Q3 2024 Baidu Inc Earnings Call
Thanks for watching!
Speaker Change: Hello and thank you for standing by for BeiDou's third quarter 2024 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, Juan Lin, BeiDou's Director of Investor Relations.
Thank you for watching!
Speaker Change: Hello everyone and welcome to Baidu's third quarter 2024 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 EVP in charge of Baidu mobile ecosystem group MEG.
Speaker Change: Bo Shen, our EVP in charge of Baidu AI Cloud Group ACG, and Junjie He, our interim CFO.
Speaker Change: After our prepared remarks, we will hold a Q&A session. Please note that the discussion today will contain four looking statements made under the safe harbor provisions of the U.S. Criminal Security Dedication Reform Act of 1995.
Speaker Change: Forward-looking statements are subject to risks and uncertainties that may cause actual results to deform materially from our current expectations.
Speaker Change: For detailed discussions of these risks and uncertainties, please refer to our latest annual report and other documents filed with ICC and Hong Kong Doctors' Church.
Speaker Change: Baidu does not undertake any obligation to update any formal statements.
Speaker Change: except as required under applicable law. Our earnings press release and this call include discussions of certain unaltered non-GAAP financial measures.
Speaker Change: Our press release contains a reconsideration of the analytic non-gap measures to the analytic most directly comparable gap measures, and it's available on our IR website at ir.baidu.com. As a reminder, this conference is being recorded. In addition,
Speaker Change: 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.
Robin Li: Hello everyone. Baidu Core total revenue was RMB 26.5 billion. That's roughly flat for the third quarter on an year-over-year basis.
Robin Li: Revenue growth from AI cloud was 11%, continuing its double-digit growth trajectory, thanks to the sustained momentum in gen-AI related revenue.
Robin Li: Our non-gap operating profit and non-gap operating margin remained stable, which demonstrates the resilience of our bins.
Robin Li: While navigating the ongoing macroeconomic weakness, we remain patient on our strategic focus of AI-driven innovation.
Robin Li: with a particular emphasis on transforming our existing products and businesses as well as fostering a new ecosystem for earning.
Robin Li: Despite near-term headwinds, we are deeply convinced that this AI-focused strategy will position us well to capture significant growth opportunities in the long run.
Robin Li: Underpinning our long-term strategic focus is the advancement of our AI capabilities, which serves as the cornerstone of our AI-driven transformation.
Robin Li: In the third quarter, we continue to improve learning through pre- and post-training, optimizing model efficiency while tailoring to the needs of our diverse application scenarios.
Robin Li: Our flagship model, Ernie 4.0 Turbo, has achieved notable improvements in inference efficiency.
Robin Li: with throughput increasing by 48% compared to its debut in June.
Robin Li: The efficiency gains were driven by the optimization of our self-developed four-layer AI infrastructure, and we expect such improvements to further reduce model inference costs going forward.
Robin Li: We have also expanded our lightweight model offerings with the introduction of Speed Pro and Light Pro in the third quarter. As enhanced versions of their predecessors, Speed Pro and Light Pro feature lower latency, higher throughput, improved stability, and superior accuracy.
Robin Li: Over the past 24 months, we have focused on resolving LLM hallucinations through RAG, Retrieval Augmented Degeneration.
Robin Li: However, we observed that image generation still faces widespread hallucination issues, leading to inaccurate and logically inconsistent outputs.
Robin Li: particularly in e-commerce and marketing scenarios where sellers need to generate images that precisely match their text descriptions.
Robin Li: Aiming at mitigating hallucinations in text-to-image generation, we launched Ernie IRAG at Baidu World 2024 to revolutionize image generation.
delivering more precise and demand-driven results with substantially enhanced
Accuracy.
Robin Li: These additions have made our offerings more comprehensive, extending the reach and effectiveness of earning across diverse scenarios.
Robin Li: Thanks to Ernie's enhanced capabilities, wide-ranging applications, and improved cost efficiencies, we've seen a substantial increase in API costs. In November, Ernie handled approximately 1.5 billion API costs daily, a significant jump from $600 million in August.
Robin Li: The certain API call volume and token generation demonstrate strong market adoption of Ernie validating its value in real-world applications.
Robin Li: Powered by the enhanced early models, we are achieving comprehensive penetration of AI capabilities across our entire product line, from consumer facing products to enterprise solutions.
Robin Li: Our continuous efforts to transform search have yielded promising progress that's encouraging user-centric outcomes emerging this quarter.
Robin Li: On Baidu app, where the majority of our search queries were conducted, an increasing number of users are engaging with generative content, reaching nearly 70% of its monthly active users.
Robin Li: Users exposed to AI-generated search results spent longer time on Baidu, used more complicated queries, and were more likely to return the next day. These positive changes become increasingly pronounced from quarter to quarter, indicating that our GenAI-enabled search is better serving users' needs and enhancing user satisfaction.
Robin Li: We have also observed changes in user behavior patterns, suggesting Baidu is evolving beyond the traditional search in users' minds, serving as a more convenient destination for their needs.
