Earnings Call: Q2 2021

Aug 12, 2021

Earnings release

Hello and thank you for standing by for Baidu's Q2 2021 Earnings Conference Call. At this time, all participants are in a 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, Ms. Jun Lin, Baidu's Director of Investor Relations. Hello, everyone, and welcome to Baidu's 2nd Quarter 2021 Earnings Conference Call. Baidu's earnings release was distributed earlier today, 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 I'm CEO, Saman Lee, our CFO and Do Shen, our EVP, charge off sufficient fee. After our prepared remarks, we will hold a Q and A session. Please note that the discussion today includes 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. 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 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, Discussions of Certain Unaudited Non GAAP Financial Measures. Our press release contains a translation of the unaudited non GAAP measures to the Analyst Day's 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. We delivered another solid quarter Baidu Core revenue growing 27% year over year, accelerated by non advertising revenues with AI Cloud Growing 71% year over year in the Q2. We are entering a new era Where technology is becoming more powerful and we are benefiting from the deployment of technology To upgrade China's industrial competitiveness, digitize urban cities and improve mobility. As China plans for the next stage of growth, it rests upon us to recognize the need to align our business strategy It's the environment that we operate in and the future that we want to build with our stakeholders. EFC highlights a shared future for humanity to support China's pledge to achieve carbon neutrality By the year 2,060, Baidu aims to reach carbon neutrality by 2,030 Through the use of green data centers, smart office buildings and other. In addition, we hope to improve urban traffic flow and lower carbon emissions for 100 metropolitan areas across China With our build out of smart transportation and accelerate the switch to EVs For the math, through our investment in Volvo Taxi and Smart TV. Leveraging technology To serve a larger population to achieve inclusiveness is part of China's growth plan. In June, we introduced Apollo Moon, 5th generation of Apollo's robotaxi vehicles that once again saw a 60% drop in cost per mile. With the rapid pace of autonomous driving technology advancement and cost efficiency improvement, Apollo robotaxi stands to become much cheaper than driver for hire ride hailing in the coming years, which will make robotaxi ride hailing much more accessible. Baidu Health is another example of expanding resources To a broader population for improved bleeding, we are enabling closed loop telehealth, Online prescription and home delivery to free up hospital resources for critical treatments. Concurrently, we are helping hospitals find patients with specific illness that match their treatment specialties By leveraging our AI powered search and smart mini program, we see great opportunities to use You will see other examples of how our AI powered business is naturally aligned with this goal. This is due in part to our belief in using technology to build a better world. Turning to Q2 operational highlights. Our AI Cloud continued to see strong growth. IDC once again ranked the Baidu AI Cloud the number one AI cloud provider in China in their 2020 report on public cloud. Over the past decade, app has been the growth driver for China's cloud market, which sets up a strong foundation to implement AI solution that solves industry specific problems and provide urban living upgrades. By differentiating with AI solutions, we have the opportunity to provide repeat business With expanded applications and become a one stop shop across selling cross selling app and Other Services. In the past, we discussed empowering financial services, utilities and Internet Media Sectors with AI. Let me give you an example of how our AI cloud empowers the auto sector. We are helping Jivi, a leading automotive manufacturer, to develop a multiyear digitization plan, which entails: 1, setting up their private cloud infrastructure 2, moving Geely's business onto cloud 3, leveraging Baidu AI solution to advance Geely's high-tech manufacturing capabilities such as IOV, security and risk management and 4, enabling JD to provide cloud services to their automotive supplier and customers. FIDO AI is Deployed into multifaceted environments. For example, Quanzhou Fujian, a city of population of 8 million implemented Baidu AI solution at its water treatment plant. Our smart monitoring capability was used to provide early detection of malfunctioned equipment, replacing labor intensive patrolling And a customized machine learning model was developed to predict water usage and dynamically adjust the water pressure of different water pipelines, cutting electricity needs by 8%. Our employees feel a sense of pride When natural resource is optimally managed and sustainability is indirectly advanced. In Healthcare Cloud, we have expanded into over 400 hospitals in 29 provinces And over 1500 primary care clinics in 11 provinces, with leading solutions like