Earnings Call: Q1 2017

Apr 28, 2017

Earnings release

Hello, and thank you for standing by for Baidu's First Quarter 2017 Earnings Conference Call. At this time, all participants are in 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 Q1 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 Jennifer Li, Baidu's Chief Financial Officer and Qi Lu, Baidu's Chief Operating Officer. After their prepared remarks, Robin, Jennifer and Qi 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 statements, 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 website at ir.baidu.com. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on Baidu's IR website. I will now turn the call over to Baidu's CEO, Robin Li. Hello, everybody, and thank you for joining today's call. Earlier today, we announced that Jennifer will become CEO of Baidu Capital, an investment firm. Jennifer will transition away from her responsibilities as CFO following the appointment of her successor. Jennifer has played an instrumental role in Baidu's growth over the 9 years she has been our CFO. And as CEO of Baidu Capital, she will continue to be part of the Baidu family and contribute to building Baidu's ecosystem, which is crucial in bringing AI to real world applications. Jennifer's extensive experience in the areas of finance, capital markets, technology, auto, financial services and consumer industries will help bridge technology with various traditional industries. And I look forward to working with Jennifer in her new capacity. Now turning to the quarter. I will begin with a few brief comments, and then she will provide a business review, and Jennifer will present the financials. 2017 is shaping up to be a transformational year for Baidu as we complete our strategic evolution to China's largest AI centric technology company. We believe that a great technological revolution comparable to the industrial revolution is taking shape, representing a once in a generation opportunity that will create new commercial frontiers and transform a wide range of industries such as auto, healthcare, education, financial services and industrial automation. In the AI enabled era, the scenarios for human machine interaction will be much broader than what we've seen before. And as natural language understanding and image recognition power new information gateways, the new paradigm for human machine interaction will have significant implications for how people conduct their daily lives. I'm confident that Baidu's advantages in technology, specifically advanced AI research, well position us to be the industry leader for the long term. Search is one of the first applications of AI, where search works to understand humans. As the leading search engine in China, we have been fortunate to invest vast amounts of rich valuable data in a market with over 700,000,000 Internet users who speak the same language, have the same culture and abide by the same laws. Moreover, we live in an age where we can finally match this data with powerful efficient computing infrastructure and a deep bench of talent to make real progress in AI. We believe Baidu's opportunity to apply AI to real world consumer and enterprise applications in China is enormous. We envision a world where machines continue to learn about humans. In the not so distant future, using natural voice input or images to interact with machines will be mainstream, alleviating humans of the burden of mutating tasks. We imagine a world where your face is your identity, and you only need to show your face to pay at the supermarket or go through airport security. Cars will drive us, freeing up our time and attention. As machines become more like hyper efficient real time assistance for people, the mode of user interaction is evolving correspondingly. Just as the mouse and keyboard were the gateways in the PC era and touch is the gateway for mobile. Voice recognition through conversational DuerOS will be the gateway in the China plus AI era. Our investment in AI is a long term proposition with dividends that will be paid over the medium to long term. We are already seeing the powerful benefits of AI in our existing online advertising platform and in a more personalized, more image enhanced and more predictive search experience. Beyond the existing PC and mobile channels, AI will expand the scenarios and use cases for search in home, car and work and lower the friction for search through voice recognition, image recognition and user personalization. Our strategy is clear, and we are working hard on multiple fronts. I'll now turn the call over to Qi to go through our business progress. Thank you, Robin. To build on Robin's key points, operationally, here at Baidu, we very much focus on building and applying AI technologies as the foundation of what we do and the primary driver of product innovation and business growth. Over the past 3 months, I have spent the majority of my time working with the product business teams to map out our strategy and the ways to drive high performance execution. Our focus is twofold: to enhance and expand our existing core business platform and to lead the commercialization of AI technology across a number of AI enabled new business initiatives such as our AI Cloud, Financial Services, DuerOS and autonomous driving. For our new business initiatives, we have gone through a rigorous and disciplined process to evaluate and select the most promising new business opportunities to pursue. Our criteria includes category life cycle, market penetration, Baidu's competitive position, differentiated value propositions and our ability to execute. We will be shedding more light on the process and the progress of these new business initiatives and sharing operating metrics as appropriate as we move forward. On our core business front, we're off to a good start, driving improvements in both traditional core search as well as in our news feed product. Search is and will continue to be a fundamental user need, especially as we digitize more and more world information in our daily lives. We see much more room for innovation to deliver a better user experience with richer information using interactions