Earnings Call: Q4 2018

Feb 22, 2019

Hello and thank you for standing by for Baidu's 4th Quarter and Full Year 2018 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 question. 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, Sharon Nang, Baidu's Director in Investor Relations. Hello, everyone, and welcome to Baidu's 4th quarter and full year 2018 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, Baidu's Chief Executive Officer and Herman Yu, Baidu's Chief Financial Officer. 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 discussion of certain unaudited non GAAP financial measures. 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 the VITIUS IR website along with our earnings press release, which is intended to supplement our prepared remarks today during today's call and provide a reconciliation of the differences between GAAP and non GAAP financial measures. Unless otherwise specified, we refer to non GAAP measures on the call, which should not be considered as a substitute for the financial information prepared in accordance with GAAP. These GAAP measures are included as additional clarifying items to aid investors in further understanding the company's performance. Please refer to the non GAAP Financial Measures section of Baidu's press release for further information about our use of non GAAP measures. I will now turn the call over to our CEO, Robin. Hello, everybody, and thank you for joining our call today. In 2018, we expanded Baidu's since beyond search with AI by strengthening our mobile foundation and leading in new AI business, which puts us on strong footing as we enter 2019. On mobile, the growth rate of Baidu app DAUs accelerated over the past year, growing 24% year over year to 161,000,000 in December 2018 compared to a range of 17% to 19% in the past 4 quarters. Haokan, our short video app, duplicated Baidu App's search plus feed strategy and saw its DAUs grow to 19,000,000 in December from 1,000,000 a year ago. Tianming, our flash video app, whose short video are usually under 1 minute long, saw its DAUs grow to 4,000,000 within 1 quarter of official launch. Aggregated feed time spent on Baidu, Haokan and Quanmin apps grew 112% year over year. The robust growth of Baidu's organic traffic is strengthening our search foundation as well as enabling us to leverage Baidu's AI to become an important player in feed and short video offerings, which are experiencing strong momentum in China. Our new AI business, DuerOS, we believe, has become the most popular voice assistant in China with the largest installed base, reaching 204,000,000 in December. On product innovation, we launched the 1st smart display in China, Jiadu Home and was the first to introduce a commercial level 4 vehicle in China, Abolong, with Kinglong Automotive. On cloud, we've helped enterprise customers build a competitive edge through Baidu's AI solution. Enterprise AI has tremendous potential in China. By leveraging powerful AI computing, it gives China's traditional industries a technological advantage over its regional peers. In 2018, Baidu reached a historical milestone with revenues surpassing RMB100 1,000,000,000. We are excited to pursue the next RMB100 1,000,000,000 of growth by leveraging Baidu's AI to expand beyond search into fast growing consumer markets as well as new AI opportunities in enterprise and government sectors. Let's begin our Q4 review with search and feed. Our focus in 2018 has been investing in organic traffic to accelerate our growth and strengthening Baidu's content ecosystem to give users a better experience with search and feed. Daily active users on Baidu App, our flagship app, has been accelerating over the past year due in part to the improved search experience and the strength of our feed. During the recent Chinese New Year Gala, the most popular TV show in China, Baidu participated in the Red Envelope giveaway, which turned out to be a success. More users now realize that Baidu App is better, safer and more powerful as it integrates search and feed seamlessly and provides a native app like experience. In the future, we do expect search traffic in the Baidu app to grow much faster than the overall search market. Over the past year, we have made significant progress in expanding our content network on Baijiahao, which now hosts 1,900,000 Baijiahao accounts With significant coverage of top tier publishers on Baijiahao accounts, we believe Baidu's AI we leverage Baidu's AI to push the most relevant content to new Baidu app users and make their onboarding experience smoother. We deployed the same methodology to Haokan earlier this year by attracting a large base of high quality video content publishers and used Baidu's AI to enable smoother onboarding for new Haokan users. As a result, Haokan was the 2nd fastest growing app among the top 10 short video apps in China in terms of DAUs, MAUs and total daily time spent during the 3 months ending December according to Press Mobile. And the fastest growing app over the same period was Quanmin, a short video app that we are incubating. Quanmin's DAU grew to 4,000,000 in 1 quarter. Short video is a growing market in China and we expect this demand to grow even faster with the arrival of 5 gs. Our foray into short videos is seeing strong results. For example, excluding iQIYI, Baidu distributed over 3,500,000,000 video views daily in December. That's up 56% from last quarter. With users showing insatiable appetite for short videos, we are leveraging Baidu AI to better test the video content and personalize each distribution based on user preferences. Whereas Baijiahao accounts fulfill our users' demand for feed content, Baidu's