Robin Li: Users are staying longer to interact with our AI features after initial queries. They are proactively engaging in more complex, multi-round conversations with the growing interaction frequency.
Robin Li: reaching tens of millions of daily interactions. Users are also moving beyond pure search to content creation on Baidu.
Robin Li: For example, during this year's Mid-Autumn Festival, we saw a surge in both image creation and text generation.
Robin Li: indicating changes in how users interact with our platform and their growing exploration of earning-powered functions.
Robin Li: These changes inspired us with new ideas for future enhancements. Going forward, we will enrich our content diversity, explore more comprehensive and unified ways of content presentation and promote chat-based interaction.
Robin Li: We envision agents as the most prominent form of AI-native application and a transformative force in driving meaningful innovation. This quarter we continue to enhance early agents capabilities and expand their applications across various scenarios.
Robin Li: We have witnessed significant growth in the conversation rounds with early agents, reaching an average volume of 15 million daily.
Robin Li: The recently released Top 100 Agent List at Baidu World covers a wide array of scenarios and industries, showcasing the breadth and variety of our agents.
Robin Li: The earning agent we created for BYD demonstrates how agents can enhance brand engagement and create significant value.
Robin Li: Rather than navigating through traditional websites, users can now discover BYD through dynamic conversations with its agent on Baidu.
Robin Li: This innovative approach has naturally inspired users to explore the brand more proactively, leading to a higher engagement and stronger purchase intent.
Thank you for watching!
Robin Li: The effectiveness of the agent is further validated by the fact that around 70% of users who engaged with the BYD agent returned to Baidu within 7 days for BYD-related searches.
Robin Li: highlighting how the agent's compelling content sparked genuine interest and motivated further brand exploration.
Robin Li: Beyond BYD, we also partnered with leading enterprises such as Sansung and Yanghe to build their own agents on Baidu.
Robin Li: While these examples demonstrate the versatility of earning agents, we believe their transformative potential is just beginning to unfold.
Robin Li: We envision agents redefining information in the AI era, much like how websites shifted the Internet age, or apps and social media accounts transformed the mobile Internet era.
Robin Li: We believe agents are emerging as the fundamental carrier of content, information, and services.
Robin Li: What sets agents apart is their human-like capabilities. They can serve as your sales representative, customer service agent, or personal assistant, delivering content and services in a more intelligent and interactive way.
Robin Li: As we continue to advance our AI technology, we expect agents to unlock unprecedented value for our users.
Thank you for watching!
Robin Li: Another standout in our product transformation journey is Baidu Wenku, our one-stop shop for document creation.
Robin Li: Since the official ramp-up of Wenku's AI renovation late last year, the MAU of AI-enabled features has grown rapidly, exceeding 50 million in September, representing a year-over-year increase of over 300 percent.
Robin Li: Users of AI-enabled features demonstrated a stronger willingness to pay, contributing to accelerated growth in our paying user base.
Robin Li: In the third quarter, Wenku's subscription revenue continued its robust growth trajectory, reaching a year-over-year growth of 23 percent.
Robin Li: We continue to roll out new AI-powered features to facilitate users in their thinking, learning, and creative process.
Robin Li: After enabling natural language instructions for PowerPoint slide building and editing last quarter, we introduced a new feature to transform even the most basic text slides into visually stunning slides.
sophisticated and professional presentations.
making presentation creation easier than ever and significantly boosting productivity.
Robin Li: With a 14-year long history at massive user base, Wenku is now experiencing a remarkable transformation as AI technology rejuvenizes this product and on
with unprecedented capabilities.
Building on this momentum, we expect such random...
Robin Li: We expect such revolution to ripple through our entire product ecosystem, unleashing extraordinary potential and creating breakthrough innovations.
Robin Li: Our vision extends beyond our consumer-facing products. By collaborating with our clients across businesses and public sectors, we can unlock greater potential of our advanced AI technologies.
Robin Li: This quarter we partnered with Yum! China, a leading Chinese restaurant company, to deploy Ke Yue, our ready-to-use customer service product powered by Ernie.
Robin Li: Key advantage lies in its superior intelligence and ability to significantly reduce the need for human intervention in customer service.
as its AI capabilities can resolve most user inquiries independently.
Robin Li: This simplified solution has enhanced customer service efficiency and reduced operational costs, driving substantial growth in Courier's API call volume, with peak API calls reaching several millions a day.
Robin Li: The partnership serves as a strong testament to the reliability and excellence of our product.
Robin Li: Another example that highlights the expanding use scenarios of earning is Kaoshibao.
Robin Li: an online exam preparation platform that leverages Ernie 4.0 Turbo and Ernie Speed Pro through public cloud API calls.
Robin Li: Initially, Klaus Schwab's question bank was limited by missing answers and explanations.
Robin Li: Ernie tackled this by automatically generating answers and explanations for existing questions.
while also creating new answer-explanation pairs.
making the question bank far more effective.
