BIDU — Q2 2026 Financial Report Analysis

AI cloud up 50%, search ads down 19%, and profit down 68% mostly because last year had an investment gain

Baidu's revenue for the quarter ended June 30, 2026 fell 4% to RMB31.3 billion (about US$4.6 billion). Two parts of the business are moving in opposite directions. Online advertising, which was 62% of the main business a year ago, shrank 19%. AI cloud infrastructure, meaning computing power Baidu rents to other companies, grew 50%. Operating income, the profit from running the business before interest, investment gains and tax, dropped a more modest 8% to RMB3.0 billion. Net income attributable to Baidu fell 68% to RMB2.3 billion. Most of that drop comes from below the operating line: a year ago Baidu booked a RMB3.3 billion gain on the value of investments it holds, and this quarter had nothing like it. Figures are in Chinese renminbi (RMB), the currency Baidu reports in. The US-dollar amounts use the release's own conversion rate of RMB6.7851 per dollar.

At a glance

• AI Cloud Infra revenue: RMB7.3 billion, up 50% year over year. Within it, GPU Cloud (renting out AI chips by subscription) grew 283%. This is now the largest single piece of what Baidu calls its "AI-powered Business."
• Online marketing revenue: RMB13.1 billion, down 19%. Baidu still earns more from ads than from anything else, and that revenue fell by about RMB3.1 billion. The AI businesses added about RMB2.5 billion, so total revenue still declined.
• Capital spending: RMB11.4 billion, three times last year's RMB3.8 billion. Operating cash flow was RMB3.4 billion, so free cash flow came to negative RMB8.0 billion. Baidu took on new bank loans while it builds out AI computing capacity.

Key figures

An ADS (American Depositary Share) is the unit that trades on Nasdaq. One ADS equals eight ordinary shares. "Non-GAAP" figures are the company's own adjusted measures. They leave out stock-based pay and certain investment gains and losses, explained below. Gross margin is calculated from the income statement: revenue minus cost of revenue, as a share of revenue.

Where the revenue came from

Baidu now splits its main business, called "Baidu General Business" (everything except the iQIYI video-streaming unit), into three buckets. The release notes that these figures come from internal management accounts and are unaudited.

Three things stand out:

• The AI cloud growth is mostly chip rental. GPU Cloud revenue rose 283%, faster than the 184% growth Baidu reported for Q1. The company says this "reflected mounting demand for public cloud-based AI computing." A GPU is the type of chip used to train and run AI models. Baidu buys or leases these chips and rents the computing time to customers. AI Applications (products such as the Wenku document service, Baidu Drive and the new DuMate work assistant) grew only 3%. Nearly all of the AI growth is therefore infrastructure. The software products customers pay for directly are not growing much yet.
• AI Cloud Infra fell 17% from Q1, from RMB8.8 billion to RMB7.3 billion. The release gives no reason. It does say cost of revenue fell from Q1 "primarily due to a decrease in costs related to AI Cloud business." That points to lower cloud volume or a smaller project mix this quarter, not to price cuts, but the filing does not confirm either. Because the year-over-year figure is so strong (+50%), the quarter-over-quarter decline is easy to miss. It is the most important open question for Q3.
• Advertising decline is concentrated in the "Legacy Business." Legacy revenue fell 23%, a loss of RMB3.2 billion. AI-native marketing services, the ads Baidu now places through AI-generated search answers and AI agents, were flat at RMB2.6 billion. Online marketing in total was RMB13.1 billion. That roughly equals legacy (RMB10.4 billion) plus AI-native marketing (RMB2.6 billion), so the legacy bucket appears to be mostly traditional search and feed advertising. CEO Robin Li said directly that "our online marketing business remains under pressure." On the positive side, online marketing rose 4% from Q1, so the decline may be leveling off from a low base.

iQIYI, the separately listed video-streaming company that Baidu controls and consolidates, had revenue down 5% to RMB6.3 billion. Its operating loss widened to RMB105 million from RMB46 million a year ago, and it was a net drag of RMB287 million on Baidu's earnings this quarter. Its results are included in the consolidated figures above. Investors who own iQIYI shares should read its standalone report for detail.

Margins: lower gross margin, offset by spending cuts

Cost of revenue rose 4% while revenue fell 4%, so gross margin dropped from 43.9% to 39.0%. The release says the increase was "primarily due to increases in costs related to AI Cloud business." Renting out computing power costs more to deliver than search ads do. Depreciation and amortization, the cost of using up servers and data centers over their useful lives, rose 16% to RMB2.4 billion. As AI cloud becomes a larger share of revenue, the overall margin falls.

Baidu made up most of that gap with operating expenses:

• Selling, general and administrative expenses fell 23% to RMB4.6 billion, which Baidu attributes to "decreases in expected credit losses and channel spending expenses." Expected credit losses are what a company sets aside for customers who may not pay. Part of this saving is lower bad-debt reserves, not lower ongoing costs.
• Research and development fell 10% to RMB4.6 billion, "primarily due to fluctuations in personnel-related expenses." Stock-based pay in R&D dropped to RMB398 million from RMB685 million.

The result is that operating margin slipped only 0.3 points, to 9.7%. Excluding iQIYI, Baidu General Business earned a 12% operating margin, compared with 13% a year ago.

