Baidu, Inc.

Hello, and thank you for standing by for Baidu's first quarter 2023 earnings conference call. At this time, all participants are in listen-only mode. After the management prepared remarks, there will be a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Wan Lin. Baidu's Director of Investor Relations. Please go ahead.

Hello, everyone, and welcome to Baidu's first quarter 2023 earnings conference call. Baidu's earnings release was distributed earlier today, and you can find a copy on our website as well as on mutual 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, ECG, and Jen Yuli, 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 risk and uncertainty 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-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 anodities and gap measures to the anodities directly comparable gaps, and it's available on our IR website at ir.by2.com. As a reminder, in addition, a webcast of this conference call will be available on By2IR's website. I will now turn the call over to our CEO, Robin.

Hello, everyone. 2023 is off to a good start. with our bins performing well across the board and driving strong growth. In Q1, Baidu Core's revenue growth really accelerated year on year and supported an improvement in our operating margin. Our online marketing bins have seen a positive impact from China's overall economic improvement. After the Chinese New Year, there was a quick recovery. which was especially beneficial for many of our advertisers in offline sectors, such as travel, healthcare, bin services, and local services. Moreover, we've been working hard to enhance user experience for Baidu apps, and this has led to good user metrics and increased online marketing revenue for the first quarter compared to the previous year. Our AI cloud achieved profitability on a non-GAAP operating level this quarter. Starting in Q2 last year, we have focused on building sustainable growth for our cloud business by phasing out low-quality projects and businesses. At the same time, we have been building standardized AI solutions for key use cases and replicating them from one project to another. This approach has led to an increase in AI cloud margins over the past few quarters, and we have seen profitability on the non-GAAP operating level this quarter. Today, all eyes are keenly focused on the transformative impact of generative AI. For today's call, I will first provide an update on this topic and then walk you through our operational highlights. in AI cloud, intelligent driving, and mobile ecosystem. Generative AI represents a tremendous opportunity for us. It can be compared to the introduction of the internet and smartphones. To capture this opportunity, we leveraged our technology capabilities and our extensive experience in search, knowledge graph, and dialogue. We were able to quickly deploy Ernie Bot in May-March, which became the first GPT model owned and operated by a public company. This launch demonstrated our significant investment and achievement in AI over the past 10 years, and it also highlights our position as the operator of China's largest search engine. With our search engine, we have gathered a vast amount of data, facts, and knowledge for natural language understanding, which has been critical in training our model. Baidu has established a robust range of AI capabilities powered by its four-layered AI architecture, which encompasses cloud infrastructure, the PedoPedo deep learning framework, large language models, learning, and AI applications. We have this distinctive advantage that helps us optimize entire process and reduce cost for model training and inference. One of our significant advantages is owning Pedal-Pedal, which is the leading deep learning framework in China. We have developed the PedoPedo in a way that aligns with ErnieBot, and this creates a strong synergy between these systems. Let me give you an example. Training and running large language models require a lot of data, which can be complex and overwhelming, and demand significant computing resources. To tackle this challenge, we use our proprietary full-stack AI architecture. we are continuously looking for new techniques to make our four layers work seamlessly, which helps us achieve better performance and quicker throughput. Specifically, we have improved compatibility between Pedal-to-Pedal, the large language models, and the cloud infrastructure. As a result, since launching EarlyBot in March, our normalized Queries per second have increased by almost 10 times, indicating significant efficiency gains. Baidu is rapidly integrating EarlyBot into all of our businesses for testing. The goal is to leverage its capabilities to enhance, rebuild, and create both our enterprise and consumer-facing products and services, thereby revolutionizing our business. We are also working on building an ecosystem around Ernie Bot to promote the adoption of generative AI in a wider range of use cases. This strategy should enable us to gain market share across all sectors and achieve sustainable long-term growth. As more people use Ernie Bot, more products integrate Ernie Bot in seamless ways, we will be able to gather large-scale human feedback and iterate the model rapidly and tailor to real-life market needs. On the enterprise-facing bin site, Generative AI is expanding the total addressable market of the cloud industry. This is because cloud service providers can use Generative AI to add or enhance capabilities to their current offerings, developed new solutions and applications to address unfulfilled market demand, and drive productivity and efficiency. As a result, since we introduced ErnieBot, we have observed more and more enterprises from various industries