Thank you for standing by, and welcome to the Baidu Incorporated Third Quarter 2022 Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your host for today, Juan Lin, Baidu's Director of Investor Relations. Please, go ahead.

Hello, everyone, and welcome to Baidu's third quarter 2022 earnings conference call. Baidu's earnings release was distributed earlier today, and you can find a copy on our website as well as on Newswire services. On the call today, we have Robin Li, our Co-Founder and CEO; Rong Luo, our CFO; Dou Shen, our EVP in charge of Baidu AI Cloud Group; and Zhenyu Li, our SVP in charge of Baidu Intelligent Driving. 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 US 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 Stock Exchange. Baidu does not undertake any obligation to update any forward-looking statements, except as required under applicable law. Our earnings press release and this call include discussions of certain unaudited non-GAAP financial measures. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures and is available on our IR site at ir.baidu.com. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on Baidu's IR website. I will now turn over to our CEO, Robin.

Hello, everyone. Recapping the third quarter in broad terms, we delivered improved bottom line results despite a challenging macro environment, especially for the mobile ecosystem, operating profit resumed positive year-over-year growth. And for AI Cloud, operating loss and margin improved meaningfully, both on a year-over-year and a quarter-over-quarter basis. Businesses across the line from mobile ecosystem to AI Cloud to Intelligent Driving have been negatively affected by the resurgence of COVID. Throughout Baidu's history, however, we have experienced many challenging environments. Periods of challenges have enabled us to emerge stronger, given our relentless effort on building long-term growth. We're using this period to ready ourselves for current business conditions to improve. Our key short-term tasks remain unchanged, which are efficiency, optimization and continuous investments in the new AI businesses. Our new AI business such AI Cloud and Intelligent Driving are well aligned with China's tech innovation and national initiatives. By doing so, we will further strengthen our leadership in the new AI business and reaccelerate business growth. In Q3, Baidu Core ad revenue was down 4% year-over-year, but improved from the second quarter's 10% year-over-year decline, as macro has improved gradually since June. Encouragingly, revenues from healthcare and retail recorded positive year-over-year growth in the quarter. Going forward, when COVID situation alleviates in major cities ad revenues across different verticals such as travel, franchising and local services should rebound. For our new AI business, I am proud to report some highlights. Revenues from AI Cloud increased by 24% year-on-year to RMB 4.5 billion in the quarter. AI Cloud has been a major growth driver for Baidu Core non-advertising revenue. In Q3, non-advertising accounted for 26% of Baidu Core total revenue, that's up from 21% a year ago. Baidu Apollo auto solutions continued to gain traction among leading automakers and the…

Thank you, Robin. Now, let me walk through the details of our third quarter financial results. Total revenue was RMB32.5 billion, increasing 2% year-over-year. Revenue from Baidu Core was RMB25.2 billion, increasing 2% year-over-year. Baidu Core online marketing revenue was RMB18.7 billion, decreasing 4% year-over-year, but improved 10% from the second quarter as macro has improved gradually since June. Baidu Core, non-online marketing revenue was RMB6.5 billion, up 25% year-over-year, driven by cloud and other AI power businesses. In Q3, Baidu AI Cloud increased by 24% year-over-year to RMB4.5 billion. Revenue from ACE was RMB7.5 billion, decreasing 2% year-over-year. Cost of the revenues was RMB16.3 billion, increasing 1% year-over-year. Baidu Core, cost of revenue was RMB10.7 billion, increasing 15%, 1-5, year-over-year, which was in line with the growth in sales of AI Cloud and other AI power businesses. Operating expenses was RMB11 billion, decreasing 19%, 1-9, year-over-year, primarily due to a decrease in channel spending, promotional marketing expenses, and staff-related expenses. Baidu Core selling, general, and administrative expenses were RMB4.2 billion, decreasing 31%, 3-1, year-over-year. SG&A accounting for 17%, 1-7, of Baidu Core revenue in the quarter and decreased from 25% in the same period last year. Baidu Core research and development expenses was RMB5.3 billion, decreasing 4% year-over-year. R&D, accounting for 21% of Baidu Core revenues in the quarter and decreased from 22% in the same period last year. Operating income was RMB5.3 billion. Baidu Core operating income was RMB5 billion and Baidu Core operating margin was 20%. Non-GAAP operating income was RMB7.2 billion. Non-GAAP Baidu Core operating income was RMB6. 7 billion and non-GAAP Baidu Core operating margin was 26%. Q3 present the first year-over-year growth in non-GAAP operating profit and margin perspective since Q2 2021. Total other loss net was RMB4.8 billion, decreasing 78% year-over-year, which mainly…

