Q2 2023 Baidu Inc Earnings Call
Hello, and thank you for standing by the Baidu second quarter 'twenty two 'twenty three.
Oh.
At this time all participants are in a listen only mode.
After management's prepared remarks, there'll be a question and answer session.
Today's conference is being recorded.
If you have any objection you may disconnect at this time.
I would now like to turn the average new housing start today's conference.
Harlan Baidu director of Investor Relations.
Yes.
Hello, everyone and welcome to <unk> second quarter 2023 earnings Conference call earnings release was distributed earlier today and you can find a copy on our website as well as a request of it on the call today, we have letting me a cofounder and CEO Don <unk> our.
Our CFO Ocean, our EVP in charge of Baidu AI itself with Atg and JV our S E T in China Baidu intelligent driving.
All of the child 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 Securities Litigation Reform Act up 1995.
Forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations.
Or do you just 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 excel.
As required under applicable law, our earnings press release and this call include 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 is available on our IR website at IR Baidu Dot com.
He's accomplished being recorded in addition, a webcast of this conference call will be available on Baidu IR website, I will now turn the call over to our CEO Robin.
Hello, everyone I'm pleased with the heart.
Our performance in the second quarter.
Revenue from online marketing increased 15% year over year, reflecting improvement in advertiser sentiment.
Q2, non-GAAP operating profit for mobile ecosystem continue to strengthen and AI cloud once again delivered positive operating profit.
At the same time, we are facing tremendous opportunity.
Foundation models or more broadly hei.
Today, I would like to share an update on our ongoing business transformation by utilizing Ernie and Ernie Bob That's all I had to our achievement in the Q.
After that I'll briefly go over the operational highlights for each arm.
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 model, well fundamentally transform work across industry.
Overall productivity and accelerating the winder demos that taxation behind innovation.
Right now we are in the midst of a slowly period. This is due to the fact that the hard work with CT into generating AI over the years is now beginning to bear fruit.
This pivotal and the transformative opportunity is setting the stage for Baidu future success, and we couldn't be more excited about it.
Product and service from where you'd be Ernie and already bought to improve we viewed and create new offering.
On the product side, we are reinventing our pod building AI native apps.
Well I can start yeah played.
Well for many years in driving innovation and improving user experience without being a consistent increase in the percentage of third party satisfied by one Scott search result.
At least the first search without displayed on the without page.
Goodbye.
Satisfactory response to our search queries.
We use the early box to enhance their trip.
Making baidu search capable answering complex question that were previously answerable.
For example.
He's crafted a marketing campaign.
Yes.
Proposal four a smartphone launch event.
Or what kind of new energy vehicles will be suitable for our family.
There's a bucket of 300000 army.
Our new boss also enables baidu search to assist the users with more personal life and in depth research on the topic or project.
The feedback from users who have testing new features has been hot.
Another example of product innovation, despite one pool, where many users search for articles papers books or temporary took place document Oh why claims copies and mini format.
We are currently beta testing in AI and assistant feature that can generate customized the content for users based on their request.
User engagement and retention among Baidu, one quick testing user for such feature significant improvement.
For example, users have doubled their time spent online pool after trying out.
The AI assistant Pizza.
And they are more likely to become paying users.
Currently we have over 100 million monthly active users and we believe such an intelligent feature will help attract even more users and convert non paying users to paying users. One it is rolled out on a large scale.
And then Ken weighted AI offering right.
Okay.
Horizons, where our online marketing business.
And we are actively using the technology to build and reviewed our marketing partner.
Actually our online marketing business has relied on me I four year to provide more value to advertisers.
Last quarter, we shared our progress on using AI.
To automate and.
To ultimately ASP creation in text format, which lead to an increase in conversion rate.
Why are we further enable advertisers to use the ITC to generally image and video.
It's natural language.
In Q2, we further improved our monetization system by using generators AI to broaden AD campaign keyword to users their trends driving better monetization for advertisers.
For example, an online professional education companies and conversion.
<unk>.
By about 16% in August after using this new pizza.
We are consistently enhancing our system.
Using generating III, and we expect to introduce more and more new features in the coming months.
Additionally, we have been leveraging generated AI to enhance our auction system. So that it can better match at two search queries and search intent.
Second improvement helped increase Baidu search ECP ASP in Q2 and contributed to the year over year growth.
In online marketing revenue in the quarter.
We're also in active conversation.
Advertisers to get their input on how to further make our marketing product what's best for them.
While we will continue to leverage Ernie and Ernie Bonner to help advertisers create sophisticated and campaigns and improved ROI on baidu.
One other initiative I'd like to mention here is that internally, we introduced an AI assistant within enforced law Baidu health.
Enterprise communication and collaboration platform.
The AI and assistant ultimately, whereas workflows, such as summarizing meeting no chat is Kris and workplace come and go.
Laughing document.
