Earnings Call: Q2 2017

Jul 28, 2017

Earnings release

I would now like to turn the meeting over to your host for today's conference, Sharon Ng, Baidu's Director of Investor Relations. Thank you. Please go ahead. Hello, everyone, and welcome to Baidu's Q2 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 Chi Wu, Baidu's Chief Operating Officer and Jennifer Li, Baidu's Chief Financial Officer. After their prepared remarks, Robin, Qi and Jennifer will answer your questions. Before we continue, please note that the discussion today will contain forward looking statements made under the Safe Harbor provisions of the U. S. Private Securities Litigation Reform Act of 1995. Forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC, including our annual report on Form 20 F. Baidu does not undertake any obligation to update any forward looking 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.fid.com. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on Baidu's IR website. I will now turn the call over to Baidu's CEO, Robin Li. Hello, everybody, and thank you for joining today's call. We delivered solid financial performance and made some significant announcements and developments in the Q2. The arrival of the AI era creates new exciting opportunities for Baidu. With the work that we're doing with our core business in mobile and the leading AI capabilities that we are applying to autonomous driving, dual OS, AI Cloud and Financial Services, we have a broader mission than we set out to achieve 17 years ago when the company was founded. In May, we announced a new mission statement to make a complex world simpler to technology. In order to achieve our mission, we will execute on 2 strategic pillars: to strengthen our mobile foundation and to lead in AI. As we reflect on the first half of 2017, we are very pleased with our overall progress. This quarter, in strengthening our mobile foundation, we made significant improvement in our flagship mobile Baidu app with version 9.0, which makes the overall Baidu search experience more mobile native app like and is the best way to experience the dual search products of query based traditional search and speed, which we think of as query less search. We've seen strong user adoption for mobile Baidu with DAU growing the fastest among the top 10 apps in China from March to June according to QuestMobile. Feed user adoption has been very strong. Feed daily active users surpassed 100,000,000 this month, and the key metrics of bottom of content distributed and monthly time spent grow rapidly, reaching new highs. Through voice search, we make it more natural for users to express queries. In search, the large majority of search landing pages now delivered a native app like experience, having more than doubled in proportion from the beginning of the year. We also dramatically increased the coverage of richer content such as video. Overall, we are laser focused on user experience. Our vision in the AI age is very clear. We are open and we are enabling. We attract the top human talent to our platform and forge ahead in the AI age. We held our 1st AI Developer Conference earlier this month and shared our principles of open platform and win win ecosystem with our partners and developers. We've made significant progress in autonomous driving by officially launching Project Apollo, the first open platform for autonomous driving, attracting over 50 strong partners. In DuerOS, we continue to lead the industry in technology and with our large and growing ecosystem. In ADP Suite Cloud, we are seeing strong momentum in customer additions and revenue. And Baidu SSG, our sim tech platform, is healthy and gaming industry and gaming industry recognition, can sign a strategic alliance with the Agriculture Bank of China. Each initiative is available to us because of our AI leadership and each represents substantial opportunity and has the potential to become a sizable core business for Baidu. I'll now turn the call over to Qing to go through our business progress. Thank you, Robert. Let me now walk you through our operating highlights and some additional details. On the current core business front, we are making sustained progress in our product, in particular, Mobile Baidu, which is the mobile app that represents our flagship product with the 2 inches g user experience of search and the feed. To us, feed is cordless search and it is a great way to extend our offering to users on mobile devices. There are strong synergies between search and the feed to drive further experience improvement, usage and engagement. Earlier this month, we launched Mobile Baidu Version 9.0, a major update that delivers a much improved user experience across a number of key areas, such as faster load speed, smoother navigation, a cleaner interface and a more mobile native app like experience for consuming content such as video, literature and music. At the same time, we drove strong user adoption of Mobile Baidu in the 2nd quarter. Mobile Baidu EAU grew the fastest among the top 10 mobile apps in China from March to June according to Quest Mobile. On search, we continue to make good progress in improving our overall search experience by making the experience much more mobile native. For example, in Mobile Baidu, we shipped a new search UI and a new navigation framework. We substantially increased the percentage of search result landing pages with a native app like experience as a portion of the total search landing pages to 85% this month from 40% at the beginning of the year. So the intelligent tutoring and advanced presentation technologies. Overall, we're focused on using AI as the fundamental driver to deliver sustained improvement of search, enabling a better and a more natural search experience via voice and images as