Baidu, Inc.

Hello, and thank you for standing by for BIDU's third 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, Joanne Lin. Baidu's Director of Investor Relations.

Hello, everyone, and welcome to Baidu's third 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, and Doshan, our EVP in charge of Baidu AI Cloud Group, ACG. After our prepared remarks, we will hold a Q&A session. Please note that the session today will contain forward-looking statements made under the safe harbor provisions of the U.S. Credit 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 and other documents filed with ICC 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 include discussions of certain annotated non-GAAP financial measures. Our press release contains a reconciliation of annotated non-GAAP measures to the annotated directly comparable gap measures 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 Core delivered solid revenues, profits, and cash flow in Q3. despite navigating in a challenging macro climate for both our online marketing business and AI cloud business. I'm proud that our team managed to strengthen operational efficiency and maintain stable margins amid a full-scale reinvention of our product portfolio with Ernie and Erniebot. Today, I would like to share an update on the new opportunities that Ernie and Erniebot have opened up for us. After that, I will discuss some key highlights of each of our businesses. Presently, we are in the midst of a broad-based platform shift driven by generative AI and foundation models that is set to revolutionize every industry. 31st, we received the approval to deploy EarningBot on a large scale and open Earning API to enterprise customers. Since then, we've witnessed a significant increase in queries handled by EarningBot and through Earning API. Moreover, we've received valuable feedback from these users and customers, enabling us to further refine our model's performance. At Baidu World in October, we showcased our progress in ErnieBot and AI Native products. During that event, we introduced Ernie 4.0, or EB4, our most advanced foundation model. We believe that EB4 is a GPT-4 level model displaying human-level performance in understanding, content generation, complex reasoning, and memory retention. These capabilities are crucial for developing AI-native applications and solutions. We are pleased to launch eB4 earlier than our expectations. It resulted from our unique end-to-end four-layer AI infrastructure, which helped enhance efficiency in model training. The input and feedback from our users and customers also played a big role. In products, as I said in the past, we continue to use Earning to reinvent our entire portfolio and introduce an AI-native experience. On the customer front, the Earning Bot enables by-do search by generating direct answers to search queries, complementing traditional search In the folder, we initiated tests on our new features that recommend newsfeed-like information together with the generated search results and enable multi-round conversations to encourage further user expression. Our initial tests have received promising feedback. We believe these features will help deepen user engagement and prolong time spent unleashing new monetization opportunities. In particular, they benefit verticals like health care, education, travel, legal, and auto, in which advertisers are willing to invest heavily in customer acquisition and re-engagement. Ernie Bot, our new AI native product, serves as a versatile multi-run conversational AI assistant on both desktop and mobile. Given the exceptional performance of our large language model, we are confident in monetizing our services. Starting from November 1st, EB4 was opened to the public through Ernie Bot at a subscription fee of about eight US dollars per month. This marks us as the first company in China to implement user charges, distinguish us from other models in the market. Our primary focus is to encourage seamless collaboration between users and AI co-pilots, which we believe is a key trend in the new era. For example, with an AI co-pilot, Baidu Wenku has transformed into a one-stop shop for various document creation needs. We have already seen an increase in the paying user count, a trend that we expect to continue in the coming quarters. On the enterprise-facing product front, we recently introduced GBI, Generative Business Intelligence with EarnBot. GBI simplifies data analysis using natural language interaction, facilitating faster decision-making for business operations. The introduction of GBI was prompted by the recognition that customers across various industries have the need for AI co-pilots to help them analyze data more efficiently. During our last earnings call, we also discussed how we use ErnieBot to create Baidu Co-Mate, our AI coding assistant, and InfoFlow, our enterprise communication and collaboration platform. These products focus on boosting productivity and efficiency gains, and each of them presents up-sell opportunities for our cloud customers. In fact, an increasing number of our cloud customers in China's traditional industries and public sector have used the trial version and shown interest in these products and features. Additionally, these products and features also allow us to acquire new customers across an even wider array of industries. In terms of ecosystem, we empower enterprises to leverage learning through API to create their own AI-native applications and solutions that will drive the development of generative AI and LLM. As more and more AI-native applications built on top of Ernie become successful, whether developed by us or by our customers, Ernie will likewise be successful. Now, over 10,000 enterprises are actively using Ernie through API on a monthly basis. This number has been growing quickly since we received the regulatory green light at the end of August. Currently, Ernie is handling tens of millions of queries every day. Right now, a large and rising number of these queries come from the Baidu family of products, as we have been pioneers in building AI-native products and have put a lot of effort into reinventing our offerings. In the first half of November, the number of daily external queries has increased by over 50%, compared to the same period in October. As we are actively assisting our cloud customers in creating AI native applications, we believe there will be a continuous and significant rise in external queries in the future. We're also actively attracting developers to connect their information and services to Ernie Bot through plugins. With plugins, EARNY can help people with more and more tasks, unlocking a wide range of possible use cases. As of today, hundreds of plugins have already been accessible through