Hello, and thank you for standing by for Baidu's Fourth Quarter and Full Year 2019 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. And 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, Juan Lin, Baidu's Director of Investor Relations. Please go ahead. Juan Lin^ Hello, everyone, and welcome to Baidu's Fourth Quarter and Full Year 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 and 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 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 statements, except as required under applicable law. Our earnings press release and this call include discussions of certain unaudited non-GAAP financial measures. We have made minor adjustments to our non-GAAP measures, and retroactively applied these changes for comparison purposes. 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 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.

I'd like to start the call by sending prayers to Wuhan and all the people who have worked so diligently and unselfishly, to contain the novel coronavirus. We have strong faith in the concerted and courageous efforts that have been made to combat the epidemic outbreak. At Baidu, many of our employees have chipped in, forgoing the extended Chinese New Year holiday and working overtime, to help contain the epidemic outbreak. For example, we leveraged our facial recognition and other AI technologies, to deploy fever-screening systems to railway stations, hospitals and municipal buildings across China. Our systems remotely measure the temperatures of up to 200 people per minute, detect body temperatures even for people wearing face masks and hats, and identify those who are not wearing masks or wearing them improperly. Baidu's AI model has been open sourced, to further help reduce the spread of the coronavirus. On Baidu App, we launched a free healthcare consultation platform, to allow people to access doctors online, ask pneumonia-related questions and save hospital resources. Our operational team is partnering with medical experts to provide authoritative information on the coronavirus, and leveraging our large platform reach to make timely and reliable information available to the public. Baidu Maps is providing timely information, such as the location of traffic control areas, designated hospitals and infected cases, to help people better manage the situation. By leveraging big data, Baidu Maps helps track population migration and predict the spread of the epidemic in China. As part of our corporate social responsibility, we have pledged RMB 300 million toward to support these efforts, provide awareness education and improve public health in China. The coronavirus outbreak has undoubtedly impacted our economy. While the near-term impact on our business has been negative, as many of our top industries, such as…

Thanks, Robin. Hello, everyone. Welcome to Baidu's fourth quarter call. All monetary amounts used in my discussion are in RMB, unless stated otherwise. Baidu had a strong finish in 2019. Total revenue reached CNY 107.4 billion, or USD 15.4 billion, up 8% year-over-year, excluding spin off revenue. Revenue from Baidu Core was CNY 79.7 billion or USD 11.5 billion, up 6% year-over-year, excluding spin off revenue. Adjusted EBITDA was CNY 18.4 billion. Adjusted EBITDA for Baidu Core was CNY 25.5 billion or USD 3.7 billion, for 2019. Total revenues for the fourth quarter was CNY 28.9 billion or USD 4.1 billion, up 6% year-over-year, which slightly beats the high end of our guidance. Revenue from Baidu Core was CNY 21.7 billion or USD 3.1 billion, up 6% year-over-year, accelerating from the last 2 quarters. On a sequential basis, fourth quarter revenue for Baidu Core was up 3% compared with being slightly down in the same period last year. Marketing services in the fourth quarter saw strength from retail/e-commerce, gaming, and services sectors, offset by softness from financial services, healthcare, franchising and auto sectors. We are encouraged to see the healthcare in the fourth quarter, while continuing double-digit decline year-over-year, was flat sequentially. And our overall CPM continued to trend up sequentially. Our new AI businesses, which include smart devices, smart transportation and Baidu Cloud, doubled year-over-year in the fourth quarter. Xiaodu smart speakers continue to experience robust growth, and unit economics continues to improve, with new products released at higher price points and BOM costs reduced on greater sales volume. Baidu Cloud revenue recorded strong double-digit growth with impressive margin improvements. As we entered 2020, we are excited that our new AI businesses are becoming an important growth driver for Baidu. iQIYI revenue reached CNY 7.5 billion, up 7% year-over-year.…

[Operator Instructions] Your first question comes from the line of Piyush Mubayi from Goldman Sachs.

