Shulou(Shulou.com)11/24 Report--

On November 22, Baidu released its results for the third quarter of 2022, which ended September 30. Baidu's total revenue in the third quarter was 32.5 billion yuan ($4.57 billion), up 2% from a year earlier, according to the results. The net loss attributed to Baidu was 146 million yuan ($21 million), the diluted loss per American depositary share (ADS) was 0.87 yuan ($0.12), and the third quarter net profit of Baidu Core was 25 million yuan ($4 million). Excluding Non-GAAP, Baidu's net profit was 5.9 billion yuan ($828 million) and diluted income per American depositary share (ADS) was 16.87 yuan ($2.37). " Baidu Core's third-quarter net profit was 5.8 billion yuan ($811 million).

After the announcement, Baidu Chairman and CEO Robin Li, CFO Luo Rong, Senior Vice President Shen Qiu and Senior Vice President and General Manager of Intelligent driving Group Li Zhenyu attended the subsequent earnings conference call to interpret the main points of the results and answer analysts' questions.

The following is a transcript of the analyst's question and answer session:

Citibank analyst Alicia Yap: two questions. First of all, can management talk about the recovery of advertising business in the short term? Second, what is the competition in the domestic advertising industry in the future? In the long run, how much market share can Baidu achieve?

Robin Li: the company's revenue is sensitive to the epidemic control measures. Baidu's core business returned to positive year-on-year growth in August, but fell into negative growth again in September due to the re-outbreak of the epidemic. Overall, the situation in the third quarter was much better than that in the second quarter, because the damage caused by the epidemic in the second quarter was much greater than that in the third quarter. After entering the fourth quarter, the situation improved in October, but at the beginning of November, the situation began to be a little uncertain, such as outbreaks in Guangzhou and Beijing. We will continue to pay attention. I think it is still unstable in the short term, but it will improve in the medium to long term. After all, China has nearly three years of experience in fighting the epidemic, and it should be developing well in the next few quarters. In addition, as you know, many of our advertisers' industries are also affected by the epidemic and the macro environment, so once the epidemic alleviates and the macro environment improves, we come from tourism. Advertising revenue in industries such as chains and local services will also rebound. We will also continue to monitor the development of the epidemic and strive to achieve positive growth year-on-year. New businesses such as artificial intelligence cloud and intelligent driving have also been hit by the epidemic, and the possible mitigation of the epidemic will also lead to improvements in these businesses.

With regard to the competition in the online advertising industry you mentioned, Baidu App is one of the few super App in China's mobile Internet industry. It is widely recognized and has a strong position in the industry. Search advertising is also a kind of advertising with the highest return on investment among many effective advertisements, because users enter the content they need to understand most in the search box, and search advertising connects users' wishes with the products and services with the highest relevance. Therefore, many advertisers believe that Baidu search advertising is the most important and effective channel to reach the target audience. Second, China's mobile Internet industry is also becoming more and more mature, the growth of the number of users has slowed down, and the competition situation will not change as drastically as before. In this context, Baidu App's user growth in the past few quarters is still quite good. In addition, based on the company's unique position in the search field, we believe that the company's market share in online advertising is sustainable in the future. Third, unlike our competitors, most of Baidu's advertisers are small and medium-sized enterprises in the real economy, and many of them are engaged in the service industry, including local services, business services and tourism. They are also the groups most affected by the epidemic. Once the epidemic is alleviated, advertising revenue will rebound rapidly, and Baidu's market share in the advertising industry will increase accordingly.

Bank of America Merrill Lynch analyst Eddie Leung: I have a question about the company's cloud business. I have noticed a slowdown in the growth of this industry. Could you ask the management to analyze the reasons? What are the growth prospects for the business in the coming quarters or in the medium term? In addition, can you talk about the market competition in this field? I have noticed media reports that the market share gained by cloud service companies has exceeded that of the Internet industry as a whole in the past year or two. Can you talk about this? Finally, the management has mentioned the improvement of the profit margin of the business before. can you talk about when the company's cloud business will be profitable?