Smart Mini program allows them to enjoy native app experience from our partner network of service apps. Through the pull down of the home screen, search results and feed viewing, Baidu App users can access the functionalities of our partner apps directly from the Baidu App. We believe the future of mobile search will shift toward closed looped native app experience from the current search experience that direct users to HTML5 sites. MAUs of our mini program has grown to 147,000,000 in December, up 30% sequentially. In December, we open sourced Baidu's Smart Mini program to allow our top partners to build their own mini program network. On monetization, the integration of search and feed in Baidu App brings together significant synergies. During the quarter, we expanded our optimized cost per click or OCPC offerings to OCPX. For example, we're now offering OCPM for impressions and OCPV for video views, which enable feed ads to use the same optimization algorithms. With feed and search under one roof, we are seeing customers opting for omni marketing, which is a powerful marketing campaign leveraging the reach of search, feed and app opening interstitial ads. Over time, we believe the adoption of Baidu Smart Mini program will also be a revenue driver for us. Early AB testing indicates that advertisers using Baidu Smart Mini Program are getting better ROI than using H5 sites as the landing pages for their advertisement. Turning to DuerOS voice assistant. DuerOS is gaining strong market adoption with an installed base reaching 204,000,000 in December, up from 141,000,000 in September. Voice queries on DuerOS continue to grow robustly, reaching 1,600,000,000 in December, representing a sequential CAGR of over 100% for the last 7 quarters. Our customers want smart devices that understand them better, that provide better search results and that offer more and better services. As a result, we will continue to make heavy investments in AI to provide best in class speech recognition and natural language processing technology. We have also begun testing the DuerOS Skill Store, where customers can subscribe to both free and fee based scale. The DuerOS scale store currently offers over 1,000 scale, such as Douyu Live Video, Dragonfly FM Online Radio and CITIC Academy Online Literature and has a developer community of 27,000 engineers. In the Q4, our first party smart device sold exceptionally well. Xiaodu Smart Speaker was the best selling smart speaker on jb.com, Pinduoduo and Guomei.com during the Double 11 event. And Xiaodu Home, our smart display, saw unit sales accelerate from previous quarters. To expand the use of DuerOS voice assistant in November, we added to our lineup of Xiaodu smart devices. Xiaodu smartphone Car mount, a smartphone charger under US15 dollars equipped with far field microphone that enable users to operate DuerOS skills such as Baidu Maps and Phoenix New Media through conversational AI, frame their hands to allow a safer driving. Stay tuned for new Xiaodu smart devices as we will be launching soon. DuerOS for Apollo, a version of DuerOS adopted for in vehicle usage has already been pre installed in Chery's high end Xpeed cars and will be pre installed in selected models of Ford, Lincoln, Great Wall Motor and Bison cars later this year. Our goal for DuerOS is not only to make interactions with smart devices simpler, we also see a need from users to be able to switch their skills interchangeably across mobile, home and car. Built into DuerOS for Apollo is a skill store that operates mini programs from the Baidu app, which will bring convenience to both our users and the developer community. In the hospitality sector, DuerOS now powers Baidu's smart display to provide personal concierge in over 2,000 rooms across a store of hotels in China, particularly 5 star hotels, including the newly opened InterContinental Shanghai Wonderland. Turning to Apollo, At CES in Las Vegas last month, we released Apollo 3.5, which supports autonomous driving on complex urban roads. We also introduced Apollo Open Road for the developer community and Apollo Enterprise offering solutions to support commercial production including DuerOS for Apollo, valet parking, assisted hybrid driving, minibus and intelligent maps. In the Q4, we added 1st Automotive Work and Volvo as Apollo partners for commercial production of Level 4 passenger cars. Apollo has garnered over 135 OEMs, Tier 1 parts suppliers and other strategic partners to date, including recent additions of Volkswagen Automotive, China Unicom, Ocari, Quanta Computer and Star Metal Technology. Beyond autonomous driving, we are receiving interest from Chinese municipalities to partner with them and provide smart transportation solutions. With the support of local government, we see commercial opportunities to minimize traffic congestion, reduce air pollution and improve road safety by leveraging Apollo B2X or vehicle to infrastructure solution. And for Baidu Cloud, in December, we open sourced OpenEdge and an edge computing platform that extends Baidu Cloud's data processing and machine learning to edge devices. Baidu's OpenEdge has received positive feedback from the developer community, reaching number 1 on GitHub in the open source edge platform category shortly after launch and continues to hold the top spot in current ranking as of February. Baidu Cloud is seeing strong growth in both revenue and customer base and expanding AI solutions across different industry verticals, such as telecom, manufacturing and financial services and transportation. For example, last quarter, we showcased a top telecom operator in China that used Baidu AI solution to power 1 