Baidu, Inc. (BIDU) on Q3 2022 Results - Earnings Call Transcript
Operator: Thank you for standing by, and welcome to the Baidu Incorporated Third Quarter 2022 Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. I would now like to hand the conference over to your host for today, Juan Lin, Baidu's Director of Investor Relations. Please, go ahead.
Juan Lin: Hello, everyone, and welcome to Baidu's third quarter 2022 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; 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 US 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 the 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 site at ir.baidu.com. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on Baidu's IR website. I will now turn over to our CEO, Robin.
Robin Li: Hello, everyone. Recapping the third quarter in broad terms, we delivered improved bottom line results despite a challenging macro environment, especially for the mobile ecosystem, operating profit resumed positive year-over-year growth. And for AI Cloud, operating loss and margin improved meaningfully, both on a year-over-year and a quarter-over-quarter basis. Businesses across the line from mobile ecosystem to AI Cloud to Intelligent Driving have been negatively affected by the resurgence of COVID. Throughout Baidu's history, however, we have experienced many challenging environments. Periods of challenges have enabled us to emerge stronger, given our relentless effort on building long-term growth. We're using this period to ready ourselves for current business conditions to improve. Our key short-term tasks remain unchanged, which are efficiency, optimization and continuous investments in the new AI businesses. Our new AI business such AI Cloud and Intelligent Driving are well aligned with China's tech innovation and national initiatives. By doing so, we will further strengthen our leadership in the new AI business and reaccelerate business growth. In Q3, Baidu Core ad revenue was down 4% year-over-year, but improved from the second quarter's 10% year-over-year decline, as macro has improved gradually since June. Encouragingly, revenues from healthcare and retail recorded positive year-over-year growth in the quarter. Going forward, when COVID situation alleviates in major cities ad revenues across different verticals such as travel, franchising and local services should rebound. For our new AI business, I am proud to report some highlights. Revenues from AI Cloud increased by 24% year-on-year to RMB 4.5 billion in the quarter. AI Cloud has been a major growth driver for Baidu Core non-advertising revenue. In Q3, non-advertising accounted for 26% of Baidu Core total revenue, that's up from 21% a year ago. Baidu Apollo auto solutions continued to gain traction among leading automakers and the total projected accumulated sales reached RMB 11.4 billion recently, growing more than 50% year-over-year. Apollo Go completed 474,000 rides in the quarter, up 311% year-over-year. By the end of Q3, Apollo Go has completed 1.4 million rides on public sales . We believe we remain the largest autonomous ride-hailing service provider globally. Now let's review the third quarter operational highlights. Revenues from AI Cloud increased by 24% year-over-year to RMB 4.5 billion in the quarter. In Q3, the operating loss margin for AI Cloud improved notably both year-over-year and quarter-over-quarter. Over the past quarters, we have made shifts away from some lower-margin businesses to build sustainable growth for AI Cloud. Meanwhile, we continue to take measures to standardize our solution to cut down deployment costs as we scale up. Our efforts have allowed us to gradually improve operating profit and margin. I'll take ACE smart transportation as an example. In the past quarter, we continued to grow revenue and improve operating margin for smart transportation as we gain scale. Leveraging our strong AI capabilities and our insights into the industry, we have divested the solutions for typical use cases, such as, traffic management and V2X for urban road and highway. Previously, we talked about how our projects help improve traffic efficiency, city roads in Beijing, Guangzhou, Changsha, Chongqing and other cities. Recently, Tuju an important transportation hub in Hunan province, adopted our smart traffic management solutions. Our solutions covered more than 70% of the major intersections in the business district of Tuju. After adopting our solutions, delays have been reduced by 22% during rush hour in the current region. By the end of the quarter, Baidu ACE Smart Transportation solutions has been adopted by 63 cities, up from 24 cities a year ago, and 51 cities a quarter ago based on contract amount of over RMB10 billion -- RMB10 million per city. As we demonstrated, our capability to use AI to improve transportation efficiency in more cities, ACE Smart Transportation will further expand its market share. We're trying to repeat our success in smart transportation in other key verticals, such as manufacturing, energy and utilities and the public sector. We will empower our customers with AI capabilities to help them increase productivity and cost control. With AI Cloud, our customers will be better positioned to take advantage of digital intelligent transformation. We believe we remain well positioned in the early-stage, fast-growing market due to number one, our capabilities to establish end-to-end solutions based on our full stack AI capabilities ranging from chip design to deep learning frameworks, to large language models, to application-level software; and on number two, our insight about customers' pain points and our growing know-how and capabilities to solve their profits. While COVID caused delays in project implementation and complicated our sales team's efforts, hampering new contract wins, we believe the long-term trend of digital and intelligent transformation remains unchanged. Looking ahead, we will continue to focus on quality growth and aim to improve margins to achieve profitability for AI Cloud. In intelligent driving, we marked several key highlights in the third quarter and our years of investing in intelligent driving and begun bearing fruit. Baidu Apollo auto solutions, our total projected accumulative sales exceeded RMB11.4 billion recently. Based on our current pipeline, some of the major car models equipped with ANP and AVP are expected to be launched in the