Baidu, Inc. Q3 2021 Results Conference Call November 17, 2021 7:30 AM ET.
- Robin Li – Co-Founder and Chief Executive Officer
- Rong Luo – Chief Financial Officer
- Dou Shen – EVP in-charge of Baidu Mobile Ecosystem
- Herman Yu – Chief Strategy Officer
- Juan Lin – Director of Investor Relations
Conference Call Participants
- Alicia Yap – Citigroup
- Piyush Mubayi – Goldman Sachs
- Alex Yao – JP Morgan
- James Lee – Mizuho
- Jiong Shao – Barclays
- Natalie Wu – Haitong International
- Gary Yu – Morgan Stanley
- Eddie Lao – Bank of America
Hello, and thank you for standing by for Baidu Third Quarter 2021 Earnings Conference Call. Well, at this time, all participants are in listen only mode. After management’s prepared remarks, there will be at an answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time. Now, I’d like to turn the meeting over to your host for today’s conference Juan Lin, Baidu’s Director of Investor Relations.
Hello everyone and welcome to Baidu’s third 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 [Indiscernible] our CFO Dou Shen our EVP in-charge of Baidu Mobile Ecosystem, and Herman Yu, our CSO. After our prepared remarks, we will hold a Q&A session.
Please note that the discussion today will contain forward-looking statements made under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Forward-Looking Statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations.
For detailed discussions of these risks and uncertainties, please refer to our latest annual report and other documents filed with the SEC and Hong Kong exchange. Baidu does not undertake any obligation to update any forward-looking statements, except as required under uptick follow-up. Our earnings press release and this call include discussions of certain unaudited non-GAAP financial measures.
Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP and is available on our website at ir.baidu.com. 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.
Hello, everyone. We delivered another solid quarter in Q3, with Baidu core revenue growing 15% year-over-year, driven by AI Cloud, growing 73% year-over-year. Many years ago, we doubled down on AI, believing that it would expand our market opportunity and accelerate Baidu’s long-term growth. Non-ad revenue accounted for 21% of Baidu co-revenue in Q3 and remains a strong growth engine for us.
Through AI, we are bringing innovation across the consumer price and the public sector on the backdrop of positive tailwinds and the rising tide of tech innovation being digital transformation in controlling that by OT and intelligent mobility. Baidu AI Cloud is empowering enterprises from traditional industry and the public sector to better serve customer and move faster with greater efficiency.
At Baidu World in August, which was broadcasted on CCTV, we showcased Baidu AI Solutions including smart quality assurance to automate the screening of electronic components of manufacturing, assembly [Indiscernible]. Smart logistic to optimize fleet management, and smart monitoring to ensure a steady energy supply from the utilities sector.
We are excited about Baidu AI Cloud continuing fast growth. Leading companies across industries are adopting Baidu AI Cloud solutions to improve their operation. And we are working hard to standardize such solutions for industry adoption. An example is our end-to-end AI solution composed of [Indiscernible] for financial services sector.
Our AI Cloud customers are recognizing Baidu’s value proposition with strong consumer Internet reach. For example, we are winning smart public parking projects with our solution, offering the convenience of collect public parking fees by a Baidu maps without the need for meter maid.
Hospitals are choosing Baidu for cloud solutions that save patients trips to the hospital with continued patient care for chronic diseases at home through dual OS smart display. According to the World Health Organization, there are 1.35 million road traffic deaths every year. Apollo Autonomous Driving aims to reduce traffic accident, accelerate mobility to EV, and provide greater passenger safety especially after dark.
Apollo Goal has become the largest Robotaxi service provider in the world. Based on our estimate. Our leadership position in autonomous driving, well, land strength to AFD and Gduauto. DeepWay, agiley between Baidu and Lion Bridge a leading trucking Company in China, recently unveiled its first-generation EV truck powered by Apollo to automate road fright.
Marking Apollo’s entry into the multi-trillion dollar truck market. DeepWay leverages Apollo’s leading autonomous driving capabilities and [Indiscernible]. Baidu is making great progress as its plans to release the first concept production car at the Beijing Auto Show early next year. [Indiscernible] showcased Apollo’s intelligent, self-driving, and an incoming feature with the aim to deliver mass production in 2023.
For the third quarter, China’s GDP growth, 4.9%, much slower than the 18.3% and 7.9% growth rate in the first 2 quarters. Our [Indiscernible] has being impacted by sectors like education, real estate, and home furnishing, travel, and franchising and we expect this headwind to continue in the near-term. As we look forward, there are also positives coming into play.
For example, Baidu app is reaching over 600 million users each month, our hosted marketing solutions is becoming ever more popular despite owners and the twinned, it’s for the internet to become more open. Non-ad mix up over 1/5 of Baidu’s co-business and growth over 70% year-over-years. We stand to benefit from China’s plan to leverage technology to grow the enterprise and public sector part of the economy.