This resulted in a 150% increase in effective questions.
in Khakzhiba's question bank.
Robin Li: Besides, by replacing manual explanation writing, the cost of creating explanations dropped by 99.8%.
Robin Li: Additionally, Ernie powers real-time tutoring services where users receive instant explanations from AI tutors by simply uploading their questions.
Robin Li: With this improvement, users showed stronger willingness to pay, as the paying user ratio increased dramatically by over 100%.
leading to a 246% increase in revenue.
Robin Li: Our strategic focus on AI innovation continues to drive transformation in consumer-facing applications as well as industry-wide solutions.
And we are seeing great results.
Robin Li: Now, let me review the key highlights for each business for the third quarter.
Robin Li: Gen-AI related revenue maintained strong growth momentum and remained a key growth driver, accounting for about 11% of our total AI cloud revenue in the third quarter, up from 9% in the previous quarter.
Robin Li: This trend reflected increasing recognition of earnings value among enterprise customers.
Robin Li: Our strong technological advantages in AI infrastructure served as a key enabler for this momentum.
Robin Li: During the quarter, we advanced our AI infrastructure management across our GPU cluster that is composed of tens of thousands of GPUs, achieving 99.5% valid LLM training time.
Robin Li: Also, we further improved our capabilities in combining GPUs from different vendors for training and hosting models by minimizing throughput loss to within 5%.
Robin Li: With this advancement, we further reinforce our position as a leading provider of the most powerful and cost-effective AI infrastructure.
Thanks for watching!
Robin Li: Our mass platform continues to evolve with a strong focus on developing comprehensive toolkits that enhance the model and app development experience for our customers and partners.
Robin Li: In Q3, we improved model builder to make lightweight model fine-tuning easier.
Robin Li: With ModelBuilder, lightweight models can be fine-tuned into purpose-specific models, achieving performance comparable to Ernie 4.0 while offering faster inference speed at lower costs.
Robin Li: We are elaborating our AI capabilities to improve internal R&D efficiency and facilitate enterprise application development.
Robin Li: Internally, we've widely adopted AI coding through CodeMate, our coding assistant for developers.
Robin Li: AI Now contributes to generating over one-third of our new code with our developers providing oversight and approval.
Robin Li: We are also lowering the barrier for enterprise in AI native application development.
Robin Li: Enterprises can build sophisticated applications through simpler approaches on our mass platform.
Robin Li: For example, using natural language instructions with minimum coding efforts to develop the most part of a business application.
Robin Li: We introduced MiaoDa at Bidu World 2024, marking our first step in delivering no-code capabilities.
Robin Li: We are excited about its potential to democratize AI, as we believe expanding AI accessibility beyond developers will drive innovation at a speed we've never seen before.
Robin Li: Meanwhile, the growing recognition of earnest capabilities continues to attract new clients.
Robin Li: with notable partnerships established this quarter with FlashX, KingD, and ChuHuCar.
Robin Li: This partnership with leading enterprises reflects the strength and credibility of Baidu AI Cloud.
I'm sorry, I'm sorry, I'm sorry, I'm sorry
Robin Li: We have also seen significant growth in adoption from mid-tier enterprise customers, as reflected in their increasing investments in GPU public cloud service. In Q3, the incremental revenue from the mid-tier enterprise customers on our public cloud increased by 170% quarter over quarter.
Robin Li: With this positive trend and development, we reinforce our long-term optimism about the growth trajectory of our AI cloud revenue stream.
Robin Li: For our mobile ecosystem, Baidu Core's online marketing revenue declined by 4% year-over-year in the third quarter due to challenging macroeconomic conditions, our ongoing AI-driven search renovation, and an evolving internet content ecosystem.
Robin Li: In the third quarter, we saw continued growth in incremental ad revenue from Gen AI and LLM enhancements to our advertising system.
Robin Li: This reflects our ongoing efforts to refine our monetization system and marketing platform, particularly in improving ad targeting capabilities and scaling up real-time ad generation.
Thank you.
Speaker Change: We believe agents open up a lot of new possibilities for our advertising business.
Speaker Change: This quarter has seen significant improvements in early agents for advertisers, in terms of response accuracy and intent recognition capabilities.
Speaker Change: As these agents become increasingly sophisticated and effective, we've observed a growing recognition of their value among advertisers. As of September, approximately 20,000 advertisers have been generating ad spending through Google
are earning agents on a daily basis.
© The Bulletproof Executive 2013
Speaker Change: A case in point is one of our healthcare clients. After building its own agent, the client was impressed with its performance. They then proactively contributed their proprietary medical insights to further enhance the agent's capabilities.
Speaker Change: Through continuous fine-tuning, the agent demonstrated good intelligence and service quality, particularly in terms of dialogue accuracy and context comprehension.
Speaker Change: This enables the agent to deliver more professional and accurate responses to customer inquiries around the clock.
Speaker Change: Through extended conversations, the agent can better identify customers' underlying needs and provide tailored service recommendations.