second half of next year. We expect meaningful revenue contribution from this business to begin in 2024, and profit to expand once material revenue kicks in. Such growth demonstrates the increasing demand for our auto solution. In Q3, we extended our partnership with one of China's largest automotive and technology companies ANP, AVP and HD Maps for one of their popular models. As of today, we have announced a collaboration with many OEM partners. Serving various automakers has helped us standardize our auto solutions, making them compatible with more popular car model. As more cars equipped with our auto solutions get into consumer plans, we will continue to refine and update our solutions. Considering the sizable development cost for high-level autonomous driving technology, many automakers seek partnerships with reliable suppliers, who have strong brand and technology capabilities. We have differentiated ourselves with world-leading Level 4 autonomous driving, which has been established through years of investments. Now, we are proactively building high-quality partnerships with an increasing number of auto OEMs to accelerate our partners' progress in autonomous driving. A few months ago, we integrated Baidu Map into our intelligent driving group to create synergies between the Baidu Map, also -- Baidu Map mobile app and the mass solutions for auto and transportation industries. Since our map have already been widely adopted, we have obtained more insights in the transportation industry, allowing us to strengthen our solutions for the mobility sector. On Apollo Go, we continue to scale up our operations, and we believe we remain the largest autonomous drive-hailing service provider worldwide. In the third quarter, the ride provided by Apollo Go reached 474,000, increasing 311% year-over-year and 65% quarter-over-quarter. A vast majority of the rides were for serving passengers during rush hours, covering places like subway stations, office buildings and shopping malls. As our operation continues to expand, Apollo Go keeps learning and improving from scenarios that do not occur during the testing phase. Leveraging large-scale operations, we're making Apollo Go, a professional AI driver, while offering a safe and comfortable autonomous ride-hailing service. Today, with an Apollo Go vehicle enters dense intersection, it is able to easily take a guess between pedestrians, bicycles and other moving objects, safety driving school while providing a comfortable experience to the passengers. Apollo Go continues to improve autonomous ride-hailing services under extreme weather. Scalable operations have indeed reinforced our Level 4 autonomous driving capabilities, setting a strong foundation for further operation expansion. We believe this virtuous cycle will make Apollo Go, the most experienced AI driver to handle various situations on the road, on a large scale. We're facing the expansion of Apollo Go based on a comprehensive financial model. In previous earnings calls, we talked about Apollo Go's achievement in the Yizhuang region of Beijing. In fact, Apollo Go has achieved significant progress in other Tier 1 cities as well. In Q3, on average, each vehicle in Beijing, Shanghai and Guangzhou completed more than 15 rides per day. According to our knowledge, this number is quite close to the average daily rides for traditional ride-hailing services. We believe that our strong and improving safety track record on public roads provide a strong endorsement for more cities to issue permits for full driverless ride-hailing. We believe fully driverless ride-hailing will create more affordable urban transport and attract more consumers to the ride-hailing market. Baidu will continue to invest to capture this massive market opportunity. Moving to the mobile ecosystem. Our operating profit improved on a year-over-year basis and we continue to generate strong cash flow in the quarter. Our mobile ecosystem continued to expand. In September, Baidu App's MAUs increased by 5% year-over-year to 634 million. In Q3, total mobile search queries increased by double-digits year-over-year and feeds distributed through Baidu App increased by 23% year-over-year. We continue to introduce short videos in feeds and search results. In September, short video distribution and time spend within Baidu Feed grew double-digits year-over-year. For Baidu Search, in September, 23% of the clicks on search result pages were short videos. And we expect the prevalence of video in search results to continue progressing rapidly. We're using AI to produce more short videos for our mobile ecosystem. While it is still in a very early stage, we believe AI will allow us to generate short video much faster and more cost effectively than human-generated content. In e-commerce, users are coming to Baidu App for product search, which resulted in a continuous increase in product-related sector. Quarterly GMV facilitated by Baidu Search grow by about 52% year-over-year in Q3. Today, users come to Baidu App not only to search for information and knowledge, but increasingly to look for services and merchandise. As we are able to make purchases and book services without leaving Baidu App, we have been deepening our understanding of user needs. Meanwhile, more customers are leveraging our ecosystem infrastructure to build their marketing campaigns and even operate their businesses on our mobile ecosystem. This has allowed us to accumulate more customer insights and better serve the customers. The improving insights into our users and customers have, in turn, allowed us to improve user experience and app conversion. In the future, we believe our mobile ecosystem will continue to generate strong profit and cash flow. To close, during this uncertain time, we focused on making the long-term investments that will position us to be stronger coming out of this challenging period, including Baidu AI Cloud and intelligent driving. While the advertising industry has been impacted by COVID-19, some of our verticals could recover faster when there is an upturn in the economy, which will drive our ad revenue to resume growth. Before I turn the call to Rong, I want to thank Baidu's employees for their diligent work in a challenging environment and the time and effort they put into making our company story a success in the long-term. With that, let me turn the call over to Rong to go through the financial highlights.
