Hello, and thank you for standing by for Baidu's Third Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question-and-answer session. 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 third quarter 2024 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 EVP in charge of Baidu Mobile Ecosystem Group, MEG; Dou Shen, our EVP in charge of Baidu AI Cloud Group, ACG; and Junjie He, our Interim CFO. 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 Credit 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 website 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 the call over to our CEO, Robin.

Hello, everyone. Baidu core total revenue was RMB26.5 billion. That's roughly flat for the third quarter on a year-over-year basis. Revenue growth from AI cloud was 11%, continuing its double-digit growth trajectory, thanks to the sustained momentum in Gen AI-related revenue. Our non-GAAP operating profit and non-GAAP operating margin remained stable, which demonstrates the resilience of our business. While navigating the ongoing macroeconomic weakness, we remain patient on our strategic focus of AI-driven innovation, with a particular emphasis on transforming our existing products and businesses, as well as fostering a new ecosystem for earning. Despite near-term headwinds, we are deeply convinced that this AI-focused strategy will position us well to capture significant growth opportunities in the long run. Underpinning our long-term strategic focus is the advancement of our AI capabilities, which serves as the cornerstone of our AI-driven transformation. In the third quarter, we continued to improve earning through pre and post training, optimizing model efficiency, while tailoring to the needs of our diverse application scenarios. Our flagship model, ERNIE 4.0 Turbo, has achieved notable improvements in inference efficiency, with throughput increasing by 48% compared to its [indiscernible] in June. The efficiency gains were driven by the optimization of our self-developed four-layer AI infrastructure. And we expect such improvements to further reduce model inference costs going forward. We have also expanded our lightweight model offerings with the introduction of Speed Pro and Lite Pro in the third quarter, as enhanced versions of their predecessors, Speed Pro and Lite Pro, featured lower latency, higher throughput, improved stability and superior accuracy. Over the past 24 months, we have focused on resolving LLM hallucinations through RAG, Retrieval-Augmented Generation. However, we observed that image generation still faces widespread hallucination issues, leading to inaccurate and logically inconsistent output, particularly in e-commerce and marketing scenarios where…

Thank you, Robin. Hi, everyone. I'm honored to step into the role of Interim CFO. Following my initial conference call, I look forward to engaging with analysts and shareholders in the coming period. Now, let me walk through the details of our third quarter financial results. Total revenues were RMB33.6 billion, decreasing 3% year-over-year. Revenue from Baidu Core was RMB26.5 billion, which was basically flat from last year. Baidu Core's online marketing revenue was RMB18.8 billion, decreasing 4% year-over-year. Baidu Core's non-online marketing revenue was RMB7.7 billion, up 12% year-over-year, mainly driven by AI Cloud business. Revenue from iQIYI was RMB7.2 billion, decreasing 10% year-over-year. Cost of revenues were RMB16.4 billion, increasing 1% year-over-year, primarily due to an increase in traffic acquisition costs and the costs related to AI Cloud business, partially offset by a decrease in personnel-related expenses and the cost of goods sold. Operating expenses were RMB11.2 billion, decreasing 5% year-over-year, primarily due to a decrease in personnel-related expenses and partially offset by an increase in channel spending and the promotional marketing expenses. Baidu Core's operating expenses were RMB9.9 billion, decreasing 5% year-over-year. Baidu Core SG&A expenses were RMB5 billion, increasing 4% year-over-year. SG&A accounted for 19% of Baidu Core's revenue in the quarter compared to 18% in the same period last year. Baidu Core R&D expenses were RMB4.9 billion, decreasing 13% year-over-year. R&D accounted for 19% of Baidu Core's revenue in the quarter compared to 21% in the same period last year. Operating income was RMB5.9 billion. Baidu Core's operating income was RMB5.7 billion and Baidu Core's operating margin was 21%. Non-GAAP operating income was RMB7 billion. Non-GAAP Baidu Core operating income was RMB6.7 billion and non-GAAP Baidu Core operating margin was 25%. Total other income net was RMB2.7 billion, increasing 40% year-over-year, primarily due to an increase in fair-value gain from long-term investments and disposal gains, partially offset by an increase in net foreign-exchange loss arising from exchange rate fluctuation between renminbi and the US dollar. Income tax expense was RMB814 million compared to RMB1.3 billion in the same period last year. Net income attributable to Baidu was RMB7.6 billion and diluted earnings per ADS was RMB21.6 billion. Net income attributable to Baidu Core was RMB7.5 billion and net margin for Baidu Core was 28%. Non-GAAP net income attributable to Baidu was RMB5.9 billion. Non-GAAP diluted earnings per ADS was RMB16.6. Non-GAAP net income attributable to Baidu Core was RMB5.7 billion and non-GAAP net margin for Baidu Core was 21%. As of September 30, 2024, cash, cash equivalents, restricted cash and short-term investments were RMB144.5 billion and cash, cash equivalents, restricted cash and short-term investments excluding iQIYI were RMB140.3 billion. Free cash flow was RMB2.6 billion and the free cash flow excluding iQIYI was RMB2.4 billion. Finally, Baidu Core had approximately 31,000 employees as of September 30, 2024. With that, operator, let's now open the call to questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Alicia Yap with Citigroup.