ESG is at the heart of Baidu as we leverage our strong Internet foundation to grow our AI business at scale. Apollo mission is aligned with lowering carbon emission from making traffic in large cities, closer, to accelerating the adoption of EV through G2 software for EVs and EV powered ride-hailing. In June, we announced our goal to become carbon-neutral by year 2030.
Our young Chen data center was awarded the carbon-neutral data center reader certification, and MSCI named Baidu as 1 of the 2 companies in China with transparent reporting on greenhouse gas emission in its net 0 tracker. Turning to Q3 operational highlights. Baidu’s AI Cloud continues to see strong growth, leveraging our world-class AI technologies and our capabilities to provide one-stop-shop solution to our customers.
Our AI solutions are being increasingly adopted across different industries and for different scenarios. We enriched our cloud offering with the release of an end-to-end AI cloud solution, powered by [Indiscernible] and PaddlePaddle deep learning framework to help financial services firms digitize and automate their operational processes in listing leading customers like China Life and Bank of Jiangsu.
Baidu AI Cloud is expanding into industrial Internet by partnering with industrial park and municipalities. Our deployment to serve large pool of enterprises, is frightening. Last year, we spent 7 months implementing our AI Pass in GuiYang economic and technology development loan serving approximately 100 enterprises. Our deployment of AI Pass to enterprises in Tongxiang, including those in their Economic Development Zone, took only 3 months.
Tongcheng hosts 40,000 [Indiscernible]. Mostly manufacturing based and we believe our AI solution can help these companies, improve their operational capabilities. Baidu AI Cloud is moving into smart city. [Indiscernible] UNESCO heritage site with 800 year-old bridges and waterways in Southwest China is using Baidu AI solution to keep the city safe and clean for visitors.
Leveraging the digitization of tourist areas, Baidu AI Cloud, helps local authority timely detect and address in fractions such as illegal parking and public littering. Our success in [Indiscernible] is leading to projects with [Indiscernible] and other cities. Moving to SAE smart transportation, Baidu SAE has been adopted in 24 cities, up threefold from last year based on contract size over RMB 10 minute.
About half of ACE projects signed in Q3 came from repeat customers. In addition to supporting policy, tailwind SEE is benefiting from the value we deliver to the public sector. For example, the SEE smart transportation solution that was deployed in Guangzhou earlier this year helped improve congestive traffic by over 30%. Smart parking has made it easier for local residents to find available parking spaces shortening travel time. Turning to autonomous driving.
Apollo level for testing has accumulated over 10 million miles or 16 million kilometers, setting a new milestone. We continue to receive green light being our application or autonomous driving testing as we demonstrate to local authorities Apollo’s progress in technology and operation. Apollo has received 411 autonomous driving permits, an increase of 237 permits from a year ago.
Our progress in autonomous driving technology, operations and continuous cost reduction positions us for [Indiscernible], monetization in a few years as paid right scale. In July, Baidu opened its third Apollo Park in Shanghai, a 10,000 square meter facility housing Apollo Cloud and Data Operation. Shanghai marks Apollo goals, fixed ride hailing service open to the public. Following the cities of Beijing from [Indiscernible] and [Indiscernible].
In August, we introduced the Chinese brand for Apollo goal Global [Indiscernible], fanatic interpretation of Robert taxi in Chinese. Apollo goal is resonating with ride-hailing passengers with total ride doubling quarter-on-quarter to reach 115,000 in the third quarter. Apollo goal is off to a good start, as we set an ambitious goal to expand operations into 65 cities by year 2025, and 100 cities by year 2030.
Turning to ASD and dual OS in vehicle infotainment software. Wema Motor Chinese EV OEM find Baidu to install a total navigation pilot in its new W6 SUV, taking Apollo partner network to 31 makes, including those from automakers like GM, Ford, Toyota, Honda, and Great Wall. Turning to Jidu Auto. Jidu has completed its first vehicle wind tunnel testing with the full side oil and Clay model.
We have identified the model design schemes and engineering development, and design optimization are underway. Jidu will showcase the latest ASE, demonstrating the appeal of smart EVs with advanced autonomous driving and smart in-cabin features. We hope to success of [Indiscernible] will, increase appeal of Apollo solutions to other automakers. On dual OS.
[Indiscernible], was ranked the number one in smart display globally and number one in smart speaker in China, based on second quarter shipment, according to strategy analytics, [Indiscernible] and IDC. A key growth driver for Baidu smart display is a shift of user time spend at home to large screens for services like karaoke, short and long videos, online games, education services, video conferencing, and other visually oriented activities.
Popular mobile apps, appearing to our OS skills like [Indiscernible] 58.com, Haiti and Kentucky Fried Chicken to name a few. In addition Xiaodu completed its Series B financing at a market valuation of 5.1 billion in August, 9 months after its Series a financing at $2.9 billion Baidu remains super majority shareholder after the Series B fee round.