Rong Luo: Thank you, Robin. Now, let me walk through the details of our third quarter financial results. Total revenue was RMB32.5 billion, increasing 2% year-over-year. Revenue from Baidu Core was RMB25.2 billion, increasing 2% year-over-year. Baidu Core online marketing revenue was RMB18.7 billion, decreasing 4% year-over-year, but improved 10% from the second quarter as macro has improved gradually since June. Baidu Core, non-online marketing revenue was RMB6.5 billion, up 25% year-over-year, driven by cloud and other AI power businesses. In Q3, Baidu AI Cloud increased by 24% year-over-year to RMB4.5 billion. Revenue from ACE was RMB7.5 billion, decreasing 2% year-over-year. Cost of the revenues was RMB16.3 billion, increasing 1% year-over-year. Baidu Core, cost of revenue was RMB10.7 billion, increasing 15%, 1-5, year-over-year, which was in line with the growth in sales of AI Cloud and other AI power businesses. Operating expenses was RMB11 billion, decreasing 19%, 1-9, year-over-year, primarily due to a decrease in channel spending, promotional marketing expenses, and staff-related expenses. Baidu Core selling, general, and administrative expenses were RMB4.2 billion, decreasing 31%, 3-1, year-over-year. SG&A accounting for 17%, 1-7, of Baidu Core revenue in the quarter and decreased from 25% in the same period last year. Baidu Core research and development expenses was RMB5.3 billion, decreasing 4% year-over-year. R&D, accounting for 21% of Baidu Core revenues in the quarter and decreased from 22% in the same period last year. Operating income was RMB5.3 billion. Baidu Core operating income was RMB5 billion and Baidu Core operating margin was 20%. Non-GAAP operating income was RMB7.2 billion. Non-GAAP Baidu Core operating income was RMB6. 7 billion and non-GAAP Baidu Core operating margin was 26%. Q3 present the first year-over-year growth in non-GAAP operating profit and margin perspective since Q2 2021. Total other loss net was RMB4.8 billion, decreasing 78% year-over-year, which mainly including a fair value loss of RMB3.1 billion and impairment of long-term investments of RMB1.4 billion. In the third quarter last year, we recognized a fair value loss of RMB18.9 billion. A significant portion of long-term investments, including but not limited to, investments in equity securities of public and private companies, private equity funds, and digital access. This is subject to quarterly fair value adjustments, which may contribute to net income volatility in future periods. Income tax expenses was RMB908 million compared to an income tax benefit of RMB1.8 billion in Q3 2021, primarily due to an increase in deferred tax benefit recognized on fair value loss of long-term investments and deduction of certain expenses that were previously considered non-deductible in the third quarter of 2021. Net loss attributable to Baidu was RMB146 million, and diluted loss per ADS was RMB0.87 Net income attributable to Baidu Core was RMB25 million. Non-GAAP net income attributable to Baidu was RMB5.9 billion. Non-GAAP diluted earnings per ADS was RMB16.87, non-GAAP net income attributable to Baidu Core was RMB5.8 billion, and non-GAAP net margin for Baidu Core was 23%. Adjusted EBITDA was RMB8.9 billion and adjusted EBITDA margin was 27%. Adjusted EBITDA for Baidu Core was RMB8.2 billion and adjusted EBITDA margin for Baidu Core was 33%. As of September 30, 2022, cash, cash equivalents, restricted cash and short-term investments were RMB184.5 billion and cash, cash equivalents, restricted cash and short-term investments excluding iQIYI were RMB179.5 billion. Free cash flow was RMB6.6 billion and free cash flow excluding iQIYI was RMB6.4 billion. Baidu Core had approximately 36,500 employees as of September 30, 2022. On a separate note, ACE generate positive operating profits on both GAAP and non-GAAP basis in this quarter. The acquisition of ACE also generated positive free cash flow in this quarter. With that, operator, let's now open the call to questions.