RCBSS, resulting in rapid revenue growth at 2 45% year over year for the first half. According to IDC's June report, Baidu deep learning platform became the most widely used in China, Surpassing Google's. Our Pedal Pedal developer community reached 3,600,000, up 62% year on year and is adopted by 130,000 businesses. Baidu's large development community helps improve our machine learning models and initialize our AI tools and technologies. Moving on to ACE Smart Transportation. As of June, Apollo has signed with 20 cities to provide ACE Smart Transportation, up from 5 cities a year ago based on a contract amount of RMB10 1,000,000 and about. Apollo also renewed agreements with My Cities to roll out their next phase of ACV Smart Transportation. Beyond urban roads, Apollo signed with Xunghang Hebei to deploy V2X smart highway, Enabling the city to remotely identify the need for highway maintenance, assess road closure for poor weather conditions Turning to autonomous drives. Apollo continued to see strong momentum. Level forecasting on public road has reached 12,000,000 kilometers for 7,500,000 miles. Apollo has received 278 AV permits, Reflecting AD piloting in dispersed geographic region and under wide ranging test scenarios, Apollo monetization. In Q2, Apollo Go ride hailing expanded into Guangzhou, our 4th city of operation and provided 47,000 rides to the public, up 200% sequentially. Customer satisfaction for Apollo Go has been high, with user rating of 4.9 out of 5.0. As pointed out earlier, our fixed generation robotaxi vehicles saw another 60% drop in cost per mile compared to an average decrease of 62% in the first four generations of AD vehicles. We plan to roll out Apollo Boat ride hailing across 30 cities over the next 2 to 3 years. On ASD, grade 4 motors become the latest automaker to announce plans for ASD. Apollo Automated Valid Parking will be installed in your WiiMocha SUV flagship due out later this year. On infotainment, DuerOS for auto has been installed in 1,800,000 vehicles, up 2 65% year on year. 12 auto OEMs, The likes of Ford, GM, Toyota and Hyundai signed have signed with DuerOS for auto for installation in 17 minutes. On DuerOS, Xiaodu continues to innovate The smart home device market. For example, the always on DuerOS smart assistant allows one to Conveniently order fresh home delivery flowers and other commonly used goods in a matter of seconds through conversational AI. China's elderly population is slated to exceed 300,000,000. Xiaodu Smart Displays connect elders with immediate senior community assistance and serves as a virtual companionship around the clock through conversational AI, improving their quality of life, while allowing family members to monitor their loved one health and safety from remote. During the June 18 e Commerce Festival, Xiaodu Smart Display and Xiaodu Smart Pass for Education market Top the sales volume list in their respective categories on leadingecommerceplatformslikejd.com. Xiaodu is receiving high customer satisfaction, selling well on higher price point product lines and topping the list On units sold, demonstrating how hardware can be differentiated with innovative AI, such as new input modalities and services. Turning to mobile ecosystem. In June, Baidu App MAUs reached 580,000,000, up 9% year on year, and daily log in users reached 77%. As an opened in app search app, Baidu App offers users instant replies on various topics. For example, mainly family health consultation on Baidu Health surpassed RMB2 1,000,000 in 2nd quarter, up 47% year on year. In addition, more than 8,000 industry experts spanning 14 other verticals, such as legal, finance and fashion, are able to instantaneously reply to user search inquiries through our AI building blocks. When users seek specific information of service, Baidu Search has a decent advantage. Manage Page now accounts for 40% of Baidu core advertising, Reflecting merchants opening storefronts on Baidu as opposed to operating their own sites. For example, a local moving company, Tianxi Moving, changed their search landing page to its managed page and saw its daily orders doubled 5 weeks after adoption. Through managed page, users are able to browse its services, Interact with the merchant, schedule a move and pay a deposit, all seamlessly on Baidu. ManagePage also monitors merchants' activities on Baidu with AI for added personal safety. For example, moving service entails strangers coming to your house. Before I turn the call to Herman, I'd like to congratulate him for his new role as Chief Strategy Officer of IDU. Henan will continue to act as CFO until we find a qualified replacement. He will spend more time on corporate strategy and the business development afterwards. Over the past 4 years, Hermit has helped Baidu We've demonstrated the business leadership, A holistic view of our business and a keen sense of the capital market, I'm confident in Krumen's ability to help chart a course for our long term growth and success in the age of AI. With that, let me turn the call over to Herman to go through our financial highlights. Thank you, Robin. Hello, everyone. Welcome to Baidu's Q2 2021 call. All monetary amounts used in my discussion are in renminbi