The continued strong performance of our new AI [Indiscernible] (ph), will not have occurred without our relentless investment in technology and our pursuit of better products and more customer adoption from our technology leadership. Baidu released Plato-XL, the world’s first $11 billion-parameter pre -trained dialogue generation model. Achieving breakthroughs in Chinese and English conversations.
Plato allows for different kind of conversation with users, including chitchat, knowledge-based dialogues, and conversational Q&A, which will be incorporated into Xiaodu in the future. Turning to mobile ecosystem. Daily logged in users in Baidu app reached another all-time high at 79% and in-app search queries was up 11% year-over-year, reflecting a better search experience from Baidu app.
We continued to focus on deepening the service offering of our key verticals. For example, Baidu Health has built a strong community of medical experts that allow users to frictionless move from search to telehealth consultation. We recently enabled doctors in our network to write a prescription for online consultation and home delivery. Baidu app now offers instant replies to search queries from over 30,000 industry participants spending 19 industry verticals.
Instant replies were up 5 votes from a year ago and 40% are paid services. For example, users who search for tips on job interviews can readily connect to career advisors to get help on reviewing their resumes and selecting career training programs. Instant replies have enriched Baidu’s search experience, further driving the vibrancy of our in-app search.
Revenue from managed page reached 43% of Baidu core advertising as we make doing business online for merchants simpler through Baidu’s hosted marketing cloud. For example, mainly on health, a physical checkup clinic chain in Shanghai opened a managed page storefront allowing users to browse its services, chat with customer service, make payments, leave comments, and share reviews.
Monthly orders increased 4-fold, 3 months after using managed page promotion. Third, supplier nature is open and we are benefiting from the trend to make Internet more open in China. Our e-commerce feature is seeing good progress. In September, the number of third-party SKUs from China’s top e-commerce site, searchable on Baidu, reached almost 1 billion and e-commerce GMV on Baidu, though small, grow 19%, sequentially.
The open nature of our mobile ecosystem, is leading smart speakers — smart maker — smartphone makers to select Baidu ‘s Smart Mini Program as the landing page for their browser search. MAU from such collaboration has reached 24 million, and we believe such trends well, intense user experience and monetization or union search.
Last but not least, I want to welcome [Indiscernible] who has joined us recently as our new CFO. Juan brings a wealth of financial management and capital market experienced I also want to thank Herman for his 4 years of service as Baidu CFO, and we expect more quick things from him as CSO. With that, let me turn the call over to loan to go through the financial highlights.
Thank you, Robin. Hello, everyone. I’m excited to have joined Baidu recently and participate on my first earnings call at Baidu. I look forward to meeting with everyone in the coming months. Now, let me walk you through the details of our quarter 2021 financial results. All monetary amounts views in my discussion are in RMB unless stated otherwise. Baidu’s curator revenue was RMB 31.9 billion or US $5 billion at 13% what three year-over-year.
Baidu cost, Q3 revenue reached RMB 24.7 billion or $3.8 billion up 15% year-over-year. Now advertising for Baidu call reached RMB 5.2 billion up 21% of Baidu cost revenue. AI Cloud revenue was RMB 3.8 billion up 73% year-over-year. Our AI Cloud growth is benefiting from the demand for close services by customers from the Internet and media, financial services, energy, manufacturing, and the public sectors.
AC as much as [Indiscernible] is another growth driver for AI Cloud revenue. We’re fighting those automakers that subscribed to our infotainment solutions, are also interested in Apollo ASD. Plus, we are reclassifying ASD revenue into AI Cloud. ISD revenue is quite smart now and ADI approximately 1% growth year-over-year to AI Cloud as a result of retroactive adjustment.
ID and OGI, [Indiscernible] continues to make great progress. Demand for higher ASP products keeps growing as customers come to appreciate the value of steel OS smart assistant and service revenue continues to grow. Baidu call app revenue was RMB 19.5 billion up 6% year-over-year. In app search advertising was solely, partially offset by the weakness in junior revenue.
IQiyi revenue was RMB 7.6 billion up 6% year-over-year. IQiyi subscribers reached 104 million in September and the membership revenue was up 8% year-over-year, mainly due to the refund membership strategy improved monetization capabilities, cost of revenues was RMB $16.1 billion up 26% year-over-year.
Primarily resulting from an increase in tech, content costs, and the cost of sales associated with new AI business. Operating expenses were RMB 13.5 billion, up 46% year-over-year. During the third quarter, we incur a contingent loss of RMB 976 million, pertaining to the legal proceeding involving former advertising agency.
Excluding such contingent loss, operating expense was up 35%, primarily due to an increase in channel spending, promotional marketing, and personnel-related expenses. Non-GAAP operating income was RMB 4.6 billion or U.S. $731 million. And non-GAAP operating margin was 15%, 1, and 5. Non-GAAP operating income for Baidu call was RMB 5.8 billion or U.S. $904 million, and non-GAAP operating margin for Baidu call was 24%.