Operator: We will now begin the question-and-answer session. The first question today comes from Alicia Yap with Citigroup. Please go ahead.
Alicia Yap: Thank you. Good evening, management. Thanks for taking my questions. I have two questions. First, can management comment how should we look at the advertising demand recovery in the near-term and it's also in the next quarters? And then secondly, can management comment on, how you think about the competitive landscape in the China advertising market will evolve going forward? And what would Baidu long-term market share be? Thank you.
Robin Li: Hi Alicia. This is Robin. Let me answer your questions. Yes, our revenues are very sensitive to COVID control measures. Baidu Core's ad revenues returned to positive year-over-year growth in August. But in September, it decreased again, because of new roundup COVID resurgence. Overall, Q3 was much better than Q2, because there were a recovery from the second quarter in which there were a lot of disruptions caused by COVID. When we entered the fourth quarter, the situation improved in October, but since early November, it got a bit cloudy because another round of COVID impacted some regions, like Guangzhou and Beijing. We're closely watching how the situation will develop. I think the short-term will probably still be quite volatile, but the economy should improve in the mid-term and beyond. China has been fighting against this COVID for almost three years and the country has been gaining experience. Well, we're certainly going to see some ongoing disruptions and uncertainties. The overall situation should improve -- should move in a positive direction over the next few quarters. As you know, many of our ad verticals were affected by COVID and macro. So once COVID and macro situations improve, our ad revenues from different verticals such as travel, franchising or local services should rebound. Again, we will closely watch how COVID situation develops, and we will work very hard to bring our ad revenue back to a positive year-over-year growth as soon as possible. In addition, AI Cloud and intelligent driving, our new business also negatively impacted by the COVID disruption. So if COVID impact the supplies, these non-advertising businesses should also see improvement. And regarding to your question on competition in the online advertising market, first of all, I think Baidu App is one of the very few super apps in China's mobile internet industry, well-recognized and well-established. Search ads enjoying the best ROI among various types of performance ad because users explicitly express their intent in our search box. And search ads connect users' intentions with the most relevant product and service offerings. This is why a lot of advertisers consider Baidu Search as the most important and most efficient channel to reach their targeted audience. And secondly, China's mobile internet is maturing. User growth is gradually slowing down and the competitive landscape is much less volatile than before. With this backdrop, Baidu App still managed to grow its user base nicely over the past many quarters. On top of that, with the unique positioning of search, we believe we should be able to sustain our market share in the online advertising market over the long run. And thirdly, unlike our peers, most of our advertisers are SMEs, being in the real economy. Many of them run businesses in the service sector such as local services, business services and travel. This business is work hurt the most by the pandemic. So when COVID impact subside, and revenue should rebound quickly. And Baidu stand to gain share in the overall advertising industry. .
Alicia Yap: Thanks, Robin.
Operator: The next question comes from Eddie Leung with Bank of America. Please go ahead.
Eddie Leung: Hi, good evening, guys. Pretty solid quarter despite all the macro headwinds. I have a couple of questions on cloud services. So we have seen -- it seems like a slowdown in the industry. So could you talk a little bit about the reasons behind the slowdown -- and how you guys are thinking about the growth rates in the upcoming lessor quarters on the medium term? And then secondly, could you also talk a little bit about the competitive landscape -- we have seen a media reporting market share gains by cloud companies all tie the Internet set in the past one or two years, right? So any color on the competitive landscape will be useful. And then finally, I remember, Robin, you mentioned about the margin improvement of cloud. So could you also talk about your thoughts on the role to profitability? Any time line would be helpful. Thank you.