input and increasing the coverage of richer content such as video. On feed, our product quality and user experience improves at a rapid pace, particularly as we leverage our strengths in AI technologies and our search data asset. Such improvements underpin the strong growth of overall data usage. Our volume of aggregated content consumption and distribution as well as the time spent are reaching historical high this month. Our FEED DAU surpassed 100,000,000 this month, up from 83,000,000 DAU in April, outpacing all industry peers. On the monetization front, because our search plus feed tooling engine and usage growth in feed, our value propositions to advertisers becomes richer, more diversified and overall more compelling for both performance and brand advertisement. As a result, our customer base is growing at a healthy pace. Over the quarter, we added nearly 20,000 online active customers sequentially across a range of industries, including education, auto, logistics and the local services. In particular, we continue to receive good feedback from our advertisers, especially those who benefit from the comprehensive combination of direct response search ads and branded feed ads and other branded ad formats. This is because search and feed ads satisfy distinct advertising needs and we see feed monetization as fundamentally incremental to search ad spend on our core search product. Advertisers recognize the value of our platform and we have seen strong momentum in feed monetization with feed revenue doubling between March June. IQIYI, it plays an increasingly important role in strengthening our overall mobile foundation. Its rich content and strong user base are key pieces to Baidu's overall ecosystem. We have made a lot of progress in establishing operational synergies in data and content across iQIYI and other Baidu products to spur long term growth. In Q2, iQIYI continued its excellent performance and leads the online video industry across multiple key metrics. In June, according to iResearch, iQIYI's PC and the mobile app daily after users reached 75,000,000 and 146,000,000 respectively, reaching new highs. Monthly time spent on PC and the mobile continue to grow with users spending 124,000,000,000 minutes on PC and 383,000,000,000 minutes on the mobile app. 2nd, only to time spent on Tencent's Weixin app. Next, I'll talk about our progress on the 2nd strategic pillar, leading in the AI era. Our focus is to accelerate the commercialization of AI technologies. Our best strategic path forward is to platformize our AI technology, build vibrant ecosystems based on healthy business models and sustained win win with developers and partners. We held a very successful AI Developer Conference on July 5, where we clearly articulated our AI platform and ecosystem strategy booking. The foundation of our AI platform is Baidu Brain, plus Baidu ABC Cloud, where Baidu Brain offers the most complete and the leading AI technology suite to developers. Coupled with Baidu ABC's growing set of AI based industry solutions. With nearly 5,000 developers and partners in attendance and wide press coverage, our AI platform and strategy have been positively received by the broad developer and the partner community. The strong support from partners and developers is key to cementing Baidu's industry leading position in AI. At the conference, we officially launched Apollo 1.0 and unveiled Apollo's detailed technology roadmap. Apollo is the Android for the auto industry, more open and even more powerful. It enables our partners to go from 0 to 1 to quickly assemble their own autonomous vehicles and start their product R and D. The Apollo platform and its ecosystem is architected with a powerful set of win win principles with open capabilities and increasingly shared resources such as precious data resources. Our partners gain access to Apollo's growing powerful capabilities. They can also contribute to Apollo. It appears the more a partner contributes, the even more outsized benefit the partner will receive from the Apollo ecosystem. As a result, the pace of innovation will continue to accelerate. We have seen the industry buy into our approach. Within the short span of just a few months, we have assembled the world's most powerful autonomous vehicle ecosystem with over 50 strong partners, including 13 OEMs, 12 of them are world leading big brands in Daimler and Ford, have world leading Tier 1 providers such as Bosch and Continental as well as leading AI technology providers such as NVIDIA, Intel and Microsoft. Currently, Project Apollo is the number 1 on GitHub inventory ranking. At the same time, Apollo creates compelling long term economic opportunities for Baidu as we will focus our business model on providing a series of high value services, including HD Maps, simulation engine, security, as well as the connected car experience. Also at the conference, we showcased strong progress by making with DuerOS. It is the natural language based human computer interaction platform of the AI app. It is invaluable to every single device on earth and enable them to hear, to understand and fulfill users' needs. It will become the future universal gateway to the digital world. DOOS is leading China's market because it has developed a skill libraries of 10 major domains and over 100 sub domains. Even more importantly, ZooaOS has established a leading ecosystem where we have built close partnerships with over 100 branded major appliances, including Vivo, Xiaomi, HTC, Madee, Hire, TCL, Lenovo and many others and provide them with end to end solutions by working together with chipset providers such as NTK, ARM and Qualcomm and content providers such as IGE and Himalaya. We also announced the acquisition of Trip Dollar AI, a Seattle based AI startup that