Baidu Inc. (BIDU) CEO Robin Li on Q2 2021 Results – Earnings Call Transcript

Baidu Inc. Q2 2021 Earnings Conference Call August 12, 2021 8:00 AM ET

Company Participants

  • Juan Lin – Director of Investor Relations
  • Robin Li – Chief Executive Officer and Co-Founder
  • Herman Yu – Chief Financial Officer
  • Dou Shen – Executive Vise President

Conference Call Participants

  • Alicia Yap – Citigroup
  • Piyush Mubayi – Goldman Sachs
  • Alex Yao – JP Morgan
  • Gary Yu – Morgan Stanley
  • Jerry Liu – UBS
  • Eddie Lao – Bank of America Merrill Lynch
  • James Lee – Mizuho
  • Natalie Wu – Haitong International
  • Tian Hou – T.H. Capital


Hello and thank you for standing by for Baidu’s Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a Question-and-Answer session.

Today’s conference is being recorded. If you have any objections, you may disconnect at this time. I’d now like to turn the meeting over to your host for today’s conference Mr. Juan Lin, Baidu’s Director of Investor Relations.

Juan Lin

Hello, everyone, and welcome to Baidu’s second-quarter 2021 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, Herman Yu, our CFO, and Dou Shen, our EVP. After our prepared remarks, we will host a Q&A session. Please note that the discussion today will be forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

Forward-looking statements are subject to risks and uncertainties that may cause the actual results to differ surely on our current expectations. For detailed discussions of these risks and uncertainties, please refer to our latest annual report and other documents filed with the ICC and Hong Kong Exchange. Baidu does not undertake any obligation to update any forward-looking statements, except as required and [Indiscernable] the law.

Earnings press release and this call, discussions of certain unaudited non-GAAP financial measures. Our press release contains patients, the un-audited non-GAAP financial measures to the unaudited most directly comparable GAAP measures, and it’s available on our IR website at As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on Baidu’s IR website. I will now turn the call over to our CEO, Robin.

Robin Li

Hello, everyone. We delivered another solid quarter with Baidu quarter revenues growing 27% year-over-year. Accelerated by non-advertising revenues, this AI Cloud growing 71% year-over-year in the second quarter. We are entering a new era where technology is becoming more powerful. And we are benefiting from the deployment of technology to upgrade China’s industrial competitiveness due to tight urban cities and improved mobility.

As China plans for the next stage of growth, it rests upon us to recognize the need to align our business strategy with the safe environment that we’re operating in, and the future that we want to build with our stakeholders. You will see a highlight a shared future of humanity to support China’s pledge to achieve carbon-neutrality by the year 2060, Baidu aims to reach carbon neutrality by 2030 through the use of green data centers, non-office buildings, and other means.

In addition, we hope to improve urban traffic flow and lower carbon emissions for 100 metropolitan areas across China, with our build-out of Smart Transportation and accelerate the switch to [Indiscernable] for the math through our investment in Robotaxi and Smart [Indiscernable] Leveraging technology to serve a larger population to achieve inclusiveness is part of China’s growth plan. In June, we introduced Apollo Moon, the fifth generation of Apollo Robotaxi vehicles, that once again saw a 60% flow in cost per mile. It’s the rapid pace of a [Indiscernable] striding technology advancement and cost efficiency improvement.

Apollo Robotaxi stands to become much cheaper than a driver for higher ride-hailing. In the coming years, which we’ll make robotaxi ride-hailing much more accessible. Baidu Health is another example of expanding resources to a broader population for improved living. We are enabling closed-loop, telehealth, online prescription, and home delivery to free up hospital resources for critical treatments.

Concurrently, we are helping hospitals buying patients with specific illnesses that match their treatment specialties, by leveraging our AI-powered search and Smart Mini Program. We see great opportunities to use technology to advance sustainability and inclusiveness. As we go through our quarterly highlights, you will see other examples of how our AI-powered business is naturally aligned with business goals.

This is due in part to our belief in using technology to build a better world. Turning to Q2 operational highlights. Our AI Cloud continued to see strong growth. IDC once again, grant the Baidu AI Cloud the number one AI Cloud provider in China in their 2020 report on public cloud. Over the past decade, as has been the growth driver for China’s Cloud market, which sets up a strong foundation to implement AI solutions that solve industry-specific problems and provide urban living upgrades. By differentiating with AI solutions, we have the opportunity to provide repeat business with expanded applications and become a one-stop-shop across selling assets and other services. In the past, we discussed empowering financial services, utilities, and Internet media sectors with AI.