What the headline numbers hide

• The 68% profit drop mostly reflects a one-off gain a year ago, not a weaker business this quarter. In Q2 2025, "Others, net" in non-operating income was RMB3.5 billion, including a RMB3.3 billion fair-value gain on long-term investments, meaning the shares Baidu holds in other companies were marked up in value. This quarter, total other income was only RMB184 million. Net interest income fell (interest income was RMB1.7 billion against RMB2.0 billion), and the foreign-exchange loss nearly doubled to RMB1.2 billion as the renminbi moved against the dollar. Baidu also wrote down RMB464 million of investments. Operating income, which shows the core business more clearly, fell 8%.
• The tax rate nearly tripled. Income tax was RMB1.0 billion on RMB3.2 billion of pre-tax income, an effective rate of about 31%. A year ago it was about 11% (RMB881 million on RMB8.1 billion). The release does not explain the change. It cut net income further than operating results alone would have.
• The adjusted EPS figure is also down sharply. Non-GAAP net income removes stock-based pay (RMB709 million), investment impairments (RMB464 million) and fair-value gains (RMB1.07 billion this quarter, RMB3.3 billion a year ago). It still fell 46% to RMB2.6 billion. Excluding the investment-mark swings does not remove the decline. The tax rate and the foreign-exchange loss are both inside the adjusted figure.
• Cash conversion looks fine on its own. Free cash flow does not. Operating cash flow of RMB3.4 billion was above net income of RMB2.2 billion, a big improvement on the RMB877 million cash outflow in Q2 2025. The CFO pointed out it was the fourth straight positive quarter. But capital expenditures were RMB11.4 billion, almost all in Baidu excluding iQIYI. Free cash flow, the cash left after paying for equipment and buildings, was negative RMB8.0 billion for the quarter and about negative RMB11.2 billion for the first half.
• Baidu borrowed to fund the buildout. Between December 31 and June 30, short-term loans went from RMB7.6 billion to RMB26.3 billion and long-term loans from RMB3.4 billion to RMB20.8 billion. Part of this replaced the current portion of older loans, which fell from RMB14.8 billion to RMB2.0 billion. Total loans, notes and convertible bonds rose by about RMB14 billion to roughly RMB104 billion. Lease right-of-use assets also doubled to RMB18.6 billion, which is consistent with leasing more data-center or computing capacity, though the release doesn't say so. Baidu still reports RMB283.1 billion of cash and investments, so there is no balance-sheet stress. The point is that the AI buildout now needs outside financing on top of internal cash.
• Buybacks did not lower the share count. Baidu says it has returned US$259 million through repurchases since the start of Q1 2026. The diluted share count still rose slightly, from 2,730 million to 2,755 million ordinary shares. None of the EPS change came from buybacks.
• Receivables are broadly in line. Accounts receivable rose 4% since December to RMB13.5 billion, while first-half revenue fell 3%. That is a small gap and not a warning sign by itself.

Takeaway: Baidu's AI cloud is growing fast enough (+50%, GPU rental +283%) to replace most of the ad revenue it is losing, but not all of it. It also runs at lower gross margins and needs heavy capital spending: RMB11.4 billion this quarter, three times last year. For now, the shift to AI means flat-to-lower revenue, lower margins and negative free cash flow paid for partly with new debt. The 68% fall in net income exaggerates the operating decline. The 8% fall in operating income is the figure to follow.

Other items this quarter

• Apollo Go (robotaxi): Baidu reports operations or testing in 28 cities and over 350 million autonomous kilometers, including more than 240 million with no safety driver. New this quarter: fully driverless commercial service in Dubai (also bookable through Uber), open-road testing in London with Uber and Lyft, driverless-testing permits in Hong Kong, and testing in Switzerland with PostBus. Baidu does not report Apollo Go revenue or ride counts separately in this release, so its financial contribution can't be measured from the filing.
• Hong Kong primary listing: Baidu has applied to become dual-primary listed in Hong Kong, so that it would be fully regulated there and not only on Nasdaq. Shareholders were scheduled to vote on August 26, 2026, and the change is expected to take effect "within this year," subject to the exchange's approval.
• Users: the Baidu App had 644 million monthly active users in June 2026.

Outlook

Baidu gives no revenue or earnings guidance in its release, and management's comments are qualitative: the company will keep "investing in AI as the core driver of Baidu's long-term growth," per the CFO. Based on this quarter's figures, three things to watch in the Q3 2026 report:

1. Whether AI Cloud Infra recovers from its 17% drop versus Q1. If GPU Cloud keeps growing at triple-digit rates but the overall line stays flat, the rest of AI cloud (project and non-GPU work) is shrinking.
2. Whether online marketing stabilizes. The 4% rise from Q1 is the first sign of that. If the year-over-year decline narrows from -19%, AI growth can start to lift total revenue, which fell 4% this quarter.
3. Capital spending compared with operating cash flow. At about RMB11 billion of capex against about RMB3 billion of operating cash flow per quarter, Baidu will keep adding debt or drawing down its cash and investments. Spending at this level will only pay off if AI Cloud revenue keeps growing.

Our view: the 8% decline in operating income and the steady General Business margin show the core business holding up better than the profit headline suggests. The main open question is margins and cash. Baidu is replacing high-margin advertising with lower-margin, capital-heavy cloud revenue, and this quarter does not yet show whether that cloud business can earn returns close to what the ad business used to.

Source: Baidu, Inc. Q2 2026 earnings release, furnished to the SEC as Exhibit 99.1 to Form 6-K on August 18, 2026. Baidu is a foreign private issuer and does not file a 10-Q, so the release is its quarterly financial statement. Segment revenue figures are unaudited management data.