A â Dou Shen: Hello, Eddie. Thanks a lot for your questions. This is Dou. I'll try to answer your questions. So for the revenue growth part, right, I think it's slowing down mainly due to the COVID-19 impact. for example, because of the travel restrictions, we could not even implement our projects on time, and the bidding for the new contracts was also affected. Apart from that, I also want to highlight that we are focused on healthier and more sustainable growth by cutting some low-margin businesses. So we believe this approach is crucial for the long-term development. Actually, looking beyond the current quarter, as Robin has just mentioned, the train for China's traditional industries and the public sector to use AI and move their business onto the cloud remains unchanged. So I think post pandemic, the companies should gain more confidence in their future growth so that they are more willing to spend more money on digital and intelligent upgrades. Baidu has already demonstrated that we are very capable of using AI to improve the efficiency in transportation. As you can already see, our ACE Smart Transportation revenues have been growing rapidly, and we continue to gain market share accordingly. So in the meanwhile, we are reducing the operating loss for small transportation because we continue to expand scale and continue to increase operating leverage. So in our next steps, so we are excited about repeating our success in transportation in other traditional industries like manufacturing and utilities. So actually, in the -- just the past quarter â the quarter, so our cloud revenues from the manufacturing and utilities industries both grow solidly. And it's largely because of our continuous efforts in improving the end-to-end AI capabilities and our understanding of the fundamental needs in these industries. So to answer your questions, we believe this or our sustainable competitive advantages to compete against other players. In addition, the market is expanding in their alternative opportunities for us and our peer companies to grow over the long-term. So talking about the profitability, so Baidu AI Cloud reduced operating loss and continue to improve operating loss margin this quarter. To expand on that, our personal cloud kept generating decent operating profit and margin. And our enterprise part grow faster than personal cloud, and we're very happy to see the trend of loss reduction because of the efforts I just mentioned earlier. So our strategy to standardize solutions in the user -- in the use cases for our key industries started to bear fruit. So we have worked very hard to replicate more solutions from one user case to another to grow business scale and improve margins. So it's already proven in Smart Transportation as we have mentioned. And in the future, we look forward to expanding this approach at large scale in more key industries. So AI Cloud is very important new business for Baidu, and we will continue to grow the business and improve margins going forward.
Eddie Leung: Thank you.
Operator: The next question comes from Alex Yao with JPMorgan. Please go ahead.
Alex Yao: Thank you management for taking my question. I have a couple of questions on Baidu Core margins. In the past several quarters, you guys did very good job in terms of cost control and the margin improvement. As large-scale BU and headcount streamlining has been already down, how much more room should we think about for further cost cutting in Baidu Core in the coming quarters and 2023? And the related question is how should we think about the Baidu Core operating margin going forward? Lastly, would Baidu slow down the cloud and autonomous driving investments if the macro situation further deteriorates? Thank you.
Rong Luo: Thank you, Alex, for your questions. Let me try to figure your questions. This is Julius. I think as Robin has said in the every beginning of the prepared remarks, I think for Baidu Core, we continue to optimize the cost expenses and we continue to improve our operational efficiency, which is one of our key short-term tasks. At the same time, we kept investing in the new AI businesses for future growth. This strategy actually has not changed in the past few quarters. And this strategy allow us to weather through the challenging market environment, and we believe that it will prepare us for accelerated growth again once the macro downturn is over. In Q3, let me recast some of the numbers. Baidu costs non-GAAP operating profit margin expanding to 26% from 24% in the same period last year. I think it has represented the first year-over-year growth in non-GAAP operating profit and margin perspective since Q2 2021. And we made a lot of efforts to achieve such results. You'll probably see from our early release, our SG&A has decreased once again in Q3, this quarter from the same quarter last year. We have been very disciplined with the channel spending and promotional activities. And just to add that, it was already less consecutive quarter that SG&A achieved a year-over-year decline. And going forward, we will continue to control the variable costs and expenses as same as what we did in the past. If you look into our each part of our business, for mobile ecosystem, our operating profit actually is going up on a year-over-year basis, even though we know the revenue was negatively impacted by COVID-19. And we have also already mentioned earlier and which is just repeated by Dou, we made a lot of efforts for the healthy growth of AI Cloud. This quarter, the operating loss margins for AI Cloud improved significantly, both on a year-over-year basis and quarter-over-quarter basis. If we're separate, two part. For enterprise and public status, we're allocating our resources to high-margin business and reduce the low-margin business. Also, we continue to standardize our end-to-end solutions, including the IaaS, PaaS, SaaS for key user cases and as much expectations started one of the examples, we continue to grow fast and at the same time, improve the margins quite notably. And the personal cloud, same as well in the past, we continue to generate a decent profit this quarter. For our robotaxi business, Apollo Go, we also chose to grow Apollo Go at well measured pace. We have very comprehensive financial models to optimize and forecast the cost and expenses in this business, especially the labor costs and the very -- hardware costs. We have been very careful to measure and estimate the cash flow for this business. Our strategy is to strengthen our leading position in robotaxi all over the world, acquire sizable market shares in the ride-hailing sector, especially in the key cities in China and in the future, and ultimately try to generate more profits in these key areas. We are not expanding our operations without thinking about building a sustainable and profitable business models for Apollo Go. For auto solutions, Zhenyu Li mentioned just now, we already have a projected cumulative sales of around RMB11.4 billion, while revenue contribution is still very small at this stage, and we expect it to see more revenue keying from the second half of next year or maybe early in 2024, as small cars with our solutions can become available in the market. And once the meaningful revenue kicks in, this business should start to generate profit. I would like to also make it clear in the RMB11.4 billion is our estimate including the contract side and nomination letters we received from OEMs. In auto industry, our nomination letter means a supplier is affected for certain projects, and then the OEMs will sign up contracts with us first. Our estimate is based on our assumptions of the timing of launch, the pricing, the future volumes. I hope this gives you a better understanding of how we have made these calculations. Looking forward, we will continue to be very disciplined with the cost and expenses. And at the same time, we'll continue to invest in the AI Cloud and intelligent driving for our long-term growth, despite of the challenging environment in the short term. And in the future, we believe our mobile ecosystem will continue to generate different profits and cash flow to support our investments in the new AI business. And we'll also continue to work very hard to narrow our loss in AI Cloud. Thank you so much for your question.