Let me give you an example of how our AI file empowered the auto sector. We are helping Geely, a leading automotive manufacturer to develop a multi-year digitization plan, which entails: 1, setting up their private Cloud infrastructure; 2, moving Geely’s business onto Cloud; 3, leveraging Baidu AI solution to advance Geely’s high-tech manufacturing capabilities, such as IOV security and risk management; and 4, enabling Geely to provide Cloud services to their automotive suppliers and customers.

Baidu AI is deployed into a multi-faceted environment. For example, Chengdu, Fujin, a city with a population of 8 million, implemented Baidu AI solution added to another treatment plant. Our Smart monitoring capability was used to provide early protection of malfunction the equipment, replacing labor-intensive patroling, and a customized machine learning model was developed to predict water usage and dynamically adjusted the water pressure of different water pipelines, cutting electricity needs by 8%. Our employees feel a sense of pride when the natural resource is optimally managed and sustainability is indirectly advanced.

In Healthcare Cloud, we have expanded into over 400 hospitals in 29 provinces and over 1500 primary care clinics in 11 provinces. This leading solution like our CB assets, resulting in rapid revenue growth at 245% year-over-year for the first half. According to IDC’s June report, the Baidu Deep Learning platform retained the most widely used in China, surpassing Google’s. Our PaddlePaddle developer community reached 3.6 million up 62% year-over-year. And it’s adopted by 130,000 businesses.

Baidu’s large development community helped improve our Machine Learning models and initialize our AI tools and technologies. Moving onto ACE Smart Transportation, as of June, Apollo has signed with 20 cities to try the ACE Smart Transportation, up from 5 cities a year ago based on a contract amount of RMB 10 million and above. Apollo also renewed agreements with 9 cities to roll out their next phase of ACE Smart Transportation.

Beyond urban roads, Apollo signed with ZIan Koubei to deploy V2X smart highway, enabling the cities to remotely identify the need for hiring and maintaining, accessed road closure for poor weather conditions, and identify travelers, who Dolch tall terminals. Turning to autonomous drive. Apollo continued to see strong momentum. Level 4 testing on a public road has reached 12 million kilometers or 7.5 million miles.

Apollo has received 278 AD permits reflecting AD piloting in the dispersed geographic region and are under wide-ranging test scenarios for Apollo monetization. In Q2, Apollo Go ride-hailing expanded into Cangzhou, our 4th city of operation, and provided 47,000 rides to the public, up 200% sequentially. Customer satisfaction for Apollo Go has been high with a user rating of 4.9 out of 5.0.

As pointed out earlier, our fifth-generation robotaxi vehicles saw another 60% drop in cost per mile compared to an average decrease of 62% in the first 4 generations of AV vehicles. We plan to roll out Apollo Go ride-hailing across 30 cities over the next 2 to 3 years. ASD, Great Wall Motors become the latest automaker to announce plans for ASD.

Apollo Automated Valet Parking will be installed in the [Indiscernable] SUV flagship throughout out later this year. On infotainment, newer OS for auto has been installed in 1.8 million vehicles, up 265% year-on-year. 12 other OEM, the likes of Ford, GM, Toyota, and Hyundai have signed with DuerOS for auto installation in [Indiscernable] On DuerOS, Xiaodu continues to innovate the SmartHome device market. For example, the OS on DuerOS Smart Assistant allows one to conveniently order fresh home delivery flowers and other commonly used [Indiscernable] in a matter of seconds through conversational AI.

China’s elderly population is slated to exceed 300 million. Xiaodu smart displays connect elders with immediate senior community assistance and serve as a virtual companionship around the clock through conversational AI, improving their quality of life while allowing family members to monitor their loved one’s health and safety from remote. During the June 18 e-commerce festival, Xiaodu smart display, and Xiaodu Smart Path for Education Market topped the sales volume list in their respective category, leading e-commerce platforms like

Xiaodu is receiving high customer satisfaction, standing well on higher price points, product lines, and topping the list on units sold. Demonstrating how hardware can be differentiated with innovative AI, such as new input modalities and services.

Turning to Mobile Ecosystem, in June, Baidu App MAU reached 580 million, up 9% year-on-year. And daily logged-in users reached 77%. As an open in-app search app, the Baidu app offers users instant replies on various topics. For example, daily pending health consultation on Baidu Health surpassed the 2 million in Second Quarter, up 47% year-on-year. In addition, more than 8,000 industry experts spanning 14 other verticals, such as legal, finance, and faction are able to instantaneously reply to user search inquiries through our AI building blocks.