In your guidance, Herman, you talked about how the business has recovered in the last 2 weeks, to a certain degree. Could you just take us through the distinct periods in the first quarter to give us a better sense of the sort of recovery that we're at? In the last 2 weeks, for example, what has been the year-on-year growth that you're witnessing in your business? And related to that guidance, also, if you could give us a sense of what the underlying search trends have been, i.e., what sort of traffic growth are you witnessing? How was that disrupted in any way? How is that evolving? And at this stage, how would you comment on what March and the rest of the year looks like, i.e., this recovery in the last 2 weeks? Can we extrapolate from that that pace of recovery will continue into the rest of the quarter? And is that in your guidance?

Yes. Piyush, I'll take the first part on revenue, and I'll have Dou talk more about the traffic for the first quarter. As I mentioned in the prepared remarks, in the first half of first quarter, we see a rather weakness because of the coronavirus and because of extended holidays and the fact that people were being quarantined, so a lot of shops were not open. A lot of offline activities were impacted. And a substantial part of our revenue is related to these offline activities that the sectors Robin has mentioned. On the other hand, we do also have a good portion of our revenue, that's online. And as I have mentioned, things like online games, e-commerce, online education and so forth. When you look at the pattern of growth, after Chinese New Year, we had anemic growth. And we usually look at how fast we're growing on a week-over-week basis. And we even compared to last year, last year, Q1 was not very strong for us. And when you compare to last year, we were still subpar this year. But we started seeing activity pick up a little bit 2 weeks ago. And then also, this week we're also seeing continued pick-up. So the assumption with our guidance is that from now until the end of the quarter that the growth on a week-over-week basis will continue to ramp up even faster than what we have seen in the last 2 weeks. And we think that is potentially possible because we're seeing that many of the cities around China, people are actually going back to work. We're seeing some of the shops in Beijing are opening up. When you're going on the freeway now, you're actually seeing traffic jams versus 2, 3 weeks ago, where the roads were pretty empty. So Dou, do you want to answer on our traffic...

Sure. On the traffic side, actually, as Robin already mentioned, right, even in last December, we already see quick growth for both the DAUs and the search volumes. Actually, for the epidemic outbreak, so people, once again, realized that the unique value proposition for Baidu services, because they were eager to know more about the coronavirus, and they wanted to proactively to search, instead of waiting there to be affected. So that side, we can see the search volume metric growth more than 30% during this time. And because of the 2 engines of Baidu App, where we have search and the feed. So with the volume growth at search, we also see robust growth for the time spend on feed, which surpassed at 100% year-over-year during this time. The good thing for us is that by analyzing the queries, we not only see the growth for the queries relative to coronavirus, we also see the growth of other verticals for searches. And it means that users are getting attempts to know more and more about Baidu service so then they can expand to other sectors. So in general, I think it's a good time actually for the customers and the users to know, to learn more about Baidu services, and the traffic growth will be a good start for the next quarter, actually.

We have the next question from the line of Eddie Leung from Bank of America.

So best wishes and our thoughts with everyone being affected by the outbreak. May I have like 2 questions perhaps to Herman. Just a follow-up on the CPM trend. I would like to clarify if the CPM started to go up year-on-year or was still down year-on-year in December or perhaps at the beginning of this year? And then secondly, on cost of services, just wondering, how should we think about the trends of TAC and content costs, excluding iQIYI going forward?

Eddie, okay, let me talk about CPM. Your question was how CPM is trending. When you look at CPM trending, we look at it on a sequential basis, we've been nicely trending up the last few quarters into Q4. On a year-over-year basis, we're still seeing us, that being a negative growth. As we saw last year, we talked about how the market was diluted by a lot of supply of inventory going into the market. But I think you're seeing good trending on a sequential basis, it's coming back. It's hard for me to comment on Q1 because I think Q1, you have an issue of demand, right? We talked about how a big part of our customer base, the base rely on offline activities, the shops closing and so forth, very hard for them to compete for CPM. So I think it's not indicative to look at the CPM trends, given our current situation. With regards to our TAC. For Q4, our TAC cost was down, our total TAC revenue is down. This is an area we're seeing the pattern of a search in China. We talked about a lot of our mobile ecosystem. We talked about in-app search. Because in-app search is so much more convenient, because when you're logged in, you can do so much more, it's personalized to the particular user, we're seeing a shift of how people are using search. We think that the future of search is going to be in-app search. You will see us growing very robustly in Baidu App. As a result, what you're probably seeing that the searches through browsers and so forth, as a percentage of overall search in China, are declining. So we expect that that market to continue to decline. As a result, our revenue from TAC as a proportion of total revenue will also decline. So the way we look at that is we'll continue to participate in bidding for TAC traffic to the extent that we think it could be profitable, since we're the largest in China, if we cannot be profitable, probably other companies cannot. So we'll allow other companies to continue to bid for TAC traffic at a negative margin, while we focus on just profitability from that perspective. And then on content costs, this is an area that's good for us in a sense that we're building up our feed system. We're also trying to strengthen our vertical propositions, certain vertical areas such as online literature, healthcare, wiki and so forth. At the same time, we're also going into, for example, live streaming, if you've seen our apps. So that's an area that's going to help contribute to the content. So I think as a percentage of growth, you're going to see content costs, we're going to continue to invest in that this year. But in terms of absolute dollars, it's not that big compared to our overall cost structure.

