Baidu, Inc.

Hello and thank you for standing by for Baidu's second quarter 2021 earnings conference call. At this all participants are in the listen only mode. After management's 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. Now I'd like to turn the meeting over to your host for today's conference, Ms. Joan Lin. Baidu's Director of Investor Relations.

Hello, everyone, and welcome to Baidu's Second Quarter 2021 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 Lee, our co-founder and CEO, Herman Lee, our CFO, and Ado Shin, our EVP, in charge of session fee. After our prepared remarks, we will hold a Q&A session. Note that the discussion today will include forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Delegation 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 ICC and Hong Kong Exchange. Baidu does not undertake any obligation to update any forward-looking statements except as required under applicable law. Our earnings press release and these calls, discussions of certain unaudited non-GAAP financial measures. Our press release contains a submission, 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. In addition, A webcast of this conference call will also be available by this IR website. I will now turn the call over to our CEO, Robin.

Hello, everyone. We delivered another solid quarter, with FIDO core revenue growing 27% year-over-year, accelerated by non-advertising revenues, with AI Cloud growing 71% year-over-year in the second quarter. We are entering a new era where technology is becoming more powerful and we are benefiting from the deployment of technology to upgrade China's industrial competitiveness, digitize urban cities, and improve mobility. As China plans for the next stage of growth, it rests upon us to recognize the need to align our BIN strategy with the environment that we operate in and the future that we want to build with our stakeholders. ESG highlights a shared future for humanity to support China's pledge to achieve carbon neutrality by the year 2060. Baidu aims to reach carbon neutrality by 2030 through the use of green data centers, smart office buildings, and other means. In addition, we hope to improve urban traffic flow and lower carbon emissions for 100 metropolitan areas across China with our build-out of smart transportation and accelerate the switch to EVs for the mass through our investment in water taxi and smart EVs. Leveraging technology to serve a larger population to achieve inclusiveness is part of China's growth plan. In June, we introduced Apollo Moon, fifth generation of Apollo robot taxi vehicles that once again saw a 60% drop in cost per mile. With the rapid pace of autonomous driving technology advancement and cost efficiency improvement, Apollo robot taxi stands to become much cheaper than driver-for-hire ride-hailing in the coming years, which will make robot taxi ride-hailing much more accessible. Baidu Health is another example of expanding resources to a broader population for improved living. We are enabling closed-loop telehealth, online prescription, and home delivery to free up hospital resources for critical treatments. Concurrently, we are helping hospitals find patients with specific illness that match their treatment specialties by leveraging our AI-powered search and smart mini-program. We see great opportunities to use technology to advance sustainability and inclusiveness. As we go through our quarterly highlights, you will see other examples of how our AI-powered is naturally aligned with this goal. This is due in part to our belief in using technology to build a better world. Turning to Q2 operational highlights. Our AI cloud continues to see strong growth. IDC once again grants Baidu AI Cloud the number one AI cloud provider in China in their 2020 report on public cloud. Over the past decade, ASK has been the growth driver for China's cloud market, which sets up a strong foundation to implement AI solutions that solve industry-specific problems and provide urban living upgrades. By differentiating with AI solutions, we have the opportunity to provide repeat business with expanded applications and become a one-stop shop across cross-selling apps and other services. In the past, we discussed empowering financial services, utilities, and internet media sectors with AI. Let me give you an example of how our AI cloud empowers the auto sector. We are helping Geely, a leading automotive manufacturer, to develop a multi-year digitization plan which entails one, setting up their private cloud infrastructure, two, moving Geely's business onto cloud, three, leveraging Baidu AI solution to advance Geely's high-tech manufacturing capabilities such as IOV security and risk management, and four, enabling Geely to provide cloud services to their automotive suppliers and customers. Baidu AI is deployed into multifaceted environments. For example, Quanzhou, Fujian, a city of population of 8 million, implemented Baidu AI solution at its water treatment plant. Our smart monitoring capability was used to provide early protection of malfunctioned equipment, replacing labor-intensive patrolling, and a customized machine learning model was developed to predict water usage and dynamically adjust the water pressure of different water pipelines, cutting electricity needs by 8%. Our employees feel a sense of pride when natural resource is optimally managed and sustainability is indirectly advanced. In