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spk05: And welcome to the Baidu Incorporated Third Quarter 2022 Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. 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 your host for today, Joanne Lim, Baidu's Director of Investor Relations. Please go ahead.
spk03: Hello, everyone, and welcome to Baidu's third quarter 2022 earnings conference call. Baidu's earnings release was distributed earlier today, and you can find a copy on our website, as well as our newswire services. On the call today, we have Robin Li, our co-founder and CEO, Rong Luo, our CFO, Dou Shen, our EVP in charge of Baidu AI Cloud Group, and Zhenyu Li, our SVP in charge of Baidu Intelligent Driving. After our prepared remarks, we will hold a Q&A session. Please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Security Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. For detailed discussions of these risks and uncertainties, Please refer to our latest annual report and other documents filed with the SEC and Hong Kong Stock Exchange. Baidu does not undertake any obligation to update any forward listing 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 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.
spk10: Hello, everyone. Recapping the third quarter in broad terms, we delivered improved bottom line results despite a challenging macro environment. Especially for the mobile ecosystem, operating profit resumed positive year-over-year growth, and for AI Cloud, operating loss and margin improved meaningfully both on a year-over-year and a quarter-over-quarter basis. Businesses across the line, from mobile ecosystem to AI Cloud to intelligent driving, have been negatively affected by the resurgence of COVID. Throughout Baidu's history, however, we have experienced many challenging environments. Periods of challenges have enabled us to emerge stronger, given our relentless efforts on building long-term growth. We're using this period to ready ourselves for current business conditions to improve. Our key short-term tasks remain unchanged, which are efficiency optimization and continuous investments in the new AI business. Our new AI business, such as AI cloud and intelligent driving, are well aligned with China's tech innovation and national initiatives. By doing so, we will further strengthen our leadership in the new AI business and re-accelerate business growth. In Q3, Bible Corps ad revenue was down 4% year-over-year, but improved from the second quarter's 10% year-over-year decline, as macro had improved gradually since June. Encouragingly, revenues from healthcare and retail recorded positive year-over-year growth in the quarter. Going forward, once COVID situation alleviates in major cities, Ad revenues across different verticals, such as travel, franchising, and local services, should rebound. For our new AI events, I'm proud to report some highlights. Revenues from AI Cloud increased by 24% year-over-year to RMB $4.5 billion in the quarter. AI Cloud has been a major growth driver for Baidu Core's non-advertising revenue. In Q3, non-advertising accounted for 26% of Baidu Core's total revenue, that's up from 21% a year ago. Baidu Apollo's auto solutions continue to gain traction among leading automakers, and the total projected accumulated sales reached RMB 11.4 billion recently, growing more than 50% year over year. ApolloGo completed 474,000 rides in the employer, up 311% year over year. By the end of Q3, ApolloGo has completed 1.4 million rides on public roads. We believe we remain the largest autonomous ride-hailing service provider globally. Now, let's review the third quarter operational highlights. Revenues from AI Cloud increased by 24% year-over-year to RMB 4.5 billion in a quarter. In Q3, the operating loss margin for AI Cloud improved notably, both year-over-year and quarter-over-quarter. Over the past quarter, we have made shifts away from some lower margin businesses to build sustainable growth for AI Cloud. Meanwhile, we continue to take measures to standardize our solution to cut down deployment costs as we scale up. Our efforts have allowed us to gradually improve operating profit and margin. I'll take ACE Smart Transportation as an example. In the past quarter, we continue to grow revenue and improve operating margin for Smart Transportation as we gain scale. Leveraging our strong AI capabilities and our insights into the industry, we have developed the solutions for typical use cases, such as traffic management and V2X for urban roads and highways. Previously, we talked about how our projects helped improve traffic efficiency on city roads in Beijing, Guangzhou, Changsha, Chongqing, and other cities. Recently, Zhuzhou City, an important transportation hub in Hunan Province, adopted our smart traffic management solution. Our solutions covered more than 70% of the major intersections in the busiest district of Zhuzhou. After adopting our solution, delays have been reduced by 22% during rush hours in the covered region. By the end of the quarter, Baidu ACE Smart Transportation Solutions had been adopted by 63 cities, up from 24 cities a year ago and 51 cities a quarter ago, based on contract amounts of over RMB 10 million per city. As we demonstrated our capabilities to use AI to improve transportation efficiency in more cities, ACE Smart Transportation will further expand its market share. We're trying to repeat our success in smart transportation in other key verticals, such as manufacturing, energy and utilities, and the public sector. We will empower our customers with AI capabilities to help them increase productivity and cost control. With AI Cloud, our customers will be better positioned to take advantage of digital and intelligent transformation. We believe we remain well positioned in this early-stage, fast-growing market due to, number one, our capabilities to establish end-to-end solutions based on our full-stack AI capabilities, ranging from chip design to deep learning frameworks to large language models to application-level software. And number two, our insights about customers' pain points and our growing know-how and capabilities to solve their problems. While COVID caused delays in project implementation and complicated our sales team's efforts, hampering new contract wins, we believe the long-term trend of digital and intelligent transformation remains unchanged. Looking ahead, we will continue to focus on quality growth and aim to improve margins to achieve profitability for AI Cloud. In intelligent driving, we marked several key highlights in the third quarter, and our years of investments in intelligent driving