of their call centers. After initial implementation, Baidu AI solution was handling millions of calls per month and reducing the average customer call time by over 70%. We recently signed with the telecom customer to expand Baidu AI powered automated call center solution to power several more call centers. At the same time, we are receiving interest from financial institutions as well as airlines to power their customers' call centers. Some investors may wonder how the economics will work for Baidu as we enter enterprise AI. Investing in feed and voice assistant are natural extensions of Baidu's search business. As we venture into enterprise AI, we have the potential to leverage the same AI to significantly expand Baidu's total addressable market into the massive enterprise and government sectors. In the case mentioned above, just like the economics of ERP projects, the economics of cloud enabled AI solution may have low margins in the beginning, but with each replication, the project margin improves and our AI solution become better with machine learning models and experience accumulated. Turning to iQIYI, as an entertainment IP powerhouse in China, iQIYI continued to see strong subscriber growth, adding 36,600,000 subscribers in 2018 to 87,400,000 members in Q4. Baidu and iQIYI co launched a hybrid OTT TV box with Sichuan cable TV, enhancing the home entertainment experience through AI. And this is the OTT TV following the release of Gehua's Little Fruit earlier this year. With that, let me turn the call over to Herman to go through the financial highlights. Thank you, Robin. Hello, everyone. Welcome to Baidu's Q4 and full year 2018 call. Before I begin with financial review, let me make a few notes. All monetary amounts used in my discussion are in renminbi unless stated otherwise. Starting on January 1, 2018, we adopted ASC 606, a new revenue accounting standard that nets value added tax on the revenue and cost of revenue line. To increase comparability with 2018 numbers, 2017 revenue numbers and related metrics such as margin have been adjusted assuming net of VAT. We had a terrific year in 2018. Total revenues grew to RMB102.3 billion, up 28% year over year, 31% year over year excluding revenues from spin off businesses, which were approximately RMB4.1 billion and RMB3.1 billion in 20172018, respectively. Revenues for Baidu Core reached CNY 78,300,000,000, up 22% year over year or up 26% year over year excluding spin off revenues. Non GAAP net income to Baidu was RMB23.3 billion, up 35% year over year and non GAAP net margin reached 23%. Non GAAP net income attributed to Baidu Core was RMB28.5 billion, up 37% year over year and net margins was 36% versus 33% last year. Adjusted EBITDA reached RMB24.3 billion, up 4% year over year and EBITDA margin was 24%. Adjusted EBITDA for Baidu Core grew to RMB31.5 billion, up 18% year over year and adjusted EBITDA margin reached 40% compared to 42% the prior year. Free cash flow was RMB27.2 billion. Free cash flow generated by Baidu Core was strong at RMB24.9 billion or US3.6 billion dollars Turning to Q4 2018. Total revenues reached US27.2 billion dollars up 22% year over year or 28% year over year excluding spin off revenues, which was RMB 1,000,000,000 in Q4 of 2017. Revenue from Baidu Core grew to RMB20.5 billion or US3 $1,000,000,000 up 20% year over year excluding Twin Op revenues. Marketing customers grew over 10% year over year, which can be largely attributed to our industry leading performance based ad products like dynamic ads and oCPX, as Robin mentioned. We saw strong strength coming from education, e commerceretail and service companies, which were partially offset by the weakness in healthcare, gaming, real estate and to a lesser extent financial services. The customer sector weakness was mostly impacted by industry specific policy. On healthcare to require healthcare customers in the field of andrology and gynecology to shift the landing pages of their ads to Baidu's content platform. By requiring healthcare marketing customer to place their content in structured data format on Baidu's platform, which allows for comparison across service providers, site commentary and ratings and other important features, we are in a better position to monitor the sites of our healthcare customers and we are those that offer questionable services. With Phase 1 of the healthcare provider network transition, we are on track to shift the ad landing pages of other healthcare customers this year. The new business model not only would improve the quality of marketing customers and the information on healthcare sites, it would also give us a better understanding of user interest, which over time would allow us to further improve the navigation and relevancy of online healthcare information in China. Using similar technology, we see an opportunity to build a content vertical for online literature and make it easier for authors to distribute their literary works online and receive revenue share. The online literature market in China is shifting to an ad supported model versus paid content, which presents Baidu with a huge market opportunity playing to our strength as a leading marketing platform. Another bright spot in Baidu's quarter revenue is our cloud business, which reached CNY1.1 billion revenue in the 4th quarter, more than doubling from last year. Revenue from iQIYI reached RMB7 1,000,000,000 growing at a robust rate of 55% year over year. Membership revenue continued to be strong with 37,000,000 subscribers added in 2018, bringing the total subscribers to 87,000,000 in the Q4, driven by premium content and hot originals like Tang Dynasty Tour, The City of