Hi, thank you. Good evening, management. Thanks for taking my questions. My questions is related to AI and search. So how should we think about the ramp-up pace for the generative AI results penetration rate? And what does management think of the optimal level? And how long do you plan for the search product transformation period to last? And could management also give more color on the recent developments in the monetizations of the AI search? So, when does management expect to commercialize the AI search results? Thank you.

Hi, Alicia. This is Julius. Let me take your question. We have been continuously transforming our core search with AI technology. I'm saying as well, Robin has said just now today, over 20% of pages and over 50% of the monthly active users that have engaged with the Gen AI contents already. However, I think the number merely represents our initial progress in one aspect of our AI-driven transformation of search. It should not be taken as a comprehensive indicator of our AI-generated content nor should it be used as the only benchmark for our progress. What really matters goes beyond it. In fact, we aim to revolutionize the search through ERNIE and transform every aspect of search experiences, providing the users with unlimited, on-demand and personalize their content through a combination of various formats whenever they need. Leveraging earnings we gain the deeper insights into user intent behind increasingly complicated queries, which can enable us to customize the content generation to better fulfill their needs. While continuously enhancing AI generating content quality, we also try to diversify our content formats such as AI summaries, you can see in the top page, and images and videos, agents, posts and even digital humans. All of these different formats can be dynamically combined to create some personalized search experiences with ERNIE, and we can tailor both the Gen AI content and its presentation format, which can best match what users want to see and how they prefer to consume this kind of information. This can allow us to optimize the user experiences and drive higher engagement. The AI-driven transformation of our search has already shown initial progress across certain user metrics, which give us some kind of confidence to keep pushing forward with our efforts. Through ongoing explorations, we are charging the…

Your next question comes from Alex Yao with J.P. Morgan.

Thank you, management, for taking my question. My question is about the ERNIE’s API. I think that the API of course have been growing fairly rapidly in the recent months. Could you guys share more details on the key drivers behind this growth? In addition, has any potential killer app emerged in the 2B or 2C markets? Finally, what is management's outlook of ERNIE adoption over the medium to longer-term? Thank you.