Adjusted EBITDA was RMB 6 billion or U.S. $925 million and adjusted EBITDA margin was 19%. Adjusted EBITDA for Baidu call was RMB $7 billion or U.S. $1.1 billion, and adjusted EBITDA margin for Baidu call was 28%. Cash and short-term investment for Baidu call as of September 30th, 2021 was RMB $183.6 billion, or U.S. $28.5 billion. Free cash flow for Baidu, excluding IC, was RMB 2.9 billion or US $449 million.
Baidu call has approximately 39,000 employees as of September 30, 2021. As Robin mentioned, China’s GDP growth has slowed over the last 3 quarters and sectors in our app businesses, such as education, real estate, estate and home furnishing, travel and franchising has been negatively impacted.
With the resurgence of COVID-19 in many cities recently, local governments are putting in place preventive measures, including quarantine, travel suspension, and mass testing. Consequently, our own advertising business may remain soft in the coming quarters before normalizing. Turning to Q4 guidance.
For the fourth quarter of 2021, Baidu Express revenue to be between RMB 31 billion, which is US dollar $4.81 billion and RMB 34 billion, which is US $5.27 billion representing a grocery of 2% to 12% year-over-year, which assumes that Baidu call revenue will grow between 5% and 16% year-over-year. The above forecast pace into consideration that the current COVID-19 situation in China, which is still evolving and business visibility is limited.
The above forecast reflects our current and preliminary view which is subject to substantial uncertainty. Before I turn the call to Operator, let me recap this quarter. China is adjusting its economy because drivers, with the introduction of a new 5-year plan in March this year. Historically, the Chinese economy has been very resistant to such adjustments and new drivers allow the GDP growth to come back.
We’re optimistic about China’s future, especially when the current COVID-19 situation comes under control. It’s quite clear that China will leverage technology to grow the enterprise and public sector portion of the economy leveraging AI our close services — our core business continued to outperform the market, growing 73% year-over-year in the third quarter.
Apollo is making great progress from L4, Autonomous Driving testing, surpassing 10 million test miles to Robotaxi ride, sharing [Indiscernible] rights. Sequentially to ASD, signing on new partners to G2, finished the weight tunnel testing of its first-cut model, 8 months after its CEO joins to build a team. We are moving at China’s speed.
China is doling our new policies to support great energy. We are hopeful that Baidu will benefit from the promotion of decoupling night vision, as we leverage AI to minimize traffic conjectures in thousands of cities across China and helped accelerate the switch to EV with G2 ASD, and Apollo Go Robotaxi.
Our mobile ecosystem, Baidu MAU reached 607 million up 12% and daily login reached 79%. Our app business is susceptible to macro environment, and what is fair, our gross rate to peak, when GDP grows our salaries. Operator, with that, let’s now open the call to questions.
Certainly. Thank you, ladies and gentlemen we will now begin the question and answer session. If you wish to ask the question [Operator Instructions ] Participants are requested to restrict to 1 question at each time. Question comes from the line of Alicia Yap from Citigroup. Please ask your question.
Hi. Good evening, Robin, Rong, and Juan, congratulation Rong on your new role and for taking my questions. I actually tried to fit into if I may. For the fourth quarter core — Baidu core revenue guidance, you provided a wider range, which is 5 to 16%. Can management elaborate the scenario and the situation that you baking through the low end of this 5%.
What would be the implied core ad revenue growth versus the AI Cloud revenue growth if we end up in the low end? And then similarly, what would be the scenario if we end up in the high end of the revenue guidance of 16%, would that come from better macro or a more car project that will be closing?
And then secondly, just in the days overall broader regulation backdrop, has Baidu started to have any discussions with other major Internet peers as related to these potentially opening up of your social network content to the search engine. If this were to go ahead, what is management view on the potential benefit and upside to Baidu fundamental going forward?
And also any discussion you have with some of the e-commerce leading player to allow Baidu to crawl into the e-commerce content item on that digital storefront. So any color you can provide would be appreciated. Thank you.
Alicia, I will have Herman answer your first question and I’ll answer your second.
Hi, everyone. So with regards to our guidance, we normally guide — totally assuming that we will hit the midpoint. You asked about, what do we factor in and what would it be, it goes to the low. I think obviously, as Robin has mentioned, 21% of Baidu Core is non-advertising, and almost 80% is advertising. And as we’re in the process of trying to control COVID-19, that obviously is the highest risk right now.
In our model, we assumed that COVID-19 will be under control for the most part in China by the beginning of December. We have seen since Guangdong’s situation that normally 60 days after it happens, that — it gets under control. But this time it spreads through several cities. Given the pattern that we’ve seen, given the example in Beijing, we’ve seen the cases have slowed down, we think that’s a doable situation. Secondly is no.
The other side of our business is mainly Cloud, right? When you think about the Cloud, the — trying to recognize revenue, trying to make sure that the software is installed, it’s a more complicated process than advertising. So as you get in into year-end, the risk there is that we delivered software, but it’s not up and running, so we cannot recognize revenue.
