After third-quarter revenue drop, Baidu warns China ad curbs to hit fourth-quarter harder

By Catherine Cadell and Paul Carsten BEIJING (Reuters) - Chinese internet search giant Baidu Inc warned investors fourth-quarter revenue will slide, hitting shares, as a government crackdown on healthcare 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 percent in the October-December period, following the 0.7 percent 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 percent 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 percent to 1.7 percent 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 percent in the third quarter. 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 percent fall estimated by a Thomson Reuters survey of 15 analysts, while net profit rose 9 percent 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. (Reporting Catherine Cadell and Paul Carsten in BEIJING and Aishwarya Venugopal in BENGALURU; Editing by Maju Samuel and Kenneth Maxwell)