Speaker Change: 13.6% and lead conversion rate increasing by 50% from July to September.
Speaker Change: Overall, while our online marketing business is going through a transitional period, we remain steadfast to aggressively drive forward our AI transformation. We are confident this will deliver long-term value for our users, customers, and shareholders.
Speaker Change: Turning now to intelligent driving. We've reached another significant milestone. The sixth generation of our autonomous vehicle, RT6, is now operating on public roads in multiple cities in China.
Speaker Change: This not only expands our vehicle lineup, but also reaffirms our commitment to scaling operations and providing users with safer, more affordable, and comfortable mobility experiences.
Thank you for watching!
Speaker Change: Following our achievement of 100% fully driverless operations in Wuhan last quarter, the proportion of fully driverless operations nationwide surpassed 70% in the third quarter and 80% in October.
Speaker Change: We are delighted to share that in October, we achieved 100% fully driverless operations in Chongqing, where we currently operate a growing fleet of autonomous vehicles.
Speaker Change: We continue to scale up our services in third quarter with Apollo Goal providing about 988,000 rides to the public nationwide.
representing year-over-year increase of 20%.
Speaker Change: The cumulative rides provided to the public surpassed 8 million in October, further solidifying our leadership in smart mobility.
Speaker Change: We are fully confident that our autonomous driving technology has achieved technical maturity with proven safety and reliability through extensive testing and real-world operations.
Speaker Change: While our technology is ready for wider deployment, safe and responsible autonomous driving requires a solid foundation of a harmonized regulatory framework.
Speaker Change: We remain patient as we continue to work alongside the evolving regulatory framework, standing ready to rapidly scale up our operations when the time is right.
Speaker Change: Meanwhile, we are also actively exploring expansion into additional cities and new operational models, such as asset-light strategies to enhance operational resilience and unlock new growth potential.
Speaker Change: In summary, while our overall revenue growth remains measured in the near term, we have strong conviction in our strategic direction, supported by encouraging progress across multiple fronts.
Speaker Change: from increased user metrics in search to the growing adoption of our large language models and cloud solutions.
Speaker Change: Looking ahead, we're confident that our strategic focus and execution will yield meaningful returns.
Thank you.
Speaker Change: Before I hand over the call, I am pleased to welcome our interim CFO, Junjie He, or Jackson.
Junjie He: With that, let me turn the call over to Jackson to go through the financial results. Thank you, Robin. Hi, everyone. I'm honored to step into the role of Interim CFO. Following my initial conference call, I look forward to engaging with analysts and shareholders in the coming period.
Junjie He: Now, let me walk through the details of our third quarter financial results.
Total revenues were RMB 33.6 billion, decreasing 3% year-over-year.
Junjie He: Revenue from Baidu Corp was RMB 26.5 billion, which was basically flat from last year.
Junjie He: Baidu's online marketing revenue was RMB 18.8 billion, decreasing 4% year-over-year. Baidu's non-online marketing revenue was RMB 7.7 billion, up 12% year-over-year, mainly driven by AI cloud business.
Revenue from ITE was RMB 7.2 billion, decreasing 10% year-over-year.
Junjie He: Cost of revenues were RMB 16.4 billion, increasing 1% year-over-year, primarily due to an increase in traffic acquisition costs and the cost rate to AI cloud business.
Junjie He: partially offset by a decrease in personnel-related expenses and the cost of goods sold.
Junjie He: Operating expenses were RMB 11.2 billion, decreasing 5% year-over-year, primarily due to a decrease in personnel-related expenses and partially offset by an increase in channel spending and promotional marketing expenses.
Junjie He: Baidu cost operating expenses were RMB 9.9 billion, decreasing 5% year-over-year.
Thank you.
Junjie He: Baidu core SG&A expenses were RMB 5 billion, increasing 4% year-over-year. SG&A accounted for 19% of Baidu core's revenue in the quarter, compared to 18% in the same period last year.
Junjie He: Baidu core R&D expenses were RMB 4.9 billion, decreasing 13% year-over-year. R&D accounted for 19% of Baidu core's revenue in the quarter, compared to 21% in the same period last year.
Junjie He: Operating income was RMB 5.9 billion, Baidu cost operating income was RMB 5.7 billion, and the Baidu cost operating margin was 21%.
Junjie He: Non-Gap Operating Income was RMB 7 billion, Non-Gap Baidu Co-Operating Income was RMB 6.7 billion, and Non-Gap Baidu Co-Operating Margin was 25%.
Thank you very much.
Junjie He: Total other income net was RMB 2.7 billion, increasing 40% year-over-year, primarily due to an increase in fair value gain from long-term investments and disposal gain, partially offset by increase in net foreign exchange loss arising from exchange rate fluctuation between renminbi and the US dollar.
Junjie He: Income tax expense was RMB 814 million compared to RMB 1.3 billion in the same period last year.
Junjie He: Net income attributable to Baidu was RMB 7.6 billion and diluted earnings per ADS was RMB 21.6
Junjie He: Net income attributable to Baidu Corp was RMB 7.5 billion and net margin for Baidu Corp was 28%.
