Earnings Call: Q3 2017

Oct 27, 2017

Earnings release

Hello, and thank you for standing by for Baidu's Third Quarter 2017 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, Sharon Ng, Baidu's Director of Investor Relations. Hello, everyone, and welcome to Baidu's 3rd quarter 2017 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. Today, you will hear from Robin Li, Baidu's Chief Executive Officer Qi Lu, Baidu's Chief Operating Officer and Herman Yu, Baidu's Chief Financial Officer. After their prepared remarks, Robin, Chi and Herman will answer your questions. Before we continue, please note that the discussion today contains 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 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 measure 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 made available on Baidu's IR website. I will now turn the call over to Baidu's CEO, Robin Li. Hello, everybody, and thank you for joining today's call. We delivered solid financial results and made meaningful progress this quarter on Baidu's strategic pillars, strengthening our mobile foundation and leading in AI. On strengthening our mobile foundation, Baidu's core business continue to build momentum from our twin engine mobile search and feed. In mobile search, Baidu is making good progress in product innovation that enables native access to rich content, such as video and content within top mobile apps. Our strategy to leverage Baidu's leading AI technology to improve the algorithmic recommendation of our feed is showing measurable results in improving user experience. In September, the DAU over MAU of our flagship app, mobile Baidu, increased by 2 percentage points year over year. Daily user time spent on mobile Baidu grew 15% sequentially in the 3rd quarter, the fastest among apps in China with DAUs over 100,000,000, according to QuestMobile. We will continue to work on increasing the user scale and improving user stickiness of mobile Baidu by leveraging Baidu's leading AI technology coupled with user experience data based on the large array of Baidu apps that they use. This strategy will allow us to continuously improve user experience on mobile Baidu, which ultimately is the key to growing market share. The natural result of our fees increasing user scale and user time spent is better monetization. For the Q3, feed revenue on an annualized basis exceeded US1 1,000,000,000 This is an impressive milestone as our feed product was officially launched about a year ago. Turning to Baidu's 2nd strategic pillar, leading in AI. We are making measurable progress across our initiatives on Apollo, DuerOS, ABC Cloud and FSG. In September, we launched Apollo 1.5, an upgrade of Baidu's open source autonomous driving platform and created a multibillion dollar fund to support the growth of Apollo's ecosystem. Last week, we announced a major milestone, forming strategic cooperation with 2 leading automotive companies in China, VAIC Group and Kinglong, which will help make Apollo an industry standard. On DuerOS, Baidu's voice assist operating system for smart devices, we are growing industry partners and increasing adoption through the expansion of DuerOS capabilities. For example, in the Q3, we launched DuerOS Intelligent Device Platform and DuerOS BOSS platform for 3rd party developers and launched our DuerOS global partner plan. ABC Cloud released new products and is expanding its industry solutions to enterprise customers across more sectors. Cloud is a key component of our voice assist and autonomous driving OS strategy, and we are leveraging this foundation to extend cloud services to targeted industries as well as internally to companies such as iQIYI. FSRG is making impressive progress leveraging Baidu AI and big data to access credit risk and customize financial products based on our user profile. At Baidu, we serve 100 of millions of Chinese users every day through an array of over 20 products and apps. We place a high priority on continuously improving user experience and the trustworthiness of information and services from our platform. At the end of September, we introduced a screening system to limit the distribution of fake news through search results. This system utilized probably China's largest centralized database to combat fake news. Employing Baidu AI and the network support of over 600 organizations to identify and verify false information and rumors. In addition, as a follow-up to the additional customer verification requirements that we added last year to improve ad quality, we are taking proactive steps to better gather, verify and write information from the healthcare and medical industry based on source, credibility, quality and relevance. We are enlisting the participation of the healthcare community, including top health and medical organizations and industry experts to work with Baidu toward a long term solution for better health information. On November 16, we will be holding our 12th annual Baidu World event in Beijing. We look forward to showcasing Baidu's AI product and hope to see many of you there. And last but not least, I'd like to extend a warm welcome to Herman Yu, who joined us a little over a month ago as Baidu's new CFO. I trust many of you know Herman from his last 10 years as CFO, first at SINA, then at Weibo. Herman joined Baidu at an opportune time as we are transforming into an AI first company by strengthening our mobile foundation while developing technology platforms for 2 potentially huge markets, 1 assisted smart devices and autonomous driving. Together with the hiring of Qi, our COO, at the beginning of the year and the reorganization of management over the last year, we believe these changes are increasing the depth and breadth of Baidu's leadership and allowing us to be more focused on what we do best as a technology company. I'll now turn the call over to Qi to go through our business progress. Thank you, Robin. On our core business front, we remain focused on improving the user experience through product innovation for search, feed, mobile Baidu and iQIYI. On search, AI is the underlying technology foundation that enables us to systematically drive product innovation in a number of areas. A big priority for us is to improve user experience so that the overall search experience is much more mobile native. For example, our TOP 1 initiative enables a faster and more immediate one and a dance search experience. It intelligently optimizes the top search result and has gained strong traction. In Q3, top home results has grown to cover over 20% of search page views. By applying intelligent filtering and advanced presentation technologies, the percentage of search landing pages that provide a good mobile native experience has now exceeded 90%, which was 40% at the beginning of 2017. At the same time, we continue to expand search's coverage of richer content, especially video, and the percentage of video content within search result pages continue to grow. Through deep link and share link, Baidu Search now can access high quality content embedded within top apps. AI also enabled voice and image as search input modalities, and we are making sustainable progress in providing our users with a more natural and overall more compelling search experience. On feed, AI technology plays an even more potent role in product and user experience and our content ecosystem. 