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spk04: Hello and thank you for standing by for the third quarter 2021 earnings conference call. Well, at this time, all participants are in the listen only mode. After management's prepared remarks, there will be an 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, Joanne Lynn Baidu's Director of Investor Relations.
spk15: Hello, everyone, and welcome to Baidu's Third 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 Li, our co-founder and CEO, Zong Luo, our CFO, Zhou Shen, our EVP in charge of Baidu Mobile Ecosystem, and Herman Yu, our CFO, 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 U.S. Private Securities Verification 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 statement, except as required under applicable law. Our earnings press release and this call include discussions of certain annotated non-GAAP financial measures. Our press release contains a reconciliation of the annotated non-GAAP measures to the annotated most directly comparable GAAP, 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 on Baidu's IR website. I will now turn the call over to our CEO, Robin.
spk07: Hello, everyone. We delivered another solid quarter in Q3, with Baidu Core revenue growing 15% year-over-year, driven by AI Cloud growing 73% year-over-year. Many years ago, we doubled down on AI believing that it would expand our market opportunity and accelerate Baidu's long-term growth. Non-ad revenue accounted for 21% of Baidu core revenue in Q3 and remains a strong growth engine for us. Through AI, we are bringing innovation across the consumer, enterprise, and the public sector on the backdrop of policy tailwinds and the rising tide of tech innovation in digital transformation infrastructure internet, IoT, and intelligent mobility. Baidu AI Cloud is empowering enterprises from traditional industries and the public sector to better serve customers and move faster with greater efficiency. At Baidu World in August, which was broadcasted on CCTV, we showcased Baidu AI solutions, including smart quality assurance, to automate the screening of electronic components of manufacturing assembly lines, smart logistics to optimize fleet management, and smart monitoring to ensure a steady energy supply from the utility sector. We are excited about Baidu AI Cloud's continuing fast growth. Leading companies across industries are adopting Baidu AI Cloud solutions to improve their operation. And we are working hard to standardize such solutions for industry adoption. An example is our end-to-end AI solution composed of SaaS, PaaS, and SaaS for financial services sector. Our AI Cloud customers are recognizing Baidu's value proposition with strong consumer internet reach. For example, we are winning Smart Public Parking Project is our solution offering the convenience of collect public parking fees via Baidu Maps without the need for meter maids. Hospitals are choosing Baidu for cloud solutions that save patients trips to the hospital with continued patient care for chronic diseases at home through dual OS smart display. According to the World Health Organization, there are 1.35 million road traffic deaths every year. Apollo Autonomous Driving aims to reduce traffic accidents, accelerate mobility to EV, and provide greater passenger safety, especially after dark. ApolloGo has become the largest robot taxi service provider in the world, based on our estimates. Our leadership position in autonomous driving will lend strength to AFD and Jidoo Auto. Deepway, a gateway between Baidu and Lion Bridge, a leading trucking company in China, recently unveiled its first-generation EV truck powered by Apollo to automate road freight marking Apollo's entry into the multi-trillion dollar truck market. Deepway leverages Apollo's leading autonomous driving capabilities and Linebridge's market reach. Jidoo is making great progress as it plans to release the first concept production car at the Beijing Auto Show early next year. Jidou will showcase Apollo's intelligent self-driving and in-camping features with the aim to deliver mass production in 2023. For the third quarter, China's GDP grew 4.9%, much slower than the 18.3% and 7.9% growth rate in the first two quarters. Our admins have been impacted by sectors like education, real estate and home furnishing, travel, and franchising, as we expect this headwind to continue in the near term. As we look forward, there are also positives coming into play. For example, Baidu app is reaching over 600 million users each month. Our hosted marketing solution It's becoming ever more popular with site owners, and the trend is for the Internet to become more open. Non-ad makes up over one-fifth of Maidu's core business and grows over 70% year over year. We stand to benefit from China's plan to leverage technology to grow the enterprise and the public sector part of the economy. ESG is at the heart of Baidu as we leverage our strong internet foundation to grow our AI business at scale. Apollo's mission is aligned with lowering carbon emissions from making traffic in large cities smoother to accelerating the adoption of EVs through GDU, software for EVs and EV-powered ride hailing. In June, we announced our goal to become carbon neutral by year 2030. Our Yangqian Data Center was awarded the Carbon Neutral Data Center Leader certification. And MSCI named Baidu as one of the two companies in China with transparent reports on greenhouse gas emission in its net zero tracker. Turning to Q3 operational highlights. Baidu's AI cloud continues to see strong growth leveraging our world-class AI technologies