AI has played a role in advertising business (BIDU-SW 1Q23 earnings call transcript)

Below is the summary of BIDU-SW's Q1 2023 earnings call, and the financial report interpretation can be found in "BIDU-SW: Not Just an AI Story, Advertising Also Helps Stabilize the Market".

I. Q1 2023 Financial Report Overview

1. Revenue: BIDU-SW's core revenue was RMB 22.998 billion, YoY+7.6%, exceeding market expectations (3.1% beat).

2. Profit: BIDU-SW's core operating profit was RMB 4.091 billion, YoY+62.1%, exceeding market expectations (51.6% beat); operating profit margin was 17.8%, YoY+6pct, exceeding market expectations (5.7pct beat).

II. Management Remarks

(I) Overall Performance

In Q1 2023, BIDU-SW achieved steady performance in its core business, with a faster YoY revenue growth rate than the previous quarter, supporting the improvement of operating profit margin and achieving operating leverage.

1. Online Marketing

Significant improvement in operating profit margin. After the Spring Festival, the Chinese economy improved, driving business development. After the Spring Festival, there was a significant demand for advertisers, especially in vertical areas such as advertising. The company has always provided users with a better experience through the BIDU-SW APP, and the relevant user experience indicators are very good, bringing more opportunities for online marketing revenue - compared with the same period last year, online marketing revenue has increased significantly.

2. AI Cloud

In Q1 2023, the non-GAPP calculated AI cloud business achieved profitability.

At the same time, the company has been building standardized AI voice solutions. Standardized AI language solutions can be used for different projects, achieving higher efficiency and better financial results. In the past few quarters, standardized AI cloud solutions have driven the growth of AI cloud profits.

BIDU-SW will further leverage generative AI to help products and services bring better experiences to users. Generative AI contains huge opportunities, and can be integrated with AI cloud, intelligent driving, and mobile ecology. Specifically, it can be used as an introduction to the new generation of the Internet, and combined with products and applications such as smartphones.

The company fully utilizes its own technical accumulation in this area to make various products and services, such as search, better. BIDU-SW has accumulated rich experience in search, with a very rich knowledge graph, user dialogue, and conversation experience. The company will integrate generative AI capabilities with all of this.

Currently, we have achieved rapid early deployment and a very good large language model in March of this year. Over the past 10 years, the company has been investing in AI and has a very solid foundation in this area, which can now further derive greater value from generative AI.

As the model is deployed, more data will be collected to better process natural language and further optimize the large language model. BIDU-SW has built a series of powerful AI capabilities, with different levels such as AI architecture at the bottom, cloud infrastructure, PaddlePaddle deep learning framework, large language models, and different AI applications - all of which are the company's unique advantages, helping to reduce costs throughout the entire process.

A large amount of data is the basis for training, and the company has a very strong advantage in this area. PaddlePaddle is also a leading deep learning framework in China. The company integrates all of this in a unified way to generate powerful energy and achieve seamless integration between different frameworks and systems.

For example, training and running large language models require a lot of data and computing resources. To meet this challenge, the company uses proprietary AI intelligent frameworks to develop new technologies and achieve seamless integration at the aforementioned levels, helping to achieve better performance and higher throughput. PaddlePaddle's performance has been improved, and now it has better compatibility with large language models and language infrastructure.

Since the launch of Ernie Bot in March, the product feedback has been very good, and we hope to conduct more business tests to use its capabilities to further restructure products and services. The products and services provided by the company to consumers and enterprise users can be integrated with the company's generative AI capabilities, making it not only for consumers but also for enterprise users, promoting industry changes. BIDU-SW is working hard to build a new ecosystem, and Ernie Bot plays a very important role in it, helping to achieve more use cases.

The company's strategy is to gain more market share and achieve sustainable long-term growth. As more and more people use Ernie Bot, the product will become more powerful. The company will collect real feedback and iterate quickly to optimize the model. At the same time, it will adjust in real-time according to the needs of consumers and enterprise users, digging deeper into what generative AI they need and expanding more value for them in which use cases. In terms of the cloud, we can further add AI to the cloud, strengthen the cloud through AI, and promote products and services to better meet market demand, helping users improve productivity and efficiency.

