Feb 18 (Reuters) -

Chinese search engine giant Baidu ( BIDU )

reported a 2% drop in quarterly revenue, dragged down by a

slowdown in the advertising business, though offset by gains

from cloud AI.

For the three months through December, the company reported

a revenue of 34.12 billion yuan ($4.69 billion), compared with

analysts' estimate of 33.32 billion yuan, according to data

compiled by LSEG.

Small businesses in China have been trimming their

advertising spending amid a sputtering economy and prolonged

property market slump.

Baidu's ( BIDU ) online marketing business, excluding its streaming

service iQIYI, which contributes the majority of its revenue,

was down 7% to 17.9 billion yuan.

However, the company has offset these losses through the

growth of its AI Cloud segment, which grew by 26% year over

year.

Baidu's ( BIDU ) U.S.-listed shares were down about 2% in premarket

trading.

Baidu ( BIDU ) has ramped up its push into AI over the past years

as it seeks to reduce its reliance on advertising revenue from

its core search engine business.

Baidu ( BIDU ) was among the first to launch a ChatGPT-style chatbot

in early 2023, with it claiming that its current Ernie 4.0

version matches OpenAI's GPT-4.

However, Baidu's ( BIDU ) Ernie large language model has

struggled to gain widespread adoption due to intense

competition, particularly from Chinese startup DeepSeek's R1

model.

In response, Baidu ( BIDU ) has recently

announced plans

to open-source its next-generation models,

offer premium

chatbot services free from April and integrate DeepSeek's

technology into its products.

The company seeks to monetise AI by integrating it into

existing apps such as Wenku and selling AI services through its

cloud computing.

Baidu's ( BIDU ) Ernie platform handled 1.65 billion daily user

queries and interactions in December, up from 600 million in

August.

($1 = 7.2770 Chinese yuan renminbi)