have begun bearing fruit. According to Apollo's auto solutions, our total projected cumulative sales exceeded 11.4 billion recently. Based on our current pipeline, some of the major car models equipped with AMP and ABP are expected to be launched in the second half of next year. We expect meaningful revenue contribution from this business to begin in 2024 and profit to expand once material revenue kicks in. Such growth demonstrates the increasing demand for our auto solutions. In Q3, we extended our partnership with one of China's largest automotive and technology companies, AMP, AVP, and HD maps for one of their popular models. As of today, we have announced collaborations with many OEM partners. Serving various automakers has helped us standardize our auto solutions, making them compatible with more popular car models. As more cars equipped with our auto solutions get into consumers' hands, we will continue to refine and update our solutions. Considering the sizable development cost for high level autonomous driving technology, many automakers seek partnership with reliable suppliers who have strong brand and technology capabilities. We have differentiated ourselves with world leading level four autonomous driving which has been established through years of investment. Now, we are proactively building high-quality partnerships with an increasing number of auto OEMs to accelerate our partners' progress in autonomous driving. A few months ago, we integrated Baidu Map into our Intelligent Driving Group to create synergies between the Baidu Map mobile app and the map solutions for auto and transportation industries. Since our maps have already been widely adopted, we have obtained more insights in the transportation industry, allowing us to strengthen our solutions for the mobility sector. On Apollo's goal, we continue to scale up our operations and we believe we remain the largest autonomous ride-hailing service provider worldwide. In the third quarter, the rides provided by Apollo Gold reached 474,000, increasing 311% year-over-year and 65% quarter-over-quarter. A vast majority of the rides were for serving passengers during rush hours, covering places like subway stations, office buildings and shopping malls. As our operation continues to expand, ApolloGo keeps learning and improving from scenarios that do not occur during the testing phase. Leveraging large-scale operations, we're making ApolloGo a professional AI driver while offering a safe and comfortable autonomous ride-hailing service. Today, With an ApolloGo vehicle and its dense intersections, it is able to easily pick a gap between pedestrians, bicycles, and other moving objects, safely driving through while providing a comfortable experience to the passengers. ApolloGo continues to improve autonomous ride-hailing services under extreme weather. Scalable operations have indeed reinforced our level four autonomous driving capabilities, setting a strong foundation for further operation expansion. We believe this virtuous cycle will make ApolloGo the most experienced AI driver to handle various situations on the road on a large scale. We're pacing the expansion of ApolloGo based on a comprehensive financial model. In previous earnings calls, we talked about ApolloGo's achievement in the Yizhuang region of Beijing. In fact, ApolloGo has achieved significant progress in other tier one cities as well. In Q3, on average, each vehicle in Beijing, Shanghai, and Guangzhou completed more than 15 rides per day. According to our knowledge, this number is quite close to the average daily rides for traditional ride-hailing services. We believe that our strong and improving safety track record on public roads provides a strong endorsement for more cities to issue permits for fully driverless ride-hailing. We believe fully driverless ride-hailing will create more affordable urban transport and attract more consumers to the right ceiling market, Baidu will continue to invest to capture this massive market opportunity. Moving to the mobile ecosystem. Our operating profit improved on a year-over-year basis, and we continue to generate strong cash flow in the quarter. Our mobile ecosystem continues to expand. In September, Baidu app's MAUs increased by 5% year-over-year to 634 million. In Q3, total mobile search queries increased by double-digit year-over-year. And feeds distributed through Baidu app increased by 23% year-over-year. We continue to introduce short videos in feeds and search results. In September, Short video distribution and time spent within Baidu feed grow double digit year over year. For Baidu search in September, 23% of the clicks on search result pages were short videos. And we expect the prevalence of video in search results to continue progressing rapidly. We're using AI to produce more short videos for our mobile ecosystem. While it is still in a very early stage, we believe AI will allow us to generate short videos much faster and more cost-effectively than human-generated content. In e-commerce, users are coming to Baidu's app for product search, which resulted in a continuous increase in product-related search queries. Quarterly GMB facilitated by Baidu search grow by about 52% year over year in Q3. Today, users come to Baidu app not only to search for information and knowledge, but increasingly to look for services and merchandise. As we are able to make purchases and book services without leaving Baidu app, we have been deepening our understanding of user needs. Meanwhile, more customers are leveraging our ecosystem infrastructure to build their marketing campaigns and even operate their businesses on our mobile ecosystem. This has allowed us to accumulate more customer insights and better serve the customers. The improving insights into our users and customers have in turn allowed us to improve user experience and ad conversion. In the future, we believe our mobile ecosystem will continue to generate strong profits and cash flow. To close, during this uncertain time, we focus on making the long-term investments that will position us to be stronger coming out of this challenging period, including Baidu AI Cloud and Intelligent Driving. While the advertising industry has been impacted by COVID-19, Some of our verticals could recover faster when there is an upturn in the economy, which will drive our ad revenue to resume growth. Before I turn the call to Long, I want to thank Baidu's employees for their diligent work in a challenging environment and the time and effort they put into making our company's story a success in the long term. With that, let me turn the call over to Rong to go through the financial highlights.
