Earnings Call: Q3 2018

Oct 31, 2018

Earnings release

Hello, and thank you for standing by for Baidu's Third Quarter 2018 Earnings Conference Call. At this time, Today's conference is being recorded and if you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Ms. Sharon Ng, Baidu's Director of Investor Relations. Thank you. Hello, everyone, and welcome to Baidu's Q3 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. F. Baidu does not undertake any obligation to update any forward looking statement except as required under applicable law. Our earnings press release and this call include discussions 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 will also be available on the Baidu IR website. I will now turn the call over to our CEO, Robin. Hello, everybody, and thank you for joining our call today. We delivered solid revenue growth in the Q3, driven by AI powered search, continued robust growth from Baidu Feed as well as strong and increasingly significant growth from new AI businesses such as ABC Cloud. Baidu has made incredible progress on strengthening our mobile foundation over the past 2 years with our efforts to improve the user experience for Baidu's family of apps with AI, such as search, maps, mobile keyboard and launching feed with AI powered algorithms. QuestMobile, a 3rd party research firm, recently cited Baidu's family of apps together generate 980,000,000 monthly active users, including Baidu, in the top 3 of MAUs in China in its autumn report on mobile Internet. Our own internal data actually indicates that the MAUs of the Baidu Family app reached 990,000,000 in September and growing 28% year over year, excluding overlaps as many users have multiple touch points with us. With massive reach on mobile in hand, we are well positioned for the shift in Internet usage in China. App developers are placing greater reliance on super apps to direct user traffic and provide native app integration, bypassing the need for new users to download their apps. Internet connectivity on home devices is seeing accelerated growth this year and the auto industry is beginning to experiment with connected Internet via voice assistance. These trends play to Baidu's strengths and put us in a sweet spot for new Internet gateways. Our use of AI to strengthen Baidu's core business is also generating new use cases and opening Baidu up to exciting new markets, such as AI as a Service. We are seeing AI extend beyond the Internet into everyday life and this presents Baidu with large new market opportunities in the 2C, 2B and 2 gs markets. Let's begin Q3 with search and feed. In core search, TOP1 now compresses over 40% of our search queries, and Zero Search is becoming ever more popular with daily queries in the tens of 1,000,000, doubling from last year. This AI powered feature not only differentiates Baidu's search experience, but also enable us to introduce features like Smart Answer for smart screens. For example, a user of Huawei, Oppo or Vivo smartphone with Baidu AI may take a photo of a plant or a pet, and the phone screen will return on a card with information about the species in the photo. Smart Answers can also identify and provide information about celebrities, points of interest and so forth. IDC recently reported that smartphone shipments in China declined 11% year over year in the first half of this year, making it more difficult for less frequent apps to continue traffic acquisition from app preinstallations. Mini programs have become a new source of traffic without requiring merchants to have native apps. We launched the invite only phase of our Smart Mini program in July and monthly active users wrapped up quickly, bypassing surpassing 100,000,000 in September. We have received favorable feedback from users, developers and our network partners, and program registration was opened to the public at the end of September. We are on track to open source our Smart Mini program, which enable apps to join our host union and run smart mini programs. Our Smart Mini Program open approach by design makes the information in Baidu's Smart Mini Program Network searchable. Moving on to Baidu App. In September, average daily active users of Baidu App reached 151,000,000, up 19% year over year and time spent on feed grew 68% year over year. In the 2 short years that we launched Baidu Feed, we have added 276 MCNs and over 1,500,000 content publishers, up from 1,000,000 2 quarters ago. Tuning Engine Search plus Feed offering, coupled with unmatched AI powered recommendation technology, deep insight of our massive user base make Baidu App a compelling offering. A twin engine app not only provides better user experience, but also generates better unit economics. Excluding iQIYI, Baidu distributes over 2,000,000,000 video views per day. The strong demand for video content on Baidu's platform places us in a good position to offer more variety of video feed. We are replicating the Baidu app formula to develop video only feed apps. For example, we began experimenting with Haokan this year, and in September Haokan reached a DAU of 12,000,000. According to QuestMobile, Haokan was the fastest growing app from June to September among all mobile apps in China with a DAU of more than 5,000,000. On