Operator: The next question comes from Gary Yu with Morgan Stanley. Please go ahead.
Gary Yu: Hi. Thank you for the opportunity and congrats on the expanded partner network and growing backlogs for ADS business. I have a question on your auto solutions. Just wondering, when should we expect meaningful revenue to start gains? And how do you differentiate the Apollo's auto solution from your peers? And could you help us understand the underlying market space for Baidu Apollo's auto solutions? And a related question to that is, have you noticed a significant change in the attitude of the OEMs towards self-developing for intelligent driving solutions? Thank you.
Robin Li: Hi, Gary, this is Robin. We've seen huge opportunities in the auto solutions market. In the first 10 months of this year, EV sales increased by more than 100% in China. We're now the largest EV market in the world, accounting for more than half of the global EV sales. A clear trend for the auto industry is vehicle intelligence. Baidu is benefiting from this trend. Our years of investments in autonomous driving have begun to bear fruit. Baidu Apollo's auto solutions derived from our core technologies. A lot of AI models we build for robotaxi can be used for ASD. Another point to note is that as the market leader, we have been investing in autonomous driving for about 10 years. And thanks to this investment, we not only have completed tens of millions of testing miles on the public roads, but also accumulated a very valuable experience by running the largest robotaxi fleet on urban roads on a daily basis. This has provided us great insight, and we have used these insights to develop auto solutions that best meet our customers' needs. So for example, ANP 3.0. We believe it is the most advanced intelligent driving solution for city roads on the market. Because ANP 3.0 is derived from our four autonomous driving technology, we were able to use a very limited amount of R&D personnel to make this advance solution available to the market within a short time. Jidu's first car Robo 01 will be the first one to use ANP 3.0. We believe that with more and more automakers adopting our auto solutions, we will become more experienced in making our solutions compatible with more popular car models. On the other hand, with more and more cars with our auto solutions are on the go, we will be able to grow experience from everyday uses and we'll continue to improve our auto solutions. As I mentioned earlier, our total projected cumulative sales for Apollo's auto solutions reached RMB11.4 billion, which is more than 50% from last year. Based on our current pipeline, some of the major car models that are equipped with ANP, AVP should be launched starting in the second half of next year. So, meaningful revenue contribution for this business should begin in 2024 and profit will follow. On the differentiation, if you look at the cost side, as we mentioned many times before, developing advanced intelligent solutions require massive investment in technology and talent. Frankly speaking, most companies cannot afford this kind of investment. Automakers trust our brand and technology. So, a lot of them have chosen to partner with Baidu intelligent solutions. For them, we are a trustworthy and reliable supplier because we have made years of investment in intelligent driving technology and we have a strong cash position and our advertising business continue generate strong cash flow to support our investments. Going forward, this will continue to support the operation with many automakers at large scale. That's why more and more leading automaker have recognized us and have broadened partnership with Baidu. For example, in the quarter, we expanded our partnership with one of China's largest auto companies, and we plan to use our ASD solutions for yet another of their popular car model. And the ASD solution used into ANP, AVP, and HD Maps. Going forward, we are looking forward to more partnerships with OEMs, both domestically and internationally. Thank you, Gary.
Operator: The next question comes from Kenneth Fong with Credit Suisse. Please go ahead.
Kenneth Fong: Hi, good evening management. Congrats for the solid quarter and thanks for taking my question. I have a follow-up question about Apollo Go. On a fully autonomous driving, what kind of progress will be seen in the near-term? Could management also talk about a key milestone that Apollo Go will achieve in 2023 and even in the longer term? And to achieve this milestone, how should we think about the impact on your P&L, as well as cash flow? And when should we expect Apollo Go business to achieve breakeven? Thank you.