and our capabilities to provide one-stop-shop solutions to our customers. Our AI solutions are being increasingly adopted across different industries and for different scenarios. We enriched our cloud offering with the release of an end-to-end AI cloud solution powered by Kunlun AI Cheap and PedoPedo Deep Learning Framework. to help financial services firms digitize and automate their operational processes, enlisting leading customers like China Life and Bank of Jiangsu. Maidu AI Cloud is expanding into industrial internet by partnering with industrial parks and municipalities. Our deployment to serve large pool of enterprises is extraordinary. Last year, we spent seven months implementing our AI path in Guiyang economic and technology development zone, serving approximately 100 enterprises. Our deployment of AI path to enterprises in Tongxiang, including those in their economic development zone, took only three months. Tongxiang hosts 40,000 enterprises, most mostly manufacturing-based, and we believe our AI solution can help these companies improve their operational capabilities. Baidu AI Cloud is moving into a smart city. Lijiang, a UNESCO heritage site with 800-year-old bridges and waterways in southwest China, is using Baidu AI solution to keep the city safe and clean for visitors. Leveraging the digitization of tourist areas by the AI cloud helps local authorities timely detect and address infractions such as illegal parking and public littering. Our success in Lijiang is leading to projects with Chengdu, Suzhou, and other cities. Moving to ACE Smart Transportation. FIDO ACE has been adopted in 24 cities, up three-fold from last year based on contract size over RMB 10 million. About half of ACE projects signed in Q3 came from repeat customers. In addition to supporting policy tailwinds, ACE is benefiting from the value we deliver to the public sector. For example, the ACE smart transportation solution that was deployed in Guangzhou earlier this year helped improve congested traffic by over 30%. Smart parking has made it easier for local residents to find available parking spaces, shortening travel time. Turning to autonomous driving. Apollo Level 4 testing has accumulated over 10 million miles, or 16 million kilometers, setting a new milestone. We continue to receive green light in our application for autonomous driving testing as we demonstrate to local authorities Apollo's progress in technology and operation. Apollo has received 411 autonomous driving permits, an increase of 250,000 37 permits from a year ago. Our progress in autonomous driving technology, operation, and continuous cost reduction positions us for ride-sharing monetization in a few years at a paid ride scale. In July, Baidu opened its third Apollo Park in Shanghai, a 10,000-square-meter facility housing Apollo Cloud and data operation. Shanghai marks ApolloGo's fifth ride-hailing service open to the public, following the cities of Beijing, Guangzhou, Changsha, and Tangzhou. In August, we introduced the Chinese brand for ApolloGo, RoboKuaipao, a phonetic interpretation of robot taxi in Chinese. Apollo goal is resonating with ride-hailing passengers with total rides doubling quarter-on-quarter to reach 115,000 in the third quarter. Apollo goal is off to a good start as we set an ambitious goal to expand operations into 65 cities by the year 2025 and 100 cities by year 2030. Turning to AST and dual OS in-vehicle infotainment software, Weimar Motor, a Chinese EV OEM, signed with Baidu to install Apollo Navigation Pilot in its new W6 SUV, taking Apollo Partner Network to 31 makes, including those from automakers like GM, Ford, Toyota, Honda, and Great Wall. turning to Jidoo Auto. Jidoo has completed its first vehicle wind tunnel testing with a full-size oil and clay model. We have identified the model design schemes and engineering development, and design optimization are underway. Jidoo will showcase the latest AISD, demonstrating the appeal of smart EVs advanced autonomous driving, and smart in-cabin features. We hope the success of Jidoo will increase the appeal of Apollo solutions to other automakers. On Duo OS, Xiaoduo again was ranked the number one in smart display globally and number one in smart speaker in China based on second quarter shipment according to strategy analytics Canalys, and IDC. A key growth driver for Xiaodu Smart Display is the shift of user time spent at home to large screens for services like karaoke, short and long videos, online games, education services, video conferencing, and other visually-oriented activities. Popular mobile apps are appearing on dual OS skills, like Douyin, Kuaishou, Red, Damping, 58.com, Haiti, and Kentucky Fried Chicken, to name a few. In addition, Xiaodu completed its Series B financing at a market valuation of $5.1 billion in August, nine months after its Series A financing at $2.9 billion. Baidu remains a supermajority shareholder after the Series B brand. The continued strong performance of our new AI business would not have occurred without our relentless investment in technology and our pursuit of better products and more customer adoption from our technology leadership. Baidu released PLATO XL, the world's first 11 billion parameter pre-trained dialog generation model. achieving breakthroughs in Chinese and English conversations. Plateau allows for different kinds of conversation with users, including chit chats, knowledge-based dialogues, and conversational Q&A, which will be incorporated into Xiaodu in the future. Turning to mobile ecosystem. Daily logged in users in Baidu app reached another all-time high at 79% and in-app