Baidu, Inc. (BIDU) on Q1 2023 Results - Earnings Call Transcript
Operator: Hello and thank you for standing by for Baidu's First Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After managements prepared remarks, there will be a question-and-answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Juan Lin, Baidu's Director of Investor Relations. Please go ahead.
Juan Lin: Hello, everyone. Welcome to Baidu's first quarter 2023 earnings conference call. Baidu's earnings release was distributed earlier today, and you can find a copy on our website, as well as on newswire services. On the call today, we have Robin Li, our Co-founder and CEO; Rong Luo, our CFO; Dou Shen, our EVP in-charge of Baidu AI Cloud Group, ACG; and Zhenyu Li, our SVP in-charge of Baidu Intelligent Driving. After our prepared remarks, we will hold a Q&A session. Please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. For detailed discussions of these risks and uncertainties, please refer to our latest annual report and other documents filed with our SEC and Hong Kong Stock Exchange. Baidu does not undertake any obligation to update any forward-looking statements, except as required under applicable law. Our earnings press release and this call include discussions of certain unaudited non-GAAP financial measures. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures and is available on our IR website at ir.baidu.com. As a reminder, this conference [is being recorded] [ph]. In addition, a webcast of this conference call will be available on Baidu's IR website. I will now turn the call over to our CEO, Robin.
Robin Li: Hello, everyone. 2023 is off to a good start with our business performing well across the board and driving strong growth. In Q1, Baidu Core's revenue growth reaccelerated year-on-year and supported an improvement in our operating margin. Our online marketing business has seen a positive impact from China's overall economic improvement. After the Chinese New Year, there was a quick recovery, which was especially beneficial for many of our advertisers in offline sectors such as travel, healthcare, bin services, and local services. Moreover, we've been working hard to enhance user experience for Baidu apps and this has led to good user metrics and increased online marketing revenue for the first quarter compared to the previous year. Our AI Cloud achieved profitability on a non-GAAP operating level this quarter. Starting in Q2 last year, we have focused on building sustainable growth for our cloud business by phasing out low quality projects and business. At the same time, we have been building standardized AI solutions for key used cases and replicating them from one project to another. This approach has led to an increase in AI Cloud margins over the past few quarters and we have seen profitability on the non-GAAP operating level this quarter. Today, all eyes are keenly focused on the transformative impact of generative AI. For today's call, I will first provide an update on this topic and then walk you through our operational highlights in AI Cloud, Intelligent Driving, and mobile ecosystem. Generative AI represents a tremendous opportunity for us. It can be compared to the introduction of the Internet and smartphones. To capture this opportunity, we leveraged our technology capabilities and our extensive experience in search, knowledge graph, and dialogue. We were able to quickly deploy early bots in mid-March, which became the first GPT model owned and operated by a public company. This launch demonstrated our significant investments and achievements in AI over the past 10 years and it will also highlights our position as the operator of China's largest search engine. With our search engine, we have gathered a vast amount of data, facts, and knowledge for natural language understanding, which has been critical in training our models. Baidu has established a robust range of AI capabilities powered by its four-layered AI architecture, which encompasses cloud infrastructure, the PaddlePaddle deep-learning framework, large language models, Ernie, and AI applications. We have this distinctive advantage that helps us optimize in higher process and reduce costs for model training and inference. One of our significant advantages is owning PaddlePaddle, which is the leading deep-learning framework in China. We have developed the PaddlePaddle in a way that aligns with ERNIE Bot. And this creates a strong synergy between these systems. Let me give you an example. Training and running large language models require a lot of data, which can be complex and overwhelming. And demand significant computing resources. To tackle this challenge, we use our proprietary full stack AI architecture. We are continuously looking for new techniques to make our four layers work seamlessly, which helps us achieve better performance and quicker throughput. Specifically, we have improved compatibility between PaddlePaddle, the large language model, and the Cloud Infrastructure. As a result, since launching ERNIE Bot in March, we normalized – our normalized queries per second have increased almost 10x, indicating significant efficiency gains. Baidu is rapidly integrating ERNIE Bot into all of our businesses for testing. The goal is to leverage its capabilities to enhance reviewed and create both our enterprise and consumer facing products and services, thereby revolutionizing [our business.] [ph] We are also working on building an ecosystem around ERNIE Bot to promote the adoption of generative AI in a wider range of used cases. This strategy should enable us to gain market share across all sectors and achieve sustainable long-term growth. As more people use ERNIE Bot, more products integrate ERNIE Bot in seamless ways, we will be able to gather large scale human feedback and iterate the model rapidly and tailored to real life market need. On the enterprise facing [fin] [ph] side, generative AI is expanding the total addressable market of the cloud industry. This is because the cloud service providers can use generative AI to add or enhance capabilities to their current offerings, develop new solutions and applications to address unfulfilled market demand and drive productivity and efficiency. As a result, since we introduced ERNIE Bot, we have observed more and more enterprises from various industries started their model training on our Cloud. Our powerful foundation models and our unique full stack AI capabilities differentiate us from our competitors, which gives us an edge in the market. In March, sales lead increased by more than 400% year-over-year, which is a significant achievement for us. We believe that our AI Cloud will continue to gain market share over time. I'll provide some examples of how ERNIE Bot is helping our customers to gain efficiency. In the financial services industry, we have partnered with a prominent domestic insurance company to help them enhance their digital experiences for employees and clients. To achieve this, we will utilize