Hi, Alex, this is Robin. Yes, we're seeing remarkable growth in API cost. I think a number of factors are driving this growth. First, ERNIE gets smarter every day and hallucinations have been reduced significantly, so more and more applications can use it to add value to the users. And second is the inference cost. It gets lower and lower, so more customers can afford it. And third, it's a tool chain we provide to our customers, they can tailor the model to address their own specific needs easily in each application scenario. The substantial volume of ERNIE API cost is driven by both internal and external demand. We began our product transformation in Q2 of last year. We first upgraded our monetization system, delivering higher advertiser ROI and generating hundreds of millions of incremental revenues each quarter. And then, we extended the AI transformation across our major consumer-facing products that includes those products over 100 million MAUs, Baidu Search, Wenku, Baidu Drive, Baidu Keyboard and Baidu Map. We are encouraged by how AI could thoroughly revolutionize and rejuvenate these longstanding products with massive user bases. And this year, we accelerated the renovation of search, showing more and more generative content on our search result page. We believe that new Baidu Search has the potential and is well positioned to become a killer app in the age of Gen AI. This is because search is by nature deeply rooted in language and text understanding, which aligns perfectly with LLM capabilities. We're fortunate to have hundreds of millions of search users every day and the most advanced foundation models. And along this line, millions of agents are being built to answer users and customers' questions. This also contributed to the growth of ERNIE API calls. While most API calls currently come from the renovation of our 2C products, ERNIE has gained a strong recognition in helping businesses tackle challenges effectively. External API calls have grown quite quickly, roughly like 240% year -- quarter-over-quarter in the last week of Q3. We see strong adoption across sectors, including online education, social media, restaurant and food services, healthcare, legal consultation and recruiting. The widespread adoption shows that enterprises recognize the value of our powerful models and are willing to invest in them. We're thrilled with our progress and committed to accelerating ERNIE's adoption across all our product lines, as we transform from an internet-centric business to an AI-first business. With Gen AI becoming central to our entire product lineup, we are confident it will unlock new revenue streams and strengthen our market leadership. Thank you.

Your next question comes from Gary Yu with Morgan Stanley.

Hi, thank you for the opportunity to ask question. I have a macro-related question. Can management comment on the underlying ad demand trend? And also, have you seen any ad spend sentiment improvement, especially after the latest stimulus policy? And what's management's view on the macro outlook heading into 2025? Thank you.

Hi, Gary. Let me take your question. I think our advertising business is highly correlated to the macro environment, especially with offline small and medium enterprises across a wide range of industries, which make the majority of our net advertisers bases. As these small and medium enterprises are both deeply connected to the domestic consumption and highly sensitive to macro conditions, their vitality and recovery pace suffers, are more relevant indicators for our business. In Q3, we have seen the continued weakness across the verticals, such as the real asset franchising and healthcare. And so far in Q4, we have not observed a notable improvement in advertiser spending patterns, and the consumer spending remains subdued. And having said that, we are particularly encouraged by the strength and the timeliness of the recent stimulus policies, which continue to be rolled out as constructive initiatives we are seeing across the market. And while we think it will still take some time for these measures to reach offline small and medium enterprises and boost their confidence in advertising spending, so we remain conservatively optimistic about the recovery trend ahead. We believe that once the macro environment improves and the domestic consumption can pick up, small and medium enterprises' confidence will quickly rebound. And Baidu has long been the primary platform of choices for these advertisers. With proven effectiveness in driving the customer acquisition and growth, we expect them to return for advertising spending, which can help us to drive meaningful recovery in the advertising business. With our intensive reach and unique value propositions to offline small and medium enterprises, we believe that our advertising business will rebound with strong recovery momentum once the market confidence comes back. Thank you, Gary.

Your next question comes from LincoIn Kong with Goldman Sachs.

Thank you, management, for taking my question. So, we -- given the ongoing ad advertising pressure and our plan to accelerate and broaden our AI transformation, so could management share more color around our business focus at the moment, our priority in terms of our investment, resources spending and the capital allocation? And how should we think about the margin trend in 4Q as well? Thank you.

Hi, Lincoln, this is Jackson. I will take your call. Yes, currently -- we will remain committed to our AI-focused strategy as both our near-term priority and long-term strategic emphasis. Given our ongoing AI-driven renovation of search and the fact that we will not heavily monetize AI-generated search results soon, we expect the circumstances will remain under pressure for our online marketing business in the near-term. Well, however, we remain steadfast in this strategic direction, as we see strong long-term value ahead. In line with this strategy, we are going through a period of continued initiatives where we further intensify our product renovations with a strong emphasis on AI search and continue to invest in advancing earnings capabilities while enhancing our AI core offerings to maintain a healthy margin and expanding our autonomous driving initiatives where we view has a viable path to profitability. We believe these initiatives are essential to sustain our position as a leading technology innovator in China. As a result, the near-term margins will be in a period of adjustment. While looking to 2025, we will focus on optimal resource allocation to high-growth opportunities while staying aligned with our long-term strategy. Thank you.