Healthcare Cloud, we have expanded into over 400 hospitals in 29 provinces and over 1,500 primary care clinics in 11 provinces with leading solutions like our CDSS resulting in rapid revenue growth at 245% year-over-year for the first half. According to IDC's June report, Baidu deep learning platform became the most widely used in China, surpassing Google's. Our PedoPedo developer community reached 3.6 million, up 62% year-on-year, and is adopted by 130,000 businesses. Baidu's large development community helps improve our machine learning models and individualize our AI tools and technologies. Moving on to ACE Smart Transportation. As of June, Apollo has signed with 20 cities to provide ACE Smart Transportation, up from five cities a year ago, based on a contract amount of RMB 10 million and above. Apollo also renewed agreements with nine cities to roll out their next phase of ACE Smart Transportation. Beyond urban roads, Apollo signed with Xiong'an Hebei, to deploy V2X Smart Highway, enabling the city to remotely identify the need for highway maintenance, assess road closure for poor weather conditions, and identify travelers who dodge tall terminals. Turning to autonomous driving, Apollo continues to see strong momentum. Level 4 testing on public roads has reached 12 million kilometers, or 7.5 million miles. Apollo has received 278 AD permits, reflecting AD piloting in dispersed geographic region and under wide-ranging test scenarios. Apollo Monetization. In Q2, Apollo GO ride-hailing expanded into Guangzhou, our fourth city of operation, and provided 47,000 rides to the public, up 200% sequentially. Customer satisfaction for ApolloGo has been high, with user rating of 4.9 out of 5.0. As pointed out earlier, our fifth generation robot taxi vehicles saw another 60% drop in cost per mile, compared to an average decrease of 62% in the first four generations of AD vehicles. We plan to roll out Apollo GO ride-hailing across 30 cities over the next two to three years. On AFD, Great Wall Motors become the latest automaker to announce plans for AFD. Apollo automated valet parking will be installed in their WeMotors SUV flagship. due out later this year. On infotainment, dual OS for auto has been installed in 1.8 million vehicles, up 265% year on year. 12 auto OEMs, the likes of Ford, GM, Toyota, and Hyundai have signed with dual OS for auto for installation in 17 May. on dual OS. Xiaodu continues to innovate the smart home device market. For example, the always-on dual OS smart assistant allows one to conveniently order fresh home delivery flowers and other commonly used goods in a matter of seconds through conversational AI. China's elderly population is slated to exceed 300 million. XiaoDu smart displays connect elders with immediate senior community assistance and serve as a virtual companionship around the clock through conversational AI, improving their quality of life while allowing family members to monitor their loved ones' health and safety from remote. During the June 18th e-commerce festival, Xiao Du Smart Display and Xiao Du Smart Pass for Education Market topped the sales volume list in their respective categories on leading e-commerce platforms like JD.com. Xiao Du is receiving high customer satisfaction, selling well on higher price point product lines, and topping the list on units sold, demonstrating how hardware can be differentiated with innovative AI. such as new input modalities and services. Turning to mobile ecosystem, in June, Baidu app MAUs reached 580 million, up 9% year-on-year, and daily login users reached 77%. As an open in-app search app, Baidu app offers users instant replies on various topics. For example, daily telehealth consultation on vital health surpassed 2 million in second quarter, up 47% year-on-year. In addition, more than 8,000 industry experts spanning 14 other verticals, such as legal, finance, and fashion, are able to instantaneously reply to users' search inquiries through our AI building blocks. When users seek specific information of service, Baidu Search has a decent advantage. Managed Page now accounts for 40% of Baidu Core advertising, reflecting merchants' opening storefronts on Baidu, as opposed to operating their own sites. For example, a local moving company, Qianxi Moving, changed their search landing page to its managed page and saw its daily orders doubled five weeks after adoption. Through managed page, users are able to browse its services, interact with the merchant, schedule a move, and pay a deposit all seamlessly on Baidu. Managed page also monitors merchant's activities on Baidu with AI for added personal safety For example, a moving service entails strangers coming to your house. Before I turn the call to Herman, I'd like to congratulate him for his new role as Chief Strategy Officer of Baidu. Herman will continue to act as CFO until we find a qualified replacement. He will spend more time on corporate strategy and development afterwards. Over the past four years, Permanent has helped Baidu transform from a mostly search company to a leading diversified AI company. This demonstrated the business leadership, a holistic view of our business, and a keen sense of the capital market. I'm confident in Permanent's ability to help chart a course for our long-term growth and success in the age of AI. With that, let me turn the call over to Herman to go through our financial highlights. Thank you, Robin. Hello, everyone. Welcome