unless stated otherwise. Baidu's second quarter was Baidu's 2nd quarter revenue was US31.4 billion dollars US4.9 billion dollars up 20% year over year, Driven by the growth of Baidu Core revenue, which reached US24 billion dollars or US3.7 billion dollars up 27% year over year. Non advertising for Baidu Core reached CNY5 1,000,000,000 or 21 percent of Baidu Core's revenue. AI cloud revenue was RMB 3,300,000,000 or up 71% year over year, which is an acceleration from the 55% growth Last quarter, our cloud growth is benefiting from the demand of enterprise customers looking to use AI to transform their industry strengthened their leadership position. For example, customers from the Internet media, from financial services, from energy and from manufacturing sectors. We're also benefiting from the urban cities seeking to adopt Apollo 8 smart transportation to modernize and digitize their Transportation Network. AI solutions in smart transportation are showing fast growth, serving as catalyst For our cloud to grow faster than the overall cloud market, with apps being a smaller part of our cloud business. On intelligent driving and other growth initiatives, we continue to make advances in product development By leveraging Baidu AI capabilities such as speech recognition, NLP and computer vision and our strong Internet foundation, Xiaodu has become the leader In smart display globally based on shipments, Xiaodu speakers entered the smart home device Market in 2018 competing on sub-one hundred product lines. Home devices equipped with AI features can be sold at much higher price points. For example, in May, we introduced Xiaodu Tian Tian T10, a 10 inches smart display with karaoke features at an MSRP of $16.99 Through our innovation, Xiaodu Services revenue such as advertising and membership has grown 5 fold from last year, now accounting for over oneten of Xiaodu's revenues. Xiaodu powered by Duo OS is transforming the smart speaker market Operating system for the automotive industry is a much larger market. Apollo has an opportunity to leverage its leadership in autonomous driving and infotainment operating system to enable every passenger vehicle to be a smart vehicle. Just as Xiaodu transformed the home device market, Apollo hopes to leverage by these capabilities, ASD and existing OEM channels to boost computing intelligence and transform the automated industry. Moving to online marketing. Q2 online marketing revenue was RMB 19,000,000,000 up 18% year over year. In app advertising was solid, growing 26% year over year, partially offset by the slow growth of unit and PC ad revenues. Most of our top ad verticals continue to perform well. Sequium saw double digit growth, especially for in app online market. IQI revenue was RMB 7,600,000,000 up 3% year over year. Cost of revenue was CNY 15,900,000,000 up 21% year over year, primarily resulting from an increase in tax and cost of sales associated with new AI business. Operating expenses were CNY12 1,000,000,000 up 30% year over year. SG and A for Baidu Core was up 40%, primarily due to an increase in channel spending and promotional activities as well as increase in sales hiring, particularly as we look out for the next 6 to 12 months to grow our cloud and also our intelligent driving business. Non GAAP operating income for Baidu Core was CNY6.5 billion or US1 $1,000,000,000 And non GAAP operating margin for Baidu Core was 27%. Adjusted EBITDA for Baidu Core was $8,000,000,000 or US1.2 billion dollars adjusted EBITDA margin for Baidu Core was 33%. Cash and short term investments for Baidu Core as of June 30, 2021 was US167.7 billion dollars or US26 billion dollars Free cash flow for Baidu excluding iQIYI was $6,900,000,000 or $1,100,000,000 Baidu Core had approximately 36,000 full time employees as of June 30, up 24% from last year. Turning to Q3 guidance. For the Q3, Baidu expects revenues to be between RMB30.6 billion and RMB33 point RMB5 billion representing a growth rate of 8% to 19% year over year, which assumes that Baidu core revenue will grow between 9% year over year and 20% year over year. The above forecast takes into consideration the current COVID-nineteen situation in China, which is evolving and business visibility is limited. The above forecast reflects our current and preliminary view, which is subject to Substantial uncertainty. Before I turn the call back to the operator, let me summarize our 2nd quarter results. Baidu mobile ecosystem continues to be strong. Baidu Core online marketing revenue was up 18% year over year in the 2nd quarter with in app marketing revenue growing 26% year over year. Baidu App MAUs reached RMB580 1,000,000, up 9% year over year and daily user login was 77%. 