When a user seeks specific information of service, Baidu Search has a distant advantage. Managed Page now accounts for 40% of Baidu Core advertising, reflecting merchants, opening storefronts on Baidu, as opposed to operating their own sites. For example, a local moving Company, Shenshi Moving, changed its third landing page to its Managed Page. And cite daily orders doubled five weeks after adoption.

Through Managed Page, users are able to browse its services, interact with the merchant, schedule a move, and pay a deposit, all seamlessly on Baidu. Managed Page also monitors merchants’ activities on Baidu with AI for added personnel safety. For example, a moving service entails strangers coming to your house. Before I turn the call to Herman, I’d like to congratulate him on his new role as Chief Strategy Officer of Baidu. Herman will continue to act as CFO until we find a qualified replacement, he will spend more time on top-line strategy and divestments afterward.

Over the past 4 years, Herman has helped Baidu transform from a mostly Search Company to a leading, diversified AI Company. We’ve demonstrated business leadership, a holistic view of our business, and a keen sense of the capital markets, I’m confident in Herman’s ability to help chart a course for our long-term growth and success in the age of AI. With that, let me turn the call over to Herman to go through our financial highlights.

Herman Yu

Thank you, Robin. Good morning, everyone. Welcome to Baidu’s Second Quarter 2021 call. All monetary amounts used in my discussion are in renminbi unless stated otherwise. Baidu’s Second Quarter was — Baidu’s Second Quarter revenue was $31.4 to $4.9 billion, up 20% year-over-year, driven by the growth of Baidu Core revenue, which reached 24 billion or $3.7 billion, up 27% year-over-year. Non-advertising for Baidu Core reached 5 billion or 21% of Baidu Quarter’s revenue. The AI Cloud revenue was 3.3 billion or up 71% year-over-year, which is an acceleration from the 55% growth last quarter.

Our Cloud growth is benefiting from the demand of enterprise customers looking to use AI to transform the industry and strengthen their leadership position. For example, customers from the Internet media, from financial services, from energy, and from manufacturing sectors. We’re also benefiting from the urban cities seeking to adopt Apollo ACE Smart Transportation to modernize and digitize their transportation network.

AI solutions and Smart Transportation are showing fast growth, serving as a catalyst for our Cloud to grow faster than the overall Cloud market, with ASP being a smaller part of our Cloud business. Intelligent Driving and other growth initiatives, we continue to take advantage of product development by leveraging Baidu AI capabilities, such as speech recognition in LP and computer vision in our strong Internet foundation, Xiaodu has become the leader in smart display globally based on shipments.

Xiaodu speakers enter the SmartHome device market in 2018, competing on sub-100 product lines. Home devices equipped with AI features can be so and much higher price points. For example, in May, we introduced Xiaodu TIAN TIAN, key 10, a 10-inch smart display with karaoke features at an MSRP of 1699. Through our innovation, Xiaodu services revenue, such as advertising and membership has grown five-fold from last year.

Now, accounting for over 1/10 of Xiaodu ‘s revenue s. Xiaodu powered by DuerOS is transforming the Smart speaker market from selling hardware to selling AI-powered features and services. The operating system for the automotive industry is a much larger market. Apollo has an opportunity to leverage its leadership in the tons-driving and infotainment operating system to enable every passenger vehicle to be a Smart vehicle.

Just as Xiaodu transformed the home device market, Apollo hopes to leverage Baidu’s capabilities, ASD, and existing OEM channels to boost computing intelligence and transform the automated industry. Moving to online marketing. Q2 online marketing revenue was 19 billion up 18% year-over-year. In-app, advertising was solid, growing 26% year-over-year, partially offset by the slow growth of mobile and PC ad revenues.

Most of our top ad verticals continue to perform well. CPM saw double-digit growth, especially for in-app online marketing. iQIYI revenue was 7.6 billion up 3% year-over-year. iQIYI subscribers reached 106 million in June, which supports the large in-house production of entertainment blockbusters. The cost of revenue was 15.9 billion, up 21% year-over-year, primarily resulting from an increase in tax and cost of sales associated with the new AI business. Operating expenses were 12 billion, up 30% year-over-year.

SG&A for Baidu Core was up 40% primarily due to an increase in channel standing and promotional activities, as well as an increase in Sales hiring, particularly as we lookout for the next 6 to 12 months to grow our Cloud and also our Intelligent Driving business. Non-GAAP operating income for Baidu Core was 6.5 billion for $1 billion, and non-GAAP operating margin for Baidu Core was 27%. Adjusted EBITDA for Baidu Core was 8 billion or $1.2 billion, and adjusted EBITDA margin for Baidu quarter was 33%.

