Hello, and thank you for standing by for Baidu's Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Sharon Ng, Baidu's Director of Investor Relations.

Thank you, operator. Hello, everyone, and welcome to Baidu's Second Quarter 2019 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 Chief Executive Officer; Herman Yu, our Chief Financial Officer; and Dou Shen, our Senior Vice President in charge of Baidu's Mobile Ecosystem Group, our Search and Feed Business. 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 U.S. Private Securities and 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. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC, including our annual report on Form 20-F. Baidu does not undertake any obligation to update any forward-looking statement except as required under applicable law. Our earnings press release and the call include discussions of certain unaudited non-GAAP financial measures. We have made minor adjustments to our non-GAAP measures and retroactively apply these changes for comparison purposes. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measure and is available on our IR website at ir.baidu.com. As a reminder, this conference is recorded. In addition, a webcast of this conference call will be available on the Baidu IR website. I will now turn the call over to our CEO, Robin.

Hello, everybody, and thank you for joining our call today. Baidu's second quarter revenues reached CNY 26.3 billion, above our guidance midpoint of CNY 25.8 billion, which can be attributed to Baidu Core performing better than our original expectation. Baidu's Q2 revenues grew 9% sequentially and Baidu Core revenues grew 12% quarter-over-quarter in spite of the impact from industry-specific policies, self-directed health care initiatives and slowing macro environment. In the midst of significant influx of ad inventory into the market, we are seeing an upward trend for Baidu's revenue on a sequential basis. Our monetization foundation is strengthening the strong traffic growth such as Baidu App DAU, in-app search queries and feed time spent and strong growth of content and services on Baidu's platform. As our mobile ecosystem expands, we are able to better understand user behavior as users navigating the landing pages on Baidu's platform. Over time, this deepening user insight will allow us to further improve Baidu's user experience and ad conversion for our marketing customers. On today's call, I will share recent developments on our search and feed business and highlight the progress that we have made on our AI business. In early July, we held our annual AI developer conference, Baidu Create, in Beijing, which drew approximately 7,000 developers and partners from around the world and was concurrently broadcasted from the Internet. We released the Baidu Brain version 5.0, which includes industrial applications of Baidu AI technologies. Baidu Brain is the common AI engine that powers all of our businesses, from search and feed to DuerOS, Apollo, Cloud and iQIYI. Developers can access the AI capabilities of Baidu Brain through Baidu AI Open Platform, which saw developer accounts reaching 1.3 million in June, up 37% in the first half of this year. Enabling a large developer…

Thanks, Robin. Hello, everyone. Welcome to Baidu's second quarter 2019 call. All monetary amounts that we'll be discussing or used are in CNY unless stated otherwise. Let's now turn to Baidu's second quarter 2019 financial highlights. Total revenues reached CNY 26.3 billion, up 6% year-over-year, excluding spin-off revenues, and up 9% quarter-over-quarter. Revenue from Baidu Core was CNY 19.5 billion, up 3% year-over-year, excluding spin-off revenues, and up 12% quarter-over-quarter. Let me give you more color on Baidu Core revenues. Baidu's marketing services revenue is well diversified, with the top 12 industry sectors making up about 2/3 of Baidu Core revenues. Half of the top 12 sectors saw year-over-year sales declines, including health care, online gaming, financial services and auto logistics. Excluding these poor performing sectors, Baidu Core revenues would have grown in the mid-teens year-over-year in the second quarter. Although the increase in ad inventory in the market has impacted the overall growth rate of our marketing services, it's fair to say that a bigger part of our revenue slowdown can be attributed to industry-specific policies, self-directed health care initiatives and the softening of macroeconomic conditions. Additionally, revenue derived from Baidu's union partners contributed to a 3% drag on Baidu Core's year-over-year revenue growth, which is in sync with our goal to optimize profit on past revenues versus bidding for incremental revenue at negative margins. Total marketing services customers in the second quarter was approximately 330,000, down 4% year-over-year and up 5% quarter-over-quarter. Please note that this customer number excludes Nuomi customers and other calculation policy adjustments that we have made internally such as excluding customers with minimal daily spending. Our new AI businesses continue to see fast growth, particularly Baidu Cloud, which generated CNY 1.6 billion revenues in Q2, up 92% year-over-year. iQIYI revenue reached CNY 7.1 billion,…

(Operator Instructions) Your first question comes from the line of Gregory Zhao from Barclays.

So if we exclude iQIYI, so we can say Baidu's SG&A and also the content cost growth had some substantial slowdown during the quarter. And so it's a very big contrast to your investment during the Chinese New Year around Q1. So I just wanted to understand your marketing and the promotional strategy for your product portfolio like the short video and also Baidu App and also the content cost to trend in the rest of the year.

