Earnings Call: Q3 2019

Nov 7, 2019

Earnings release

Hello and thank you for standing by for Baidu's Third Quarter 2019 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, conference, Zhang Lin, Baidu's Director of Investor Relations. Hello, everyone, and welcome to Baidu's Q3 2019 earnings conference call. Baidu's earnings release was distributed earlier today, and you can find a copy on our website as well as on Newswire services. On the call today, we have Robin Li, our Chief Executive Officer Simon Yu, our Chief Financial Officer and Dou Shen, our Senior Vice President and in charge of Baidu's Mobile Ecosystem Group, our search and feed business. After our prepared remarks, we will hold a Q and A session. Please note that the discussion today will contain 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. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC, including our annual report on Form 20 F. Baidu does not undertake any obligation to update any forward looking statements, except as required under applicable law. Our earnings press release and this call include discussions of certain unaudited non GAAP financial measures. We have made minor adjustments to our non GAAP measures and will actively apply these changes for comparison purposes. Our press release contains a reconciliation of the unaudited non GAAP measures to the unaudited most directly comparable GAAP measures and is available on our IR website at ir.baidu.com. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on Baidu's IR website. I will now turn the call over to our CEO, Robin. Hello, everyone. Baidu's 3rd quarter revenues reached RMB28.1 billion, above the midpoint of our guidance. With Baidu Core performing better than our original expectation. Baidu Core revenues grow 8% sequentially in the 3rd quarter, on top of the 12% sequential growth in the 2nd quarter. In spite of the slowing macro environment, industry specific policy changes and self directed healthcare initiatives. Baidu Core's quarterly sequential growth rates compared to last year's 2nd and third quarter of 26% and 9%, respectively, excluding spin off revenues, have been narrowing. Our marketing services business is improving in part due to a stabilizing market as well as our efforts to strengthen our mobile ecosystem and our monetization capabilities. We have made significant progress in strengthening Baidu's mobile ecosystem centering around information and knowledge. We continue to push Baidu AI to better match users to the vast and diversified content pool in Baidu App. Our top one satisfying user queries with the first result has reached 56% compared to 40% a year ago. On top of leading search and a comprehensive set of knowledge based products, Baidu App provides hosted solutions such as Baijiahao or BGH accounts, Smart Meeting Program and Managed Page app developers and HTML5 site owners to offer a wide range of 3rd party content and services in Baidu App with native app like experience. Our efforts to strengthen Baidu's mobile ecosystem is hosted a solution at a high level of barrier to entry to in app search, while presenting Baidu with news feed and short video opportunities. Baidu's cutting edge AI technologies plus hosted solutions are leading to a better search and feed experience which has joined many users to log in on the Baidu app. In the Q3, we began to unify our mobile pillars BGH, Smart Mini Program, Managed Page and CRM onto a hosted marketing platform to allow our customers to build brand, engage with users and grow audience. Our hosted marketing platform leverages Baidu's technologies and user insight to enable SMEs and KA's to perform user relationship management. In August, we made available a toolkit of over 300 web created content tablets on our hosted platform and now managed page owners can significantly streamline their ad creative process with the toolkit. We also released a toolkit to our customers to enable users who see their ads complete a lead generation form with just one click. By offering a hosted marketing platform that can be continuously upgraded with Baidu Technologies, our customers can focus on the marketing rather than the IT aspect of their campaigns, which will make Baidu's marketing services more compelling. We also made great progress in Baidu's new AI business and in improving our operational efficiencies, which Herman will elaborate later on. Uncertainty, in September Baidu App daily active users continue to see robust growth reaching 189,000,000 that's up 25% year over year. Momentum for in app traffic remains strong with in app search queries grow over 25% year over year, fee time spend up 16% year over year and fee plus short video app time spent up 35% year over year. On top of rapid traffic growth, user login has been growing now accounting for more than half of Baidu App's daily active users. BGH now hosts 2,400,000 publisher accounts, up 57% year over year. BGH allows our publishers to get the optimal exposure in Baidu search. Our efforts to improve content quality and emphasize the social aspect of BGH have boosted traffic and user engagement. In September, content sharing was up 29% year over year, while usage of like function grew 89% year over year. Our knowledge based products including Baidu Wiki, Baidu Knowles, Baidu Experiences and Baidu WENKU have accumulated over 1,000,000,000 content pieces including articles, videos, etcetera, collaboratively produced with users, professionals and institutions. Our focus to enrich Baidu's knowledge content has led to a significant increase in user engagement. For example, in September, daily user time spent on