Shulou(Shulou.com)06/02 Report--

Baidu has had a tough year, and the negative voice of Baidu by the market and media has climbed to its highest level since its inception in 2019. On the evening of January 22, 2019, the author of an article entitled "search engine Baidu is Dead" in the News Lab of the media became famous overnight.

The article "search engine Baidu is Dead" blames Baidu search results for more than half of Baidu's own products, especially Baijia accounts, which are full of marketing and poor-quality content. it has also led to a sharp decline in the content quality of Baidu search results. This is the most serious public opinion crisis that Baidu has encountered except the "medical accident in 2016".

But shortly before that, in the early morning of Nov. 7, Beijing time, Baidu released a third-quarter earnings report that far exceeded market expectations. Since then, Baidu's share price has soared for two consecutive trading days, rising 13.52% on Nov. 7 and rising and falling for two weeks after rising another 2.21% on Nov. 8, but overall, the share price has remained at a relatively high since September.

And Baidu this financial report itself, and from time to time revealed some problems. It will inevitably make many investors feel confused that "the sun rises in the east and the rain in the west, the road is sunny but sunny".

Baidu's financial report is in doubt

For Baidu's third-quarter results, Li Yanhong showed a very satisfied appearance.

In the internal letter of the financial report, Li Yanhong said: "this kind of performance is achieved under the staggered influence of a variety of uncertain factors, so it is even more valuable." this also shows that the positive changes we have made some time ago have initially shown their results. we have a better grasp of the balance of innovation, speed and efficiency, so that the company continues to improve, so that we are more confident in the coming 2020. "

"such performance" means that under non-US general accounting standards, the net profit attributed to Baidu reached 4.4 billion yuan, while the net profit attributed to Baidu core reached 6.3 billion yuan, with a total revenue of 28.08 billion yuan. Previously, Wall Street investment banks expected revenue of 27.6 billion yuan for Baidu in their earnings outlook, belonging to Baidu's net profit of 3.467 billion (not under US GAAP).

It can be seen that Baidu Q3 performance has achieved steady changes that exceed Wall Street expectations in key indicators. It is also worth mentioning that after the release of the results, Baidu's share price increased by 4.64% in after-hours trading, from which we can see the overall recognition of the results by investors.

However, under closer inspection, it is not difficult to find that Baidu's financial report, which has won market recognition and looks good, is also shrouded in some doubts.

First of all, from the revenue point of view, Baidu's revenue in the third quarter did exceed Wall Street expectations, reaching 28.08 billion yuan, which is very rare. But in terms of growth, year-on-year growth of-0.44% is another trough since medical malpractice in 2016 and the lowest level since 2017.

This stagnant revenue growth does not bode well for Baidu. But compared with the profits, it is already gratifying.

Baidu's operating gross profit has been declining for as long as a year. In the third quarter, Baidu's operating gross profit reached 11.7 billion yuan, a month-on-month growth rate of 14.61%, a significant improvement from 9.97% in the previous quarter. Year-on-year decline of 16.32%, the decline has indeed narrowed, but the situation is still not optimistic.

(data from Baidu Financial report)

Baidu's operating profit in the first three quarters totaled 1.652 billion, its lowest level since 2010. This is the inevitable result of Baidu's declining operating profit after the second half of 2018.

In fact, under the US general accounting standards, the net profit attributed to Baidu in the third quarter is a loss, and the loss is quite large.

Under GAAP, Baidu posted a net loss of 6.373 billion yuan in the third quarter.

(data from Baidu Financial report)

Li Yanhong mentioned in his open letter that the net profit attributed to Baidu in the third quarter was 4.4 billion yuan under non-American general accounting standards (Non-GAAP).

Under two different sets of accounting standards, the net profit attributed to Baidu can differ by more than 10 billion yuan, shrouded in the biggest fog on Baidu's third-quarter results.

Baidu said that the loss had nothing to do with the company's main business operation, but related to the previous sale of Ctrip shares. "due to the decline in the valuation of some equity investments over a long period of time, it included an unrealized loss of 8.9 billion yuan."

To put it simply, because the market value of Baidu's Ctrip stock is declining, "the continued low market price caused the company to recognize a non-cash impairment loss of 8.9 billion yuan in the third quarter of 2019."

There is some origin to tell about this matter.

In 2015, Baidu traded shares in Qunar, a holding subsidiary, and a minority stake in Ctrip, and then continued to invest in Ctrip, with non-cash accounting income as high as 24.4 billion yuan at one point. But since then, the market value of Ctrip stock has been falling. Baidu said it suffered a loss of 8.9 billion in the third quarter of this year.

On Sept. 26, Ctrip announced that its shareholder Baidu plans to issue 31.304 million American depositary shares (ADS), each ADS representing 0.125 common shares, valued at about $1 billion. "in October 2019, the company sold its shares in Ctrip," Baidu said in the financial report. After the sale, Baidu's stake in Ctrip's outstanding shares fell from 19% to 12%.