Cash and short-term investments for Baidu Core as of June 30th, 2021 was 167.7 billion or $26 billion U.S. Free cash flow for Baidu excluding iQIYI was 6.9 billion or $1.1 billion U.S. Baidu Core had approximately 36,000 full-time employees as of June 30th, up 24% from last year. Turning to Q3 guidance. For the third quarter, Baidu expects revenues to be between 30.6 billion and 33.5 billion, representing a growth rate of 8% to 19% year-over-year, which assumes that Baidu Core revenue will grow between 9% year-over-year and 20% year-over-year.

The above forecast takes into consideration the current COVID-19 situation in China, which is evolving and business visibility is limited. The above forecast reflects our current improvement their view, which is subject to substantial uncertainty. Before I turn the call back to the Operator, let me summarize our Second Quarter results.

Baidu Mobile Ecosystem continues to be strong. Baidu Core online marketing revenue was up 18% year-over-year in the Second Quarter, within that Marketing revenue growing 26% year-over-year. Baidu App MAU reached 580 million of 9% year-over-year and daily user log-in was 77%. Four years ago, we committed to strengthening our Mobile Ecosystem and be with AI.

Our searching is stronger now with AI Building Blocks and Marketing Cloud, and non-marketing has become sizable and growing quite fast. We have delivered on our goals and we’re very proud of our team for their strong execution. Many investors have enquired about the recent regulatory landscape. Governments generally favor fair competition and maybe, even so, when mobile Internet is low penetrated.

We see this being play across Europe and in the U.S. Search fundamentally is open. As exclusivity is forbidden for the largest players, this will allow more players in each Internet sector to exist, which gives consumers more choices and make search more useful. Some investors have asked about government incentives and special tax treatment.

It’s important that we elevate this to see the overall direction of China’s Development Plan. Consumer Internet has been in China for 2 decades. And the country is promoting new growth sectors, such as industrial Internet, V2X, autonomous driving, and the monetization of city government.

Thus, it will not be surprising if certain incentives for the older industries gradually decrease while the new economy benefits from government incentives. We believe government policy will also be adjusted to support these new growth areas. Our new AI business is well-positioned in sectors of the new economy, such as AI cloud, Smart Transportation, autonomous driving, smart devices in AI chips. In the second quarter, I’m sorry — Baidu will return $566 million to our shareholders under the 2020 share repurchase program this year.

During the cumulative repurchase from last year to 2.5 billion U.S. Dollars. We’re excited about Baidu’s future, excited about Baidu’s durable search and fee business. and our new AI business to support China’s growth while advancing sustainability and exclusiveness. On August 18th, starting at 9:30 AM Beijing time, we will be hosting Baidu World on CCTV. Please join us to follow the latest on our product development.

And lastly, it’s truly been a privilege to serve as Baidu CFO and witness our growth initiatives like AI Cloud solutions, Smart Transportation, self-driving solutions, and smart devices developed into 1/5 of Baidu Core business, using the steady profitability of our search to expand and accelerate Baidu’s growth. I’m excited about my new role as CFO, which will allow me to spend more time thinking about technology opportunities. Operator with that, let’s now open the call to questions.

Question-and-Answer Session


Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from the line of Alicia Yap from Citigroup. Please ask your question.

Alicia Yap

Hi. Thank you. Good evening, Robin, Herman, and Gwen. Thanks for taking my questions. Congratulation, Herman, for your new role as the CFO. To follow up your question — your high-on-high brief remarks about the regulation, I actually have a question on this data security. What could be the impact on Baidu, any things that we need to do, or the changes that we need to do to ensure compliance by September 1st for this data security law?

And then very quickly, as we just finished the Summer Olympics and with the Winter Olympics coming up, can you provide some update in terms of the latest Robotaxi or even the Robobus commercialization service, any expectations on these [Indiscernable] demand in this upcoming winter game? Do you think Baidu’s driverless car service could leverage this big event to draw more commercial usage and enhance the branding? Thank you.

Robin Li

Hi, Alicia. Data security is very important to us and we have consistently improved on the management of our internal data security system over the past few years, we have a data privacy committee. among our management team that oversees that the crack cases of the whole Company. We are also active in assisting with the setting of industry-standard and we share our year-end systems and dialogues with others to ensure that we are on top of industry best practices. If you look at the highs, Baidu is leading on data privacy, and data protection is amongst the highest compared to our peers.

So I’m quite confident we will be able to cope with the new regulatory involvement well, in terms of data security and user privacy. On the Olympics side, yes, we do plan to do something with our Robotaxi during the Winter Olympics. But what’s important is that we just launched this fourth city of Robotaxi operation, which is Guangzhou. I think we will continue to rollout our Robotaxi services in many different cities, different regions, and the number of rides that we are providing, having grown very quickly, as I mentioned, during the prepared remarks, we delivered 47,000 rides for our customers.