Baidu knowledge content in Baidu family of apps grew 41%, while daily video views within Baidu Wiki and Baidu experiences increased 36% as compared to June. Baidu Smart Mini program is seeing great traffic momentum with MAUs reaching 290,000,000 in September, up 157% year over year And a quarter of Baidu's in app user clicks from search results were fulfilled by the information services from Baidu Smart Mini Program. In addition, in the last 3 months, the number of Smart Mini programs more than doubled, while user time spent on Baidu's Smart Mini program grew 32%. We are excited to see app developers adopting Baidu's Smart Mini Program as a key channel for user acquisition and to deepen customer engagement. By leveraging Baidu's intent based traffic, hosted marketing platform and Spark Mini Programs' closed loop features, our partners can continuously improve traffic growth and conversion through user relationship management on Baidu. For example, a well known e commerce company in China used Baidu's Smart Mini program to give away coupons to users. Leveraging Baidu's user insight and saw its conversion improved 2.5 times over its HTML5 pages. The adoption of Baidu Smart Mini program is also helping our customers broaden their spectrum of marketing options. A leading K-twelve after school tutoring provider use their Baidu Smart Mini program to allow users who see their ad automate the completion of sales lead form for trial classes with one click for user authorization. By hosting the traffic on Baidu's platform, the education company improved its marketing ROI by 30% compared to its HTML5 sites. By connecting to Baidu's platform through an SDK or through hosting on Baidu Cloud, Baidu's Smart Mini Program partners can leverage the advanced technologies and user insight provided by Baidu's toolkit. Turning to Managed Page. Better user experience and ad conversion are leading to the adoption of our Managed Page. Revenue from Managed Page in the 3rd quarter accounted for nearly onefive of Baidu Core's marketing revenue. We are adding more benefits for SMEs to move to Managed Page. In August, we released a toolkit on Baidu's hosted marketing platform with over 300 content created templates, which makes it easier for SMEs from all industries to migrate their H5 site to Baidu's managed page. In the healthcare area, we've seen our customers use more video content on their managed page to provide healthcare information to users compared to their original H5 sites. Managed pages are hosted on Baidu Cloud, which is typically more stable and provides a smoother experience for video broadcasting than the IT infrastructure SMEs usually purchase on their own. Manage space can also improve conversion. For example, our driving score in Xi'an, the capital of Shanxi province saw an 80% lift in lead conversion compared to its own H5 site by using the online chat and live call consultation toolkit from Baidu's hosted marketing platform with its managed page. According to CNNIC, there are approximately 5,000,000 websites in China and most of them do not have the resources nor capabilities to leverage AI and other leading technologies to improve their marketing effectiveness. By joining Baidu's managed page and using our hosted marketing platform, SMEs can continuously improve traffic growth and marketing conversion in light of the slowing overall mobile traffic growth in China. Turning to monetization, we have expanded OCPX for news feed to OCPX for Phoenix Nest, our search monetization platform to allow SMEs to purchase P4P marketing services based on a cost per action basis most suitable for their industry such as on a cost per lead, cost per download or cost per purchase basis. By knowing what the return will be in advance based on the metrics that our customers care about, OCTX now can improve marketing ROI certainty for search on the backdrop of current macro uncertainties. In the Q3, ad spending on OCPX grow fourfold and average cost per action decreased over 10% year on year. In summary, we are building a comprehensive and diversified mobile ecosystem centered around information and knowledge with Baijiahao, Smart Mini Program and Managed Page as important pillars. Our hosted solutions enable publishers, app developers and customers to share their content, information and services on Baidu's platform with native app like experience, which is translating into robust traffic growth for Baidu App and providing a foundation for us to enable our customers and partners to grow through the use of Baidu Technologies. Moving to DuerOS. In the Q3, DuerOS voice assistant continues to grow fast with monthly voice queries surpassing 4,200,000,000 in September, up over 4.5 fold year over year. DuerOS is gaining strong momentum in the Chinese market due to our relentless focus on user experience. We strive to upgrade features in DuerOS to make voice assistant friendlier to use. For example, DuerOS for Xiaodu Smart Display can now respond to hand gestures to stop playing music when one hears a phone call, for instance, and make full duplex continuous conversations or multi round conversation without wake word through eye gesture detection. Turning to DuerOS first party devices. While our goal for DuerOS smart speakers is not necessarily number to be number 1 meaning hardware sales, Xiaodu smart speakers continue to see strong sales momentum. Leading market research firms analysis, Strategy Analytics and IDC ranked Xiaoju Series Speaker number 1 in smart speaker shipments in China for the Q2. According to analysis, Baidu overtook Google in the Q2 to become number 2 globally in smart speaker