Baidu, Inc.

Thank you for standing by and welcome to the Baidu Second 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. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Ms. Wan Li, Head of Investor Relations for Baidu. Please go ahead.

Hello everyone, and welcome to Baidu's second 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 Robin Li, our co-founder and CEO, Rong Luo, our CFO, Zhou 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 U.S. Private Security Mitigation 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. The detailed discussions of these risks and uncertainties please refer to our latest annual report and other documents filed to the SEC 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 this call include discussions of certain analytical and gap financial measures. Our press release is a reconciliation of the analytical and gap measures to the analytical most directly comparable gap 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 be available on Baidu's IR website. I will now turn the call over to our CEO, Robin.

Hello, everyone. Baidu Corp earned RMB $23.2 billion in revenues and $5.1 billion in non-GAAP operating profits in the second quarter. The resurgence of COVID-19 led to an unfavorable macro environment in the quarter. However, Baidu AI Cloud and intelligent driving business maintained their rapid growth momentum as they aligned well with the government's repeated calls for technology innovation. Specially, Q2 revenues from Baidu AI Cloud increased by 31% year-over-year, outgrowing many of our peers contributing 18% of Baidu Core's revenues in the quarter. That's up from 14% in the same period last year. Further, the operating margin for Baidu AI Cloud improved on both the year-over-year and quarter-over-quarter basis. Apollo Go completed 287,000 rides in Q2, increasing by almost 500% year-over-year. On July 20th, Apollo Gold's accumulated price reached $1 million. And in July, we unveiled Apollo RT-6, the sixth generation Apollo robot taxi vehicle, bringing the cost of robot taxi to the price range of mass market electric vehicles for the first time in China and globally. We aim to put a sizable amount of RG6 vehicles into operation in the year 2024. While by report, ad revenue decreased by 10% over the year, in second quarter, due to a challenging macro environment, our mobile ecosystem continued to generate strong cash flow as we focused on operational excellence and efficiency. Since early June, we have seen signs of recovery as the control measures were gradually lifted. For example, the year-over-year decline of our ad revenues narrowed in June and July. In particular, ad revenues from retail customers resumed year-over-year growth during the 6-18 shopping festival. Project implementation for Baidu AI Cloud has also been improving thanks to the gradual removal of some major travel restrictions. While the recovery is likely to be at a gradual pace, and there could still be some uncertainties about the development of COVID-19, our long-term goals, strategies, and capabilities for shareholder value creation remain intact. At Baidu, we have used a discipline of long-term thinking, which we believe is a strong asset in this fast-evolving, innovative, and highly competitive venture development. Cost optimization and operational efficiency are always top of mind for us. Our mobile ecosystem business should continue to generate strong cash flow to fuel and fund our investments in Baidu AI Cloud and intelligent driving over the long term. Now, let's review the second quarter operational highlights. Revenues from Baidu AI Cloud grew by 31% year over year in the quarter, once again, outstripping our peers, despite the macro challenges brought by COVID-19 resurgence. Our growth was driven by the strong performance in cloud business, business enterprises, and the public sector. Notably, we managed to improve our operating margins both on a year-over-year and quarter-over-quarter basis in Q2, as we focused on healthier and more sustainable cloud revenue growth. We aim to achieve profitability as we scale up further. By the way, our cloud continues to benefit from the growth opportunity in China's digital and intelligent transformation. We believe this transformation is still at the early stage and organizations are eager to leverage technologies to improve efficiency and productivity. Over the past years, we have made tremendous advances in AI technologies. made our AI capabilities widely available to enterprises and developers through our open platform, gained valuable industry expertise, saw significant improvements in productivity in areas like manufacturing, transportation, energy and utilities, and the public sector. By the way, AI Cloud's differentiating strengths are our AI capabilities and deep understanding of industry-specific pain points to help our customers to accelerate their transformation. In short, our competitiveness enables us to take full advantage of the talent offered by this new secular trend. Revenues from ACE Smart Transportation increased by about 40% in Q2. During the second quarter, we run several new projects for highways and in urban roads, both from our new and existing customers. By the end of the second quarter, Baidu ACE Smart Transportation has been adopted by 61 cities, up from 20 cities a year ago and 41 cities a quarter ago, based on the contract amount over RMB $20 million. Going forward, we will continue to focus on key industries and enable cross-industry replications for similar use cases by utilizing AI innovation. By doing so, we believe we will be able to reduce the operating losses and achieve profitability over