spk11: Thank you, Robin. Now, let me roll you through the details of our quarter financial results. Total revenue was RMB 32.5 billion, increasing 2% year-over-year. Revenue from Baidu Core was RMB 25.2 billion, increasing 2% year-over-year. Baidu Core online marketing revenue was RMB 18.7 billion, decreasing 4% year-over-year, but improved 10% from the second quarter, as micro has improved gradually since June. Baidu Core non-online marketing revenue was RMB 6.5 billion, up 25% year-over-year, driven by cloud and other AI-powered businesses. AI cloud increased by 24% year-over-year to RMB 4.5 billion. Revenue from ICE was RMB 7.5 billion, decreasing 2% year-over-year. Cost of the revenues was RMB 16.3 billion, increasing 1% year-over-year. By the call, cost of revenues was RMB 10.7 billion, increasing 15%, 1.5 year-over-year. which was in line with the growth in sales of AI cloud and other AI-powered businesses. Operating expenses was R&D 11 billion, decreasing 19% one-night year-over-year, primarily due to a decrease in channel spending, promotional marketing expenses, and stock-related expenses. By default, selling, general, and administrative expenses were R&D 4.2 billion, decreasing 31% year-over-year. SG&A accounting for 17% one-seventh of buy-to-call revenue in the quarter and decreased from 25% in the same period last year. Buy-to-call research and development expenses was RMB 5.3 billion, decreasing 4% year-over-year. R&D accounting for 21% of buy-to-call revenues in the quarter and decreased from 22% in the same period last year. Operating income was RMB 5.3 billion. Baidu Core operating income was RMB 5 billion, and Baidu Core operating margin was 20%. Nongat operating income was RMB 7.2 billion. Nongat Baidu Core operating income was RMB 6.7 billion. And Nongat Baidu Core operating margin was 26%. Q3 presented the first year-over-year growth in Nongat operating profit and margin perspective since Q2 2021. Total other loss net was RMB 4.8 billion, decreasing 78% year-over-year, which may be including a fair value loss of RMB 3.1 billion and an impairment of long-term investments of RMB 1.4 billion. In the third quarter last year, we recognized a fair value loss of RMB 18.9 billion. A significant portion of long-term investments including but not limited to investments in equity securities of public and private companies, private equity funds, and digital assets. This is such to quarterly fair value adjustments, which may contribute to net income volatility in future periods. Income tax expenses was RMB 908 million, compared to an income tax benefit of RMB 1.8 billion in Q3 2021. Primary due to an increase in deferred tax benefit recognized on fair value loss of loan term investments and deduction on certain expenses that were previously considered not deductible in the quarter of 2021. Net loss attributable to Baidu was RMB 146 million, and diluted loss per ADS was RMB 87 cents. Net income attributable to Baidu Corp was RMB 25 million. Nongan net income attributable to Baidu was RMB 5.9 billion. Nongan diluted earnings per ADS was RMB 16.87. Nongan net income attributable to Baidu Core was RMB 5.8 billion, and Nongan net margin for Baidu Core was 23%. Adjusted EBITDA was RMB 8.9 billion, and adjusted EBITDA margin was 27%. Adjusted EBITDA for Baidu Core was RMB 8.2 billion, and adjusted EBITDA margin for Baidu Core was 33%. As of September 30, 2022, cash, cash equivalents, restricted cash and shortening investments were RMB 184.5 billion, and cash, cash equivalents, restricted cash and shortening investments, excluding IT, were RMB 179.5 billion. Free cash flow was RMB 6.6 billion, and free cash flow, including ITE, was RMB 6.4 billion. Baidu Corp had approximately 36,500 employees as of September 30, 2022. On a separate note, ITE generated positive operating profits on both GAAP and non-GAAP basis in this quarter. In addition, ITE also generated positive free cash flow in this quarter. With that operator, let's now open the call to questions.