provides industry leading development tools for natural language understanding and a voice based hub. In the AI era, the future of the cloud industry will be increasingly driven by integrating AI and the big data. We were among the first to spot that trend and see the opportunity to pursue our ABC, AI Big Data Cloud strategy by delivering a growing suite of powerful industry vertical AI based solutions to partners and developers, including marketing, media, IoT, video, etcetera. By fully leveraging Baidu's AI technology strengths and the vast data assets, our ABC business is growing very rapidly, securing a growing number of customers. For example, while working with 1 of China's top mobile phone manufacturers to provide them with a 360 degree solution from marketing to deep learning to intelligent CDN. One of the most promising areas for commercialization of AI technology is financial services. At Baidu FSG, our focus is AI enabled Think Tech by leveraging Baidu's technology strength and data assets to build a suite of leading AI based think tech capabilities. Our long term objective is to build out a platform that enables Baidu and our partners to provide much more compelling financial services. Toward this, we are making very good progress in developing core capabilities and growing our businesses. Last month, we announced a strategic partnership with the Agriculture Bank of China, one of China's largest banks, to collaborate on building an intelligent bank using AI. At the same time, in order to further drive our FSRG business, we are beginning the process of working out a future operating structure that allows FSG to operate more independently to expand into areas that may require domestic licenses and enable stronger long term growth. There is no specific timetable in the structure determined at this point. Overall, we are very pleased with our progress in the first half of the year. We look forward to continuing our momentum and a strong execution on our 2 pillar strategy in mobile and AI to better achieve our mission of making a complex world simpler through technology. With that, I'll turn the call over to Jennifer to go over go through the financials. Thank you, Qi. Hello, everyone. We delivered a solid second quarter and further drove operational efficiencies on our platform. We further scaled back spend for normie and shifted our resources to invest in AI, where R and D is a key investment area. ITE, a strong partner in our ecosystem, performed well, and we will work more closely together to leverage the strength of our platform. We'll continue to extract efficiencies and allocate resources with deliberation and discipline. As Qi mentioned earlier, FSP operates very well with its positioning as a fintech service provider. To build the capability, we have taken on some credit origination and wealth management assets to gain customer and business insights. It is our plan that we will manage financial services related asset exposure as a portion of our total assets around the current range and will also contemplate an appropriate structure that enables FSG to operate with independence and flexibility. And finally, about a month ago, we raised $1,500,000,000 in a public notes offering with cash coming in at the beginning of July. We intend to use the net proceeds from this offering to repay existing indebtedness and for general corporate purposes. Now moving to the financials. All monetary and non recurring RMB unless otherwise noted. For the Q2, total revenues were RMB20.9 billion, representing a 14% increase from the corresponding period in 2016. During the 2nd quarter, Baidu had approximately 470,000 active online marketing customers, representing a 4% increase compared to the previous quarter. Revenue for online marketing customers was a 16.5% increase compared to the Q1 of 2017. Traffic acquisition cost as a component of cost of revenue in Q2 was CNY 2,500,000,000 representing 11.9 percent of total revenues compared to 15.9% in the corresponding period in 2016 and 12.9% in the Q1. Bandwidth cost as a component of cost of revenue in Q2 were RMB1.4 billion, representing 6.6% of total revenues compared to 6 0.3% in the corresponding period in 2016. Depreciation costs as a component of cost of revenue in Q2 were CNY 828 million, 4 percent of total revenue compared to 4.1% last year's same period. Operational costs as a component of the cost of revenue in Q2 were CNY1.2 billion, representing 5.9 percent of revenue compared to 5.4% last year in the same period. Content costs as a component of cost of revenue in Q2 were RMB 3,100,000,000, 14.9 percent of total revenue compared to 9.3% in the corresponding period in 2016. This increase was mainly due to IT's increased content costs. SG and A expenses in Q2 were CNY2.9 billion, representing a decrease of 30% from the corresponding period in 2016. The year over year decrease was primarily due to decreased promotional spending for transaction services. R and D expenses in Q2 were CNY3.1 billion, a 27.7% increase over the corresponding period last year. The increase was mainly due to the growth of R and D personnel related expenses. Share based compensation expenses, which were allocated to related operating cost and expense line items, increased in aggregate to $796,000,000 in Q2 from RMB 401,000,000 in the corresponding period last year. This year over year increase was a result of increased share rents to employees. Operating profit for Q2 were RMB4.2 billion, representing a 46.9% increase from the corresponding period in 2016. Non GAAP operating profit was CNY 5,000,000,000, a 53% increase over the corresponding period in 2016. Income tax expense was CNY 564,000,000 for the Q2. The effective tax rate was 11.3% compared to 24.8% last Q2. The decrease in effective