monetization, the strong traffic growth of our feed as well as video traffic are contributing to Baidu's revenue growth. In addition, our industry leading use of AI to power ad monetization such as dynamic ads, mobile action ads and optimize the cost per click, continues to position Baidu as a compelling source of performance based traffic. Baidu is pushing the boundary of innovation with cutting edge technologies to better meet our customers' needs, for example, using blockchain and visual search to combat fake goods and generate more revenue for our customers. Herry crabs from the Yangtze Lake in Jiangsu province are a prized 4 season delicacy in China. This year, we worked with hairy crab fisheries from the Yangtze Lake to set up a smart mini program to enable consumers to verify product authenticity via the Baidu app. Blockchain ensures a tag or a card uniqueness, while visual search provides a matching reading to ensure that the product was not switched. The combination of the 2 technologies have significant commercial value for merchants of big ticket items sold online. Baidu has made significant strides to proactively improve the quality of healthcare information, and consumers are increasingly dependent on Baidu for healthcare related services. We are developing a search solution to organize healthcare information into a structured format, so that users can more easily compare services across healthcare providers. Our solution will verify the identity of licensed medical institutions and use AI to monitor the information quality on the landing pages. Ads will link to such structured data instead of third party websites. Although these efforts to improve user experience may impact our revenue in the near term, as users get used to the new information structure, we believe they will ultimately lead to better traffic conversion for healthcare providers. Turning to DuerOS, Baidu's voice assistant. DuerOS continues to gain traction as we focus on user experience, such as improving natural language processing, which enables endless conversation. And building out fewer OSGEO's ecosystem. We are seeing people across China from Tier 1 to lower tier cities, from toddlers to senior citizens, use DuerOS powered devices to perform voice search, watch videos, listen to music, make video calls and control IoT devices in their homes. In September, DuerOS installed base reached 141,000,000, up from 100,000,000 in July, and voice queries on DuerOS continued its rapid rise, surpassing 800,000,000 times, which roughly doubled every quarter for the past 7 quarters. DuerOS Scales Store now has a community of over 24,000 developers and over 800 scales available, such as education, cooking and game genres, such as VIP kit, cooking recipes and digital path, respectively. DuerOS partners continue to expand from TVs to smart speakers to smart watches. In addition to homes, DuerOS also expanding its partnership in the IOV environment. For example, UCAR, better known as Shenzhou Youche, a car rental and ride hailing service provider, will be installing DuerOS on its fleet of new vehicles. Turning to Apollo, we are gaining valuable experience in commercial operations with Level 4 vehicles. The Xiamen Jinlong produced Apollo, Apollo based fully autonomous minibus is currently running in over 10 locations throughout China. We are learning that end customers are requesting to purchase wholesale annual maintenance plans and that the passengers are willing to pay for rides on the Apollo mini buses. For example, Guangzhou Sunflower Garden charges RMB20 a ride for adults and RMB10 for children. Smart City utilizing AI to improve urban living present Baidu is a great opportunity to serve the 2 gs market and bring Baidu AI to everyday lives. The municipality of Changsha has just signed with us to be the 1st municipality in China to test robot taxi and our connected road solution powered by Apollo. We are also in discussions with Beijing and Shanghai, whose population is almost equivalent of 3 New York Cities to provide AI powered city management solutions to help with urban safety, traffic congestion and public parking. Leveraging Baidu Brain, Baidu Cloud and autonomous driving technologies to improve urban leading. Turning to ABC Cloud. Baidu Cloud continued to grow robustly and recently recognized by 3rd party market research firm, Analysis, as the fastest growing and among the top 3 most technologically advanced cloud service providers in China. At Baidu ABC Cloud Summit in Shanghai last month, we announced new enterprise solutions with advanced AI capabilities to serve the transportation, education and financial services industries. Our AI as a service approach aims to help customers increase productivity and improve operational efficiency. For example, a top Chinese telco chose Baidu's ABC Cloud with AI as a service to power their call center. Baidu Cloud was chosen for our differentiated AI technology in speech recognition, natural language processing and knowledge graph, enabling endless conversation and sparing customers the tedious experience of IVR menus. Using Baidu's enterprise AI solution, the call center saw dramatic improvement in customer service quality, with average call time falling 70% and Baidu's AI solution