1st, we continue to strengthen the core foundation of FEE, which is a very high scale personalized information recommendation. Our core algorithms are iterating and improving at a rapid pace, leveraging Baidu's strength in AI algorithmic capabilities and Baidu's data assets, such as search data. As a result, the core product metrics such as click through rates and user satisfactions continued a healthy pace of improvement. At the same time, we significantly enriched the content in our feed product. Video and short videos consumptions on the Baidu platform has grown very rapidly as well as other key areas such as user generated content, question and answers, new verticals such as sports and highly engaging content areas such as animations and the literature. Baijiahao is the publishing platform of our content ecosystem and we made strides in enabling more quality publishers and better content productions on our platform over the past quarter. The ratio of clicked on content to displayed headlines has grown at a very healthy upward trend, doubling from 1 year ago. Overall, the user base and the usage of feed product continue to grow at a strong pace. Mobile Baidu is flagship product for strengthening our mobile foundation and has the strong twin engine of search and the feed to propel its growth. We continue to make good progress across a number of areas such as the synergies between search and the feed, the speed and the richness of the user interactions such as voice output, content social sharing, mobile bandwidth discount offerings, we believe mobile Baidu has the foundation and what it takes to build out the industry's leading mobile information content container and the corresponding ecosystem over time. We will share more about our product vision and the future plans about mobile Baidu at the upcoming Baidu World Conference. On the customer front, with our twin engine of search and feed, we're able to deliver a more comprehensive, richer and diversified offering to fulfill customer needs. For example, we helped Chrysler Jeep with a unified campaign to expand their presence in China across search, brand zone and the feed. The campaign was highly successful, exceeding the expectations for lead scales and ROI. With Baidu's robust ad platform and technology and data capabilities, we were able to provide Chrysler Jeep with targeted high quality leads that resulted in better conversion rates compared with leads from other ad platforms. We continue to use AI and big data to systematically drive improvements on our advertising platform across a number of areas. For example, this past quarter, we launched dynamic ads in feed, which tightly integrates consumer shopping data with our feed ads. Dynamic ads in feed complement our dynamic ads in search. Dynamic ads shows user products that are most relevant to them based on past actions, such as browsing or adding products in a checkout basket. Customers share their data with us, which dramatically improves the relevancy and the level of targeting, resulting in a step function increase in ROI and higher ad spend with Baidu. We're working closely with a select number of customers in e commerce and the travel verticals, including JD and Ctrip. JD has been a long standing customer using dynamic ads across search and the feed. Since the adoption of dynamic ads in feed in early July, JD saw ROI from dynamic ads in feed more than doubled, and JD meaningfully increased overall ad spend with Baidu. We plan to roll out dynamic ads to even more customers, such as those in auto, travel and the real estate sectors. Turning now to iQiyi. IQiyi has continued to drive the secular growth of video and entertainment. In Q3, iQIYI again showcased its industry leadership with the Rap of China, China's 1st rap reality show. The Rap of China was self produced by iQIYI and garnered over 2,700,000,000 views in the 1st season. Over the years, iQIYI has invested to grow its library of self produced content and has established itself as an IT platform with premium content. This strategy has differentiated iQIYI from its peers and underpins iQIYI's leadership and the growth. In August, according to iQIYIYIYI's PC and mobile app daily active users reached 78,000,000 160,000,000, respectively, again reaching new highs. Monthly time spent in August grew strongly with users spending 461,000,000,000 minutes on the mobile app, 29.5% higher than August last year. In addition, we are leveraging the operating synergy between Baidu and iQIYI through content integration and data cooperation. For example, iQIYI is an exclusive content partner for Baidu Feed. IQIYI's video feed uses Baidu's platform and the back end technologies. Next, I will talk about our progress on our AI enabled new businesses. Our Apollo and our autonomous vehicle business, we made strong progress in Q3. Last month, we released Apollo 1.5, which opens up a number of important services, such as HD Map and simulation engine, which will be key to drive developer productivity. Also, a number of key capabilities such as map engine, perception, planning and control and LiDAR reference implementation. Apollo 1.5 has been very positively received by our partners and developers. Overall in Q3, the number of Apollo ecosystem partners has grown from 54 to 74, with more OEMs, component and solution providers as well as start ups joining the Apollo ecosystem. We reached strategic agreements with OEMs such as BAIC Group Kinglong, one of China's largest bus manufacturers and Cherry and the Jianghuai for commercial L3 productions in 2018 for buses and 2019 for cars, as well as L4 production by 2021. This month, we began a strategic collaboration with Sochi, one of China's leading car hailing platforms, and we will work with Sochi to integrate Apollo technology and DuerOS across their fleet. We have also began putting Apollo Funds' capital to work and have made investments in areas including hardware, software and transportation services. On DuerOS, our conversational AI platform, we continue to improve our technology and platform and strengthen our leadership position in this important emerging ecosystem because voice and natural language interface will become the future universal gateway to the digital world. According to IDC, 27% of homes and 51% of cars will be voice powered by 2020. In Q3, we launched our DuerOS intelligent device platform and DuerOS bot platform for 3rd party developers and our DuerOS global partner plan. We continue to expand the DuerOS market footprint to power more third party devices, including select models of TCL and Lenovo Television, Vivo and Xiaomi smartphones, Guo An television set top boxes and the connected cars dashboard in select models of the 1st automotive works, Hyundai, carry cars and many more. On ABC, our AI and big data powered cloud business, we held our 2017 ABC Summit last month and launched a number of new products such as the ABC Stack, which integrates a broad suite of d AI technologies and 9 open source big data technologies and the powerful infrastructure services. Another key offering is ABC all in one hardware, which can be deployed in either hybrid or private cloud, enabling our enterprise customers to implement end to end