as we expand search into more and more scenarios. For example, we are making great strides in enriching our search results, especially with video. In fact, now over 25% of mobile queries have rich video content as part of the search results, representing a material increase over last year. We are also making our search experience on mobile devices more natural and easy to navigate using touch. The experience is much more engaging like that of mobile native apps as compared to the traditional browser based experience. This is achieved through intelligent filtering and presentation technologies based on our AI capabilities in content and the user intent understanding, especially in more advanced areas such as classification and object recognition in images and videos. With the twin engines of search and news feed, we have broadened our core product experience by complementing the explicit intent driven pool experience of the traditional search with implicit user understanding driven push experience of newsfeed. While we are pleased with the rapid user adoption of our News Feed product, with daily active users reaching 83,000,000 this month and the overall volumes of content distributions and the user time spent reaching a new weekly high. We stayed laser focused on improving the user experience and building out our content platform, especially the number of content creators on our Baijiahao content platform has surpassed 450,000, more than doubling over last quarter, becoming an increasingly important part of the Baidu overall information ecosystem. Now speak of ecosystem. Maps, Nomi and the Local Express continue to play a vital role in connecting users with local content and services and helping local businesses connect to users. Through our search, feed and advertising product. Operationally, in Q1, we consolidated Nomi into our core business. Going forward, our focus for Nomi will be building more and better content about local services and monetization through advertising through local express instead of the traditional business. All of these improvements to our core products and ecosystem are reflected in the growing engagement of our users with the ratio of mobile search daily active users to monthly active users showing a clear upward trend. On the commercial product front, we added upgrades to our search ad platform, making click to connect ad formats available across search, union and the news feed. This has yielded a notable lift in monetization. We're also actively developing and applying AI technologies across a number of key areas such as ad targeting, creative and the landing page optimization, which will contribute to increasing monetization capabilities over time. While monetization is still at an early stage for news feed, customer feedback has been very positive. They view news feed traffic as incremental to their campaigns. Late last year, we also launched a dedicated news feed ad platform to complement news feed bidding within our search ad platform and customer campaigns through this dedicated channel is ramping up at the rapid rate. Now turning to AI enabled new business initiatives. We are making good strides across the board. And here, a few specific areas to call out. DuerOS is our next generation conversational AI platform. By design, it provides powerful capabilities to enable the use of voice in natural language to interact with any digital experience on any device for any scenario. This is because for the first time in our history, AI technology enabled natural language to serve as a general purpose user interface. While it is still early, this platform will have enormous potential relative to the traditional platforms because it can run everywhere and enable users to interact naturally and easily. We believe we're the clear market leader in China. Duerl has already gained great momentum in building out its ecosystem. For example, we have secured broad partnership to power conversational AI services for Xiaomi and Vivo smartphones, Lenovo Smart TV, Cara and Meitd Smart Appliances, common smart speakers and many others across rapidly growing number of devices. Home and cars are 2 high value scenarios to anchor the DuerOS platform at this early phase. Here, we have made important investments in our Raventech acquisitions as well as our Internet of vehicles business unit, both of which will help further establish the DuerOS platform and strengthen our market leadership position. At the same time, both in their own right, we have significant business opportunities that we will grow into. In Q1, we consolidated our L4 and L3 and Internet of Vehicle Business Unit into the new IDG, intelligent driving group. This will enable us to build out a common technology platform, shared services and a consistent solution for all our partners. At the Shanghai Auto Fair last week, we announced Project Apollo, an open and complete and reliable autonomous driving technology platform that we plan to launch in July. This is a historical opportunity to apply our AI technology strengths to create an open innovation ecosystem that will empower all parties in the auto industry to accelerate the pace of innovation, enable more win win partnership, create greater business opportunities in this fast and rapidly growing market. The response from the industry and our partners has been very positive thus far. It is a big step forward. Our AI Cloud business, named as ABC or AI Big Data in the Cloud, has been gaining traction with our customers who appreciate our AI value added approach. Baidu Cloud builds upon foundational cloud solutions of computing, storage and CDN. We differentiate by providing AI technology enabled solutions such as big data, deep learning, video, IoT and more. Customers across media, financial services, healthcare and other verticals have expressed very positive feedback. This month, at the Baidu Cloud ABC Summit, together with NVIDIA, we announced the establishment of the Baidu deep learning platform, which will greatly help our customers and partners to enhance their capability in deep learning and AI. Our Financial Services business continues to grow as our AI and the big data