search queries was up 11% year over year, reflecting a better search experience from Baidu app. We continue to focus on deepening the service offering of our key verticals. For example, Baidu Health has built a strong community of medical experts that allow users to frictionlessly move from search to telehealth consultation We recently enabled doctors in our network to write prescriptions for online consultation and home delivery. Baidu app now offers instant replies to search queries from over 30,000 industry participants spanning 19 industry verticals. Instant replies were up five folds from a year ago and 40% are paid services. For example, users who search for tips on job interviews can readily connect to career advisors to get help on reviewing their resumes and selecting career training programs. Instant replies have enriched Baidu's search experience, further driving the vibrancy of our in-app search. Revenues from managed page reached 43% of Baidu core advertising, as we make doing business online for merchants simpler through Baidu's hosted marketing cloud. For example, Mei Nian One Health, a physical checkup clinic chain in Shanghai, opened a managed page storefront, allowing users to browse its services, chat with customer service, make payments, leave comments, and share reviews. Monthly orders increased fourfold three months after using managed page promotion. Search by nature is open, and we are benefiting from the trend to make internet more open in China. Our e-commerce feature is seeing good progress. In September, the number of third-party SPUs From China's top e-commerce sites, searchable on Baidu reached almost 1 billion. And e-commerce DMV on Baidu, though small, grow 90% sequentially. The open nature of our mobile ecosystem is leading smartphone makers to select Baidu's Smart Mini program as the landing page for their browser search. MAU from such collaboration has reached 24 million, and we believe such trend will enhance user experience and monetization or union search. Last but not least, I want to welcome Luo Rong, who has joined us recently as our new CFO. Rong brings a wealth of financial management and capital market experience. I also want to thank Herman for his four years of service at Baidu CFO, and we expect more great things from him as CFO. With that, let me turn the call over to Rong to go through the financial highlights.
spk14: Thank you, Robin. Hello, everyone. I'm very excited to have joined Baidu recently and participate on my first earning call at Baidu. I look forward to meeting with everyone in the coming months. Let me walk you through the details of our quarter 2021 financial results. All monetary amounts used in my discussion are in RMB, unless stated otherwise. Baidu's Q3 revenue was RMB 31.9 billion, or USD 5 billion, at 13% 1.3 year-over-year. Baidu's Q3 revenue reached RMB 24.7 billion, or USD 3.8 billion, up 15%, 1.5% year-over-year. Non-advertising for Baidu Core reached RMB 5.2 billion, or 21% of Baidu Core's revenue. AI Cloud revenue was RMB 3.8 billion, up 73% year-over-year. Our AI Cloud growth is benefiting from the demand for cloud services by customers from the internet and media, financial services, energy, manufacturing, and the public sectors. ASE smart transportation is another growth driver for AI Cloud revenue. We are finding that automakers who subscribe to our infotainment solutions are also interested in Apollo ASE. Thus, we are reclassifying ASE revenue into AI Cloud. ASE revenue is quite small now and adding approximately 1% growth year over year to AI Cloud. as a result of the retroactive adjustment. On ID and OGI, Xiaodu continues to make great progress. Demand for higher ASP products keeps growing as customers come to appreciate the value of DuoOS smart assistant and service revenue continues to grow. Baidu core ad revenue was RMB 19.5 billion at 6% year-over-year. In-app search advertising was solid, partially offset by the weakness in union revenue. IT revenue was RMB 7.6 billion, up 6% year-over-year. IT subscribers reached 104 million in September, and the membership revenue was up 8% year-over-year, mainly due to the refined membership strategy and improved monetization capabilities. Cost of revenues was RMB 16.1 billion, up 26% year-over-year, primarily resulting from an increase in tech, content costs, and the cost of sales associated with new AI business. Operating expenses were RMB 13.5 billion, up 46% year-over-year. During the third quarter, we incurred a contingency loss of RMB 976 million, pertaining to the legal proceeding involving former advertising agency. Excluding such contingent loss, operating expense was up 35%, primarily due to an increase in channel spending, promotional marketing, personnel-related expenses. Non-GAAP operating income was RMB 4.6 billion, or US dollars 731 million. and non-GAAP operating margin was 15%, 1.5. Non-GAAP operating income for Baidu Core was RMB 5.8 billion, or US dollar 904 million, and non-GAAP operating margin for Baidu Core was 24%. Adjusted EBITDA was RMB 6 billion, or US dollar 925 million, and adjusted EBITDA margin was 19%, 1.9. Adjusted EBITDA for Baidu Core was RMB 7 billion or US dollar 1.1 billion and adjusted EBITDA margin for Baidu Core was 28%. Cash and shorting investment for Baidu Core as of September 13, 2021 was RMB 183.6 billion or US dollar 28.5 billion. Free cash flow for Baidu excluding iQiyi was RMB 2.9 billion or US dollar $449 million. Baidu Core has approximately 39,000 employees as of September 30, 2021. As Robin mentioned, China's GDP growth has slowed over the last three quarters, and sectors in our