Understood.

One that I'll add on the CPM-wise. Because the first months of the first quarter, actually, we have multi-factors like the Chinese New Year and the epidemic, right? But just before the outbreak of the epidemic, by removing all other factors we can think of, actually, we already see the CPM outpacing the last year, quite significantly, actually. But the epidemic actually just disrupted this pace. But down the road, I think we are confident on this.

The next question we have is from the line of Alicia Yap from Citigroup.

Robin, Herman, Dou Shen, Juan, and also wishing you all healthy. So in light of the coronavirus, it seems like Baidu decision last year to transition to the medical structural platform landing page seems timely. So and you mentioned earlier the DAU for the healthcare search query up 35% in December. Could you share with us the rough sense of the absolute size of this DAU? And could you also give us some comparison in terms of the DAU increase so far until now in the first quarter? And how will these potential higher queries and traffic search to translate to potential higher demand for the medical keyword advertising in the first quarter and also future quarters?

Alicia, right, before I talk about these numbers, I wanted to show you why we are seeing the growth of the healthcare queries and such volumes. So let's say about this coronavirus, right? So around the outbreak of that epidemic, we put together a channel to cover all the relevant information about the epidemic. So specifically, we actually launched a free healthcare consultation that allows people to access doctors online. And also, our operational team is partnering with medical experts to providing authoritative information on the coronavirus. And also, we invite them to do quite a lot of live broadcast to answer the users' questions. So with all that, actually, Baidu's platform, once again, to show its capability to answer, address users such concerns. So as Robin mentioned, right, so we see the query volumes about healthcare grows 35% year-over-year in a normal pace, actually. During this epidemic, we can see even higher growth for the healthcare queries. So in terms of the specific DAUs, actually, I do not have that number at hand, but we can calculate based on the query volumes proportionately. Does that address your question?

Yes. It's helpful, yes. Can we get some sense of how we can get the benefit later in the quarter or like in future quarters in terms of translating to revenue upside?

Yes. From my perspective, I think it's pretty correlated. And so since we have more and more users coming to Baidu for the healthcare. And actually, as I said, the user comes to here for the healthcare related information. Actually, they already show their interest for beyond just healthcare. So that's why we can see the total search volume growth. And that said, we can see all this in a user interest and search volumes are going to be monetized properly.

Yes, I think, Alicia, it's more important to look at the big picture of what we're trying to do with the whole mobile ecosystem. I think healthcare is just one of the factors. What we're trying to do with the healthcare with the Managed Page is so that the information is verifiable so that it becomes more reliable. And what Dou has mentioned earlier is that during the coronavirus, you see a lot of people applying feeds and so forth. You also note that when you have a lot of feeds and so forth, you have things, what they call fake news. So what people want to do when these things impacts people's health, impacts people's lives, they want a place where they can go and have information that's more authoritative, that's more reliable. And that's why you're seeing people come to Baidu during this time, to search, to get the information, to make sure that this is correct. So I think we talked about a lot of things we're doing with healthcare. But I think when this is over, it's not just going to be focused on healthcare advertisers, but more broadly, the users are going to come here because this is where they can verify more reliable information. As a result, that overall traffic growth is probably going to spill to other sectors for our advertisers. I think that's probably a better way to look at this versus just focusing on our healthcare customer sector.