The real curiosity is that Ctrip can be blamed for the loss, but where will Baidu use the $1 billion (about 7 billion yuan) that Baidu cashed out from selling Ctrip shares? Of course, it is not mysterious, it is likely to be used to beautify the fourth-quarter results.

Although Baidu said that "the loss in the third quarter has nothing to do with the company's main business operation and Ctrip." But even if Baidu achieves a turnaround in the fourth quarter, and even optimistically expects a normal profit of more than 4 billion yuan to more than 5 billion yuan in net profit, there is still a high probability that the net profit (GAAP) attributed to Baidu in fiscal year 2019 will still be a loss.

Unfortunately, from the actual point of view, it is difficult to produce too optimistic expectations of Baidu Q4 performance. Because Baidu currently relies mainly on online marketing services (advertising), revenue from this business was 20.434 billion yuan in the third quarter, down 9.11% from a year earlier.

The "winter" of the Internet advertising industry is not a new topic. In an industry environment with great downward pressure, demand in the advertising industry has been weak for more than a year. At the same time, all service providers, including Tencent, are still under the pressure of byte bounce to continue to clear inventory. In Q4 in 2019, it is still difficult for the industry environment to make more favorable changes for Baidu.

Baidu expects its revenue for the fourth quarter to be 27.1 billion yuan to 28.7 billion yuan, an increase of one to six points. To achieve such growth, it is clear that the cash-out of 7 billion also needs to play a role.

However, it is clear that cashing out is not simply to beautify the financial results. Baidu paid a great price to get this money, there must be other more realistic, more urgent intentions.

This intention is not difficult to guess, probably to increase investment in the field of artificial intelligence. Because Baidu in the artificial intelligence track, must not be left behind by competitors.

Ya bao AI, missing out on Mobile Internet dividend

On December 10, 2018, Harvard Business selected the "Top Ten most watched AI leaders in the World", with Baidu CEO Robin Li, the only Chinese entrepreneur on the list.

Among them, the Harvard Business selection made the following comments on Li Yanhong: "the enlightened and designer of China's AI industry; he first put forward the trinity standard, believing that future enterprises need AI; the earliest self-driving open platform in the world to allow automobile companies to ALL in AI has greatly promoted the development of intelligent driving industry in China and the world." China's only CEO with a full set of AI technology and industrial capabilities, in its territory, the promotion of artificial intelligence for industrial upgrading, as well as for intelligent transportation, the construction of smart cities has entered the stage of landing application. "

Can Robin Li bear the title of "enlightening and designer of China's AI industry"? Judging from the reality of the past, it is well deserved.

Search engine is one of the most important technologies in the Internet industry, which appeared in the 1990s. In 1994, Infoseek began to allow webmasters to submit web addresses, which was an important step in the development of search engine technology. Robin Li is one of the core engineers of Infoseek.

In September 1998, Google Company was officially established. At this time, Robin Li has invented hyperlink analysis technology. In 2000, Li returned home with his own search engine patent technology and founded Baidu. This year, Google added both simplified and traditional Chinese versions. The decade from 2000 to 2010 was the decade when Google constantly challenged Baidu's dominance in the Chinese market.

In 2010, Google withdrew from China. After that, Baidu is the only major search engine market in China. Baidu looks very unenterprising after 2010. One year after the establishment of Google China in 2007, Baidu Japan Branch was officially established. After Google withdrew from China in 2010, Baidu's overseas expansion began to die down.

At the same time, around 2010, it is the rise of smart phones, 3G communication technology into commercial stage, the rise of the mobile Internet.

And miss the dividend of the Internet era, it is the fundamental reason why Baidu fell out of the "BAT" circle.

In fact, as a real technology master in the Internet industry, Robin Li missed the mobile Internet only because he was attracted too much attention by other technological trends. And this technological trend is artificial intelligence.

At present, we are in the third upsurge in the history of artificial intelligence. This wave of artificial intelligence has been on the rise since the 1990s with the rise of Internet technology. But the real landmark progress was around 2010.

In 2010, TSMC and other international chip manufacturing giants have broken through the 28nm process, the basic computing power has been improved by leaps and bounds, making a variety of artificial neural network research and application development trend is very good.

Since 2010, search engines have to deal with countless corpus and information every day. In the Internet industry, Baidu and Google are the first to increase the application of artificial intelligence technology.

Baidu has invested a lot in artificial intelligence and has yielded fruitful results.

Baidu set up a natural language processing unit in 2010 and decided to build an artificial intelligence laboratory in 2012. Since then, a lot of resources have to be invested in the field of artificial intelligence every year.

So although it seems to be unenterprising, it also misses the dividend of the mobile Internet era. But after 2010, Baidu's R & D investment is growing rapidly every year.

The question is how much output has been achieved after so many resources have been invested? After all, what shocked the world when defeating Lee se-dol with AlphaGo in 2016 was Google's deep learning algorithm, which had nothing to do with Baidu.