And that’s always the case when you have 2B businesses. I think that there is a risk there with our Cloud business. There’s a risk there with transportation. I think those are the key risk factors, I think, I will call out. But as we said, normally when we go out with the guidance, given the information that we have today, we think we’re more likely to be somewhere in the middle.
Hi, Alicia. I’ll take the second one. As you know, search by nature is open, and with the leaving of being able to share content across apps, provides better user experience. And also with believing on this will be a going forward trend. Actually we already see things are happening around this direction for example, some developers are more willing to open up their ecosystem nowadays because is also good for their own business.
As Robin already mentioned, our e-commerce effort are almost 1 billion SKUs from the top, e-commerce sense, were now searchable on Baidu. And the GMV in Baidu goes 90%, sequentially. So actually another great example, I want to share, which Robin already mentioned is that, the major smartphone makers in China are adopting our open source smart to mini program framework for their in-house partners.
With this adoption, users will have better experience and the developers or significant, again, significantly extend their reach through the major [Indiscernible] in China. So you’re right. We believe we’ll benefit from the openness over the whole Internet and we’re seeing things are happening in that way. Thank you.
Great. Thank you. Our next question comes from the line of Piyush Mubayi from Goldman Sachs. Please go ahead.
Thank you for taking my question. When I look at the guidance that you talked through Herman, it appears to be generally slowing down and we realize it’s a very high base for the Cloud business in the fourth quarter of last year. As we look at that pace of growth and we go through the core which looks like it’s a 5 to 16% range.
And we try to estimate where are the in the advertising vertical weaknesses and whether it’s COVID related or macro-related or third-party related. As you exited third quarter, what was the pace of decline that was the commencement of the fourth quarter? You could take us through that pace, so we can understand where we might end up to a certain degree.
And also, I know it’s very early to talk about it, but broadly speaking, into 2022, we’d be opening up our platforms with so much that’s going on from a business perspective on the AI front, as well as on the cloud front. What is the pace of growth we can expect on the call?
Can you repeat that last sentence? I missed that.
As we look at — we’ve seen a slowing down into the third quarter, which is probably one of the reasons why you’re giving a very wide range for Q4 for the core. But there’s so much that’s going on that is — that leads to a level of optimism for what 2022 would look like, including the opening of the systems, opening of the platforms, how much [Indiscernible] search you can originate in the e-commerce vertical, and that’s just the e-commerce space.
I don’t know how many other verticals you can tap into. Do we think through 2022 and the core pace of growth, any feelings around how that would be would be great.
Okay. Let me answer that. We talked about Q3. When you look at advertising Q3, we’ve been gradually slowing down in terms of our growth. And in Q3, what we’ve seen that sectors that have impacted us. Some of these are pretty obvious, like education, like real estate and home furnishing, like travel and franchising, these would probably be more related to COVID-19.
These situations are going to extend into Q4 and we suspect that this might be a multi-quarter [Indiscernible]. Based on what we have seen right now, we expect that advertising for Baidu Core, which was a 6% year-over-year in Q3 would probably go into even a slower growth rate in Q4, assuming that a COVID-19 gets under control by the beginning of December. So a lot of uncertainty there.
If that continues to not get — if that continues to have new cases every day, then our advertising could even perform worse than that. So I think a lot of it has to do with COVID-19, but there are other factors that’s impacting that, such as regulations and so forth. I think with regards to the AI businesses, I think COVID-19 does impact that a lot.
As we talked about before, that our AI Cloud is based on solutions and we have to customize for certain customers and so forth. If we are unable to travel or we were not able to be as fluid as before, that will have some impact. Others are just your normal end of the year trying to complete these enterprise solutions.
And sometimes, given that the difficulties that we have right now having about and so forth, might not make it. I think we’re just putting that uncertainty in there. With regards to our range, actually we’ve been pretty consistent. If you look at over the last year, it’s — at the Baidu consolidator level is always a plus or minus 5%.
I don’t think we’ve made any changes in the recent quarter. Going to 2022, it’s hard to look out so many quarters into 2022, but what we have seen for advertising, as I mentioned, we think that this could be a tight quarter impact because example COVID-19 comes and goes and then the regulations and so forth. And when we look at — talk to our peers in the market.
There seems to be a consensus that this could be beyond 1 quarter. I think that’s where we’re advertising. Sure enough, there’s also that upside with the opening up with a different apps and so forth but it’s hard to bake that in until we actually see more development. We’ll keep you guys apprised as that comes.
The other side of this is that we’re pretty optimistic with our AI businesses. Robin has been QB, which we’ve seen year-over-year. If you look at the last few quarters that we’ve been always growing above market speed. We continue to believe that we can grow above the market. If you look at our NDR for example, it’s been gradually improving or increasing. We’re coming — feeling pretty good about that.