Alicia, maybe if you guys maybe already noticed, Baidu's unique position in serving users knowledge and information. With that, we already see a lot of news, including CCTV has quoted or cited Baidu's data or information a lot during the past few weeks actually. So this, again, proves the authoritative information that's Baidu's service. And once again, to help the users to know Baidu's service even better actually to improve their confidence in Baidu service. I think these are all good signals going on forward.

[Operator Instructions] The next question we have is from the line of Thomas Chong from Jefferies.

Wish everyone is in good health and safe. My question is about our Smart Mini Program's potential. Given the good traction that we are seeing, I noticed that we mentioned about Baidu AI will be a key driver or one of the drivers for this year revenue growth. Can management comment about the timeline on Smart Mini Programs' monetization? And on the other hand, can we also talk about the trend in operating expenses for this year, given the fact that our Q4 margin is so solid with our ROI strategies.

Dou will answer the first one and Herman will answer the margin question.

Okay. Actually, for the Smart Mini Programs, we already see quite a lot of examples today and before about its advantages in terms of the user experience and the help to the developers. So besides the examples shown before, so fundamentally, it is because with the AI capability, so the developers, they can simplify their development and provide an even more powerful functions. Just as the example given by Robin for the Housing fund. So I just scan the face and we can immediately get all the data about the personal information. So that is a good example, actually. So we have a lot of other examples. So in terms of the monetization, just because we've seen that Smart Mini Programs, we can have more data about the user, and we can understand the user better. So then we can match the user with the more relevant ads. And with all the Smart Mini Programs launched and monetized through our ad services, so we can see the CPM lift pretty significantly, which is also mentioned in Robin's script. And also for the advertisers, whoever use the Smart Mini Program as the landing page for their campaign, so we also see that ROI lift, which is proven example by example, one after another. So that's why we already see the advantage brought by the Smart Mini Programs so far. And also, we can see, so the adoption reach for Smart Mini Program is growing quickly, actually. So all this actually depends on the user experience, which is a fundamental factor for all the advantages I just mentioned. So we are monitoring closely the experience between our Smart Mini Programs and Smart Mini Programs on other platforms. Actually, we can see we are showing advantages little by little.

Yes. So Thomas, just to add what Dou has said, the way I think I would look at Smart Mini Programs in what we're trying to do with this mobile ecosystem is we're actually disrupting how search is doing, right? We're going from browser search to what we call AI search. And AI search is basically you log in to Baidu App and the results you get is personalized. That's why, when you scan your face, we know exactly what the balance of your housing fund is. So think of it as, in the past, people search through browser, disrupting the in-app search. Because you can log in, because you can then use your personalized information through your AI. With regards to your margin question, can you ask that again? I didn't hear all of that. Thomas Chong^ It's about the trend in operating expenses in 2020. We see that the Q4 margin is very strong, and our ROI-focused strategy is very successful. So with the coronavirus outbreak, how should we think about the trend in operating expenses or the margin outlook, if there's any color?

Yes. So when you look at the cost structure in Q4, we went through our operations, and we deliver our promise back in May when we said we're going to do it last year. And then when you plus 4, 6, 7 months later, we basically cut down our cost structure and took out areas that we thought there's operating leverage. So in Q4, on a non-GAAP basis, the cost of sales plus operating expenses for Baidu Core exclude the non-GAAP items. We're talking about a level of CNY 13.2 billion. So going into Q120, we think that we can maintain that range or they'll be a little bit down. And even at that range of CNY 13.2 billion, when you compare it, for example, Q1 of 2019, we're talking about being down 14%. So I think we're in a good position going into 2020, even if we maintain at the Q4 level.

The next question we have is from the line of Binnie Wong from HSBC.

Wishing everyone's safe and healthy. So 2 questions here. One is that, I guess, it's understandable that the situation is very tough now. If you look beyond this one-off event, based on your experience with SARS or other epidemic, do you think it's more realistic to see a U- or V-shaped recovery? Do you notice any change in user behavior or advertiser approach that might lead to new business opportunities? And second is that we noticed there's an uptick in the Baidu App traffic during the Chinese New Year, and it surpassed the 200 million DAU milestone. So I think that's very encouraging. Despite we have scaled back our promotion this year compared to last year. How do you think we can sustain this traffic and monetization as well? And just very lastly, on housekeeping, in 4Q, what are the outperforming, underperforming advertising verticals you see?

