Yahoo Finance Baidu, Inc. (NASDAQ:BIDU) Q4 2023 Earnings Call Transcript
Baidu, Inc. (NASDAQ:BIDU) Q4 2023 Earnings Call Transcript February 28, 2024
Baidu, Inc. beats earnings expectations. Reported EPS is $21.92, expectations were $2.75. Baidu, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello and thank you for standing by, for Baidu’s Fourth Quarter and Fiscal Year 2023 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. [Operator Instructions] I would now like to turn the meeting over to your host for today's conference, Juan Lin, Baidu’s Director of Investor Relations.
Juan Lin : Hello everyone and welcome to Baidu’s fourth quarter and fiscal year 2023 earnings conference call. Baidu’s earnings release was distributed earlier today and you can find a copy on our website as well as on our newswire services. On the call today, we have Robin Li, our Co-Founder and our CEO; Rong Luo our CFO, and Dou Shen our EVP in charge of Baidu AI Cloud Group ACG. 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 Provision 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 maturity 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 includes discussion of certain unaudited non-GAAP financial measures. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most comparable with GAAP measures and it's 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.
Robin Li: Hi. And when we concluded 2023 with the solid note. Baidu’s total revenue for the fiscal year increased about 8% year-over-year, and the non-GAAP operating margin expanded from 22% to 24%. This improvement highlighted the resilience of our core business, which serve as a strong foundation for our ventures in ERNIE and ERNIE Bot. 2023 marked a year of Gen AI and foundation models. A massive technology shifts that will re-engineer this process and bring about a real renaissance in every sector of the economy. Baidu is well prepared to benefit greatly from this groundbreaking economic revolution. We progressed from talking about the opportunities of Gen AI and foundation models to activity of high ERNIE and ERNIE Bot at scale.
As the front runner in AI, Baidu probably became the first public company globally to launch a GPT model with our EP 4.0 standing high as the most powerful foundation model in China. ERNIE continues to gain market recognition, as evidenced by ERNIE API calls from multiple well known companies. Notably, Samsung uses ERNIE API on its Galaxy S24 5G sales. Honor uses ERNIE API in its Magic 8.0 and Autohome using ERNIE API to power multiple AITC apps. The partnerships further solidify our leadership in Gen AI. Furthermore, we continued improving the efficiency of ERNIE. For example, the inference cost of EB 3.5 is only about 1% of the March 2023 version. With lower infant costs, ERNIE will become increasingly accessible to users and enterprises.
We are able to do that primarily because of our unique four-layer AI architecture and our strong ability in end-to-end optimization. Additionally, we are offering our RMs in smaller sizes. This small models can balance between performance and efficiency, better serving wherever customer needs things. Since Q2 2023, we have actively utilized ERNIE to revolutionize our products and services, creating AI native experiences. We believe real applications are essential to unleashing the full business potential of ERNIE and ERNIE Bot. Recently, we began to generate incremental revenues from ERNIE and ERNIE Bot. In the fourth quarter, we earned several hundred million RMB primarily from ad technology improvement, and helping enterprises build their own models.
I'll provide a more detailed explanation in the business review section. Looking into 2024, we believe this incremental revenue will multiply to several billion RMB primarily from advertising and AI cloud building. While we are beginning to commercialize Gen AI and foundation models, we see enormous monetization potential in this ground breaking technology. We invasion ERNIE as the future foundation system, serving as the foundation for millions of AI native applications developed by third-party and Baidu. This paradigm will enable us to create an ecosystem around ERNIE which opens up whereas revenue sources. Now the key highlights in Baidu’s native AI application. Equipped within AI copilot, Baidu Wenku has become a platform for users to create content in a wide range of formats, helping them express their ideas.
In addition to summarizing, creating and expanding content users particularly appreciate Baidu Wenku’s features for assisting them in automatically turning their inspiration into PowerPoint. We have been consistently improving and enriching its AI features. For example, we recently introduced a new one, such as Mind-Maps for organizing information. We are reconstructing Baidu search using ERNIE. Last quarter, we talked about how we used ERNIE to generate search results, improving the on shop experience. In Q4, Baidu search introduced a news feed like information alongside the generated a search results at scale to offer users useful and relevant content to explore. In Q4, we also began facilitating certain search queries with multi-round conversations to delve deeper into understanding users’ intention.
