$BIDU-SW(09888.HK) 3Q24 Financial Report Quick Read: Here we still discuss Baidu's core business, excluding iQIYI.

The third-quarter performance concretely shows the pressures Baidu is currently facing—macro environment, competition, and the impact of AI transformation on traditional search, reflected in the sluggish growth of mobile traffic, with Baidu's core advertising revenue down 4.5% year-on-year, while other revenues grew by 12% year-on-year.

Due to most institutions adjusting their expectations downward at the end of October (including advertising and cloud), the final results show that the revenue side basically met expectations or slightly exceeded the relatively conservative expectations of some institutions. However, on the expense side, Baidu's confirmed R&D expenses for the period were significantly lower than usual, which Dolphin believes may be influenced by recent organizational optimization adjustments (department mergers, executive changes); specifics can be checked in the management's comments during the conference call.

Ultimately, Baidu's core profitability exceeded market expectations, but operating net cash inflow decreased by half year-on-year, which means that although capital expenditures in the third quarter were lower than market expectations, the final free cash flow was only 2.4 billion, lower than any quarter in the past three years except for the first quarter of 2022.

Dolphin believes that the cash flow from the advertising business has always been good, so when Baidu's advertising is under pressure, cash flow will naturally be affected. Meanwhile, other businesses (smart cloud, smart hardware, autonomous driving, etc.) may appear to have good revenue growth, but they may not necessarily result in immediate cash inflow. In addition, AI may also involve investments in intangible assets such as content, which can also be monitored through management's explanations.