Baidu, Inc.

Hello, and thank you for standing by for BIDU's fourth quarter and fiscal year 2023 earnings conference call. At this time, all participants are in 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, Zhou Lin, Baidu's Director of Investor Relations.

Hello, everyone, and welcome to Baidu's fourth quarter and fiscal year 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 newsletter services. On the call today, we have Zhou Lin, our co-founder and CEO of our CFO, and 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 discussion today will contain forward-looking statements made under the safe harbor position 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 maturely from our current expectations. For detailed discussions of these risks and uncertainties, please refer to our latest ending 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 pledge release and this call include discussions of certain and audited financial measures. Our press release contains a reconciliation of the anonymous non-GAAP measures to the anonymous most directly comparable GAAP measures, and it's available on our IR website at irstopbydude.com. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available by this IR website. I will now turn the call over to our CEO, Robin.

Hi, everyone. We concluded 2023 with solid core. Final core's total revenue for the fiscal year increased by 8% year-over-year, and the non-GAAP operating margin expanded from 22% to 24%. This improvement highlighted the resilience of our core base, which serves as a strong foundation for our ventures in earning and earning bots. 2023 marked a year of GenAI and foundation models, a massive technology shift that will re-engineer this process and bring about a real renaissance in every sector of the economy. Baidu is well prepared to benefit greatly from this groundbreaking economic revolution. We progressed from talking about the opportunities of Gen AI and foundation models to actively applying early and early bot at scale. As a frontrunner in AI, Baidu proudly became the first public company globally to launch a GPT model, with our EB 4.0 standing call as the most powerful foundation model in China. Ernie continues to gain market recognition as evidenced by Ernie API calls from multiple well-known companies. Notably, Samsung uses Ernie API on its Galaxy S24 5G series. Honor uses Ernie API on its Magic 8.0. And Auto Home uses Ernie API to power its multiple AIGC apps. The partnerships further solidify our leadership in GenAI. Furthermore, we continued improving the efficiency of earning. For example, the inference cost of EB3.5 is only about 1% of the March 2023 version. With lower inference costs, earning will become increasingly accessible to users and enterprises. We are able to do that primarily because of our unique four-layer AI architecture and our strong ability in end-to-end optimization. Additionally, we are offering LLMs in smaller sizes. These small models can balance between performance and efficiency, better serving various customer needs. Since Q2 2023, we have actively utilized Ernie to revolutionize our products and services, creating AI-native experiences. We believe real applications are essential to unleashing the full business potential of Ernie and ErnieBot. Recently, we began to generate incremental revenues from Ernie and ErnieBot. In the fourth quarter, we earned several hundred million RMB, primarily from ad technology improvement and helping enterprises build their own models. I'll provide a more detailed explanation in the BINS review section. Looking into 2024, we believe this incremental revenue will multiply to several billion RMBs. primarily from advertising and AI cloud businesses. While we are beginning to commercialize GenAI and foundation models, we see enormous monetization potential in this groundbreaking technology. We envision Ernie as the future foundation system, serving as the foundation for millions of AI-native applications developed by third-party and Baidu. This paradigm will enable us to create an ecosystem around earning, which opens up various revenue sources. Now, the key highlights in Baidu's AI-native applications. Equipped with an AI co-pilot, Baidu Wenku has become a platform for users to create content in a wide range of formats helping them express their ideas. In addition to summarizing, creating, and expanding content, users particularly appreciate Baidu Wenku's features for assisting them in automatically turning their inspiration into PowerPoint. We have been consistently improving and enriching its AI features. For example, we recently introduced a new one such as mind maps for organizing information. We are reconstructing Baidu Search using Ernie. Last quarter, we talked about how we used Ernie to generate search results, improving the one-shot experience. In Q4, Baidu Search introduced newsfeed-like information alongside the generated search results at scale. to offer users useful and relevant content to explore. In Q4, we also began facilitating certain search queries with multi-round conversations to delve deeper into