Shen: the main reason for the slowdown in revenue growth is the epidemic. Due to travel restrictions, we are unable to implement the project on time, and the bidding for new contracts has also been affected. In addition, we focus on healthier and sustainable growth, so we cut some low-margin businesses, which is very important for the company's long-term development. In the future, China's traditional industries and public sectors will not change their plans for the use of artificial intelligence technology, as well as Shangyun, so after the epidemic, enterprises should be more confident about future growth. Will be more willing to increase investment in digital and artificial intelligence. Baidu has a very strong ability in the use of artificial intelligence technology to improve traffic efficiency, so our ACE (autopilot, vehicle-road coordination and efficient travel) traffic engine business is growing rapidly, constantly increasing market share, reducing the loss of intelligent transportation business, growing business scale, and increasing operating leverage. In the next step, we will replicate the success of this business to other traditional industries, including manufacturing and utilities, etc., in fact, these two areas have generated very strong growth in cloud business revenue for the company. it can be attributed to our continued efforts to enhance the strength of end-to-end artificial intelligence and our deep understanding of the underlying needs of these industries. The sustainable competitiveness we have is the key to win the competition, in addition, the market is also expanding, we see many opportunities to promote the long-term development of the industry as a whole.

On the question of profit margin, the operating loss of Baidu Cloud business continued to narrow in the third quarter, and profit margin continued to improve. Separately, our personal cloud business continued to contribute considerable profits and profit margins, while the enterprise business grew faster than the personal business, showing a trend of loss reduction. We will continue our efforts to standardize user usage scenarios in key industry areas, and good results have been achieved. More and more solutions have been replicated and applied to other scenarios, rapidly expanding the scale of the business and helping to improve profit margins. This achievement is particularly obvious in the field of intelligent transportation, and we look forward to blossom and bear fruit in other areas.

JPMorgan analyst Alex Yao: a question about the profit margin of Baidu's core business. The company has done a very good job in cost control and profit margin improvement in the past few quarters, as well as reducing the number of large departments and employees. How much room for cost reduction in Baidu's core business in the next few quarters, including next year? What will be the trend of the profit margin of Baidu's core business in the future? Finally, if the macro environment continues to deteriorate, will the company invest less in cloud business and self-driving business?

Luo Rong: the company continues to optimize the expenditure of Baidu's core business and improve operational efficiency, which is also our most critical task in the short term. In addition, we continue to invest in the new artificial intelligence business with a view to achieving future growth, a strategy that has not changed in the past few quarters and has helped us cope with the challenging market environment smoothly. After the macro environment improves, we are expected to achieve faster growth. I would also like to review some figures for the third quarter: not in accordance with US GAAP, the operating profit margin of Baidu's core business increased to 26% from 24% in the same period last year, the first growth since the second quarter of 2021. In order to achieve this profit margin growth, we have made great efforts, as you can see from our third-quarter results, our sales General and administrative expenses have declined again compared with the same period last year, and we are very cautious in terms of channel expenditure and promotional activities. The third quarter is also our third consecutive quarter of sales, and general and administrative expenses have declined compared with the same period last year. We will continue to control costs in this area in the future. Immediate revenue was affected by the epidemic, and the operating profit of the company's ecosystem business increased compared with the same period last year. The growth of artificial intelligence cloud business is also relatively healthy, and the loss rate has been greatly improved compared with the same period last year. We allocate more resources to sub-businesses with high profit margins and reduce businesses with low profit margins. Continue to standardize end-to-end services such as infrastructure, software and platforms, and personal cloud businesses continue to generate profits.

In terms of Apollo Go self-driving taxi service business, we carefully design the expansion of our business, optimize and forecast the cost expenditure and cash flow of the business using a comprehensive financial model, consolidate the company's leading position in this field, and continue to increase market share in key cities. We will consider building a sustainable and profitable business model to expand our business. In terms of automotive solutions, we just mentioned an estimate, that is, cumulative sales of 11.4 billion yuan, and the contribution to revenue at this stage is still very small. We expect to start from the second half of next year or early 2024. With the launch of small cars using our solution, revenue will increase. Once you have a substantial income, the business should start to turn a profit. I would also like to make it clear that 11.4 billion RMB is our estimate, including the contracts and nomination letters we have received from manufacturers. In the automotive industry, the nomination letter means that if other suppliers are affected on certain projects, the manufacturer will sign a contract with us first. Our estimates are based on our assumptions about time to market, price and future sales.

Looking to the future, we will continue to strictly control costs and expenses. At the same time, despite the challenging environment in the short term, we will continue to invest in artificial intelligence clouds and smart driving to achieve our long-term growth. We believe that our mobile ecosystem will continue to generate profits and cash flow to support our investment in our new artificial intelligence business. We will also continue to work hard to reduce our losses in artificial intelligence cloud business.

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