businesses, such as education, real estate and home furnishing, travel and franchising, have been negatively impacted. With the resurgence of COVID-19 in many cities recently, local governments are putting in place preventive measures, including quarantines, travel suspension, and mass testing. Consequently, our own advertising business may remain soft in the coming quarters before normalizing. Turning to Q4 guidance. For the fourth quarter of 2021, Baidu expects the revenue to be between RMB 31 billion, which is USD 4.81 billion, and RMB 34 billion, which is USD 5.27 billion, representing a growth rate of 2% to 12% year-over-year, which assumes that Baidu core revenue will grow between 5% and 16% year-over-year. The above forecast takes into consideration that the current COVID-19 situation in China, which is still 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 to operators, let me recap this quarter. China is adjusting its economic growth drivers with the introduction of a new five-year plan in March this year. Historically, the Chinese economy has been very resistant to such adjustments, and new drivers allow the GDP growth to come back. We are optimistic about China's future, especially when the current COVID-19 situation comes under control. It's quite clear that China will leverage technology to grow the enterprise and public sector portion of the economy. Leveraging AI, our cloud services, our cloud business continue to outperform the market, growing 73% year-over-year in the third quarter. Apollo is making great progress, from L4 autonomous driving testing surpassing 10 million test miles, to robot taxi rides sharing doubling rights sequentially to ASD signing our new partners to Jidou finish the wind tunnel testing of its first cap model eight months after its CEO joins to build a team. We are moving at China's speed. China is throwing out new policies to support great energy. We are hopeful that FIDO will benefit from the promotion of decarbonization as we leverage AI to minimize traffic conjectures in thousands of cities across China, and helped accelerate the switch to EV with Jidoo, ASD, and ApolloGo Robotaxi. On mobile ecosystem, Baidu app MAU reached 607 million, up 12%, and then login reached 79%. Our app business is susceptible to macroenvironment, and what is our growth rate to peak back up when GDP growth rate accelerates? Operator, with that, let's now open the call to questions.
spk04: Certainly. Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Participants are requested to restrict to one question at each time. Question comes from the line of Alicia Yeo from CT Group. Please ask your question.
spk16: Hi, good morning, good evening, Robin, Rong, and Joanne. Congratulations, Rong, on your new role. Thanks for taking my questions. I actually tried to fit in two, if I may. So for the fourth quarter, by the core revenue guidance, you provided a wider range, which is 5% to 16%. Can management elaborate the scenario and the situation that you baked into the low end of this 5%? What would be the implied core ad revenue growth versus the AI cloud revenue growth if we end up in the low end? And then similarly, what would be the scenario if we end up in the high end of the revenue guidance of 16%? Would that come from better macro or a more cloud project that will be closing? And then secondly, just in this overall broader in the regulation backdrop. So have Baidu started to have any discussions with other major internet peers as related to these potentially opening up of their social network content to the search engine. If this were to go ahead, what is management view on the potential benefit and upside to Baidu Fundamental going forward? And also any discussion you have with some of the e-commerce leading player to allow Baidu to crawl into the e-commerce content item on their digital So, any color you can provide will be appreciated. Thank you.
spk07: Alicia, I will have Herman answer your first question, and then I'll answer your second one.
spk06: Hi, everyone. So, with regards to our guidance, we normally assume that we will hit the midpoint. You asked about, you know, what do we factor in and what would it be if it goes to low-end. I think, obviously, as Robin has mentioned, 21% of Baidu core is non-advertising and almost 80% is advertising. As we're in the process of trying to control COVID-19, that obviously is the highest risk right now. In our model, we assume that COVID-19 will be under control for the most part in China by the beginning of December. We have seen since Guangzhou's situation that normally, you know, 60 days after that it happens, that it gets under control. But this time, it spreads to several cities. But given the pattern that we've seen, given the, for example, in Beijing, we've seen the cases slow down. We think that that's a doable situation. Secondly is, you know, that the other side of our business is mainly cloud, right? So when you think about the cloud, trying to recognize revenue, trying to make sure that the software is installed, it's a more complicated process than advertising. So as you're getting into your end, the risk there is that we deliver the software, but it's not up and running, so we cannot recognize revenue. And that's always the case when you have 2B businesses. So I think that there's a risk there with our cloud business. There's a risk there with our transportation. So I think those are the key risk factors I would call out. But as we said, normally when we go out with the guidance, given the information that we have today, we think we're more likely to be somewhere in the middle.