spk05: We will now begin the question and answer session. If you wish to ask a question, please press star then 1 on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press star then 2. If you are on a speakerphone, please pick up your handset before pressing the key. The first question today comes from Alicia Yap with Citigroup. Please go ahead.
spk04: Thank you. Good evening, management. Thanks for taking my questions. I have two questions. First, can management comment how should we look at the advertising demand recovery in the near term and also in the next few quarters? And then secondly, can management comment on how you think about the competitive landscape in the China advertising market will evolve going forward and what would Baidu long-term market share be? Thank you.
spk10: Hi, Alicia. This is Robin. Let me answer your questions. Yes, our revenues are very sensitive to COVID control measures. By the course end, revenues returned to positive year-over-year growth in August. But in September, it decreased again because of a new round of COVID resurgence. Overall, Q3 was much better than Q2 because there was a recovery from the second quarter in which there were a lot of disruptions caused by COVID. When we entered the fourth quarter, the situation improved in October, but since early November, it got a bit cloudy because another round of COVID impacted some regions. like Guangzhou and Beijing. We're closely watching how the situation will develop. I think the short term will probably still be quite volatile. But the economy should improve in the midterm and beyond. China has been fighting against this COVID for almost three years, and the country has being gaining experience. Well, we're certainly going to see some ongoing disruptions and uncertainties. The overall situation should improve, should move in a positive direction over the next few quarters. As you know, many of our app rep verticals were affected by COVID and medical. So once COVID and medical situations improve, our ag revenues from different verticals, such as travel, franchising, or local services, should rebound. Again, we will closely watch how COVID situation develops, and we will work very hard to bring our ag revenue back a positive year-over-year growth as soon as possible. In addition, AI Cloud and intelligent driving our new businesses are also negatively impacted by the COVID disruption. So if COVID impact subsides, these non-advertising businesses should also see improvement. And regarding to your question on competition in the online advertising market, first of all, I think Baidu app is one of the very few super apps in China's mobile internet industry. Well recognized and well established. Search ads enjoy the best ROI among various types of performance ads. Because users explicitly express their intent in our search box. And search ads connect users' intentions with the most relevant product and service offerings. This is why a lot of advertisers consider Baidu Search as the most important and most efficient channel to reach their targeted audience. And secondly, China's mobile internet is maturing. user growth is gradually slowing down, and the competitive landscape is much less volatile than before. With this backdrop, Baidu app still managed to grow its user base nicely over the past many quarters. On top of that, with the unique positioning of search, we believe we should be able to sustain our market share in the online advertising market over the long run. And thirdly, unlike our peers, most of our advertisers are SMEs, right, in the real economy. Many of them run businesses in the service sector, such as local services, business services, and travel. These businesses were hurt the most by the pandemic. So when COVID impact subsides, ad revenue should rebound quickly. and Baidu stand to gain share in the overall advertising industry.
spk03: Thanks, Robbin.
spk05: The next question comes from Eddie Long with Bank of America. Please go ahead.
spk08: Hey. Good evening, guys. Pretty solid quarter. despite all the macro headwinds. I have a couple of questions on cloud services. So we have seen, it seems like a slowdown in the industry. So could you talk a little bit about the reasons behind the slowdown and how you guys think about the growth rate in the upcoming, let's say, your quarters or in the medium term? And then secondly, could you also talk a little bit about the competitive landscape We have seen media reporting market share gains by cloud companies outside the Internet sector in the past one or two years, right? So any color on the competitive landscape will be useful. And then finally, I remember, Robin, you mentioned about the margin improvement of cloud. talk about your thought on the role to profitability. Any timeline would be helpful. Thank you.