One of the thing is that if you look at our cloud business, SaaS businesses, is the fast right now. We were ranked by IDC as one with the largest AI solutions in China. And this is a piece asset facet of our Cloud solutions or our Cloud AI. So I think we’re pretty — feel like we’re in a good spot right now because of the policy trends supporting technology, supporting a leveraging AI for enterprises, also for the public sessions.
About the opening up on e-commerce platforms; that will enable users to do transactions, Baidu Mobile Ecosystem, especially Baidu app more easily, given that the e-commerce infrastructure in China has matured it’s very easy for people to pay using their mobile phone, and it’s very quick to get something delivered to our home.
And now that we can index a lot of that to use on Baidu, we expect a very quick increase in terms of TMV from a low base revenue contribution directly from transactions will not be large, but once users get used to do transactions from the Baidu platform, I think the overall conversion rate for our advertisers will also improve. I think that the benefit will be well beyond simple transactions on the Baidu platform.
Your next question comes from Alex Yao from JP Morgan. Please ask a question.
Thank you management for taking my question and [Indiscernible] welcome back to the Internet investments community. I have 2 questions. Number 1 is we have seen a lot of regulatory and operating environment changes recently for example Apco’s that idea of the policy change. For example, the implementation of [Indiscernible] on 1st of November.
Can you guys talk us through the operational and the financial impact from those changes particularly, how should we think about the union business into the next couple of quarters? And then second question is regarding the general corporate strategy. Well, the advertising revenue outlook through the week for the next couple of quarters.
How do you guys think about the general corporate strategy? For example, are you still pushing the investments on head counts and user acquisition costs? And I think — in the past, you guys had a very tough cost control when the top-line was under pressure. Are you thinking very differently this time? Any thoughts on the general corporate strategy in the current [Indiscernible] revenue on look will be helpful. Thank you.
The first one. On the IDF [Indiscernible] because majority of Baidu’s core ad business do not rely on user data not like, some of the US companies do. The impact on that side is most pronounced, actually. In January, we strive to be a global technology leader in issues such as this type of data, privacy and security has been taken into consideration for a long while.
Many years ago before this topic even caught up in — caught the industry’s attention, we saw the need to establish internal committees to define strict policies and procedures to address data privacy, data management and data security. Also, we are working with the leading companies globally and domestic to treat ideas and drive best practices.
But we also share our experience with authorities to help the industry address these complicated issues. Again, all the efforts we have done, I think the impact on this study is not that pronounced.
The next question comes from James Lee from — sorry. Go ahead, please.
Alex, you mentioned about corporate strategy. So where we are at this time is that we have our expenses. You can look at mainly 2 buckets, right. 1 bucket of spending is related to our growth with our new business, whether that’s in Cloud, whether that’s in intelligent driving and so forth. And you got it to invest ahead of time to make sure that your sales force is there, to make sure that people are doing a pre -sell there to support your future growth.
And as we mentioned earlier, that piece of the business is still growing very fast. When you look at non-amortizing, we’re growing over 7%. So you’ve got to build a funnel. You’ve got to get the people and so forth. I think that’s going to continue. Secondly, a new AI business has higher cost of goods sold. Whether you are talking about selling smart devices, whether you’re talking about delivery for [Indiscernible] solutions or smart transportation.
Those things we have to factor in for this new business; that’s just part of it. We look at gross margin very carefully but you still have to find the [Indiscernible] the salespeople, the development people to support the business growth. And we’re leading in those businesses, so we feel comfortable continuing to invest.
The 2nd pool of investment that we have is with a mobile ecosystem, and what you see there mainly is supporting our Baidu [Indiscernible] (ph). A big part of that spending is channel spending, or marketing spending for the Baidu ABP. This year, we’ve been pushing Baidu ABP [Indiscernible], which will allow us to tap in to users from lower tier cities. And that has been working.
And in addition to that, we’ve been beefing up some development in that area to help search experience. I think we manage that side of the expenses, especially channel spending based on ROIs. As long as we’re seeing positive good ROI, we will continue to spend in the channel and marketing areas.
I will just like to emphasize that our investments is pretty much pegged with growth potential. We see a lot of growth potential in the AI enabled new businesses. So, we’ll continue to aggressively invest in that area. Mobile ecosystem in general, not just for Baidu, I think the overall mobile market in China is maturing. So, we will use discipline to balance our investment and growth.
Thank you. Our next question comes from James Lee from Mizuho. Please ask your question.
Great. Thanks for taking my questions. My questions on intelligent driving, Autonomous Driving, and obviously does a lot of moving parts in this business right now. I think you guys have lay out, your plans of robo-taxi.
Can you also lay out the road map and how Apollo can achieve a meaningful presence in connected infrastructure, and OEM licensing your technology? So what I mean is that does your footprints of your smart transportation influence OEMs decision to choose the Autonomous Driving Solutions? Thanks.