Junjie He: Long gap net income adjusted to by June was RMB 5.9 billion. Long gap diluted earnings per ADS was RMB 16.6.
Junjie He: Non-government income attributable to Baidu Corp. was RMB 5.7 billion and non-government margin for Baidu Corp. was 21%.
Junjie He: As of September 30, 2024, cash, cash recruitment, restricted cash, and short-term investments were RMB 144.5 billion, and cash, cash recruitment, restricted cash, and short-term investments excluding ITE were RMB 140.3 billion.
Junjie He: Free cash flow was RMB 2.6 billion and the free cash flow excluding ITE was RMB 2.4 billion.
Junjie He: Finally, Baidu Corp had approximately 31,000 employees as of September 30, 2024.
With that operator, let's now open the call to questions.
Speaker Change: Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star then 1 on your telephone and wait for your name to be announced.
Speaker Change: If you wish to cancel your request, please press star 2.
Your first question comes from Alicia Yap with Citigroup.
Alicia Yap: Hi, thank you. Good evening management. Thanks for taking my questions. My questions is related to AI and search.
Alicia Yap: So how should we think about the ramp-up pace for the generative AI results penetration rate? And what does management think of the optimal level? And how long do you plan for the search product transformation period to last?
Alicia Yap: And could management also give more color on the recent developments in the monetizations of the AI search? So when does management expect to commercialize the AI search result? Thank you.
Thank you for watching!
Hi Alicia, this is Julius, let me take your question.
Speaker Change: We have been continuously transforming our co-op search with AI technology. And seeing as what Robin has said just now, today, over 20% of pages and over 70% of the monthly active users, they have been engaged with their AI contents already.
Speaker Change: However, I think the number merely represents our initial progress in one aspect of our AI-driven transformation of search. It should not be taken as a comprehensive indicator of our AI-generated content, nor should it be used as the only benchmark for our progress.
Speaker Change: What really matters goes beyond it. In fact, we aim to revolutionize the search through earning and transform every aspect of search experiences.
Speaker Change: Providing the users with unlimited on-demand and personalized content through a combination of various formats whenever they need.
Speaker Change: Leveraging the earnings, we gain a deeper insight into the user's intent behind increasingly complicated queries, which can enable us to customize the content generation to better fulfill their needs.
Speaker Change: While continuously enhancing the AI-generating content quality, we are also trying to diversify our content formats such as AI summaries you can see in the top page, images, videos, agents,
digital humans.
to personalize such experiences.
Speaker Change: with Erning and we can tailor both the content and its presentation format which can best match what users want to see and how they prefer to consume this kind of information.
Speaker Change: The AI-driven transformation of our research has already shown initial progress across certain user metrics, which gives us some kind of confidence to keep pushing forward with our efforts.
Speaker Change: Through ongoing explorations, we are charting the new frontiers of possibility, unlocking unprecedented potentials with the power of AI.
Speaker Change: And quarter by quarter, we will continue to see an update of achievement across various aspects of AI-driven search transformations.
Speaker Change: Specific about your question, in the monetization site, we are seeing some encouraging early results in certain verticals, including legal, education, and B2B services.
Speaker Change: For example, our earning agents for advertisers today have demonstrated an increase in effective sales leads, which can bring value to advertisers while enhancing the overall user experience.
Speaker Change: As our early foundation models continue to evolve, we expect agents to unlock greater revenue opportunities in the future.
Speaker Change: That said, we are still in the early stage of exploring modernization opportunities for AI search, and we are taking a mature approach at our own pace.
Speaker Change: In the near term, we will prioritize the user experience enhancement instead of rushing into monetization.
Speaker Change: In fact, our production transformation journey strongly reflects our strategy direction, which is we are making deliberate choices to prioritize long-term value creation over short-term gains. It's true that we experience some short-term pressures.
Speaker Change: But these near-term trade-offs are something we are waiting to assess as we work towards our long-term vision.
Speaker Change: Beyond such, we also have cultivated a comprehensive mobile ecosystem with multiple consumer facing products. That's the massive user basis.
Speaker Change: such as FEED, WENKU, and HAERS. We're also leveraging EARNING to revolutionize the entire product lines across our mobile ecosystem.
enhancing the quantum production.
Speaker Change: and try to optimize the distribution mechanism and try to strengthen the monetization capabilities.
Speaker Change: We remain fully committed to these transformations and focusing primarily on enhancing the user experiences and engagement.
Speaker Change: This kind of encouraging early results have reinforced our confidence in the strategy direction, and we believe that following this period of adjustment, we expect to start seeing improvements in our advertising business next year.
Thank you for your question.
Your next question comes from Alex Xiao with JPMorgan.
Speaker Change: Finally, what is management's outlook of early adoption over the medium to longer term? Thank you.
Hi Alex, this is Robin.
