Baidu, Inc. Q3 FY2024 earnings call

AI Cloud - AI cloud revenue reached RMB4.9 billion, up 11% year-over-year, with Gen AI-related revenue being a key growth driver. The company advanced AI infrastructure management, achieving 99.5% valid LLM training time and minimizing throughput loss. The mass platform evolved with improved model builder for lightweight model fine-tuning. Internally, AI coding through Comate was widely adopted, with AI generating over one-third of new code. Miaoda was introduced for no code capabilities. Notable partnerships were established, and mid-tier enterprise customers' incremental revenue on public-cloud increased 170% quarter-over-quarter.

Mobile Ecosystem - Baidu Core's online marketing revenue declined 4% year-over-year in Q3 due to macro conditions. There was continued growth in incremental ad revenue from Gen AI and LLM enhancements. ERNIE agents for advertisers saw improvements in response accuracy and intent recognition, with approximately 20,000 advertisers generating ad spending daily. A healthcare client's agent led to increased customer engagement.

Intelligent Driving - The sixth-generation autonomous vehicle RT6 operates on public roads in multiple cities. Fully driverless operations proportion nationwide surpassed 70% in Q3 and 80% in October, with 100% fully driverless operations achieved in Chongqing in October. Apollo Go provided about 988,000 rides nationwide in Q3, up 20% year-over-year. The company continues to explore expansion into additional cities and new operational models.

Baidu core total revenue was RMB26.5 billion, roughly flat year-over-year. AI cloud revenue was RMB4.9 billion, up 11% year-over-year, with Gen AI-related revenue accounting for about 11% of total AI cloud revenue in the third quarter. Baidu Core's online marketing revenue declined 4% year-over-year in Q3, while non-online marketing revenue was RMB7.7 billion, up 12% year-over-year. Baidu Core's operating margin was 21%, non-GAAP operating margin was 25%. Revenue from iQIYI was RMB7.2 billion, decreasing 10% year-over-year.

Forward-looking - The company will continue to focus on AI-driven innovation, emphasizing the transformation of existing products and businesses and fostering a new earning ecosystem. ERNIE's ongoing renovation of the personal cloud is expected to mitigate short-term impact and position for long-term growth. Confident in AI Cloud business maintaining strong revenue growth momentum and delivering healthy operating profit. Anticipates the launch of a new version of ERNIE early next year to strengthen leadership in foundation models.

Risks - Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from current expectations. Macro conditions could impact the advertising business. Competition in the cloud market and autonomous driving space poses challenges. AI model hallucination issues in text-to-image generation still need mitigation.

Q: How should we think about the ramp-up pace for the generative AI results penetration rate? And what does management think of the optimal level? And how long do you plan for the search product transformation period to last? And could management also give more color on the recent developments in the monetizations of the AI search? So, when does management expect to commercialize the AI search results?

A: Rong Luo stated that over 20% of pages and over 50% of monthly active users have engaged with Gen AI contents, but this is just initial progress. The company aims to revolutionize search through ERNIE, transforming all aspects of search experiences. In monetization, there are encouraging early results in certain verticals, but the company is in the early stages of exploring monetization opportunities for AI search and will prioritize user experience enhancement over rushing into monetization.

Q: Your question is about the ERNIE’s API. I think that the API of course have been growing fairly rapidly in the recent months. Could you guys share more details on the key drivers behind this growth? In addition, has any potential killer app emerged in the 2B or 2C markets? Finally, what is management's outlook of ERNIE adoption over the medium to longer-term?

A: Robin Li said factors driving API growth include ERNIE getting smarter with reduced hallucinations, lower inference cost, and a tool chain to tailor models. New Baidu Search has potential to be a killer app in the Gen AI age. External API calls have grown quickly with strong adoption across sectors. Confident ERNIE will unlock new revenue streams and strengthen market leadership across product lines.

Q: Can management comment on the underlying ad demand trend? And also, have you seen any ad spend sentiment improvement, especially after the latest stimulus policy? And what's management's view on the macro outlook heading into 2025?

A: Rong Luo said the advertising business is highly correlated to the macro environment. Q3 saw continued weakness in verticals like real asset franchising and healthcare. No notable improvement in advertiser spending patterns in Q4. Encouraged by recent stimulus policies, but expects some time for measures to reach offline SMEs. Conservatively optimistic about recovery trend, believes the advertising business will rebound with strong momentum once market confidence returns.

Q: Given the ongoing ad advertising pressure and our plan to accelerate and broaden our AI transformation, so could management share more color around our business focus at the moment, our priority in terms of our investment, resources spending and the capital allocation? And how should we think about the margin trend in 4Q as well?

A: Junjie He said the company will remain committed to the AI-focused strategy as near-term priority and long-term strategic emphasis. It will continue to intensify product renovations with strong emphasis on AI search, invest in advancing earnings capabilities, enhance AI core offerings, and expand autonomous driving initiatives. Near-term margins will be in an adjustment period, and looking to 2025, it will focus on optimal resource allocation to high-growth opportunities.

Q: In terms of revenue growth, it has moderated maybe compared to the last couple of quarters. And maybe can you unpack the performance of both personal and enterprise cloud? And in addition, can you give us an update in terms of competitive landscape in the market? And lastly, can you share the outlook the cloud business, particularly contribution from Gen AI? And how should we think about the long-term margin assumptions?

A: Dou Shen said AI Cloud revenue growth slightly moderated due to a temporary impact on personal cloud from business adjustment, but enterprise cloud maintained strong momentum. Growth in enterprise cloud was driven by demand for model training and inference. In the cloud market, foundation model capabilities are essential, with few models likely to survive. Confident AI Cloud will maintain strong revenue growth momentum and deliver healthy operating profit, with Gen AI business revenue continuing to grow.

Q: Given the recent IPO wave of autonomous driving related companies that have partnerships with big automakers and marketing platforms, what are your thoughts about how the competitive dynamic going forward? Looking ahead, how do you see the Apollo Go mobile taxi business strategy development? Can management share any details about the future plans for expanding and growing Apollo Go?

A: Robin Li said autonomous driving has a high bar, and Baidu has built an unparalleled foundation in technical expertise, talent, and long-term investment. Apollo Go hit 8 million total rides, making it the world's top automated service provider. RP6 has a competitive price under $30,000. The market is still in its infancy, and competition will help accelerate market growth. The company is actively seeking new opportunities for international expansion and exploring different business models like asset-light strategy.

Q: Could management provide any updates on capital return plans for shareholders such as share buyback and dividend?

A: Junjie He said since 2005, the company has made consistent efforts to generate long-term value through growth and share buyback programs, averaging about $1 billion annually in share repurchases. Currently focused on executing sustainable and recurrent share buyback programs, and remains open to evaluating various options for returning value to shareholders.

Q: Can management provide an overview of ERNIE's technology roadmap for the future development? And what are the upcoming milestones for the Company's AI model? And then when can we expect to achieve them?

A: Robin Li said the company launched ERNIE bot in March last year, introduced ERNIE 4.0 in October last year, and ERNIE 4.0 Turbo in June this year. Expect to launch a new version of ERNIE early next year. The company takes an application-driven approach, focusing on resolving real-world problems according to market demand, making models more accessible and affordable.