Hello, and thank you for standing by for second quarter 2020 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, Juan Lin, Baidu’s Director of Investor Relations.

Hello, everyone, and welcome to Baidu's Second Quarter 2020 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 Executive 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 session 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, the 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.

Hello, everyone. Baidu's total revenues in the second quarter reached RMB 26.0 billion, declining 1% year over year, versus a 7% decline in the first quarter. Baidu Core contributed to the rebound, with the second quarter revenue growing 24% sequentially. Baidu Core's online marketing services has demonstrated steady improvement since the trough in February, with encouraging recovery across many industries. The second quarter, however, was also met with temporary setbacks, such as new waves of COVID-19 cases appearing in Beijing and other areas of China, where Level 2 pandemic precautionary measures were again put in place. Fast forward to latter half of July, the situation has been improving since then as COVID-19 cases subside. These positive moves forward, coupled with some temporary setbacks, leave us cautiously optimistic about the business climate in the second half. While COVID-19 geopolitical tension and other phenomenon plaguing the economy may continue to bring about hiccups, the opportunities that AI has presented us are getting more exciting. Our foray into in-app search 3 years ago is proving to redefine how content and services are consumed and allow Baidu to be a competitive force to enable long-tail SMEs to do business online. More than 2/3 of Baidu App users are logging in daily, which not only demonstrates user stickiness, but also indicates greater sense of identity and belonging of Baidu’s users. The CPM gap between Baidu App and union traffic continues to widen, in-app revenue makes up the majority of search and feed revenue, and daily in-app search queries outgrowing the total search market in China. Traditional search through a browser directs users away from Baidu, whereas in-app search aggregates third-party content and services onto our platform for a unique closed-loop experience. Users come to Baidu to form relationships with merchants through follow, messaging, live video,…

Thanks, Robin. Hello, everyone. Welcome to Baidu's second quarter 2020 call. All monetary amounts used in my discussion are in RMB, unless stated otherwise. Baidu's total revenues reached RMB 26.0 billion, or $3.7 billion, decreasing 1% year over year, which is an improvement from last quarter's 7% decline. Our business improvement mainly came from Baidu Core, whose revenue reached RMB 18.9 billion, or $2.7 billion, in the second quarter, decreasing 3% year over year, which is a significant improvement from the 13% decline last quarter. Travel, financial services, franchising, healthcare and auto underperformed in the second quarter, though we are seeing a meaningful recovery in healthcare and franchising, along with real estate and machinery. In-app revenue grew double digits year over year in the second quarter, and made up more than half of our search and feed revenues. The robustness of in-app revenue, and its increasing revenue proportion, will be an important revenue driver for us going forward. Our new AI businesses also saw strong growth, up double digits year over year, with strength coming from Baidu cloud and smart transportation. Cloud revenue reached RMB 2 billion in the second quarter, and we expect cloud and smart transportation to be important revenue drivers for us going forward. iQIYI revenue reached RMB 7.4 billion, up 4% year over year. iQIYI subscribers reached 104.9 million, and its membership revenues was up 19% year over year. iQIYI's ad business was down 28% year over year, impacted by the challenging macro environment and the delayed release of top hits. Non-GAAP cost of revenues was RMB 12.9 billion, down 19% year over year, primarily due to a decrease in traffic acquisition costs, sales tax and surcharges, and costs of goods sold. Traffic acquisition costs decreased primarily due to a double-digit decline in TAC revenue. Our…

Thank you. First question comes from the line of Piyush from Goldman.

Thank you, Robin and Herman, for taking my question. I really have one question centered around how your business has been recovering into the third quarter. You mentioned, Herman, that medical has started coming into its own, which is very encouraging. Could you give us a sense of what percentage or some scale of how much it's come back and how much further we can expect it to come back in the coming quarters based on the guidance you've set for 3Q? And related to the guidance and the medical, you talked about some of the other verticals where you're in the earlier stage of recovery. Can you give us a feel for how long that might take to come back? And essentially, give us a feel for how the broader economy has been performing? And I know you said one question only, but there is a pronounced improvement in your gross margin in 2Q over the first quarter and versus the past. Are the gains you're seeing on the operating profit level sustainable? Thank you.