applications with 1 stop services. We continue to expand vertical solutions across manufacturing, media, marketing, financial services, energy and logistics and secure key customers such as Shanghai Pudong Development Bank. On FSG, our AI enabled financial services business, we continue to have healthy growth in our core offering of wealth management and consumer credit. At the same time, we are making strides in building out a broad suite of fintech capabilities and a comprehensive fintech platform with over 300 financial institutions sharing data and plug into our platform. Since last quarter, we have put in motion a plan to provide the FSG business with an operating structure that allows FSG to operate more independently, enable stronger long term growth. At this point, we do not have a specific timetable and a structure to share. Overall, we are pleased with our operating focus and the business progress. We look forward to continuing our momentum and sharing our progress with you as we continue to move forward. With that, I will turn the call over to Herman to go through the financials. Thanks, Chi. Hello, everyone. It's a great pleasure to join Baidu and participate on my first earnings call. Baidu is an enviable tech company. Its search business delivers an operating margin of approximately 50%, and it invests another 30% or so on its revenues back to invest another 30% or so of its revenues back to strengthen its mobile and be in AI. In the Q3, Baidu shared its delivery business as part of a year long strategy to free up company resources and management attention to focus on AI and projects that have strong synergy. In addition to investing in mobile, in areas such as mobile Baidu and IT, we are also putting significant efforts to develop AI based platforms in the voice assistant and autonomous driving markets. Like the rest of the world, smartphone sales in China over the last few years have been flattish, and we are seeing heavy investments moving towards smart devices for homes and autonomous driving. These trends present a unique opportunity for Baidu to offer operating systems for smart devices and autonomous driving vehicles. On a global scale, our peers in the voice assist and autonomous driving spaces are formidable. However, Baidu has been developing AI technology for the last 5 to 6 years, including voice assist in Chinese. Over the past year, we have been very focused on developing a strong network of partnerships with local companies in areas such as home electronics and auto manufacturers to adopt our technologies. We believe this is what it takes for an AI platform player to be successful in China. A big part of Baidu's investments today is in the new market opportunity presented by AI that will not have material revenues in the near future. We believe our investments to become a platform player for smart devices and autonomous driving will bear significant return in the future as this strategy plays to Baidu's core strength. Thus, we must exercise due care to avoid assigning a negative value to Baidu's enviable AI investments based on a simple PD multiple or deviation thereof. Let's now turn to our financials. All monetary amounts are in renminbi unless stated otherwise. For the Q3, Baidu's total revenues reached $23,500,000,000 representing a 29% increase from the same period last year. Online marketing services revenue were $21,100,000,000 representing an increase of 22% year over year. Online marketing customers reached approximately 480,000 this quarter, down 7% year over year and up 3% quarter over quarter as our business steadily recovers. Revenue per online marketing customer was RMB4900, showing a healthy increase of 31% year over year and 9% quarter over quarter. 2 key drivers of our online marketing services revenue growth were feed and IT, which we are quite excited about. From ad offering standpoint, Qi talked about the power of Baidu's dynamic ad leveraging customer data to increase ad efficiency and effectiveness. In addition, we experimented with AI ads. For example, Mercedes Benz ran an ad using Baidu's facial recognition technology to help potential customers select the most suitable Mercedes car model. Baidu's other AI ad formats include using artificial reality in the campaign where a mobile user can take a selfie and insert him or herself in the ad. The rich user experience that these AI brand ads create will generate new opportunities for Baidu to grow our display ads, especially as we venture into the feed business. This is another example that Baidu's focus on AI is creating synergy across our platforms, from mobile to voice assist to autonomous driving, 3 platforms weave together through Baidu's leading AI. Turning to other service revenue. Other service revenue was $3,400,000,000 up 92% year over year, primarily driven by FSG and IT membership. Let me quickly go over Q3 cost of revenue components. Traffic acquisition costs were $2,500,000,000 decreasing 5% year over year and representing 10.5% of our total revenues compared to 14.2% in the corresponding period last year. Bandwidth costs were RMB1.4 billion, increasing 16% year over year, representing 6.1% of total revenues compared to 6.8% last year. Depreciation costs were RMB 852 1,000,000 I'm sorry, RMB 852 1,000,000, increasing 6% year over year, representing 3.6% of total revenues compared to 4.4% last year. Operational costs were RMB1.4 billion, increasing 19% year over year, representing 5.9% of total revenues compared to 6.3% last year. Content costs were $3,900,000,000 increasing 70 6% year over year, representing 16.6 percent of total revenues compared to 12.1% last year. The year over year increase in content costs was mainly due to IT's acquiring more hot series content. Turning to Q3 operating expenses. SG and A expenses were RMB 3,700,000,000, increasing 4% year over year. R and D expenses were RMB 3,200,000,000, increasing 24% year over year. The increase in R and D expenses were primarily due to the growth of R and D personnel costs. Share based compensation, which were allocated to related operating expenses and expense line items, were RMB 841,000,000 compared to RMB 418,000,000 last year. The year over year increase was mainly due to additional share grants to retain talent and stay competitive in the high-tech industry. Operating profit was RMB4.7 billion, representing a 69% increase from the corresponding period in 2016. Non GAAP operating profit reached RMB5.5 billion, increasing 73% year over year. Other income net was RMB4.2 billion, which mainly consists of investment gains recognized as a result of the disposal of Baidu deliveries. Income tax expense was RMB1.1 billion for the Q3. The effective tax rate for the Q3 was 12% compared to 25% in the same period last year. The decrease in the effective tax rate was primarily due to a non taxable investment gain arising from the disposal of Baidu deliveries. Net income attributable to Baidu for the Q3 was RMB 7,900,000,000, increasing 156% year over year. Diluted earnings per ADS was RMB24. Non GAAP net income attributable to Baidu was RMB9.1 billion, increasing 100 and 63% year over year. Non GAAP diluted EPS was RMB26. Adjusted EBITDA reached RMB6.8 billion, increasing 62% year over year. As of September 30, the company had cash, cash equivalents and