tax rate was due to preferential tax status that was granted to certain PRC subsidiaries in this quarter of 2017. Net income attributable to Baidu for Q2 was $4,400,000,000 an 83% increase from corresponding period in 2016. Basic and diluted earnings per ADS for the Q2 amounted to CNY11.36 and CNY11 point 3 1, respectively. Non GAAP net income attributable to Baidu for Q2 was CNY5.6 billion, a 98% increase year over year. Non GAAP diluted earnings per ADS for Q2 was CNY16. As of Q2, the company had cash, cash equivalents and short term investments of RMB 92,200,000,000. Net operating cash inflow and CapEx for the 2nd quarter were CNY 6,600,000,000 and CNY 1,100,000,000, respectively. Total headcount on a consolidated basis, including domestic entities, was about 42,200 as of the end of the Q2 of 2017. This represents a decrease of 2.6% as compared to last quarter. Now let me provide you with our top line guidance for the Q3 of 2017. We currently expect our total revenues for the Q3 to be between CNY 23,130,000,000 and CNY 23,750,000,000 representing a annual increase of $26,700,000,000 to 30.1 percent. On an apples to apples basis, excluding mobile games from Baidu's financials, the guidance represents a 29.1% to 32.6% year over year increase. Please note, this forecast reflects Baidu's current and preliminary view and is subject to change. I will now open the call to questions. Operator, please go ahead with questions. Thank you. The question and answer session of this conference call will start in a moment. We will take one question at a time from each caller. If you have more than one question, please request to join the question queue again The first question comes from the line of Eddie Leung of Merrill Lynch. Please go ahead. Good morning. Thank you for taking my questions. Just quickly on two things. The first one is we noticed that other revenue, other services growing pretty nicely in the quarter. So just wondering what are the key growth drivers for that business line. Is it more from cloud or financial services? And then secondly, quickly on Keith's comment on AI commercialization. I'm curious on the longer term economic opportunities about IoT. Are we thinking more along the line of a direct monetization approach like for example, charging our brand partners a fee per device? Or are we talking about more indirect approach? And if so, what could be some of the commercialization opportunities that we are thinking down the road? Thank you. Hi, Eddie. I'll take the first question. Other revenues, yes, you're correct. Other revenues sequentially have stepped up decisively. The components in there includes, of course, the subscription income that we generate out of the ITE's paid memberships. There is also financial services. So it's a combination of matters that other revenues are growing and we're very pleased with the progress that's making on multiple fronts. So let me take the second part of the AI questions. With regard to AI as a price to IoT, as you asked, Our approach is using our DuerOS platform. The DuerOS platform will enable each IoT devices, particularly intelligent home devices to be able to listen, to talk, to understand user, provide services. And economically, there's 2 future frontiers. 1 is these IoT devices that are enabled by DuerOS, they become the future information entry points. The economics will be very similar to today's search business because as long as the people are seeking information, interacting with the information that represents services, content, knowledges that will be natural extension of economics like today's search engine business. That's 1. The second is because DuerOS is a platform that enable devices, there's typical what's called platform economics. You mentioned per device licensing, that's one way to do that. Windows, for example, can do that. Or there's channel distribution economics that's in App Store. There's channel distribution economics. And the 3rd part is future VIX, you can take, for example, like app store, when you sell content to app stores, like iOS, Apple will take 30% comp. So Duo iOS in the long run represents very compelling economic opportunities for Baidu. Our focus is really execution building out our products, our platforms, a very healthy ecosystem. And there's many, many important execution tasks in front of us over the coming years. We are fully prepared when these economic opportunity becomes more material, we will be able to share future operating metrics when we are ready. The next question comes from the line of Chi Chiang of HSBC. You may ask your question. Great. Thank you so much for taking my questions. I wanted to ask you about 2 topics. Firstly, News Feed and secondly, CERT. In terms of News Feed, I was wondering if you can give us a little bit more color as it relates to the synergies between Search and News Feed in terms of user engagement, app opening times, paid click growth? And secondly, as it relates to search, and I guess this is related, paid clicks grew 11% in 2016. I'm wondering what your expectation might be for paid click growth over the medium to long term And sort of how much more can click through rates improve from the current levels? Thank you so much. Maybe let me take the first part, Jennifer, maybe you take the second part. So with regard to synergies between search and feed, we see plenty of opportunities to drive those user experience synergies. As a matter of principle, for each of the vertical segment, whether it's commerce, travel, retail services, often human needs can be satisfied by a combination of search and the feeds together. For example, in terms of, let's say, travel as potential verticals. When you're looking for picking leisure locations, you go through a planning phase. And in that