Generally can talk facilitating.
Facilitating knowledge Q any Q&A.
Competing Pat.
Okay, creating meeting by 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 are equal flow to our customers in the future.
In Q2, the number of heartbreak connecting to Ernie bonds continue to grow.
Foundation models large language Thanos and generating AI are expanding our total addressable market, attracting new customers, while also increasing sales to our existing customers.
We are also using learning and already bought to help customers in whereas the industry will work challenges with unprecedented effectiveness and competence.
This further strengthened the capability is awful Ernie and army bought empowering them to take a more significant role in solving industry specific issues.
What's that.
And in the software Department industry, we launched Baidu, Comate and AI coding assistant to the public in June .
Baidu call me eight people in coding and can be used in multiple programming languages.
It has now been widely adopted by Baidu, all R&D team, who have reported a meaningful improvement in their productivity after using comment.
As of today more than 100, all foundations have tested baidu call meat and some of them have already decided to purchase baidu commit to boost productivity in coding.
In the health care industry, we are solidifying our present by utilizing industry expertise and sales network the bulk through our collaboration with leading hospitals in China.
Somehow limited the.
Traditional Chinese medicine clinic chain using our early based on Aldo the paths for the health care industry to support upturn and use our patient care.
Our AI assistant helps doctors right now for patients and like medical images and make informed clinical decisions.
In the past.
It also helps patients find the most astute Bob Hoctor and departments and provide pre consolidation service.
Furthermore, we devote tool for motto training and fine tune data processing labeling and more.
These tools help to lower the threshold and cost for enterprises to use the foundation model on Baidu and support them to train and operate yeah. They.
We are a purpose viewed model's efficiency.
Additionally, baidu AI cloud stands out as our AI optimized cloud infrastructure makes us a top performing platform for cleaning and serving foundation models, including large luxury models.
This is why more and more enterprises are absolutely there.
Digital spend or cloud infrastructure to capture the new AI opportunities.
This is particularly the obvious among internet and tech companies as they are early adopters of Gen II and foundation models.
Shifting our focus to technology as I do.
We maintained an unwavering commitment to improve earnings.
During Q2, we unveiled our new sweep on fine our Lady says they don't be Art Foundation model powered by pedal pedal.
Notably kind of Windows enhancement.
In April .
As a result compared to early sweep on zero version in March early sleep Horne five has tripled its training throughput and it's Chris per second or two P. S. Four.
Insurance has increased by more than 30 times.
Additionally, I am proud to note that IDC recently reported earnings three five surpassed appeared in many areas.
Oh great.
Industry coverage developer tool.
Ecosystem.
As compared to as compared to earnings coupons.
035 is capable of producing safer more responsible and more creative responsive.
<unk> significant improvement in question answering.
<unk> and coding.
Earliest three five is now powering or any box.
With plucky to.
Expand its functionality to cover real time and precise information.
<unk> text to submarine.
Data analysis, and visualization task to video conversion and facilitate the kind of dialogue that include images.
We are committed to reaching our ecosystem by adding more high quality plugging in particular from third party to contribute to the advancement of China's Foundation model.
The ecosystem front, we are determined to make <unk>. The most popular foundation model in China.
Importantly, we believe foundation model should be able to well support problem solving capability for whereas industry.
As a result, we need to work collaboratively with our partners such as enterprises and advisors.
Vipers to continually build industry models and solutions.
Our 8 million developers on kind of pedal off the anchor that we can leverage to build a community for earn.
Yeah.
It attracted almost a 1000 to startups to submit their ideas and prototypes covering why rescue encompassing productivity towards the bathroom sales and marketing companies entertainment companies social platform middleware Goodbye hurt asphalt.
Applications across different industries.
Including education Health care finance it.
We have also launched a venture fund 1 billion RMB to support a lot in developing all kinds of AI native application.
Which will complement our organic growth.
Regulation Baidu has recently.
A poll on Baidu.
Recently appointed as our leader of China, Al and standardized decent task force at the War AI Conference.
This position signifies national level recognition and endorsement of our foundation models and AI capabilities.
Well, we are still waiting for the green light for large scale rollout off already bought we have absorbed that.
The Chinese government has been increasingly supportive of the give us an opportunity I and L. L.
As a market leader, we believe baidu is well capable of benefiting from the opportunity and are contributing to this mega trend in China.
Now let's have a.
Quick little after second quarter operating highlights for each business.
Revenue from AI cloud increased by 5% year over year to RMB, four 5 billion and an employer.
And AI cloud maintained positive non-GAAP operating profit.
Our business has become healthier than ever laying a solid foundation for future growth.
Intelligent driving in Q2, the rights provided by Apollo Gulf increased by about 150% year over year to around 714000, resulting in accumulative right exceeding $3 3 million.
Which is greater than our closest competitor by orders of magnitude.