Hi, James. Apollo is a platform for both smart transportation and autonomous driving. It has gained a lot of partners, customers, and so we being a leader in many of the fronts including Robotaxi as I mentioned, we are probably the largest Robotaxi service provider in the world by number of rides which we provide. And it’s open to the public in 5 cities in China and for many of those areas, we also have smart transportation projects going on.
Government pay off to install roadside units, and also software systems to better managed the traffic and help — I’m striving to become safer and greater. We also worked with quite a number of OEMs to provide infotainment system, as well as other pilots or navigation system what we call AIC.
And we have gained quite a number of OEM customers. So all-in-all as a platform Apollo connects smart transportation, OEMs, [Indiscernible] services altogether. And we are quite confident that we will continue to lead that market and even become dominant in the future.
Your next question comes from Jiong Shao (ph) from Barclays. Please go ahead.
Thank you very much, for taking my questions. First off, big congrats to both Herman and Rong, on your new roles. My question are related to your Apollo Autonomous Driving and a robo-taxi as well. Just following up on the previous question, could you elaborate a bit on the top line for G2 in terms of when the assembly line manufacturing facility will be ready?
What kind of scale we are talking about when you talked about mass production in 2023? And you talked about your partnership with Lion Bridge for semi-truck. I understand GD just announced their ambition for the EV semi-truck business a couple of days to go.
I think — I was wondering, since you are big partner, do you have any plan to work with them for their Semi truck EV initiative? And then lastly on Robotaxi, I recall I may have read somewhere you may have commercial operations up and running for Robotaxi sometime next year. Is there anything there you can share with us? Thank you so much.
Alright. On Jidu, like I mentioned during the prepared remarks, we are planning to launch the concept production car early next year at the Beijing Auto Show. That car will be the final shift in architecture for when it is available for sale in the latter part of 2023. So, by mass production, we mean everyone, every consumer can place an order or to buy the Jidu car sometime in the second half of 2023.
Of course, it’s too early for us to predict how many units we can sell at that time but we are all very excited the feature we’re putting in and the values we can offer to our consumers when it’s available. In terms of Autonomous trucking, it’s a huge market. We already have a partnership with Lion Bridge and GD, as you know, is a strategic partner of Baidu too. We are open to all kinds of collaboration with them.
And again, this kind of collaborations are not exclusive. Apollo is an open platform. We can work with everyone and we would like to help a lot of companies to become successful. And now the commercial operation of robo-taxi, we can charge right now in a couple of the areas in Beijing and Tongzhou and we are applying such licenses in other cities. It’s a very quick wrapping up process.
We are already providing — we already provided 115,000 rides in 1 quarter in Q3 and in Q4, I think that number will continue to increase. And this is probably much, much larger than the reported number you can hear anywhere else in the world.
Thank you. Our next question comes from Natalie Wu from Haitong International. Please ask your question.
Hi, good evening. Thanks for taking my question and congrats on [Indiscernible] my question is regarding the investment plans for your new AI business. Firstly if we take — look at the development history of AliCloud, when the revenue scale approached RMB [Indiscernible] annually, it developed loss ratio actually might lower significantly.
So, should we expect that margin profile on [Indiscernible] to improve next year after an AI account revenue scale which also goes [Indiscernible] scale. Or how should we see the modern chain of your AI car business in the next 1, 2 years? Also for the intelligent driving, what kind of investments down shall we expect for the next 1 to 2 years, and how could that impact the margin? Thank you.
Yeah. So on the AI Cloud, I think — yes, I think when you talked about other Cloud players, do you talking about scaling with regards to us right? As we talked about before us, there is a smaller piece of our business where we’re more excited about where we’re differentiating in the market as our SaaS. And as I mentioned earlier, SaaS is the fastest growing piece of our business.
And when you look at SaaS, as we talked about a Baidu world, there’s several factors with regards to our margin improvements right. As we come out with new solutions, working with new customers, that the first project — the first few projects, we might have to spend that extra time in order to integrate with your legacy system in order to build towards and so forth way to go looking ready.
When we’re going into new industries. That would also — there’s that ramp up the cost to be able to adapt our current solutions to that new industry. So you are seeing with our fast-growth, as Robin mentioned, 73% year-over-year growth is much faster than market right now. And we cannot have done that without going into new industries with new solutions, without consistently getting new customers.
So at the early stage where we’re just expanding market, expanding customers, you’re not going to see good margins. But when you look at a particular solution over time, when you looking at particular customer overtime, you’re seeing margin improvements. And we went to that in very detail during the Baidu World presentation and IR can go through that with you again on those things.
This is a proven business. If you look at our counterparts in the U.S. who are in the SaaS market. As you see the same trends. So we’re pretty confident that as we continue to grow our businesses here in the beginning, you’re not going to have a good margin because you have to customize.