Chaos and Original Sin. IQIYI is becoming a strong entertainment IP powerhouse through its relentless efforts on and focus on originals, on premium content and multiple monetization models of the same IP such as membership subscription, online games, e commerce and cross licensing. Turning to cost of sales. Excluding stock compensation, cost of sales was RMB15.5 billion, up 54% year over year. Content cost was up 96% year over year to RMB7.5 billion, mainly due to iQIYI's increased investment in content and to a much lesser extent investment in Baijiahao content. SG and A expenses, excluding stock compensation, were RMB5.4 billion, up 61% year over year, primarily due to the increase in channel and promotional marketing to acquire new users for the Baidu family of apps. As Robin mentioned, time spent for Baidu App, Haokan and Quanmin together grew 112% year over year in Q4, which illustrates our ability to convert marketing dollars into repeatable traffic. Our focus to place greater shift our financial model to spending upfront marketing dollars with spread out over the life of the user. In other words, revenue from channel spend has a delayed effect, whereas revenue from TAC is reported in the quarter of expense. In the first half of twenty eighteen, a big part of our marketing expenses were spent on promoting the Baidu App. In the second half, Baidu App seeing strong growth. Our app promotion expanded to other products such as Haokan Short Video and Quanmin Flash Video. Our traffic acquisition mix shifting from TAC traffic to organic traffic will dampen our profit margin in the near future. But with extensive internal ROI analysis, we believe over the long term, this will strengthen Baidu's foundation in search and feed, especially with users' super apps and the increase in popularity of many channels in China. Turning to R and D expenses. Excluding stock compensation, R and D expenses were up RMB3.6 billion, up 19% year over year mainly due to the increase in personnel utilization. Non GAAP operating income in the 4th quarter was RMB2.7 billion. Non GAAP operating income for Baidu Core was RMB5.8 billion, down 17% year over year and non GAAP operating margin for Baidu Core was 28%. Income tax expense was RMB484 1,000,000. Effective tax rate was 26% compared to 16% last year, primarily due to iQIYI not being able to recognize tax benefit from its losses in the current quarter. Non GAAP net income to Baidu was RMB4.6 billion, down 17% year over year. Non GAAP net income attributed to Baidu Core was CNY6.5 billion, down 1% year over year and net margin reached 31% compared to 36% last year. Adjusted EBITDA was RMB4 1,000,000,000 and adjusted EBITDA margin was 15%. The adjusted EBITDA for Baidu Core was RMB6.9 billion, down 12% year over year and adjusted EBITDA margin reached 34%. As of December 31, 2018, cash and short term investments were CNY20.6 billion. Excluding iQIYI, cash and short term investments were CNY 128 700,000,000 or US18.7 billion dollars Free cash flow was RMB5.9 billion. Free cash flow to Baidu Core was strong at RMB5.5 billion or $801,000,000 and total headcount of Baidu Core was approximately 33,700, up 1% year over year. Turning to Q1 guidance. We expect total revenues to be between CNY23.5 billion and CNY24.7 billion, representing a 12% to 18% increase year over year or 18% to 24% increase year over year, excluding spin off revenues of RMB1.8 billion for Q1 of 2018. For 2019 margins, please consider the large marketing campaign that we did around the Chinese New Year timeframe, including branding, red envelope giveaway and so forth. These forecasts are our current and preliminary view, are subject to change. I will now open the call to questions. Thank you so much. The question and answer session of this conference call will start now. In order to be fair to all callers who wish to ask questions, we will take one question at a time for each caller. All right. And our first question comes from the line of Benny Wong. Benny, your line is now open. Hi. Thank you, management, for taking my questions. My first question is basically on our investment cycle. In terms of like a lot of investment we have been in 2018, when we look forward in 2019, how should we expect in terms of our investment priorities into 2019? And if we look at the growth coming from actually about new business initiatives, how do you rank in terms of like the growth drivers? Any color on the how should we expect on the investment cycle and also the margin trend will be very helpful. Thank you. Hi, Vannie. Good morning. As I mentioned in our call, there are a few businesses that we'll be focused on going forward that we also have been focused on in the last few quarters. I think the way to look at our margins and our investments are like this. We finished our 3 year plan just in January and our plan was to figure out a way to accelerate our revenue growth based on the new markets that we're going after. And the cost driver, I think, for 2019 will be a function of a few factors. I think number 1 is when we look at, for example, search and fee, our priority would be to grow our organic traffic. Although, as I mentioned before, for our TAC, as long as there's profit to be made, we'll continue going down that path. But the priority, I think, will be with organic traffic. And that would be a function of investing in marketing and content costs. And also it's a function of the number of apps that we decide to promote. As I mentioned earlier, in 2018, at the beginning of the year, we focused on Baidu App. And as we got into the second half, we looked at Haokan and in the Q4, we also added Quanmin. So that caused our