This leadership in operation, implying competitive advantages in data quantity and quality that's better models.
In the bathroom model and greater safety ratings.
In addition, <unk> has widened its footprint in fully driverless ride hailing services in more cities.
In mid June our Pogo received a permit from Shenzhen P sand government to offer 40 properties ride hailing services to the public's ending.
And in early July in Shanghai, we were allowed to conduct fooling, probably testing Oh pengo as well.
With the expansion of the area and 354 40 families operation along with the improvement.
Our operational efficiency, we witnessed growth not only in the total average daily orders, but also.
A portion of 40 families others within the overall portfolio.
Autonomous driving.
In particular in China, where we initiated fully traveling like hitting survey just one year ago.
E continue to improve in the past few quarters.
On the revenue side.
Daily order volume and revenue per order have searched propelling total revenue to grow. Meanwhile, the cost of per kilometer per car is decreasing as well thanks to improved operational efficiency.
Finally, our mobile ecosystem, our users continue to grow with Baidu apps and they use increasing by 8% year over year to 677 million in two.
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 Montney accelerated in Q2 aided by strength in wireless merged knows this offline exposure, including health care business services local services and travel.
At the same time revenue from E Commerce demonstrated strength and outperformed England, Florida.
non-GAAP operating profit for our mobile ecosystem grow steadily year over year in the player.
Ecosystem continued to generate robust cash flow to fund our investments in AI.
Additionally, in foundation models and generated by AI.
Confident that revenue profits and cash flow generated from our mobile ecosystem well remains strong in the future.
With that let me turn the call over to long to go through our financial results. Thank you Robyn.
Now let me walk you through the details of our second quarter financial results total revenue was RMB 74, 1 billion, increasing 15% one five year over year revenue from Baidu core was RMB $26 4 billion, increasing 14% one four year over year Baidu Pos online marketing revenue was RMB 19 6 billion.
Increasing 15% one five year over year Baidu cost non online marketing revenue was RMB six 8 billion up 12% year over year in <unk>.
Q2 in AI cloud revenue increased by 5% year over year to RMB four 5 billion revenue for IC was RMB seven 8 billion, increasing 17% one seven year over year cost of revenue was RMB 16, 2 billion, increasing 7% year over year.
Costs cost of revenue was RMB 10, 6 billion, increasing 4% yield.
Operating expenses were RMB 12, 7 billion, increasing 14% one four year over year, primarily due to an increase in China's spending promotional marketing expenses.
Depreciation expenses and cloud related expenses, which support of unemployed rich glucose and partially offset by a decrease in personnel related expenses Baidu costs operating expenses were RMB 11, 3 billion, increasing 15% one five year over year Baidu.
Baidu core SG&A expenses were RMB, five 3 billion, increasing 34% year over year SG&A accounting for 20%.
Baidu core revenue in the quarter compared to 17% one seven he left that period last year Baidu core R&D expenses was RMB, five 9 billion, increasing 2% year over year R&D accounting for 23% of Baidu core revenues in the quarter and decreased from 25% same period last year.
Operating income was RMB five 2 billion Baidu costs operating income was RMB, four 6 billion and Baidu costs operating margin was 17% one seven.
non-GAAP operating income was RMB seven 3 billion non-GAAP Baidu costs operating income was RMB, six 5 billion and non-GAAP Baidu core operating margin was 25%.
Total other income net was RMB, one 4 billion compared to RMB 161 million in same period last year, primarily due to the increase in net foreign exchange gains and net interest income.
Partially offset by the increase of favorable loss Frontloading some of your investments.
In context tax expenses was RMB, one 3 billion compared to RMB 25 million in the same period last year, the lower level off the income tax expenses in the second quarter opportunities into two is primarily due to the reversal of certain tax expenses based on the 2021 tax return.
A possible reversals the reason for the increase.
Income tax expenses due to the increase in profit before tax year over year.
Net income attributable to Baidu was RMB, five 2 billion and diluted earning per ads. Yes was RMB 14, one seven net income attributable to Baidu core was RMB 5 billion and net margin for Baidu core was 19% one nine non-GAAP net income attributable to Baidu at Wassa.
It's better now.
non-GAAP diluted earning cried, yes was RMB 22 point double play.
non-GAAP net income attributable to Baidu core was RMB seven 7 billion non-GAAP net margin for Baidu core was 29% as.
As of June 32, new to industry cash cash equivalents restricted cash and short term investments were RMB 200, or one time slot and.
And cash cash equivalents.
<unk> cash and shops in the investment excluding I see were RMB 196, probably not better.
Cash flow was RMB, seven 9 billion and free cash flow. Excluding IC was RMB seven 1 billion Baidu core approximate <unk> 35, selling properties as of June 32000 to industry without prejudice, let's now open the call for questions.
Thank you.
We will now begin the question and answer session.