That’s 200% growth over the first quarter of this year. We believe that the scale will grow very quickly. And we all will be able to learn all kinds of quanta cases and quickly improve our technology. I’m quite optimistic that Robotaxi will be commercially available in more than 30 cities in 2 to 3 years.

Herman Yu

Yeah. And I just wanted to add a point from what Robin just say. You asked specifically about Winter Olympics. If you look at today in Sagan Park in Beijing, we believe we’re the only second atoms driving car Company in the world, where you actually have a car driving without someone at the driver’s seat. So I think that shows the number of years of experience that we’ve been doing in atoms driving. It also just shows the fact that we’ve been doing operations for car driving for a while. That’s why we can get the deployment and actually start testing that. So it’s open to the public. You guys are free to come and look at how atoms driving is being done without someone at the driver’s seat.


All right. Thank you. Our next question comes from the line of Piyush Mubayi from Goldman Sachs. Please go ahead.

Piyush Mubayi

Thank you, Robin, Herman. When I look at the way your ride-hailing business is expanding, I can’t help but think that you’ll soon be running a business without the cost of a driver to factor in. If you could just take us through the math as you see it evolve to getting to 20 cities, at what point of time does it get to the revenue line that you’ll spill out separately and talk about the profitability of it all? Thanks.

Robin Li

Yeah. We continue to work very hard to drive down the cost of the Robotaxi vehicles. It has just come down 60% for our fifth-generation vehicle. And in the meantime, we are running more testing miles and taking more orders to learn from all kinds of quantitative and quickly improve our technology. Based on our current projection, I think by the year 2025, we will cross the line, which means that the total cost of Robotaxi ride-hailing will be lower than man-vehicle ride-hailing. And after that, I think that the scale will be able to grow much larger than it is today. And I think around that time, we should be able to report payment line.

Herman Yu

Yeah. And just to add to that [Indiscernable] if you look at the economics, Robin talks about how from 4th generation to 5th generation, we reduced by 60% in cost per mile. If you look at the prior 4 generations, we average around 62%. So we’ve been consistently decreasing costs for the last 5 generations and at around 60% each time.

And if you look at what Robin just said, throughout to 2025, what we’re seeing in the economics is that in a ride-hailing with after drivers look the concept of a person — labor costs only goes up, it doesn’t go down over time, but you’re competing with technology. You’re competing with the fact that the more miles that we have, the more data that we have, our operation experience that this thing will continue to go down.

So I think that’s the section of this business model, if you look beyond 2025, if you look at the next 5 years, what we have internally, we can drive that cost down a lot, lot more based on what we have seen in the first 5 generations. So, sure this thing will be very interesting once you pass 2025, you have efficiency, technology, operational improvements compared to labor cost.


Thank you. And next question comes from Alex Yao from JP Morgan. Please ask your question.

Alex Yao

I have a follow-up question to Piyush’s question. So you’ve got [Indiscernable] in 2025, the CPM of your Apollo solution could be cheaper than a human driver. My follow-up question is, when do you expect the — I think to the ratio for your Apollo solution to be safer than the human driver? And then for these two conditions to materialize, so what does it take? Is it the cumulative mileage to reach a certain level or is it something else? Thank you.

Robin Li

Yeah, that’s a good question. We take 50 very seriously. I think we’ve been testing for more than 10 million kilometers. We haven’t had a serious injury, yet. So that demonstrates that once we decide to operate a certain loss for Robotaxi ride-saving services, we have the confidence that the service has a higher safety level than human drivers.

That will be the minimum bar for us to roll out services without human drivers. But my? declaration rates? really that we should be ten times safer than a human driver. That benefit is quite clear and it’s absolutely assured. What’s the second part of the question?

Alex Yao

Second part is what would it take for these two conditions to play out? Are we —

Robin Li

Yes, yes. That’s right.

Alex Yao

— and that would be cheaper.

Robin Li

Right. There are 500 million kilometers of roads in China. And the road’s conditions vary greatly. The approach we’re taking is a very gradual one. We carefully choose roles that we have high confidence that can be operated without human drivers. That’s why you’re saying that we were pacing ourselves. We are carefully picking areas and brought so that we have high confidence that we can operate this Robotaxi.


Thank you. Our next question comes from Gary Yu from Morgan Stanley. Please ask your question.