Zhenyu Li: Thanks for your question. This is Zhenyu. We are making very good progress and package of providing fully drive ride-hailing for the public. We believe Apollo Go is the largest autonomous ride-hailing service provider in the world, because, number one, when we look at the numbers back on coverage rate. Apollo Go has provided 1.4 million drive for the public. In Beijing, Shanghai and Guangzhou each half complete 15 drive per day. We are also providing fully driverless AI ride-hailing solution to public in Wuhan and Chongqing and the number of ride providers by fully driverless AI is growing very fast. And number two, Apollo Go is already in more than 10 cites in China. It is also cities have a population of more than 10 million, as Rong Luo mentioned in his script, building up operation of us to improve technology and safety. He give examples about technical improvement â share about the operation help us to improve user experience. In operations, we got a lot of feedback from passengers. For example, passengers, one half, a operated customer to moderate, b, to citizen up faster and improve plan or rules can be formed . We then refined and improve or open for quality. Our efforts help us gain more recognition from passengers. Today, in Chongqing, Beijing, Apollo Go is already importantly for computing. After trying Apollo Go, people come to realize that it is a reliable and fixed service. It drove just like a professional driver. Some people may wonder why is Apollo Go 25% human drivers? This operation is always be in compliance with traffic regulation and our AI driver never get tired or distracted like human drivers, all of those allow Apollo Go provide worry-free to drive for the public. While strong takeaway product 150 have helped us to us entrust, both from auditor and also from our regulators. We mentioned before, set in Wuhan and Chongqing. We will allow to provide fully driverless cadence service this August. The operation in both cities is well on track. Going forward, we plan to continue to expand this operation â and this operation -- also and as more fully driverless vehicles. In 2023 and beyond, we will continue to skills our operation. In particular, fully driverless ride-hailing operation in more region and reduce hardware and vehicle cost. We believe while we are testing we will eventually be profitable and cheaper than the current ride-hailing service. We will continue to invest in robotaxi to capture a huge market opportunity.
Rong Luo: Hi, Kenneth, this is Julius. Regarding your question about the impact on our P&L and cash flow. We believe the overall impact is actually manageable. As Robin said in the script, actually, our team today has built a very comprehensive financial model for Apollo Go. This model actually helped us to understand what should we do, where we should improve and adjust to generate profit in these models in the future. For example, today, we are working very hard towards two goals. Number one is, we aim to remove safety officers in the cars, as labor cost is where we should reduce and make a kind of new ways. And number two, we continue to reduce the hardware costs. During the past quarters, we continued to improve our AI for autonomous driving technology and just now, both Zhenyu and Robin have given some examples of how we do that, how we leverage the large-scale operation to improve technology. These efforts help us to earn trust and build track records. Today, we are providing fully driverless ride-hailing services in Wuhan and Chongqing, meaning no safety officers in the cars at all. In Beijing, we're also making good progress as the safety officers today are now allowed to -- not to see behind the steering wheel and maybe even the front seats, which will help us to remove the safety officers in more cities and reduce the labor costs in the future. And on the other hand, for the hardware perspective, most of the newly added car in the coming 12 months will be RT5, the model of Apollo Go. This means there will be some investments in hardware next year. Once a sizable amount of RT6 which has just launched a few months ago, pulling operation in the year 2024, our unit economy will significantly improve because RT6 has much lower production costs than any previous generations of robotaxis. The unit economy in our operations in key cities is also improving, because we continue to scale out and improve the order cost -- the cost efficiencies. Robin has mentioned, our rides continue to grow in the past few quarters and also each car now provide 15 rides every day in some Tier 1 cities. Apollo Go today is becoming -- recognized as a reliable and efficient way for daily commute. Overall, Apollo Go our measures be, we aim to achieve the unit economy in key cities before we expand to more cities. I think, just a summary, all of this impact to our cash flow and the P&L is manageable, and we have the patience. Thank you.
Kenneth Fong: Thank you. It's very clear.
Operator: The next question comes from Lincoln Kong with Goldman Sachs. Please go ahead.
Lincoln Kong: Thank you, gentlemen. I want to ask about our sales of advanced chips to China, because we have seen recently a lot of press report around US chip restriction against China. So we wonder how you are seeing these restrictions impacting your ability to grow the business by AI Cloud, the autonomous driving and lastly, wider our AI business? So, could you also remind us, our business that's the most is depending on the advanced large AI chips and if there's any way, we'll be able to manage this with the master chip capability? Thank you.