If you wish to ask a question. Please press star one on your telephone and wait for your name to be announced.
Press Star two.
If you're honest speaker phone please pick up the handset to ask your question.
The first question today comes from Alicia Yap with Citigroup. Please go ahead.
Yeah.
Hi, Thank you good evening management, Thanks for taking my questions. Congrats on the solid results. So can management provide update on the current state of the advertising industry, including how online and offline platform. So I'll be covering can management share about the pace of.
Recovery for key industry and each one has a stronger seasonality and then in addition, Ah can management also discuss the main drivers.
For the growth in this industry and finally, what are the medium term growth targets are.
Paul.
Hi, Alicia this is robin.
Let me answer your question, our online marketing revenue increased by 15% year over year last quarter, I think a number of them are.
However contributed to this growth.
Hum on the vertical side as we are coming out of the pandemic many offline verticals like.
Health care and services local services and travel.
<unk> to hospital for them.
For example, health care, we saw solid year over year growth in both search queries and E CPM.
Which leads to revenue trends we're.
We're seeing this momentum continue.
Offline sector contributes to a sizable amount of our total online marketing revenue to baidu.
And in the meantime, ecommerce continued tool roll in.
Q2 and <unk>.
We men top revenue contributor.
Poor.
Market like the e-commerce, it's highly competitive so more and more merchants they come to realize the value of baidu and they come to us to acquire new users and buyers and also EMA.
They are existing buyers to come back and buy more.
For the second half of the year, we should continue to see.
Pretty clear recovery trend for our online marketing business.
Also remember search remains the most effective form of.
Performance based and this is because users approached search with a clear intent.
And search ads allow us to connect with this intention directly with the most relevant product and service offering.
In fact that E C P M floor.
Search outgrow other ad formats.
In the quarter, reflecting the effective.
Yeah.
Due to the relatively high comp base in Q3, the growth rate might not be at higher Q2, but it should well outperform kind of GDP growth.
Features more and more users are watching the short video on Baidu short videos distributed.
Through the Baidu App again grow by double digits in Q2.
As a result revenue from short video has continued to grow well contributing meaningfully to the overall online marketing revenue were up.
Looking to the mid to long term I believe both user traffic growth and monetization upgrade.
Important growth driver for our online marketing business.
Yeah.
And on the user side I talked about our M. A U S.
It grow by 8% year over year, I mean bagwell EVP.
The growth rate.
In June in the month.
As of June .
If we looked at search we are renovating the baidu search a step by step gives them already but we believe it will provide users with innovative and intuitive experience.
Which will help our mobile ecosystem are getting traffic and a <unk>.
Increase user time spent.
And on the monetization side, we've been leveraging AI.
To improve AD targeting capabilities and our bidding system for a number of years.
And now with Ernie and Ernie bought we are further upgrading the game.
I mentioned earlier that we have made.
Some major improvement in advertising technology by using O L. L N and are generally pay on.
For more innovative and personal lines.
I believe there are a lot of room for growth in this aspect.
I look forward to further our breakthroughs.
Yeah.
It's actually improvements in monetization technology have started to contribute to.
Revenue and EC <unk> usage.
<unk> growth.
Starting from this quarter.
Q3.
Thank you.
Yes.
Yeah.
Okay.
The next question comes from Gary Yu with Morgan Stanley . Please go ahead.
Hi, Thank you for the opportunity to ask questions and congrats on the solid set of results I have a couple of questions related to an AI product and monetization.
Firstly can management share some insight on how users have responded to the integration of any part in multiple products.
Any new development of putrid that have come up with the only bought offerings.
Uh huh.
How with market growth in China.
Specifically in the mobile Internet sector.
And also lastly, though I would like to know more about the monetization.
Right.
I'll play a role in your advertising business.
And also.
Okay.
Update in key industries and use cases related to.
<unk> side can you provide additional information on the business model and also potential revenue specifically Oh.
Like to gain a better understanding on finishing all our cloud performance. Thank you.
Oh, Hi, Gary let me answer that.
Consumer facing products are part of your question and I'll have Don talk about on the enterprise side, especially cloud centers.
I think it's clear we are in a paradigm shift.
In our opinion with our early commitment to AI.
We saw this time was coming we are reinventing our consumer facing products.
AI and Nike mindset.
As I mentioned in my opening remarks, we are rebuilding our search experience.
Users who are testing our early bought enables baidu search and Baidu app tend to ask more questions that were not frequently search in the past.
And they tend to have multi around the conversation and interaction.
This is quite different from the user behavior for traditional starch. Therefore.
Therefore, it's incremental.
Incremental.
And for Us.
We are using generated AI to construct direct answers to use of Congress.
This is typically quicker better and easier to understand answers then.
Expert.
From our existing web pages.
We see increases in click through rate and user retention rate.
For this kind of changes.
Yeah.
We also launched as a testing version of Ernie box.