our AI capabilities, including PaddlePaddle and Ernie on their private cloud. Additionally, we will create customized tools and technologies to assist them in training and refining models on ERNIE Bot with their unique data. And we will continuously improve the system over time. These models will power various applications, including helping financial advisors, analyze large amount of research reports and public information. We believe that this project has the potential to establish a new industry standard for innovation and efficiency in China's financial services sector. In the software industry, we are collaborating with some productivity software developers to test the integration of ERNIE Bot into their applications with the goal of automating certain workloads and expanding the capabilities of their end users. Additionally, we are partnering with some ERP companies who are exploring the use of ERNIE Bot to assist their programmers in writing code. In the education industry, we opened ERNIE Bot to a leading online education company via model as a service, helping them fine tune their own model on Baidu AI Cloud. One of the features we're working on together is an enhanced sophisticated AI tutor enabling them to better serve their students. We've observed that industry is experiencing a surge in demand after the pandemic are interested in using ERNIE Bot to improve their business operations more efficiently. Online travel companies are a good example of this trend. As some of the biggest players are testing the use of ERNIE Bot to assist their customer service teams in managing customer queries, suggesting trips, and directing customers to relevant information. The feedback so far has been positive and customers are also beginning to switch their IT expenditures to our cloud. On consumer facing businesses, we are utilizing ERNIE Bot to enhance our product for the users. We're currently beta testing an upgraded version of Baidu search, which is powered by ERNIE Bot. This version provides natural conversational interactions for a more seamless search experience. We are also testing the integration of ERNIE Bot is Baidu Wenku, our online document sharing platform to enable ERNIE Bot to work alongside users and assist with searching, summarizing, and generating content using natural language. Additionally, we are incorporating ERNIE Bot into other consumer facing products such as Baidu Map, Baidu keyboard, Baidu Post, and Xiaodu. Furthermore, we are testing a standalone application for ERNIE Bot. So far, we have been encouraged by the positive user feedback at the current testing stage and look forward to bringing these experiences to more users in the coming months. In the new era, AI chatbots will become a traffic gateway for people to seek information and content. Therefore, we should continue to gain user traffic and mind share, which will drive monetization over time. We're also working to build an ecosystem around ERNIE Bot with our partners to fuel innovation and drive growth. On the regulatory front, as a leader in AI and an advocate for AI ethics, Baidu continues to promote the responsible use of AI. To comply with regulatory requirements, any new technology product or service must undergo government review and approval before large scale deployment. We have applied for review and approval of ERNIE Bot and will roll it out at a large scale to our customers and users once we get the green light. Baidu has been operating search in China for more than 20 years and has extensive experience with Chinese culture and regulatory environment, which we believe will help us navigate the regulatory landscape. In early April, the cyber space administration of China released a new draft regulation for comments on generative AI, which explicitly endorses the development of self-designed [AI algorithms] [ph] and deep learning frameworks. We believe that regulators active engagement in generative AI in the early stage will raise the bar to entry and we are well-positioned for that. Overall, we are thrilled about the prospects that lie ahead with Ernie Bot, and we will continue to invest in it to unlock the tremendous potential that we envision. Now, let's have a look on the first quarter operational highlights. In Q1, revenues from AI Cloud increased 8% year-on-year, which is an improvement from the 4% year-over-year growth in the fourth quarter last year. We're pleased to report that AI Cloud achieved profitability on the non-GAAP operating profit level during the quarter. The margin improvement [unrolled] [ph] two points of progress. One is our ability to optimize operations and drive sustainable and healthy revenue growth. Two is our efforts to standardize our AI solutions and applications and efficiently replicate them across different customers and sectors. Since Q2 of last year, we have phased out low margin businesses and projects for AI Cloud leading to a healthier business product portfolio and cost structure. At the same time, we continue to standardize AI solutions for key used cases for replication. In the water industry, for example, last year, we replicated AI solutions we developed for predicting water usage and controlling water pressure from Changzhou water company to Quanzhou Water company. And in Q1, we deployed the majority of our earlier standardized dissolutions to the Lintao County Water Company in Gansu Province. This example demonstrated the scalability and margin expansion of our standardized approach in creating AI Solutions for traditional industries. As I mentioned earlier, generative AI is creating a host of opportunities for the Cloud industry and expanding the Cloud market significantly. Therefore, we will continue to invest and actively explore ways to grow our cloud services. Moving into intelligent driving. We continue to make solid progress. In Q1, the number of rides provided to the public on [open road] [ph] increased over threefold, compared to the same period last year and reaching nearly 660,000. Thanks to the remarkable growth in rides and our strong track record of safe operation, we have received more permits from government to offer fully driverless ride hailing services in China. On March 17, Apollo Go was allowed to provide fully driverless ride-hailing services in Yizhuang region of Beijing,. As of today, we are providing the services in three cities, Beijing, Wuhan, and Chongqing. We are prioritizing fleet expansion and passenger adoption in regions where we can provide driverless commercial operation. Meaning it's fully driverless and we can charge. Our efforts are yielding good results. In Wuhan, where we first received the permit to provide such services on public growth last August, we now have more than 135 travel lease vehicles and more than one-third of the paid ride Apollo Go provided were in fully driverless vehicles. We are confident that the number of rides provided by 40 driverless vehicles will continue to increase leading to cost optimization and creating a profitable