EARNY. The initial batch of third-party plugins include ctrip.com, Civic Press Group, China Justice Big Data Institute, New Oriental, Auto Home, and TreeMind. In summary, during the quarter, we made significant progress in using GenAI to revolutionize product usage and transform business operations for our users and customers. We believe that this is just the beginning. In the future, we will realign resources to invest in this growth opportunity and shift away from lower priority efforts and improve efficiency for existing businesses, thus balancing investment and margins. We are excited about the possibilities for Baidu for our users, customers, partners, and the entire ecosystem. Now, let me recap the key highlights of each of our businesses. Mobile ecosystem continue to exhibit steady growth for both user metrics and financial performance in the quarter. Baidu apps MAUs increased by 5% year-over-year to 663 million in September. Search queries and content distributed by Baidu app remained resilient. In particular, videos distributed by search and feed within Baidu app both experienced a double-digit growth in third quarter. Baidu Core's online marketing revenue increased by 5% year-over-year in the third quarter. consistently generating strong profit and cash flow for the group. This growth was driven by the continuous recovery in verticals such as healthcare and travel, among others. In the quarter, we continue to use GenAI to help advertisers increase ROI and conversion on our platform. Starting from September, advertisers can engage with our new marketing platform This platform supports natural language input and multi-round conversations which help advertisers articulate their requirements more comprehensively, enabling us to formulate more effective campaign strategies for them. Moreover, we made ongoing enhancements to our monetization system, focusing on improving targeting capabilities and the auction system. For example, Carina Education, an IT professional education company, achieved an increase of 23.3% in conversion rate and 22.7% boost in ROI after using this enhanced platform and capabilities. We are still in the early stages of using GNI to help advertisers achieve higher conversions and RIs on our platform. Our efforts will ultimately lead to significant improvement in monetization capabilities and contribute to future revenue growth. In the corner, we also used our AI capabilities to help merchants grow their sales on Baidu. One example is how we help SMEs with live stream shopping. With EarlyBot, we introduced a tool that allows them to easily create their own digital human, generate live scripts, and more, significantly lowering the barrier and cost for live streamers to sell merchandise on Baidu. Looking forward, we are optimistic that the growth of our online marketing revenue will continue to exceed China's GDP growth. At the same time, we will continue to test AI-native marketing products that could potentially open up more opportunities than traditional general search ads. This gives us confidence in Baidu's long-term online marketing growth prospects. Turning to AI Cloud, we continue to generate positive operating profit on a non-gas basis in the quarter, as we remained focused on the healthiness of our business. GenAI and LLM have brought us a lot of opportunities which have strengthened our competitive advantages in cloud and increased our time. A growing number of enterprises are using Ernie API to develop their own AI native applications and solutions. We're also helping customers build their own models efficiently by leveraging our unique four-layer AI infrastructure and our years of experience in building and using foundation models. Our training is very complicated. It requires a large number of GPUs working simultaneously. Any GPU failures can impact the entire process. We have developed ways to identify and address GPU failures quickly, leading to a significant reduction in training costs. Now, about 98% of the training time on our platform is valid, setting an industry benchmark. We also have a set of different resources, including toolkits, data sets for enterprise customers to easily fine-tune their customized models. General AI has helped us grow our cloud customer base. a large number of cloud customers using Ernie API are new customers. At the same time, some of our existing cloud customers have increased their spending with us because of generative AI. AI cloud revenues declined by 2% year-over-year in the third quarter, mainly due to the weak demand in smart transportation projects. We believe AI cloud revenue should rebound to positive growth in the fourth quarter, driven by the increasing momentum in generative AI-related benefits. Also, since smart transportation revenue started this low down in Q4 of last year, we will have an easier year-over-year compass in Q4 this year. Moving on to intelligent driving, our target remains unchanged. which is to achieve break-even on the regional unit economics for robot taxi operation in a couple of years, before turning operationally profitable. To this end, we are strategically concentrating our resources on pivotal regions. Wuhan remains our largest operational area, and we believe it is also the largest region globally, providing autonomous ride-hailing services currently covering a population of about 2.7 million. In the third quarter, the portion of fully driverless orders within the overall order portfolio in Wuhan exceeded 40%, that's up from 35% in Q2. We are also particularly pleased to highlight that ApolloGo's operations in Wuhan continue to expand. In late August, Apollo Gold remains the first company in China to provide autonomous blind-hailing services to the general public at Wuhan Tianhe International Airport, one of the busiest airports in central China. The extended wage into the airport transfer involves longer travel distances, presenting an excellent opportunity for the future improvement of unit economics. All of this development contributed to the UE improvement, and we aim to reach regional UE break even in a couple of years. In Q3, ApolloGo provided 821,000 rides to the public, marking a 73% increase year over year. And the cumulative order volume has surpassed 4.1 million by the end of Q3. As part of our executive reshuffle program, we have recently named Dr. Wang Yunpeng as Corporate VP of Baidu, who will lead the Intelligent Driving Group. Yunpeng has been with us since 2012 and has been responsible for autonomous driving business since 2018. I take great pride in seeing another business leader developed within Baidu. Zhenyu has taken a rotational position as CEO Assistant and Chairman of the Technology Ethics Committee. Now, let's proceed with Rong's financial performance review.