shipment, while IDC reported that Xiaodu Smart Display ranked 1st in smart display shipments globally in the Q2. We believe it is important for Xiaodu Smart Speaker to maintain a large market share because scale will allow us to build brand, increase pricing power and reduce unit cost. We are differentiating Xiaodu smart speakers through Baidu AI capabilities and the breadth of service offerings provided by DuerOS Gail Store. We are excited by the opportunity to monetize DuerOS Smart Speaker through membership, advertising, Skill Store revenue share as we test trial different monetization options over the next year. On Apollo, we are excited about our progress in early stage commercialization of smart transportation, especially in terms of forming strategic partnerships with municipal government across China and helping bigger cities improve transportation, traffic, safety and air quality using Baidu AI. In September, China's 1st robot taxi pilot program was made available to the public with an initial fleet of 45 Apollo Powered autonomous vehicles roaming the streets of Changsha, the capital city of Hunan Province. Tens of passengers in the city of Changsha experienced Apollo powered robot taxi fleet in the 1st 30 days. Initial feedback has been quite positive. Changsha's robot taxi pilot program leverages Baidu's B2X solution, which sends signals on traffic lights and close proximity traffic conditions to Apollo Powered Vehicles overcoming blind spots and improving traffic efficiency and safety. On cloud, at the Baidu Cloud ABC Summit in August, new AI enterprise solutions were introduced to optimize visual, speed processing and other AI capabilities to help customers increase productivity and improve operational efficiency. For example, Baidu Cloud released an AI powered video editing solution that can automate the tedious task of cutting films into video clips and tagging them while the film is broadcasted live. The official website of China's largest TV station, CCTV.com, used Baidu Cloud's video editing AI solution during the live broadcasting of China's 70th anniversary celebration on August 1 and saw its video editing efficiency gain by roughly 10 times. Baidu Cloud also released an extension of its AI call center enterprise solution, which Shanghai Pudong Development Bank or SPD Bank is using to develop its virtual customer service representative called Xiaopu. Xiaopu will appear in SPD Bank's mobile app carrying human like expressions as it interacts with SPD customer as a virtual assistant. We see such call center solution extension applicable to industries beyond financial services such as telecommunication, media and education. To encourage the usage of Baidu AI and Baidu Cloud Services, we continue to improve Baidu's AI technology and make them available on Baidu's AI open platform, which saw user growth in the Q3 with developer membership more than doubling from last year to over 1,500,000. In September, Baidu Maps enhanced its voice feature with Baidu's leading voice synthesis technology, allowing users to customize the voice feature on Baidu Maps with users' own voice by recording just 20 sentences. Over 280,000,000 Baidu users have used Baidu Maps voice feature as of September, with subscribers reaching 105,800,000 in September, up 31% year over year. IQIYI's strong membership growth further strengthens its foundation as a leading video platform in China, self producing long form video series and as an important video partner of Baidu's search plus ecosystem. With that, let me turn the call over to Herman to go through the financial highlights. Thanks, Robin. Hello, everyone. Welcome to Baidu's Q3 2019 call. All monetary amounts used in my discussion are in renminbi unless stated otherwise. Total revenues for the 3rd quarter reached US28.1 billion dollars dollars or US3.3 billion dollars up 3% year over year excluding spin off revenues and up 7% quarter over quarter. Revenue from Baidu Core was $21,000,000,000 or $2,940,000,000 up 2% year over year, excluding spin off revenues and up 8% quarter over quarter. Marketing services revenue saw strength from education, retail and services sectors and were offset by weakness in healthcare, financial services, franchising and auto sectors. As Robin mentioned, we are seeing a stabilizing market in general. Our new AI businesses including DuerOS Smart Devices and Baidu Cloud continue to see fast growth, which in total grew over 100% year over year. Xiaodu smart speakers saw robust growth and the unit economics are improving through price increases and reduction in cost of goods sold. Baidu Cloud revenue for the 3rd quarter was up over 70% year over year as we place more emphasis on project margin. Going forward, where we'll not disclose Baidu Cloud revenue separately each quarter, Revenue scale, margins and pricing are sensitive information in the highly competitive market, smart speakers, cloud and other AI businesses. IQIYI revenue reached RMB7.4 billion, up 7% year over year. Membership revenue continued to see strong growth, up 30% year over year. And iQIYI's ad business was down 14% year over year due to slowing macro, delay of top content launches and heavy competition from in feed advertising. Adjusted EBITDA reached RMB5.1 billion and adjusted EBITDA margin was 18%. Adjusted EBITDA for Baidu Core is CNY7.5 billion or US1.05 billion dollars and adjusted EBITDA margin for Baidu Core reached 36% compared to 24% from last quarter. On a sequential basis, Baidu Core revenue grew RMB1.5 billion, while Baidu Core adjusted EBITDA increased RMB2.8 billion. Our disciplined approach to spending, coupled with