Our stand alone App that is Uh huh.
<unk>, our latest generation of AI and a L. L M L.
And Oh.
It aims to serve user as a personal assistant.
We see <unk> as a potential new traffic gateway that can connect users to Huawei application Inc.
Third party application.
The address users' needs.
We also launched earlier.
Lucky like.
Like our search like chat file E car et cetera.
The benefits will soon be able to submit the IDE application at urban box hockey.
For Baidu, one cool is the AI assistant feature.
User time spend more than doubled.
The seven day retention rate.
<unk> has increased by almost 10%.
With the AI assistant.
I will not be surprised that we can convert more users into paying dot com.
And charge a premium for the.
New AI function in the future.
Overall, we are highly encouraged by user feedback. This is just the beginning for us to reconstruct all the products and businesses.
And generating AI.
Very importantly, we pass.
Also same promising too.
Promising opportunities to lift the monetization capability by rebuilding our advertising system.
As I mentioned in the prepared remarks, <unk> already bought allow us to continue improving our targeting and our ASP.
ASP bidding system.
All in all I believe that generated AI will help us gain market share of managed products and ultimately become a new growth driver for our online marketing business.
Yes.
Hey, Gary for your second part right so for the impact on our cloud business.
I was first mentioned that you know the beauty of the foundation motor and a generous AI is that it can help organizations in the industry.
To increase productivity and efficiency, we see more and more enterprises willing to adopt six latest AI technologies and that's why we say you know the new technology is increasing our time.
Specifically the early and early part has been helping our customers from different industries to handle their business challenges more effectively.
Whinging from like software in a nice health care education, right plan is even to the public sector.
So the us Ernie and Ernie bought two clean models to build applications and to improve solutions for efficiency gain.
Such as you know improving their customer service producing different cancel the content, writing code, providing knowledge searches within their organizations as.
As well as increasing their sales and marketing efforts.
Now as to the business models that you just asked I think is still at a very early stage and it's evolving.
Though we have our preference, but we're pretty open and we'd like to take any effort to speed up the groups of generative AI.
So in addition to providing AI computing infrastructure to our customers. We also consider charging customers for the usage. That's why early inherent in box or using our applications such as Comate Robin just mentioned.
And also we can charge our customers for a re cleaning or operating their own models on our platform.
Or we can deploy the foundation models, you know to our customers' private cloud on the project basis.
So we expected the revenue generated from six new opportunity to be a great deal.
But it would be the long term potential is that and that's it. So we'll continue to invest in that Ernie and here he bought to serve our customers well so for the long term.
That's it Gary.
Okay.
Okay.
The next question comes from Lincoln call with Goldman Sachs. Please go ahead.
Thank you management for taking my question and congrats on the solid quarter.
So my question is about the cloud business.
So could match and help us understand sort of the main reason for the revenue slowdown for cloud this quarter and when do we expect that revenue to pick up on Saturday So again.
When we're looking into the second half our entire <unk> suite.
How is that revenue gross high trajectory expected play out and what factors might be driving that.
And also on the profitability side I'm also curious.
What that is a profit breakeven on a non-GAAP operating level is sustainable and what's the current trend off with it yeah cloud profitability. Thank you.
Okay. Thank you for the question I'll take it.
So our cloud revenue growth.
A 5% year over year in the Q2 and we.
Turning to generate profit on the non-GAAP operating level.
It means that our business is becoming healthier and are laying a solid foundation for sustainable growth in future.
The gross rate was mainly dragged by governance related projects.
Each year, they take a longer time to recover after the pandemic.
But many of enterprise related projects in the key verticals like manufacturing utilities and Internet service.
<unk> demonstrated quite solid growth in the Q2.
As I just mentioned before we see strong interest from existing and new customers in the general economy.
Well some of them directly leverage Ernie already bought to enhance their products to improve their operational efficiency. So some of them actually choose our AI infrastructure. That's the foundation for their models and applications.
Although it may take a little while to see significant revenue contribution, but this opens up a very new space for our our club business.
There were already in.
Leading position.
So on the profit side.
Believe we can keep generating operating profits from Ti closed as we did in the previous quarters.
So this indicates that actually our business is becoming increasingly healthy.
But we are going to keep standardized.
Our AI solutions that can effectively address a critical pinpoints and then replicate them from one project to another which we believe will further.
What would the margin and profit.
The next question comes from Kenneth Fong with Credit Suisse. Please go ahead.
Hi, Good evening management. Thank you for taking my questions and congrats on this I'll accept the results.
I have a question regarding to generate if AI recording two recent introduce interim measures to regulate generate if AI service by the government could you provide insight into whether it does suggest an imminent authorized authorization after lost language models.
Additionally, do you have a projected timeline for the rule of the applications utilizing these models. Thank you.
Okay.
Thank you for your question Ken.
We've seen the government continuing to support for Tech innovation.