handling millions of calls per month. At Baidu World in Beijing tomorrow, we will share many more case studies illustrating Baidu's enterprise AI solutions now serving over 1 dozen industries. Turning to iQIYI, in the Q3, iQIYI added a record 13,500,000 subscribers, reaching a total of 80,700,000 subscribers, driven by top quality content and blockbuster originals like Story of Yanxi Palace. IQIYI's continued strength number 1 across reach and engagement metrics in the Q3 according to 3rd party market research firms. Also during the quarter, iQIYI co launched a hybrid OTT box with Beijing Gehua CATV network, featuring DuerOS voice assistant, video search and children's mode. The hybrid OTT box enables users to access both IT video and cable TV from 1 box and industry first. Partnerships such as this help DuerOS and iQIYI extend presence into the fast growing OTT market and exemplify the unique value proposition that Baidu and iQIYI can offer, working in tandem. 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 Q3 2018 call. Before I begin the Q3 review, let me make a few notes. All monetary amounts used in my discussion are in renminbi unless stated otherwise. Starting on January 1, we adopted ASC 606, a new revenue accounting standard that nets value added tax from revenue and cost of revenue line items. To increase We completed the spin off of Dushao Man, Baidu's Financial Services during the Q3, which was the last of the announced spin offs. For today's discussion on Baidu Core, we are providing revenue and operating income numbers excluding the spin off businesses to give more visibility on the performance of Baidu Core without the spin offs and allow for easier comparison for future quarters. Please refer to our press release for full information on Baidu Core Financials. With that, let's turn to Q3. We had a solid quarter in Q3. Total revenues reached RMB28.2 billion, up 27% year over year. Non GAAP operating income was RMB 5,700,000,000, up 2% year over year. Non GAAP net income to Baidu was RMB 6,700,000,000, up 47% year over year and non GAAP net margin was 24%. Revenue from Baidu Core, excluding spin off revenues, were RMB20.6 billion, up 27% year over year. Non GAAP operating profit of Baidu Core, excluding spin offs, was RMB7.7 billion, up 12% year over year, and non GAAP operating margin was 37% compared to 42% from the previous year. As we previously highlighted, our plan this year is to increase investment in content purchase for BJH accounts and increase marketing expenditures for the Baidu app. This helps Baidu achieve several benefits. Number 1, shifting Baidu's search to our own properties improve the user experience for search and saves on tech. 2, fee is a complementary business for search. The 2 together drives better unit economics for marketing purposes. And 3, with more and more apps relying on super apps to generate traffic, strengthening the Baidu app as we roll out Baidu Smart Mini program will increase our ad monetization potential. Although content and marketing costs are expensed as incurred, we believe we'll be able to recover more dollars from these investments to further increase the scale of Baidu App. We are already seeing time spent on fee in the Baidu App growing 68% year over year in September. But to ensure good budget management, we have placed a sophisticated tracking system in place to keep a close watch on our marketing investments. As Robin elaborated, we are making strong progress in our strategy to solidify our mobile foundation in Lian AI, and we stay committed to Baidu's future. As of September 30, 2018, Baidu has returned 487,000,000 dollars to our shareholders $487,000,000 to our shareholders under the 2018 share repurchase program announced in June. Let me now go through the rest of the quarter financial highlights. Online marketing revenues were RMB22.5 billion, up 18% year over year. We had approximately 522,000 online marketing customers, up 7% year over year and revenue per customer was approximately RMB43,000 100, up 12% year over year. Other revenues were RMB 5,700,000,000, up 80% year over year, mainly resulting from the robust growth in IT membership and other businesses. Excluding spin off revenue of 1 dollars in the Q3, revenue from Baidu Core was RMB20.6 billion, up 27% year over year. Revenue from iQIYI reached RMB6.9 billion, up 48% year over year. Cost of sales, excluding stock compensation, was RMB14.2 billion, up 36% year over year. Content cost was up 73% year over year to RMB6.7 billion, mainly due to increased content purchases by iQIYI and to a much lesser extent from Baijiahao or Bijah accounts, Baidu's fee content network. Other operating expenses, excluding stock compensation, was RMB8.4 billion, up 35% year over year, mainly due to the increase in channel and promotional marketing of Baidu apps and other apps and the increase in R and D personnel related costs. Other income in the 3rd quarter was RMB4.4 billion, down 6% year over year. Non GAAP operating income was RMB5.7 billion, up 2% year over year. As mentioned, excluding spin offs, non GAAP operating income from Baidu Core was RMB7.7 billion, up 12% year over year and non GAAP operating margin for Baidu Core was 37%. Net income attributable to Baidu in the 