the traction that we have made, the strengthening Baidu's mobile ecosystem have allowed Baidu Core's sequential revenue increase to basically fall to the bottom line, while our cost management initiatives have contributed to the sequential decrease of over RMB1 1,000,000,000 in Baidu Core's costs and expenses. We continue to invest heavily for the future and our disciplined approach puts an emphasis on investment return. In our GAAP numbers, net loss attributable to Baidu was RMB6.4 billion, which included a non cash impairment loss of RMB8.9 billion in total other loss. In the Q4 of 2015, following a transaction where we exchanged shares of our majority owned subsidiary, Trianar, for a minority investment in trip.com, we deconsolidated Trianar recorded investment in ctrip.com@theclosingdatemarketvalueandrecognizeda non cash accounting gain of RMB24.4 billion. Since then, the market value of trip.com shares has declined and the continued low market price has caused us to recognize a non cash impairment loss of RMB8.9 billion in the 3rd quarter, which was determined other than temporary. In October 2019, we sold down our holding in trip.com, which decreased from approximately 19% to over 12% of trip.com's outstanding shares. Let me quickly go over the rest of the financial highlights. Turning to cost of sales. Between flat compensation and intangible asset amortization, cost of sales was RMB16.2 billion, up 15% year over year. Bandwidth and depreciation costs increased primarily due to robust growth of our cloud business, increased video consumption. While constant goods sold increased primarily from the sales of increased in Xiaodu smart speakers. TAC increased 5% year over year as a result of higher TAC prices and expansion into connected offline screens and other areas. SG and A expenses, excluding stock compensation, were RMB4.3 billion, down 15% year over year, primarily due to the decrease in channel and promotional marketing as less marketing spending met our stringent ROI criteria. The decrease in marketing spending has hampered the sequential growth of our apps, including Haokan short video and trending flash video. We will continue to manage our marketing dollars with a strong discipline toward investment return, while recognizing that our marketing investments may not provide a return in the same quarter that the expense was incurred. R and D expenses, excluding stock compensation, were RMB3.9 billion, up 18% year over year, primarily due to increased personnel expenses, particularly for AI development. Non GAAP operating income was RMB3.7 billion and non GAAP operating margin was 13% compared to 7% last quarter. Non GAAP operating income for Baidu Core was CNY6.2 billion or US871 million dollars and non GAAP operating margin for Baidu Core reached 30% in the 3rd quarter compared to 18% last quarter. Income tax expense was RMB934 1,000,000 compared to RMB2.1 billion in the same quarter last year. Income tax expense in the 3rd quarter included a tax withholding for potential dividend distribution to offshore entities. Non GAAP net income attributable to Baidu was RMB4.4 billion and non GAAP net margin was 16%. Non GAAP net income attributable to Baidu Core was CNY6.3 billion or $883,000,000 Non GAAP net margin for Baidu Core was 30% compared to 24% last quarter. As of September 30, 2019, cash and short term investments was US137.4 billion dollars or US19.2 billion dollars Excluding iQIYI, cash and short term investments for Baidu Core was US123.5 billion dollars or US17.3 billion dollars Free cash flow was US7.6 billion dollars and free cash flow for Baidu Core was US7.5 billion or US1 $1,000,000,000 Total full time equivalents of Baidu Core was approximately 30,300. Turning to 4th quarter guidance. We expect total revenue to be between RMB 27,100,000,000 and RMB 28,700,000,000 representing a minus 1% to 6% increase year over year. Our guidance assumes Baidu core revenue will grow between 0% to 6% year over year. These forecasts are current and preliminary view and are subject to change. Before I turn the call over to the operator, let me recap Baidu's 3rd quarter results. Baidu's search and feed business is making great progress. Baidu app traffic remains strong as we expand Baidu's mobile ecosystem centering around information and knowledge and improve user experience with mobile pillars, including BJH accounts, Smart Mini Programs and Manage Page. Our monetization capabilities are strengthening with Baidu's hosted marketing platform and expansion of our monetization products such as OCPX for search. Baidu revenues for the 3rd quarter was higher than the midpoint of our original expectation, with upside coming mainly from Baidu Core. Looking into the Q4, we expect Baidu Core revenues to grow on a year over year basis. On the cost side, our disciplined approach to managing resources and focusing on investment returns, coupled with the strengthening of Baidu's mobile ecosystem, allow us to deliver significant margin improvement sequentially. Adjusted EBITDA margin for Baidu Core reached 36% in the 3rd quarter, 1200 basis points sequentially. As of October 31, 2019, we have returned approximately US1.2 billion dollars to our shareholders. US778 million dollars under the 218 share repurchase program, which expired in June this year and US397 million dollars under the 2019 share repurchase program. Operator, with that, let's open the call to questions. The question and answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. Your first question comes from the line of Alicia Yat from Citigroup. Please ask your question. Hi. Thank you. Good morning, Robin, Carmen