understanding users' intentions. Overall, GenAI enabled search complements traditional search, expanding the tab of Baidu Search by serving a wider range of information needs and answering content creation related questions. We are actively encouraging SMEs in service industries to build AI chatbots as new landing pages for Baidu Search. AI chatbots enable them to better serve potential buyers directed to them by us, driving transactions on our platform. At the same time, our AI chatbots can help merchants increase productivity. Currently, about 4,000 merchants are using our AI chatbots, particularly in healthcare, education, travel, legal, B2B, and auto, where users often interact with merchants to learn about their offerings before making purchasing decisions. We believe the GenAI-enabled search will help increase user retention on Baidu, reinforcing our position as the primary entry point for users seeking information and services. We are also expanding the reach of Earning by enabling enterprises to easily develop AI-native applications on Earning. In December, we introduced AppBuilder, a comprehensive set of tools on our public cloud to support enterprises to swiftly view AI-native applications from the ground up. These tools enable enterprises to incorporate capabilities such as organizing on-ramp messages for prioritization, creating drafts, summarizing meeting notes, and facilitating GenAI enabled data analysis. Additionally, we have included several ready-made templates, such as AI Agent, to enable enterprises to promptly create applications for validating their ideas. Such progress is in large part based on our own pioneering experience in developing AI-native applications. In addition to the tools for app development, Enterprises partner with us because we have the most powerful and most efficient foundation models and the most cost-effective cloud platform for running apps. In December, about 26,000 enterprises are actively using Ernie through API on a monthly basis, increasing 150% quarter over quarter. And Ernie is now handling more than 50 million queries every day. That's up 190% quarter over quarter. It's a significant rise in third-party calling. As the number of AI-native applications hosted on our public cloud continue to rise, we are poised to accelerate the enhancement of our model performance by incorporating feedback from our users and customers. This will further widen the gap between Ernie and our domestic peers. Moreover, as more and more AI-native applications on Ernie become popular, Ernie will likewise be successful and support a robust ecosystem around it. Steering our multi-year growth forward. In conclusion, we find ourselves amidst a tremendous opportunity in general AI and foundation model. With Earning and Earning Bot, we have started generating incremental revenues. In 2024, we expect AI revenues contribution to become more meaningful, while our core business will remain resilient. Moreover, we are preparing to serve the next wave in the development of earnings. In the future, we believe that there will be millions of AI-native applications on Ernie, with a vast majority of them devised by our cloud customers. The expanding Ernie ecosystem will then unlock numerous monetization potentials for Baidu. Now, let me recap the key highlights for each business for the fourth quarter of 2023. Mobile ecosystem exhibited a solid performance across revenue, margin, and cash flow. In the fourth quarter, Baidu forced online marketing revenue increased by 6% year-over-year, driven by verticals in travel, healthcare, business services, and others. In Q4, we generated several hundred million RMB incremental ad revenue due to improvement in ad tech. We continue to use earning to enhance our monetization system, including targeting capability and bidding system in the quarter. Starting from January, our monetization system has been able to generate real-time text-based ads for search queries, demonstrating significant technology improvement in both targeting and ad creation. As of today, our new marketing platform has attracted about 10,000 advertisers. An advertiser in the medical aesthetics industry began to adopt our new marketing platform in Q4. With the AI co-pilot, the advertiser can articulate its requirements comprehensively through natural language and multi-round conversations for further clarification and explanation. The conversational experience has assisted in building optimized search and feed campaigns by generating relevant ad content. Our platform has also helped them reach highly targeted audiences while dynamically allocating budget to drive conversions. The advertiser achieved increase of 22% in conversion rate and a reduction of 5% in cost for sales lead acquisition after using this enhanced platform and capabilities. Currently, only a small portion of our entire advertiser base has adopted this new marketing platform, which means there is a significant opportunity for future growth. All these initiatives have helped advertisers improve their conversion, leading to an increase in their ad budget on our platform in the