3rd quarter was RMB 12,400,000,000. Diluted earnings per ADS was RMB 35. Non GAAP net income attributable to Baidu was RMB6.7 billion, up 47% year over year and non GAAP diluted earnings per ADS was RMB19. The year over year increase was partially due to the change in non controlling interest as losses from Iqiu were not allocable to preferred shares prior to the IPO. Non GAAP net income attributed by Du Quora was RMB8.4 billion, up 57% year over year. Adjusted EBITDA in the 3rd quarter reached RMB6.8 billion and EBITDA margin reached 24%. Adjusted EBITDA for Baidu Core reached 9,000,000,000 and adjusted EBITDA margin reached 42%. As of September 30, 2018, cash and short term investments was RMB 100 and RMB4.5 billion, free cash flow was RMB9.1 billion, total headcount as of September 30, 2018 was approximately 40,700, up 2% year over year. Excluding iQI, cash and short term investments was RMB94.8 billion, free cash flow to Baidu Core was RMB8.3 billion and total headcount for Baidu Core was approximately 32,300, down 3% year over year. Turning to 4th quarter guidance. Toward the latter half of Q3, iQIYI's brand advertising and Baidu's brand advertising to a lesser extent began to fear the impact of recent policy changes related to certain verticals such as gaming, financial services and so forth, as well as general uncertainties from a potential trade war. We expect this trend to continue into the Q4. In addition, our proactive effort to improve the structure of healthcare information may impact our ad revenues in the near future. Based on the above, we expect total revenues to be between RMB25.48 billion RMB26.72 billion, representing a 15% to 20% increase year over year. Excluding spin off revenue of RMB1 1,000,000,000 for the Q4 of last year, this guidance assumes Baidu's 4th quarter revenues will grow between 20% to 26% year over year. These forecasts are current and preliminary view and are subject to change. I will now turn the call over to the operator. Thank you. Operator, we're ready for our first question. The question and answer session of this conference call will start in a moment. And the first question is from the line of Alicia Yap from Citigroup. Hi, good morning, Robin, Herman and Sharon. Thanks for taking my questions. I wanted to ask if management could share with us your view when comparing the newsfeed ad versus the search advertising. In light of these softening advertising environment or potentially more ad budget cut, which one is actually likely to be more resilient and which one is more vulnerable to the budget cut? In addition to iQIYI, which on previous call noted it was impacted by the online game sector, wonder how big the exposure of Baidu Mobile newsfeed ad is related to the online games? And is management obviously expecting the economic conditions are indeed softening. Any measure that Baidu plans to do to mitigate the downturn or do you think Baidu will be more immune to any slowdown? Thank you. Hi, Alicia. This is Robin. Your question regarding to the resilience on feed ad and search ad, I would say first that both search and feed ad are primarily performance ads, which means that advertisers always find that the performance on our platform is better or at least worthwhile for them to spend money on. I think the brand ad, the display ad impacted more due to macro conditions. And having said that, I would say that the feed is probably less resilient than search because a percentage of the feed app could be brand related. But on the other hand, as you know that the feed is growing faster than search. And new regulations on games did have an impact on our revenue. We have a number of advertisers from the game industry. They are affected significantly. But game is not a very large industry for Baidu's advertising base. So we to a certain extent affected, but it's not a top five industry for us. Yes. To give more color, Alicia, for I think going into Q4, there's been various policies in China. So game would probably be one of the industries that would be impacted, but there's several other ones we could be impacted, for example, from real estate and interior design, some from lifestyles, online commerce and so forth, some on financial service. So it's not any particular industry that's impacting us heavily for the Baidu core business. It's just each of these industry file is spread around several industries. A little bit here, a little bit added together did cause us to probably grow not as fast as we would like in Q4. But we also need to remember that when comparing sorry, we also need to remember that when we're comparing for Q4 that last year over a RMB1 1,000,000,000 was related to the spin off. So we got to have a lower base to recognize that. Sure. Can I just follow-up on next year? Are we expecting further slowdown that we should probably take more into consideration for now, expecting next year will be slower? Alicia, we don't really give forward looking guidance for next year. It's very hard for us to predict the macro economy over the next year. What we have seen is that for the next couple of quarters, the current macro environment is like this. Okay. Thank you, Robin. Thank you, Herman. Thank you. Thank you. And the next question that we have