to Baidu's second quarter 2021 call. All monetary amounts used in my discussion are in renminbi unless stated otherwise. Baidu's second quarter revenue was $31.9 billion U.S. dollars, up 20% year-over-year, driven by the growth of Baidu core revenues. which reached $24 billion, or $3.7 billion, of 27% year-over-year. Non-advertising for Baidu Core reached $5 billion, or 21% of Baidu Core's revenue. AI Cloud revenue was $3.3 billion, or up 71% year-over-year, which is an acceleration from the 55% growth last quarter. Our cloud growth is benefiting from the demand of enterprise customers looking to use AI to transform their industry and strengthen their leadership position. For example, customers from the internet, media, from financial services, from energy, and from manufacturing sectors. We're also benefiting from the urban cities seeking to adopt Apollo 8's smart transportation to modernize and digitize their transportation network. AI solutions and smart transportation are showing fast growth, serving as catalyst for our cloud to grow faster than the overall cloud market, with us being a smaller part of our cloud business. On intelligent driving and other growth initiatives, we continue to make advances in product development by leveraging Baidu AI capabilities such as speech recognition, NLP, and computer vision, and our strong internet foundation, Xiaoduo has become the leader in smart display globally. based on shipment. Xiaodu speakers entered the smart home device market in 2018, competing on sub-100 product lines. Home devices equipped with AI features can be sold at much higher price points. For example, in May, we introduced Xiaodu TianTian T10, a 10-inch smart display with karaoke features, at an MSRP of $16.99. Through our innovation, Xiaoduo services revenue, such as advertising and membership, has grown five-fold from last year, now accounting for over one-tenth of Xiaoduo's revenues. Xiaoduo, powered by DuoOS, is transforming the smart speaker market from selling hardware to selling AI-powered features and services. Operating system for the automotive industry is a much larger market. Apollo has an opportunity to leverage its leadership in autonomous driving and infotainment operating system to enable every passenger vehicle to be a smart vehicle. Just as Shoudu transformed the home device market, Apollo hopes to leverage these capabilities, ASD, and existing OEM channels to boost computing intelligence and transform the automated industry. Moving to online marketing. Q2 online marketing revenue was $19 billion, up 18% year-over-year. In-app advertising was solid, growing 26% year-over-year, partially offset by the slow growth of union and PC ad revenues. Most of our top ad verticals continue to perform well. CPM saw double-digit growth, especially for in-app online marketing. IT revenue was $7.6 billion, up 3% year-over-year. IT subscribers reached 106 million in June, which supports the large in-house production of entertainment blockbusters. Cost of revenue was $15.9 billion, up 21% year-over-year, primarily resulting from an increase in tax and cost of sales associated with new AI business. Operating expenses were $12 billion, up 30% year-over-year. SG&A for Baidu Core was up 40%, primarily due to an increase in channel spending and promotional activities, as well as an increase in sales hiring. particularly as we look out for the next 6 to 12 months to grow our cloud and also our intelligent driving business. Non-GAAP operating income for Baidu Core was $6.5 billion, or $1 billion. And Non-GAAP operating margin for Baidu Core was 27%. Adjusted EBITDA for Baidu Core was $8 billion, or $1.2 billion, and adjusted EBITDA margin for Baidu Core was 33%. Cash and short-term investments for Baidu Core as of June 30, 2021, was $167.7 billion, or $26 billion U.S. Free cash flow for Baidu, excluding IHU, was $6.9 billion, or $1.1 billion U.S. Baidu Core had approximately 36,000 full-time employees as of June 30th, up 24% from last year. Turning to Q3 guidance. For the third quarter, Baidu expects revenues to be between $30.6 billion and $33.5 billion, representing a growth rate of 8% to 19% year-over-year, which assumes that Baidu Core revenue will grow between 9% year-over-year and 20% year-over-year. The above forecast takes into consideration the current COVID-19 situation in China, which is evolving, and business visibility is limited. The above forecast reflects our current and preliminary view, which is subject to substantial uncertainty. Before I turn the call back to the operator, let me summarize our second quarter results. Baidu mobile ecosystem continues to be strong. Baidu core online marketing revenue was up 18% year-over-year in the second quarter, with in-app marketing revenue growing 26% year-over-year. Baidu app MAUs reached 580 million, up 9% year-over-year, and daily user login was 77%. Four years ago, we committed to strengthening our mobile ecosystem and lead with AI. Our search and feed is stronger now, with AI building blocks and marketing cloud, and non-marketing has become sizable and growing quite fast. We have delivered on our goals and we are very proud of our team for their strong execution. Many investors have inquired about the recent regulatory landscape. Governments generally favor fair competition and maybe even so when mobile internet is well penetrated. We see this theme play across Europe and in the US.