4 years ago, we committed to strengthening our mobile ecosystem and deal with AI. Our search and fee is stronger now with AI building blocks and marketing cloud And non marketing has become sizable and grown quite fast. We have delivered on our goals, and we are very proud of our team for their strong execution. Many investors have inquired about the recent regulatory landscape. Governments generally favor fair competition And maybe even so when mobile Internet is well penetrated. We see this theme play across Europe and in the U. S. Search fundamentally is open. As exclusivity is forbidden for the largest players, this will allow more players in each Internet sector to exist, which gives consumers more choices and make search more useful. Some investors have asked about government incentives and special tax treatment. It's important that we elevate this to see the overall direction of China's development plan. Consumer Internet has been in China for 2 decades, and the country is promoting new growth sectors such as industrial Internet, V2X autonomous driving and the modernization of city governments. Thus, It would not be surprising if certain incentives for the older industries will gradually decrease While the new economy benefits from government incentives, we believe government policy will also be adjusted to support these new growth areas. Our new AI business is well positioned in sectors of the new economy such as AI cloud, smart transportation, Atoms driving, smart devices and AI chips. In the second quarter I'm sorry, Baidu returned $566,000,000 to our shareholders under the 2020 share repurchase program this year, Bring the cumulative repurchase from last year to US2.5 billion dollars We are excited about Baidu's future, excited about Baidu's durable search and feed Our new AI business to support China's growth, while advancing sustainability and exclusiveness. On August 18, starting at 9:30 am Beijing Time, we will be hosting Baidu Wo on CCTV. Please join us to follow the latest on our product development. And lastly, it's truly been a privilege to serve as Baidu's CFO and Our growth initiatives like AI, cloud solutions, smart transportation, self driving solutions and smart devices Developed into a fit of Baidu core business using the steady profitability of our surgeons to fund and accelerate Baidu's growth. I'm excited about my new role as CSO, which will allow me to spend more time thinking about technology opportunities. Operator, with that, let's now open the call for 2 questions. Thank you. Ladies and gentlemen, We will now begin the question and answer session. One question at a time. If you have follow-up questions, please request to rejoin. Once again, it's star 1 for questions. Our first question comes from the line of Alicia Yap from Citigroup. Please ask your question. Hi, thank you. Good evening, Robin, Herman and Duan. Thanks for taking my questions. Congratulations, Herman, for your new role as the CFO. To follow-up your kind of like brief remarks about the regulation, I actually have questions on this data security. What could be the impact on Baidu? Anything that we need to due order changes that we need to do to ensure in compliance by September 1 for this data security law? And then very quickly, as we just finished the summer Olympics and with the winter Olympics coming up, can you provide some update in terms of the latest robot taxi or even the robot bus commercialization service, Any expectations on this ride hailing demand in this upcoming winter game? Do you think Baidu's driverless car service could leverage this big event to draw more commercial usage and enhance the branding? Thank you. Hi, Alex Shen. Data security is very important to us And we have consistently improved on the management of our internal data security system over the past A few years. We have a data privacy committee among our management team that oversees the practices of the whole company. We are also active in Assisting with the setting of industry standard and we share our experiences and dialogue with others To ensure that we are on top of industry best practices. If you look at MSPI, Baidu's reading on data privacy and data protection is among the highest compared to our peers. So I'm quite confident we'll be able to cope with the new regulatory environment well in terms of data security and use of privacy. On Olympics side, yes, we do plan to do something in the dark taxi During the Winter Olympics. But what's important is that we just launched the 4th of robot taxi operation, which is Guangzhou. I think we will continue to roll out Our robot taxi services in many different cities, different regions And the number of rides that we are providing have been growing very quickly, as I mentioned during the prepared remarks. We delivered 47,000 rides for our customers. That's 200% growth over the Q1 of this year. So we believe that the scale will grow very quickly and we are able to learn All kinds of cases and quickly improve our technology. I'm quite optimistic that Robo texting will Commercially available in more than 30 cities in 2 to 3 years. Yes. And I just wanted to add a point from what Robin just said. You asked specifically about Winter Olympics. If you look at today In Sogoung Park in Beijing, we believe we're the only second autonomous driving car Company in the world where you actually have a car driving without someone at the driver's seat. So I think that shows the number of years experience that we've been doing at times driving. Also shows the fact that we've been doing operations for the contracting for a while. That's why we can get the permit and actually start testing that. It's open to the public. You guys are free to