(Bloomberg) — Baidu Inc.’s quarterly revenue fell its most in about three years, hurt by an economic downturn that’s capping its ability to fight bigger rivals in AI and make inroads in newer areas.

The Ernie chatbot creator’s sales in the June quarter fell 4% to 32.7 billion yuan ($4.6 billion), weighed down by a slowdown in its core internet search operations. Net income rose 33%, versus projections for a decline, helped by a boost from long-term investments. The company’s US shares slid 2% in pre-market US trading.

China’s internet search leader is betting big on generative AI to drive future growth, but it faces mounting pressure from open-sourced models like DeepSeek as well as a wave of AI-native apps encroaching on its turf. The company will continue to invest in artificial intelligence even as margins and revenue come under pressure in the near term, Chief Financial Officer Henry He said.

That’s while its mainstay search business loses ground to social-video platforms like Xiaohongshu and TikTok’s Chinese twin Douyin. Online advertising revenue declined 15%. But non-marketing revenue grew a better-than-expected 34%, aided by demand for its cloud unit.

“Since the AI search monetization is still in very early stages and has yet to scale, our revenue and margins are under considerable pressure in the near-term with Q3 expected to be especially challenging,” He said. “We see potential for margin improvement as our core advertising business recovers and stabilizes.”

Baidu ADRs Dip as Results Show Revenue Drop: Street Wrap

Baidu is counting on Ernie to underpin an AI ecosystem and drive demand for its cloud division, whose sales have grown by double-digits in recent quarters. 

It’s also accelerating an overseas push by its Apollo Go robotaxi service, through partnerships with Uber Technologies Inc. and Lyft Inc. Baidu’s driverless rides in the June quarter more than doubled to 2.2 million, with cumulative rides passing 14 million in August, it said. 

Baidu plans to take its fleet of self-driving robotaxis — common in Beijing, Guangzhou and Wuhan — to Singapore and Malaysia as early as this year, Bloomberg reported. The company is now running trials in Hong Kong.

But in China’s increasingly crowded AI arena, Baidu faces rivals Alibaba Group Holding Ltd. and Tencent Holdings Ltd. — both with far more firepower and larger global footprints — as well as nimble upstarts. Baidu’s stock price is up around 6% this year, trailing both of the bigger internet leaders.

“We are not yet at the stage for large-scale monetization,” co-founder Robin Li told analysts on a call. “While our AI transformation is progressing rapidly, it is still in the early stages, with considerable room for optimization before reaching its full potential.” 

Baidu’s Ernie was one of the first chatbots to launch in the world’s biggest internet arena, but it’s since lost ground to apps from ByteDance Ltd. and Tencent as well as open-sourced models like Alibaba’s Qwen. 

What Bloomberg Intelligence Says

Baidu’s modest 2Q core top-line beat on rising AI cloud services demand came despite search engine ads falling 15% to 16.2 billion yuan, while adjusted operating income plunged 41% to 4.4 billion yuan. Margins were also pressured with gross margin missing forecasts by 120 bps, falling 780 bps annually to 43.9%, as the revenue mix shifted toward lower-margin cloud services. 

– Robert Lea and Jasmine Lyu, senior analyst

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The company has had to abandon its paid subscription model as well as open-source its proprietary Ernie models.

That’s as Baidu’s Netflix-style subsidiary iQiyi Inc. reported an 11% revenue drop. The embattled streaming platform is seeking to raise $300 million for a listing in Hong Kong this year, Bloomberg News has reported.

–With assistance from Vlad Savov.

(Updates with shares, CEO’s quote from the second paragraph.)

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