Piyush, well, that's a mouthful of questions here. Let me see what I can do. With regards to health care, as I mentioned, when you look at on a year-over-year basis, we're still down significantly double digits. But when you look at how we're recovering on a sequential basis, we've come back pretty significantly. And we expect, at this current rate that health care should probably be as good as last year. Probably sometime in Q3, given the current trajectory. We're also seeing several other verticals at the same trend. And that's why when you look at our guidance in Q3, you're seeing us doing better on a year-over-year basis than Q2. And Q2 is assuming we hit midpoint and then Q2 is much better than Q1. So I think, on a whole, the trend is right. And as I mentioned in the prepared remarks, given this COVID-19 pandemic, we have seen a second wave coming back to Beijing. So the assumption here is that we will continue to have smooth sailing and that we don't have further ways to disrupt the economy because part of our business relies on the fact that stores need to be open, so they'll come to Baidu to buy traffic to their stores. With regards to gross margin and operating margin, I think that you can probably expect the savings that we had in the last few quarters, as we talked about this last year in May, we promised you that we will go through our operations and look at where we should put our investment on that would have higher ROIs. We followed through 6 months after that. And you saw, starting from Q4 last year, that we had a pretty lean P&L. And we've been going through with this strategy in Q1…

Thank you.

Thank you.

Thank you for the questions. Next question comes from the line of Eddie Leung of Bank of America. Please go ahead.

Good morning, guys; just 2 questions. Number one, could you comment on your thought about the potential combination of Tencent and one of your competitors? Would that change the competitive landscape and how Baidu can address the potential changes? And then number two, probably more a housekeeping question. You mentioned that the COVID situation in Beijing affected the second quarter Core business. So just wondering, could you help us to get a sense of potential impact? And how much exposure of the Core business to the advertisers in Beijing, for example? Thank you.

Thank you for the question, Eddie. I'll take the first one. So it is actually not new, between Sogou and Tencent. So they have been working together for a long while. I think it is not new in terms of the collaboration. So actually, in the mobile era, users usually remember each app by its key feature, and Baidu App has clearly established the brand as the #1 general search engine. So I think such brand awareness is very hard to duplicate. And what's more for Baidu, we have moved to the Baidu App strategy to build our ecosystem within the app. So with that, actually, we have already improved user experience from the traditional general search engine. It is not just for users to get information, but also help the users to experience the closed-loop experience, to complete the tasks in their minds, not only for service, but also even for shop online. So the more we build our ecosystem, the more good features we can present to the users. So with that, I think Baidu will keep leading innovations in search market and keep doing well.

Let me add to what Dou just said, Eddie. So it's important to understand the different product positioning, right? For example, WeChat is a social network. So the purpose of the social network is to get people together. You try to connect people with other people that are known. The purpose of search is not trying to connect people to people. It's trying to connect people to certain content, whether it's text, whether it's a photo, whether it's a video. So when you go, for example, into a social network, you have their newsfeed, and what you want to do is usually trying to just kind of get a very quick update and you want to go through a lot of various feeds. Whereas, when you're going into search, sometimes you're interested in a topic. As we mentioned in prepared remarks by Robin, we have people listening to live broadcasting for maybe an hour on a certain topic. You won't want just very rich content. Usually, it's from whether a social account or certain apps. And we have a Managed Page, whether it's some website. So the more information you have on that specific content, the deeper you could dive in that a person who's doing the search would feel more comfortable that they have well-informed information. So when you start building a lot of search functions in a social app, you might be good at search, but you will lose that social function. So it's a question of whether Tencent wants to make their social product more search-oriented and search-centric and less social. Because if they start doing that, then they leave the door open for someone to build a better social product.

And then, exposure to Beijing, perhaps?

Yeah. The exposure from Beijing is not very significant to our overall revenue, but it will have some influence because some of our advertisers are in the north part of China. So I would say, probably, it's in the single-digit rather than more significant than that.

Thank you, Herman and Dou.

Thank you for the questions. Next question comes from the line of Alicia Yap of Citi. Please go ahead.