More and more industries and enterprises are starting to train their own models on BIDU-SW cloud. BIDU-SW hopes to establish such an open platform so that everyone can train models based on their own needs. The company has a very strong foundation in AI and the cloud, so it has the conditions to build such an open platform.

In March, sales leads related to this increased by more than 400%. We believe that the AI cloud will continue to grow, and market share will further increase. In the financial industry, there are very good examples: working with a famous domestic insurance company to improve efficiency and provide better digital experiences for employees and customers. To achieve this goal, AI capabilities, PaddlePaddle framework, and other tools were deployed on its private cloud, customized and provided technology to help it train and improve models.

In different fields such as China's financial services and software industries, companies can create greater value. The company cooperates with some productivity software developers for early testing, integrating the company's AI capabilities into their applications, with the goal of making their software more user-friendly and benefiting users. In addition, it collaborates with ERP companies to explore the integration of ERP and AI capabilities. In the education industry, it is also considering how to cooperate with online education companies; in fact, it has already provided corresponding support to a leading online education company.

The demand for AI cloud is very strong, especially after the COVID-19 pandemic, and Ernie Bot can seize the current opportunity. For example, OTA online travel companies can use Ernie Bot to assist customer service teams in better communication with users and guide users to obtain relevant information. So far, the feedback has been very positive, and expenses have increased.

AI can also empower traditional industry enterprises, enabling them to embrace digitalization and achieve digital transformation. In addition, BIDU-SW library and online document sharing platform are very important services that can improve user work efficiency and achieve better collaboration, which can also be integrated into natural language processing.

It is hoped that through different field divisions, it can reach more consumers, such as integrating Ernie Bot into BIDU-SW maps, BIDU-SW Tieba, Xiaodu, etc. Many tests have been conducted, and the feedback is positive.

Looking to the future, it is hoped that Ernie Bot can bring better experiences to users and benefit more users. In the next month, relevant deployments will be further carried out, and the AI chat box will become a traffic portal for users to seek information and content in the new era, continuing to gain more user traffic and mindshare. As time goes by, this will also bring more monetization opportunities to the company. The company and its partners will build a new ecosystem based on Ernie Bot, further innovate, and promote growth.

In terms of regulation, as a leader in AI and an advocate of AI ethics, BIDU-SW will continue to use AI responsibly and comply with relevant regulatory requirements. Any new products, technologies, or services must meet regulatory requirements before they can be deployed on a large scale. Relevant regulatory approvals have been obtained for Ernie Bot, and it will soon be deployed to more users on a large scale. Once final approval is obtained, more users will benefit.

BIDU-SW has been operating search businesses in China for more than 20 years, with rich experience and familiarity with Chinese culture and regulatory environment. It is believed that all of this can help develop generative AI technology better in the new era.

In early April, the National Internet Information Office issued a new regulatory draft for generative AI, which clearly defined regulatory requirements for AI and deep learning frameworks. It is believed that regulatory agencies are very clear about the trend of technological development, and such regulation is very necessary in the early development of generative AI. BIDU-SW is very pleased with the early development prospects of generative AI and will continue to invest in creating greater value for all stakeholders.

(II) Business Highlights

1. AI Cloud

, achieving a healthier business portfolio and better cost structure. The company will also focus on which use cases are most critical, further standardizing them and making solutions replicable.

For example, in the water industry, last year's successful replication of an AI solution for water volume prediction and water pressure control at Quanzhou Water Company was directly copied to Guangzhou Water Company. In 1Q23, many standardized solutions were deployed, such as the aforementioned water solution being replicated at Linyi Free Water Company in Gansu Province. By establishing better standards, AI can bring greater value to different users in traditional industries. Looking ahead, the company will continue to solidly promote the development and deployment of AI-related capabilities.