spk09: Hi, Alicia. I'll take a second one. As you know, Search by Nature is open. And we believe being able to share content across apps provides a better user experience. And also we believe this will be a going forward trend. So actually we already see things are happening around this direction. For example, some developers are more willing to open up their ecosystem nowadays because it's also good for their own business. So as Robin already mentioned, on our e-commerce effort, almost one billion SKUs from the top e-commerce sites are now searchable on Baidu. And the GMB Baidu grows 90% sequentially. So actually another great example I want to share, which Robin already mentioned, is that the major smartphone makers in China are adopting our open sourced smart mini program framework for their in-house brothers. Now with this adoption, users will have better experience, and the developers can significantly extend their reach through the major borders in China. So you're right. We believe we know. We'll benefit from the openness of the whole internet, and we are seeing things happening that way. Thank you.
spk04: Great. Thank you. Next question comes from the line of from Goldman Sachs. Please go.
spk03: Piyush, your line is open. Please go ahead.
spk01: Thank you for taking my question. When I look at the guidance that you talked through, Herman, it appears to be generally slowing down. And we realize it's a very high base for the cloud business in the fourth quarter of last year. So as we look at that pace of growth and we go through the core, which looks like it's a 5% to 16% range, And we try to estimate where are the, in the advertising vertical, the weaknesses and whether it's COVID related or macro related or third party related. As you exited third quarter, what was the pace of decline that was the commencement of the fourth quarter? If you could take us through that pace so we can understand where we might end up to a certain degree. And also, I know it's very early to talk about it, but broadly speaking into 2022, With the opening up of platforms, with so much that's going on from a business perspective on the AI front as well as on the cloud front, what is the sort of pace of growth we can expect on the core?
spk06: Hey, Piyush, can you repeat that last sentence? I missed that.
spk01: As we look at... We've seen a slowing down into the third quarter, which is probably one of the reasons why you're giving a very wide range for 4Q for the core. But there's so much that's going on that leads to a level of optimism for what 2022 would look like, including the opening of the systems, opening up of platforms, how much search you can originate. in the e-commerce vertical, and that's just the e-commerce space. I don't know how many other verticals you can tap into. So as we think through 2022 and the core pace of growth, any feelers around how that would be would be great.
spk06: Okay. The answer to that. So... We talked about Q3, right? So when you look at advertising Q3, we've been gradually slowing down in terms of our growth. And in Q3, what we've seen, sectors that have impacted us, some of these are pretty obvious, like education, like real estate, and home furnishing, like travel and franchising. These would probably be more related to COVID-19. So these kind of situation are going to extend into Q4, and we suspect that this might be a multi-quarter impact. So based on what we have seen right now, we expect that advertising for Baidu Quora, which was 6% year-over-year in Q3, would probably go into even a slower growth rate in Q4, assuming that COVID-19 gets under control by the beginning of December. So a lot of uncertainty. So if that continues to have new cases every day, then our advertising could even perform worse than that. So I think a lot of it has to do with COVID-19, but there are other factors that's impacting that, such as regulations and so forth. I think with regards to the AI businesses, I think COVID-19 does impact that a lot. As we talked about before, our AI cloud is based on solutions, and we have to customize certain customers and so forth. So if we are unable to travel or we're not able to be as fluid as before, that will have some impact. Others are just your normal end of the year trying to complete these enterprise solutions. And sometimes, given the difficulties that we have right now, traveling about and so forth, why not make it? So I think we're just putting that uncertainty in there. With regards to our range, actually, we've been pretty consistent. If you look at over the last year, at the Baidu consolidated level, it's always a plus or minus of 5%. I don't think we've made any changes in recent quarter. So, you know, going into 2022, it's kind of hard to look out so many quarters into 2022. But what we have seen, you know, for advertising, as I mentioned, we think that this could be a tight quarter impact because, you know, for example, COVID-19 comes and goes, and then the, you know, regulations and so forth. And when we talk to our peers in the market, there seems to be a consensus that this could be beyond one quarter. So I think that's where we're advertising. Sure enough, there's also that upside with the opening up with different apps and so forth. But it's hard to bake that in until we actually see more development. So we'll keep you guys apprised as that comes. You know, the other side of this is that we're pretty optimistic with our, you know, AI businesses. You know, Robin has said, you know, QB, we've been increasing year-over-year. If you look at the last few quarters, we've been always growing above market speed. We continue to believe that we can grow above the markets. If you look at our NDR, for example, it's been gradually improving or increasing. If you... So we're coming, you know, feeling pretty good about that. One of the things is that our cloud business, SaaS business is the fastest piece of food right now. You know, we were ranked by IDC as the one with the largest solutions in China. And this is a piece that's the fastest of our cloud solutions or our cloud. So I think we're pretty, feel like we're in a good spot right now because of the you know, policy trends, supporting technology, supporting or leveraging AI for enterprises, also for the public sector.