come and look at how tons driving is being done without sunlight to driver's seat. All right. Thank you. Our next question comes from the line of Piyush Mubayi from Goldman Sachs. Please go ahead. Thank you, Robin Herman. When I look at the way your ride hailing business is expanding, I can't help but think that you'll soon be running a business without the cost of a driver to factor in. If you could just take us through the math as you see it evolve to getting to 20 cities, at what point in time does it get to be a revenue line that you'll Yes. We continue to work very hard to drive down The cost of the robotic vehicles, it has just gone down 60% for our 5th generation vehicle. And in the meantime, we are running more testing miles and taking more orders To learn from all kinds of quantitative and quickly improve our technology, based on our The current projection, I think by the year of 2025, we will Cross the line, which means that the total cost of robotic or ride hailing will be lower than manned vehicle Right, Hae Ling. And after that, I think the scale will be Able to grow much larger than it is today. And I think Around that time, we should be able to report in a second line. Yes. And just to add to that, Apiush, if you look at Robin talked about how from 4th generation to 5th generation, we reduced by 60% in cost per mile. If you look at the prior 4th generations, We averaged around 62%. So we've been consistent decreasing costs for the last 5 generations And at around 60% each time. And if you look at what Robin just said, go back to 2025, what you're seeing in the economics is that in a Right hailing with actual drivers, look, the cost of a person labor cost only goes up. It doesn't go down over time, You're competing with technology. You're competing with the fact that the more miles that we have, the more data that we have, Our operational experience that this thing will continue to go down. So I think that's the section of this business model. If you look beyond 2025, if you look at the next 5 years, what we have internally, we can drive that cost down a lot, lot more Based on what we have seen in the first five generations. So this thing will be very interesting once you pass 2025, you have technology Efficiency Technology operational improvement compared to labor cost. Thank you. And next question comes from Alex Yao from JPMorgan. Please ask your question. I have a follow-up question to Pierre's question. So you've got it in 2025, the TPM of your Apollo solution could be cheaper than human driver. My follow-up question is, when do you expect the safety ratio For your Apollo solution to be safer than the human driver. And then for these 2 conditions to Materialized, what does it take? Is it the cumulative mileage to reach a certain level? Or is it something else? Thank you. Yes, that's a great question. We take 50 very seriously. I think we've been testing for like more than 10,000,000 kilometers. We haven't had a serious injury Yes. So that demonstrates that once we decide to operate a certain watt For our robot taxi by heating services, we have the confidence that The service has a higher safety level than human drivers. That will be a minimum bar for to roll out services without human drivers. But my second question is really that we should be 10x more safer than the human drive. So that kind of benefit is quite clear and it's absolutely assured. What's the second part of the question? Second part is what does it take for these two conditions to play out? I mean, it will be cheaper. Right. There are 500 1,000,000 kilometers of road in China and the road conditions vary greatly. The approach we are taking is a very gradual one. We carefully choose, Roth That we have a high confidence that can be operated without a human driver. That's why you're saying that we're pacing We are carefully picking areas and route so that we have a high confidence that we can operate It's Robert Haxi. Right. Thank you. Our next question comes from Gary Yu from Morgan Stanley. Please ask your question. Hi. Thank you, management, for the opportunity to ask questions. I actually have two questions, both of which are follow-up of the previous questions. First is on regulation. Appreciate the management comment about data piracy. How about on data security issue? Have we heard anything from kind of regulator or government level where the officials are comfortable For a private company tech company like us to have kind of full control of the sensitive Road data traffic on our system or is there any discussion on potential formation State owned joint venture of company having full access of these data is fully on the hands of private company. So On our first question related to data security. My second question is also related to robo taxi. So we talk about The cost opportunity, how about revenue? After 2025 or even longer term, how should we project In terms of penetration, mobility penetration or share mobility penetration that we think will be kind of served by Driverless cars, the reason I am asking Chris this question is, seems like that currently driverless car is still limited to certain usage scenario with specific locations. So how should we look