Gary Yu

Thank you, management for an opportunity to ask a question. I actually have two questions, both of which are follow up on the previous questions. The first is on regulation. I appreciate the management comments about data piracy. How about on data security issue? Have we heard anything from the regulator or government level where the officials are comfortable for a private Company — tech Company like us to have full control of these sensitive roads data traffic on our system?

Or if there is any discussion on the potential formation of say, own joint venture, a Company having full access to this data. Is that fully in the hand of private companies? So that’s our first question related to data security. My second question is also related to Robotaxi.

So we talk about the cost — the opportunity, How do revenue after 2025, or even longer-term, how should we project in terms of penetration, mobility penetration, or share mobility penetration that we think will be served by driverless cars? The reason I am asking this question is, it seems like currently, driverless cars are still limited to a certain safe scenario with specific locations. So how should we look at penetration going forward? Thank you.

Robin Li

Yes, on the regulation with the data security, we maintain a constant dialogue with the regulator in the — as I mentioned that sometimes we participated in the setting of industry standards. So I would say that we have a very high standard and we haven’t heard anything that’s very abrupt or adverse — that’s going to have an adverse impact on our operation yet. On the penetration of Robotaxi. Right. Like I mentioned, we’re taking a gradual approach.

There is a certain road that is suitable for Robotaxi. We have certain roads that are not suitable for Robotaxi. We are careful in selecting what road to operate on. But if you looked at the overall market, I think ride-hailing, half like the probably 50 million orders per day. As for the cost can become — there’s been 1/5 of the current cost. I think that the number of orders could get easily double. So it’s a huge market. It just depends on how fast we can improve our technology and still up to our services.


All right. Thank you. Our next question comes from Jerry Liu, from UBS. Please ask the question.

Jerry Liu

Hi. Thanks for taking my question. Yeah. Maybe let me ask a question about the advertising business. Mainly, if I look at the Third Quarter guidance, we will talk about some of the COVID-19 resurgent’s potential impact. So I just want to ask, first of all, is this something we’re already seeing, or is it more preempted?

And then secondarily, we’re also seeing some potential COVID or regulatory impact across different sectors in the whole industry. So I wanted to get a sense of the strengths and weaknesses of the different verticals at the moment? We’ve seen the further impact, for example, online education, eCommerce, or other verticals. Thank you.

Herman Yu

Okay. Thanks for the question, Jerry. You’re right. So we already see the impact because of COVID-19 for the Q3, especially for travel, and it’s very good, those trends, even though we’re in the early few weeks for Q3. That certainly, the COVID-19 dropped that trend, actually, it dropped pretty quickly. On the other hand, we did pretty good progress on the media in the [Indiscernable] and vocational identification and those verticals.

So talking about the regulation, so far we see revisions or on the kick-out adaptation and some other verticals. So 50 forces that the [Indiscernable] adaptation itself is pretty bigger on vertical bores, but 6 out more quotation in our venue. And also for the Q12 innovation, and now we were pretty optimistic about it because we see two potential good themes.

Number 1, is that we are expecting more quarreling along the [Indiscernable] because the current [Indiscernable] And the second one, for us, I know. So some of the resources or moving to our vocational allocation, which is a very good, vertical leap, pretty strong edge [Indiscernable]


Thank you. Our next question comes from Eddie Lao from Bank of America Merrill Lynch. Please ask your question.

Eddie Leung

Good evening all. I would like to have a question about your Cloud pieces. It seems like the strong growth, this couple of quarters was potentially driven by new projects. So I just wondering, could you give us some rough timeline that when we could get into the development stage that the growth of your Cloud pieces more chosen by your existing clients upgrading the services and then buying more — kind of like more from the usage of existing clients rather than opening up a new project. Thank you.

Herman Yu

Yeah. As you know that our Cloud wins are still growing at a very high rate, a high double-digit growth rate. So by nature, you get back — you’re right that there are a lot of new projects from new customers. And what I can say is that our customer retention has been very good and it’s also improving as we expand our customer base.

More of them they decide and give us new businesses. If we want to maintain a very high growth rate, it’s inevitable that we will have a large percentage of — I spoke on new projects. So at this stage, I wouldn’t manage the percentage of new customers or our existing customers.

We will try to grab the opportunities that are presented to us if it’s an AI-driven solution or a cloud solution. That is our sent to try to do as much as we can.

Yes. And let me add to that. I think Robin summarizes that pretty well. When you’re growing at 71% year-over-year, clearly you cannot be relying on one driver. What you’re seeing actually are two drivers. Number 1 is, you are seeing us getting repeat solutions. We talked about, for example, Smart Transportation. Look, we’re in 20 cities, if you look at contracts over 10 million, 9 of them have renewed.