Including AI and foundation models.
I I think I get to them.
Fine.
Is that to the.
New guideline none the less.
Deprecation that came out.
In mid July about how true used generally they've AI technology and related services in China.
This is a.
The new version and then this version went a effectively a I think in August 15th compared to the previous version.
The first and you can probably tell.
It's more of a co innovation and regulation.
<unk>.
We're still waiting for the Green light for a large scale rollout of our new bot.
Alright youth in.
In the consumer facing apps.
But as I said before the government have increasingly recognized and already bought.
Which we believe provide.
Good foundation for the eventual release up already bought on large scale.
Generating AI, it's pretty new and it's understandable that people might have concerns about things like use of probably see IP protection.
Six.
So there should be certain.
Regulatory requirements in place.
And Baidu, we have accumulated extensive experience.
In providing appropriate information to.
The vast amount of internet users and.
And we are a leader in.
Not only AI technology for commercial purposes, but also looking out for good.
In fact, we are working closely with the.
The regulator then onto organization to push the divestment and a.
Proper usage also countering with me.
So we believe we are well positioned to benefit from this opportunity and.
Contributes to this the megatrend of.
Hum.
Sure.
Generating of AI.
Hello.
Well, we don't happen exactly date for for Edison.
That trend it's.
Very promising and we are quite optimistic.
Future.
I'll have a better.
Regulatory involvement.
The next question comes from <unk> Shah with UBS. Please go ahead.
Hey, Good evening management. Thank you for taking my questions and congrats on the solid results. My question is also related to the foundation model how can we assess our Baidu is foundation motto is performance.
Comparing to other Chinese peers.
And also related to that when we think about industry specific model versus foundation models, how how the balance between these two oh, well will shape up for the broader AI landscape in the future and now we have more companies I'm offering or focusing on motto is tailored to specific industries. So how does.
Management proceed the landscape in terms of opportunities and competition. So what are our competitive edges. Thank you.
Yeah.
It's a very good question.
When it comes to foundation modeling, China, earning three five clearly stand out people have witnessed is that you know faster iteration and improvement over the past five.
Five six months Ah or.
Our unique four stack AI capabilities differentiate us from our competitors and give us an edge in the market.
As mentioned in my prepared remarks, and IDC report recently published unnamed Ernie.
Three five at the leader across whereas ethics.
Like many other technology Foundation model speed of innovation.
All the applications that Houston market.
Baidu is an AI company with a strong portfolio of Internet products.
This product all being reviewed and we constructed with already bought.
Therefore drive the innovation of Ernie into the right direction.
And all of the work, we know what kind of problem to solve and I I think many other peers don't really know.
Holton domain.
Testing.
To evaluate the effectiveness of their models.
We also have tens of thousands of cloud customers testing, our new bot.
They provide valuable feedbacks.
The improvement too.
Yeah.
As for that.
But industry specific model I think I've mentioned.
He should be built upon the most powerful foundation model.
I think that that.
With time Foundation models will have rapidly evolved given its.
Strong capabilities to learn new subjects and gain industry impact.
And the stand alone industry, especially the model will have a hard time to keep up with the pace of innovation.
In fact, I think the earnings three five became available and increasing number of customers have told us that Oh learnings.
<unk> three five is visibly more advanced than earning $3 zero and.
It has helped them solve a growing number of pain points.
And as you can imagine we are.
Working toward.
<unk> three point, earning full point.
And.
<unk> launch it by the end of the year.
I believe that ultimately are only a select few companies well reached this level of advancement for foundation models.
And baidu well be one of them.
During this transition.
Transitional period, we are focused on multiple initiatives to drive the adoption of foundation model.
We're working hard to read two to build earning power applications and solutions for different industries and their scenarios.
Baidu cold meat.
It's such an example.
And with.
With the upgrade to <unk> $3, five we swiftly rolling out to empower.
Nebraska is to create industry specific models and applications like that.
Tackles, the our own challenges.
Also we offer.
Mass platform, which.
In truth, not funny, Ernie Corso a variety of models.
This allows businesses to easily viewed a fine tune and Oh.
Operate their own models using their own data.
We provide a set of valuable tools on our platform.
Enabling our customers to easily enhancing your model training and application development.
All of our enterprises can directly access earnings capability at school API to enhance their businesses.
Recognizing that in the early stages the enterprise.
Our archive security so.
So we do provide the flexibility of using our foundation model services on both the.
Public and.
Private client.
Yeah.
Our self to about a four layer AI architecture is our.
Core competitive advantage because.
We deliver better modeled performance when we start.
Sure.
As shown in the testing phase over the past.
A few months.
Our stress testing model 'twenty efficiency and cost effectiveness.
Turn attracts more enterprises to partner them and stuff.
So.
We gained more and more industry now hall and besides that.
And building a reinforcing positive cycle to further improve army.