spk07: Yeah, let me just add about the opening up of e-commerce platforms. That will enable users to do transactions on the Baidu mobile ecosystem, especially Baidu app, more easily. Given that the e-commerce infrastructure in China has matured, it's very easy for people to pay using their mobile phone. And it's very quick to get something delivered to your home. And now that we can index a lot of SKUs on Baidu, we expect a very quick increase in terms of DMV. from a low base. The revenue contribution directly from transactions will not be large, but once users get used to do transactions on the Baidu platform, I think the overall conversion rate for our advertisers will also improve. So I think that the benefit will be well beyond simple transactions on the Baidu platform.
spk04: All right. Your next question comes from Alex Yeo from JP Morgan. Please ask your question.
spk13: Thank you, Benjamin, for taking my question. And welcome back to the internet investment community. So I have two questions. Number one is we have seen a lot of regulatory and operating environment changes recently, for example, APCO's IDFA policy change, for example, the implementation of PIPL on 1st of November. Can you guys talk us through the operational and the financial impact from those changes, particularly how should we think about the union business into the next couple of quarters? And the second question is regarding the general corporate strategy. Well, the advertising revenue outlook is weak for the next couple of quarters. How do you guys think about the general corporate strategy? For example, are you still pushing the investments on headcounts and user acquisition costs? And I think, you know, In the past, you guys had a very tough cost control when the top line was under pressure. Are you thinking very differently this time? Any thoughts on the general corporate strategy in the current advertising revenue outlook will be helpful. Thank you.
spk09: Take the first one. So on the IDFA side, because the majority of Baidu's core ad business does not rely on user data, it's not like some of the US companies do. So the impact on that side is less pronounced, actually. But in general, we strive to be a global technology leader. Issues such as this type of data privacy and security has been taken into consideration for a long while. So many years ago, before this topic even caught the industry's attention, we saw the need to establish internal committees to define strict policies and procedures to address data privacy, data management, and data security. Also, we are working with the leading companies globally and domestically to treat ideas and develop best practices. We also share our experience with authorities to help the industry address these complicated issues. So given all the efforts we have done, I think the impact on this side is not that pronounced.
spk03: The next question comes from James Lieberman.
spk02: Sorry, go ahead, please.
spk06: Alex, you mentioned about our corporate strategy. So, you know, where we are at this time is that we have our expenses. You can look at mainly two buckets, right? One bucket of spending is related to our growth with our new business, whether that's in cloud, whether that's in intelligent driving and so forth. And you've got to invest ahead of time to make sure that your sales force is there, to make sure that people who are doing pre-sales is there to support your future growth. And as we mentioned earlier, that piece of business is still going very fast. When you look at non-advertising, we're going over 70%. So you've got to build a funnel. You've got to get the people in and so forth. I think that's going to continue. Secondly is a new AI business has a higher cost of goods sold. whether you're talking about selling smart devices, whether you're talking about delivery for to-be solutions or smart transportation. Okay, so those things we have to factor in for this new business. That's just part of it. And we look at the gross margin very carefully, but you still have to fund the OPEX, the sales people, the development people to support the business growth. and we're leading in those businesses so we feel comfortable continuing to invest. The second pool of investment that we have is with a mobile ecosystem and what you see there mainly is supporting our Baidu ABP. So a big part of that spending is channel spending, marketing spending for the Baidu ABP. This year we've been pushing a Baidu ABP Lite which would allow us to tap into users from lower tier cities, and that has been working. In addition to that, we've been beefing up some development in that area to help our search experience. I think we manage that side of the expenses, especially channel spending based on ROI. As long as we're seeing positive ROI, we will continue to spend in the channel and marketing areas.
spk07: Yeah, I would just like to emphasize that our investment is pretty much packed with growth potential. We see a lot of growth potential in the AI-enabled new businesses, so we'll continue to aggressively invest in that area. mobile ecosystem in general, not just for Baidu. I think the overall mobile internet market in China is maturing, so we will use discipline to balance our investment and growth.
spk03: Thank you. Our next question comes from James Lee from Mizuho.
spk04: Please ask your question.
spk08: Great. Thanks for taking my questions. My question's on intelligent driving and autonomous driving. And obviously, you know, there's a lot of moving parts in this business right now. I think you guys already lay out your plans for RoboTaxi. Can you also lay out the roadmap and how Apollo can achieve a meaningful presence in connected infrastructure and OEM licensing your technology? So what I mean is that does your footprint of your smart transportation influence OEM's decision to choose their autonomous driving solutions? Thanks.