Overall, Gen AI enabled search complements traditional search expanding the TAM of Baidu search by serving a wider range of information meaning and answering content creation related questions. We are actively encouraging SMEs in service industries to build AI chatbot as new landing pages for Baidu search. AI chatbots enable them to better serve potential buyers directed to them by us driving transactions on our platform. At the same time, our AI chatbot can help merchants increase productivity. Currently, about 4,000 merchants are using our AI chatbots, particularly in healthcare, education, travel, legal, B2B and auto, where users often interact with merchants to learn about their offerings before making purchasing decisions. We believe that Gen AI enabled search will help increase user intention on Baidu, reinforcing our position as the primary entry point for users seeking information and services.
We are also expanding the range of ERNIE by enabling enterprises to easily develop AI native application of ERNIE. In December, we introduced app builder, and comprehensive set of tools on our public cloud to support enterprises to swiftly view AI and easy applications from the ground up. This tool enable enterprises to incorporate capabilities, such as organizing unread messages for prioritization, creating draft, summarizing meeting notes, and facilitating Gen AI enabled data analysis. Additionally, we have included several readymade templates, such as AI agent to enable enterprises to promptly create Application for validating their ideas. Such progress is in large part based on our own pioneering experience in developing AI native applications.
In addition to the tools for app development, enterprises partner with us, because we have the most powerful and most efficient foundation models. And the most cost effective cloud platform for running app. In December about 26,000 enterprises are activity using ERNIE through API on a monthly basis, increasing 150% quarter-over-quarter. And ERNIE is now handling more than 50 million queries every day. That's up 190% quarter-over-quarter is a significant rise in third party quality. As the number of AI native applications hosted our public clouds continue to rise, we are poised to accelerate the enhancement of our model performance by incorporating feedback from our users and customers. This will further widen the gap between ERNIE and our domestic peers.
Moreover, as more and more AI native applications on ERNIE become popular, ERNIE will likewise be successful, and to support a robust ecosystem around it, steering our multi-year growth forward. In conclusion, we find ourselves amidst tremendous opportunity in Gen AI and information model. With the ERNIE and ERNIE Bot, we have started generating incremental revenue. In 2024, we expect AI revenues contribution to become more meaningful, while our core business will remain resilient. Moreover, we are preparing to serve the next wave in the development of ERNIE. In the future, we believe that there will be millions of AI native applications of ERNIE and the majority of them divided by our cloud customers. The expanding ERNIE ecosystem will then unlock numerous monetization potentials for Baidu.
Now let me recap the key highlights for each business for the fourth quarter of 2023. Mobile ecosystem exhibited solid performance across revenue margin and cash flow. In the fourth quarter Baidu’s core online marketing revenue increased by 6% year-over-year, driven by verticals in travel, healthcare, business services, and others. In Q4, we generated several hundred million RMB incremental ad revenue due to improvements in ad tech. We continue to use ERNIE to enhance our monetization system, including targeting capability and bidding system in the quarter. Starting from January, our money violations system has been able to generate real time text-based ads for search queries. Demonstrating significant technology improvements in both targeting and ad creation.
As of today, our new marketing platform has attracted about 10,000 advertisers. An advertiser in the medical aesthetics industry began to adopt our new marketing platform in Q4. With the AI copilot, if the advertiser can articulate its requirements comprehensively through native language, and multiband conversations for further clarify -- clarification, and explanation. The conversational experience has assisted in building optimized search and feed campaigns by generating relevant ad content. Our platform has also helped them reach highly targeted audiences, while dynamically allocating budget to drive conversions. The advertiser achieved increase of 22% in conversion rate, and that reduction of 5% in cost for sales lead acquisition after using this enhanced platform, and capabilities.
Currently, only a small portion of our entire advertiser base has adopted this new marketing platform, which means there is a significant opportunity for future growth. All these initiatives have helped advertisers improve their conversion, leading to an increase in their ad budget, our platform in the quarter. We expect to continued growth in ad revenue from Gen AI and foundation models in 2024 and beyond. While we enhanced our ad technologies, we also introduced AI chatbot for brands, an innovative ad product building on top of ERNIE Bot in Q4. AI chatbots has further enriched our app product portfolio. It can enhance user engagement and customer surveys, while also capturing customer attention and driving customer demand. Since last October, China Feihe [ph], a local infant formula company has adopted AI chatbot to promote its brand.