business model. We firmly believe the demand for autonomous driving services will continue to grow at a rapid pace and we will further dedicate our technology and operational capabilities to better provide safe and reliable services to the public. Moving to mobile ecosystem. I'm pleased to report that online marketing revenues returned to positive year-over-year growth in Q1, resulting in an increase in operating margin. One contributing factor to this growth was the overall improvement in China's economic recovery and commercial environment as a result of China's reopening. As I mentioned earlier, many offline related verticals, travel, healthcare, business services, and local services have substantially increased. We are at spending on our platform. Some of these verticals have already rebounded to above pre-pandemic levels, indicating [solid finds] [ph] of recovery. Our own initiatives aimed at improving the product experience such as incorporating short videos and product listing information within the Baidu app, also plays a significant role in the revenue increase. Additionally, revenues from retail and e-commerce continued to grow, mainly driven by merchant, direct spending on our platform. The quarterly GMV facilitated by Baidu Search, grew by 55% year-over-year in Q1, demonstrating our continuous traction in the e-commerce sector. Our users and traffic continued to grow in the quarter. The Baidu app MAU increased by 4% year-over-year in March and feed distributed through Baidu app and mobile search queries maintaining steady growth. This reflects the high value that users placed on Baidu Search as their primary source of information. During the quarter, we continued to focus on enhancing user experience and customer satisfaction. On the user side, Baidu app has a wonderful flow on the [Explore page] [ph], which is particularly attractive to young female, enabling an infinite browsing experience and catering to their diverse needs. We expanded our immersive video feature to more and more used cases on Baidu app, including incorporating it into search results. Additionally, we continuously improve our one-shop search result through AI to provide better search experience. These efforts have helped to increase user engagement and expand our user base. On the advertiser side, since launching our AIGC capabilities late last year, we've been working with advertisers to create more effective ads. By allowing advertisers to specify their requirements, our platform generates customized options for them to choose from. For instance, a local travel agency turn to our AIGC capabilities to create ads. Our AI generated ads outperformed those created by the advertiser. Delivering an average of about 20% higher sales leads. In Q1, advertisers adopting AIGC increased their ad spending year-over-year and quarter-over-quarter on our platform, demonstrating the effectiveness of our technology in driving business results. Earlier this year, we began using our AIGC capabilities to help advertisers respond to customer inquiries on our platform. By harnessing the power of AI, our advertisers can provide professional and timely answers to their customer inquiries, which in turn drives an increase in sales lead. For instance, a B2B advertiser witnessed a monthly increase of over 100% in sales leads in March after using our AIGC technology. We are expanding the service to increasing number of advertisers helping them better serve their customers and drive improved business results. These efforts have resulted in improved ROI for advertisers on our platform. Looking ahead, we remain committed to assisting our advertisers in reaching and converting their target audience by leveraging our cutting edge generated AI technology. With that, let me turn the call over to Rong to go through the financial results.
Rong Luo: Thank you, Robin. Now let me walk you through the details of our first quarter financial results. Total revenue was RMB31.1 billion, increasing 10% year-over-year, Revenue from Baidu Core was RMB23 billion, increasing 8% year-over-year. Baidu Core’s online marketing revenue was RMB16.6 billion, increasing 6% year-over-year. Baidu Core's non-online marketing revenue was RMB6.4 billion, up 11% year-over-year. In Q1, AI Cloud increased by 8% year-over-year to RMB4.2 billion. Revenue for iQIYI was RMB8.3 billion, increasing 15% year-over-year. Cost of revenue was RMB15.2 billion, decreasing 3% year-over-year. Baidu cost of revenue was [RMB9.4 billion] [ph], decreasing 4% year-over-year. Operating expenses were RMB11 billion, increasing 7% year-over-year, primarily due to an increase in China spending and promotional market expenses. Baidu Core’s operating expenses were RMB9.5 billion, increasing 5% year-over-year. Baidu Core’s SG&A expenses were RMB4.5 billion, increasing 16% year-over-year. SG&A accounting for 20% of Baidu Core revenue in the quarter, compared to 18%, the same period last year. Baidu Core R&D expenses were RMB5 billion, decreasing 3% year-over-year, R&D accounting for 22% of Baidu Core revenues in the quarter and decreased from 24% in the same period last year. Operating income was RMB5 billion. Baidu Core's operating income was RMB4.1 billion and Baidu Core's operating margin was 18%, and non-GAAP operating income was RMB6.4 billion. Non-GAAP Baidu Core’s operating income was RMB5.4 billion, and non-GAAP Baidu Core operating margin was 23%. Total other income, net was RMB2.6 billion, which mainly including a fair value gain of under RMB1.5 billion from long-term investments. In the first quarter last year, we recognized a fair value loss of RMB3 billion. A significant portion of the long-term investments include, but not limited to, investments in equity securities of public and private companies and private equity funds. This is subject to quarterly fair value adjustment, which may contribute to net income volatility in future periods. Income tax expenses was RMB1.2 billion, increasing 205% year-over-year, primarily due to an increase in profit before tax. Our net income attributable to Baidu was RMB5.8 billion, and diluted earnings per ADS were RMB15.92. Net income attributable to Baidu Core was RMB5.5 billion. Non-GAAP net income attributable to Baidu was under RMB5.7 billion. Non-GAAP diluted earnings per ADS was RMB16.1, and non-GAAP net income attributable to Baidu Core was RMB5.3 billion, and non-GAAP net margin for Baidu Core was 23%. As of March 31, 2023, cash, cash equivalents, restricted cash and short-term investments were RMB194 billion, and cash, cash equivalents, restricted cash and short investments, excluding IT, were RMB188.8 billion. Free cash flow was RMB4.5 billion. And free cash flow, excluding IT, was RMB3.5 billion. Baidu Core had approximately 36,000 employees as of March 31, 2023. On [separate] [ph] notes in the quarter, [iQIYI] [ph] generated about RMB1 billion in non-GAAP operating income and above RMB1 billion in free cash flow. With that, operator, let's now open the call to questions.