2. Intelligent Driving

Compared to the same period last year, open road testing has grown significantly - DaCar provided 660,000 trips in 1Q23, a year-on-year increase of over 200% and a significant increase from the previous quarter. In addition, the safety operation record is very good, which has earned more licenses to conduct more tests throughout China. On March 17, DaCar was granted permission to conduct further tests without drivers or safety officers in Changping District, Beijing, which means that regulators have a considerable degree of trust in the company's services. The company will further deploy DaCar, leverage its intelligent driving capabilities, and benefit more users. The company firmly believes that the demand for autonomous driving services will continue to grow, and will further focus on technology and operational capabilities to provide safer and more reliable services.

3. Online Marketing

Online marketing revenue has recovered with positive year-on-year growth, and operating profit has increased. One of the important driving factors behind this is the recovery of the Chinese economy and overall improvement in the business environment.

More users are using the BIDU-SW app for mobile search, and mobile search volume is steadily increasing, reflecting users' strong dependence on BIDU-SW search. The company will continue to focus on improving user experience and satisfaction.

On the user side, the BIDU-SW app has very good features, such as corresponding functions and features for users of different age groups, especially designed for young women. The company will continue to explore video-related functions and features, integrate more videos, and achieve the synergistic effect of AI and video, striving to improve user engagement, expand the user base, and thereby improve the monetization ability of advertising.

In terms of advertising, since the launch of AIGC last year, the company has been working with advertisers to explore how to make advertising more effective through AIGC. The company allows advertisers to specify specific advertising requirements - the BM generative AI platform can provide custom options for advertisers to choose how to place their ads; advertisers can also use the company's AI tools to create better ads. AI-assisted advertising ultimately increases sales leads by 20%. 1Q23, advertisers using AIGC increased their advertising spending on the platform compared to the previous quarter. At the beginning of this year, AIGC was used to help advertisers respond to user inquiries on the platform, and the efficiency was very high.

Q&A Section

Q: Advertising industry recovery situation and 2023 growth rate expectations

A: Achieved high single-digit growth in 1Q23. Last year, all online marketing revenue declined year-on-year, especially compared to 4Q22, the recovery was significant.

1Q23 growth mainly comes from medical health, travel, etc. After the COVID-19 pandemic, the demand for travel increased, and the demand for online marketing in this vertical field was very strong, which can be said to be an important driving factor for further growth in online marketing revenue.

In terms of the mobile ecosystem, BIDU-SW's core overall profit margin has improved. The company pays more attention to user experience, and user participation on the platform has gradually increased, and platform traffic has grown strongly.

China has now reopened, and people spend more time offline, and BIDU-SW APP achieved very good growth in monthly active users in March, which shows that users have a strong dependence on and love for BIDU-SW APP to obtain information and knowledge.

It is expected that in the future, advertisers will further recognize that BIDU-SW APP and BIDU-SW search can bring great advertising opportunities, and believe that the company is in a favorable position to benefit from it.

In addition, generative AI helps improve search, and user access channels and content creation can be better integrated with BIDU-SW APP through generative AI. It is expected that user traffic and participation will continue to increase, thereby further promoting overall healthy growth and benefiting online marketing revenue. Finally, we hope to integrate Ernie Bot into all products and services, bring more advertising value, make advertising more targeted, and this also means that online marketing business can achieve sustained growth.

The current fundamentals are very good, and online marketing revenue is improving under such fundamentals. With China's GDP achieving better growth, online marketing can also do better.

Q: The impact of cost reduction and efficiency improvement measures, and the trend of BIDU-SW's core operating profit margin

A: Not only focus on costs, but also on organizational operational efficiency. Achieved a non-GAPP operating profit margin of 23%, and a year-on-year increase in free cash flow of 200%+, indicating that the measures are effective.

In terms of the mobile ecosystem, growth is promoted through adjustments. In terms of AI and AI cloud, low-profit projects are cut, and focus on core capabilities and high-quality projects. Standardization is very important, and it is hoped that solutions for an industry or some customers can be replicated in other customer scenarios to improve efficiency and reduce costs.