Thanks, Greg, for the question. As we mentioned on the prepared remarks, our SG&A, mainly marketing expenses, are very ROI-driven. So when we are spending the channel costs and other marketing programs, we're looking at the lifetime value that we can get from our users. So when the economy is good and we think that we can generate more revenues compared to the cost that we have accumulated, then we'll spend more money. Because we're transitioning from a TAC model to a in-app services model, TAC you get revenue in the quarter that we expense, but in the channel cost and in the marketing program in-app services, which we're expensing in that one quarter, then we might deriving revenue from the user and in the quarters after that, there's a lag. But even with that, we are very disciplined in calculating ROI. So you see us spending more on Q1 when we see higher ROI. With the current macro conditions and some of the issues that we talked about in prepared remarks, the ROI has come down. And as a result, we've been very diligent in screening out the marketing costs that has a low ROI. And we'll be looking at that continuously very closely as we move forward for the remainder of the year. With regards to our content costs, I think it's been growing on a year-over-year basis, but recognize that Baidu Core, the content cost is not that significant. For example, in the second quarter, we talked about maybe CNY 0.5 billion per quarter. So although the increase is significant on a percentage basis, but the total cost is 0.5 billion. So we're increasing even if the base is pretty very small. I don't think it's that significant compared to our overall expenditures.

Your next question comes from the line of Alicia Yap from Citigroup.

My question is related to the Mini Programs. So with increasing applications and services tapping into Baidu Mini Program ecosystem, and I think management also commented on some positive developments on the progress and traction earlier. So how should we think about the tractions of this Mini Program to translate into the monetization upside over time? And then any update on upcoming rollout of the CRM initiative?

Alicia, I'll have Shen Dou answer your questions.

Okay. Thanks for your question, actually. As you say, the Mini Program has attracted much attention from the developers. We have seen the benefit of the Smart Mini Programs already, but for the users, the better Smart Mini Programs offer them richer content in service selection. And then for developers, the Smart Mini Programs use our AI-powered algorithms to screen the massive content of the Smart Mini Programs and recommend the relevant content and service to the users based on their proactive search for information and service. So this Smart Mini Program already helped the developers to acquire users, and in turn, to enhance better user experience on the Baidu's platform. So actually, as you may already have seen, Baidu Smart Mini Program has attracted some well-known apps like Weibo, Meituan, JD as well as services with lower frequency of usage like the Shanghai Auto Show. So that' said, we also have our customers from different industry sectors. They have tried the Smart Mini Programs as their landing page for their campaigns. So we see pretty significant ROI lift for those who tried this Smart Mini Programs. So actually, the Smart Mini Programs also offered our customers and the developers much more options to engage the users in their service. So with that, the ROI would be further improved. So that is how we're going to see how Mini Programs is going to help first to strengthen our monetization capabilities, actually. As to CRM, actually it's just a start. And because we guided that most of our customers, they have the leads generated from Baidu's platform, so combined with the CRM, we have more ways to help the customers to engage with their users better and to explore the leads in a better way to improve the effectiveness and also clearly to improve the ROI. So that's why we are using the CRM to help the campaigns on our platforms first, and then in the next level, we're going to provide more valuable features to the customers to further explore the utilities of the CRM.

Let me add a point, Alicia. For the Smart Mini Programs, I think from a service provider, there's a couple of points that are key for them. First is as the number of smartphones in China sales is declining, we saw that last year, we saw that first half of this year, it cost more and more to actually leverage our App Stores in order to have installation of their apps. The economics of Smart Mini Programs is much better than App Stores because app stores, you have to spend the channel cost and you're not sure if you're going to get ROI, whereas Mini Programs, because we're in the business of search, these are natural results to be in search. So rather than shifting this and directing the traffic over to your apps, you have to, first, pay-per-channel app. Secondly, there's usually more steps, for example, to convert a sale from our Mini Programs to -- within an app versus if you're a native on Baidu's platform directly to that buy page on the Mini Program. So I think first of all, you're able to see that result right away. You don't need users to download the app. And secondly, I think the case that Dou have explained would help drive up conversion. So obviously, with better conversion, marketing customers are usually focused on better conversion, looking at ROI. So with better conversion, you'll have, we believe, over time, more people developing Smart Mini Programs so that when they have their search results, they have better conversion. I think from a user perspective, you will probably have users over time relying more and more on search within Baidu because of that native app experience directly with the Mini Programs.

Your next question comes from the line of Tian Hou from T.H. Capital.