Thanks for taking my questions. My question is related to the revenue from the Managed Page, which, this quarter, increased to 30%, right, of the core marketing revenue. Is there a time frame that you anticipate all the app revenues to be fully migrate to the 100% Managed Page? Is it feasible? So out of the merchants that previously on each 5 websites, what is the percentage of the merchants that already switched over to the Managed Page versus those yet to shift over? And then just quickly follow-up. Can you describe the advertiser sentiment? Do you feel that the attitude of the spending has dramatically changed or affected in the last 2 months in light of another layer of the U.S. and China tension? Thank you.

I will start with the first part. So actually, in Robin's opening remarks, he has already mentioned about the percentage of the spending on the Managed Pages. So in the beginning for the Managed Pages, our intention is to make the experience for the users safer and to get more true information. But later on, we are seeing more and more advertisers. Actually, they start to use the Managed Page by themselves without our enforcement. So this is because we are adding more and more features to the Managed Pages so they can significantly improve their ROI. So in terms of the number of advertisers adopting Managed Pages, and it is even higher numbers because Managed Pages now can help the niche to easily do the business on our products. So that's why we were seeing more and more advertisers. They are adopting Managed Pages by themselves. And I think with more features and more advertisers realizing the advantage of the Managed Pages, the rate for adaptation will be even higher or faster.

Yeah. And let me add to that, Alicia. Your question was, do we have a set target for Managed Page? We don't have a set target. I think as we mentioned many times, using our building blocks, the idea is that if we can get content on Baidu's platform, we'll have better user insight, we can provide better user experience, right? So the idea is not to have 100% of our revenue from Managed Page, but to have it from Managed Page, to have it from Smart Mini Program because that's content services from other apps, to have it from Baijiahao so that we can promote creators and publishers and so forth. So obviously, the more of that, the better. But because we are a search engine, we're an open app, we want to also be able to search content that's not on our platform, so you have the worldwide web. So I think the goal is trying to have as much of the worldwide web on our platform so that we can improve user experience, not just on Managed Page. And we're seeing a lot of content coming over to Baidu platform since we've been focusing on this, strengthening our mobile ecosystem. With regards to advertiser sentiment on geopolitical tension. We think that currently, our advertisers' sentiment is more a function of the economy in China, is more of a function of the kind of policies we have, allowing people to actually go to stores, to the shops outside and so forth. So as China opens up more, as people have more opportunity to run about, I think our business will come back. I don't think right now geopolitical tension has a meaningful impact on our business so far.

Thank you, Herman. Thank you, Dou.

Thank you.

Thank you for the questions. Next question comes from the line of James Lee of Mizuho. Please go ahead.

Great. Herman, I was wondering maybe you can comment on the Baidu App, DAU decline sequentially. Is it more due to suspension of your app? Or is this because more people returning back to work here? And just curious, are you taking any initiatives to drive DAU growth in the second half? Or do you feel you have the critical mass at this point in time? And also secondly, regarding the SEC inquiry on iQIYI and its independent review. I'm just curious how involved is the Baidu management in the process. And especially on the internal review side, such as selecting the adviser here to make sure it's credible and impartial process for this important matter. Thanks.

Okay. So James, let me answer the first question. I'll answer in part, and then I'll turn over to Dou to answer the second part, which is how do we improve our DAU growth and so forth. So as you know, China was hit hard by COVID-19 in first quarter. I think we came to probably the trough of our economy, and people were very stringent with social distancing in February. And even going into March, people were actually the same, and you can see that throughout China. So a lot of stores didn't open up and a lot of people were staying home. You don't have schools open. So when you compare that, our DAU reported in the third month of each quarter. So when you compare March to June, obviously, in June, you have seen a lot of places in China opening up, a lot of stores opening up, some of the schools opening up. So I think the big differentiation between March and June is the fact that people were running about outside of their house. And as a result, they have probably less time spent on their app. So when you look at basically the top apps in China, QuestMobile is a good example, you can see that it's not just Baidu App. It's a pretty consistent trend with all the top apps that March is very high, and going into June, you're just going to have less traffic. I think with the companies that just reported over the last few days, you're seeing the same trend. With that, let me turn it over to Dou and talk about what we're doing to improve DAU growth.