time. In the meanwhile, we will continue to focus on quality and sustainable revenue growth and aim to continue outgrowing our peers. Moving to intelligent driving, ApolloGo continues to take a big step toward scaling up operations, strengthening its lead position as the world's first autonomous ride-hailing service provider. In Q2, ApolloGo provided 287,000 rides to the public, up from almost 500% year-over-year and 50% quarter-over-quarter. On July 20, 2022, ApolloGo's accumulated rides reached 1 million. In the Yidong region of Beijing, according to our estimates, ApolloGo has obtained a 10% market share for ride-hailing services with pick-up and drop-off both in Yidong. ApolloGo already becomes an important supplement for daily commuting after we launched the services less than two years ago. Now, more than 100 ApolloGo vehicles are serving the Yuzhong residents on a daily basis, and each vehicle on average completes more than 20 rides per day. In July, ApolloGo branched out to Hefei and Chengdu and is now operating in more than 10 cities, charging fees in seven cities across China. We believe large scale operation allows us to improve our level four autonomous driving technology further. With data generated from everyday operation, we can identify problems that are not visible during the testing phase. The number of corner cases incurred during operation has far exceeded the ones found by vehicles in testing. In addition, Apollo Gold has made some exciting progress since our last earnings call, marked by receiving the green light to provide fully driverless light heating services and launching of the sixth generation Volvo taxi vehicle, RP6. Earlier this month, we obtained the regulatory permits in Chongqing and Wuhan to provide fully driverless light heating services on open roads. We were also authorized to collect fees on those services. We are proud to be the first and only company in China now to offer fully driverless driving services to the public on open roads entirely without human drivers in the car. Such achievements validate our superior level 4 autonomous driving technology and endorse our strategy of utilizing large-scale operations to boost further technological advancement. On July 21 at Baidu World, we unveiled Apollo RT-6, the sixth generation Apollo Global Taxi vehicle with a targeted mass production cost of RMB $250,000. This is significantly lower than the mass production cost of the fifth generation vehicle and is in the price range of mass market electric vehicles. RT6 is designed to offer large-scale, fully driverless ride-hailing services and launched at a time that both our technological and operational capabilities are ready. We believe that China's smart EV value chain has already been well established. Some of the auto parts and components for Level 4 autonomous driving solutions are already being produced in China at a much lower price than a few years ago. Moreover, RT6 is a passenger-centric vehicle, so we have removed some components specially designed for drivers. For example, RT6 has a detachable steering wheel, which could unlock space for extra seats luggages, desks, and even some entertainment equipment in reaching the in-car experience for the passengers. Such achievements have set a strong foundation for ApolloGo to significantly reduce the two largest cost items for its operation, labor cost and the robot taxi vehicle cost. This is a critical step for ApolloGo to build a revolutionary business model and accelerate its expansion. Over the long term, we aim to make ApolloGo an alternative mobility option for millions of people, creating tremendous economic and social value. By doing Apollo's auto solutions, including ASD and your OS for auto, continue to gain popularity among automakers. As an increasing number of auto OEMs have publicly committed their brand to autonomous and connected vehicles, we are pleased to see that many have chosen to form alliances with Baidu to expedite their timelines and plans. The total projected accumulated sales of our auto solutions have grown to RMB 10.3 billion per our internal estimate. Moving to the mobile ecosystem, the user base of our mobile ecosystem continued to grow steadily. We once again delivered strong margins in the second quarter despite the negative impact on our absence caused by macro weakness. On the user side, Baidu App's MAU increased by 8% year-over-year to 628 million in June. Daily search queries and content distributed through Baidu App grow double-digit year-over-year in Q2. Our innovations and efforts in delivering a closed-loop experience have made Baidu App increasingly valuable to users. In addition to searching for information and knowledge, people come to BaiduApp to look for ways to fulfill their needs. We have enabled them to order services, purchase products, and interact with industry experts and others without leaving BaiduApp. Here are some metrics to share. 