Your next question comes from James Lee with Mizuho.

Great. Thanks for taking my questions. I have several follow-up questions on cloud. In terms of revenue growth, it has moderated maybe compared to the last couple of quarters. And maybe can you unpack the performance of both personal and enterprise cloud? And in addition, can you give us an update in terms of competitive landscape in the market? And lastly, can you share the outlook the cloud business, particularly contribution from Gen AI? And how should we think about the long-term margin assumptions? Thank you.

Thank you, James, for your question. This is Dou. Since last year, we have observed an accelerating shift in China's cloud industry towards AI computing, driven by the development of Gen AI and foundation models. We have seen more customers choosing Baidu's AI Cloud infrastructure and foundation models. The growing adoption is evidenced by our Gen AI business revenue. It started at about 5% of our total AI Cloud revenue when we first reported it in Q4 last year and has now more than doubled, reaching 11% in the third quarter. So, we are confident that this upward trend will continue. And so, as you know, our AI Cloud business consists of two main parts, personal cloud and cloud service for enterprise and public sector. This quarter, total AI Cloud revenue growth slightly moderated, primarily due to a temporary impact on our personal cloud revenue brought by a short-term business adjustment. However, we believe ERNIE's ongoing renovation of the personal cloud will help mitigate this short-term impact and position it well for greater long-term growth opportunities. Meanwhile, our cloud service for enterprise and public sector, which makes up the majority of our AI Cloud revenue, actually maintained a strong momentum this quarter, continuing to outpace our overall AI Cloud business. So, the growth in enterprise cloud revenue has been driven by a strong demand for model training and inference across various sectors, including internet education, finance and so on. This reflects our customers' strong recognition of our AI infrastructure and mass platform capabilities. In particular, the major customers in industries like [in-night] (ph), tech and automotive increased their spending on our GPU public cloud. So, we are also seeing a rise in both the number and spending of mid-tier enterprises, especially in sectors like marketing software and other growing industries. In today's cloud market, foundation model capabilities have become more and more essential. Given the significant requirement for powerful AI infrastructure, specialized AI expertise and substantial capital investments, only a slight few foundation models will survive, both in China and overseas. And for sure, we will be the one of them standing as the front-runner. So, we are proud that ERNIE has already demonstrated its market leadership through widespread adoption and advanced technology. So, these experiences position ERNIE to stay at the forefront, attracting more cloud customers and fortifying our market leadership. So, on the profit side, our AI Cloud is healthier than ever, with non-GAAP operating profit margin expanding year-over-year. So, this improvement is driven by a continued margin enhancement from our Gen AI business revenue and our commitment to achieving high-quality revenue growth. So looking forward, we are confident that our AI Cloud business will maintain strong revenue growth momentum over time, while continuing to deliver a healthy operating profit. Thank you, James.

Your next question comes from Thomas Chong with Jefferies.

Hi, good evening. Thanks, management, for taking my question. My question is related to robotaxi. Given the recent IPO wave of autonomous driving related companies that have partnerships with big automakers and marketing platforms, what are your thoughts about how -- the competitive dynamic going forward? Looking ahead, how do you see the Apollo Go mobile taxi business strategy development? Can management share any details about the future plans for expanding and growing Apollo Go? Thank you.