and Jen. Thanks for taking my questions. Congrats on the improving results. My question is related to the priorities in the overall strategic initiatives and also the investment spend. So can management share with us as we look out into the next 1 to 2 years on the various strategic initiatives like the Search Mini program, Managed Page, the Duo OS and the Apollo autonomous system and the cloud computing. What are the must win better among these? If you could share with us in terms of the rankings of the quadrant and in terms of the future revenue contribution in the orders of the ranking as well as on the budget spend. In terms of dollar amount, what are the percentage of the total spend if you can rank for some of those initiatives? And then just lastly on the strategic equity space that Baidu owns, could you comment or share with us if online travel still consider as a strategic for Baidu? Or is that okay if Baidu doesn't have to necessarily own the equity stake in the future? Thank you. Hi, Alicia, this is Robin. I think our strategy has not changed very much. Our core business, which is Baidu Mobile Ecosystem centered around search and feed It's very much knowledge and information based mobile ecosystem and we're leading in this part in China. Using the pillars like Baijiahao, Smart Mini Program and Managed Page, we are fostering healthier and stronger ecosystem and this will continue to be the highest priority for Baidu. As our experiences in the Baidu mobile ecosystem continue to improve, we do not have to spend as much money to buy traffic as before. So that's one of the reasons you see the margin improving on a quarter over quarter basis. And going forward, we think there are still a lot of things to do in the mobile ecosystem area and we will continue to innovate and provide better and different user experience than the industry peers in China. And on the AI enabled new businesses, we think all are very promising and DuraOS, we think we are the very clear leader in the conversational AI space. It has cost us a lot of money in the past, but going forward I think the overall loss will continue to narrow for the next 1 to 2 years. And Apollo is walking into more like a smart transportation total solution because most of the Chinese cities are very keen to work with us and improve on their transportation infrastructure. Cloud is more generic and we strive to use to leverage our AI capabilities to grow market share in areas that we are good at. And for travel, I think we are still very committed to partner with trip.com and we will continue to work closely with them on all fronts within our mobile ecosystem as well as with our AI capabilities. Thank you, Robin. Your next question comes from the line of Piyush Mubasher from Goldman Sachs. Please ask your question. Thank you for taking my question. Robin Herman, just looking at the revenue line, could you take us through how you get a 25% traffic growth versus the revenue growth rate that you've seen both on a year on year basis as well as on a sequential basis. And as we look into 2020, could you take us through potentially quarter by quarter the sort of time frame it would take for recovery in the key verticals that have monetized very well in the past? That's my first question. And second, looking at how well you've managed cost, it's been a very, very strong show. Over the last two quarters, your TAC is down from 18.2% to 15.4% of core revenue. Bandwidth cost is down to 6.8% from 8.7%. SG and A has calmed down very nicely. Can we expect these trends to continue into the Q4 2020? Thank you. Okay. I'll answer your first question and Herman will answer the second one. On the first, I think because we continue to improve the user experience for Baidu App and we also try to direct users from 3rd party browser to the Baidu App, we think strong traffic growth of our in app search where users get much better experience. So there is going to be a virtuous circle for this kind of user behavior. And the disparity between traffic growth and revenue growth is that we basically explained all the headwinds industry specific regulation self enforced discipline in industries like healthcare and macro. There are also things that we need to improve on our self management system. So these things I think will be temporary and we're also seeing the macro involvement stabilizing. So we do think that eventually the revenue will catch up with traffic. Yes. And hi Piyush. The question with regards to our cost structure, I think when you look into Q4, I think we said 2 things, right? We said that from Q2 to Q3 sequentially, we're able to increase our non GAAP operating margin and net margin for two reasons. One is the operational efficiency that we have driven and Robin talked about that. With the stronger mobile ecosystem, users are stickier to come in more for better technology searches and so forth. So that's helping us. And the second factor is our cost management initiatives that we've employed. Obviously, these type of factors will be able to carry through going forward. So when we look at, for example, Q4, I expect we will have a similar impact as we did Q3, meaning that we think that the margin should be similar to Q3, if not better. We continue to look at other areas where we can implement cost management initiatives and we'll also continue to focus on operational efficiency. Thank you. Your next question comes from the line of Eddie Leung from BOAML. Please ask your question. Good morning. Two quick questions. The first one is about the advertising industries. Could you remind us the top advertising industries? And