Our ultimate goal is to cultivate an AI native.
Ecosystem centered around her.
We believe that the <unk> of the foundation model lies in driving a wide array of high quality AI deep applications.
Much like an operating system.
Some of the applications.
Ah built by us while others will be used by <unk>.
I would say most will be viewed by our ecosystem partner to address.
The industry specific challenges.
To enhance its the ecosystem, we're happy to invest in other companies to complement our organic growth.
Just as I mentioned in the prepared remarks, we hosted a baidu already cut innovation challenge and launched.
<unk> a venture fund to support startup in developing all kinds of AI native applications.
To sum up we will continue to improve already I mean, Ernie easy to use and comp and the practice in any industry.
Yeah.
To not only return or fine tune models on top of Bernie, but more importantly, a lot.
Language, Ernie and already bought to develop their own applications.
We aim to make Bernie the preferred choice of Mt.
I have heard so that more and more applications will be built upon hardy and making our ecosystem.
Library.
Thank you.
Okay.
The next question comes from Miranda Zhang with Bank of America. Please go ahead.
Thank you good evening management. Thanks for taking my question I'm. So lately open source AI models have attracting significant market attention. So can management provide your insights into baidu is perspective on those fronts and the strategy regarding the open choice sports.
The closed AI models. Thanks.
Yeah.
Yeah.
Thank you.
This is a very interesting question and I believe they're all quite different views on this.
I think both open source and close stores Foundation models will coexist for Wow.
In fact actually we have already seen many models are trained on top of a day open source Foundation models pouring tons of applications, you know and even today on our call at the playful.
But it's really tough actually for open sourced foundation modal to keep evolving and getting better you know due.
Due to the lack of them.
Effective feedback loops, which should play a super important role improving the foundation models.
And Additionally building and upgrading the foundation model is can be very expensive.
So it is really important to build a durable business model you know two founded the sustainable improvement if the foundation models.
With that they can finally provide long term value to the market.
So for us, it's our priority that Ernie Keith.
Keeps evolving quickly and remains the market leader, which can then attract more and more customers to use our platform to accrete.
Entity the.
Apps and improve their business.
Their feedback from the real worst scenarios, we can further improve our foundation modems.
Looking ahead you know.
I believe that that will be limited to supply if the advanced Foundation models, you know weather open source or a closed source.
Or even our industry specific available in the market.
So like we just said talk to me.
The industry.
Progresses, and enterprises will need advanced models to develop maura.
Our sophisticated applications and I bet Ernie will be one of the few foundation models that can satisfy those evolving demands in the long run.
Yeah.
Okay.
Yes.
The next question comes from Alex Yao with Jpmorgan. Please go ahead.
Yeah.
Hi, Thank you management for taking my question and congrats on the strong quarter.
Have a couple of questions margin outlook, considering the opportunity.
<unk> ended March language models, how should we think about the investment trajectory for the second half this year.
Additionally, more once we start large scale rollouts, what's direct cost will be incurred partially compare the modest mouse army, Bob or Lance language model related to products related products. So Dan D E.
Search et cetera.
More broadly the nation.
Slide directional color on the trends of Baidu core margins when we look into the second half this year.
After the significant cost reduction and efficiency improvements implemented last year, what would be the key drivers.
The path moving forward. Thank you.
Thank you Alex let me throw questions visit students.
I think previously Robin has karate talk about lots of opportunities of learning onion boss. So first off so in the first place I would like to.
To reiterate that we are highly committed to the long term investments in this promising areas.
To support the fast upgrade all earnings what have you invested in compensation infrastructures.
If youre Lynch.
Our cash flow statements you probably can see that the baidu cost capex in Q2 half the increase over last year.
The increase is mainly due to higher purchase to support the training and iterations off.
<unk> of all our AD campaigns, such as Ernie.
The boss.
But the impact on the income statement, which is quite manageable at SB cost such hover depreciations in general we are spread over the next few years and the impact on the near term profitability, it's not essentials.
The investments is expected to continue and the magnitude of the future investments will be highly correlated to that pace.
<unk> expansion.
Rather than only supporting the motto training.
Which means that in the near future spending will be sponsor by the incremental revenue, which is generated from the earning earning boss a formalized our possible what show cycles.
And regarding to the margin for the financial model and related products.
I believe it is a little bit earlier to discuss at a current stage.
Small those still evolving.
Rami as mentioned earlier in part by earnings unless such advertising.
It will become more customized and which will result increase our advertisers additions for cloud services are still has just put buyback le hei and financial models with empower various industry.
The efficiencies across different industries, so formula for on a long term perspective, we believe that our customers will be increasingly motivate you to leverage our services to enhance desk efficiencies and increasing our pricing power and resulting in higher margins as compared to our current class.
Business.
If a low into the second half of this year for mobile ecosystem will continue to serve us.