Operator: Thank you. [Operator Instructions] Your first question comes from Alex Yao with J.P. Morgan. Please go ahead.
Alex Yao: Good evening management team. Congrats on a strong quarter and thank you for taking my question. I have a view on the advertising side of the business. What is the month-on-month trend for ad recovery since March? And how big is the vertical exposures to off-line-related verticals? How is the advertiser demand changing on your platform? And then lastly, how should we think about the full-year ad growth rate? So, what is the mid-to-longer-term growth potential for ads business beyond the COVID for normalization? Thank you.
Robin Li: Hi, Alex. This is Robin. Thank you for your question. We're happy to see significant progress in our online marketing business. For Q1, revenue made a remarkable comeback and return to high single-digit-growth. Recall that last year, online marketing revenue declined year-over-year for all four quarters. I think it was a 4% decline in Q1, 10% in Q2, 4% in Q3, and 6% in Q4. Now, we are in a positive territory, and the momentum got further strengthened in the current quarter – in Q2. The Q1 growth was primarily driven by a number of verticals in the offline sector that I just mentioned during my prepared remarks. Offline sector contributes to a sizable amount of our online marketing revenue. Particularly, our largest revenue contributor, health care, has been improving and is back to the pre-pandemic level. So, travel is also improving, apparently, and we saw the Labor Day holiday was really, really hot. The growth in our online marketing revenue have also had a positive impact on the margins of our mobile ecosystem. So, the overall margin for Baidu Core got better. The success is due to our focused user and customer experience on our platform. And furthermore, we have observed a strong growth in user engagement and traffic. Despite the reopening of China and people spending more time offline, our MAU for Baidu App grew 4% year-on-year in March, and our feed content distributed to Baidu App also demonstrated robust growth. And looking ahead, we anticipate advertisers will continue to allocate more dollars to performance-based platforms. And we believe Baidu search is well-positioned to benefit from this trend. In addition, we see generative AI as a significant opportunity that complements our search capability and drive new avenues for users to access and create content. As we integrate ERNIE Bot into our apps, particularly in the search, we expect user traffic and engagement will go up, thereby further supporting the growth of our online marketing revenue. ERNIE Bot can also enhance our commercial products, presenting an exciting opportunity for us to strengthen our offering. With ERNIE Bot empowered commercial products, we can capture a larger market share and deliver even greater value to our advertisers. This additional dimension gives us further confidence in our online marketing business and its ability to drive sustained growth in revenue. So, based on this development and our strong fundamentals, we expect our online marketing revenue to outperform the growth of China's GDP.
Alex Yao: Thank you.
Operator: Thank you. Our next question comes from Alicia Yap with Citigroup. Please go ahead.
Alicia Yap: Hi, thank you. Good evening, Robin and management team. Thanks for taking my questions. My questions is related to margins and spending. So what [will] [ph] we see the major margin driver this year after large scale of the cost-cutting effort last year, how should we think about core operating margin trend for the rest of – especially given there will be a few moving factors that will impact margins, such as, for example, the potential investment related to the large language model, the autonomous and others? Thank you.
Rong Luo: Hello, Alicia. Let me address your questions. I think we have implemented a number of initiatives last year to show our operational efficiency, which you can see that in the past four or five quarters. And all of them have led to notable improvements in our overall margins. These measures have not only made the profit numbers better, but also transformed our organizations, making it leaner and more agile and which will adapt to drive the sustainable long-term growth. Purely number [indiscernible] as a result, consider our non-GAAP operating margin expanded from 17% in Q1 last year to 23% in Q1 this year, and free cash flow also grew by over 200% from a year ago. Notably, all of this growth was also accompanied by a synergy revenue in Q1. More specifically, as Robin has just mentioned, number one, our mobile ecosystem profit margins entry, which is also together with the revenue [form] [ph] of the online marketing businesses. Number 2 is we can see that for Baidu AI Cloud, by focusing on carbon low-margin projects and businesses, as well as our developing more standard AI solutions for key used cases, our Baidu AI Cloud has reached the profitability on the operating level. This is a more important and significant milestone for us. And looking forward, we aim to continue enhancing the margins across all of our major operations, while at the same time, we also will continue to invest in the promising new areas, in particularly the ERNIE Bot and intelligent driving. Our reconstructing investments are actually quite aligned with our long-term growth objectives, which also reflect two areas where we have identified a significant potential opportunities. By focusing on these areas, we aim to capture the large market shares and we try to drive sustainable growth, while we're delivering more values to our shareholders. And as for the near-term, I think incremental investment in the new opportunities is also quite manageable [indiscernible]. Overall, our focus on disciplined execution and operational efficiency and at the same time, we try to seize the long-term growth opportunities, all of these efforts has resulted in the improvement of the overall Baidu Core margins in Q1, and this will continue in the future quarters. We will prudently manage our P&L and leveraging our core business improvements and further drive the sustainable growth. Thank you so much, Alicia.