The AI chatbot has been enabled for Facebook to have multi-round interactions with our customers, increased brand recognition and gain valuable insights into its potential consumers. These profound insights have also helped the player Facebook understand customers views of the brand and products leading to an enhanced marketing strategy AI chatbot for brand has garnered significant interest from brand advertisers and we expect more interest to embrace the AI chatbot in the future. As I previously mentioned, we're using ERNIE to build our apps. With continuous enhancement of our AI native product offerings, we believe more and more users will come to Baidu platform. This, in turn, will assist us in gaining more market share in both user engagement and online advertising revenues.
Looking into 2024, mobile ecosystem should continue to generate steady profits and cash flow. AI Cloud revenue grew by 11% year-over-year to RMB5.7 billion and continue to improve profitability in the fourth quarter. Revenue from Gen AI and foundation model represents 4.8% of our AI Cloud revenue in Q4. The increasing demand for model building played a significant role in this accelerated revenue growth, along with increasing distributions from inference. We have seen a growing number of enterprises, in particular, tech companies turning to our public cloud to build their models. Additionally, the AI cloud revenue generated by Baidu Core, other business groups, such as the Mobile Ecosystem Group and the Intelligent Driving Group was about RMB2.7 billion in Q4.
Within the Q4 internal cloud revenue, Gen AI and foundation model accounted for about 14%. On a combined basis, the total internal and external AI Cloud revenue was RMB8.4 billion in Q4, with Gen AI and foundation model contributing around RMB656 million. Gen AI and LLM have become pivotal considerations for many enterprises driving a shift in the cloud industry from general purpose computing to AI computing. This evolution is reshaping the competitive dynamics within the cloud industry strengthening our lead in AI and expanding our total addressable market. Enterprises choose us, thanks to our position of the most powerful and cost-effective AI infrastructure for both model training and inference in China. Thanks to our unique four-layer AI infrastructure to drive consistent efficiency gains and years of experience in ERNIE.
Last quarter, we explained that 98% of LLM training time on our AI infrastructure was valid. Moreover, our GPU networking is running at a 95% utilization for training LLMs. Both of these metrics have set industry benchmarks. Within our Maps, we offer model builder and app builder, which are two set of tools that help enterprises effortlessly build models and develop apps. As of now, enterprises have built about 10,000 models on our Maps. Since its inception, App Builder has facilitated the creation of thousands of AI native apps. As more and more applications are being built on our Maps, we will have greater revenue potential going forward. Looking into 2024, AI Cloud should maintain strong growth in revenue and generate profit as a non-GAAP operating level.
Our intelligent driving business continued to focus on achieving new breakeven for Apollo Go. In Wuhan, Apollo Go's largest operation, about 45% of our orders were provided by fully driverless vehicles in Q4. This metric surpassed 50% in January. The increase is because we intensified operations during peak hours in areas with complex traffic conditions and further expanding our operating area in the past few months. This development resulted from our ongoing efforts to improve technology through safety -- through safely operating Apollo Go on public doles. In China, Apollo Go provided about 839,000 ride in the public in Q4, marking up 49% year-over-year increase. In early January, the cumulative rides offered by Apollo Go exceeded 5 million.
The substantial data collected from operations will further help us enhance the efficiency of safe operations. Looking into 2024, we will remain focused on getting closer to Apollo Go's UE breakeven target and managing our costs and expenses to reduce losses in intelligent driving. Upon reaching UE breakeven, we plan to swiftly replicate our successful operations in Wuhan to other regions. In summary, we are facing tremendous opportunities in Gen AI and foundation models. We will continue to invest in these opportunities. And at the same time, we will strive to optimize our cost and expense structure for each business line to improve operational efficiency. With that, let me turn the call over to Rong to go through the financial results.