We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Alicia Yap with Citigroup. Please go ahead.

Thank you. Good evening, management. Thanks for taking my questions. I have two questions. First, can management comment how should we look at the advertising demand recovery in the near-term and it's also in the next quarters? And then secondly, can management comment on, how you think about the competitive landscape in the China advertising market will evolve going forward? And what would Baidu long-term market share be? Thank you.

Hi Alicia. This is Robin. Let me answer your questions. Yes, our revenues are very sensitive to COVID control measures. Baidu Core's ad revenues returned to positive year-over-year growth in August. But in September, it decreased again, because of new roundup COVID resurgence. Overall, Q3 was much better than Q2, because there were a recovery from the second quarter in which there were a lot of disruptions caused by COVID. When we entered the fourth quarter, the situation improved in October, but since early November, it got a bit cloudy because another round of COVID impacted some regions, like Guangzhou and Beijing. We're closely watching how the situation will develop. I think the short-term will probably still be quite volatile, but the economy should improve in the mid-term and beyond. China has been fighting against this COVID for almost three years and the country has been gaining experience. Well, we're certainly going to see some ongoing disruptions and uncertainties. The overall situation should improve -- should move in a positive direction over the next few quarters. As you know, many of our ad verticals were affected by COVID and macro. So once COVID and macro situations improve, our ad revenues from different verticals such as travel, franchising or local services should rebound. Again, we will closely watch how COVID situation develops, and we will work very hard to bring our ad revenue back to a positive year-over-year growth as soon as possible. In addition, AI Cloud and intelligent driving, our new business also negatively impacted by the COVID disruption. So if COVID impact the supplies, these non-advertising businesses should also see improvement. And regarding to your question on competition in the online advertising market, first of all, I think Baidu App is one of the very few super apps in…

Thanks, Robin.

The next question comes from Eddie Leung with Bank of America. Please go ahead.

Hi, good evening, guys. Pretty solid quarter despite all the macro headwinds. I have a couple of questions on cloud services. So we have seen -- it seems like a slowdown in the industry. So could you talk a little bit about the reasons behind the slowdown -- and how you guys are thinking about the growth rates in the upcoming lessor quarters on the medium term? And then secondly, could you also talk a little bit about the competitive landscape -- we have seen a media reporting market share gains by cloud companies all tie the Internet set in the past one or two years, right? So any color on the competitive landscape will be useful. And then finally, I remember, Robin, you mentioned about the margin improvement of cloud. So could you also talk about your thoughts on the role to profitability? Any time line would be helpful. Thank you. A – Dou Shen: Hello, Eddie. Thanks a lot for your questions. This is Dou. I'll try to answer your questions. So for the revenue growth part, right, I think it's slowing down mainly due to the COVID-19 impact. for example, because of the travel restrictions, we could not even implement our projects on time, and the bidding for the new contracts was also affected. Apart from that, I also want to highlight that we are focused on healthier and more sustainable growth by cutting some low-margin businesses. So we believe this approach is crucial for the long-term development. Actually, looking beyond the current quarter, as Robin has just mentioned, the train for China's traditional industries and the public sector to use AI and move their business onto the cloud remains unchanged. So I think post pandemic, the companies should gain more confidence in their future growth so…

Thank you.