Alicia Yap: Thank you.
Operator: Thank you. Our next question comes from Gary Yu with Morgan Stanley. Please go ahead.
Gary Yu: Hi, thank you and good evening. I have a question related to cloud. So on your AI Cloud revenue growth, what's the expectation for growth in 2Q and rest of 2023? And could you help us quantify any incremental cloud revenue in coming quarters coming from Ernie adoption? And a related question on cloud is on margin. With your improvement in revenue growth and margin, how should we look at the normalized revenue growth and margin for cloud going forward? Thank you.
Dou Shen: Okay, this is Dou. Thanks for your question on the cloud. So, since the second quarter of last year, so we have made significant efforts in three ways trying to consistently improve our margins for the AI Cloud. Firstly, we are resolute in phasing out the low-quality products and businesses. And secondly, so we are committed to building standardized AI solutions for key used cases and then efficiently replicate them across different customers. Secondly, we are continuously investing in the technical capabilities of our standard cloud offerings to reinforce their competitiveness. So, as a result of the efforts, Baidu AI Cloud achieved a profitability on the non-GAAP operating level this quarter. In addition to that, after China is reopened, now we finally can meet our clients in person to execute products and present our proposals. And we believe AI Cloud's revenue growth since accelerated from quarter of last year, and it will continue in the coming quarters. Moreover, we believe ERNIE Bot could provide a messy opportunity for us to gain shares in the cloud industry. Since its launch in the mid of March, we have received hundreds of thousands of beta testing requests for the ERNIE Bot from enterprise customers across a range of sectors, such as finance software and education, online travel and so on. So, this overwhelming interest indicates a promising start for the ERNIE Bot's debut. So, our customers are so eager to explore and utilize ERNIE Bot for their businesses, and we are confident that it will improve their productivity and we enhance their competitive edge. Actually, now as Robin had mentioned, several customers has opted to develop their own large models on our cloud platform. We need to leverage the advantages of the four-layered AI architecture, as Robin just mentioned in the prepared remarks. So, as we look ahead, our focus will still remain on achieving healthy and sustainable revenue growth for the existing cloud business, while we are striving to improve the margins. And in the meanwhile, so we will capitalize on the long-term huge market opportunity of large language models. And for sure, so we are committed to the investment and the value creation of our ERNIE Bot. So overall, we believe we will continue outgrowing our peers in cloud revenue in the long run. That's it, Gary.
Gary Yu : Thank you.
Operator: Thank you. Our next question comes from Lincoln Kong with Goldman Sachs. Please go ahead.
Lincoln Kong: Thank you management for taking my question. So, my question is related to ERNIE Bot. So basically, can management further elaborate a bit more on the growth and monetization opportunity for ERNIE Bot in a large enterprise model? So, how should we think about ERNIE bot will reshape our existing business and especially help us gain share in each of the business line in the markets? Thank you.
Robin Li: Yes, ERNIE Bot has been making great progress since its launch in mid-March. For instance, we have already upgraded ERNIE Bot 4x, and we have managed to reduce the inference cost by nearly 90% since its release. While some of our competitors are still focusing on auto training, we've moved ahead with a significant reduction of our inference cost. This improvement a result of our self-device AI architecture is four layers, which sets us apart and enables us to swiftly reduce cost and enhance efficiency for model training and inference. This strong foundation will facilitate the widespread adoption of ERNIE Bot. We're using ERNIE Bot to upgrade almost all of our products and services, enhancing and rebuilding our existing offerings. This enables us to strengthen our position and gain market share in our target markets, including cloud services, online marketing, and smart devices. In AI Cloud, ERNIE Bot is being tested by more and more enterprises, as Dou just mentioned, and is proving to be beneficial to customers in all kinds of sectors, helping them solve problems and improve their productivity and efficiency. It truly demonstrates the power of generated AI and large language models. Since launch, we have witnessed increasing adoption of ERNIE Bot as hundreds of thousands of enterprise business and entities queuing for testing. This is an encouraging recognition of Baidu's AI capability, particularly our [Par Foundation] [ph] model. To assist customers to better use ERNIE Bot, we have developed tools and technologies that support training and refining models using our customers' unique data, which also leads to continuous system improvement over time. And customers are becoming more selective than before when choosing a cloud provider, they take into consideration the capabilities of generative AI and large language models. We see a growing number of new customers wanting to migrate to our AI cloud. So. we expect ERNIE Bot to enhance our competitiveness and our pricing power of AI Cloud. In March, we saw more than 400% year-over-year growth in the sales fleet, and we anticipate more opportunities in the future. Additionally, while the cloud industry presents significant opportunity for ERNIE Bot adoption, there are great opportunities in online marketing market, too. As I mentioned earlier, we're utilizing ERNIE Bot to upgrade popular consumer facing products, including Baidu App, Baidu Search and other applications within Baidu family. The initial user feedback we have received is very promising. Upon widespread implementation, we should quickly gain user traffic and engagement, therefore, reshape the competitive landscape in China's Internet and mobile sectors. So, in summary, ERNIE Bot's progress has been very encouraging, and we are excited about the future. We're pushing the boundaries of AI and exploring new avenues of growth.