In fact, Baidu's achievements are not dazzling, but they can also be called fruitful.

Lu Qi, who left Microsoft in 2017, announced that he would join Baidu as president and chief operating officer of Baidu Group. After taking office, Lu Qi quickly carried out drastic reforms to the entire Baidu, and combed the development of Baidu's artificial intelligence in detail. At the Baidu AI developer Conference (Baidu Create 2017), the Baidu AI platform architecture map was unveiled for the first time and opened more than 60 core competencies.

A lot of things happened before and after the third Baidu AI developer Conference this year, such as Lu Qi's departure, that bottle of water, and so on. Of course, the conference focused on the significant issue of "industrial intelligence", rather than anything else. At the meeting, Baidu demonstrated the application prospect of AI in autopilot, intelligent transportation, smart home, intelligent education, intelligent medical care, intelligent finance, intelligent city and other scenarios.

In its third-quarter results, Baidu said that the Chinese voice assistant DuerOS has more than 4.2 billion monthly voice queries, and the DuerOS skills store now offers more than 3200 skills. More than 36000 developers behind DuerOS are still feeding it a steady stream of ideas. In the second quarter of 2019, small smart speakers using DuerOS technology ranked first in shipments of smart speakers in China, according to data from technology market analysis companies Canalys,IDC and Strategy Analytics.

Baidu has also made substantial progress in self-driving. On September 26th, Baidu announced in Changsha that the Robotaxi trial operation of the self-driving taxi fleet was officially launched. The first batch of 45 Apollo and FAW Hongqi jointly developed "Red Flag EV" Robotaxi fleet began trial operation on some open test roads in Changsha. At present, Baidu has obtained 150 autopilot licenses, accounting for more than half of the domestic autopilot licenses.

As of the end of September, Baidu AI open platform has been widely adopted by more than 1.5 million developers. This means that Baidu still holds the most dynamic AI development platform in China, and can continuously contribute new artificial intelligence research ideas and even related achievements to Baidu. At present, Baidu is also showing a more and more positive attitude towards the commercialization of artificial intelligence.

It takes ten years to sharpen a sword.

Baidu has made great efforts in the field of artificial intelligence in the past decade, which has given it the unique technology and application of domestic Internet players. What is in short supply now is only further education and development of the market.

With the continuous promotion of the industrialization of artificial intelligence, the development of Baidu will get a brand-new engine.

In the next two or three years, can artificial intelligence create a new Baidu?

Meituan issued a notice through the intranet encouraging all employees to participate in an internal discussion called "a better decade". Wang Xing hopes to form a consensus among all Meituan staff on corporate culture and development in the next ten years through great discussion. He believes that Meituan's development in the next two years will establish the situation that the company will form in five to ten years' time.

Not from the perspective of corporate culture, from the perspective of the technological development of 5G+IOT+AI, the development of the entire Internet industry in the next two or three years may also have a decisive impact on the pattern of the Internet field in the next five to ten years.

At present, Baidu, which ranks sixth in terms of market capitalization of China's Internet listed companies, is still among the giants. But compared with Ali, Tencent, the two top giants, the market capitalization has a gap of about 10 times.

Is it possible for Baidu to return to the top giants?

So far, Baidu's performance in 2019 has been poor, and even the financial performance of Q4 may not be too optimistic.

But from a longer-term point of view, now that Robin Li has said he is confident about the coming 2020, Baidu is likely to make more intensive moves in 2020.

Considering Baidu's huge investment in artificial intelligence, it has become one of the few Chinese enterprises that really run through the ecology of artificial intelligence industry from technology layer to application layer. As long as the industrialization of artificial intelligence progresses steadily in the next two or three years, Baidu reappears the glory of "BAT", it will not be just a fantasy.

According to the China Academy of Information and Communications, the market size of China's artificial intelligence industry reached 41.55 billion yuan in 2018, with a compound annual growth rate of 54.6 per cent from 2015 to 2018.

With the increasing investment in artificial intelligence in politics and industry, the scale of artificial intelligence industry may usher in explosive growth after 2020. According to the summary of the forecast of the scale of China's artificial intelligence by many authoritative institutions at home and abroad by the prospective Industrial Research Institute, it is optimistically estimated that the size of China's artificial intelligence market is expected to exceed 160 billion in 2020; the neutral forecast is that the size of China's AI market in 2020 is about 700-100 billion yuan.

In other words, it is optimistically estimated that the market size of China's artificial intelligence industry will reach 2000-300 billion yuan in the next two to three years. The total revenue of the Internet advertising market in 2018 was 369.423 billion yuan, while Baidu relied on online marketing (advertising) services for 81.9 billion of its total revenue of 102.3 billion yuan. Simply from the perspective of market prospects, artificial intelligence will be enough to recreate a Baidu in the next two to three years.

It can be said that Baidu is in the pre-dawn darkness, but it needs to survive the immediate test.

Wen, Snake Eye Financial reporter / Cheng Xiang, official account ID:sheyancaijing

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