Baidu, Inc.

Hello everyone and welcome to Baidu's first 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 our newsletter services. On the call today, we have Yubin Li, our co-founder and CEO, Yong Luo, our CFO, Dao Shen, our EVP in charge of Baidu AI Cloud Group, ACG, and Zhen Yuli, our IT team in charge of Baidu Intelligent Driving. After our prepared remarks, we will hold a Q&A session. Please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Public Security Planification 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 IDC and Hong Kong Exchange. FIDO does not undertake any obligation to update any full written statement except as required under applicable law. Our earliest press release and recall includes 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 measures and is available on our IR website at ir.fidu.com. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on Baidu's AI website. I will now turn the call over to our CEO, Robin.

Hello, everyone. We delivered solid first quarter results, driven by the continued strength of our new AI business. More specifically, revenues from Baidu AI Cloud increased by 45% year-over-year. We've achieved new wins for Apollo Self-Driving, or AIC, from automakers during the quarter, validating our confidence in the auto solution monetization roadmap. Apollo Gold made groundbreaking headway. We won the first permit in China for driverless ride-hailing services on open roads in April, further fortifying our unquestionable leadership in the robot taxi market. Like many other companies in China, since mid-March, our bins have been negatively impacted by measures to stem the spread of COVID-19. Specifically, the recovery of our ad bins and the implementation of some cloud projects have been delayed. In the near term, the challenges related to the virus continue to cause uncertainty to the macro environment and pressure our business operation. Looking beyond the near-term turbulence, we believe both China's economy and Baidu's business will remain promising for the mid- to long-term. We expect our ad business to recuperate when overall economic buoyancy returns. In the meantime, to enable our long-term growth, we will continue to invest proactively and prudently in our new AI businesses, including Baidu AI Cloud, Ologo, and AIC. Most notably, our new AI businesses are well aligned with China's priorities in tech innovation, green transition, and digital economy. The themes have been repeatedly emphasized by top officials at national events including the recent meeting convened by Chinese People's Political Consultative Conference, boosting the application of AI in China, and with that, the long-term growth prospects of Baidu. We see great opportunities to use technology to accelerate the development of the real economy. Organizations in various sectors, such as energy and utilities, manufacturing, finance, and the public sector have come to realize that not only do they need to digitize what they do, they can also use all kinds of AI technology to enhance their competitiveness through cost reduction and efficiency improvement. So the demand for digitization and AI come at the same time. That presents a unique opportunity for us to deliver Baidu AI Cloud solutions in a seamless way. In addition, Baidu ACE Smart Transportation supports our contribution to the growing economy. According to China Academy of Transportation Science of the Ministry of Transport, Baidu ACE projects have helped Baoding City reduce its carbon dioxide output by 24.4 thousand tons annually, which is equivalent to planting more than 240,000 trees. As more and more cities adopt Baidu ACE Smart Transportation, we believe we will make increasing contributions to reduce carbon emissions with AI technologies and fulfill our commitment to the environment and society. Now, let's review the first quarter operational highlights. Fido AI Cloud maintained its fast growth momentum, benefiting from digital and intelligent transformation of China's traditional industry and the public service sector, as well as our cutting-edge AI technology. Over the past quarter, we have achieved rapid revenue growth with an emphasis on the quality of growth. With the integration of AI and cloud, we have built a wide range of AI-powered applications and tools that can generate more replicable and scalable AI solutions in industries such as the public service sector, energy and utilities, healthcare, as well as transportation. By doing so, we are working hard to shorten our project implementation time, and we believe we will be able to also improve our margins over the long term. One example is how we bring AI to the public service sector. Last year, we talked about how we used AI to build a smart city together with the Lijiang Municipality, helping improve the city's safety, efficiency, convenience, and environmental quality. By serving larger cities such as Lijiang, Baidu AI Cloud has standardized a set of AI solutions that many other cities or districts can adopt and adapt. This year, Guangdong, one of the seven districts of Kunming City, began adopting our AI solutions to keep the region safe and clean. Compared to the Lijiang project, we managed to reduce the development time of our Smart City project by 50%. Another example is in the energy and utilities sector. We empowered