Robin, Herman, Sharon, the question is related to Baidu's efforts in content building. So as you guys are aggressively developing feed business, you guys also need to build a very healthy content. So in addition to your Baijiahao, Haokan video, Baidu App, recently, we saw from the news you acquired some stakes in Zhihu. And also, I think yesterday, you put money in Guokr. So I wondered for Guokr, in which way they helped you in the content ecosystem building. And also in the going forward, what are some other content area you see you need to continue to build up? And so is there any other potential content investment on the horizon? So that's the question.

Tian, let me just add a few comments. I think our content strategy is pretty much to adopt the overall user experience to the new mobile ecosystem, meaning that we will make or strike a partnership or investment if that deal can help us to improve the user experience. But the content may be available on the open web or on the PC Internet, but if we can have a deal that enhances the mobile user experience with that kind of content, we will do it. Or if that kind of content is not available on the open web or not available on the PC Internet, if we can acquire that content, we will also do it. So basically, the content strategy is to either make the experiences better or make something that was not available to become available to our Internet users.

And just to add, Tian, you asked which areas will we be interested in. When you look at our content, Baidu as a whole, there's really 3 categories of content. We're looking at a content that's knowledge-based, in this case, Zhihu. In case of Baidu Knows, that would be it. So we're looking at example the vast amount of services and information that are in apps today and making that basically having a native app experience. So service is very important. And clearly, we're looking at industry verticals where right now, if it's fragmented on the Internet, if we can concentrate it within Baidu's content platform so that they have better conversions so that they can build user engagement and have better user experiences. So 3 areas: knowledge, services and industries vertical information.

Your next question comes from the line of Eddie Leung from Bank of America Merrill Lynch.

Could you share with us your thoughts on the recent news of potential new entrants? So are you going to see any difference this time? And then just a quick follow-up on Herman's comments on some of the advertising industries. Given the recent weakness in some of the verticals, could you remind us what the top, for example, 3 or 5 verticals we have right now?

Dou will answer your first question, and Herman will answer the second.

Yes. And Eddie, with regards to our top industry, we have health care as you guys know is our top. In addition to that, the other industries are much smaller. So the top 12 industries are 2/3 , and the remaining industries are all less than 10% of Baidu Core’s revenue, and those would include e-commerce, online games and education.

Your next question comes from the line of James Lee from Mizuho Securities.

Two, if I may. First -- and maybe, Robin, you can talk about -- you sound pretty excited about the prospect of Duer operating system, the voice search going into next year. And maybe can you help us understand the road map in terms of commercial road map going to 2020 and maybe help us understand what verticals that you weren't able to monetize on text search now you're able to monetize in voice and also what verticals that you could optimize potentially with voice search over the text search. And also second question on Herman. On 4Q, on revenue growth, is that going to be similar to your guidance in 3Q? And also in operating expenses, you're stepping up about CNY 400 million and change in total expenses in 3Q. Should we expect very similar trend into 4Q as well?

Yes. On DuerOS, it's a whole new ecosystem. It fully leverages Baidu's investment in search and in AI technologies for the past many, many years. And we are offering a better and better user experience. It does lower the barrier to entry significantly. I talked about it during the prepared remarks that we are entering lower cities with more affordable device system. And we are also able to access people at very young age or very old age because it's just a lot easier to use, and we see strong momentum continue going into the current quarter and maybe in the coming years. Talking about the potential business model, because right now, it's in very early stage, we have not really seriously tried to monetize the product, but we see huge potential in many fronts. For example, in education, it's very natural for kids to learn things through this kind of new devices. Games, can offer a very different experience in mobile games because for mobile, you have to hold your handset. But for the Smart Display, your hands are free and we have cameras to capture users' behaviors intelligently. So there are many, many possible business models, including the app model, including the subscription model for all kinds of content and services. And this is a whole new era for entertainment, for education and for the smart life for many, many people who may not spend a lot of time with mobile phones.

And James, the question you asked about revenue and expenses. We typically do not give guidance out of 2 quarters. And with the current macro situation, it's hard to predict what's going to happen in 2 quarters. But I would use a reference. For example, if you look at last year, Q3 to Q4 has very minimal sequential growth. So if the economy keeps pace and so forth, we will probably have similar trends. But I can't commit at this point given that we don't have as much visibility in the current macro situation. And so when we set our expenditures for the second half, we're cognizant of the current of revenue situation and the economic conditions. So from an expenditure perspective, in terms of total expenditure for Baidu Core, cost of sales plus operating expenses, we're going to try to keep pace with our total expenditures for Q2. So we should not see too significant increase from the second quarter level. And mind you that this would adjust if, for example, our revenue, for example, improves significantly and so forth. So that's current thinking right now.

Your next question comes from the line of Natalie Wu from CICC.