The next question comes from Alex Yao with JPMorgan. Please go ahead.

Thank you management for taking my question. I have a couple of questions on Baidu Core margins. In the past several quarters, you guys did very good job in terms of cost control and the margin improvement. As large-scale BU and headcount streamlining has been already down, how much more room should we think about for further cost cutting in Baidu Core in the coming quarters and 2023? And the related question is how should we think about the Baidu Core operating margin going forward? Lastly, would Baidu slow down the cloud and autonomous driving investments if the macro situation further deteriorates? Thank you.

Thank you, Alex, for your questions. Let me try to figure your questions. This is Julius. I think as Robin has said in the every beginning of the prepared remarks, I think for Baidu Core, we continue to optimize the cost expenses and we continue to improve our operational efficiency, which is one of our key short-term tasks. At the same time, we kept investing in the new AI businesses for future growth. This strategy actually has not changed in the past few quarters. And this strategy allow us to weather through the challenging market environment, and we believe that it will prepare us for accelerated growth again once the macro downturn is over. In Q3, let me recast some of the numbers. Baidu costs non-GAAP operating profit margin expanding to 26% from 24% in the same period last year. I think it has represented the first year-over-year growth in non-GAAP operating profit and margin perspective since Q2 2021. And we made a lot of efforts to achieve such results. You'll probably see from our early release, our SG&A has decreased once again in Q3, this quarter from the same quarter last year. We have been very disciplined with the channel spending and promotional activities. And just to add that, it was already less consecutive quarter that SG&A achieved a year-over-year decline. And going forward, we will continue to control the variable costs and expenses as same as what we did in the past. If you look into our each part of our business, for mobile ecosystem, our operating profit actually is going up on a year-over-year basis, even though we know the revenue was negatively impacted by COVID-19. And we have also already mentioned earlier and which is just repeated by Dou, we made a lot of efforts for…

The next question comes from Gary Yu with Morgan Stanley. Please go ahead.

Hi. Thank you for the opportunity and congrats on the expanded partner network and growing backlogs for ADS business. I have a question on your auto solutions. Just wondering, when should we expect meaningful revenue to start gains? And how do you differentiate the Apollo's auto solution from your peers? And could you help us understand the underlying market space for Baidu Apollo's auto solutions? And a related question to that is, have you noticed a significant change in the attitude of the OEMs towards self-developing for intelligent driving solutions? Thank you.

Hi, Gary, this is Robin. We've seen huge opportunities in the auto solutions market. In the first 10 months of this year, EV sales increased by more than 100% in China. We're now the largest EV market in the world, accounting for more than half of the global EV sales. A clear trend for the auto industry is vehicle intelligence. Baidu is benefiting from this trend. Our years of investments in autonomous driving have begun to bear fruit. Baidu Apollo's auto solutions derived from our core technologies. A lot of AI models we build for robotaxi can be used for ASD. Another point to note is that as the market leader, we have been investing in autonomous driving for about 10 years. And thanks to this investment, we not only have completed tens of millions of testing miles on the public roads, but also accumulated a very valuable experience by running the largest robotaxi fleet on urban roads on a daily basis. This has provided us great insight, and we have used these insights to develop auto solutions that best meet our customers' needs. So for example, ANP 3.0. We believe it is the most advanced intelligent driving solution for city roads on the market. Because ANP 3.0 is derived from our four autonomous driving technology, we were able to use a very limited amount of R&D personnel to make this advance solution available to the market within a short time. Jidu's first car Robo 01 will be the first one to use ANP 3.0. We believe that with more and more automakers adopting our auto solutions, we will become more experienced in making our solutions compatible with more popular car models. On the other hand, with more and more cars with our auto solutions are on the go, we…

The next question comes from Kenneth Fong with Credit Suisse. Please go ahead.