Quanzhou Water Company to deploy our AI solutions for predicting water consumption and automatically adjusting water supply. By serving Quanzhou, we have established a set of AI solutions for the water industry, quickly driving our business scaling. In March, we won a project from the water company of the Baiyun District of Guangzhou, one of the largest cities in China. On top of offering similar solutions to Quanzhou, we also built additional AI solutions to help customers improve wastewater treatment and flood control in the region. Given the expanded work scope of Baiyun District of Guangzhou, this contract amount will be multiple the size of the Quanzhou project. Turning to ACE Smart Transportation. By the end of the first quarter, Baidu ACE has been adopted by 41 cities up from 16 cities a year ago and 35 cities a quarter ago, based on the contract amount of over RMB 10 million. Leveraging our AI capabilities to synergize a vast amount of real-time data from multiple sources by the ACE has helped increase traffic management efficiency. According to a senior official from the Beijing high-level automated driving demonstration area, the traffic flow at the intersection has improved by 28% thanks to our ACE Smart Transportation solution in the Yizhuang region. Going forward, we continue to aim at above industry growth for our AI cloud systems and target long-term quality revenue and sustainable growth despite the near-term headwinds caused by the COVID-19 control measures. Moving to intelligent driving, we continue to grow our field pipeline with Auto OEM for the provision of our ASD solutions. In particular, for Apollo Navigation Pilot, or AMP, according to our internal estimates, The total projected cumulative sales of auto solutions, including ASD and dual OS for auto, surpassed RMB 10 billion. After winning a partnership with BYD at the beginning of the year in April, we received a nomination letter from Dongfeng Motors, which is the top three domestic automakers. Dongfeng intends to adopt are AMP, AVP, and HDMAP in one of its popular auto models. With smart driving and smart connectivity gaining popularity, and considering in-house development is costly and time consuming, automakers are increasingly interested in adopting our intelligent driving solution to capture this new trend. As a result, we expect our AISD pipeline to keep growing in the future. ApolloGo achieved a major new milestone with the award of the first driverless driving permit in China on public roads. On April 28, 2022, the Beijing High-Level Automated Driving Demonstration Area took the lead nationally when its specified the criteria and granted permits for providing driverless ride-hailing services on open roads in the Yizhong region of Beijing. ApolloGo became the first company to receive the permits. We believe this approval indicates a regulatory openness to taking a further step towards a fully driverless mobility future, allowing ApolloGo to further scale up In 2018, we became the first company to launch road testing for autonomous driving in Yuzhong. In the fourth quarter of 2020, we won the project to build ACE Smart Transportation and introduced our autonomous ride-hailing services in the densely-magneted areas of Beijing. By doing so, we have taken a more holistic approach to intelligent mobility, which synergized our ACE Smart Transportation solutions, autonomous vehicles, maps, and cloud services. This approach has allowed us to better overcome the complexity and high density of urban traffic in Beijing. Last year, ApolloGo was authorized to conduct driverless testing on open roads and provide paid autonomous ride-hailing services. This April, we were allowed to provide driverless ride-hailing services on open roads to passengers without a safety driver behind the steering wheel. This rapid development reflects the government's recognition of our proprietary technologies and operational capabilities. In the future, we plan to replicate the Yizhong case to other cities. Most recently, we were authorized to conduct driverless testing on open roads in Chongqing, following the permit for ApolloGo to charge passengers on open roads three months ago. We are happy to note that ApolloGo continues to hold a leading position in the global autonomous ride-hailing market. During the first quarter, we provided 196,000 rides, up over 11 times from a year ago. The number of rides dropped by 8% quarter on quarter, mainly due to the COVID-19 physical measures since the beginning of this year and weak seasonality. In terms of geographic coverage, ApolloGo further advanced into 10 cities in China. While expanding our services, Baidu has worked hard to meet the technical challenges of China's complex traffic environment. It is important to note that by serving passengers on a daily basis and on a much wider scale, we have detected problems that have been unnoticeable during the testing phase, further speeding up the development of our autonomous driving technology. Looking ahead, we are confident in maintaining our absolute market leadership in Intelligent Driving as demonstrated by the ongoing growth of AFBDO's pipeline and scaling of the ApolloGo operation. Now, briefly updating you on DuoOS. XiaoDuo retains the top rankings in Smart Display and Smart Speaker Shipments that we have cited in previous