But if you look at, for example, we’ve talked about that Geely, we didn’t just — our first phase was building that private part for them, and then we talked about the three-year plan, and then we talked about the other things that we’re going to do. And Robin talked about those four steps. So clearly that’s not a one solution one-time, that is a repeat solution, right? Join us for our call for Baidu World. We’re actually going to AI solutions for many different industries. And you’ll see what I’m talking about.

Basically, our model is we’ve served on where the AI Pass, that’s the AI engine. And if they want to do different things, they would then come back for different phases to add applications. So those you can see is because that the original engine is on Baidu Cloud, the applications that will come back to us, to add on that. Very similar to Smart Transportation at V2X, and they can expand to different applications of our V2X. So you can see, our business model enabled us to do repeat business.

At the same time, if we don’t expand to different industries, if we don’t add different customers, we cannot keep up with the kind of growth that we have. Look, we look at our Q2, our annualized revenue for the base in Q2 is 2 billion U.S. and growing at 70%. So you have a very exciting business and wanted to continue that robust growth, you really have to accelerate from products from different industries and adding through some of our customers.


Thank you. Our next question comes from James Lee, from Mizuho. Please go ahead.

James Lee

Great. Thanks for taking my questions. Just I want to follow up on Eddie’s question on Cloud. Maybe can you guys talk about the improvements that you guys are making to make your offering more scalable? I think last quarter, you talked about developing standardized solutions layered out in April, third-party developers, and system integrators to customize for their clients. Can you give us an update on that? And also secondly, the adoption of machine-learning AI or Cloud in the U.S. is much smaller and much slower in the U.S. Can you help us understand why we’re seeing a faster adoption cycle in China? Thanks.

Robin Li

Right. On the Cloud solution, as we do more projects and we serve more customers, we are able to more or less standardize our solutions. So in the beginning we can only take more of the system integrator role to get all the deals, but at this stage, we are able to provide seeing a lot of cases standard packages or parts to the other people who are system integrators, who gets a large part of those Total Solution projects.

That demonstrates that our capability to continue to improve and that the standardized vision of our — in our adoption of per-share learning, I think the difference between U.S. and China is that the U.S. tends to separate the product or solution on a more hard income fashion. Mainly that they have in the past, and that at At each layer you have large players that are all kinds of different industries. But in China, you can easily see more of those vertically integrated solution providers.

For example, for Baidu, we provide Smart Transportation solutions for a lot of cities. That’s summarizing through hardware, software, Cloud, and on — and all kinds of things. But that doesn’t mean, if — are not the standard designs that will — it’s actually quite similar from city to city and from customer to customer.

And by vertically integrate, or by providing an end-to-end solution, we can actually innovate a lot more to really improve efficiency and serve the customer better. Therefore, the customers are better served, and when you can vertically integrate a lot of things, AI, for Machine Learning, naturally plays a much more important role.

Herman Yu

And let me just give more granularity of what Robin just said. When you look at, for example, Smart Transportation, we started with V2X, right? You’re trying to synchronize traffic lights. We posted the project back in Upoldin (ph). So obviously, we had the product where you’re going into a city, you’re trying to understand their systems and so forth, and a lot of times you’ve got to then connect to the system, to a legacy system that will want to make it work.

But as you’re going to different cities in China, and if once you have certain tools that are set up to deal with the same legacy system and so forth, You get to number 1 that proceeds from operational experience. And secondly, a lot of tools that we’ve built up. So when you think about us doing V2X specifically to synchronize our traffic lights because we’ve done this for several years, you’re actually seeing very high scalability. You’re actually seeing better margins, and so forth, because we’ve been doing this.

So, now you see us start expanding into different scenarios, right? For example, into highways, into math, and so forth. And what I would predict based on our past experience is that these margins will improve as we buy more technical environment. Same thing as we’re going into our enterprises where we talked about automated call centers.

The first one with a unit converse and very profitable, and then they start expanding into different call centers throughout the country, so all of a sudden we’re familiar with the backend system. We just have to buy another server, you’re going to put the software in there, all up and running because you’ve already trained the Machine Learning model for a specific client. And then once you start expanding into different industries, you get 1 or 2 leading customers.

Again, you are now repeating a lot of things that you’re doing, all the same, you get the inertia. So, I think AI Solution is very similar to the enterprise solutions they have, software, and so forth in the U.S. It takes time whenever you’re getting into a new industry, into a new customer. But once the environment connecting to the legacy system is very familiar, you get that initial and phases after that.