Rong Luo : Thank you, Robin. Now let me walk through the details of our fourth quarter and full year 2023 financial results. We closed 2023 with solid financial results. Total revenues in the fourth quarter was RMB35 billion, increasing 6% year-over-year. Total revenues for the full year 2023 were RMB134.6 billion, increasing 9% year-over-year. Baidu Core's Q4 revenue was RMB27.5 billion, increasing 7% year-over-year. In 2023, Baidu Core generated RMB103.5 billion in revenue, increasing 8% year-over-year. Baidu Core's online marketing revenue increased 6% year-over-year to RMB19.2 billion in Q4, accounting for 7% of Baidu Core's total loan. Baidu Core online marketing revenue was up 8% year-over-year in 2023. Baidu Core's non-online marketing revenue was RMB8.3 billion, up 9% year-over-year.
For the full year 2023, our online marketing business increased 9% year-over-year. The increase in our online marketing business was mainly driven by the AI Cloud business. Revenue from IT was RMB7.7 billion in Q4, increasing 2% year-over-year. Revenue from IT was RMB31.9 billion in 2023, increasing 10% year-over-year. Cost of revenue was RMB17.4 billion in Q4, increasing 3% year-over-year, primarily due to an increase in causes related to AI cloud business, partially offset by a decrease in quantum costs. Cost of revenue was RMB65 billion in 2023, increasing 2% year-over-year primarily due to an increase in track acquisition costs, partially offset by a decrease in the content costs and the costs related to AI Cloud business. Operating expenses were RMB12.1 billion in Q4, increasing 5% year-over-year, primarily due to an increase in server depreciation expenses and the server custody fees which support Gen AI research and development improves and channel spending and promotional marketing expenses.
Operating expenses were RMB47.7 billion in 2023, increasing 9% year-over-year, primarily due to an increase in channel spending and promotional marketing expenses and server depreciation expenses and sever custody fees, which support Gen AI research and development improves. Operating income was RMB5.4 billion in Q4. Baidu Core's operating income was RMB4.7 billion, and Baidu Core's operating margin was 17%, 1-7, in Q4. Operating income was RMB21.9 billion in 2023. Baidu Core's operating income was RMB18.8 billion, and Baidu Core's operating margin was 18%, 1-8, in 2023. Non-GAAP operating income was RMB7.1 billion in Q4. Non-GAAP Baidu Core operating income was RMB6.2 billion, and non-GAAP Baidu Core operating margin was 23% in Q4. Non-GAAP operating income was RMB28.4 billion in 2023.
Non-GAAP Baidu Core operating income was RMB24.7 billion and non-GAAP Baidu Core operating margin was 24% in 2023. In Q4, total other loss net was RMB2.5 billion compared to total other income net of RMB1.8 billion for the same period last year mainly due to a peak of losses from equity method investments as a result of a modification of certain terms of underlying preferred shares. Income tax benefit is RMB96 million. In 2023, total other income net was RMB3.3 billion compared to total other loss net of RMB5.8 billion last year mainly due to a fair value gain of RMB198 million from our long-term investments this year compared to a fair value loss of RMB3.9 billion last year and a decrease of RMB2.2 billion in impairment of long-term investments.
Income tax expenses was RMB3.6 billion. In Q4, net income attributable to Baidu was RMB2.6 billion, and diluted earnings per ADS was RMB6.77. Net income attributable to Baidu Core was RMB2.4 billion, and net margin for Baidu Core was 9%. Non-GAAP net income attributable to Baidu was RMB7.8 billion, non-GAAP diluted earnings per ADS was RMB21.86. Non-GAAP net income attributable to Baidu Core was RMB7.5 billion, and non-GAAP net margin for Baidu Core was 27%. In 2023, net income attributable to Baidu was RMB20.3 billion and diluted earnings per ADS were RMB55.08. Net income attributable to Baidu Core was RMB19.4 billion, and net margin for Baidu Core was 19%, 1-9. Non-GAAP net income attributable to Baidu was RMB28.7 billion, non-GAAP diluted earnings per ADS was RMB80.85.
Non-GAAP net income attributable to Baidu Core was RMB27.4 billion, and non-GAAP net margin for Baidu Core was 26%. As of December 31, 2023, cash, cash equivalents, restricted cash and short-term investments were RMB205.4 billion and cash, cash equivalents, restricted cash and short-term investments, excluding IT, were RMB200 billion. Free cash flow was RMB25.4 billion, and free cash flow, excluding IT, was RMB22.1 billion in 2023. Baidu Core had approximately 35,000 employees as of December 31, 2023. With that, operator, let's now open the call to questions.
Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Alicia Yap of Citi. Please go ahead.
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