marketing dollars toward the end of 2018 to accelerate. I think going into 2019, you should see us focusing on investing at least in 3 dApps and potentially more. Another business that we are very focused on is the DuerOS. And I think for that, you can see it's a function of the number of products that we have, the amount of promotion we have to do for new products and also the number of units that we sell. And I think the last set of investment is in the cloud space. We're seeing cloud doing very well, as Robin mentioned. The cloud, given it's a function of how we're growing and preparing to scale our business for the next year and it's also a function of the number of Lighthouse projects that we have. So with every growth plan, our focus is to also grow revenue. So what we'll be looking at this year is to focus on as we're spending these things, are we getting very positive operating metrics? And if so, then we should see revenue growth accelerate in future quarters. So we'll be looking at the operating metric first and then we believe that in following quarters the revenue growth should come. At the same time, just wanted to note that we're also very diligent in terms of content costs. So if you look at, for example, in 2018, our core business grew 28%, excluding divestitures. At the same time, our headcount only grew 1%. In 2019, our cost control policy in the company will be very similar where there are areas where we're tightening, we're very focused on improving greater efficiency and so forth. Does that help answer your question? Yes, yes. That's very helpful. And just one last follow-up on the newsfeed. How do you see the competition will be trending in 2019 on the competition on News Feed side? In terms of also any sharing ratio with the content creator, how should we see that? Thank you. Benny, the question you had was how do we see the newsfeed revenue trending? Competition, the competition dynamics on the newsfeed competition on that front with other platforms? How do you see the 'nineteen in terms of strategy? How do we position to in terms of in view of the competition here? And also in terms of any like revenue sharing with the content creators as we talked about earlier in last quarter call? Just a follow-up on that on your speed would be really helpful. Thank you. Okay. This is Robin. Let me answer your question. I think it's very obvious that newsfeed is a fast growing market. Everyone in the Chinese Internet landscape is trying to expand in this direction. And Baidu obviously is leading one of the leaders in this space and by leveraging our strong technological capabilities, We have been able to grow the new feed business at a very rapid rate. We expect this trend will continue. In terms of cost structure, it's basically a revenue sharing structure for the content contributors in our feed system. So the more we can drive our feed traffic, the better we can monetize and the better the economics will be for the content contributors. So at the end of day, it's how many users you can reach and how better you can match content with users. Yes. Let me just add a little, Benny, on this thing. As you can see, newsfeed in the beginning was mainly social based and it relies on user coming on and acquiring fans and so forth. What you're seeing now is newsfeed is getting to a place where there are many people that create content, especially they create in an organization rather than on an individual basis. So that's why you see Baidu entering at this stage and we're doing it with Baidu App and also using the same methodology going to video because now the limitation is not about the availability of content because the same person will put the content on different sites. Where Baidu's strength is using our AI algorithm, the technology we build up to be able to recommend better than everyone else so that the users are very sticky. That's why we show you our time spent. So to answer your question, I think our competition, our strength is the ability to use our AI to recommend better and to get a user just more sticky. And then I think content has become a commodity. So in terms of that, I think this year you'll see us probably growing more video content as we're having a few more video apps that we're pushing. But for the non video side, I think that you'll see probably a slower growth because we have built up that library of content from past year, just adding content. Probably will not grow as fast for the non business. And our next question comes from the line of Alicia Yap from Citigroup. Alicia, your line is now open. Thank you. Good morning, Robin, Herman and Sharon. Thanks for taking my questions. I have a question regarding the achievement for the Chinese New Year Gala promotion. So any metrics that you could share with us in terms of the total numbers of users that have successfully bind their bank card to Baidu Wallet? What is the increase in, let's say, the total real name registration for the Baidu app after the gala? And then any metrics in terms of increase and the usage for the DuerOS smart speaker from prior to the Chinese New Year to now post the Chinese New Year? So any metrics you could share would be helpful. Thank you. Yes. As you know that we operated Spring Festival Gala. During the whole Chinese Spring Festival period, tens of millions of users participated in our red package giveaway activities. And many of them start to realize that the Baidu app is different from the Baidu search from 3rd party browsers. That is I think the biggest achievement for us because before people always go to a third party browser and thought they are using Baidu App. Now we have the chance to show