Natalie, on the financial impact of CRM, we are currently trying to do an integrated solution for our online marketing customers. They already spent a lot of money to try to acquire potential customers for their products and services, and we help them to better manage this process and achieve better conversion. We think, longer term, the CRM offering will be able to provide independent product value, and we will be able to charge a significant amount of money for this kind of offering. But to begin with, we'd like to help our advertisers and customers to think in a more holistic way. They acquire traffic from the Baidu channel, and we help them to better manage the traffic or better manage the users, and then help them to improve the overall efficiency of the whole marketing funnel. That's the difference between our CRM and the independent CRM products. A – Dou Shen: For the Smart Mini Programs, let me add a few new things. So actually the user come to Baidu not only for information but also for service. So with Smart Mini Programs, we provide both information and service to the users. So that's saying we are seeing growth for Smart Mini Programs in quite a few different verticals, including travel, real estate, education and other stuff. So say for Weibo and Xiaohongshu, right, so in general, we think they provide information to users. And for this type of Smart Mini Programs, we see each of them has like a few million users, daily active users actually in Baidu's platform for their Smart Mini Programs. Also, the Smart Mini Program is very valuable to developers with long tail information and service, because users come to Baidu yearly looking for some long tail information and service. So this is very helpful for them to locate new users, because new users come here proactively to identify or locate some information. So for those type of business, they also get players for the Smart Mini Programs. So for your question about marketing customers, we do see more and more customers adopting Smart Mini Programs as their landing page. So we see examples from travel like Ctrip, from real estate, from education like Xueersi.? So all those customers, we do see their performance, budget performance are getting better through different traffic. So these are just some examples to see, and we are expanding the coverage of the landing pages through Smart Mini Programs. So down the road, maybe you can see more good examples, to share more information with you.

Your next question comes from the line of Jin Yoon from New Street Research.

Just on the Mini Programs again. I just wanted to kind of go back into kind of the health care vertical, just kind of where we are on kind of bringing everyone up to speed. And at the same time, you were also talking about moving more of the other verticals into the Mini Program, just kind of just on the traction of that. That's kind of my first question. And my second question is -- well, we'll stop there and then I'll follow up with the second question.

Great. If I could follow up -- go ahead.

Yes. In terms of sector in relation to health care, we also mentioned moving companies, home repair, attorneys. They are all using managed pages with this.

Got it. If I can just -- one just follow-up. I remember just the last time you guys had a health care cleanup like in 2015, there was a little bit of a drop-off in terms of the number of advertisers not being able to qualify. You said in this time around that a lot of the, I guess, marketers have moved over. Have you seen any kind of the overall TAM or actually the number of advertisers being able to drop off this time as well? Are you seeing that some of these advertisers are not able to qualify? And is that anything material?

Jin, your question is, are we seeing the number of health care marketing services customers drop off?

Yeah, because that's where it being not able to qualify or not able to get to make the transition? Because I think that happened a little bit in 2015, correct?

Yes. So when you look at the number of customers from the health care sector, we saw them started to drop off at the beginning of the year, and we've seen that consistently into Q2. And as Robin mentioned earlier, because once they use the managed pages, we're able to screen the content using our AI. We're installing, for example, live call capabilities and messaging capabilities. So we use our AI to also screen the communication with users to make sure that they're providing content and information that was more secure and more trustworthy. So as a result of that, it's a filtering system for the lower-quality health care providers. So those are probably going to go elsewhere, probably going to drive revenues for other people. For us, we're basically turning away the lower-quality customers in health care.

Your next question comes from the line of Piyush Mubayi from Goldman Sachs.

Thank you for the additional color on traffic growth rates in the second quarter. I wonder if you could just take us through what you think are the drivers of the acceleration in that number from the first quarter. And could we expect that to potentially continue at least based on the July and August data that you're seeing currently? And my second question is -- I know you talked about the medical vertical quite a bit, but can I ask what the number would have been or the growth rate would have been for the core, if you excluded the medical vertical? And also on medical, could you talk about what percentage of traffic is on your landing pages and what the initial feedback is?

Dou, can you answer the traffic question, the growth rate?

Okay. With regard to the questions on the numbers, a few verticals that helped us grow sequentially are retail and e-commerce or education. Travel did very well, too, and then service-related industries. So these are some of the highlights for the second quarter. And then with regards to health care revenues, we're seeing double-digit declines in health care revenues (year over year). So when you look at the second quarter, as a percentage of total Baidu Core revenues, we're talking about less than 1/7 of our revenue. So that has declined pretty significantly when you look at it from last year. But I think for the long term, it's better for us because we're now having a better way to ensure better quality of the content, both looking at the landing page and also monitoring the kind of communication between the merchants with the users. End of Q&A:

We are now approaching the end of the conference call. Thank you for your participation in today's conference. You may now disconnect. Good day.