short term investments of RMB108.1 billion. Net operating cash flow and capital expenditure for the 3rd quarter were RMB9.7 billion and RMB1.3 billion, respectively. Total headcount at the end of the 3rd quarter was approximately 39,800, representing a decrease of 6% from the end of last quarter. Turning to Q4 2017 guidance. We currently expect total revenues for the 4th quarter to be between CNY22.23 billion and CNY23.41 billion, representing a year over year growth rate of 22% to 29%. Based on our Q3 revenue run rate, Baidu deliveries would have generated approximately RMB400 1,000,000 reference. As mentioned above, we disposed of Baidu deliveries in August and will no longer have such revenue stream going forward. Excluding disposed businesses such as mobile games and Baidu deliveries, we expect our revenue in the quarter to grow between 28% to 34%. Also built into our Q4 guidance is the assumption that iQIYI revenues will drop roughly RMB700 1,000,000 sequentially, primarily as a result of limited hot series being featured in China in the recent period. Over the past month, television stations in China have been broadcasting programs reaching the 19th party congressional meetings and related content in China. To show our respect, iQIYI adopted a self restriction to not show hot series during this time. IQIYI has been a robust driver of Baidu's revenue growth historically. Year to date, it has been consistently growing over 50% year over year each quarter. We expect this to slow down to less than 40% in the Q4. Thus excluding revenues from iQIYI and Disposed businesses, we are expecting Baidu revenues in the 4th quarter to grow between 25% to 34% year over year, and this compares to 26% year over year in the 3rd quarter. In other words, we continue to see healthy growth for our core business. This reflects our current and preliminary view and is subject to change. I will now open the call to questions. Thank you. You. Our first question today comes from the line of Chi Chung from HSBC. Please ask your question. Good morning. Thanks very much for taking my question. I wanted to ask you about Mobile Baidu. And I think I guess my first question is maybe a house keeping question. Did you guys disclose how many DAUs, you have for News Feed currently? And secondly, I was wondering if you can sort of give us a little bit more commentary about engagement. And secondly, I was wondering if you can sort of give us a little bit more commentary about engagement. I was wondering if you can sort of give us a little bit more commentary about engagement. And I'm wondering sort of how many times people are opening up the mobile Baidu app per day? And then sort of related to that, the number one news app in China has about 70 to 80 minutes of use per day. I'm wondering if that is a figure that you think Mobile Baidu can reach at some point in the future. Thank you. So let me take a first color and Robin and Helen, feel free to chat me. For mobile Baidu, as we talked in the past, we view this is the flagship product for the mobile era information content containers. And Baidu is in a unique position to drive sustained improvement of growth on user base, DAU and user engagement such as time spent. The reason the fundamental reason is we have the twin engine of Feed and the search because Feed through the fundamental power of AI technology and more data will be able to understand the users' interest, users' needs in an increasing degree. The product will really know you and provide services that are timely and of high value to you. And at the same time, we always know for our industry's last 20 almost 20 years, search is a fundamental need for users. We always have information, content, service, knowledge needs to access those search. So by harnessing the synergy between these two fundamental trends and by those fundamental strengths, we believe we will be able to drive sustained improvements of product through better, more content in our ecosystem, overall better experience, richer modality and most importantly, the toy engine of personalized recommendation and search. Baidu is in a unique position more than any other players in China market to sustainably drive a high paced improvement on user base growth and engagement. Yes, this is Robin. Let me add that we basically view mobile Baidu as one product including the search feature and the feed feature and feed is highly, highly personalized. We distribute feed content based on a lot of understandings about our users, especially the user queries that represent their true interest. So we basically view feed and search as 2 major features of this one product and we are able to provide much more personalized information distribution channel for our users and we believe this still has a lot of potential to go. Our recommendation would continue to evolve on almost a daily basis. Users who use our feed product will be able to see progress going forward. Constantly, I think there are still a lot of room for improvement on this front. Our next question today comes from the line of Alicia Yap from Citigroup. Please ask your question. Hi, good morning, Robin, Doctor. Lu, Herman, Sharon. Thanks for taking my call. Congratulations to Herman on your new role. So my question is related to the traffic acquisition cost versus the SG and A spend. So it seems like the TAC continued to decline on the year over year basis. So could we assume that this is mainly driven by overall slower growth in the search specific traffic from the union members, while the organic mobile Baidu apps traffic improving as the user engagement in news feed are these leading to more organic search traffic in return? And then it seems that the step up in SG and A this quarter is mainly related to more aggressive promotions in mobile Baidu installation. So any color for the Q4 as well as the TAC for the Q4 and some color into the 2018? Thank you. Okay. Great. Hi, Alicia. So two items. First on the TAC, I think the fact that you mentioned, I think that it's correct. Part of the reason is the fact that part of our TAC is also coming from mobile Baidu and that we're seeing good growth with overall mobile Baidu. I think secondly, on the SG and A, within the SG and A expense this quarter, we had bad debt allowances for Baidu deliveries and also for normally that would amount to over RMB522 1,000,000. So that was part of the reason for the increase. So when you back that out, actually looking at marketing expenses is not as significant. Our next question today comes from the line of Gregory Zhao from Barclays. Please ask your question. Hello Robin, hello Doctor. Lu, Herman and Sharon. Thanks for taking my question and congratulations to Herman on the new role. So I have 2 very quick questions. The first one is about our core search revenue. So if we compare our segment revenue growth trend with our Q4 total revenue growth guidance, So our news feed is very strong. So IG is very strong. So if we backfill to get the search revenue growth, so the search revenue for Q4 looks a little bit soft. So do you have any special reason behind? That's my first question. The second question is about our newsfeed product. So in terms of revenue, the newsfeed is growing very fast and based on Robin's disclosure, it's catching up with our competitors