Lincoln Kong: Thank you.
Operator: Thank you. Our next question comes from Miranda Zhuang with Bank of America Securities. Please go ahead.
Miranda Zhuang: Thank you management for taking my questions. Congratulations on the good results. My question is about [competition] [ph]. With many other Internet peers launching or about to launch their large language model, how to think about Baidu's competitive advantage? And how does management think about the competitive landscape in China in the near-term and the long-term, especially for the enterprise facing business? Thank you.
Robin Li: Yes, that's a good question. AI and LLM are still in the early stage of divestment, and we are very happy to see the entry of more players into this field as it will help the industry to develop rapidly. Moreover, we are actively constructing an ecosystem around ERNIE Bot to attract new participants and drive innovation in the emerging direction. In our view, generative AI and the large language model present a very high barrier to entry. And very few companies possess the necessary capabilities to establish a significant presence in this market. The requirements include substantial upfront investment, robust AI capability expertise and vast amount if data for model training. Also, extensive experience in delivering appropriate content to Chinese Internet and mobile users is crucial. Given such high requirements, we anticipate a highly concentrated market, probably two to three major players winning in the end. As mentioned earlier, as the first mover in China, we leveraged ERNIE Bot to upgrade and revitalize our entire product and service portfolio because we have a large product portfolio and large user base, we are able to get lots of user feedback about ERNIE Bot, which will help us further enhance our leading position in LLM. This approach allows us to convert cutting-edge technology into practical features, products, and solutions that address challenges and support sustainable growth. Baidu has a distinctive AI architecture consisting of four layers that we have developed ourselves. The architecture gives us a competitive advantage in terms of AI capability and played a crucial role in the successful early launch of ERNIE Bot. With this architecture, we are able to quickly decrease costs and improve efficiency in both training and inferencing. For example, we have optimized the performance of PaddlePaddle for inferencing, and this optimization enables us to more effectively work between the framework layer and the model layer, which leading to a substantial efficiency improvements and cost savings. Developing and training LLM require significant resources, including robust cloud infrastructure. To this end, we have our own AI Cloud business and have secured a substantial amount of computing power, including the most advanced GPUs to sustain the ongoing training and iteration of ERNIE Bot. Another critical point is that our experience in operating China's largest search engine for over two decades have allowed us to build an extensive database in Chinese language, including very valuable data, facts, and knowledge and enhancing our leadership position in [indiscernible] in China. We have extensive experience in reviewing the vast amount of content on search and in [setting] [ph] our mobile ecosystem. And for [indiscernible], we're able to offer our customers any combination of all different layers of our AI stack. If the customer only needs infrastructure, we can provide that. If the customer needs both infrastructure and framework layer, we can provide that. If the customer needs framework layer and model layer, we have to offer those two. And if the customer wants end-to-end solution, we have that ready. So, we are uniquely positioned and very flexible in serving our cloud customers. Based on this competitive advantage, I'm confident that we will be a winner in this market. Thank you.
Miranda Zhuang: Thank you very much.
Operator: Thank you. Our next question comes from Kenneth Fong with Credit Suisse. Please go ahead.
Kenneth Fong: Hi, good evening management. Thank you for taking my question. It has been noted that the Cyberspace Administration of China recently released a draft regulation on the generative AI. So, what sort of additional investments are needed to beat the requirement? Thank you.
Robin Li: Okay. During our testing of ERNIE Bot, we have engaged in close discussions with the regulators. Through effective communication, we have found that the principles of content review for generative AI are quite similar to those applied to search. Baidu has been operating China's largest search engine for over 20 years, and we have extensive experience in providing appropriate online content. We also put a lot of efforts into both technology and compliance development to ensure our products and services meet applicable regulatory requirements. For important and sensitive topics, we have to make sure AI will not hallucinate. Given that LLM is more or less a probabilistic model, this task is not trouble at all. The requirements are not final yet. So, we have to continue to update our strategy as it evolves. Furthermore, we maintain an ongoing dialogue with the relevant authorities and keep them informed about the latest technology tin. We actively share our insight supporting the responsible and beneficial growth of technology, particularly for generative AI. This proactive effort position us well to meet the requirements and offer industry-leading generated AI solution in China. Conversely, companies which do not have extensive experience in providing appropriate online content or lacking a track record of working closely with regulators will face significant challenges in offering scalable generated AI solutions in China. So here, I would like to emphasize that Baidu has been [leadering] [ph] AI for social good for a long time. We are one of the early adopters of AI for responsive use in China. We believe our new initiative ERNIE Bot is the best in its kind in China, and it has the potential to increase productivity and efficiency across various industries, which can contribute to China's economic growth and social investment. We expect ERNIE Bot to power agricultural enterprises to promote innovation and to optimize energy use, resource allocation, and waste reduction, and to improve disease diagnosis in health care industry, therefore, enhancing people's well-being and the quality of life. Also, we always attach great importance to AI ASIC. Back in 2018, I came up with the four principles of AI ASICs. That's like: One, AI should be safe and controllable. Two, AI should promote equal access to technologies for humanity. Three, AI should empower humanity to learn and grow instead of replacing them. And then four, AI should bring more freedom and possibilities to humanity. I want to make sure that within Baidu, everyone understands these principles once it comes to new AI technology and products, so as to enable the co-existence between AI and mankind. In addition, we also prioritize data privacy and data security in business operation and business strategy. We have a dedicated committee to oversee data management, and we are currently establishing another committee for AI ASICs. And all of these efforts are aimed at promoting AI for social good.