Robin Li: Yes, we've seen remarkable growth in API calls. I think a number of factors are driving this growth. First, earnings get smarter every day, and hallucinations have been reduced significantly. So more and more applications can use it to add value to their business.
The users
Robin Li: And second, it's the inference cost. It gets lower and lower, so more customers can afford it.
Robin Li: And third, it's a tool chain we provide to our customers. They can tailor the model to address their own specific needs easily in each application scenario.
Robin Li: The substantial volume of earning API calls is driven by both internal and external demand.
We began our product transformation in Q2 of last year.
Robin Li: We first upgraded our monetization system, delivering higher advertiser ROI and generating hundreds of millions of incremental revenues each quarter.
Robin Li: And then we extended the AI transformation across our major consumer-facing products.
Robin Li: That includes those products over, you know, 100 million MAUs. Baidu Search, Wenku, Baidu Drive, Baidu Keyboard, and Baidu Map.
Robin Li: We are encouraged by how AI could thoroughly revolutionize and rejuvenate this long-standing product with massive user bases.
Robin Li: And this year we accelerated the renovation of search, showing more and more generated content on our search result page.
Robin Li: We believe the new Baidu search has the potential and is well positioned to become a killer app in the age of Gen AI.
Robin Li: This is because search is by nature deeply rooted in language and text understanding, which aligns perfectly with LLM capabilities.
Robin Li: We're fortunate to have hundreds of millions of search users every day and the most advanced foundation models.
Robin Li: And along this line, millions of agents are being viewed to answer users' and customers' questions.
This also contributed to the growth of learning API calls.
Robin Li: While most API calls currently come from the renovation of R2C products, Ernie has gained a strong recognition in helping businesses tackle challenges effectively.
Robin Li: External API calls have grown quite quickly, roughly like 240% a quarter, over a quarter in the last week of Q3.
We see strong adoption across sectors including online education.
Robin Li: social media, restaurant and food services, healthcare, legal consultation, and recruiting.
Robin Li: The widespread adoption shows that enterprises recognize the value of our powerful models and are willing to invest in them.
Robin Li: We're thrilled with our progress and committed to accelerating Ernie's adoption across all our product lines as we transform from an internet-centric business to an AI-first business.
Thank you for watching!
Robin Li: With Gen.AI becoming central to our entire product lineup, we are confident it will unlock new revenue streams and strengthen our market leadership.
Thank you.
Thank you.
Your next question comes from Gary Yu with Morgan Stanley.
Gary Yu: Hi, thank you for the opportunity to ask questions. I have a macro related question. Can management comment on the underlying ad demand trend and also have you seen any ad spend sentiment improvement especially after the latest stimulus policy and what's management viewed on the macro outlook heading into 2025? Thank you.
Speaker Change: Hi, Gary. Let me take a question. I think our advertising business is highly correlated to the macro-environment, especially with the offline small and medium enterprises across a wide range of industries, which make up the majority of our advertising spaces.
Speaker Change: As these small and medium enterprises are both deeply connected to the domestic consumption and highly sensitive to macro expeditions.
Speaker Change: Their vitality and recovery pace serve as more relevant indicators for our business.
Speaker Change: In Q3, we have seen a continual weakness across the verticals, such as the real estate, franchising and healthcare. So far in Q4, we have not observed a notable improvement in advertising spending patterns, and consumer spending remains subdued.
Speaker Change: And having said that, we are particularly encouraged by the strength and the tininess of the recent stimulus policies.
Speaker Change: which continue to be rolled out, as well as the constructive initiatives we are seeing across the market. And while we think it will still take some time for these measures to reach offline small and medium enterprises.
and boost their confidence in advertising spending.
So we remain conservatively optimistic about the recovery train ahead.
Speaker Change: We believe that once the macroenvironment improves and domestic consumption can pick up,
Small and medium enterprises' confidence will quickly rebound.
Speaker Change: And Baidu has long been the primary platform of choices for these advertisers. With proven effectiveness in driving the customer acquisition and growth, we expect them to return for advertisement spending, which can help us to drive meaningful recovery in the advertising business.
Speaker Change: With our intensive, rich, and unique value propositions to offline, small, and medium enterprises, we believe that our tithing business will reboom with strong recovery momentum once the market confidence comes back. Thank you, Gary.
Your next question comes from Lincoln Kong with Goldman Sachs.
Thank you. Bye-bye.
Speaker Change: Thank you, management, for taking my question. So we, given that ongoing advertising pressure and our plan to accelerate and broaden our AI transformation, so could management share more color around our business focus at the moment, our priority in terms of our investment, resources spending, and the capital allocation, and how should we think about the margin trend in 4Q as well. Thank you.
Speaker Change: Hi, this is Jackson. I will take your call. Yeah, currently we will remain committed to our AI focus strategy as both our near-term priority and long-term strategic emphasis.
Speaker Change: Given our ongoing AI-driven renovation of search and the fact that we will not heavily monetize AI-generated search results soon,
Speaker Change: We expect the circumstances will remain under pressure for our online marketing business in the near term.