Looking forward to more standardized solution replication in the future, and ultimately improving business profit margins. At the same time, we are also actively looking for promising new investment areas and hope to increase investment in intelligent driving. Regardless of the investment, the long-term growth goal is consistent, hoping to ultimately gain a larger market share through investments in these fields, achieve long-term sustainable growth, and bring more value to shareholders. In the profit and loss analysis, there are corresponding considerations for investment opportunities, and short-term considerations should not be the only focus.

Q: AI Cloud revenue curve trend, and how to further increase revenue in the remaining time in 2023

A: Efforts have been made since 2Q22, and the profit margin of AI Cloud has been greatly improved.

First, firmly cut low-quality projects and products. In addition, committed to the development of new technologies, looking for corresponding partners to deploy AI language solutions, and striving to standardize to deploy AI language solutions across different industries and customers. In addition, continuous investment will further consolidate the underlying capabilities of AI Cloud and enhance competitiveness.

In 1Q23, AI Cloud achieved profitability according to non-GAPP calculation. After the reopening in China, it can finally meet with customers offline and execute previously shelved projects and propose company suggestions.

Since mid-March, more than 100,000 test requests for Ernie Bot have been received from enterprise users, hoping to cooperate with them to improve software, such as financial software, education software, online travel software, etc. Users believe that even in the early stages, productivity can be improved through Ernie Bot, thereby enhancing competitive advantages.

Several customers also hope that the BIDU-SW cloud platform can develop their own large models. The company hopes to establish an open platform that allows individual users and corporate customers to develop their own models on the platform. The company will integrate underlying capabilities, cloud infrastructure, etc., to achieve synergies and strive for healthy and sustainable revenue growth.

Q: Ernie Bot's growth curve and monetization opportunities, and the reshaping of the existing business model

A: Looking to the future, we will continue to focus on the iteration and development of Ernie Bot. Some competitors still focus on model training, while BIDU-SW has moved forward and hopes to further reduce the call cost of Ernie Bot, thereby benefiting more users.

The AI framework developed by BIDU-SW is unique, with very low development and deployment workload and very high efficiency. Ernie Bot can be integrated into all products and services, and the existing product and service portfolio can be restructured, which will further consolidate its leading position and gain more market share.

Even though Ernie Bot is still in the relatively early stages, enterprise users are willing to use it to improve their business models, improve productivity and efficiency, which proves that generative AI and large language models have huge potential. BIDU-SW has strong training capabilities and hopes to further build a powerful basic model to help users better use Ernie Bot-developed tools and technologies to help users train and improve models, and ultimately form a very healthy ecosystem. As time goes by, users' demand for generative AI will become more and more demanding, and their needs will certainly be met. After the launch of Ernie Bot in March, we achieved very good growth, with sales leads increasing by about 400% year-on-year. In the future, we hope to provide more and better opportunities for more people through cloud and AI, thereby promoting the development of online marketing. We will continue to upgrade Ernie Bot and launch more popular products for consumers. We will integrate Ernie Bot into the BIDU-SW APP, allowing Ernie Bot to bring more value to users in daily searches, and other APPs in the BIDU-SW family will also be integrated into Ernie Bot's capabilities. So far, such integration has received positive user feedback, indicating that BIDU-SW is gradually exploring the boundaries of AI and pushing these boundaries further.

Q: Competitive situation of AI

A: AI is still in its early stages of development, and we are pleased to see more players entering this field. Many users hope to deploy generative AI, and the company actively promotes the formation of an ecosystem around Ernie Bot, which also attracts more new participants and further promotes innovation. Generative AI and large language models have great potential, but the entry barrier is also very high. We hope to let more stakeholders participate through the construction of the ecosystem.

Few companies have the ability to do such models, and after doing the models, a lot of data is needed for training. Even if there is data, a lot of upfront investment is required, but BIDU-SW can do it.