at kind of penetration going forward? Thank you. Yes. On the regulation, the state of security, we maintain a constant dialogue with Regulators and as I mentioned, sometimes we participate in the setting of industry standards. So I would say that we have a very high standard and we haven't heard anything that Very abrupt or adverse that's going to have adverse impact on our Since operation yet. On the penetration of Robert Taxi, right, Like I mentioned, we're taking a gradual approach. There are certain roles that is suitable for Roma Taxi. Yes, certain road that's not suitable to Robotaxi. We are carefully selecting What role to operate on? But if you look at the overall market, I think ride hailing has like probably 50,000,000 orders per day. If the cost can Become, let's say, onefive of the current cost, I think that the number of orders could easily double. So it's a huge market. It just depends on how fast we can improve our technology and scale up I'm sorry. All right. Thank you. Our next question comes from Jerry Liu from UBS. Please ask your question. Hi, thanks for taking my question. Yes. Maybe let me ask a question on the advertising business. Mainly, if I look at the Q3 guidance, we would talk about some of the You know, COVID-nineteen resurgence potential impact. So I just want to ask, first of all, is this something we're already seeing or Is it more preemptive? And then secondarily, we're also seeing some potential COVID or regulatory Impact across different sectors in the whole industry. So wanted to get a sense about on the strengths and weaknesses of the different verticals at the moment, are we seeing further impact, for example, Online education, e commerce or other verticals? Thank you. Okay. Thanks for the question, Jerry. You're right. So we already see the impact in the COVID-nineteen for the Q3. So especially for travel, right, we see very good growth trend in their early few weeks for Q3. Certainly, the COVID-nineteen just stopped that trend actually. It drops pretty quickly. On the other hand, we Pretty good progress on the media, actually meant vocational education and those verticals. So talking about the regulation, I mean, so far we see trade tier positions on the K-twelve Education and some other verticals. So getting worse is that the Q12 education itself is a pretty big Vertical for us, but Q12 has only got more partition in our guidance. And also for the Q12 revision, we're pretty optimistic about it because we see 2 potential good things. Number 1 is that we are expecting more such queries along the K-twelve because the permanent students need to work on the assessment. And second one, as far as I know, so some of the resources are moving to a vocational education, which is a very big vertical. We are Thank you. Our next question comes from Eddie Lau from Bank of America Merrill Lynch. Please ask your question. Good evening. I would like to have a question on your cloud business. It seems like the strong growth this couple of quarters, potentially driven by new projects. So just wondering, could you give us some rough time line that When we could get into the development stage that the growth of your account business would be more driven by Your existing clients upgrading the services and then buying more, kind of like more from the usage of existing Yes. As you know that our cloud business is still growing at a very high Right. The high double digit growth rate. So by Sure, you're right that there are a lot of new projects from new customers. And what I can say that our customer retention has been very good and it's also improving as we expand our customer base, More of them will stay with us and give us new businesses. If we want to maintain a very high growth rate, it's inevitable that will have a large percentage of so called new projects. So at this stage, I wouldn't manage the percentage of New customers or existing customers, we will try to grab the opportunities That's presented to us as it's AI driven Solution or cloud solution, that is our strength. We will try to do as much as we can. Yes. And let me add to that, Eddie. I think Robin summarizes pretty well. When you're growing at 71 Year over year, clearly, you cannot be relying on one driver. What you're seeing actually is 2 drivers. Number 1 is, You are seeing us getting repeat solutions, right? We talked about, for example, smart transportation. Look, we're in 20 If you look at contracts over RMB10 1,000,000, 9 of them have renewed, right? If you look at, for example, we talked about Jiwi, we didn't just when our first phase was building that private cloud for them, and then we talked about 3 year plan, and then we talked about The other things that we're going to do, and Robin talked about those 4 steps. So clearly, that's not a one solution, one time. That is a repeat solution, Right. Join us for our call for Baidu Ro. We're actually going to go through AI solutions for many different industries and you'll see what I'm talking about. Basically, our model is we serve them with the AI pass, that's the AI engine. If they want to do different things, they would then come back for different phases to add applications. So those you can see it's because