Okay. So we do have many approaches to work out, to address this issue, right. So as we said, we are adding more and more content and services to the app, right, so that we can increase the engagement between the users and our product. So this will help us to get users being longer and more frequent on this app. And also we are adding more features, not only content and service, but also more new features to this product for a different group of users. So now, we are developing some specific products for the colleges. When they come back to universities, campus, they are going to have a chance to use our newer product. So with that, I think we already see the trend coming back. But for now, because it's in the summer break, so we are going to see how our solutions will work or not in the near future.

Yeah. And let me comment on the iQIYI SEC investigation. At Baidu, we have zero tolerance for fraud. When there is a short seller or issue against a subsidiary, it's actually ’one that’s quite autonomous. It is important to get an independent opinion. The Audit Committee of iQIYI stepped in, and they summoned the internal audit as well as hired an independent external adviser. This process is part of good corporate governance, and we think this validation process is important to earn investors' trust. Since I am part of the parent company, I am not directly involved in the independent investigation, and thus, I am not in a position to comment on iQIYI's situation, specifically. Perhaps I can talk about my understanding of how the process usually works. In addition to looking at the short-seller report, it is customary for independent external advisers to also perform forensic procedures on the rest of the financial numbers, which means the process will take time. The fact that the SEC is involved, they may ask the independent external adviser questions, and the independent external adviser may end up doing additional procedures. With COVID-19 in the backdrop, one should expect this process to be longer than normal. In past cases, without a pandemic, we have seen investigations lasting months and sometimes beyond a year. The positive side is that we have a very qualified independent external adviser looking into this situation. Typically, if evidence comes to light, that there is reasonable doubt to believe the company is fraudulent and that the numbers are not reliable, then the company's auditor will pull their audit opinion and withdraw from the engagement. Again, having an independent set of eyes reviewing this situation is meant to put the allegations to rest. At Baidu, we will take action to ensure good corporate governance, if necessary, and operate with our interest in mind. Only this way, will we be able to tap the capital markets in the future. I hope this answers your question.

Thank you for the questions. Next questions comes from the line of Tian Hou of T. H. Capital. Please go ahead. T. H. Capital, your line is now open, please ask your question. I'm sorry. I have to move on to the next question, it's from Gregory Zhao from Barclays. Please go ahead.

Hi. Good morning, management. Thanks for taking my question. My first one is about your marketing or non-advertising services. So as mentioned in the press release, your AI, your cloud-related business as well as smart transportation, have become important revenue driver in the quarter. So in the future, let’s see a 5-year or 3-year horizon, do you think this non-advertising business revenue can be kind of possible to exceed your current advertising revenue someday? And a quick follow-up for your share repurchasing. So the amount was raised from $1 billion to $3 billion. I know you have a rich onshore cash position in RMB, and you also recently finished the $1 billion debt offering. So do you have a plan to convert RMB more into U.S. dollar for the buyback? Or issuing more debts or other measures to leave the money for the buyback? Thank you.

Hi, Greg, thanks for your questions. With regards to how significant our non-AI businesses or non-ad business can be, I think what it will do is to become an important growth driver for us. As you can see, Baidu Core is non-advertising piece. It's getting bigger and bigger. It's pretty significant now. And because of the size, we think there's potential to really help drive overall growth of our business. And we talked about in my prepared remarks that just the cloud business alone, we're talking about RMB 2 billion in a year this quarter. Obviously, when you add on the other businesses such as the Xiaodu speakers， you're talking about smart transportation and so forth, and the size is bigger than that. With regards to our share repurchase program, where we expanded from USD 1 billion to USD 3 billion, we have several ways of getting US dollars. Obviously, we just raised the bond earlier this year, billed all in US. We can also do several things, as you mentioned. One is to convert RMB into USD, and obviously, we'll take advantage of that when the opportunity arises. The second thing we can also do is to sell down our investments, and we've been steadily doing that. We look at the current market prices and so forth and then we look at our US dollar cash needs, and we'll sell our investment down as appropriate if we feel like there's no strategic need for the previous investments.

