Baidu, Inc.

Hello, and thank you for standing by for Baidu's second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After management's 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, Juan Lin, Baidu's Director of Investor Relations.

Hello, everyone, and welcome to Baidu's second 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 Newswire services. On the call today, we have Robin Li, our co-founder and CEO, Rong Luo, our CFO, Doshan, our EVP in charge of Baidu AI Cloud Group, ACG, and Zhen Yu 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. Credit Security Delegation 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 SEC and Hong Kong Stock 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 includes discussions of certain unaudited non-GAAP financial measures. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures, and it's 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. I'm pleased with our financial performance in the second quarter. Revenue from online marketing increased by 15% year-over-year, reflecting improvement in advertiser sentiment. In Q2, non-GAAP operating profit for mobile ecosystem continued to strengthen, and AI Cloud once again delivered positive operating profit. At the same time, we are facing tremendous opportunities in foundation models, or more broadly, AGI. Today, I would like to share an update on our ongoing business transformation by utilizing Ernie and ErnieBot, as well as our achievements in this field. After that, I'll briefly go over the operational highlights for each of our bins. Over the past few months, foundation models have captured the imagination of people and businesses around the world. It is becoming increasingly clear that foundation models will fundamentally transform work across industries, boosting overall productivity and accelerate the wider democratization of AI innovation. Right now, we are in the midst of a thrilling period. This is due to the fact that the hard work we poured into generative AI over the years is now beginning to bear fruit. This pivotal and transformative opportunity is setting the stage for Baidu's future success, and we couldn't be more excited about it. On product and service front, we're using early and early bot to improve, rebuild, and create new offerings. On the product side, we are reinventing our products, building AI-native apps. For by research, AI has played an important role for many years in driving innovation and improving user experience. resulting in a consistent increase in the percentage of search queries satisfied by one-shot search results. It means the first search result displayed on the result page that can provide a satisfactory response to a search query. We're using EarlyBot to enhance search experience, making by research capable of answering complex questions that were previously unanswerable For example, please craft a marketing campaign proposal for a smartphone launch event. Or what kind of new energy vehicles would be suitable for a family of six with a budget of 300,000 RMB? ErnieBot also enables by-do search to assist users with more personalized and in-depth research on a topic or project. The feedback from users who have tested these new features has been positive. Another example of product innovation is Baidu One Cool, where many users search for articles, papers, books, or templates to create documents on a wide range of topics and in many formats. We are currently beta testing an AI assistance feature that can generate customized content for users based on their requests. User engagement and retention among Baidu Wenku's testing users for such features saw significant improvement. For example, users have doubled their time spent on Wenku after trying out the AI Assistant feature, and they are more likely to become paying users. Currently, WinQ has over 100 million monthly active users, and we believe such an intelligent feature will help WinQ attract even more users and convert non-paying users to paying users once it is rolled out on a large scale. Generative AI offers bright horizons for our online marketing business. and we are actively using the technology to build and rebuild our marketing products. Actually, our online marketing business has relied on AI for years to provide more value to advertisers. Last quarter, we shared our progress on using AIGC to automate app creation in text format. which leads to an increase in conversion rate. This quarter, we further enable advertisers to use AIGC to generate image and video ads with natural language. In Q2, we further improved our monetization system by using generative AI to broaden ad campaign keywords to user search queries, driving better monetization for advertisers. For example, and online professional education companies' ad conversion increased by about 16% in August after using these new features. We are consistently enhancing our system using generative AI and we expect to introduce more and more new features in the coming months. Additionally, we have been leveraging generative AI to enhance our auction system so that it can better match ads to search queries and search intent. Such improvement helped increase Baidu's search eCPM in Q2 and contributed to the year-over-year growth in online marketing revenue in the quarter. We're also in active conversations with advertisers to get their input on how to further make our marketing products work best for them. Meanwhile, we will continue to leverage Ernie and Erniebot to help advertisers create sophisticated ad campaigns and improve ROI on Baidu. One other initiative I'd like to mention here is that internally, we introduced an AI assistant within InfoFlow, Baidu's self-developed enterprise communication and collaboration platform. The AI Assistant automates various workflows such as summarizing meeting notes, chat histories, and workplace content, drafting documents, generating charts, facilitating knowledge Q&A, and completing tasks such as creating meeting invites, applying for vacation days, and conducting data analysis using natural language. This assistance helps our employees work more productively. We plan to open up the intelligent features of InfoFlow to our customers in the future. Alongside our own products, we are empowering cloud customers to build their transformative products and services using EarlyBot. In Q2, the number of corporates connecting to EarlyBot continued to grow. Foundation models Large language models and generative AI are expanding our total addressable market, attracting new customers while also increasing sales to our existing customers. We are also using Early and EarlyBot to help customers in various industries address real-world challenges with unprecedented effectiveness and competence. This further strengthens the capabilities of Ernie and ErnieBot, empowering them to take on more significant roles in solving industry-specific issues. For example, in the software development industry, we launched BaiduComet, an AI coding assistant to the public in June. BaiduComet aids people in coding and can be used in multiple programming languages. It has now been widely adopted by Baidu's own R&D team, who have reported a meaningful improvement in their productivity after using Comet. As of today, more than a hundred organizations have tested Baidu Comet, and some of them