is from the line of Eddie Leung from Merrill Lynch. Your line is now open. Good morning. Just a question on traffic and competition. I think Robin you mentioned that it's getting less efficient to acquire traffic via the mobile channel, given your slowing down in handset growth. But it seems like recently you have seen a couple of your competitors probably since early of this year pretty aggressively buying traffic I mean competitors direct competitors on the search side. So just wondering how you see the competitive landscape going? Because a couple of third party sources showing, it seems like they are quite a bit of MAU, although you're still much smaller than you guys. Just you're wondering how you think about these phenomenon? Thanks. Yes, sure, Eddie. I think there are 2 types of companies. One is platform companies like us. We own Super Apps. We will continue to aggressively invest in channel to do all kinds of pricing installation or marketing to further solidify our position as the super app or as the platform. But for most other companies who had a native app or had a website, but hoping to establish their native app as the gateway to their services. It's getting tougher because consumers just don't want to install that many apps on their phones and the number of mobile Internet users are not growing that fast. So we expect most of the companies will increasingly rely on large platforms like us to get traffic through either Baijiaha or Smart Mini Programs. I think they will shift their developing resources from native apps to smart mini programs and Baijiahao infrastructure. The advantage Baidu has is that we are very strong in AI technology. We have DNA of using technology to distribute content and services. So our core competence is really to find the most efficient way to distribute content and services and to deliver the best conversion for our advertisers and merchants. As you mentioned, we do have competition in this area. There are other Internet platforms that are trying to attract more users, more traffic, more advertisers. And again our strength is technology. We have unmatched capability to distribute content services more efficiently and drive conversion better than anyone else. Got it. Thank you. Thank you. The next question is from the line of Gregory Zhao from Barclays. Your line is now open. Hi, Robin, Herman and Sharon. Thanks for taking my question. So my first question is still about your advertising. So can you share with us the top ranking like top 5 or top 3 advertising categories in this quarter and how is that compared to the last quarter and last year? And based on your KA account and SME advertising account, so which account is seeing more impact from the regulation on the policy impact? And a quick follow-up is in the e commerce category, your advertising saw very strong growth last year. So we still have less than 2 weeks before this year's single stick promotion. So can you share us some early like the colors or metrics for this year's single stay? Thank you. Yes. So Craig, I'll take the first one. We actually are because of the size of our advertising, we actually span widely among all the industries. Our top industry in advertising will include things like medical, would include retail as a general term, both e commerce and other type of retail businesses would include education, especially those post college. These are just some of the top advertising industries we have. Yes. I think that the regulatory environment change affects both the KeyA account and SME. It's more industry specific than size specific. And regarding to the e commerce market or the upcoming Double 11 shopping festival, we do expect solid growth again. And I think both the e commerce platforms as well as merchants and retailers are really active in promoting their products during this period and we stand to benefit from the advertising dollars they spend on our platform. Thank you very much. Thank you. The next question is from the line of Grace Chen from Morgan Stanley. Your line is now open. Hi, thank you. Thank you for taking my question. Could you share with us your strategy for 2019? For this year, we made it clear that we focused more on top line growth in share gains. So we invest more aggressively in content and marketing expenses. And the results we're seeing very good revenue growth through margin are trending down in the recent quarters. How about your strategy for the next year, specifically your plan for content spending, marketing expenses? And what's the implication on margin for the next year? Thank you. I think our strategy for next year will pretty much stay the same. We will continue to invest for growth and we will continue to solidify our mobile foundation and lead in the AI. New businesses such as DuerOS, Apollo all requires continued investment. And the fast growth of video and other apps will also require marketing dollars to continue to fulfill their momentum. Herman? Yes. Just as Robin said, I think with regards to margins, I think we explained it pretty well in the prepared remarks. There's really 2 issues here. Number 1 is the revenue guidance that we have in Q4 is growing less than the Q3 rate. So that's going to impact our margin a little bit. For