quarters, and revenues continued to grow rapidly. Moving to mobile ecosystem, FIDO app users and traffic growth remained solid. In March, MAU increased by 13% year-over-year to 632 million, and daily logged-in users continued to trend up, reaching 83%. Both in-app search queries and daily content distributed by feed achieve double-digit year-over-year growth. Baidu's smart mini program MAU reached 500 million marks, up 22% from a year ago. While our mobile ecosystem continues to thrive, we persist in our efforts to innovate and improve user experience. Daily short videos distributed by Baidu app, including both search and feed, enjoyed accelerated year-over-year growth to over 25% in March, enabled by the fully immersive video experience we introduced at the end of last year. In Services, over 100,000 industry participants signed up for our Instant Replies feature in March. up from about 44,000 in December. Total daily instant replies increased by almost six times year-over-year in March, up about 20% from last December. As China's mobile Internet matures, apps and mobile platforms are eager to acquire traffic at affordable costs. We have observed that many virtual leaders In particular, local service providers such as Made From Online and Maoyan choose to deepen their collaboration with Baidu apps by tailor-making their offers to our users. This has resulted in notable increases in user engagement and transactions for their smart gaming programs on Baidu. In e-commerce, GMV, facilitated by Baidu Search, Those too small grow about 14 times year-over-year in the forest. The above-mentioned innovations and steps forward are the latest in our transformation from information search to delivering closed-loop user experiences, which enables us to strengthen our mobile ecosystem around search. Going forward, we will continue to work hard on maintaining stable margins for the mobile ecosystem and fund our investments in the new AI benefits despite the near-term advent. With that, let me turn the call over to Dong to go through our financial highlights.

Thank you, Robin. Now, let me go through the details of our first quarter financial results. Baidu's Q1 revenue was INB 28.4 billion or US dollar 4.5 billion at 1% year-over-year. Baidu Core's Q1 revenue reached INB 21.4 billion or US dollar 3.4 billion at 4% year-over-year. Now advertising for Baidu Core reached INB 5.7 billion at 35% year-over-year. and accounting for 27% of vital cost revenue, up from 21% a year. AI cloud revenue with IMD 3.9 balance, up 45% year-over-year. Cloud contributed almost 70% of the non-AI revenue, and remains a key revenue growth engine. Our ads have been facilitated from a multi-cloud strategy adopted by many of our customers. in particular the customers in the Internet industry. Our business for enterprises and the public sector is the driving force for club revenue, again, achieving revenue growth in key sectors, such as energy and utilities, the public service sector, and transportation. Revenue from Xiaodu remains solid in the quarter. Baidu Core's ad revenue was RMB 15.7 billion. decreasing 4% year-over-year. The performance of our athletes is highly correlated with the macro, heavily impacted by COVID-19-related control measures. In fact, many of our top industries, such as travel, fundraising, real assets, and healthcare, have suffered from reduced offline activities. On the flip side, when people are safe at home due to the COVID-19 resilience, they tend to spend more time on our platform. In particular, they tend to buy the app to check reliable information about the COVID-19 situation, which has positively contributed to our news and traffic goals. As Robin said, we expect our app to recover once the macro environment improves thanks to our widely diversified customer space that covers many industries in the Chinese economy. IT revenue was RMB 7.3 billion, decreasing 9% year-over-year. IT average daily number of total subscribed members reached 101 million for the quarter. And membership revenue was up 4% year-over-year, mainly due to a refined membership strategy and improved monetization capabilities. Cost of revenue was RMB 15.5 billion, up 4% year-over-year. primarily due to an increase in cost of goods sold, chart acquisition costs, bandwidth costs, and other costs related to new AI business, offset by a decrease in content costs. Operating expenses for IMB 10.3 billion, decreasing 1% year-over-year, primarily due to a decrease in channel spending, promotional marketing, and back-to-back expenses. Non-GAAP operating income was $94 billion, or US$630 million. And non-GAAP operating margin was 14%, one-fourth. Non-GAAP operating income for VitalCore was $93.9 billion, or US$581 million. And non-GAAP operating margin for VitalCore was 17%, one-seventh. Adjusted EBITDA was IMD 5.5 billion, August dollar $867 million. And Adjusted EBITDA margin was 19%, one nine. Adjusted EBITDA for Baidu Call was IMD 5.1 billion, August dollar $805 million. And Adjusted EBITDA margin for Baidu Call was 24%. Cash and shorting investments for Baidu Call at the March 31st was RMB 185.8 billion or USD 29.3 billion. Free cash flow for Baidu, excluding ITE, was RMB 1.1 billion or USD 175 million. Baidu Core had approximately 38,000 employees as of March 31, 2022. Operator with that, let's now open the call to questions.