planning phase, you will do a bunch of search to find the information. And you also want to receive set of feeds with regard to pricing and new offers that are available. But this applies to pretty much every key verticals where our information matters to our users. So as I said, as a matter of principle, the systematic synergies to be explored and our mobile Baidu is really the flagship container product that enables us to systematically to explore those all those synergies, particularly on emphasize on version 9.0. It's a great app. If we haven't used it, I had to encourage everybody to download and use it. There's a lot of improvements and one of the key improvements is enabled from engineering product perspective to drive those synergies across all those verticals. So the fruits will come out over the coming quarters and years as we deliver more and more product innovations on the synergy front. And for search clicks, Tee, last year, our search click grew double digits. And for the past quarter, we continue to see double digit growth on paid clicks. So search is very solid and feed is creating additional inventory for us, additional revenue source for us. So on both the Tween engine on the search and feed side is progressing well. Your next question comes from the line of Alicia Yap of Citigroup. Relating to your 3Q guidance, can you help us to think about what would be the assumptions for the numbers of online marketing customer versus the ARPU growth? How should we think about the absolute addition of the online marketing customer on a sequential basis from the Q2 to the Q3? And then on the year over year basis, will the customer additions still experience some year over year decline, given it is still relatively high base last year? And related to the traffic acquisition costs as a percentage of sales actually continue to decline, what was the reasons and will this trend continue? Thank you. Lucia, thank you for the question. You did notice that we had pretty solid additions on the customer front in Q2. And seasonally, we do carry out our nationwide campaign to promote our search and overall add services to our customers. As you note earlier in our prepared remarks, there is a rich combination of services that we're building for our customers, and we hope to service our customers with a variety of with their variety of needs, varied needs that we can meet their desires. And so we do see last year towards year end, we implemented stricter rules to have higher standard for our customers to qualify to do business with us. And after that exercise, we're building our customer base again. And so we do anticipate our customers' base should grow. And because of the rich product portfolios that we offer, we aim to grow our ARPU as well. With regards to tag traffic acquisition cost, you will note that year over year, it is a decrease. There are basically three factors driving this change. One is last year, you will recall that we had gone through some significant changes and some lost revenue last year was related to organic revenues that made our base of last year artificially high. That's one. And at the same time, we are deliberately moving some of the tag resources to support the feed business and that will gradually ramp up. And the third reason would be a growing contribution on the IT side, which normally would not carry a tag. And so we do anticipate that the contextual and the union network will continue to be very important for us and the tag as we do manage tag proactive. The next question is from Alex Yao of JPMorgan. Please go ahead. Hi, good morning, guys. Thank you for taking my question and congrats on the quarter. I want to dig a little deeper into the near term trends of take clicks and CPC. I think in your most recent 424 filings, you disclosed that 1Q paid clicks declined by 6% on a year over year basis, which is a bit different compared to the trend in the past few years. What is the reason for PayClick to decline to be roughly flat on a year over year basis, which I think is a quite achievement given the Q1 last year, you had not had the regulatory impact and health care cleanup. Can you talk about why with a different basis the CPC is flat? Does it indicating faster than expected recovery of the ARPU, particularly from health care sector? Thank you. Alex, if you recall last year, Q1 was a normal quarter and Q2 was a little bit of noises because of the incident that happened in the middle of the quarter. So as we have gone through our customer base and kind of start to rebuild, our Q1 is still in the ramp up stage. And compared to last Q1, which is a high base, I think both on the access, especially on the pay to click side, year on year number is just as what you noted. But as we continue to build up our business recovering from Q4, Q3 of last year, we do see the whole business is on a good trajectory and the paid click is recovering very nicely and so that's growing. And overall, I think paid the CPC is also solid and healthy, and we want to really deliver the kind of traffic and good ROI to our customers. And the CPC is just a natural fraud of the customer dynamics right now and also the kind of keywords and the bidding activities that's going on. The next question comes from the line of Juan Lin of 86 Research. Please go ahead. Hi, good morning and congratulations on the strong quarter and guidance. My question is related to the core search. Firstly, could you please share with us the current user metrics and trends of user metrics for mobile Baidu App? And secondly, I'm wondering what is the current CPC and RPM for mobile search as compared to PC pricing? Thank you. So let me talk about the user trend, particularly on mobile Baidu, our flagship product. The trend is users are increasingly