Speaker Change: However, we remain steadfast in this strategic direction as we see strong long-term value ahead.
Speaker Change: In line with this strategy, we are going through a period of continued initiatives.
will further intensify our product renovations.
with a strong emphasis on AI search.
Speaker Change: continue to invest in advancing earnings capabilities while enhancing our AI car offerings to maintain a healthy margin and expanding our autonomous driving initiatives where we view has a viable path to profitability.
Speaker Change: We believe these initiatives are essential to sustain our position as a leading technology innovator in China.
Speaker Change: As a result, the near-term margins will be in a period of adjustment.
Speaker Change: We are looking to 2025, we will focus on optimal resource allocation to high growth opportunities while staying aligned with our long-term strategy. Thank you.
Thank you. Thank you.
Your next question comes from James Lee with Mizzouho.
Thank you.
Speaker Change: Thank you, James, for your question. This is Dou. Since last year, we have observed an accelerating shift in China's cloud industry toward AI computing, driven by the development of gene AI and foundation models.
Speaker Change: We have seen more customers choosing Baidu's AI cloud infrastructure and foundation models.
Speaker Change: The growing adoption is evidenced by our gene-AI release revenue. It started at about 5% of our total AI cloud revenue when we first reported it in Q4 last year.
Speaker Change: and has now more than doubled, reaching 11% in the third quarter. So we are confident that this upward trend will continue.
Speaker Change: And so, as you know, our AI cloud business consists of two main parts, personal cloud and cloud service for enterprise and public sector.
Speaker Change: This quarter, total AI cloud revenue growth slightly moderated, primarily due to a temporary impact on personal cloud revenue brought by a short-term business adjustment.
Speaker Change: However, we believe Ernie's ongoing renovation of the personal cloud will help mitigate this short-term impact and position it well for greater long-term growth opportunities.
Speaker Change: Meanwhile, our cloud service for enterprise and public sector, which makes up the majority of our AI cloud revenue, actually maintained strong momentum this quarter, continuing to outpace our overall AI cloud business.
Thank you.
Speaker Change: So, the growth in enterprise cloud revenue has been driven by a strong demand for model training and inference across various sectors, including internet education, finance, and so on.
Speaker Change: This reflects our customers' strong recognition of our AI infrastructure and mass platform capabilities.
Speaker Change: In particular, major customers in industries like Internet, tech and automotive increased their spending on our GPU public cloud.
Speaker Change: So we are also seeing a rise in both the number and spending of mid-tier enterprises, especially in sectors like marketing software and other growing industries.
Thank you.
Speaker Change: In today's cloud market, foundation model capabilities have become more and more essential.
Speaker Change: Given the significant requirement for powerful AI infrastructure, specialized AI expertise, and substantial capital investments,
Speaker Change: Only a slight few foundation models will survive, both in China and overseas.
Speaker Change: And for sure, we will be the one of them, standing as the frontrunner.
Speaker Change: So we are proud that Ernie has already demonstrated his market leadership through widespread adoption and advanced technology.
Speaker Change: So on the profit side, our AI cloud is healthier than ever, with non-gap operating profit margin expanding year over year. So this improvement is driven by a continued margin enhancement from our gene-AI-related revenue and our commitment to achieving high-quality revenue growth.
Speaker Change: So looking forward, we are confident that our AI cloud business will maintain strong revenue growth momentum over time while continuing to deliver a healthy operating profit.
Thank you, James.
Your next question comes from Thomas Chong with Jefferies.
Xiaomeng Zhuang Li, Xiaomeng Zhuang Li, Xiaomeng Zhuang
Speaker Change: Hi, good evening. Thanks, management, for taking my question. My question is related to MobileTaxi. Given the recent IPO wave of autonomous driving-related companies that have partnerships with big automakers and wide-hailing platforms,
Speaker Change: What are your thoughts about how the competitive dynamic going forward looking ahead? How do you see the Apollo Go mobile taxi freight and business strategy development? Can management share any details about the future plans for expanding and growing Apollo Go? Thank you
Speaker Change: technical expertise, top talent, as well as strong commitment to long-term investment and significant capital reserve.
Speaker Change: We have built an unparalleled foundation in all these areas, giving us a strong competitive edge and setting a high bar for others to follow.
Speaker Change: As one of the earliest players in the market, we've consistently demonstrated our unwavering commitment through over a decade of investment.
This long-term dedication has fielded our technological advancements.
positioning us as the global leader in autonomous driving technology.
Speaker Change: As mentioned earlier, Apollo Go hit a significant milestone of eight million total rides, making us the world's top autonomous bike hailing service provider.
Speaker Change: In addition to our cutting-edge technology and strong operational capabilities, we've achieved significant cost-effectiveness in hardware. RT6 stands out with a competitive price of under 30,000 US dollars for mass production.
making it the most competitive option in the market.
Speaker Change: All the strengths that's mentioned above are driving us forward, paving the way to validate our Benz model.