Kenneth Fong: Thank you.
Operator: Thank you. Our next question is from Wei Xiong with UBS. Please go ahead.
Wei Xiong: Thank you management for taking my questions and congrats on the good quarter. My question is about Apollo Go. So, could management provide some updates on your robotaxi business in terms of your strategy and business plan for the year, especially for the fully driverless ride hailing operation? Is there any timeline you can share regarding the scale up or the breakeven of the business? And what are some catalysts or milestone event that we could expect for Apollo Go this year? Thank you.
Rong Luo: Thanks Wei [indiscernible]. Our Apollo Go remains the largest for autonomous ride [indiscernible] hailing service provider in the [world] [ph]. And just as Robin mentioned, in the first quarter, we all hold almost 660,000 rides to public, and this number keeps growing. We aim to continue the expense of our autonomous driving technology by providing more rides to the topic. In addition, we will always carry in mind the goal of achieving breakeven, gaining skill and building a sustainable business model or TAM when we make our [operations] [ph]. To reach this objective, it's important to reduce operational costs and improve operational efficiency. On cost, we are focusing on lowering labor and hardware costs, and those are the major cost for robotaxi operation. So, we are working hard to find ways to cut down on those expenses. To reduce the labor cost, we continue to grow development of [fully crowded operation] [ph]. As Robin mentioned in his prepared remarks, we are doing really well in getting closer to our goal and adding mobile while we can provide fully [indiscernible]. In the Yizhuang region of Beijing, [indiscernible] after getting fully crowded for the testing [indiscernible]. We got the green light to offer purely having services to the public on the open roads in mid of March. This progress is because of solid [indiscernible] and reliable ride for the public in the past. So that we gain the trust from both users and the government since [process] [ph]. And in Wuhan, we started offering for a ride hailing services last August. Now, we are still adding vehicles and expanding operations. As Robin mentioned earlier, more than one-third of the rides provided by Apollo Go in Wuhan offer almost [indiscernible]. We think this number will keep going up in the future. We will provide safety and reality for the future fully driverless operation. Our hardware costs, we believe that after the release [indiscernible] and other new models of robotics in the future, it will continue to decrease. On [operating efficiency] [ph], we are housing a steady increase in the average daily ride nationwide. In the future, we will continue to automate our operational strategy to achieve long-term success in robotaxi. Thank you.
Operator: Thank you. Ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may all disconnect your lines.
Related Analysis
Baidu Inc. Reports Mixed First-Quarter Earnings
- Baidu Inc. reported an EPS of $0.2675, missing expectations but exceeding revenue forecasts with $4.36 billion.
- The stock experienced a decline of up to 5.5% in morning trading despite surpassing earnings estimates with $2.76 per ADS.
- Financial metrics reveal a P/E ratio of approximately 118.59 and a P/S ratio of about 2.22, indicating investor valuation of the company.
On Thursday, May 16, 2024, Baidu Inc. (NASDAQ:BIDU), a leading Chinese internet search provider, reported its first-quarter earnings before the market opened. The company revealed an earnings per share (EPS) of $0.2675, which did not meet the anticipated $2.3. Despite this, Baidu's revenue reached approximately $4.36 billion, slightly exceeding the expected $4.31 billion. This mixed financial performance showcases the challenges and successes Baidu faced during the quarter.
Following the earnings announcement, Baidu's stock experienced a decline of up to 5.5% in the morning trading session. This drop occurred despite the company surpassing earnings estimates for the first quarter of 2024, with earnings of $2.76 per American depositary share (ADS) on sales of $4.4 billion. These figures exceeded analysts' expectations of $2.18 per ADS and $4.3 billion in revenue. However, by late morning, the company's stock was still down about 1%, indicating investor reactions to the earnings report.
The decrease in Baidu's stock price can be attributed to its earnings, as calculated according to generally accepted accounting principles (GAAP), which were significantly lower than both the pro forma number and analyst forecasts, at only $2.06 per share. Additionally, the company's year-over-year earnings declined by 6%, and sales growth was modest at only 1%. Despite these challenges, Baidu did report a 3% growth in online marketing revenue, highlighting some areas of strength within its business model.
Baidu, headquartered in Beijing, is recognized as the leading search website in China and competes with global giants like Alphabet's Google. The company has diversified its operations to include cloud-computing services, a streaming service, and an autonomous vehicle division, among others. This diversification strategy is part of Baidu's efforts to maintain its leadership position and drive future growth.