using more and more AI like search experience. For example, using voice to search queries, seek information, for example, using their cameras to look for information based on the images the camera is taking. So that's an important usage trend. The second important usage trend is more and more richer type of content is being showcased and presented as a compelling product search results. In the past quarter, we talked about richer video content. But going forward, our focus is to use AI technology as foundation to continue to drive a more compelling and natural search experience so that making much, much easier for people to use mobile devices, all the capability of the device, voice, camera, location, other ways. And then the result will be present in a way that combination of richer content and also much native app like quality of experiences. That's the overarching usage trends and we fully expect our user engagement will grow as we continue to improve the experience and that will also continue over the coming years. Your next question comes from the line of Karen Chan of Jefferies. You may ask your question. Thank you, management and congratulations on the solid quarter. I got two questions. One is, how should we think about revenue contribution from mobile newsfeed in a full year context? What's the budget allocation from advertisers between search and newsfeed? And can management share more color on the tie up with PayPal announced yesterday? Thank you. As we mentioned earlier, Feed is, on the user front, making great progress and user engagements is also ramping up nicely. And also on the advertising and revenue side, it's contributing more. Sequentially, it grew slightly. And we anticipate feed will continue to contribute increasingly in the overall ad spend from our customer. It is we do focus very much so this year on the user experience and not very effectively pushing for the news feed. But it's growing nicely and the customers' acceptance are pretty good. On the PayPal, yes, we entered into strategic partnership with PayPal. And under the agreement, the Chinese consumers will be able to use Baidu Wallet to do shop and pay at PayPal's network. So it offers basically a service solution for many of the Chinese customers traveling overseas and it's providing a greater choice for international shopping opportunities. It's just one of the features that we offer on our wallet. Next question comes from the line of Piyush Mubayi from Goldman Sachs. Please ask your question. Thank you for taking my question. On the call you spoke about the strong adoption of apps and time spent on search. Could you also take us through potentially the rising relevance of search itself? And if possible comment on the sort of pay click growth rate or CPC trends we can expect and the impact of AI there? I know that's been asked in a different form in the past in earlier on the call. Thank you. Yes. Let me take that question. So with regard to our core search product, particularly using AI technology to increase the core aspects of the product, which is relevancy. There's indeed plenty of opportunities to increase the overall relevancy of a search experience, particularly as we increasingly personalize our search bar. This is one of the important areas we see we can grow not only the search quality in terms of relevancy, but also use that to expand the scope what search can offer. So search can become more and more personalized over time by using AI as the technological foundation to drive those growth. On the monetization side, indeed, we see headrooms by using AI technologies to continue to improve the economic yield, particularly by leveraging more converging data using deep learning. For example, over the last two quarters, we actually are able to deliver meaningful improvement on converging rates. As we all know, search advertising is really converging economics. Anytime you use data and technology to improve conversion, over time, you will be able to deliver more economics. And we do believe that opportunities will continue to exist as we continue to drive deeper utilization of AI technology and more data access to improve search relevancy and also advertising yield over a period of time. The next question is from Natalie Wu of CICC. Please ask your question. Hi, good morning and good evening, management. Thanks for taking my question. Since that there's significant step up in the loan balance, if you look at your balance sheet, also the item of amounts due to the 3rd party investors. So just wondering what specifically the item is and what kind of impact does it have for the income statement? Also for the financial related business, about the COGS, which line of the corresponding COGS is that classified into? Thank you. Within our Financial Services business, we have some credit business as well as wealth management business. So these are basically balance sheet that you would see more material existence. P and L wise, FSG, the Financial Services, does not really represent significant P and L items, line items. And their revenue, financial revenue and the cost of funding goes to the operating income. So it's above the it's not the interest income or interest expense that you see in other income. It's part of the operational expense and operational income. Next question is from Alan Halliwell of Deutsche Bank. Please ask your question. Great. Thank you. I just wanted to touch on iQIYI as it relates to comments we made earlier in the year. I think, Jennifer reflected on, the belief that maybe, margin should improve at IGE. And then we also talked about content growing by as much as 100%. Admittedly, some of that would go into news feeds. Content spend seems to be tracking well below that guideline. And I'm wondering, Jennifer, whether