especially, could you comment on their recent outlook? And then secondly, just a follow-up question on Piyush, question about cost control. One thing that has been a bit volatile in the past is the sales and marketing costs in the Q1 depending on any major branding campaign. So any color on the upcoming Q1 would be great. Thank you. Hi, Eddie. In our industry that we think are doing, I mentioned education is doing well. Retail, e commerce did well. This is an area that we also I think it's the fact that we're now enabling actions in Baidu APPD. We're able to allow people to come on our platform to do marketing services with their core experience, so that we've seen continued improvement in conversion and it helps with our revenue growth and the overall effectiveness of our marketing. Service sectors, we historically have done well. So those are kind of trends that we're seeing. In regards to Q4, I think Q1 historically has been the lowest quarter seasonality for us if you look at the last few years. So we expect from Q4 into Q1 a down quarter because of basically seasonality, right? Q4, we're going to have a strong strength probably from e commerce, retail and so forth, the double revenue celebration and so forth. And then in the 4th in the Q1, you're going to have Chinese New Year. And so that kind of change, we're going to expect down historically, it's down in the teens from Q4 to Q1. And we'll have better view of this as we progress and get closer to Q1. Herman, is there any major branding campaign planned for the Chinese New Year in 20 20? So far, we haven't finished planning for Q1. We've actually just started our planning for 2020. So right now, we don't see anything that particularly major, although historically, as you saw last year, there was this campaign with CCTV and so forth. I think that probably will we'll probably know better probably in a month or so once we midway into our 2020 planning. But I think that typically we're very strong with mobile and during Chinese New Year that's where mobile traffic is stronger relatively to PC. And that's really an opportunity for us to show the world the things like the great products that we have in our mobile MEG and our SLG and so forth. So that's something we'll be considering, but we'll have probably more information in a month or so. Understood. Thank you. Your next question comes from the line of Ming Zhao from 86 Research. Please ask your question. All right. Thank you for taking my question. I'm asking question on behalf of our analyst, Xiaoju Zhang. So management, I think Robin, you have talked about a lot of the exciting developments at Baidu and it's also great to see some stabilization revenue quarter over quarter in the business. So we want to maybe ask you to comment on if you see any major challenges for Baidu because we hear a lot of so many opportunities at Baidu. So what are the major challenges do you see for Baidu these days? And the second question is, Herman, you commented a little bit about the different verticals performance right now. Can you expand it a little bit more to include verticals like auto, finance, real estate, travel, those verticals, so we can have a clear idea about the vertical performance, especially can we say the healthcare and brand advertising segments have bottomed? Because I think those are the 2 big drivers for the business. Thank you very much. Yes. I think we have 2 major challenges. 1 is on the mobile side. On the mobile side, as many of you know, a lot of the large mobile apps are very much closed ecosystem. So it's not easy for us to index every piece of content as we did during the PC era. So what we are trying to do is to build our own mobile ecosystem so that content and services can be more native to the Baidu ecosystem. Although these are the challenges, but these are also opportunities. Once we can build a healthy and strong mobile ecosystem, the user experience will be more indigenous, meaning that they get better experience and our customers get better conversion. We are in the process of this kind of transitioning. So that's why you see that traffic probably a leading indicator that it's growing, but the revenue side or monetization side has not picked up that significantly. So going forward, we will continue to push the mobile ecosystem side with all of our organically viewed content and services. And on the AI side, I think that the main challenge is that the market does not grow as fast as some would expect. So that's why we still need to continue to invest in this kind of new initiative and so waiting the market to become more mature so that we will be able to profit from that. Okay. And let me talk a little bit more about our revenue makeup. With regards to the verticals that you talked about, auto and financial services, those are both down, right? Automobile, as we know, a number of car unit sales this year is down. You look at the industry is not doing as healthy. You look at financial services, that's another area that since Q1 this year that has been down and this has been down pretty significantly. Travel, we've been focusing on building better products. We have good content over the strategic relationship with trip.com and so forth. So travel, overall, has done well. It's one of our stronger verticals. With regards to healthcare, if you look at healthcare, we started introducing Managed Page last December and at the end of March this year, we required that everyone who's doing advertising are using mobile on Baidu to switch over the H5 size to our managed page. And that has put a damper in terms of revenue goes would probably put all the