such as Weibo and Jinre Totou. So in terms of our content generation capability and the user engagement, so Weibo's social features and Jinyu Dotiao strategy such as video, they have some I think they have some special selling point, right, compared to the Weibo, compared to junior total, what's our position into the market and what's our strategy to compete with such kind of competitors? Thank you. Rename, I'll answer your first question. Yes. Hi, Gregory. So on your question of search, whether it's soft in the 4th quarter, as I mentioned earlier, the guidance that we're giving when you're looking at Baidu core business that excludes our spin off business in iQIYI, we're actually seeing the range that we give you, most of it is above Q3. So I don't actually see that. I think your point is, can we break out the difference between feed and search? And as Robin mentioned earlier, when we look at, for example, the traffic in mobile Baidu, we actually don't see a user and try to break out the time they're spending on search versus on free. We see it as just one product and as long as the user is getting good experience in that product and we're generating revenue whether it's in search or whether it's in the feed, we see that as kind of one container and how do you optimize the time spent also monetization for that one app. So I wouldn't break that out separately. The way I would just see it is that a lot of properties including mobile Baidu where you have the different experiences in one. And when we, for example, do marketing and so forth, we look at it as how much can we get from this particular app versus how much can we get it from different functionality of that particular app. Yes. So let me answer the second question and also add to what Herman just said. We fundamentally view mobile Baidu, the combination of search and feed as one unified product. And we have what it takes to build the mobile era leading containers and a starting point for our users. With regard to competition specifically against you mentioned the Genuerto China Weibo, there are several fronts. We believe Baidu has a strong strength in our capability to compete extremely well and grow our business at a very, very rapid pace. 1st is the fundamental strength of algorithm and data. If you look across our competitors, Baidu has the strongest AI algorithmic capability and data because our search data encompass so much user signals about the user interest and the user needs. That's number 1. Number 2, on growing the richness of content offering, we mentioned videos. Our video product not only videos displayed within feeds and also we have a separate video app, they're all growing at a very, very rapid pace. You will see us investing more and growing more innovations in enriching the content in our offerings. And 3rd front is monetization. Our ad platform has fundamental strengths. We have vast scales of customer base. We have rich algorithmic capabilities and data sets leveraging from our search advertising synergies. So if you combine all these three key factors, we have very high confidence that our products will compete extremely well and will grow very strongly going forward. Yes. And Greg, let me ask another point just to hone on the point of looking at mobile Baidu search and feed together. So as you know, one of the things in trying to get app adoption is channel cost, right? So because we have 2 functionality, when we look at channel cost, we look at it very closely on the ROI, we can get a bang for it. But so that means that you're looking at the lifetime cycle lifetime value of that user once you acquire versus the cost. And because we have 2 functionalities, we look at the functionalities together and what we can get from the user as we're acquiring this. And you can see our peers who basically is reinforcing our strategy by now trying to add search. The thing is it takes many, many years to actually build that quality, but it just shows that our business model works that you're probably going to be able to get more monetization if you have fee and if you have a very good search engine. Yes. I'll add that in terms of content generation, we view the whole Baidu platform as one content ecosystem, which includes the search content in web format, the iQIYI video, which is mostly in the long form video, but we cut that into shorter clips and distribute it through our feed product. We also have TiaBa, ZheDAO, We have lots of content generation tools and apps and we continue to integrate all this kind of content into the mobile Baidu platform. And mobile Baidu, both in terms of search and have unmatched distribution capabilities for content. Therefore, we will be able to build a stronger and stronger content ecosystem. Our next question today comes from the line of Alex Yao from JPMorgan. Please ask your question. Hi, good morning guys. Thank you for taking my question and congratulations to Herman's new role. Wish you all the best in the new role. I'd like to follow-up with the 4Q revenue guidance. I think, Herman, you mentioned the core search could be growing at 26 percent on year over year basis for 4Q. And then if my math is correct, that still suggests that the core search is going to decline somewhere between 2% to 4% q onq from 3Q to 4Q. And then, Ji also mentioned that AI has improved click through rates, which supposedly should improve the RPM. Does it mean we are seeing some weakness in the traffic for the core search? Thank you. I'll stop here. Yes, Alex. Thanks. Actually, the math I'm looking at is converse to what you just said. When you look at our sequential growth from Q3 to Q4, taking on iQIYI, taking out the businesses that we have spun off from. Actually, looking at if you look at the midpoint, we're talking about maybe a sequential growth of 2%. So it's up 2%. This is very consistent with, for example, past year. When you look at 2015, using the same math, taking out businesses that we have spun off sequentially, you're also looking at around 2%. So I'm looking at this number pretty consistently because it's an up quarter. I think that when you put in the calculation, it might be a little bit you might get a different result. Next question? Our next question today comes from the line of Thomas Chong from Credit Suisse. Please ask your question. Hi, thanks management for taking my questions and congratulations Herman on the new role. I have a couple of quick questions regarding the cloud and the financial services. On cloud, how should we ambition the business scale over the next couple of years? And how we think we can outpace our peers in terms of customers and revenue? And my second question is about the financial services. Can management provide some more guidance about the timing for profitability, the business breakdown, etcetera, that would be great? Or if not, can we actually rank different business in descending order under the others' revenue? Thank you. So let me take both questions. First, with regard to our ABC Cloud business, the fundamental position differentiation is ABC, which is AI Technology plus Big Data, which is the data assets Baidu's ecosystem is able to harness and then overlay on top of a very strong set of cloud infrastructures and services. With that in mind, our focus is to leverage ABC, but