Hi, good evening management. Congrats for the solid quarter and thanks for taking my question. I have a follow-up question about Apollo Go. On a fully autonomous driving, what kind of progress will be seen in the near-term? Could management also talk about a key milestone that Apollo Go will achieve in 2023 and even in the longer term? And to achieve this milestone, how should we think about the impact on your P&L, as well as cash flow? And when should we expect Apollo Go business to achieve breakeven? Thank you.

Thanks for your question. This is Zhenyu. We are making very good progress and package of providing fully drive ride-hailing for the public. We believe Apollo Go is the largest autonomous ride-hailing service provider in the world, because, number one, when we look at the numbers back on coverage rate. Apollo Go has provided 1.4 million drive for the public. In Beijing, Shanghai and Guangzhou each half complete 15 drive per day. We are also providing fully driverless AI ride-hailing solution to public in Wuhan and Chongqing and the number of ride providers by fully driverless AI is growing very fast. And number two, Apollo Go is already in more than 10 cites in China. It is also cities have a population of more than 10 million, as Rong Luo mentioned in his script, building up operation of us to improve technology and safety. He give examples about technical improvement – share [ph] about the operation help us to improve user experience. In operations, we got a lot of feedback from passengers. For example, passengers, one half, a operated customer to moderate, b, to citizen up faster and improve plan or rules can be formed [ph]. We then refined and improve or open for quality. Our efforts help us gain more recognition from passengers. Today, in Chongqing, Beijing, Apollo Go is already importantly for computing. After trying Apollo Go, people come to realize that it is a reliable and fixed service. It drove just like a professional driver. Some people may wonder why is Apollo Go 25% human drivers? This operation is always be in compliance with traffic regulation and our AI driver never get tired or distracted like human drivers, all of those allow Apollo Go provide worry-free to drive for the public. While strong takeaway product 150 have helped us to us entrust, both from auditor and also from our regulators. We mentioned before, set in Wuhan and Chongqing. We will allow to provide fully driverless cadence service this August. The operation in both cities is well on track. Going forward, we plan to continue to expand this operation – and this operation -- also and as more fully driverless vehicles. In 2023 and beyond, we will continue to skills our operation. In particular, fully driverless ride-hailing operation in more region and reduce hardware and vehicle cost. We believe while we are testing we will eventually be profitable and cheaper than the current ride-hailing service. We will continue to invest in robotaxi to capture a huge market opportunity.

Hi, Kenneth, this is Julius. Regarding your question about the impact on our P&L and cash flow. We believe the overall impact is actually manageable. As Robin said in the script, actually, our team today has built a very comprehensive financial model for Apollo Go. This model actually helped us to understand what should we do, where we should improve and adjust to generate profit in these models in the future. For example, today, we are working very hard towards two goals. Number one is, we aim to remove safety officers in the cars, as labor cost is where we should reduce and make a kind of new ways. And number two, we continue to reduce the hardware costs. During the past quarters, we continued to improve our AI for autonomous driving technology and just now, both Zhenyu and Robin have given some examples of how we do that, how we leverage the large-scale operation to improve technology. These efforts help us to earn trust and build track records. Today, we are providing fully driverless ride-hailing services in Wuhan and Chongqing, meaning no safety officers in the cars at all. In Beijing, we're also making good progress as the safety officers today are now allowed to -- not to see behind the steering wheel and maybe even the front seats, which will help us to remove the safety officers in more cities and reduce the labor costs in the future. And on the other hand, for the hardware perspective, most of the newly added car in the coming 12 months will be RT5, the model of Apollo Go. This means there will be some investments in hardware next year. Once a sizable amount of RT6 which has just launched a few months ago, pulling operation in the year 2024, our unit economy will significantly improve because RT6 has much lower production costs than any previous generations of robotaxis. The unit economy in our operations in key cities is also improving, because we continue to scale out and improve the order cost -- the cost efficiencies. Robin has mentioned, our rides continue to grow in the past few quarters and also each car now provide 15 rides every day in some Tier 1 cities. Apollo Go today is becoming -- recognized as a reliable and efficient way for daily commute. Overall, Apollo Go our measures be, we aim to achieve the unit economy in key cities before we expand to more cities. I think, just a summary, all of this impact to our cash flow and the P&L is manageable, and we have the patience. Thank you.