spk07: Hi, James. Apollo is a platform for both smart transportation and autonomous driving. It has gained a lot of partners, customers, and so on. We've been a leader in many of the fronts, including Robotaxi, as I mentioned. We are probably the largest Robotaxi service provider in the world by number of rides we provide. And it's open to the public in five cities in China. And for many of those areas, we also have smart transportation projects going on. pay us to install real-time units and also software systems to better manage the traffic and help, you know, the homes driving become safer and greener. We also work with quite a number of OEMs to provide infotainment systems as well as you know, autopilots or navigation systems, what we call ASD. And we have, again, quite a number of OEM customers. So all in all, as a platform, Apollo connects smart transportation, OEMs, you know, ride-hailing services all together, and we are quite confident that we will continue to lead this market and even become dominant in the future.
spk04: Your next question comes from Joe Xiao from Buckley. Please go ahead.
spk12: Thank you very much for taking my questions. First off, big congrats to both Hermann and Ron on your new roles. My questions are related to your Apollo autonomous driving and a robot taxi as well. Just following up on the previous question, Could you elaborate a bit on the pipeline for G2 in terms of when the assembly line manufacturing facility will be ready? What kind of scale we are talking about when you talk about mass production in 2023? And you talked about your partnership with Linebridge for semi-truck. I understand GD just announced their ambition for the EV semi-truck business a couple days ago. I was wondering, since they are your big partner, do you have any plan to work with them for their semi-truck EV initiative and the last day on Robotaxi? I recall I may have read somewhere you may have commercial operations up and running for Robotaxi sometime next year. Is there anything there you can share with us? Thank you so much.
spk07: All right, like I mentioned during the prepared remarks, we are planning to launch the concept production car early next year at the Beijing Auto Show. So that car will be the final ship in the architecture for when it is available for sale in the latter part of 2023. By mass production, we mean everyone, every consumer can place an order or to buy the Jidoo car sometime in the second half of 2023. Of course, it's too early for us to predict how many units we can sell at that time, but we are all very excited with the features we're putting in and the values we can offer to our consumers. when it's available. In terms of autonomous trucking, it's a huge market. We already have a partnership with LineBridge, and Geely, as you know, is a strategic partner of Baidu, too. We are open to all kinds of collaboration with them. And again, this kind of collaborations are not exclusive. Apollo is an open platform. We can work with everyone, and we would like to help a lot of companies to become successful. And on the commercial operation of Robotaxi, we can charge right now in a couple of the areas in Beijing and Hangzhou, and we are applying such licenses in other cities. So it's a very quick wrapping up process. We already provided 115,000 rides in one quarter in Q3. And in Q4, I think that number will continue to increase. And this is probably much, much larger than the reported number you can hear anywhere else in the world.
spk04: All right, thank you. Our next question comes from Natalie Wu from Haitong International. Please ask your question.
spk17: Hi, good evening. Thanks for taking my question. And congratulations, Herman, and all of you. My question is regarding the investment plan for your new AI business. So firstly, if we take a look at the development history of AliCloud, when the revenue scale approached 20 billion annually, it is a loss ratio actually narrowed significantly. So should we expect the margin profile of cloud business to improve next year? So AI cloud revenue scale, which also the 20 billion scale, or how should we see the margin trend of your AI cloud business in the next one or two years? Also for the intelligence driving, what kind of the investment scale should we expect for the next one, two years, and how could that impact the margin? Thank you.
spk05: Yeah, so on the AI cloud, I think, yeah, I think when you talked about
spk06: other cloud players, they're talking about scaling with regards to us, right? As we talked about before, us is a smaller piece of our business. What we're more excited about, what we're differentiating in the market is our SaaS. And as I mentioned earlier, SaaS is the fastest growing piece of our business. And when you look at a SaaS, as we talked about at Baidu World, there's several factors with regards to margin improvements, right? As we come out with new solutions, working with new customers, the first project, first few projects, we might have to spend that extra time in order to integrate with your legacy system in order to build tools and so forth for it to go up and running. When we're going into new industries, That would also, there's that ramp-up cost to be able to adapt our current solutions to that new industry. So you're seeing with our fast growth, as Robin mentioned, 73% year-over-year growth is much faster than market right now. And we could not have done that without going into new industries with new solutions, without consistently getting new customers. So at the early stage where we're just expanding market, expanding customers, you're not going to see good margins. But when you look at a particular solution over time, when you're looking at a particular customer over time, you're seeing margin improvements. And we went through that in very detail during the Baidu World presentation, and our IR can go through that with you again on those things. But this is a proven business. If you look at our counterparts in the U.S. who are in the SaaS industry, market, you're seeing the same trends. So we're pretty confident that as we continue to grow our businesses here, in the beginning, you're not going to have a good margin because you have to customize. But as the product line becomes more standardized, as we become more standardized solutions by industry and so forth, you're going to see that margin pick up. That's number one. Number two is