BIDU-SW has a deep understanding of the Chinese Internet and has accumulated a large amount of data, which can be used to invest heavily in deploying models and then training them with data. As a pioneer in this field in China, we will further improve, upgrade and iterate, and integrate the capabilities of Ernie Bot into all products and services.

So far, we have received a lot of user feedback on Ernie Bot, which is very necessary. We will continue to maintain a leading position in the field of large language models, continue to study cutting-edge technologies, and transform cutting-edge technologies into products, features, and solutions to meet the challenges of different industries.

In terms of architecture, BIDU-SW has a unique AI4 layer architecture with obvious advantages. Based on the AI architecture, costs can be quickly reduced and deployment efficiency can be improved. We will further optimize the performance of PaddlePaddle and achieve synergies at different levels. Large language models require a lot of resources, cloud architects, infrastructure, and their own AI, all of which BIDU-SW has.

In the past 20 years, BIDU-SW has been the largest search engine in the Chinese market, collecting a lot of data and forming a huge database. The language is mainly Chinese, and this data is of great significance to the Chinese Internet. It can train models based on data and bring great value to Chinese users.

In the mobile ecosystem, we will also consider the integration of generative AI based on user needs and provide an open platform for users to train models.

Q: Details of the draft regulations on generative AI and their impact on Ernie Bot

A:

For the past 20 years, BIDU-SW has been the largest search engine in China with rich experience and can provide appropriate online content. In this regard, the company is a leader in the Chinese market and has invested a lot of effort in technology and compliance to ensure that products and services can meet user needs and regulatory requirements, especially on important and sensitive topics. It is necessary to ensure compliance with regulatory requirements, and large language models and corresponding probability models will be deployed and developed in accordance with regulatory requirements.

As the company continues to develop, its strategy is very clear - it hopes to continue to communicate with regulatory agencies and report on the situation at any time.

Currently, BIDU-SW is one of the early adopters of AI and will take measures to make Ernie Bot benefit more people, ultimately helping China's economic growth and social development. In the fields of medical health and retail, Ernie Bot can play a huge value. Ernie Bot can also be used to promote the development of agricultural enterprises, better optimize resource allocation, and reduce waste emissions.

There are several principles of AI ethics: first, AI must be safe and controllable; second, AI should be equal and available to all human beings; third, AI should empower human learning and growth, rather than simply replacing humans; fourth, AI should bring more freedom to human beings and enable them to pursue more possibilities.

BIDU-SW is very clear about these four principles of AI ethics and hopes to further empower products and services through AI. In business operations, data privacy and security will be given priority, and there is a dedicated committee to regulate data. So far, BIDU-SW has done a very good job in AI regulation.

Q: Carrot Run Strategy

A: So far, Carrot Run is still the world's largest unmanned taxi service provider. In 1Q23, it provided 660,000 trips, and this number is still growing, with the goal of using autonomous driving technology to operate fleets and provide better services to the public.

Always keeping in mind the goal of achieving a balanced budget, Carrot Run will establish a sustainable business model to promote further development. To this end, it will further consider how to reduce operating costs and improve operating efficiency.

On the cost side, it focuses on reducing labor costs - there are currently no drivers or safety officers, greatly reducing labor costs. In terms of vehicle operating costs, labor costs and hardware costs are the two largest parts, and further research will be conducted on hardware to reduce hardware costs.

As mentioned earlier, more testing mileage and more licenses mean more data can be collected. In Beijing Yizhuang, it has been licensed to conduct more tests on open roads - providing services without drivers or safety officers on open roads is a big step forward for the company.

Last August, adjustments were made to the corresponding deployment of Carrot Run; now its testing mileage is further improved. In terms of safety, Carrot Run has a very good safety record. In cities such as Wuhan, the number of Carrot Run trips without safety officers is very high, and it will be promoted to more cities in the future. Different cities across the country have strong demand for such services, and current data shows that the average daily number of passengers has increased. In the future, the service will continue to be promoted to attract more users to use Carrot Run and achieve a balanced budget as soon as possible.

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