<unk> cash costs will accrue in the long run are across the mobile ecosystem is too because it's.
As to consistently achieve high modules.
Fuller AI cloud sites and to achieve for the profitability on a non-GAAP op level.
Improved margins overtime for intelligent driving how Huawei suddenly believes that there's a huge long term opportunities. We will continue to make sure how would you invest in a measured pace as a whole. It's hand focuses on developing sustainable growth strategy for each businesses.
We should prioritize the long term thinking and additions we tend to invest in earning ball to have wanted you all are huge opportunities presenting pilot foundation models.
Thanks, Alex.
Yes.
Yes.
The next question comes from Thomas Chong with Jefferies. Please go ahead.
Good evening, Thanks management for taking my questions and congratulations on a strong set of results.
I have two questions. The first one just about all about botox. He speaking this management mentioned that the do the economics in some cities are improving our core.
Could management share the logic and the efforts taken behind it.
Your plan in terms of the city expansion and the volume.
Cat food each autodesk operations in the upcoming quarters. In addition, when can we expect the alky such vehicles to be launch what's the projected size of the vehicle fleet for this year and how could it potentially impact the cost of my second question is on auto solution.
We are co Moldova, you'll hit the wall in the later half of this year and this year and how should we size up therefore financial impact on the books. Thank you.
That's part of the pension 15th of June .
I will start from the Gulf Hectic Hudson.
Autonomous driving can answer where things are rapidly gaining traction in major cities.
Or why the and why did they did hurt that they looked at the people who come into all I'll gladly, it's the technology.
This data is determined.
Hawkins of 50 M P.
You can see on the audio experience.
<unk> operation.
As a result.
In Canada, the drum about from both customers and regulators.
Enabling us to expand into new locations.
And so you can either tend to equate all put it.
This positive feedback loop or lack of operation also trials of the prominent hill or model.
Did they improve the model.
Pension operation.
Poor planning path towards a bomb Franco was a global meeting in autonomous driving technology.
On the logic behind it the UE implement yeah I go back to the takeover hands off in Asia as an example.
Cool.
We have continued to go up.
And we'll have in the past year.
If you compare what is the situation by uncle Youll notice of that.
Are they all fully if you have any feel free fire has extended significantly green from finally close.
One year ago to almost 200 at the August this year.
Secondly, the operation or alcohol for use gravity is supposed to be if it hasnt expanded by a long term sinking boat.
Meanwhile, the operation of Aqua has been important and yet covering both peel off in the morning, and the U S.
That's all at the later Tonight accommodation.
Suddenly.
It can also mean more passengers.
Becoming lateral with the largest with arrow.
The rest are providing whether you're traveling for ride hailing in the work.
And importantly in terms of the order.
All shell fleet orders.
All Autonation has increased from 10% in late August 12 55.
In philosophy.
Also procrastination about contributor towards the improvement of O U E.
Looking ahead, we will continue to focus on the operation in case it is on the operation.
Good.
Like the Beijing and Wuhan.
To further expanded the fleet of five and operation Ironwood, Oh drought in the operation and does that gradually improve with the youll need to take on August <unk>.
NASA, we aim to enter into multi use a tool condenser, putting three I'll be at the right cadence or was it.
And at the scale of what he's traveling into commercial operation.
Regarding our key states.
So Tom last fall protection, it's a proceeding at patent.
A temporary items.
They could need Costa advantage with mass production costs below the pie so keep a pinch comparator with the protest of the generation.
So it will be gradual consummate authority, yet operation, we cooperate preparing so you'll need to economic closer to profitability.
Hum.
I'm great.
Programming.
This led to a drilling program to now.
They meet our standards intense overgeneralization and 15.
Trading tools hedges by consumer demand fall.
<unk> commenced the panda efficiency.
But that being this year.
So you tend to price communication in China's EV market has led to a general decline in the profitability within the automobile sector.
And the OEM.
And Oems have been showing solid tenant demand with Paul in Paddington traveling.
And leaning more toward half of talking my roads to the accumulator steel.
We just had a fire pit and it is also I have to qualify because they were all toward solutions in Shanghai.
However, we feel it was a market opportunity ahead.
In the long run.
I'm totally driven by the kill Cmos demand for intelligent driving.
What are your plans for longs off peaky navigation pallets of product Apollo safety Apollo safety do you have in mind.
Uh huh.
Hence the later this year.
As we look ahead, we believe the change in the also in pest and hygiene clause in Paddington grabbing whether you're asking opportunistically in the field trial.
And we will capitalize on this change with hockey agent next technologies and Pittsburgh is it smaller.
Thank you.
Yeah.
This concludes our question and answer session and does conclude our conference for today. Thank you for participating you may now disconnect.
Yes.
Yes.
Okay.
Okay.
Okay.
[music].
Okay.
Okay.
Yes.
Yeah.