example, in Q4, you see our Baidu core business, it's probably down around RMB800 1,000,000 on a quarter over quarter basis, if you assume midpoint of Q4. And then on top of that, you should expect that our cost of sales plus operating OpEx, we've been growing at over RMB1 1,000,000,000 per quarter. So that's going to dampen our margin. So that's one reason for dampening our margin. The other to consider is the fact that we are heavily investing in the app world to create super apps. So in the past couple of quarters, we've been focusing on Baidu App. Now that we have seen a pattern of success, we are also going into different video apps, Haokan being the one that we tried in Q3 and you can see how DAU have a significant growth in Q3 and the fact that Quest Mobile sector has the fastest growing app with DAU over 5,000,000. So we're going to continue to invest in that. And because of that particular financial model, you're not going to be able to match expenses with revenue because expenses occurs during the quarter, while the revenue is over several quarters after the investment as users come back. So that is changing. So we have to factor in that as we look at 2019 margins. But all in all, we do have a tracking system that tells us over the 2 years how the users generate revenue and when we see positive only when we see a positive ROI do we double down and increase the marketing spending for that particular app. Hope that helps. Yes. Thank you. Thank you. The next question we have is from the line of Hwan Lin from 86 Research. Your line is now open. Hi, good morning, Robin, Herman and Sharon. Thanks for taking my questions. My first question is related to our business outlook. On the outlook, you mainly referred to regulations impacting certain industries. I'm wondering, have you seen the early sign of macro slowdown impacting advertisers spending sentiment for the next few quarters? Also if I got it correctly, you also mentioned the restructure and cleanup of medical ads. Could you elaborate the reasons and details for such changes? And whether there is risk for further adjustment of your screening process of advertisers in any other industries down the road? My second question is related to DURAZ. Given that DURAZ has already accumulated very high install base queries and partners, could you please remind us on the monetization roadmap planned for Duo Ads? In particular, when shall we expect Duo Ads to contribute meaningful revenue? Thank you. Okay. On the possible massive slowdown, right now, what we have seen is that the confidence level from the private sector, from the entrepreneurs are not that high. But the actual impact is not obvious yet. If, let's say, during the next couple of months, the company level changes, things will change to the positive direction, but we don't know exactly what's going to happen. On the medical ad, the cleanup is an ongoing process. It's like many other industries and it's like fighting with fake news on the Internet. It's a battle between the platform and those merchants who want to find on Euroways to take advantage of our platform. So this is the ongoing part. And in particular, for this quarter and next few quarters, we are basically redesigning the sponsored search system so that starting from the medical industry, we will not allow advertisers to direct the link to their own website. We will host all the information on the Baidu servers in a more structured format so that we have better control on what they can say and what kind of information they present to the consumers. We believe this will be beneficial to the end users and eventually drive better conversion for the health care providers. DuerOS monetization, as I mentioned, it's been growing very, very rapidly. We expect the growth to continue in 2019 and meaningful for monetization should start from 2020. Thank you, Robin. Very helpful. Thank you. Next question is from the line of Piyush Mubayi from Goldman Sachs. Your line is now open. Robin, there have been rumors recently of a potential international search engine entering China. I wonder whether you would be able to talk through the advantages that you think you have in the face of a company like that. And in the same vein, we're looking at several Chinese companies exploring opportunities internationally. I know you've done those. I looked at those in the past. And I wondered if you could take us through how your experience has been and relate that to the potential entry of a search engine into the China market? That's my first question. And second and a very short question, from a macro slowdown perspective, which period in your operating history does this remind you of at this stage? Okay. Yes. If you look at the overall Chinese Internet landscape, you probably cannot find any single U. S.