Release Date: August 22, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Baidu Inc (BIDU, Financial) reported a slight increase in total revenue to RMB26.7 billion in Q2, driven by the acceleration of its AI cloud business.
- The company's non-GAAP operating margin improved by nearly 2 percentage points year-over-year to 26%, with non-GAAP operating profit growing by 8% year-over-year.
- Baidu Inc (BIDU) has made significant progress in scaling its AI capabilities, with ERNIE handling over 600 million API calls daily, up from 200 million three months ago.
- The company has introduced several new AI models, including ERNIE 4.0 Turbo, which offers superior capabilities at a lower cost.
- Baidu Inc (BIDU) has achieved 100% fully driverless ride-hailing services in Wuhan, marking a significant milestone in its autonomous driving efforts.
Negative Points
- Baidu Inc (BIDU)'s online marketing revenue declined by 2% year-over-year due to broader macroeconomic challenges and competition.
- The company's AI-generated search results may reduce ad impressions, negatively impacting short-term monetization.
- Despite the progress in AI, Baidu Inc (BIDU) faces fierce competition in the AI industry from other major players like Alibaba and Tencent.
- The company is experiencing pressure on its advertising business due to weak macroeconomic conditions and changes in user behavior.
- The scaling of AI-generated search results and other new features requires significant computing capacity, which may put pressure on margins in the short term.
Q & A Highlights
Q: How do you foresee the competition in AI evolving over the next two to three years? Will Baidu's current first-mover advantage sustain or will the technology gap among key players narrow over time?
A: Robin Li, Co-Founder, Chairman and CEO: Competition will be fierce over the next two to three years. Ultimately, whoever can make money from it will survive. We are seeing strong demand for our Gen-AI products, and I'm confident we will maintain our leadership. Our decade-long investment in AI provided us with a first-mover advantage and technological leadership. We continue to roll out upgraded versions of our flagship foundation models and expand our competitive advantage through an application-driven approach.
Q: What kind of progress has been made in renovating traditional search using Gen-AI and large language models? What kind of KPI is the company monitoring for AI in search?
A: Robin Li, Co-Founder, Chairman and CEO: We are committed to using cutting-edge AI technologies to transform our search capabilities. Currently, 18% of search results are provided by Gen-AI, offering more comprehensive and relevant information. We are also rapidly rolling out ERNIE agents within search results to provide intelligent assistance to users. Our vision is to create an ecosystem where developers contribute to building a robust network of agents, enhancing user experience and engagement.
Q: What are the drivers behind the accelerating growth of cloud revenue this year? How much of this incremental revenue is AI-related?
A: Dou Shen, Executive Vice President: The record growth is driven by strong demand for Gen-AI and LLMs across various industries. Gen-AI-related revenue has increased from about 5% of total AI Cloud revenue in Q4 last year to almost 9% this quarter. We offer a wide range of products and solutions, including the most cost-effective AI infrastructure and the ERNIE family of models. We are confident that our AI cloud revenue growth will maintain strong momentum in the coming quarters.
Q: Can management quantify the impact of the soft advertising revenue distinguishing between weak macro, the cannibalization impact from generative AI implementation, and competition?
A: Robin Li, Co-Founder, Chairman and CEO: Our advertising business is facing pressure from macro weakness, competitive pressure, and our proactive efforts to accelerate AI-driven renovation of search. The recovery of consumer spending has been sluggish, and certain verticals like real estate and automobile have been particularly weak. Additionally, 18% of our search results contain Gen-AI content, which is not monetized at this time. However, we are confident that focusing on creating long-lasting user value will ultimately drive sustainable revenue growth.
Q: How is the AI agent used in user experience and monetization? How do you drive adoption among SME advertisers?
A: Robin Li, Co-Founder, Chairman and CEO: ERNIE agents significantly improve user experience in our mobile ecosystem. Advertisers are using ERNIE agents to get better sales conversions than traditional methods. More and more advertisers, especially in fields like legal, education, and B2B, are starting to use ERNIE agents. As ERNIE agents become smarter, they have the potential to drive direct sales and move us from a CPC model to a more effective CPS model.
Q: Is the expansion in Baidu Core's operating margins sustainable? What is the outlook on profit margin trends for Baidu Core in 2024?
A: Rong Luo, Chief Financial Officer: We continue to phase out low-margin businesses in AI Cloud to generate operating profit and improve margins. The normalized margins for generative AI-related cloud businesses should be higher than legacy cloud business. However, the accelerated AI native transformation of search will put some pressure on margins in the short term. We are committed to balancing high-quality growth and investments.
Q: With government support on accelerating robotaxi license approval in more cities, how would that translate to Baidu's robotaxi opportunities?
A: Robin Li, Co-Founder, Chairman and CEO: Our dedication has made Apollo Go the world's largest autonomous ride-hailing service provider. We have achieved 100% fully driverless operations in practically the entire Wuhan municipality. Our focus on cost reduction through innovation has made our services increasingly affordable. We are open to various business models and partnerships to capture the huge market opportunities and ultimately benefit society with better transportation solutions.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