that the original engine It's on Baidu Cloud, the applications that will come back to us to add on that. Very similar to then with smart transportation, you have V2X and then you can And the different applications of V2X. So you can see our business model enables us to do repeat business. At the same time, if we don't expand to different Industries, if we don't add different customers, we cannot keep up with the kind of growth that we have. Look, if you look at Q2, our annualized revenue Based on Q2, it's US2 $1,000,000,000 and growing at 70%. So you have a very exciting business. In order to contain that robust growth, you really have to accelerate from products, from different industries and adding different customers. Thank you. Our next question comes from James Lee from Mizuho. Please go ahead. Great. Thanks for taking my question. Just want to follow-up Eddie's question on cloud. Maybe can you guys Talk about the improvements that you guys are making to make your offering more scalable. I think last quarter, You talk about developing a standardized solution layered that will enable 3rd party developers and system integrators to customize for their clients. Can you give us an update on that? And also secondly, the adoption for machine learning and AI for cloud in the U. S. Much smaller Much slower in the U. S. Can you help us understand why we're seeing a faster adoption cycle in China? Thanks. Right. On the cloud solutions, as we do more projects and we serve more We are able to more or less standardize our solutions. So in the beginning, we can only take those more of the system integrator role to get all the deals. But this day, we are able to provide, In a lot of cases, standard packages or parts to the other people who are system integrators who get a large part of those total solution projects. Well, that demonstrates that our capability to Continue to improve the standardization of our product. The adoption of machine learning, I think the difference between U. S. And China is that U. S. Tend to separate the product or solution On a more horizontal fashion, namely that they passed in past and fast, At each layer, you have large players that are all kinds of different industries. But in China, you can easily see more of those vertically integrated solution providers. For example, for Baidu, we provide smart transportation solutions for a lot of cities. That sometimes includes hardware, software, cloud and on premise, all kind of things. But That doesn't mean it's not the standardizable. It's actually Quite similar from city to city and from customer to customer. And by vertically integrate or by providing A solution, end to end solution, we can actually innovate a lot more to Really improve the efficiency and serve the customer better. Therefore, the customers are better served. And When you can vertically integrate a lot of things, AI for machine learning naturally plays a much more important role. And let me just give more granularity of what Robin just said. When you look at, for example, smart We started with V2X, right? You're trying to synchronize traffic light. We first did the project back in BaoDing. So obviously, we have the product, but you're going into a city, you're trying to understand their systems and so forth. And a lot of times, you got to then connect to the system to legacy system in order to make it work. But as you're going to different cities in China, once you have certain tools that are set up To deal with the same legacy system and so forth, you get number 1 that you proceed from the operational experience and secondly, a lot of tools that we've built up. So when you think about us doing V2X specifically to synchronize our traffic lights because we've been doing this for several years, you're actually seeing a very high scalability. You're actually seeing better margins so forth because we've been doing this. So now, if you see us start expanding into different scenarios, right, for example, into highways, into math and so forth. And what I would predict based on our past experience is that these margins will improve as we find more familiar environments. Same thing as we're going into enterprises, right? We talked about automated call centers. The first one we did with Unicom was very profitable. Then they started expanding into different call centers throughout the country. So all of a sudden, we're familiar with the back end system. You just have to buy another A service, you're going to put the software in there. All of a sudden, you're up and running because you've already trained the machine learning model for a specific client. Once you start expanding into different industries, you get 1 or 2 leading customers. Again, you're now repeating a lot of things that you're doing. All of a sudden, you get the inertia. So I think AI solution is very similar to the enterprise solution that you have for softwares and so forth in the U. S. It takes time whenever you're getting into a new industry, into new customers. But once the environment connecting to legacy system, it is Very familiar. You get that initial in the phases after that. Thank you. Our next question comes from Natalie Wu from Haitong