spk12: Hello, Eddie. Thanks a lot for your questions. This is Joe. I'll try to answer your questions. So for the revenue growth part, I think it's slowing down mainly due to the COVID-19 impact. For example, you know, because of the travel restrictions, that we could not even implement our projects on time. And the bidding for the new contracts was also affected. Apart from that, I also want to highlight that we are focused on healthier and more sustainable growth by cutting some low margin businesses. So we believe this approach is crucial for the long term development. Actually looking Beyond the current quarter, as Robin had just mentioned, the trend for China's traditional industries and the public sector to use AI and move their business onto the cloud remains unchanged. So I think post the pandemic, the companies should gain more confidence in their future growth so that they are more willing to spend more money on digital and intelligent upgrades. Baidu has already demonstrated that we are very capable of using AI to improve the efficiency in transportation. So as you can already see, our AC smart transportation revenues have been growing rapidly, and we continue to gain market share accordingly. So in the meanwhile, we are reducing the operating loss for smart transportation because we continue to expand scale and continue to increase operating leverage. So in our next steps, we are excited about repeating our success in transportation in other traditional industries, like manufacturing and utilities. So actually in just the past quarter, our cloud revenues from the manufacturing and utilities industries both grow solidly. And it's largely because of our continuous efforts in improving the end-to-end AI capabilities and our understanding of the fundamental needs in these industries. So to answer your questions, we believe these are our sustainable competitive advantages to compete against other players. In addition, the market is expanding and there are plenty of opportunities for us and our peer companies to grow over the long term. So talking about the profitability, so by the way, our cloud reduced operating loss and continued to improve operating loss margin this quarter. To expand on that, our personal cloud kept generating decent operating profit and margin. And our enterprise part grow faster than personal cloud, and we're very happy to see the trend of loss reduction because of the efforts I just mentioned earlier. So our strategy to standardize solutions in the use cases for key industries started to bear fruit. So we have worked very hard to replicate more solutions from one user case to another. to grow business scale and improve margins. So it's already proven in smart transportation, as we have mentioned, and in the future, we look forward to expanding this approach at large scale in market industries. So AI Cloud is very important new business for Baidu, and we will continue to grow the business and improve margins going forward. Thank you, Eddie. Thank you, Eddie. Thank you.
spk05: The next question comes from Alex Yao with J.C. Morgan. Please go ahead.
spk01: Thank you, Benjamin, for taking my question. I have a couple of questions on Baidu core margins. In the past several quarters, you guys did a very good job in terms of cost control and the margin improvements. The large-scale BU and HECOM streamlining has been already done. How much more room should we think about for further cost-cutting in Baidu Core in the coming quarters and 2023? And the related question is how should we think about the Baidu Core operating margin going forward? Lastly, will Baidu slow down the cloud and autonomous driving investments if the macro situation further deteriorates? Thank you.
spk11: Thank you, Alex, for your questions. Let me try to figure out your questions . And I think as Robin has said in the very beginning of the previous remarks, I think for Baidu Core, we continue to optimize the cost expenses, and we continue to improve our operational efficiency, which is one of our key tasks. At the same time, we kept investing in the new AI businesses for future growth. This strategy actually has not changed in the past few quarters. And this strategy allows us to weather through the challenging market environment. And we believe that it will prepare us for a surge of growth again once the macro downturn is over. In Q3, let me recap some of the numbers. By-to-cost non-GAAP operating profit margin expanding to 26%. from 24% the same period last year. I think it has represented the first year-over-year growth in operating profit and margins since Q2 2021. We made a lot of efforts to achieve such results. You probably can see that from our early release, our SG&A has decreased once again in Q3 this quarter from the same quarter last year. We have been very disciplined with the channel spending and promotional activities. And just to add that, it was already the consecutive quarter that SG&A achieved a year-over-year decline. And going forward, we will continue to control the variable costs and expenses, same as what we did in the past. If we look into each part of our business, for mobile ecosystem, our operating profit actually is going up on a year-over-year basis, even though we know the revenue was negatively impacted by COVID-19. And we have also already mentioned earlier, and which is just repeated by Dow, we made a lot of efforts for the heresy growth of AI Cloud. This quarter, the operating loss margins for AI Cloud improved significantly, both on a year-over-year basis and quarter-to-quarter basis. If we separate two parts, for enterprise and public sectors, we're advocating our resources to high-margin business and reduce the low-margin business. Also, we continue to standardize our end-to-end solutions, including the SaaS, PaaS, SaaS, for user cases and CRR. Smart transportation is definitely one of the examples. It continues to grow fast, and at the same time, it improves the margins quite notably. And the personal cloud, seeing as we're leading in the past, we continue to generate a decent profit this quarter. For our robot taxi business, ApolloGo, we also chose to grow ApolloGo at a well measured pace. We have very comprehensive financial models to optimize and forecast the cost and expenses in this business, especially the labor costs and the variable hardware costs. We have been very careful to measure and estimate the cash flow for this business. Our strategy is to strengthen our leading position in robot taxi all over the world, acquire sizable market shares in the retailing sector, especially in the key cities in China and in the future, and ultimately try to generate more profits in these key areas. We are not expanding our operations without thinking about building a sustainable and profitable business models for our local. For auto solutions, since we mentioned just now, we already have a projected cumulative sales of around 11.4 billion. Well, revenue contributions is still very small at this stage, and we expect to see more revenue key in from the second half of next year or maybe early in 2024, our small costs with our solutions can become available in the market. And once the meaningful revenues kicks in, this business should start to generate profit. I would like to also make it clear the RMB 11.4 billion is our estimate, including the contract size and nomination letters we received from OEMs. In auto industry, nomination letter means a supplier is affected for certain projects, and then the OEMs will sign a contract with suppliers. Our estimate is based on our assumptions of the timing of launch, the pricing, the filter volumes. I hope this gives you a better understanding of how we have made these calculations. Looking forward, we will continue to be very disciplined with the cost and expenses. And at the same time, we'll continue to invest in the AI cloud and intelligent driving for our long-term growth despite of the challenging environment in the short term. And in the future, we believe our mobile ecosystem will continue to generate the different profits and cash flow to support our investments in the new AI business. And we'll also continue to work hard to narrow our loss in AI cloud. Thank you so much for your question.