deliver industry vertical specific end to end solutions with big customers first and then horizontalize and then build industry specific ecosystems to grow our business. And we've been showing strong tractions in that approach. As I mentioned in the prepared remarks, we are continuing to expand the industry verticals that we're covering and deepen the penetration in each of the verticals. In terms of the pace of growth, we are growing at a very rapid pace and on the pace essentially to double on an annual basis or more than double on an annual basis. So even though it starts from small numbers, it will become material over the coming 2 to 3 years. So that's for our cloud business. And with regard to FSG, so you mentioned the profitability. This is indeed something that teams internally has been working on super hard. At this point, we are not prepared to share the specific timing, but we are on a very healthy path for this business to become quickly to become profitable. Our next question today comes from the line of Wan Lin from 86 Research. Please ask your question. Hi, good morning Robin, Doctor. Lu, Herman and Sharon. Thanks for taking my questions and congratulations Herman for the new role. My first question on iQiyi. I noticed that your competitor have recently announced aggressive content purchase in the production plan. I'm wondering how should we foresee the competitive landscape for video content going forward? And what is the trend for video price for the next year? And secondly, on the core business, as you have been adopting AI and innovative products for core business, I'm wondering what is the long term potential for monetization improvement such as lifting click through rate and CPC and in particular click through rate and the CPC for search has been quite stable. I'm wondering whether you have seen new opportunities to improve search monetization due to the AI adoption going forward? Thank you. Let me take both questions. So first, with regard to iQIYI business and the content production and content cost question that I mentioned. First of all, let me reemphasize iQIYI, their core competency. The team has done tremendous job over the years building up a core competency, a combination of content procurement and content self productions. And this is very, very important. If you look at the past track record, there is open public statistic available for you to look at. IQIYI has been consistently procuring top ranked video content. And also, iQIYI was able to show a strong track record of self producing content. Overall, this is the key focus areas for the IG management team. So continue to strengthen the leadership positions in content procurement and the content self production. That's a very important part. The other part I would like to emphasize is iQIYI also has been driving a lot of product innovations, particularly the personalized video feed recommendation product. It has been growing very, very strongly and that product also has a lot of monetization potentials. So overall, we continue to have a strong confidence in iQIYI's as a leading video entertainment platform for China, continue to drive strong growth on user engagement and monetization. The second, with regard to using AI to improve the monetization for our core business, It's a great question. That's indeed one area we have strong potentials, again, through a combination of AI technology and data. In AI technology, I believe in the last quarter, I mentioned that we've been using deep learning, using the better models to be able to harness more signals from our conversion data and to improve the conversion rate for ad product. As we all know, search advertising economics is fundamentally conversion economics. As long as we keep improving conversions, we will be able to keep improving our ability to monetize. That's number 1. Number 2 is the direction headed by our dynamic ads, which is our partners, our advertising partners are increasingly willing to share their structured data, their product catalogs and their user data. By a combination of their structured data, by a combination of their user data, again, we will be able to use AI technology to harness more converging signals, more user interest. So those are core dimensions that would pay off in both search advertising and in feed monetization. And 3rd area is as mobile Baidu continues to grow through the twin engine of feed and search, we will be able to draw more budgets, more diversified ad budget, not just focused on performance ads, but increasingly brand advertising and rich media advertising. Through AI technology, we will also be able to offer new interactions, as Honu mentioned, through face recognition through AI. These are all key avenues for us to increase systematically increase the yield of our ad platform over time, again, through the combination of AI and data assets. C. Wei:] Jen, let me add a few points on top of that. When we talk about dynamic assets that Qi just talked about and data structure with partners, customers and so forth, let me just give you a couple of examples. For example, when you look at Baidu search, you can now search, for example, going to a destination. And by working with Ctrip, we'll get a display, for example, you want to go to Beijing to Shanghai when you search that, we'll actually get a display of the data coming from Ctrip. And then on our website, even though behind is powered by a Ctrip system, on our website, you'll actually get the display, You'll actually be able to go directly to Ctrip's platform and be able to consummate that transaction. But everything will be done from a user interface perspective on Baidu's platform. So the very fact that you're able to go from in the path of just kind of doing a search, now you're able to actually consummate the transaction from a user experience directly on here, having that closed loop, that's pretty powerful. Another example is if you're talking about financial services, on the one hand, we're making micro loans, having asset management. On the other hand, it's being able to get that user behavior, that technology and then be able, for example, if you want to search for a loan based on user, different user profiles, we'll actually push you different products and be able to set the credit limit based on your past behaviors. So these are kind of the steps we're going. It used to be just kind of contextual search decision for where now you're actually being able to customize the product based on different users using Baidu products. So I think that is just significant amount of improvement and that's kind of technology we're heading with our AI. And just a few more points on iQIYI. I think we need to recognize the business model of online video. If you look at in the U. S, there's basically 2 type of models. And one type of model is basically you're just distributed, right? You license content that's already well known. You pay for heavy content costs. And what you're doing is you're just trying to arbitrage and trying to deliver on your platform. That's one model and we've seen that over the last few years, people who license already very top brands and so forth and the margin is very, very low. The other type of business we're seeing and we're seeing this is the one that's more successful