Yes, autonomous driving has a high bar. It requires best-in-class technical expertise, top talent as well as strong commitment to long-term investment and significant capital reserve. We have built an unparalleled foundation in all these areas, giving us a strong competitive edge and setting a high bar for others to follow. As one of the earliest players in the market, we've consistently demonstrated our unwavering commitment through over a decade of investment. This long-term dedication has fielded our technological advancements, positioning us as the global leader in autonomous driving technology. As mentioned earlier, Apollo Go hit a significant milestone of 8 million total rides, making us the world's top automating service provider. In addition to our cutting-edge technology and strong operational capabilities, we've achieved significant cost-effectiveness in hardware. RP6 stands out with a competitive price of under $30,000 for mass production, making it the most competitive option in the market. All the strengths just mentioned above are driving us forward, paving the way to validate our business model. The overall market is still in its infancy. So, competition should help accelerate the growth of the market and foster a more friendly, pro innovation regulatory environment. We believe such regulatory environment is essential for the healthy growth of the -- of this industry and we remain prepared for expansion when the time is right. Meanwhile, we are actively seeking new opportunities for international expansion. We see significant potential in cities that enable large-scale, fully driverless operations, similar to Wuhan, Chongqing. Additionally, we are open to exploring different business model options, focusing on asset-light strategy to keep our operations flexible and efficient as we grow. Thank you.

Your next question comes from Xiong Wei with UBS.

Good evening, management. Thank you for taking my question. My question is regarding capital allocation. I was wondering, could management provide any updates on capital return plans for shareholders such as share buyback and dividend? Thank you.

Hi, Wei, I will take your question. So, since becoming a public company in 2005, we have made consistent efforts to generate long-term value to our shareholders through our growth as a leading technology company in China, complemented by share buyback programs. So, over the past few years, we have maintained a steady pace of share repurchases, averaging about $1 billion annually. So, I'm pleased to share that through our consistent share repurchase efforts, we have seen a decline in our total number of shares outstanding this year. While the pace of share buybacks may vary from quarter-to-quarter, according to our established execution rhythm, we remain firmly committed to our share buyback programs as a key component of delivering value to our shareholders. While we are currently focused on executing our sustainable and recurrent share buyback programs, we remain open to evaluating various options for returning value to shareholders. As always, we firmly believe in Baidu's long-term and sustainable growth potential and we'll ensure that our shareholders will be rewarded for their trust in us. The ultimate way of serving shareholders' interests is to have a solid business foundation and capitalize on growth opportunities. We are in the midst of a paradigm-shifting technology transformation based on Gen AI and the foundation models. At Baidu, we have the AI infrastructure, technical expertise, as well as financial and human resources to execute on our plans. So, we want to have the flexibility to invest as needed to propel our new business forward and with that, bring long-term value to our shareholders. Thank you.

Your next question comes from Miranda Zhuang with Bank of America Securities.

Thank you, management, for taking my questions. So, can management provide an overview of ERNIE's technology roadmap for the future development? And what are the upcoming milestones for the Company's AI model? And then when can we expect to achieve them? Thank you for my question about ERNIE. Thank you.

Well, we launched ERNIE bot in March of last year. Since then, we've been continuously enhancing our foundation model capabilities, particularly our flagship models. In October last year, we introduced ERNIE 4.0, China's first [TCD4] (ph) type model with world-leading capabilities. And then, we launched ERNIE 4.0 Turbo in June of this year and delivering even greater performance. Building on these milestones, we are committed to continuously advancing our flagship models to deliver better performance, accuracy and broader support for diverse user needs. We expect to launch a new version of ERNIE early next year to further strengthen our leadership position in foundation models. Compared to overseas companies, we distinctly take an application-driven approach. We believe foundation models hold real value only when they power widely-used, practical applications that meet user needs. Over the past 18 months, our model development has centered on addressing real-world problems according to market demand. With this approach, we've made significant progress in resolving hallucinations and improving accuracy while also introducing a series of models tailored to diverse needs. To make ERNIE models more accessible and affordable, we boosted the performance, lowered inference costs and enhanced response speed. What sets us apart is that we really have a clear sense of our strengths and where we are heading. We are tied to those technologies that align most closely with our business and create the most value. Earlier this year, I mentioned that we have expanded our visual foundation model capabilities to our autonomous driving this, aiming to further enhance our leading position in this space. Now, we are also proactively exploring model capabilities and applications based on ours to insist in language models, seeking to create more synergistic value and unlock new possibilities. Throughout all areas, we are very thoughtful about how we allocate our resources optimizing our foundation models in directions that maximize impact across our business and help maintain our market leadership. Thank you.

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