the proportion of SaaS is getting higher versus SaaS. And as we know, because it's a commodity cloud, it's just going to have lower margins. So you have several trends that are playing in our favor. So I can see it a few years out. You're going to see margins improving. OK. Intelligent driving. Intelligent driving, I think there's three pieces, as we talked about before. At times, driving is the technology. And then out of that, there's ways to monetize. There's the infotainment business, right? There's what we call ASD, the Tom's Driving Navigation Pilot, so forth. So that is a business where you have to invest up front with our R&D and so forth. But when we sell it on a gross margin level, that gross margin is usually pretty healthy compared to other AI businesses. There's the other piece for Apollo is smart transportation. Smart transportation is mainly with the government sector and so forth. It's usually a very complicated solution. Those margins are pretty healthy, especially when you compare it to a business like us. So I think when you're going into smart transportation, the factors that impact the market are very similar to what I described earlier. Coming out with new solutions, you know, when you're working with new cities, you've got to make that investment. Coming out with new solutions. But as we're working with the same city, we understand their legacy system, we build out the tools and so forth. Over time, with the particular customers, we're seeing that margin improvement. So I'm pretty confident because when you look at us, we're growing on the one hand, as Robin mentioned, smart transportation. The customers went up three, four year over year. So the new customers, they're going to dampen margins. On the other hand, half of that business is with repeat customers. That's going to improve. So I think over time, we see, as we go out for the next few years, that more and more revenue is going to be reoccurring, which is going to help us.
spk04: Thank you. Our next question comes from Gary Yu from Morgan Stanley. Please ask a question.
spk11: Hi, thank you for the opportunity to ask question. I have one follow-up question regarding the opportunities with the open up or further open up of the Internet. Seems like there is a great opportunity from both the kind of e-commerce space and also potentially content space. But at the same time, given users have already you know, got into the habit of doing those transactions in some of the other competing platforms. How are we going to kind of change some of these user behavior to start doing more kind of e-commerce transaction on Baidu? And as a result of that, are we going to kind of go into another kind of investment cycle in terms of acquiring traffic and users on these transaction-based traffic? Thank you.
spk09: Yeah, Gary, I'll take this question. Actually, as we see the user's behaviors in our web search, before the people make their final decision to buy something or not, so they come to Baidu for more information. So this is how we step in to help them to do the transactions, actually. So also as Robin just mentioned, the infrastructure for transactions in terms of the payment delivery is pretty matured in China. So that said, once we give the user comprehensive information for them to make the right decision, people will come back again for another transaction. In terms of getting more traffic, I think for now, We still have tons of actually user search volumes in Baidu for not just the typical e-commerce queries and all other queries related to transactions. So that's why at this stage, we are trying to make the transaction experience as smooth as possible on Baidu's platform. And actually, we have been working on this for a while, since we started building smart mini-programs on many pages by . So that's how we can not only get the right information, but also have the right support for these transaction-related queries.
spk04: All right, thank you. Our next question comes from Eddie Leung from Bank of America. Please ask a question.
spk10: Good evening. Thank you for taking my questions. May I have two questions on your cloud basis? The first one is about hybrid cow and private cow. As the government is pushing for the awareness of data security, will there be a potential increase in demand for private cloud and hybrid cloud versus public cloud? And how might that affect your business? And then secondly, I remember, Robin, you mentioned earlier a pretty interesting point. You guys have been focusing your cloud business on SaaS and end-to-end solutions. while some of your industry peers seem to be emphasizing more on the, should we say the modules or the component capabilities and performance? So probably a bit more about past, at least from a marketing perspective, right? So could you share your thought on any difference between the clients that these two approaches may get? Thank you.
spk07: Hi, Eddie. I think you're right. Given the regulatory environment changes, I think more and more customers would want private deployment or private cloud or hybrid cloud rather than public cloud. And like Herman mentioned before, you know, high growth area and also higher margin area comes from those kind of private placements or solutions offered to our customers, typically end-to-end solutions, leveraging our, you know, strong capability in all kinds of AI value chain, PaaS, all included. AI chips, frameworks, deep learning frameworks. And when we say SaaS, it means more like an end-to-end solution, which typically would include the path part. It's just AI path in China, or path in general in China, it's not a big market yet. It's growing very fast, but it's very hard to charge a lot of money for a middle layer of the solution. But yes, I think a lot of customers do value our end-to-end capability and solution in terms of AI. And I think cloud overall is a very large and our strength is to really leverage Baidu's investment in AI and provide end-to-end solution to our customers in important verticals like industrial internet, smart transportation, energy, financial services, this kind of vertical set.
spk02: we think we have a very strong proposition. All right.
spk04: Thank you. So we have reached the end of the question and answer session. So with that, we conclude our conference for today. Thank you for participating. May all of us connect.
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