84% of our DAU in June were locked-in users. That's up from 76% a year ago. People have discovered that their user experience within Baidu apps continues to improve once they are logged in. Quarterly GMV facilitated by Baidu Search, those too small, grow by about 127% year-over-year. In particular, during the 6-18 shopping festival, GMV increased by about 260% year-over-year. In June, about 130,000 industry experts actively signed up for our instant replies feature, up from about 100,000 in March. Total daily instant replies increased by about 190% year over year, up about 30% from March. Another highlight is our progress in short videos. Currently, about 85% of the content distributed between Baidu app feeds on short videos. During the quarter, we expanded the fully immersive video experience in the search result page to all the users. This feature is now available on both search and feed, helping guide short video consumption on Baidu app. In Q2, short videos distributed through search and feed increased by double digits year over year. In addition, we are also using AI to expand our content portfolio. We give content creators AI tools which they can use to produce video content more efficiently. AI-generated content works particularly well for launching content and breaking news. While using our closed-loop experience, more and more users are leaving their footprint within our mobile ecosystem. increasing our capability to understand user needs and enabling strong conversion optimization at each step of their journey. Together with our continuous efforts to optimize the advertising technologies, this has helped us to significantly improve the ad conversion rate for our customers. Looking ahead, here are some key takeaways I'd like to give you. First, Operationally, we have used strong new growth engines for Baidu Core, which we believe will boost Baidu Core's revenue growth in the coming years. Baidu AI Cloud, with its uniqueness in AI capabilities, continues to outgrow most of our peers. ApolloGo continues to solidify its position as the largest autonomous ride-hailing service provider in the world. ApolloGo has entered a new chapter with fully-fabulous ride-hailing open roads. While the launch of our purpose-built RT6 robot taxi vehicles for ride-hailing has really low cost, ApolloGo is set to accelerate its operation, further differentiating from our peers in both technology and operation. And the second takeaway financially, the mobile ecosystem will continue to generate strong cash flow to fund our investments in cloud and intelligent driving. On a separate note, we are also excited about ITE's continuous efforts in improving operational efficiency. ITE once again generated operating profits in Q2 the second consecutive quarter to report positive operating profits on both GAAP and non-GAAP financial measures. Furthermore, ICHE generated positive net operating cash flow in the quarter for the first time. Before I turn the call to Rong, I'd like to highlight that we will be added to the Hansen Index from September 5th. We believe with the inclusion of Hansen Index, one of the best known indices in Asia, the Hong Kong shares of Baidu will receive more sunflowers. Overall, I'm very proud of the team's strong execution in the quarter and remain excited about our future. With that, let me turn the call over to Rong to go through our financial highlights. Thank you, Robin. Now, let me walk you through the details of our second quarter to results. Total revenue was RMB 29.6 billion, decreasing 5% year over year. Revenue from BaiduCore was RMB 23.2 billion, decreasing 4% year-over-year. BaiduCore online marketing revenue was RMB 17.1 billion, decreasing 10% year-over-year. BaiduCore non-online marketing revenue was RMB 6.1 billion, up 22% year-over-year, driven by cloud and other AI-powered businesses. Baidu AI Cloud increased by 31% year-over-year to RMB 4.3 billion. Revenue for IT was RMB 6.7 billion, decreasing 13% year-over-year. Cost of revenues was RMB 15.2 billion, decreasing 5% year-over-year, primarily due to the decrease in quantum causes, partially offset by the increase in personnel related expenses. and other causes related to new AI businesses. Operating expenses were RMB 11.1 billion, decreasing 8% year-over-year, primarily due to an increase in channel spending and promotional marketing expenses. Operating income was RMB 3.4 billion. By-law core operating income was RMB 3.2 billion, and by-law core operating margin was 14%, one-fourth. Non-GAAP operating income was RMB 5.5 billion, Now again, Baidu Core operating income was RMB 5.1 billion. And now again, Baidu Core operating margin was 22%. Total other income net was RMB 151 million, compared to a total other loss of RMB 2.4 billion last year, which included a fair value loss of RMB 3.1 billion from long-term investments. In the second quarter of 2022, we recognized a fair value gain of IMB 536 million, 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 assets. It's subject to quarterly fair value adjustments, which may contribute to a net income volatility in future periods. Income tax expenses was IMB 25 million, decreasing 99% year-over-year, primarily due to a reversal of certain tax expenses accrued for 2021 based on the 2021 tax return fired in the second quarter of 2022, and an increase in deduction on certain expenses that were considered not deductible in the second quarter of 2021. Net income attributable to Baidu was RMB 3.6 billion, And diluted earnings per ADS was IMB 9.97. Net income attributable to Baidu Core was IMB 3.7 billion. Non-GAAP net income attributable to Baidu was IMB 5.5 billion. Non-GAAP diluted earnings per ADS were IMB 15.79. Non-GAAP net income attributable to Baidu Core was IMB 5.4 billion. And non-GAAP net margin for Baidu Core was 24%. Adjusted EBITDA was RMB 7.1 billion and adjusted EBITDA margin was 24%. Adjusted EBITDA for Baidu Core was RMB 6.6 billion and adjusted EBITDA margin for Baidu Core was 28%. As of June 30, 2022, cash, cash equivalents, restricted cash and shorting investments were RMB 189.4 billion and cash, cash equivalents, Restricted cash and short-term investments, excluding ITE, were RMB 184.5 billion. Free cash flow was RMB 5.5 billion. And free cash flow, excluding ITE, was RMB 5.5 billion. Baidu Corp had approximately 36,000 employees as of June 13, 2022. With that, I'll pray that let's now open the call to questions.