International. Please go ahead. Hi, good evening. Thanks for taking my question. We noticed recently from a press release that you are expanding your campus can you share with us where to now the handset expansion at this point? And how should we The margin trend of Baidu Core ahead. Also, if we simply look at the Marketing related business in Baidu Core, just wondering what's the margin profile of that segment alone? Thank you. Yes. On the headcount growth, if you look at our Growth rate of Smart Cloud, it's very high and this kind of Industry Solutions require a lot of headcount additions. If you compare this compare our CloudYi with other industry peers, I think that the headcount for Baidu It's not that high. It's actually quite reasonable, and we do a lot more people to help us to Deliver our services. Yes. And then on the margins for Baidu Core, We're looking at a non GAAP basis. You look at Q3, my estimate right now would be we're probably going to increase Cost of sales plus OpEx, maybe RMB 1,000,000,000 to RMB 1,500,000,000 on a sequential basis. Sure. That's how I would look at this. And you guys have the last two quarters, I would look at the non GAAP provided core, and then I think you guys have a very clear trend. Thank you. Our next question comes from Tian Hou from TH Capital. Please go ahead. Hi Robin, Herman. The question is related to your AI cloud. So they're normal cloud and they're AI cloud. So I wonder if we measure these 2 type of clouds. So from a financial point of view, can I say AI Cloud is much more higher margin? So can I treat that That's number 1? What kind of clients need AI cloud? What kind of clients need regular cloud? So that's the first one question. The second one is manage the page has already increased to a Bigger portion of the online marketing. So what's the outlook for this Manage page going forward? Thank you. Yes. The margin for AI Cloud is higher, significantly higher than The more general cloud, especially app, I think you all know that app and CDN generally has a lower Margin, but I would say, clients need AI Cloud and general cloud. We need all kinds of technology and solutions. It's just our strength is that We are very advanced in AI, and we find that by integrating our AI technology, AI solution To really solve our customers' problems, we are able to do a much better job. We do provide as we do provide general cloud Services. But I think the market is very large. It's large enough and it's growing very quickly. And we are gaining market share in this very attractive space. And let me just add. You asked about who Who needs AI? If you look at our customer set, we see several specific. One is, for example, Internet media, right? We have a media win for example, some of the media companies, it's very data heavy. But when you look at, for example, our industrial sectors, different Areas of manufacturing, when you look at utilities, energy and so forth, they all have a lot of data sets. You look at, for example, smart transportation, the government has a lot of data sets. So our AI solution basically says, if you are a customer, you have a lot of data sets, You need to improve operational efficiency and so forth. Our machine learning models, when you go in there, our Baidu brain, can help you. A lot of things that you had to do manually before, we can automate that. We can do it much faster with AI computing. So companies or industries that have a lot of data sets, we can automate. For example, you look at financial services, Rather than computing and improving every loans, to have examples of few 1000000 customers, we can automate that whole computation where Just ask by DuBrent rather than having someone manually compute all the different ratios and all the numbers on that particular customer. So you can see that usage are very helpful, especially in China's economy. Yes, Tian. I will take the second one. You're right. So the Managed page now accounts for like 40% of the Baidu core advertising. So actually, Managed Page, it is not a law. We treat it as part of the marketing cloud we have been discussed a few times, including The managed page and also the tools we provide to the merchants and to make it easy for them to run campaigns on Baidu. So as we always said, so managed page together with Baijiahao and the small middle programs, they Altogether, all the building blocks for the mobile ecosystem. Actually, we'd like because we can provide more Closed loop experience, which increased the thickness or the engagement between the user and the Baidu app. So as a result, we can see so the conversion rate with the building blocks Or much higher than before. That's why we can see this COVID-nineteen outbreak in Q1 last year. So we our online marketing business has actually rebounded consistently in the last 5 quarters, especially for the in app market because of the 3 building blocks And it grows as much as 26 year over year. So that side, we'll keep working on the main stages because it will improve the user All right. Thank you very much. So ladies and gentlemen, we have reached the end of the question and answer session. So with that, we conclude our conference for today. Thank you very much for participating.