content. Our customers just will not come to Baidu. And then because we now have stronger control of the content that's on there and so forth, we are putting an emphasis on ensuring that the content on our pages are good for our users. And we started then rolling out to our PC, which is less than 20% of total healthcare revenues in July. So Q3 really it's a partial quarter hit. Q4, you'll see a full quarter hit. So we actually have seen most people, customers who are switching over have switched over. So we don't see too much of a difference from Q3 into Q4. This is we're halfway through the quarter. So as of right now, we don't see too much difference going from Q3 to Q4. But if you look at overall, our revenue guidance for Baidu Core this quarter, the last few quarters, we had more uncertainties and we started with a range of negative percentage. And this quarter, now we're guiding from 0% to 6%. So we think that in terms of your year over year growth, we're much better off in the last couple of quarters. I think in May, we said that we'll come back with a 100 day plan. We executed very well on both top line and bottom line. So you're seeing our business getting more solid and the revenue with the products that we talked about, the hosted marketing platforms that are strengthening mobile ecosystem. So that's helping us, I think, fight the current softer macroeconomic environment. Your next Your next question comes from the line of Gregory Zhao from Barclays. Please ask your question. Hi, Robin, Herman, Chen. Thanks for taking my question. So the first one is, so if you look at your TAC and your SG and A expense, so we can see significant year over year and the Q on Q decrease. So just wanted to understand the trends going forward and the sustainability of the trend. And also one more thing is the volume of your search query of the Baidu, the native app, I think last quarter you mentioned is 20% year over year. So do you have any update for this quarter? And also want to understand the Q3 volume, the growth in the 3rd party, the mobile browser and also on PC? Thank you. Suleiman will answer this first one. I'll add Okay. Hi, Greg. Yes. So with regards to the 2 expense finance and you talked about tax. Tax still grew 5% year over year. I think tax growth rate has leveled off, it's growing slower year over year than previous quarter. I think 4 things. Number 1 is, as we focus more on building our mobile ecosystem, we're going to be relying more on in app searches to grow our revenue. And we've been transitioning off of this, I think, over the last year. I think The Street misinterpreted our strategy to move over into in app services because in app services, you're required to pay for channel costs upfront and then you would have revenues over the following quarters. When we look at the user lifetime, whereas tech, every dollar you spend, you get that revenue in that same quarter. So as our business model shift, the margin shifted and the street took, I think, several quarters to understand that. So I think that's one issue. And I think overall so far, I think we are having still increasing our costs. I think pack price is still increasing, but I think it's not hitting us as bad on margin as previous quarters. The sales and marketing, as Robin mentioned, we're still spending heavily on sales and marketing, but on a year over year basis, we're down for sales and marketing plus G and A. I think we mentioned in our prepared remarks, how much we spend for channel and promotional marketing is a function of investment return. Although we don't expect every dollar we spend to be to get a return in the same quarter, we measure over the lifetime value of the users. So as economy softens and seeing that the returns are not meeting the internal threshold that we have set, then we'll tone it back. So that's why as we tone it back, you can see, for example, Baidu, APP is actually quite profitable because this is a big segment of our overall business. So I think with the economy like this, we'll be more careful in terms of spending what we're looking for, the return that we can get. But as the economy gets better and we're seeing good returns, we might increase that in the future. But ultimately, we think that whatever we spend, we can get the return back because we have a very sophisticated system internally to measure these kind of return for channel for promotional marketing. Gregory, this is Dou. For the search volume, actually the total mobile search volume, we still see pretty good lift year over year. And specifically for the in app search, as Robin mentioned in the prepared remarks actually, we saw 25% year over year lift. So actually given the better experience in Baidu app search with Baidu and Smart Media Programs and Managed Pages all together, so the experience is getting better, measured by all the metrics we are using. Given that we are going to see the momentum continue in terms of the in app search traffic in total. Thank you very much. Your next question comes from the line of Grace Chen from Morgan Stanley. Please ask your question. Thank you. Thank you for taking my question. My question is also about the online marketing business. It's good to hear that the management talk about the business environment is overall stabilizing. But can you also elaborate a bit more about the outlook into 2020, specifically from the demand and supply side? For demand side, can you elaborate more about your observations about macro and our budget for the next year? And from the supply side, can you specific comment about the competition environment? Because I remember we talked