spk05: The next question comes from Gary Yu with Morgan Stanley. Hey, go ahead.
spk09: Hi. Thank you for the opportunity, and congrats on the expanded partner network and growing backlogs for ADS business. I have a question on your auto solutions. Just wondering, when should we expect meaningful revenue to start kicking in, and how do you differentiate the Apollo's auto solution from your peers? and could you help us understand the underlying market space for Baidu Apollo's auto solutions? And a related question to that is, have you noticed a significant change in the attitude of the OEMs towards self-developing for intelligent driving solutions? Thank you.
spk10: Hi, Gary. This is Robin. We're seeing huge opportunities in the auto solutions market. In the first 10 months of this year, EV sales increased by more than 100% in China. We're now the largest EV market in the world, accounting for more than half of the global EV sales. A clear trend for the auto industry is vehicle intelligence. Why do we benefit from this trend? Our years of investments in autonomous driving have begun to bear fruit. Baidu upholds all the solutions derived from our L4 technologies. A lot of AI models we build for Robotaxi can be used for ASD. Another point to note is that as the market leader, we have been investing in autonomous driving for about 10 years. And thanks to this investment, we not only have completed tens of millions of testing miles on the public roads, but also accumulated a very valuable experience by running the largest robot taxi fleet on urban roads on a daily basis. This has provided us great insight, and we have used this insight to develop auto solutions that best meet our customers' needs. So, for example, EMP 3.0. We believe it is the most advanced intelligent driving solution for city roads on the market. Because AMT 3.0 is derived from L4 autonomous driving technology, we were able to use a very limited amount of R&D personnel to make this advanced solution available to the market within a short time. Jidoo's first car, RoboOne, will be the first one to use AMT 3.0. We believe that with more and more automakers adopting our auto solutions, we will become more experienced in making our solutions compatible with more popular car models. On the other hand, when more and more cars with our auto solutions are on the road, we will be able to grow experience from everyday uses and will continue to improve our As I mentioned earlier, our total projected accumulated sales for Apollo's auto solutions reached $11.4 billion, which is more than 50% from last year. Based on our current pipeline, some of the major car models that are equipped with AMP should be launched starting in the second half of next year. So meaningful revenue contributions for this business should begin in 2024, and profit will follow. On the differentiation, if you look at the cost side, as we mentioned many times before, developing advanced intelligent solutions require massive investment in technology and talent. Frankly speaking, most companies cannot afford this kind of investment. Automakers trust our brand and technology. So a lot of them have chosen to partner with Baidu on intelligent solutions. For them, we are a trustworthy and reliable supplier because we have made years of investment in intelligent driving technology, and we have a strong cash position, and our advertising business continue generate strong cash flow to support our investments. Going forward, this will continue to support the collaboration with many automakers at large scale. That's why more and more leading automakers have recognized us and have broadened partnerships with Baidu. For example, in the quarter, we expanded our partnership with one of China's largest auto companies. And they plan to use our AIC solutions for yet another of their popular car models. And the ISD solutions used include AMP, AVP, and HDMAPS. Going forward, we are looking forward to more partnerships with OEMs, both domestically and internationally. Thank you, Gary.
spk05: The next question comes from Kenneth Fong with Credit Suisse. Please go ahead.
spk06: Hi. Good evening, management. Congrats for the solid quarter, and thanks for taking my question. I have a follow-up question about Apollo Go. On a fully autonomous driving, what kind of progress will be seen in the near term? Could management also talk about a key milestone that Apollo Go will achieve in 2023 and even in the longer term? And to achieve this milestone, how should we think about the impact on your P&L as well as cash flow, and when should we expect Apollo Gold business to achieve breakeven? Thank you.