Thank you. It's very clear.

The next question comes from Lincoln Kong with Goldman Sachs. Please go ahead.

Thank you, gentlemen. I want to ask about our sales of advanced chips to China, because we have seen recently a lot of press report around US chip restriction against China. So we wonder how you are seeing these restrictions impacting your ability to grow the business by AI Cloud, the autonomous driving and lastly, wider our AI business? So, could you also remind us, our business that's the most is depending on the advanced large AI chips and if there's any way, we'll be able to manage this with the master chip capability? Thank you.

Thank you, Lincoln. You're right. This is a hard topic to reason to actually. So, the short answer to your question is that, we think the impact is quite limited in the near future, and here are the reasons. So first of all, as of today, a large portion of our AI Cloud business and even whether AI business does not rely to much on the high advanced chips. And secondly, for the part of our business is that need advanced chips, we have already started enough in hand actually to support our business in the near term. Thirdly, there were some alternative to the restricted chips and we have the technologies to use these alternatives to achieve almost the same effectiveness and efficiency in our AI Cloud and the weather AI businesses. Last, but not least, automotive chips are not on the prohibited list. So this means that in the near future, in-vehicle computing is not affected. So when we look at the mid to longer term, we actually have our own developed AI chip, so named Kunlun. Actually, we already started to use Kunlun chip to support some large-scale AI computing tasks internally. We also use Kunlun to serve external customers already. So because we have full stack AI capabilities from chips to AI frameworks to foundation models and then to application software, so we can achieve much higher efficiency as we optimize AI tasks from end to end. So let me give you some examples. By using our Kunlun chips [indiscernible] and large language models, the efficiency chip to perform text and image recognition talks on our AI platform has been improved by 40% and the total cost has been reduced by 22% -- 30%. There are more cases like this in a quality inspection in our…

Great. Thank you.

The last question today comes from James Lee with Mizuho. Please go ahead.

Great. Thanks for taking my questions. I have two here. First, can you guys provide some more color on your progress of e-commerce search and short video opportunities? Can you guys talk about maybe from a consumer, merchants' and creators' point of view, what kind of pinpoint are you trying to resolve here? And second, can you talk about the traction that you have made in open mobile ecosystem and potential monetization opportunities here? Thanks.

Yes, this is Robin. I mentioned earlier that we have been building closed-loop experience for our users and advertisers in our mobile ecosystem especially in Baidu app. For e-commerce, because of the efforts we made in the past, users now come to Baidu not only for information and knowledge, but also for services and merchandise. Since the beginning of this year, merchandise-related search queries on Baidu have grown much faster than last year. You may be wondering why? It is because users increasingly find out that on our platform they can now find detailed product information, product reviews and even buy the product without leaving our app. Now, we have a huge number of SKUs available for search on our platform. We have also deepened the partnership with leading e-commerce platform, so that users can easily buy products they need here on Baidu App. Just like I said in my prepared remarks, in Q3, GMV facilitated by the search continue to grow very fast. I also mentioned earlier that retail has been an outperforming vertical for our online ad business for quite a few quarters. Even very recently, revenues from the retail vertical during the Double Eleven, e-commerce promotional season, grow by double-digits from last year. And this all prove that our efforts gradually bearing fruit. As for our short video, we're making short videos increasingly available in our feed and search services. For feed, short video distribution and time spend continue to grow steadily. Right now, about 85% of the feed distributed by Baidu App are short videos. And for search, more than 20% of the clicks on the search pages were short video. This number increased by more than 80% year-on-year during the month of September. So we believe the popularity and the adoption of video in our…

This concludes our question-and-answer session, and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.