about the inventory supply increase earlier this year. And how do you see that competitive environment will evolve into the next year? So that's my first question. And second question is about 5 gs. How do you expect the 5 gs opportunities will change or what kind of impact will that be to the overall Internet business? Thank you. Yes. On the demand side, I think, as I mentioned, overall, we are seeing signs of stabilization, which means it's not getting worse. So we actually viewed a more solid and user friendly mobile ecosystem. We will be able to gradually get back those advertising budgets. And on the supply side, yes, there has been a sudden flash of new ad inventories over the past year or so, we see that kind of speed of increase slowing down. So that is also kind of good for us. But ultimately we focus on our own strength, building the best mobile ecosystem for knowledge and information. Therefore, we can provide unique value to our customers and advertisers. The initiatives that we talked about during the prepared remarks all resulted in better conversion for our customers because the mainstream of our revenues are basically pay for performance as long as we can continue to improve the performance, we will be able to get more budget from our customers. And for 5 gs, I think that will give us more opportunities to innovate in a lot of fronts. On the mobile side, I think the video product features will continue to evolve and it could be very different from what we see today. And on the AI to be side, smart transportation, smart manufacturing, education, etcetera, we see opportunities to transform those business models in all kinds of different areas and industry. Thank you. Your next question comes from the line of Binnie Wong from HSBC. Please ask your question. Good morning, Rod and Herman and Zhuang. My question is on if we can dissecting the traffic growth of the 25%. How do you see that the drivers coming from search fees and video? Just so that we can better understand that in terms of like how you see that will trend? And also when do you see that can translate into faster revenue growth? Because we actually see our 4Q outlook is an acceleration from your past few quarters. So just wanted to see how we should see that maybe seeing the upside from fees and video can translate into faster growth there? And then also second question is also in the opening of the press release. I think Robin mentioned that your in app search has really also gained shares market share. Can you comment on user behavior in terms of search usage as we see rising competition from newsfeed platform launching the search function earlier and also of course against the larger social network also people are searching within the moment. So can you comment on those? Thank you. Okay. For the video question. The video question actually is right. It has been there has been a it's closely the growth in China's short video sectors in recent years. And but we believe it's the forefront being a game over yet. Actually for us, we distributed the short videos not only through our video apps, but also through the Baidu apps. So actually in Robin's Twitter remark, he already mentioned that for the short videos, the distribution through Baidu app and video app, So we see the time spent up to like 35% year over year actually. So not only for the videos itself, even in search, we see the search satisfied through videos are being increased almost 50% year over year. So put that together, we see video is playing a very important role in Baidu's whole ecosystem. So actually especially with the 5 gs over years, so we're going to see more applications of videos in Baidu's ecosystem. Then what's the second question? Let me answer the competition question. I think search has a very high barrier to entry and the wave for a long time and the user behavior have been formed. So it's not that easy to change user behavior from a browsing habit to a search habit because for browsing users do not need to do much. So it's easier to do browsing. If you ask someone to transform from an easier to do things to harder to do things, that's not that easy. But on the other end if you want to transform those users who are used to search who are used to type in Facebook or express their needs explicitly to a browsing behavior that's much easier. So that's why it's for Baidu to do feed, but it's harder for a feed player to do search. And on top of that, I think the technology barrier to search is very high. If you can solve the 3rd problem, you basically solve the AGI problem, artificial general intelligence, because whatever the users say, you have to be able to understand that and come up with relevant loop. So it requires a lot of research, a lot of investment and it's a very hard problem. Okay. Thank you. And just a follow-up here is that in terms of the traffic growth, when do management see that can translate into potentially a faster revenue growth and outlook into 2020? Thank you. So for the marketing customers, right, so what they really care about is the effective traffic. So with the managed pages, smart mini programs, actually we see more and more examples where the customers when they use this services, their ROI are being improved. So it's really hard to say how we are going to turn that into numbers, but we do see the trend is going up. And actually, as Robin mentioned in the opening remarks, right, so more and more marketing customers are adopting our managed pages actually. So we're seeing improvement over ROI. So I bet that it's going to turn into revenue lift, but it's hard to say the specific number.