Robin Li: Thank you, Lincoln. You're right. This is a hard topic to reason to actually. So, the short answer to your question is that, we think the impact is quite limited in the near future, and here are the reasons. So first of all, as of today, a large portion of our AI Cloud business and even whether AI business does not rely to much on the high advanced chips. And secondly, for the part of our business is that need advanced chips, we have already started enough in hand actually to support our business in the near term. Thirdly, there were some alternative to the restricted chips and we have the technologies to use these alternatives to achieve almost the same effectiveness and efficiency in our AI Cloud and the weather AI businesses. Last, but not least, automotive chips are not on the prohibited list. So this means that in the near future, in-vehicle computing is not affected. So when we look at the mid to longer term, we actually have our own developed AI chip, so named Kunlun. Actually, we already started to use Kunlun chip to support some large-scale AI computing tasks internally. We also use Kunlun to serve external customers already. So because we have full stack AI capabilities from chips to AI frameworks to foundation models and then to application software, so we can achieve much higher efficiency as we optimize AI tasks from end to end. So let me give you some examples. By using our Kunlun chips and large language models, the efficiency chip to perform text and image recognition talks on our AI platform has been improved by 40% and the total cost has been reduced by 22% -- 30%. There are more cases like this in a quality inspection in our smart manufacturing projects and image recognition in the smart city products and so forth. So as our business grows, we believe our end-to-end capabilities will gain us even stronger competitive advantages. For the core chips, so we expect to see more auto force, including core chips to be manufactured in China in the future. So as China's intelligent driving market continues to develop rapidly. So this means that supply chain in auto industry may become more and more independent unless weâre in the imports. So once again, I want to emphasize that Baidu has built a very strong R&D team. We keep introducing cutting-edge technologies to the market, and we help users and customers to use these technologies to improve efficiency. So that's why we believe, we can leverage our strong AI capabilities and AI algorithms to support the top level computing, even though we face some turbulence in the semiconductor supply chain. So to sum up, chip sales restriction should have a limited impact on our business operation in the near term. Instead, we think it increased some good market opportunities for the Chinese chip companies and our equipment AI chips and our AI business will eventually benefit from these opportunities.
Lincoln Kong: Great. Thank you.
Operator: The last question today comes from James Lee with Mizuho. Please go ahead.
James Lee: Great. Thanks for taking my questions. I have two here. First, can you guys provide some more color on your progress of e-commerce search and short video opportunities? Can you guys talk about maybe from a consumer, merchants' and creators' point of view, what kind of pinpoint are you trying to resolve here? And second, can you talk about the traction that you have made in open mobile ecosystem and potential monetization opportunities here? Thanks.
Robin Li: Yes, this is Robin. I mentioned earlier that we have been building closed-loop experience for our users and advertisers in our mobile ecosystem especially in Baidu app. For e-commerce, because of the efforts we made in the past, users now come to Baidu not only for information and knowledge, but also for services and merchandise. Since the beginning of this year, merchandise-related search queries on Baidu have grown much faster than last year. You may be wondering why? It is because users increasingly find out that on our platform they can now find detailed product information, product reviews and even buy the product without leaving our app. Now, we have a huge number of SKUs available for search on our platform. We have also deepened the partnership with leading e-commerce platform, so that users can easily buy products they need here on Baidu App. Just like I said in my prepared remarks, in Q3, GMV facilitated by the search continue to grow very fast. I also mentioned earlier that retail has been an outperforming vertical for our online ad business for quite a few quarters. Even very recently, revenues from the retail vertical during the Double Eleven, e-commerce promotional season, grow by double-digits from last year. And this all prove that our efforts gradually bearing fruit. As for our short video, we're making short videos increasingly available in our feed and search services. For feed, short video distribution and time spend continue to grow steadily. Right now, about 85% of the feed distributed by Baidu App are short videos. And for search, more than 20% of the clicks on the search pages were short video. This number increased by more than 80% year-on-year during the month of September. So we believe the popularity and the adoption of video in our search results will ramp up quickly. When we talk about monetization, short videos, especially for videos that provide fully immersive video experience, can be much better monetized than text and images. For example, in feed, ECM -- ECPM for fully immersive video apps are much higher than text and images. This is one key reason for feed revenue to show positive growth year-over-year in this quarter, even though the macro was unfavorable. This progress in feed has made us quite confident that short videos will also benefit search revenue later on. Now we're also trying to use AI-generated content to enrich our short video portfolio. We still have a very early stage for them. We believe with AI, we will generate a large number of short videos in a faster and more cost-effective way. To sum up, e-commerce and short videos are two areas that could drive incremental revenue growth for us, and we will continue to work hard on that. Meanwhile, we would like to stress that profit growth remains a top priority for our mobile ecosystem. As for interoperability, we believe it is a long-term trend. As we talked about it before, being a search engine, we benefit from more content becoming searchable on the Internet. Looking into the longer-term, we believe the government's willingness to build an open mobile Internet industry remains unchanged because benefit the users and the SMEs. And for us, by the way, is getting ourselves ready for that trend. Thank you.
Operator: This concludes our question-and-answer session, and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.
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.