is companies that are able to leverage and bridge those with deep entertainment knowledge and technology. And those are the type of companies that can actually self produce content that become top hits. So at the end of the day, that business model is basically trying to be an IP powerhouse. Once you can make top hits, you can get a lot of memberships, attract a lot of people. Now when you have that scale, that base, then you also prove to the entertainment industry that you really understand entertainment. Other people will want to license their content to you. And all of a sudden, you have that inertia of both user scale and also that partnership. And by having that kind of creative innovative leverage, then you can continue to make more and more content. So this is kind of the path that we're seeing with iQIYI. So I believe in online video, it's important to understand the business model. Those that actually can create great content while being a great technology company and continue to get more and more content, whether it's through self production or through signing with a strategic partner because they trust you, they know that you understand entertainment. I think that's where iQIYI is positioned. And I think that's where our strategic advantage is. Our next question today comes from the line of Alvin Jiang from Deutsche Bank. Please ask your question. Hi, management. Thank you for taking my questions and congratulations on Herman's new role. And my first question is on AI. For AI new initiatives and we can see there are some other big Internet companies are also doing the same exploration. And do you think there will be much more competition in this field in 2 to 3 years? And what is Baidu's key strengths in AI comparing with peers? And also on financial impact, how big is the investment specifically on AI in 2017? And what's the monetization plan? Thank you. I have a follow-up. Okay. Let me take both questions and then Herman will chime in as you see. So with regard to AI competitions over the next 2 to 3 years, it is indeed the case there's a lot of industry energies and investment across our peer set of companies in AI. However, Baidu has fundamental strengths around a few key dimensions. First, as you all know, Baidu is among the very first companies to identify the importance of AI and proactively investing in AI technology and talent over many, many years ago. It takes time to develop the core competency of talent base and technology. That's number 1. Number 2, we view the best strategy and best path forward for AI commercialization is to platformize it and to build an ecosystem. And that will have scale advantage. That will have increasingly bigger and bigger first mover advantage. For example, in our self driving car, Apollo Ecosystem, we are actually the world's very first open ecosystem, and our ecosystem is growing at a very, very rapid pace. And that, over time, will have increasingly competitive barriers in advantage for Baidu. And similar story is happening on our DuerOS platform. At this point, we are clearly, by far, the best leading technology platform for conversational AI in powered devices for home, for in car navigations. Again, you will see scale advantage, 1st mover advantage in those front. So overall, Baidu's combination of early investments, the buildup of talent base and technology and the platform orientation and the ecosystem approach will enable Baidu to accelerate the pace of commercialization and increasingly build up competitive barriers in AI competition. With regard to AI investment, we've been very disciplined in running our overall internal operations. We use a very systematic approach to ensure our OpEx, particularly R and D and sales marketing, allocate proportional to the economic long term returns that we can see. For example, we've been investing heavily in mobile Baidu, in our feed, in our mobile search, because that's the area we see tremendous growth opportunity. At the same time, the AI enabled new businesses, the financial maturity will take time to come. But we have to invest at this stage proactively. The key is being very disciplined, being very efficient. Overall, we are very pleased how everything plays out. And over a period of time, Henmen, our CFO, will share more operating highlights with regard to cost and benefit for our AI initiative businesses over the coming quarters. Yes. And Alvin, let me just add a couple of points. With regards to competition, I think AI at the end of the day is just supercomputing, right? So the power of your computing, the way you actually leverage that is really the broad sets of data that you have, right? When you think about Baidu, you look at the properties that we have from maps to years years of search data and so forth, we really have the broadest set of data across the users in China. So as a result, because you know the user so well, you know across so deeply across the spectrum of data, then when you have that supercomputing power, then you can have pretty amazing results. And as we mentioned over and over that our AI is just focused on 3 platforms. It's focused on mobile. It's focused on voice assist and it's focusing on autonomous driving. And really, when you're looking at peers that in this space, you're looking at basically a lot of global players that are kind of focusing on this direction. So when you look at Baidu, I think you have to look at the computing that we're doing, which is AI, look at the inputs that we have, I think it's very different than other Internet companies because we're in the business of search for so many years and the properties that we have across China. And then separately, when we're looking at our sector that we're going into, trying to be an operating system for autonomous driving, for smart devices and so forth. It's a pretty unique position, I think. With regards to investment in AI, as I mentioned earlier, over the last year, we've been becoming more and more singular focused, right? We divested businesses that were not as synergistic as we think, for example, like Baidu Games, like Baidu Deliveries and so forth. And basically, as we're divesting from those things, we now have more capital to spend. And the great thing about Baidu's new business model is that we're leveraging AI on our traditional business as well as our new business. So as you're further developing the power of computing mix with the broad amount of data that we have, we're really able to leverage our existing business and also grow the new businesses. So the total investment is quite huge, but a lot of it is already built into our financial model. Our next question today comes from the line of Piyush Mubai from Goldman Sachs. Please ask your question. Thank you for taking my question. I have a very simple question. In the and this is addressed to Doctor. Chi. In the in which innings are we in the utilization of AI in improving search monetization according to you? Thank you. You're using a baseball analogy. So I would say probably the second inning, somewhere between the second to third inning. There's a long trajectory ahead of us. Good question. Our next question today comes from the line of Grace Chen from Morgan Stanley. Please ask your question. Hello. Hi. Thank you for taking my question. I just like