But as the product line becomes more standardized, as we become more standardized to [Indiscernible] industry and so forth. You’re going to see their margin pickup. That’s number 1. Number 2 is, the proportion of SaaS is getting hired versus IaaS. And IaaS as we know, because it’s a commodity, it’s just going to have lower margins.
So you have several trends that are playing in our favor. So I can see it a few years out, you’re going to see margins are improving. Okay. Intelligent driving: I think there is 3 pieces that we talked about before. At times driving is the technology and then out of that there’s ways to monetize. There’s the infotainment business.
There’s the — what we call ASD Apollo, the [Indiscernible], navigation pilot, so forth. That is a business where you have to invest upfront with R&D and so forth. But when we sell it on a gross margin level, that gross margin is usually pretty healthy compared to other AI businesses. Okay. There are other piece where Apollo is smart transportation. Smart transportation is mainly with government sector and so forth.
It’s usually very complicated assumptions where those margins are pretty healthy, especially when you compare to a business like our asked. So, I think when going into smart transportation the factors that impact margins are very similar to what I described earlier. Coming out with new solutions when you’re working with new cities, you got to make that investment.
With new solutions, as we’re working with the same city we understand your legacy system and we got to towards and so forth. Over time with the particular customers. We’re seeing a margin improvement. So I’m pretty confident because when we look at us, we’re growing on the one hand, as we’ve mentioned — Robin mentioned despite the transportation the customers went up a 3.0 year-over-year.
So the new customers are they going to adapt the margin. On the other hand, half of that business, but it’s with our repeat customers. With that, that’s going to improve. So I think over time, we see — as well for the next few years that more and more revenue is going to be reoccurring, which is going to
Thank you. Our next question comes from Gary Yu from Morgan Stanley. Please ask your question.
Thank you for the opportunity to ask question. I have 1 follow-up question regarding the opportunities with the — for the open up of the internet. Seems like there is great opportunity from both kind of e-commerce space and also potentially content space.
But at the same time, given users have already got into the habit of doing those transactions in some of the other competing platforms, how are we going to change some of these user behaviors to start doing more e-commerce transaction on Baidu? And as a result of that, are we going to go into another investment cycle in terms of crying traffic and users on this transaction-based traffic? Thank you.
Yes, Gary. I’ll take this question. Actually as we see the users behaviors in our web search, before the people do their — make their final decision to buy something or not, so they come to BIDU for more information. So this is how we step in to help them to do their transactions actually. So also, as Robin just mentioned right. So the infrastructure for transactions in terms of the payment to delivery are odd, and it’s pretty maturity in China.
So that said, once we give the user comprehensive information for them to make the right decisions, people will come back again for their another transaction. In terms of getting more traffic, I think for now, we still have tons of actually do their search volumes in BIDU for not just the typical e-commerce queries and are other questions – queries related to transactions.
That’s why at this stage we were trying to make the transaction experience as smooth as possible on Baidu’s platform. And actually, we have been working on this for a while, since we started building Smart Mini programs, [Indiscernible] pages, and by [Indiscernible], so. That’s how we can not only get the right information but also have the right support for this transaction related inquiries.
Thank you. Our next question comes from Eddie Lao from Bank of America. Please, ask a question.
Good evening. Thank you for taking my questions. May I have 2 questions on your Cloud pieces? The first one is about hybrid count and private count. As the government is pushing for the awareness of data security, will there be a potential increase in demand for private cloud and hybrid cloud versus public count? And how might that affect your basis? And then secondly, I remember Robin, you mentioned earlier a pretty interesting point.
You guys have been focusing your Cloud basis on a SaaS and end-to-end solutions while some of your industry peers are seem to be emphasizing more on the, should we say, the modules or the component capabilities and performance. So probably a bit more about that, a little from a marketing perspective, right? So could you share your thoughts on any difference between their clients that these 2 approaches may get? Thank you.
Hi, Eddie. I think you’re right. Given the regulatory environment changes, I think more and more customers would want private deployment, where private cloud or hybrid cloud rather than public cloud. And like Herman mentioned before, that — our highest growth area and also higher margin area comes from those private placements or solutions offered to our customers.
Typically, end-to-end solutions, leveraging our strong capability in all kinds of A.I. value chain. PaaS, Saas all included, A.I. chips, frameworks, and deep learning frameworks. And when we see SaaS, it means more like end-to-end solution which typically would include the past part. It’s just AI part in China or part in general, in China. It’s not a big market yet. It’s growing very fast, but it’s very hard to charge a lot of money for a middle layer of the solution.
But yes, I think a lot of our customers do value our end-to-end capability and solution in terms of AI. And I think Cloud overall it’s a better large market and our strength is to really leverage Baidu’s investment in Ai and the provide end-to-end solution to our customers in important verticals like industrial Internet, smart transportation, energy, financial services. These kind of verticals that we think we have a very strong proposition.
So we have reached the end of the question and answer session. With that, we conclude our conference for today. Thank you for participating. You may all disconnect.
Source: Seeking Alpha