-based company that has meaningful market share here. Well, that's for reasons. First, China is a very large market. And secondly, it's a very fast growing, fast changing market. Things changes every day and you need to make new decisions every day. I don't think a non China based company has that kind of competency to really compete in this market, be it search or e commerce or social or whatever you can think of. You just cannot find anything that's meaningful in this market. And secondly, on our international expansion or the international expansion for Chinese Companies. Both us and many other Chinese companies are expanding overseas and we are learning how to do business outside of China. What we have learned is that it's very difficult to get into a new market where there's a status quo, there's an existing dominant player and you play the same rule. That's very difficult. What we have seen is that if we can come up some kind of new products, we have a chance to win over the users there and make money. Take Japan as an example. We own the largest input message engine called Synergy in Japan and a lot of people, a lot of Japanese consumers are familiar with this brand. And Synergy is also profitable and growing. And it's also related to our core technology in terms of search and AI, we enable users to do voice input, which requires good speech recognition technology in Japanese. So going forward, we are continuing to find new opportunities, new markets, new products to try to gain traction in international markets. On the macro, people will probably most likely think of 2,008 when the financial crisis happened. But this time, I think it's different. I think right now, it's about the more about the traditional industry, more about end of the world's confidence and that can change very quickly. I don't think the fundamental fabric of the Chinese economy is in question. So I think longer term, I'm still very optimistic about the future of Baidu and the future of China. Thank you, Robin. Thank you. Next question is from the line of Natalie Wu from CICC. Robin, Herman and Sharon. Just following up with the lending pay change related with merchant account for healthcare industry. Robin, you mentioned that it will bring along some short term pain in your prepared remarks. Just wondering, is it only related with mobile side and core search product, right? And also how's that going to impact for your 2 stuff brand medical sector. I'm just wondering if 2 stuff brand medical sector. I'm just wondering is there any follow-up for other top verticals for your advertisers? And if yes, can you give us some color about your plan for that? Thank you. Okay. Herman will address the Q4 impact. Let me elaborate on the landing page strategy change more. If you look at other type of services on the Internet, it's actually quite natural for platforms to use structured data instead of directing consumers to a third party website. It's just the nature of the search or due to the legacy of the search, people naturally think that they do a search here, they find all kinds of different links and they click one of the links, they are brought to a different website where search engines have no control. This is not the best user experience in the mobile age. That's why in the beginning of the prepared remarks, I said 40% of our top one results now can satisfy users' needs. Many of the top one results are actually structured data. It's not a website linked to 3rd party content. If you look at in the online travel industry, if you try to find information about a particular hotel, you typically do not go to go from an online agency like Ctrip and to the website of hotels official website, you actually find structured data about users' comments and their price and all sorts of things on the Ctrip app or on the Ctrip website. And for restaurant, right, if you go to, again, Ping or Meituan, you also find all kinds of related information in the structured matter. You are not directed to the official website of that restaurant. And healthcare should be similar. I think in the future, we should provide structured data for healthcare providers so that consumers have an easier way to navigate around all kinds of information and make their choices. This is a transition transition always affects revenue, but longer term, I think this is a win win win situation. The platform has better control on the content. Users have a more transparent way to find information and services they're interested in and healthcare providers get better conversion. Herman? Natalie, your question is what's the impact of Q4? Let me try to answer it this way. So when you look at our guidance, excluding spin off for Q4 right now, it's between 20% to 26% and the midpoint is 23%, right? When you look at Q3, for example, our actual result was 27%. So assuming we're trying to reach 27%, we're 44% off, 4% slower using our midpoint versus Q3. So when you look at last year Q4, we're talking about RMB21 1,000,000,000. So you're talking about maybe a little bit RMB800 1,000,000 light, right? So I can't break out for you that 800,000,000, how much is medical, how much is all the other industry. What I can tell you is that, that RMB800 1,000,000 lighter than what we would have thought we could do for Q4, assuming it's equivalent to the growth rate of Q3, is that it will be spread out between this healthcare initiative. And we think that it's probably going to be impacted from some of the industry that we're already seeing, such as games, such as real estate interior decoration, such as lifestyle, such as financial services and maybe a few others. So you can see, CNY800 1,000,000 is not significant of our overall