you can give us an update about both the bottom and top lines of iQIYI. And then just on content, how much might be now focused on News Feed? Thank you. Yes. Hi, Alan. With regards to IT's the revenue line as well as the content cost line, both are tracking very well. IT's performance in delivering well. Advertising as well as subscription revenue is tracking very well and is very, very solid and strong. And on the content cost, our guidance provided earlier in the year continue to hold. We do anticipate that we significantly on the content cost wise. Quarter on quarter, you might see variations because content costs kick in depends on why you have the popular show starts to get into the audience. So quarter on quarter, there might be variances, but the whole year's spend is tracking as planned. The next question comes from the line of Ming Shi of UBS. Please go ahead. Good morning, Robin, Doctor. Lu and Jennifer. Congratulations on the strong quarter. So my question is, could you help us understand the comparison of the pricing of the new feed ad between you and your major competitors in terms of both RPM and also like CPC, CTR, etcetera? And also very quickly, you mentioned a lot about the rising contribution of the native landing pages. I think recently you have also changed the algorithm of your search engine, which caused some which increased the weighting of native landing page requirement. So what kind of impact while this is very good for consumer experience, so what kind of impact do you think this will happen to the recovery of your number of advertisers? And do you have any target for the recovery in the coming quarters? Thanks. Regarding to the pricing for the feed product, it's not that directly comparable because a lot of our advertisers come from the Phoenix net search advertisers. They would use a combination of search and feed to decide how much they spend and what kind of price they pay. So this is quite different from the competitors outside of Baidu. The native experience, I think, overall, we are still driving a lot of traffic to 3rd party websites. And in order to provide the best user experience for search and therefore for most of the websites designed for mobile phones. We need to kind of regulate the format and user experience for the 3rd party website. That's I think that's good for the overall ecosystem. Even after the new rules and regulations, I think this still gives Webex honors much more liberty and freedom to do things that they cannot do in other closed ecosystems for mobile phone. Your next question comes from the line of Grace Chen of Morgan Stanley. Please go ahead. Hi. Thank you for taking my question and congratulations on My question is about the dual OS. I can see that this is a great opportunity for the company and also for the industry as well. And can you and I can see that you've been building up a partnership with smartphone vendors, home appliance brands. Can you talk about the competitive landscape? Definitely, it's a brand new opportunity, but not just by doing older and also other competitor as well. So it would be great if you can share your thoughts about the competitive landscape and also Baidu's competitive edge. Thank you. We'll try to make sure we really understand your question. Sorry to would it be possible to ask you to maybe just that again, make sure that we give you the right answer? What kind of competitors? Yes. So what you are asking? Yes. I mean in terms of dual OS, this product, yes, this is a great opportunity as a brand start for the industry and also for Baidu as well, right? So I can see that we are very aggressive, but also other competitors or domestically and foreign competitors, they are also very aggressive too. So I'm just wondering, can you share your thoughts about the competitive landscape in these operating system in AI edge? And also what's BrightView's competitive edge in order to succeed in this new game? Thank you. Got it. Got it. Let me take that question. So with regards to 2 hours, the competitive landscape is following. First, on the domestic front, there are more traditional voice recognition technology based companies such as iFlytek, those are one set of competitors. Baidu's advantages in many ways is very apparent because we have not only voice speech recognition technologies, but we have the entire stack of all the content integrations and as well as the cloud platforms that delivers an end to end full package solution to our partners. And then there's online companies. They have some ability to offer a similar type of services. On those fronts, DuerOS Advantage is also pretty substantial because as I mentioned in my prepared remarks, there's a few important dimensions we are reading strongly. First is the platform understands much more domains than any other competitors. We have 10 major domains and 100 subdomains. And this is a long term stress because it's one thing to understand the voice to text tokens. It's not another thing to understand the semantics. In order to understand the semantics of a user sentence, you need the knowledge graph knowledges. And Baidu has by far the largest knowledge graph in China. We have 100,000,000 of knowledge nodes for knowledge entities and we have more than 10 1,000,000,000 knowledge relationships in our knowledge graph and it's growing at a very rapid pace. That's by the way through accumulation of 17 years operating a search engine to build that knowledge back. We believe this is one of the very important sustained advantages that Baidu DuoOS platform enjoys our competitions. And also our technology is by far leading strongly. As I mentioned, we have more than 100 branded appliances partners using our technology put into these appliances, those devices. So overall, we