spk13: Thanks for your question. This is James. We are making very good progress in the package of providing fully wireless red-hitting service for the public. We believe Apollo Gold is the largest autonomous red-hitting service provider in the world because, number one, When we look at the numbers by the end of the quarter three, ApoGo has provided 1.4 million rides for the public in Beijing, Shanghai, and Guangzhou. Each has completed 15 rides per day. We are also providing fully driverless ride-hailing services for the public in Wuhan and Chongqing. And the number of rides provided by fully driverless cars is growing very fast. And number two, Apple Go is already in more than 10 cities in China. Eight of those cities have a population of more than 10 million. Just as Robin mentioned in his script, scaling up operations helps us to improve technology and safety. He gave examples about the technical improvement. I will share some examples about how scaling up operations help us to improve user experience. In operation, we got a lot of feedback from passengers. For example, passengers want us to break the cars more smoothly, to pick them up faster, and to better plan our routes than before. We then refined and improved all of them accordingly. Our efforts have helped us to gain more recognition from passengers. Today, in Yizhuang, Beijing, Apple Go is already an important way for early computing. After trying Apple Go, people come to realize that it is a reliable and safe service. It drives just like a professional driver. Some people may wonder whether Apple Go can be better than human drivers. Yes, its operation is always in compliance with traffic regulations. and our AI drivers never get tired or distracted like human drivers. All of those allow or go to provide a very safe route to the public. Our strong track record around safety has helped us to increase trust, both from our users and also from our regulators. We mentioned before that in Wuhan and Chongqing, We will allow to provide fully driverless ride-hailing service this August. The operation in both cities is well on track. Going forward, we plan to continue to expand the operation at and the operation also there and add more fully driverless vehicles. In 2023 and beyond, we will continue to scale up operation. In particular, fully-traveled red-hitting operations in more regions and reduce hardware and vehicle costs. We believe Robotexy will eventually be profitable and cheaper than the current red-hitting service. We will continue to invest in Robotexy to capture the huge market opportunity.
spk11: Hi, Kenneth. This is Julius. Regarding your question about the impact on our P&R cash flow, we believe the overall impact is actually manageable. And as Robin said in the screen, actually, our team today has built a very comprehensive financial model for our local. This model actually helps us to understand what should we do, where we should improve and adjust to generate profit in these models in the future. For example, today we are working very hard towards two goals. Number one is we end to remove safety officers in the cars as labor cost as where we should reduce and make kind of new ways. And number two, we continue to reduce the hardware costs. During the past quarters, we continue to improve our L4 autonomous driving technology. And just now, both Zhenyu and Robin have given some examples how we do that, how we leverage large-scale operation to improve technology. This effort has helped us to earn trust and build track records. Today, we are providing the fully driverless right-heading services in Wuhan and Chongqing, meaning no safety officers in the cars at all. In Beijing, we're also making progress as the safety officers today are now a lot to not to see behind the steering wheel, and maybe even the Francis, which will help us to remove the safety officers in more cities and reduce the labor costs in the future. And on the other hand, for the hardware perspective, most of the newly added car in the coming 12 months will be the model of Apollo mode. This means there will be some investments in Harvard next year. Once a sizable amount of Rt6, which has just launched a few months ago, put in operation in the year 2024, our unit economy will significantly improve because Rt6 has much lower production costs than any previous generations of robotics. The unit economy in our operations in key cities is also improving because we continue to scale up and improve all the cost efficiencies. Robin has mentioned our rights continue to grow in the past few quarters. And also, each car now provides 15 rides every day in San Diego cities. Apollo Go today is becoming recognized as a reliable and efficient way for daily commute. Overall, our grow-up local air measure speed will aim to achieve the unit economy in key cities before we expand to more cities. I think just a summary, all of these impacts of cash flow and the P&L is manageable, and we have the patience. Thank you.
spk06: Thank you.
spk05: The next question comes from Lincoln Kong with Goldman Sachs. Please go ahead.
spk02: Thank you, Benjamin. I want to ask about our sales of our advanced chips to China because we have seen recently a lot of our press report around U.S. chip restriction against China. So we wonder how you are seeing these restrictions impacting your ability to grow the business A, AI cloud, B, autonomous driving, and lastly, wider, our AI business. So could you also remind us our business that the most depending on the advanced large AI chips, and if there's any way we'll be able to manage this with domestic chip capability. Thank you.
