Baidu Inc (ADR) (BIDU) AI-Enabled Products Making Progress

CFO Jennifer Li is taking on the role of becoming the CEO of Baidu Inc. (ADR) (NASDAQ:BIDU) Capital and will no longer serve as Baidu's CFO. 1Q17 earnings beat due to lower-than-expected O2O spending and revenue was largely in line. Core search recovery is ongoing, however the news feed ad product has yet to generate significant revenue. Commercializing AI-enabled products have become the top priority for the new COO Lu Qi but these are still long-term projects. Macquarie retains its Neutral rating and raise its TP to US$189 from US$182. Macquarie's SOTP values core search at US$136 per share, or 12X 2017E PE; the rest (Ctrip, iQiyi, Didi, cash etc.) at US$53 per share.  
1Q17 revenue was in line at RMB16.9bn. Non-GAAP net profit came in at RMB2.39bn and beat consensus by 13.5% due to lower-than-expected O2O spending. Mobile represented 70% of total revenue in 1Q17 vs 67% in the previous Q. NonGAAP OPM was 15.6% in 1Q17 and the firm expects full-year non-GAAP OPM to be 16.3% in 2017 vs 16.7% in 2016. The company guided 2Q17 revenue of RMB20.47-20.98bn, in line with consensus of RMB20.7bn. 
Baidu's core search non-GAAP OPM was 43% in 1Q17, down from 47%-50% in the past four quarters. The decline in core search margin is largely due to the ramp-up of news feed products which requires more content spending than pure search products. Going forward, transaction services will be lumped into core search business as Nuomi monetization transitions from a take-rate model to an advertising model. Macquarie expects core search business (including transaction services) to grow 13% yoy to RMB66.3bn in 2017. 
Accelerating the commercialization of Baidu's AI-enabled products has been Lu Qi's top priority since he took on the leadership role of Baidu in January of this year. The company has identified AI-cloud, financial services, DuerOS, and autonomous driving as the four key areas that have the most potential for applying AI technology. However, these products are still in the early stages and are unlikely to generate significant revenue in the near term.  
CFO Jennifer Li will take on the role of forming Baidu Capital and serving as its CEO. In the meantime, she will step down as Baidu's CFO after nine years in the position. Given the fact that Melissa Ma, Baidu CEO Robin Li's wife, has already returned to Baidu in January as the CEO's special assistant to oversee Baidu's investment, HR, and finance business segments; Macquarie did not thinks the management change will cause material impact to Baidu's daily operations.