quarter. We expect continuous growth in ad revenue from GenAI and Foundation models in 2024 and beyond. While we enhanced our ad technologies, we also introduced AI chatbots for brands. an innovative ad product building on top of Ernie Bot in Q4. AI Chatbot has further enriched our ad product portfolio. It can enhance user engagement and customer service while also capturing customer attention and driving customer demand. Since last October, China Feihe, a local infant formula company, has adopted AI Chatbot to promote its brand. The AI chatbot has enabled Fei He to have multi-round interactions with our customers, increase brand recognition, and gain valuable insights into its potential consumers. These profound insights have also helped Fei He understand customers' views of its brand and products, leading to an enhanced marketing strategy. AI chatbots for brands has garnered significant interest from brand advertisers, and we expect more and more businesses to embrace the AI chatbot in the future. As I previously mentioned, we're using Ernie to build our apps. With continuous enhancement of our AI native product offerings, we believe more and more users will come to buy this platform. This, in turn, will assist us in gaining more market share in both user engagement and online advertising revenues. Looking into 2024, mobile ecosystem should continue to generate steady profit and cash flow. AI cloud revenue grow by 11% year over year to RMB 5.7 billion and continue to improve profitability in the fourth quarter. Revenue from GenAI and Foundation model represent 4.8% of our AI cloud revenue in Q4. The increasing demand for model building played a significant role in this accelerated revenue growth, along with increasing distributions from inference. We have seen a growing number of enterprises, in particular tech companies, turning to our public cloud to build their models. Additionally, the AI cloud revenue generated by two cores, other BINs groups, such as the mobile ecosystem group and the intelligent driving group, was about RMB 2.7 billion in Q4. Within the Q4 internal cloud revenue, GenAI and Foundation Model accounted for about 14%. On a combined basis, the total internal and external AI cloud revenue was RMB 8.4 billion in Q4, with GenAI and foundation model contributing around 656 million RMB. GenAI and LLMs have become pivotal considerations for many enterprises, driving a shift in the cloud industry from general purpose computing to AI computing. This evolution is reshaping the competitive dynamics within the cloud industry, strengthening our lead in AI, and expanding our total addressable market. Enterprises choose us thanks to our possession of the most powerful and cost effective AI infrastructure for both model training and inference in China. Thanks to our unique four-layer AI infrastructure to drive consistent efficiency gains and years of experience in earning. Last quarter, we explained that 98% of LLM training time on our AI infrastructure was valid. Moreover, our GPU networking is running at a 95% utilization for training LLMs. Both of these metrics have set industry benchmarks. Within our math, we offer Model Builder and App Builder, which are two sets of tools that help enterprises effortlessly build models and develop apps. As of now, enterprises have built about 10,000 models on our math. Since its inception, App Builder has facilitated the creation of thousands of AI-native apps, As more and more applications are being built on RMS, we will have greater revenue potential going forward. Looking into 2024, AI cloud should maintain strong growth in revenue and generate profits at the non-gas operating level. Our intelligent driving bins continue to focus on achieving new eBrick events for Apollo Go. In Wuhan, ApolloGo's largest operation, about 45% of our orders were provided by fully driverless vehicles in Q4. This metric surpassed 50% in January. The increase is because we intensified operations during peak hours in areas with complex traffic conditions and further expanded our operating area in the past few months. This development resulted from our ongoing efforts to improve technology through safely operating ApolloGo on public goals. In China, ApolloGo provided about 839,000 rides in Q4, marking a 49% year-over-year increase. In early January, the cumulative rise offered by ApolloGo exceeded 5 million. The substantial data collected from operations will further help us enhance the efficiency of safe operations. Looking into 2024, we will remain focused on getting closer to ApolloGo's UE breakeven target and managing our costs and expenses to reduce losses in intelligent driving. Upon reaching UE breakeven, we plan to swiftly replicate our successful operations in Wuhan to other regions. In summary, we are facing tremendous opportunities in GenAI and foundation models. We will continue to invest in these opportunities. And at the same time, we will strive to optimize our cost and expense structure for each business line to improve operational efficiency. With that, let me turn the call over to Rong to go through the financial results.