have already decided to purchase Baidu Comet to boost productivity in coding. In the healthcare industry, We are solidifying our presence by utilizing industry expertise and sales network developed through our collaboration with leading hospitals in China. Gu Sheng Tang Limited, a traditional Chinese medicine clinic chain, is using our early-based model developed for the healthcare industry to support doctors in their patient care. Our AI assistant, helps doctors write notes for patients, analyze medical images, and make informed clinical decisions among other tasks. It also helps patients find the most suitable doctors and departments and provide pre-consultation service online. Furthermore, we've developed tools for model training and fine-tuning. data processing, labeling, and more. These tools help to lower the threshold and cost for enterprises to use foundation models on Baidu and support them to train and operate their purpose-built models efficiently. Additionally, Baidu AI Cloud stands out as our AI optimized cloud infrastructure makes us a top performing platform for training and serving foundation models, including large language models. This is why more and more enterprises are upping their digital spend on our cloud infrastructure to capture the new AI opportunities. This is particularly obvious among internet and tech companies as they are early adopters of Gen-AI and foundation models. Shifting our focus to technology, at Baidu, we maintain an unwavering commitment to improve early. During Q2, we unveiled Early 3.5, our latest state-of-the-art foundation model powered by PedoPedo. Notably, PedoPedo's enhancements enabled our self-developed four-layer AI architecture to operate more seamlessly than ever before, significantly improve the framework's compatibility with Ernie and demonstrating engineering excellence. As a result, compared to Ernie 3.0 version in March, Ernie 3.5 has tripled its training throughput and its queries per second, or QPS, for inference have increased by more than 30 times. Additionally, I'm proud to note that IDC recently reported that Ernie 3.5 surpassed peers in many areas, such as algorithm, industry coverage, developer tools, and ecosystem. As compared to Ernie 3.5, 3.5 is capable of producing safer, more responsible, and more creative responses, making significant improvements in question answering, reasoning, and coding. Ernie 3.5 is now powering ErnieBot with plugins to expand its functionality to cover real-time and precise information, long text summary, data analysis and visualization, text-to-video conversion, and facilitate dialogue that include images. We are committed to enriching our ecosystem by adding more high-quality plugins, in particular from third parties, to contribute to the advancement of China's foundation model. On the ecosystem front, We are determined to make Ernie the most popular foundation model in China. Importantly, we believe foundation models should be able to well support problem-solving capabilities for various industries. As a result, we need to work collaboratively with our partners, such as enterprises and AI developers, to continually build industry models and solutions. Our 8 million developers on Pedal to Pedal are the anchor that we can leverage to build a community for early. To foster a vibrant ecosystem, we hosted Baidu Early Cup Innovation Challenge. It attracted almost 1,000 startups to submit their ideas and prototypes, covering various fields, encompassing productivity towards developers sales and marketing companies, entertainment companies, social platforms, middleware developers, as well as applications across different industries, including education, healthcare, finance, et cetera. We have also launched a venture fund of 1 billion RMB to support startups in developing all kinds of AI native applications, which will complement our organic growth. On regulation, Baidu was recently appointed as a leader of China's LLM Standardization Task Force at the World AI Conference. This position signifies national-level recognition and endorsement of our foundation models and AI capabilities. While we are still waiting for the green light for large-scale rollout of Ernie Bot, we have observed that Chinese government has been increasingly supportive of the development of Trend AI and LLM. As a market leader, we believe Baidu is well capable of benefiting from the opportunity and contributing to this mega trend in China. Now, let's have a quick look of the second quarter operating highlights for each business. Revenue from AI Cloud increased by 5% year-over-year to RMB $4.5 billion in the quarter, and AI Cloud maintained positive non-gap operating profit. Our business has become healthier than ever, laying a solid foundation for future growth. On intelligent driving, In Q2, the rights provided by ApolloGo increased by about 150% year-over-year to around 714,000, resulting in a cumulative right exceeding 3.3 million, which is greater than our closest competitors by orders of magnitude. This leadership in operation implies competitive advantages in data quantity and quality, thus better model and greater safety rates. In addition, ApolloGo has widened its footprint in fully driverless ride-hailing services in more cities. In mid-June, ApolloGo received a permit from Shenzhen Pingshan Government to offer fully driverless ride-hailing services to the public. And in early July, in Shanghai, we were allowed to conduct fully driverless testing on open roads as well. With the expansion of the area and fleet size for fully driverless operation, along with the improvement of operational efficiency, we witnessed growth not only in the total average daily orders, but also in the portion of fully driverless orders within the overall order portfolio. This highlights a promising pathway for improving the unit economics of autonomous driving business. In particular, in Wuhan, where we initiated fully driverless ride-hailing services one year ago, the UE continued to improve in the past few quarters. On the revenue side, the average daily order volume and revenue per order have surged, propelling total revenue to grow. Meanwhile, the cost per kilometer per car is decreasing as well, thanks to improved operational efficiency. Finally, on mobile ecosystem, our users continue to grow, with Baidu apps' MAUs increasing by 8% year-over-year to 600% 77 million in June. Also in June, videos distributed by Baidu app achieved double digit growth year over year. Baidu remains a significant platform for users who are seeking a wide range of content such as information, products, and services. The revenue growth rate for online marketing accelerated in Q2, adding by strength in various verticals with offline exposure, including healthcare, business services, local services, and travel. At the same time, revenue from e-commerce demonstrated strength and outperformed in the quarter. Non-GAAP operating profit for mobile ecosystem grew steadily year over year in the quarter. mobile ecosystem continue to generate robust cash flow to fund our investments in AI, particularly in foundation models and generative AI. We are confident that revenue, profits, and cash flow generated from our mobile ecosystem will remain strong in the future. With that, let me turn the call over to Long to go through our financial results.