Speaker Change: The overall market is still in its infancy, so competition should help accelerate the growth of the market and foster a more friendly, pro-innovation regulatory environment.
Speaker Change: We believe such regulatory involvement is essential for the healthy growth of this industry. And we remain prepared for expansion when the time is right.
Thanks for watching!
Meanwhile, we are actively seeking new opportunities for international expansion.
Speaker Change: We see significant potential in cities that enable large-scale fully driverless operations similar to Wuhan and Chongqing.
Speaker Change: Additionally, we are open to exploring different BIMS model options, focusing on asset light strategy to keep our operations flexible and efficient as we grow.
Thank you.
Your next question comes from Xiong Wei with UBS.
Speaker Change: Good evening, management. Thank you for taking my question. My question is regarding capital allocation. I was wondering could management provide any updates on capital return plans for shareholders such as share buyback and dividend. Thank you.
Speaker Change: Hi Wei, I will take a question. So since becoming a public company in 2005, we have made consistent efforts to generate long-term value to our shareholders through our growth as a leading technology company in China.
accompanied by Shared Biobank programs.
Speaker Change: So, over the past few years, we have maintained a steady pace of share-to-share purchases.
averaging about U.S. dollar 1 billion annually.
Speaker Change: So I'm pleased to share that through our consistent share repurchase efforts, we have seen a decline in our total number of shares outstanding this year.
Speaker Change: We remain firmly committed to our share buyback programs as a key component of delivering value to our shareholders.
Speaker Change: We remain open to evaluating various options for returning value to shareholders.
Robin Li: As always, we firmly believe in Baidu's long-term and sustainable growth potential, and we ensure that our shareholders will be rewarded for their trust in us.
Robin Li: The ultimate way of serving shareholders' interests is to have a solid business foundation and capitalize on growth opportunities.
Robin Li: We are in the midst of a paradigm-shifting technology transformation based on Gen AI and the foundation models.
Robin Li: At Baidu, we have the AI infrastructure, technical expertise, as well as financial and human resources to execute on our plans.
Robin Li: So, we want to have the flexibility to invest as needed to prepare our new business forward and with that, bring long-term value to our shareholders. Thank you.
Thank you.
Speaker Change: Your next question comes from Miranda Zhuang with Bank of America Securities.
Thank you for watching!
Speaker Change: Thank you management for taking my question. So can management provide an overview of Ernie's technology roadmap for the future development?
Speaker Change: What are the upcoming milestones for companies' AI model? And then when can we expect to achieve them? Thank you for my question about earning. Thank you.
Thank you.
Well, we launched ErnieBot in March of last year.
Speaker Change: Since then, we've been continuously enhancing our foundation model capabilities, particularly our flagship models.
Speaker Change: In October last year, we introduced the Ernie 4.0, China's first GPT-4 type model with world-leading capabilities.
And then we launched a...
Speaker Change: Ernie 4.0 Turbo in June of this year and delivering even greater performance.
Speaker Change: Building on these milestones, we are committed to continuously advancing our flagship models to deliver better performance, accuracy, and broader support for diverse user needs.
Speaker Change: We expect to launch a new version of Ernie early next year to further strengthen our leadership positioning foundation models.
Compared to overseas companies, we distinctly take an
application-driven approach.
Speaker Change: We believe foundation models hold real value only when they power widely used practical applications that meet.
usernames.
Over the past 18 months...
Speaker Change: Our model development has centered on addressing real world problems according to market demand.
Speaker Change: With this approach, we've made significant progress in resolving hallucinations and improving accuracy.
Speaker Change: We are also introducing a series of models tailored to diverse needs.
Speaker Change: To make earning models more accessible and affordable, we boosted the performance, lowered inference costs, and enhanced response speed.
Speaker Change: What sets us apart is that we really have a clear sense of our strengths and where we are heading.
Speaker Change: We prioritize those technologies that align most closely with our business and create the most value.
Speaker Change: Earlier this year, I mentioned that we have expanded our visual foundation model capabilities to our autonomous driving, aiming to further enhance our leading position in this space.
Speaker Change: Now, we are also proactively exploring multi-modal capabilities and applications based on our strengths in language models.
seeking to create more synergistic value and unlock new possibilities.
Speaker Change: Throughout all areas, we are very thoughtful about how we allocate our resources.
Speaker Change: optimizing our foundation models in directions that maximize impact across our business and help maintain our market leadership.
Thank you.
Thank you.
Ladies and gentlemen, that does conclude our conference for today.
Thank you for participating. You may now disconnect.
[music]
See full cast and crew on IMDb.com
Thanks for watching!
Thanks for watching!
Thanks for watching!
[music]
Speaker Change: We look forward to future collaboration! Until then, let us b together.
Speaker Change: current resources spiritual relationships multi dimensional can harness our powerful collective consciousness Blastholm heir Consecutive precursors and the inheritors of moisture inner and natural centers in our history
Thank you for watching.
Thank you for watching!
Thanks for watching!
Thanks for watching!
[music]