All right. Thank you. Our next question comes from Natalie Wu from Haitong International. Please go ahead.

Natalie Wu

Hi. Good evening. Thanks for taking my question. We noticed recently from a press release as you are expanding your candidate’s recruitment this year, giving out [Indiscernable] of the community headcount. So just wondering if management can share with us [Indiscernable] now behind that advancement expansion at this point and how should we see the margin chance of Baidu Core ahead? Also, if we simply look at marketing-related business in Baidu Core, just wondering what’s the margin profile of that segment alone. Thank you.

Robin Li

Yeah, on the headcount growth, if you look at our growth rate of our Cloud, it’s very high. And this kind of industry solution requires a lot of headcount additions. If you compare our cloud to use with some other industry peers, I think that the headcount for Baidu, it’s not that high. It’s actually quite reasonable. And we do need a lot more people to come up to deliver our services.

Herman Yu

Yeah. And then on the margins for Baidu Core, we’re looking at a non-GAAP basis. You look at Q3, my estimate right now would be, we’re probably going to increase the cost of sales plus our OPEX, maybe 1 billion to 1.5 billion RMB on a sequential basis. So that’s how I look at this. And you guys have the last two quarters, I will look at the non-GAAP for Baidu Core, and then I think you guys have a very clear trend.


Thank you. Our next question comes from Tian Hou from T.H. Capital. Please go ahead.

Tian Hou

Hi, Robin, Herman. The question is related to your AI Cloud. So there are normal Clouds and there are AI Clouds. So I wonder, if we merged these two types of Clouds, so from a financial point of view, can I say AI Cloud is a much higher margin? So can I treat that as a difference? That’s number 1. What kind of clients need AI Cloud? What kind of clients need a regular Cloud? So that’s the first question. The second one is Managed Page has already increased to a bigger portion of the online marketing. So what’s the outlook for this Managed Page going forward? Thank you.

Robin Li

Yeah. The margin for AI Cloud is higher, significantly higher than the more general cloud, especially the app. I think you all know that app and CDN generally have a lower margin, but I will say clients need AI Cloud and general cloud, they need all kinds of technology and solutions. It’s just that our strength is that we are very advanced in AI and we find that by integrating our AI technology, AI solutions to really solve our customer’s problems, we are able to do a much better job. We do provide general Cloud Services. But I think the market is very large, it’s large enough and it’s growing very quickly. And we are gaining market share in this very attractive space.

Herman Yu

And let me just add. You asked about who needs AI. If you look at our customer set, we see several specific. One is, for example, Internet media, right? When you have a media link, for example, some of the Media Companies it is very data-heavy. When you look at, for example, our industrial sectors, different areas of manufacturing, when you look at our utilities, energy, and so forth, they all have a lot of datasets.

But you look at, for example, Smart Transportation, the government has a lot of datasets. So our AI solution, basically said, if you are a customer, you have a lot of data sets. You need to improve operational efficiencies and so forth. Are Machine Learning models when you go in there is Baidu Brain. We can help you. A lot of things that you had to do manually before, we can automate that, we can do them much faster with AI computing. So companies or industries that have a lot of datasets, we can automate.

For example, you look at financial services rather than computing and improving every loan, we have examples of 2 million customers, we can automate that whole computation, where you just ask Baidu Brain rather than having someone manually compute all the different ratios and all the numbers on that particular customer. So you can see that users are very helpful, especially in China’s economy.

Robin Li

Yeah, Tian, I will take the second one. You’re right, so Managed Page now accounts for like 40% of the Baidu Core advertising. Actually Managed Page is not alone. We treated part of them marketing Cloud that we have been discussing a few times, right. Including the Managed Page and also the tools we provide to the merchants, and to make it easy for them to run campaigns on Baidu. So as we always side, so Managed Page together with — by Yahall (ph) and the Smart Mini Programs, they work together with all the building blocks for the Mobile Ecosystem.

Actually, with NYSE because we can provide an even more close-to-loop experience, which increases the thickness of the engagement between the user and the Baidu app. So as a result, we can see — so then converting wait. The Building Blocks or much higher than before. That’s why we can see now due to COVID-19 outbreaks in Q1 last year.

So we — are online marketing business is actually rebounded inconsistently in the last 5 quarters. The impression for the impact marketing because of it then 3 building blocks and it grows as much as 26 year-over-year. So that’s either we will keep working on the Managed Page s because it will improve the user experience and also monetization capability.


Great. Thank you very much. So, ladies and gentlemen, we have reached the end of the question and answers session. So with that, we conclude our conference for today. Thank you very much for participating. You may all disconnect.

Source: Baidu

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