to know, can you give us guidance about the various cost items such as content costs, SG and A, chat acquisition costs and R and D? I remember we talked about to double the content costs year over year, early this year. But if you look at the run rate so far, it seems like the spending is actually much lower than what we planned earlier. So can you help us understand the gap there and update us the latest guidance? Thank you. Yes. I think rather than giving line by line guidance, I think it's probably easier just looking at our operating margin. So when you look at our non GAAP operating margin for the Q3, I think it's around 24%. I think historically when you're moving from Q3 to Q4, you're going to see several points drop. And really, our operating margin at the end of the day, a big factor of that is looking at our margin and channel cost. And as I mentioned earlier, it's purely on an ROI basis. If we think that there are opportunities where we can spend and we can increase our users and we think that the lifetime value of the user is worthwhile, we'll spend a little bit more. So that's probably one of the factors that going to decide what our ultimate operating margin is. But we should expect a few points drop from 2, With regards to content costs, I think several factors in there. The biggest factor, as you probably know, is from iQIYI. So as I mentioned earlier, in the Q4, we expect iQIYI revenue to be lighter because of the environment that we're in. Naturally, when your revenue is lower, does that mean that you're not going to buy a lot of hot series content? So I think those things are related. I think that's probably the major factor for our content going into Q4. Our next question today comes from the line of Ming Zhu from UBS. Please ask your question. Thank you, management, for taking my questions. So I just have one very quick follow-up on the video side. So in last month, one of your competitors actually announced a very impressive membership number. So I remember Robin, you mentioned your membership number was around over 30,000,000 during the last earnings call. So could you maybe update us on the latest membership count you have? And can you maybe share with us your like long term target on this front? Thank you. Yes. We noticed that some of our competitors aggressively promoting their membership. They either bundle the membership of their existing product or cut it in a very big discount. So we no longer think the number of membership matters that much, but the subscription revenue as a percentage of total revenue, IT continue to lead and we have a a significant lead over the competition. Operator, we'll take the last two questions. Our next question today comes from the line of Natalie Wu from CICC. Please ask your question. Hi, good morning, management. Thanks for taking my question. My question is regarding the FedAT. As I just mentioned, we should look search and FedAT together as they are in one single app or one unified product. So does that mean FedaB is showing cannibalization effect for core search? And as you mentioned in prepared remarks, FIDAD generated the US1 $1,000,000,000 revenue on an annualized basis in the Q3. So does that mean your FIDAD revenue in the 3rd quarter reached the RMB2 1,000,000,000? And is that number net of sales rebate or on a gross basis? And does that number include IG's video feeds? And also how do you view the growth prospect of this business? Will you consider launch an individual app for that? Thank you. So let me take the first part with regard to cannibalization and then Herman can talk about the number breakdown. So the simplest is clearly no, feed ads has been too incremental to our overall advertising business. There's a few key areas to further elaborate. First, our search advertising budget and ad spend continue to remain strong and stable and growing. So that's very, very important. The second is we are increasingly adding more capabilities to offer to advertisers when they pick up feed ad product. For example, ad creatives, ad authoring tools, so that make it much easier for advertisers to use our feed product. And it's also important to point out, many of our search advertisers, they see the combination of search feeds is very, very useful and helpful for their advertising campaign because oftentimes they want to cover their target customers across different layers of consideration funnels. So there's indeed campaigns across both search and the feeds. But in terms of ad spend from ad spend perspective, it's very much incremental. And more importantly, over time, the feed products would harness more and more brand advertising budget, particularly richer advertising creatives, ad interactions. So overall, we see the combination of ad platform offering both search advertising and the feed advertising is net incremental and have very, very strong headroom and trajectory for long term and sustained growth ahead of us. Let me just add a few points to that. So I think your question just assumes that Feed and Surge are 2 separate products. But let me kind of put it in context of why we think that we should look at this as one. If we start looking at these 2 as one product, then actually strategically for Baidu, we're going to be able to differentiate our products with other people. For example, one way to look at this is the content ecosystem, right? The idea is that when you the fee is where you have a healthy ecosystem where you have a lot of bloggers that come in and actually use, for example, Baijiahao, Baijia's feed account. And what Baijia is able to do is once these users come and actually generate content on these accounts, Baidu also makes it available for people to actually search these accounts. So in other words, we really don't have a preference whether the user actually looking at the content through feed or looking at the content through search. We see it kind of as two ways to display the same amount of content. So on the one hand, we're expanding our content base using Baijiahao in addition to what the properties that Robin mentioned earlier, like Baidu knows like Baijiahao, other properties like KFI and so forth. So that's why I think the more we allow the users to leverage different ways to look at the content, we see it more as one product and that's a huge differentiated thing to other properties. Secondly, your question on the $1,000,000,000 I mean, when we say analyzed by $1,000,000,000 then what you need to do is, look at it for Q3, just divide it by the fee product that within Baidu's other products. Let me just add that for search and feed, we can look at this from 2 fronts. From the advertiser front, I think, as Qi mentioned, feed can attract a lot of brand advertisers. But on the other hand, we do share a large amount of advertisers, both on search and on feed. So I view that as a strength, we have a very large advertiser base and they can distribute their ads both on search result page and the feed page. So this is a very advantageous point for Baidu. And from the traffic point of view, I've been saying this over the past few years many, many times. Our business is very much traffic bound, not a budget bound. So the more traffic you generate, the more revenue you generate. Advertisers always want to buy more from our platform.