the users that Baidu App offers better, safer and more powerful search and feed capability on our app and the retention rate has been very satisfactory. And meanwhile, we also used this opportunity to promote our smart display Xiaodu Zaijia and that has also been very well received and that a lot of users placed order because of this marketing campaign and the device will be shipped to the user in the coming weeks. Operator, next question please. Thank you so much. And our next question comes from the line of Eddie Leung from Merrill Lynch. Eddie, your line is now open. Good morning. Hey, Robin, I think you mentioned about omni marketing in your opening remark. As we add more advertising opportunities into our platform, including mini programs and soft video on top of search and newsfeed, What's your vision on how your advertisers using these different solutions going forward? And specifically, how would we prepare our advertising system as well as the sales team for the increasingly complex solution on our platform? Thank you. Yes, Eddie, that's a great question. As you mentioned, we now have a lot of marketing channels for our advertisers including newsfeed, search, app opening ads, Juping or those offline outdoor screens at public areas. We are promoting OCPX so that advertisers just need to tell us what they care about and how do we measure success, we are able to use computer programs to distribute their app messages. So this has been a very good trend for us because it can leverage our technological capabilities and improve conversion for our advertisers. We devote a very meaningful amount of engineering resources to constantly improve the performance of this kind of ad deliveries. Thank you. Thank you so much. And our next question comes from the line of Hwanna Lin from 86 Research. Hwanna, you may now ask your question. Hi, good morning, Robin, Herman and Sharon. Congratulations on a solid set of results and thanks for taking my questions. So I would like to ask about the healthcare advertisement. I'm wondering whether the cleanup and process of redesigning medical search have been finalized. And in terms of the adjustment of structured content, has such adjustment already been fully applied to all relevant verticals? Does it mean if so, does it mean that we should expect revenue to restart improve your monetization restart improving from here? Thank you. Hi, Chen. Good morning. Yeah. We have done so far, we have done 2 fields, basically gynecology and also the male field. And we're in the process of expanding that into other medical fields. I think we've seen the initial phase to be very successful better than our original I think the initial is better than our expectation. And as you guys saw, very well Thank you so much. And our next question comes from the line of Gregory Zhao from Barclays. Your line is now open. Hi, Robin, hi, Sharon. Thanks for taking my question. So my question is about the content cost. So Iqiyi's earnings call, the management just talked about their expectation about long video content cost to gradually come down in 2019. So here I want to check the content cost, the trend of your news feed and short video content cost and how shall we think about the content cost trend in 2019? Hi, Greg. Yes. For iQIYI, as Gong Yig mentioned on the call, environment with content costs toward the end of last year started to come down. It's going to take probably a or so for it to attribute less than the P and L because it takes time for the content to produce. For us, in addition to the long form, I think this year, content cost is usually 2 types. 1 is on the non video type, which we've been building in Cinex during last year as a result of building up the content for Baidu App. But you saw the Baidu App content increase pretty significant last year. And this year, I think with regards to that piece, you'll see some incremental increases, but not too significant. But on the other hand, this year, our focus is in addition to continue to grow by jahao, we're looking at also different type of video apps, one is flash video, which means that the videos are usually at the moment and the other one is short video, which is probably a few minutes to find that kind of product. So that one, we're going to have to continue to ramp up the content for these apps in order for to have more content and to grow more users. So you should see us ramping that up. Thank you so much. And our next question comes from the line of Grace Chen from Morgan Stanley. Grace, your line is now open. Hi, thank you. Thank you for taking my question. My question is about Baidu's short video investments. We can see that Baidu's short video apps have achieved very good growth. So it would be great if the management can share with us your view about the short video competitor landscape as we see more and more short video apps entering the market. And how Baidu positions itself in this market to differentiate from others? And also can you share the size of investments in the short videos to have an understanding impact on your financials? Thank you very much. Guiz, let me answer the first part of your question. I think video is a secular trend that basically impact everyone, the whole world, the whole Internet is moving from text to images to video. So it's a very large sector. There are lots of things can be done and I think the innovation has just begun. For Baidu, our competitive advantage is that we have the best matching capability between users and the content. So we can distribute the content more efficiently than everyone else, be it search, news feed or short video feed. I think we will continue to invest in the