revenues when you have so many different industries and so many different policies impacting us a little bit here, a little bit there. Hard to really quantify at this point how much of each of these factors will be. We just think that overall it should be around that range. Got it. Thank you. Any follow-up plan for copying this kind of a change to other top verticals? Eventually, yes. Right now, we are focusing on the care industry right now. Got it. Thank you very much. But do recognize this is a tiny issue, Natalie, because as Robin mentioned, structured data has better conversion. The risk of structured data is initially when you change the format of that information, users have to get used to it. So in the front end, you might lose some revenue or have some revenue impact because users are looking at this and they're not familiar with better quality information. But as they get used to it in the back end, they actually would have higher conversion rate. So it's a timing issue. So as we look at this medical, maybe a few other quarters down the line when we see better conversion rates and so forth, we might go into other industry. But net net, it doesn't mean that whenever we go into an industry, it's going to have a significant impact on revenues. We'll have to see. And presenters, we have the next question from the line of Jerry Liu from UBS. Your line is now open. Hi, thank you. Yes, I just have 2 quick questions. The first one is, when we look at the macro impact, the regulatory impact in the Q4, are we assuming on a month to month basis some further deterioration from August to September to October? What do we see for the next few months? And then the second question is on Smart Mini Programs. When should we expect some ramp in monetization? And when can we see that tailwind for the search and feed business? Thank you. Okay. Jerry, I'll answer the first one. With regards to how we do a forecast for Q4, we try to gather the information from our sales team and also from our channel. So it's not so much of month to month, but overall as Robin mentioned, part of it is policy that we have seen. So that would be on a historical trend. Another is really general sentiment of our customers, of our channels and so forth. So the totality of that assessment goes into our Q4. So I would say based on the information that we have right now, this is what we think the impact will be for Q4. On the Smart Mini program, you can think of it as the mobile version of websites for native apps. Itself, it's not a VIN model. It's not a new BIMS model. It's an enhancement to the existing Baidu Mobile ecosystem. People get better experiences when they are navigating around the mini program. But having said that, I think this will help enhance monetization because and improve conversion because users have better experiences when they land on Smart Mini Program and the user accounts typically connected through the Baidu account and the Mini Programs user account and things like payment or seamless experience. And even better that because our strength in technology, we can find the best match between the user query or the user intent and the Smart Mini Programs offerings. So we have the best matching and Smart Mini Programs ensure better user experience and better conversion. So longer term, this will enhance our monetization capability, but itself is not a new business model. Yes. Just to add a little bit, Jerry, the assumption behind this is that a lot of the search links today, they're HTML5, right? So someone searching direct traffic to the other sites, whereas what Robin just described is it allows you to have a closed loop transaction within the app. So if you're in Baidu App, you search for something, you go to a mini program, you can actually transact, do all the things you want to do with that particular mini program and you come back to the Baidu App. So it's still within the whole Baidu app ecosystem. You're not really leaving to another site. So that user experience, it's seamless, it allows you to do transaction. It also allows the users to go back and forth in different areas of Baidu App. Got it. Thanks. Thank you. And the next question is from the line of Ms. Karen Chan from Jefferies. Your line is now open. Thank you, Robin, Herman and Sharon. So my first question is, quarter over quarter growth of 20% on average in 2018, wondering how we should think about going into 2019 given the current visibility? And also just a follow-up question on care management size, the approximate revenue contribution from healthcare currently compared to a year ago? Thank you very much. Hi, Darren. Yes. So the question was on fee revenue. When you look at our fee revenue, what we disclosed last quarter and this quarter is a little bit more is that, historically, last quarter, fee plus all the AI businesses were less than 20%. So this quarter, we see it up a few more percentages now making up over 20 some percent fee plus the AI businesses. Yes. And then with regards to healthcare revenues and so forth, we have about 30% of our advertising revenue from medical and it's been declining steadily over the last few quarters. Thank you. Thank you. Ladies and gentlemen, we are now approaching the end of the conference call.