertising business, and how long it will take for Baidu to completely break free from its dependence on advertising business, remains a question mark.
Intelligent driving orders increased by 26% year-on-year, and Baidu still bears a significant amount of capital expenditure.AI has already brought tangible benefits to Baidu's search and intelligent cloud services, and intelligent driving is considered the new driving force for Baidu's future revenue and valuation growth.
In the second quarter of 2024, Baidu's autonomous driving service, RoboTaxi, provided approximately 899,000 autonomous driving orders, a year-on-year increase of 26%. As of July 28, 2024, RoboTaxi has cumulatively provided over 7 million autonomous driving travel service orders to the public. Baidu's financial report emphasized that on June 19, RoboTaxi began offering 100% fully unmanned taxi services in almost the entire city of Wuhan.
In June of this year, "RoboTaxi," humorously referred to by Wuhan netizens as "Tao Luobo," attracted public attention due to tags such as "not refusing rides, following rules, low prices, and competing for business"; subsequently, doubts arose that "the development of unmanned driving technology will take away many jobs from experienced drivers and impact employment in the mobility market."
For Baidu, the business focus of RoboTaxi remains on achieving a break-even point in key cities.
It is reported that all vehicles of RoboTaxi are currently owned by Baidu, which bears the hardware capital expenditure and depreciation costs, and maintains an open attitude towards various business models and partnership relationships. Speaking about the business model of RoboTaxi, Robin Li said, "Our current focus is still on achieving a break-even point in key cities with the UE model (unit economic model, i.e., the operational cost of a single vehicle is balanced). In the long run, our goal is to innovate through asset-light models such as technology licensing to seize market opportunities."Baidu's Chief Financial Officer, Luo Rong, stated that regarding intelligent driving, Baidu's goal is to reduce losses, improve operational efficiency, and continuously enhance performance in businesses such as RoboTaxi. Robin Li, on the other hand, indicated that for a long time, RoboTaxi has been seen by the industry as a very advanced field, to the extent that no one can accurately predict how long it will truly take to achieve it. However, Baidu is on the verge of achieving regional break-even, "We are constantly innovating to reduce costs, and with the large-scale testing of the sixth-generation autonomous vehicle, the Apollo RT6 model, we anticipate that the official operation of the RT6 model will lead to sustained cost reduction."
"The Wuhan fleet has about 400 vehicles, and its current share in the Wuhan taxi service market is still very small, approximately 1%. The expansion of scale will definitely be a gradual process, and it may likely take many years."
AI Search Revolution: Baidu's Public Reputation Still Needs Improvement
"Search is one of the most suitable scenarios for AI to be implemented," as early as 2018, the former Vice President of Baidu, Wu Haifeng, explained the future of AI search from the perspectives of frameless, boundaryless, and infinite.
Looking at the global landscape, search is becoming the first cash cow business that large model companies are starting to compete for, and it is also the first major scenario for the application and implementation of large models. With platforms like Xiaohongshu, Douyin, Kuaishou, Bilibili, and Zhihu increasingly improving their content construction, users have more options beyond Baidu. According to the latest data from Statista, as of May 2024, Baidu still ranks first in China's search market, but its market share has dropped to 55.85%. Compared to the 86.82% market share in November 2021, it has lost nearly half of its dominance.Financial reports indicate that Baidu continued to advance the AI-driven transformation of its search engine in the second quarter. According to the teleconference disclosure, 18% of Baidu's search results in the second quarter were generated by AI, providing users with more accurate and direct answers. This represents a 7% increase from the 11% share in the first quarter of 2024.
Robin Li stated that AI-generated search results not only provide users with more accurate and direct answers but also add information that was previously inaccessible. Secondly, the new interactive features added to the search support users in refining their needs through multi-round dialogues, enhancing the user experience. However, due to the reduced frequency of the same content appearing, this has led to a decrease in commercial monetization.
An e-commerce online reporter searched for "places to visit in Hangzhou" via the Baidu app. In the comprehensive page, the top results still displayed advertising information about travel agencies. On the AI assistant page, a video introducing the corresponding tourist attractions would pop up in about 3 to 5 seconds, and the information about famous attractions would be generated word by word. After the complete answer was generated, it would also display refined question requirements, such as asking whether the user prefers natural landscapes or historical culture.
Baidu hopes to use AI to consolidate its search foundation and leadership position. However, in terms of traffic acquisition, Baidu appears to be too eager, which has backfired. In early May, some inappropriate remarks made by Qu Jing, then Vice President of Baidu's Public Relations, on her personal social media account sparked widespread controversy and dragged Baidu into a whirlpool of public opinion.In a publicly released video, Qu Jing displayed an indifferent and impatient attitude towards employees' personal family life situations, such as saying, "If an employee breaks up and asks to resign, I approve it immediately. Why should I consider the employee's family?" "If you refuse to travel with me for 50 consecutive days, don't come to me when it's time for promotion and raise..." This has caused strong dissatisfaction among netizens and raised doubts about Baidu, with some commenting, "It's clear what kind of company Baidu is," and "Seeing such values, Baidu's products are also clear at a glance."
After the incident escalated, Qu Jing posted an apology on her social circle at 9 am and resigned from Baidu on the same day. Some industry insiders pointed out that from a strategic decision-making perspective, Baidu's strategic positioning and decision-making speed seem to lag behind when facing the changes in emerging markets. In addition, organizational structure and talent management are also important issues faced by Baidu. During the rapid expansion process, the reform of internal management mechanisms and incentive systems did not keep up with the pace, which to some extent affected the team's vitality and innovation motivation.
According to the official WeChat account of Baidu on May 10, at Baidu's annual advanced award ceremony, Cui Shanshan, Senior Vice President of Baidu Group, pointed out many major factory diseases in Baidu: "We can't just sing praises and not talk about problems," "Flatter the superiors and deceive the subordinates, and work overtime to show work attitude," "All communication with superiors depends on the subordinates to convey, and the result is still a mess, but still say beautiful words."
"These major factory diseases also exist in Baidu, and some are quite serious. It's no wonder that employees complain, and the company's management is also anxious, and they are all focusing on and starting to solve these problems."
According to media such as China News Jie Mian, on August 9, Baidu's new public relations person Jiang Xinjie has taken office. After three months, Baidu has ushered in a new public relations position. Can Jiang Xinjie, who took over the position of public relations person, change Baidu's image inside and outside? A middle-level person in Baidu believes that there is only one way for Baidu to completely change the dilemma of public opinion, that is, to win a beautiful comeback in the AI era. If the business is not strong enough, it is impossible to improve the company's overall reputation by just replacing the public relations person.As the leading figure of the old-guard "BAT" (Baidu, Alibaba, and Tencent), Baidu's strength and resources are undoubtedly formidable. However, to reclaim its central position in the tech industry through AI, Baidu still has many hurdles to overcome.