started their model training on our cloud. Our powerful foundation models and our unique full stack AI capabilities differentiate us from our competitors, which gives us an edge in the market. In March, sales lead increased by more than 400% year-over-year, which is a significant achievement for us. We believe that our AI cloud will continue to gain market share over time. I'll provide some examples of how EarniBot is helping our customers to gain efficiency. In the financial services industry, we have partnered with a prominent domestic insurance company to help them enhance their digital experiences for employees and clients. To achieve this, we will utilize our AI capabilities, including PedoPedo and Ernie on their private cloud. Additionally, we will create customized tools and technologies to assist them in training and refining models on EarningBot with their unique data. And we will continuously improve the system over time. This model will power various applications, including helping financial advisors analyze large amounts of research reports and public information. We believe that this project has the potential to establish a new industry standard for innovation and efficiency in China's financial services sector. In the software industry, we are collaborating with some productivity software developers to test the integration of Ernie Bot into their application. with the goal of automating certain workloads and expanding the capabilities of their end users. Additionally, we are partnering with some ERP companies who are exploring the use of Ernie Bot to assist their programmers in writing code. In the education industry, we opened Ernie Bot to a leading online education company via Model as a Service. helping them fine-tune their own model on Baidu AI Cloud. One of the features we're working on together is an enhanced, sophisticated AI tutor, enabling them to better serve their students. We've observed that industries experiencing a surge in demand after the pandemic are interested in using Ernie Bot to improve their business operations more efficiently. Online travel companies are a good example of this trend, as some of the biggest players are testing the use of Ernie Bot to assist their customer service team in managing customer queries, suggesting trips, and directing customers to relevant information. The feedback so far has been positive. and customers are also beginning to switch their IT expenditures to our cloud. On consumer-facing businesses, we are utilizing ErnieBot to enhance our product for the users. We're currently beta testing an upgraded version of Baidu Search, which is powered by ErnieBot. This version provides natural conversational interactions for a more seamless search experience. We are also testing the integration of ErnieBot with Baidu WenKu, our online document sharing platform, to enable ErnieBot to work alongside users and assist with searching, summarizing, and generating content using natural language. Additionally, we are incorporating ErnieBot into other consumer-facing products such as Baidu Map, Baidu Keyboard, Baidu Post, and XiaoDu. Furthermore, we are testing a standalone application for ErnieBot. So far, we have been encouraged by the positive user feedback at the current testing stage and look forward to bringing these experiences to more users in the coming months. In the new era, AI Chatbots will become a traffic gateway for people to seek information and content. Therefore, we should continue to gain user traffic and mindshare, which will drive monetization over time. We're also working to build an ecosystem around early bots with our partners to fuel innovation and drive growth. On the regulatory front, as a leader in AI and an advocate for AI ethics, Baidu continues to promote the responsible use of AI. To comply with regulatory requirements, any new technology, product, or service must undergo government review and approval before large-scale deployment. We have applied for review and approval of ErnieBot and will roll it out at a large scale to our customers and users once we get the green light. Baidu has been operating search in China for more than 20 years and has extensive experience with Chinese culture and regulatory environment, which we believe will help us navigate the regulatory landscape. In early April, the Cyberspace Administration of China released a new draft regulation for comments on generative AI, which explicitly endorses the development of self-designed AI algorithms and deep learning frameworks. We believe that regulators' active engagement in generative AI in the early stage will raise the bar to entry, and we are well positioned for that. Overall, we are thrilled about the prospects that lie ahead with ErnieBot, and we will continue to invest in it to unlock the tremendous potential that we envision. Now, let's have a look on the first quarter operational highlights. In Q1, revenues from AI Cloud increased 8% year-on-year, which is an improvement from the 4% year-over-year growth in the fourth quarter last year. We're pleased to report that AI Cloud achieved profitability on the non-GAAP operating profit level during the quarter. The margin improvement underlows two points of progress. One is our ability to optimize operations and drive sustainable and healthy revenue growth. Two is our efforts to standardize our AI solutions and applications and efficiently replicate them across different customers and sectors. Since Q2 of last year, we have phased out low-margin businesses and projects for AI Cloud, leading to a healthier business portfolio and cost structure. At the same time, we continue to standardize AI solutions for key use cases for replication. In the water industry, for example, last year