marketing and distribution of our short video apps. But in the meantime, I think the or at the end of day, the user experience we can deliver or the matching and distribution capability we have is better than everyone else. That's why we should be able to make the money that we deserve. Yes, Grace. And with regards to the financial model, you're going to probably see these video apps following the same trajectory that we saw for Baidu App. So in the beginning, we're going to have to acquire content for these apps. And then more importantly, we're going to have to spend promotions to grow the users. And how much we spend on promotion really depends the daily analysis that we have on the ROIs, whether each of the inventory spots is giving that good ROI. If we do see it, then we're going to continue to double down. And if the ROIs are not good, users are not staying on the apps after they come in, then with that inventory channel, then we'll cut off. So it's a really function of if we can grow the users and grow user stickiness. Thank you. And next question comes from the line of James Lee from Mizuho Securities. James, your line is now open. Yes. Thanks for taking my question. And Herman, maybe you can help us maybe crystallize the operating income for the core business in 1Q a little bit here. Given the fact that you talk about your priorities are more on organic growth of apps and also you're going to focus on promotional costs. Should we think about maybe your total cost base, How should we think about that relative to 4Q versus 1Q? So for example, in 1Q 2018, your total cost base stepped down about 13% sequentially. Is that the right way to think about it? Thanks. Hi, James. Yes, good question on 1Q. So we gave you revenues. With regards to cost of sales and OpEx, the way I would look at it is that in the first quarter, as Robin mentioned, we made a huge promotion around Chinese New Year and a couple of days ago on the Yuanxiao, which is the ending of the Chinese New Year, we also did another promotion on television. So we have to consider that cost. So the way I would look at it is when you look at cost of sales plus OpEx, we could be increasing on a sequential basis upwards to maybe RMB1 1,000,000,000. Where we reside from that RMB0 1,000,000,000 to RMB1 1,000,000,000 will really depend on several factors, which I think we're going to have to wait for a few more weeks to be more precise, because there's some activities that we have to see for it to pan out. But I would say on a sequential basis, you'll probably see a growth, It could be up to $1,000,000,000 it could be less than that. Thank you so much. And our next question So just wondering for Q4 2018, what's the revenue contribution from mobile newsfeed? We noted very robust growth in the total online advertising customers, while pricing side is relatively suppressed. Are we seeing any pricing pressure potentially as a result of the overall industry supply and demand dynamic changes there? Thank you. Hi, Karen. So the way we look at our business today, we don't look at news feed versus search. We actually look at the ROI of the app and itself. So Robin talked about how customers are buying omni marketing, what package they're looking at now on the search results, they're looking at the same time if the advertising can also work so that when the users just saw the advertising in the feed and then they did a search and natural search and they actually see this. By being able to see that same ad in different ways, it's actually more effective. So the customers are looking at it that way. It's very hard for us to then be able to decouple how to allocate the revenue between search and between feed because there's value for that synergy. So the way we actually look at it is how do we grow organic growth versus inorganic growth. With regards to pricing, we're seeing pricing come down, but I don't think it's because of competitive reasons. Our pricing, because we're performance based, it's really a function of the industry mix that we have. If you look at Baidu's products, whether it's dynamic ads, whether it's CPX, whether it's action oriented ads and so forth, we're industry leading. We're really the best in class. So I think it's not a function of whether we're seeing better effectiveness elsewhere. It's a function of, for example, if you have more gaming revenues, for example, you're going to see higher CPMs. If you have other type, for example, e commerce compared to gaming, you're just going to see less CPMs. So a lot of it has to do with the industry mix. And that's why I mentioned on the call where the industries are increasing, where the industry sectors are decreasing for Q4, so you guys can get a flavor of how that's impacting our business. Thank you so much. And your next question comes from the line of Piyush Mubayi from Goldman Sachs. Piyush, your line is now open. Thank you for taking my question. I have a quick question, Robin Herman, if you could just take us through what you think the organic growth rates are for the overall core business, excluding the near term corrections that we're seeing because of either macro factors or the adjustments that you're making in specific verticals. So I'm referring to the 21% on our core growth rate guidance that you've given for the Q1 and what you think it would be on a normalized basis? Thank you. Yes. I think we have entered a new stage for Chinese Internet, the landscape, the population or the penetration dividend has gone. The growth the future growth will be driven by technological innovation at least for Baidu. For our core business both search and feed, we continue to see a lot of room