Feb 18 (Reuters) - Chinese search engine giant Baidu 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 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 U.S.-listed shares were down about 2% in premarket trading.

Baidu 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 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 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 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 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)