Chinese motorists pass  by the Chinese W
Chinese motorists drive pass the Chinese Web search giant Baidu's head office in Beijing. SIMON LIM/AFP/Getty Images

Chinese Search Giant Baidu Warns of Government Crackdown After Its First Loss

Oct 28, 2016

Chinese internet search giant Baidu (bidu) warned investors fourth-quarter revenue will slide, hitting shares, as a government crackdown on health care advertising that tipped the firm into its first-ever quarterly sales drop bites even harder.

Baidu said revenue could slip as much as 4.6% in the October-December period, following the 0.7% third-quarter drop it reported on Thursday. Though the latter was better than analysts had estimated, the warning was enough to send shares down as much 4% extended New York trading.

Though net profit remained robust last quarter, the revenue slowdown comes as China's biggest search engine, with a market value of about $60 billion, rides out a public and regulatory backlash. Earlier this year it was at the center of a national media outcry when a student with a fatal cancer blamed Baidu ads for directing him to suspect, ultimately ineffectual treatment.

Regulators responded by slapping curbs on the firm's lucrative healthcare advertising business.

Chief Executive Robin Li said on an earnings call Baidu is unlikely to regain ground lost in the current "challenging" period until early next year. Baidu estimated fourth-quarter revenue will be 17.84-18.38 billion yuan ($2.63-2.71 billion) - 4.6% to 1.7% below the same period a year earlier.

"Q4 is what we consider to be the bottom," said Chief Financial Officer Jennifer Li. "We will see a more pronounced impact over the next quarter."

Reflecting the new regulations, Baidu said the number of advertising customer dropped 16% in the third quarter.

For more on business in China, watch Fortune's video:

Jennifer Li said the pool of advertisers available to Baidu's core business was still large, but conceded the new regulations would have a lasting impact. "Because of this really strict control... some of the customers will not be able to do business with us," she said.

For the three months ended September, Baidu revenue fell to 18.25 billion yuan. The drop was slightly smaller than the 1% fall estimated by a Thomson Reuters survey of 15 analysts, while net profit rose 9% to 3.10 billion yuan.

Having flagged earlier this year that the new rules would affect revenue, Baidu said this month it would establish a $3 billion investment fund focused on mid- and late-stage deals in the internet sector in a search for new business lines with growth potential.

Baidu has also placed long-term bets on fields like artificial intelligence and even automated driving, but these projects are still far from profitability.

During the conference call, Robin Li reiterated the company's commitment to research and development projects, saying that the company is on track to start small-scale production of a Baidu autonomous vehicle by 2018.

All products and services featured are based solely on editorial selection. FORTUNE may receive compensation for some links to products and services on this website.

Quotes delayed at least 15 minutes. Market data provided by Interactive Data. ETF and Mutual Fund data provided by Morningstar, Inc. Dow Jones Terms & Conditions: S&P Index data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Terms & Conditions. Powered and implemented by Interactive Data Managed Solutions