This is Robin. I think Herman already basically described our expectation for the rest of the quarter, you can call it V-shaped or U-shaped, probably different people have different interpretation, but what we can tell is that the majority or probably almost all the industries to advertise on us, those kind of demand, they don't disappear. They are just to postpone. If you plan to get married, you'll still get married. If you plan to buy a car, you will still buy a car. If you plan to become prettier, you still go for a cosmetic surgery. So this kind of demand will come back after the epidemic ends. And in terms of traffic, Dou mentioned that the traffic has gone up very dramatically during this epidemic outbreak. Because we have better technology, better user experience, there's more accurate information, people get a better sense that the Baidu services are superior. So we think they will stay with us even after the epidemic outbreak. Herman, do you want to cover the Q4 industry?

Yes. I think in the Q4 industry, we talked about it in the prepared remarks. Basically, the ones that are strong are our e-commerce retail, online gaming and services. And then the ones that are weak are our financial services, healthcare, franchising and auto.

And sorry, can I just follow-up here in the 1Q. So far, how you see this has been trending?

You're talking about by customer segments?

Yes, by customer segment in 1Q?

Yes, I think it's obvious that these customers that are doing from online are going to do well, such as online gaming, online education, e-commerce and our other online services. And those are going to be negative, probably obvious, are going to be things like travel industry, which is a big sector for us, auto, real estate, healthcare and franchising.

The next question we have is from the line of Tina Long from Credit Suisse.

Just one quick question on the sales team structure. So it has been almost a year since the senior management change on the sales team. So I would like to know what has been done over the past 8 months or so on the sale team, including like team structure, staff incentives and KPI setting, all that kind of thing. And what the change will actually lead to a stronger year for the following quarters in 2020?

Yes. About the sales management, I'll ask Dou to answer it.

Okay. Sure. We have seen a lot of changes over the sales team, both in terms of the member and culture, and the collaboration with the products team. So as you guys already know, we have hired or replaced quite a few positions with high-quality people and with a pretty solid experience in sales. And I think the most important thing is that we have strengthened the connection between the sales team and the commercial product team and even the user side of products team. So we are exchanging the ideas quickly so that we can fully exploit the power or the service provided through the commercial and users side of products to help the advertisers to acquire their target customers, and therefore, improve their ROIs. Actually, we already see the synergy is happening, and that gave us the confidence or encourage us to see better results in the coming quarters. Does that answer your question? Tina?

Sure. Sure.

Thank you, Tina.

The next question we have is from the line of Tian Hou from T.H. Capital.

The question is related to the new focus of 2020. 2019, I understand, for Baidu is a transitional year. So we have a lot of things for new and the management changes and sales team changes and healthcare sector removal and the market change. A lot of changes. So in terms of our packaging, I think was really smart. So we spent money，we use our return on investment as a principle to direct how we spend. So we didn't grow that much, and we didn't spend that much either, so we have a good margin improvement. So as we enter into 2020, I wonder what is the new focus for development. And how are we going to direct, deploy our capital in a different area in order to generate more growth? That's the question.

Tian, I think you're asking maybe M&A question. So when we're looking at deploying...

Yes. What is the business focus? And how you're going to spend the money to support your focus? Which area?

Yes. I think when you look at our spending focus in 2020, a big part of it is going to be similar to how we have focused in Q4. And I think what you're going to see us, in Q4, we took a look at our operations, and we rightsized it, we made the fine-tune and so forth. I think going into 2020, first, we've got to deal with the coronavirus and then try to get our business to go back to growth again. And then once we're beyond that, I think there are certain areas that we want to focus on. I think we want to continue to invest in our technology in the research that we have. This is an important area, as we're moving into AI search with in-app search, and at the same time with our AI businesses and so forth. Another area we talked about earlier that going into more with content as we're focusing on verticals, trying to strengthen our video areas and also live broadcasting and so forth. This is just another medium in which advertisers can communicate with users and so forth. And then just beyond this, I think it's just the things that we've been talking about, how do we further continue to invest in our mobile ecosystem, the foundation of building blocks that we talked about and also building our AI businesses, the 3 areas that we talked about, the smart transportation, the smart devices and also our cloud business. So those are the areas that we're going to continue to focus on as we move into 2020.

Thank you. Ladies and gentlemen, this does conclude our conference for today. Thank you for participating. You may all disconnect.