Financially, Baidu has a price-to-earnings (P/E) ratio of approximately 118.59, indicating a higher valuation compared to the earnings it generates. The price-to-sales (P/S) ratio stands at about 2.22, suggesting that investors are willing to pay $2.22 for every dollar of sales. These financial metrics, along with others such as the debt-to-equity (D/E) ratio of about 0.34 and the current ratio of approximately 2.79, provide insights into Baidu's financial health and investor perceptions of its value.
Baidu Reports Better Than Expected Q1 Revenues
Baidu's (NASDAQ:BIDU) reported first-quarter revenue that exceeded expectations, while earnings aligned with analyst estimates. The company reported Q1 earnings per share (EPS) of RMB16.10, meeting consensus estimates. Revenue for the quarter was RMB31.51 billion, surpassing the projected RMB31.43 billion.
Baidu's core business generated revenue of RMB23.80 billion, exceeding the estimated RMB23.58 billion. Conversely, revenue from iQIYI was RMB7.9 billion, falling short of the expected RMB8.02 billion.
Robin Li, Co-founder and CEO of Baidu, noted that the company’s online marketing revenue remained stable, and the end-to-end optimization of their AI technology stack continued to drive growth in AI Cloud revenue. He highlighted the emergence of a new era of Gen-AI in China, with foundation models like ERNIE serving as crucial infrastructure, enhancing various aspects of life. Li emphasized Baidu's efforts to make the ERNIE family of models more affordable and efficient, which should create more opportunities for the company.
Baidu’s Buy Rating Maintained at Jefferies
Jefferies analysts maintained a Buy rating and a $179 price target on Baidu (NASDAQ:BIDU), adjusting the analysis to account for recent business activities and adopting a more cautious outlook across various segments.
This adjustment includes expectations of a subdued advertising market in certain categories alongside tempered forecasts for both cloud and non-cloud segments. The analysts emphasized the crucial role of artificial intelligence (AI) in enhancing monetization opportunities and operational efficiencies, highlighting its vast potential. Despite these adjustments, the full-year projections for Baidu have not been altered.
Baidu Stock Drops 7% on Q4 Revenue Miss
Baidu’s (NASDAQ:BIDU) shares declined over 7% intra-day today as the company revealed Q4 revenues that fell short of expectations. The company reported earnings per share (EPS) of RMB21.86, surpassing the consensus of RMB17.58. However, revenue stood at RMB34.95 billion, missing the Wall Street forecast of RMB35.14 billion.
The revenue from Baidu Core reached RMB27.49 billion, exceeding expectations of RMB27.31 billion, while revenue from its video streaming service iQIYI was RMB7.7 billion, below the expected RMB7.86 billion.
Baidu also reported monthly active users (MAUs) totaling 667 million, which was higher than the 658.74 million anticipated by analysts. Additionally, the non-GAAP operating margin for Baidu Core was reported at 23%.
Baidu Stock Drops 7% on Q4 Revenue Miss
Baidu’s (NASDAQ:BIDU) shares declined over 7% intra-day today as the company revealed Q4 revenues that fell short of expectations. The company reported earnings per share (EPS) of RMB21.86, surpassing the consensus of RMB17.58. However, revenue stood at RMB34.95 billion, missing the Wall Street forecast of RMB35.14 billion.
The revenue from Baidu Core reached RMB27.49 billion, exceeding expectations of RMB27.31 billion, while revenue from its video streaming service iQIYI was RMB7.7 billion, below the expected RMB7.86 billion.
Baidu also reported monthly active users (MAUs) totaling 667 million, which was higher than the 658.74 million anticipated by analysts. Additionally, the non-GAAP operating margin for Baidu Core was reported at 23%.
Morgan Stanley Bullish on Baidu
Morgan Stanley analysts maintained their Overweight rating on Baidu (NASDAQ:BIDU), expressing optimism about the company's stock performance in the near term.
The analysts commented that there is a strong likelihood for the stock's price to rise in the next 60 days, citing its recent decline as a factor that has made its short-term valuation particularly attractive. The stock price, according to the analysts, has undergone a significant correction due to market concerns surrounding the recent developments with Ernie Bot. Despite these concerns, they foresee an improvement in Baidu's fundamentals towards the fourth quarter of 2023 and into 2024.
This anticipated improvement is expected to be driven by advertising growth outpacing GDP growth and a pivotal rise in cloud growth, fueled by incremental contributions from AI technologies. The analysts estimate a 70% to 80% probability, or a "very likely" chance, of this scenario occurring.
Baidu's 'Ernie' AI Bot Achieves Milestone with Over 100 Million Users
Baidu’s (NASDAQ:BIDU) AI model, known as Ernie Bot internationally and as Wenxin Yiyan in China, recently surpassed a user base of over 100 million. Bloomberg reported that Baidu's Chief Technology Officer, Wang Haifeng, announced this achievement at a recent conference.
The model's user count surged rapidly within just two months of its launch in 2023, underscoring its appeal and contribution to the development of large language models (LLMs). Following the rapid expansion of generative AI technologies, the Chinese government's State Internet Information Office, along with six other departments, has implemented provisional rules to regulate services centered around AI.