we replicated AI solutions we developed for predicting water usage and controlling water pressure from Quanzhou Water Company to Guangzhou Water Company. And in Q1, we deployed the majority of our earlier standardized solutions to the Lintau County Water Company in Gansu Province. This example demonstrated the scalability and margin expansion of our standardized approach in creating AI solutions for traditional industries. As I mentioned earlier, Generative AI is creating a host of opportunities for the cloud industry and expanding the cloud market significantly. Therefore, we will continue to invest and actively explore ways to grow our cloud services. Moving into intelligent driving, we continue to make solid progress. In Q1, the number of rides provided to the public on open roads increased over three-fold compared to the same period last year and reaching nearly 660,000. Thanks to the remarkable growth in rides and our strong track record of safe operations, we have received more permits from governments to offer fully driverless ride-hailing services in China. On March 17, ApolloGo was allowed to provide fully driverless ride-hailing service in Yizhong region of Beijing. As of today, we are providing the services in three cities, Beijing, Wuhan, and Chongqing. We are prioritizing fleet expansion and passenger adoption in regions where we can provide driverless commercial operation, meaning it's fully driverless and we can charge. Our efforts are yielding good results. In Wuhan, where we first received the permit to provide such services on public roads last August, we now have more than 135 driverless vehicles, and more than one-third of the paid rides ApolloGo provided were in fully driverless vehicles. We are confident that the number of rides provided by fully driverless vehicles will continue to increase, leading to cost optimization and creating a profitable business model. We firmly believe the demand for autonomous driving services will continue to grow at a rapid pace, and we will further dedicate our technology and operational capabilities to better provide safe and reliable services to the public. Moving to mobile ecosystem. I'm pleased to report that online marketing revenues returned to positive year-over-year growth in Q1, resulting in an increase in operating margins. One contributing factor to this growth was the overall improvement in China's economic recovery and commercial involvement as a result of China's reopening. As I mentioned earlier, many offline-related verticals, travel, healthcare, business services, and local services have substantially increased. they are ascending on our platform. Some of these verticals have already rebounded to above pre-pandemic levels, indicating solid signs of recovery. Our own initiatives aimed at improving the product experience, such as incorporating short videos and product listing information within the Baidu app. also played a significant role in the revenue increase. Additionally, revenues from retail and e-commerce continue to grow, mainly driven by merchants' direct spending on our platform. The quarterly GMV facilitated by Baidu Search grew by 55% year-over-year in Q1, demonstrating our continuous traction in the e-commerce sector. Our users and traffic continue to grow in the quarter, with Baidu App's MAU increased by 4% year-over-year in March, and feed distributed through Baidu App and mobile search queries maintaining steady growth. This reflects the high value that users place on Baidu Search as their primary source of information. During the quarter, we continue to focus on enhancing user experience and customer satisfaction. On the user side, Baidu app has a wonderful flow feature on the Explorer page, which is particularly attractive to young females, enabling an infinite browsing experience and catering to their diverse needs. we expanded our immersive video feature to more and more use cases on Baidu apps, including incorporating it into search results. Additionally, we continuously improve our one-shot search results through AI to provide better search experience. These efforts have helped to increase user engagement and expand our user base. On the advertiser side, since launching our AIGC capabilities late last year, we've been working with advertisers to create more effective ads. By allowing advertisers to specify their requirements, our platform generates customized options for them to choose from. For instance, a local travel agency turned to our AIGC capabilities to create ads, Our AI-generated ads outperformed those created by the advertisers, delivering an average of about 20% higher sales leads than them. In Q1, advertisers adopting AIGC increased their ad spending year-over-year and quarter-over-quarter on our platform, demonstrating the effectiveness of our technology in driving wins results. Earlier this year, we began using our AIGC capabilities to help advertisers respond to customer inquiries on our platform. By harnessing the power of AI, our advertisers can provide professional and timely answers to their customers' inquiries, which in turn drives an increase in sales leads. For instance, a B2B advertiser witnessed a monthly increase of over 100% in sales leads in March after using our AIGC technology. We are expanding the service to increasing number of advertisers, helping them better serve their customers and drive improved business results. These efforts have resulted in improved ROI for advertisers on our platform. Looking ahead, we remain committed to assisting our advertisers in reaching and converting their target audience by leveraging our cutting-edge generated AI technology. With that, let me turn the call over to Rong to go through the financial results. Thank you, Robin.