to grow and to improve. On the search side, I mentioned OCP ads that will automate ad delivering and we Feng Ming also mentioned that we are moving 3rd party websites to hosted ads where we have more control on the content and have better visibility on the conversion. We are developing the Smart Mini Programs that will enable advertisers to deliver better user experiences. And we are also seeing strong demand for video content not only from the feed front, but also from the search front, we see video search growing at a very fast pace and we need to develop the technologies that can better understand video content so that users will be able to find relevant video content more easily. Thank you so much. And your next question comes from the Thomas Chong from Credit Suisse. Thomas, your line is now open. Hi, good morning. Thanks management for taking my questions. I have a big picture about the ad advertising market. Can management comment about how we see the advertising sentiment changing before and after the Chinese New Year, if any? And how should we think about the trend for our key advertising categories as we head into 2019? And then a quick follow-up on Duos and Apollo. Should we expect 20 20 is the year that we should expect a meaningful ramp up in terms of monetization for these 2 business? Thank you. Well, I think it's a little bit early to talk about the advertising market trend after Chinese New Year because Chinese New Year is not one day, It's like a month long holiday. Typically after the Latin festival, advertisers gradually come back. So it's only a couple of days, it's too early for us to tell whether it's different from 2018. And because of the heavy investment we are making this year, we do expect that monetization in 20 20 will pick up. Yes. Let me add a little bit on that. I think, first of all, when you mentioned how our advertising sentiment is before and after Chinese New Year, I think that's probably more relevant in terms of brand advertising business. As you know, in brand advertising business, you usually have the master contract after the Chinese New Year. So our business for the majority is based on performance based, as I mentioned earlier. So that way it really depends on our technology, our ability to actually get marketing customers ROI. So I think one point on that. Secondly, you mentioned how do you see the marketing customer sectors growing. As I mentioned earlier, in 2018, the Q4, the sectors that were strong for us, education, e commerce and retail in general, service, we think that that's going to continue to be strong sectors for us. With regards to gaming, real estate, financial and so forth, I think it's a function of policy changes, as I mentioned earlier. So if the policies are loosening up, if there are more advertisers coming from these sectors and so forth, we believe we're going to get our share because our performance base, I think, is best in class. Thank you. Next is Han Jin Kim from Deutsche Bank. Your line is now open. Great. Thank you for the chance to ask a question. I understand your strategic initiatives and so forth, but one thing that I was interested was the latest kind of investments into H5 gaming. And when I look at your by the main app, I see kind of mini program games being more prominently featured there than before. So I wanted to understand the strategic importance of gaming to you guys and how you think about positioning the interface to focus a little bit more on gaming recently. So just some explanations around that would be great. Thank you. Yes. The Baidu app is a super app with daily active user of well more than 100,000,000 and that provides users a chance to just to spare some time and relax, sometimes just to play a few games based on the mini program structure. We started to roll out the mini games during the Chinese New Year Festival and we obviously saw very good results. Tens of millions of users play business game and from day 1, it has been a profitable win for us. Thank you. Next question comes from the line of Wendy Huang from Macquarie. Wendy, your line is open. Thank you. Can you clarify what's Cloud revenue implied in your Q1 guidance? And also what's your differentiated strategy in targeting the new cloud customers? And also on the literature side, in your prepared remarks, you mentioned you see great potential there. But on the other hand, we noticed that iQIYI is also doing quite well with their literature product recently. So how do you see the synergies as where is the competition actually between you 2 in the literature space? Thank you. Forward guidance on a particular step of our business being legacy business in hold. So I'll be able to talk more about our cloud as we exit Q1. With regards to how we differentiate, as Robin mentioned on his prepared remarks talking about DDI solution, really our competitive strength app that's powering solution. And see whether we can provide AI solutions to the enterprise. First, the literature, our strength is in search. The search happens. So while iQIYI is building their library of content and so forth and growing, I think they're probably going to be more related to investment. Whereas for Baidu, we're looking at the total WAN Internet in China. So there would be a portion of our overall content strategy. We couple that with the amount of traffic that we have already in search. I think we that Iqiyi has in content and the content that I do have access to and then plus the search traffic that we have to give an overall industry strategy. We are now approaching the end of the conference call. Thank you for your participation in today's conference. You may now disconnect.