Thank you.

Thank you for the questions. We'll move on to the next questions, once again from Tian Hou of T.H. Capital. Please go ahead.

Good morning, Herman, Juan, Shen Dou and Robin. So my question is related to your investment. So if I look at your business, we can literally separate them as one part is consumer facing, let's say, your three building blocks. And the other part is business facing. That's your cloud, AI, Apollo. So I can imagine each of those areas you can do a great deal. so what's the plan? What's your investment plan in the second half or next year? And if you have to rank them, what is your priority investment? Thank you.

Tian, this is Robin. Let me try to answer your question. I think our consumer-facing business and business-facing business are all great businesses. They each have their own potential. The consumer-facing ones, during the prepared remarks as well as the answers from Dou and Herman, you can see that there are still a lot of things we can do, especially using technology, to provide better content and services to our users, and provide better conversions for our advertisers. But for the business-facing opportunities, this sector will grow apparently faster than the consumer-facing ones, and we will continue to aggressively invest in areas we picked. And these areas will grow year after year for many years. And we are leading in almost all the categories we decide to get in for the business-facing opportunities.

Yeah. And let me just add to that, Tian. We talked about priorities. I think it's been pretty clear. We've been very consistent with our priorities. When you look at our 2C business, it’s in-app services, right? And then outside of our AI businesses, we talked about the 3 businesses that we have. And particularly, cloud, it's at a bigger scale. And it's a huge market, and we do have our advantage of having a leading AI capability. So with the AI businesses, in addition to in-app services or our top priorities. And I think among the AI businesses, they're all growing nicely. And then I think cloud is the biggest scale, and that's probably something that we will put more emphasis on.

Thank you. In the interest of time, we have time for one question. The last question comes from Binnie Wong of HSBC. Please go ahead.

Hi. Good morning, management. Thank you for the time here. So congrats on the earnings beat with a meaningful margin improvement. The question here is on the Smart Mini Program. Looking at our competitive strategy that is Mini Program and social network actually work nicely together to sustain the relationship with the users, and advertiser can actually feel it's that private domain. So how would that change the advertising industry landscape and then also our positioning in the Smart Mini Program? And then a quick follow-up here is that I recall, Robin, in your opening remarks, you mentioned that video is accounting for 70% of the feeds. So I wonder if you can discuss more about the pricing. Because, again, your competitor mentioned that the shift from banner ads towards feeds has seen like a meaningful increase in the pricing. So do you think this is also going to be one of our drivers into the second half and do you see a faster revenue growth from here? Thank you.

For the Smart Mini Program, as Robin already mentioned, so we see the increase in terms of MAU, monthly active user. Actually, if we would talk about the time spent on the Smart Mini Programs, the growth is even much higher. So it means that Smart Mini Program is leading to higher engagement between the users and the service providers. So we have already seen the numbers of the transactions through the Mini Programs and also the budget dollars used in our Smart Mini Program as the landing page for their campaigns. And then the amount of the transactions, I mean, in terms of the GMVs, are also growing. So we see pretty good trends for the Smart Mini Programs in our ecosystem. And then all this happens because it is providing better user experience to users. And it's a good way to connect with users and the service providers. So later on, we are going to share more information and data about the Smart Mini Programs. And then with that, I will turn it to Robin for the second one.

Yeah, on the video content for advertisers, it's also very effective for our advertisers as well as users. It improves the conversion for many of our advertisers. Therefore, as you know, most of our advertisers were at budget performance-oriented. So the pricing for app created for this video content is generally higher than the average. Is that what you're asking?

Thank you, management, for the reply. Binnie, do you have anything to add?

Oh yes. I was just asking in terms of the pricing, because we are seeing more video advertising. So thank you for the color on the conversion. But what about on the pricing side? Do you think we can also charge higher pricing with the video ads on the ECPM side from better ads. And then that should help us to be another growth driver into second half?

Yeah, the simple answer is yes, because the advertisers are mostly performance driven. When we can improve the conversion through video or through other means, the pricing will follow.

Thank you very much, management, for the answers. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect your lines.