spk12: Thank you, Lincoln. You're right. This is a hot topic recently, actually. So the short answer to your question is that we think the impact is quite limited in the near future. And here are the reasons. So first of all, as of today, a large portion of our AI cloud business and even wider AI business does not rely too much on the highly advanced chips. And secondly, for the part of our businesses that need advanced chips, we have already stocked enough in hand actually to support our business in the near term. Thirdly, there are some alternatives to the restricted chips and we have the technologies to use these alternatives to achieve almost the same effectiveness and efficiency in our AI cloud and the wider AI business. Last but not least, unmotivated or not on the prohibited list. So this means that in the near future, in-vehicle computing is not affected. So when we look at the mid to a longer term, we actually have our own developed AI tip, so named Kunlun. Actually, we already started to use Kunlun tip to support some large-scale AI computing tasks internally. We also use Kunlun to serve external customers already. So because we have full-stack AI capabilities from tips to AI frameworks to foundation models and then to application software, so we can achieve much higher efficiency as we optimize AI tasks from end to end. So let me give you some examples. By using our coolant tips, PaddlePaddle, and large language models, The efficiency to perform text and image recognition tasks on our AI platform has been improved by 40% and the total cost has been reduced by 20 to 30%. There are more cases like this in quality inspection in our smart manufacturing projects and image recognition in the smart city products and so forth. So as our business grows, we believe our end-to-end capabilities will give us even stronger competitive advantages. For the core chips, so we expect to see more auto parts, including core chips, to be manufactured in China in the future. So as China's intelligent driving market continues to develop rapidly. So this means the supply chain in auto industry may become more and more independent and less reliant on the imports. So once again, I want to emphasize that Baidu has built a very strong R&D team. We keep introducing cutting edge technologies to the market and we help users and customers to use these technologies to improve efficiency. So that's why we believe we can leverage our strong AI capabilities and AI algorithms to support the top level computing, even though we face some turbulence in the semiconductor supply chain. So to sum up, chip sales restriction should have limited impact on our business operation in the near term. Instead, we think it creates some good market opportunities for the Chinese chip companies. And our human AI chips and our AI business will eventually benefit from these opportunities.
spk13: Great, thank you.
spk05: The last question today comes from James Lee with Maduho. Please go ahead.
spk07: Great, thanks for taking my questions. I have two here. First, can you guys provide some more color on your progress of e-commerce search? and short video opportunities. Can you guys talk about maybe from a consumer, merchant, and creator's point of view, what kind of pain points are you trying to resolve here? And second, can you talk about the traction that you have made in open mobile ecosystem and potential monetization opportunities here? Thanks.
spk10: Yeah, this is Robin. I mentioned earlier that we have been building closed-loop experience for our users and advertisers in our mobile ecosystem, especially in Baidu app. For e-commerce, because of the efforts we made in the past, users now come to Baidu not only for information knowledge, but also for services and merchandise. Since the beginning of this year, merchandise-related search queries on Baidu have grown much faster than last year. You may be wondering why. It is because users increasingly find out that our platform, they can now find detailed product information, product reviews, and even buy the product without leaving our app. Now, we have a huge number of SKUs available for search on our platform. we have also deepened the partnership with leading e-commerce platforms so that users can easily buy products they need here on Baidu app. Just like I said in my prepared remarks, in Q3, GME facilitated by Baidu Search continued to grow very fast. I also mentioned earlier that retail has been an outperforming vertical for our online ads for quite a few quarters. Even very recently, revenues from the retail vertical during the double 11 e-commerce promotional season rolled by double digit from last year. And this all proved that our effort gradually bearing fruit. As for short video, we're making short videos increasingly available in our feed and search services. For feed, short video distribution and time spent continue to grow steadily. Right now, about 85% of the feeds distributed by Baidu app are short videos. And for search, more than 20% of the clicks on the search result pages were short videos. This number increased by more than 80% year on year during the month of September. So we believe that popularity and adoption of video in our search results will ramp up quickly. When we talk about monetization, short videos, especially short videos that provide fully immersive video experience, can be much better monetized than text and images. For example, in feed, EECPM for fully immersive video ads are much higher than text and images. This is one key reason for feed revenue to show positive growth year over year in this quarter, even though the macro environment was unfavorable. This progress in feed has made us quite confident that short videos will also benefit search revenue later on. Now, we're also trying to use AI-generated content to enrich our short video portfolio. We're still at the very early stage for this. We believe with AI we will generate a large number of short videos in a faster and more cost-effective way. To sum up, e-commerce and short videos are two areas that could drive incremental revenue growth for us, and we will continue to work hard on that. Meanwhile, we would like to stress that profit growth remains a top priority for our mobile ecosystem. As for interoperability, we believe it is a long-term trend. As we talked about it before, being a search engine, we benefit from more content becoming searchable on the internet. Looking into the longer term, we believe the government's willingness to build an open mobile internet industry remains unchanged because it benefits the users and the SMEs. And for us, by the way, it's getting ourselves ready for that trend. Thank you.
spk05: This concludes our question and answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.
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