enjoy very large positions against domestic competitors. And there's international competitors, for example, let's say Amazon or Apple or Google, their advantage is also very apparent because to local services has to be localized. You have to have strong local language, local content. Again, Baidu enjoys overwhelming advantage in understanding Chinese conversations and integrating all the Chinese services content. So overall, in summary, DuerOS is very strongly positioned competitively, but we take nothing for granted. Our focus is to stay absolutely laser focused at sort of the pace of innovation, getting more and more value to our customers and building up the full ecosystem with more partners on board. Your next question Your next question is from Zoe Zhao of Credit Suisse. Please go ahead. Hi, management. Thank you for taking my question. Just two quick ones. One is, what is the normalized tax rate that we should expect going forward? And second one is, can management give us some color on iQIYI's current subscriber base? Thank you. The tax rate, I did give an indication earlier in the year, it should be in the low 20s. It should still hold. We did have a preferential tax treatment that came through this quarter, but the normalized tax rate should be in the 20s, low 20s. Yes. On the IT subscriber base, it's more than $30,000,000 and the revenue from subscription is much larger than any of our competitors. The next question comes from Wendy Huang of Macquarie. Please go ahead. Thank you. Your margin recovered nicely in the quarter. I can see that R and D cost and also the SG and A cost both actually decreased significantly year over year. I just wonder if this kind of the cost level change is structural or sustainable, how should we look at margin change going forward? And also, I think in past, you provide the margin drag from iQIYI. Can you provide this quarter's number as well? Thank you. Okay. The margin, we did deliver pretty solid margin this quarter. And you I mentioned earlier in the prepared remarks that we are really driving further operational efficiency, having a keen focus to direct our resources to AI and having high efficiency in other parts of the business. And we dialed back again in Nomi and so hence the savings on SG and A related expense. Our focus is to invest in AI capabilities and a lot of that is incremental and is R and D focused. So you will see, we have increased in R and D expenses, but we do have a year on year decrease in SG and A expense. We'll continue to exercise discipline as we go forward. We do have resources allocated for to support our feed product, the feed user coverage. And so second half of the year, maybe slightly more aggressive on the SG and A expenses because we do want to have installation coverage for our product. R and D expenses will be a steady incremental consistent with our prior practice. For IT, it's drag in the earnings release. We will take our last question from Gregory Zhao of Barclays. Please go ahead. Hi, Robin, Doctor. Lu and Jennifer. Thanks for taking my question and congratulations on a strong quarter. I have 2 follow-up questions. The first one is about our Q3 guidance. So I just want to understand what the driver of the strong Q3 revenue guidance? Shall we expect continued strong growth in other revenue or I mean the growth is from the marketing services that will drive the overall growth. And another follow-up question is still about voice. So in China, actually globally, you will see more and more young users, especially some teenage users, they prefer to use audio and video functions than text. So given your advantage in voice technology versus other vertical apps such as online travel or O2O, do you think the voice can be a new engine to attract users from other verticals back to our search platform? And also want to understand what the percentage of the traffic or search contribution from voice? Thank you. The Q3 guidance reflects our current best estimates. We mentioned earlier, we're very pleased with our progress on the core search side as well as IT's performance. So both on search feed and IT, they're very solid. And of course, we're also growing our business in the financial services and the cloud business. So that reflects the combined force of all these different fronts that is reflected in our Q3 I can take the voice out of the question. Terrific question. The simple answer is there's huge opportunity ahead. The fundamental reason isn't just the voice as a modality. It's natural language conversation. Because for the first time in our history, because they are every device you do not have to learn. They learn you. You can talk to every device using human language. It understands you. So it's highly disruptive, as you mentioned, all vertical apps, vertical domains, once our users get used to using Xiaodu as their assistant, as ZuoraOS is a constant companion that understands that users and to be able to fulfill these users' needs, it can change the landscape. There's a huge set of economic long term opportunities for Baidu. I mentioned the natural economics will be search, advertising like economics, but it can go all these verticals as well. Half can be human tax based or can be particular verticals. So to summarize it, that's why we are so focused on investing in building out substantially leading positions for DuerOS and driving accelerate expansion of our ecosystem and growing our installed base and the user usage active usages so that over time, we can deliver really compelling experience for our users and economically the huge disruptive opportunities for Baidu over the coming 7 years. We are now approaching the end of the conference call. Thank you for your participation in today's conference. You may now disconnect. Good day.