capabilities serve as key differentiators that can intelligently target and match users with the right products, identify and prevent fraud and appropriately assess credit risk through our continuously increasing proprietary data and the modeling capabilities. IQIYI, which celebrated its 7th anniversary this month, continued its sector leadership with ongoing improvements in revenue and the paid subscriber numbers. In March, according to iResearch, iQIYI's mobile app maintained its top ranking with 129,000,000 daily active users, 490,000,000 monthly active users and 342,000,000,000 minutes of monthly user time. We will continue to work closely with iQIYI to support its growth as part of the overall Baidu ecosystem. Baidu deliveries with its 1st rate service quality and a clear technology advantage made a strong progress in the quarter, seeing healthy revenue growth year over year. In March, during the International Women's Week, Baidu deliveries ran a highly successful special joint promotion with Yum! China's KFC and the Pizza Hut brands. In conclusion, we are very pleased with our progress in Q1, and we're more confident and energized about using AI to elevate our core product and the business and to create long term values through our next generation AI enabled new business initiatives. With that, I'll turn over to Jennifer to go through the financials. Thank you, Qi. Hello, everyone. In the Q1, we bought back about $200,000,000 of our own stock. We are very confident in Baidu's long term outlook and this decision is consistent with our overall capital allocation framework. We had a solid first quarter with the business performing to our expectations. As we're moving from mobile first to AI first, we work to align our business operations by folding Nomi into our core business. Nomi will play a role to serve as part of the core business' content and service ecosystem. We'll continue to scale back spend for Nuomi and shift Nuomi from a take rate transaction based business model to an advertising based business model, which leverages our core business. We do not expect Nomi to be a significant contributor to margin drag going forward. Other components in transaction services, such as map, financial services and Baidu Delivery are also part of our core businesses, content and service ecosystem, with financial services and Baidu delivery very much leveraging our AI capabilities. Baidu deliveries continue to show improving operational efficiency and a visible path to sustainability and profitability. Consistent with our strategic and operational focus to build our core business and invest in AI, we intend to realign our segment reporting and full transaction services into our core business. Starting next quarter, we'll report Baidu Core as a whole and transaction services will no longer be a separate segment. As Robin and Qi have shared and as we have been communicating to you in the past few quarters, AI is the core of our strategy and is both the foundation of our existing platform and driver of vast opportunities going forward. We are continuously leveraging our existing technology capability and devoting resources to our AI enabled initiative of enterprise cloud, financial services, DuerOS and autonomous driving. The majority of these investments are on the R and D front, which we expect to bear fruit in the medium to longer term. This year, we expect incremental R and D expenses over 2016 to be all related to AI. Incremental R and D spend this year is largely related to AI R and D headcount. As a reminder, as disclosed in our 20 F form, we disposed of our mobile gaming business for RMB2.1 billion, a transaction which is expected to close mid May. After mid May, we will no longer recognize revenue for the mobile gaming business. The mobile gaming business contributed close to 3% of total revenue in 2016. Now moving to the financials. All monetary amounts are in RMB unless otherwise stated. For the Q1, total revenues were RMB16.9 billion, representing a 6.8% increase from the corresponding period in 2016. During the Q1, Baidu had approximately 451,000 active online marketing customers, representing a 23% decrease from the corresponding period in 2016 and flat compared to the previous quarter. Revenue per online marketing customer for the Q1 was 32,200, a 27% increase from the corresponding period in 2016 and a 9% decrease compared to the prior quarter. Traffic acquisition cost as a component of cost revenue in Q1 was CNY2.2 billion, representing 12.9 percent of total revenues compared to 14.1% in the corresponding period in 2016 and 14.5% in the Q4 of 2016. Bandwidth cost as a component of cost of revenue in Q1 were RMB1.3 billion, representing 7.9 percent of total revenue compared to 6.9% in the corresponding period in 2016. Depreciation costs as a component of cost of revenue in Q1 were CNY 823,000,000, representing 4.9% of total revenues compared to 4.5% in Q1 of 2016. Operational costs as a component of cost of revenue in Q1 were RMB 959,000,000, representing 5.7 percent of total revenue compared to 6.9% in Q1 last year. Content cost as a component of cost of revenue in Q1 was CNY2.6 billion, representing 15.6 percent of total revenue compared to 8.7% in the corresponding period in 2016. This increase was mainly due to iQIYI's increased content costs. SG and A expenses in Q1 were CNY2.8 billion, representing a decrease of 29% from corresponding period in 2016. The year over year decrease was primarily due to a decrease in promotional spending for transaction services. R and D expenses in Q1 were CNY2.8 billion, a 35% increase over the corresponding period in 2016. The increase was mainly due to growth of R and D personnel related expenses. Share based compensation expenses, which were allocated to related operating and expense line items, increased in aggregate to RMB631 1,000,000 in Q1 from RMB 309 1,000,000 in the corresponding period in 2016. This year over year increase was a result of increased share grants to employees. Operating profit for Q1 was RMB2 1,000,000,000, representing a 9.3% decrease from the corresponding period in 2016. Non GAAP operating profit was 2.6 percent, a 4.6% RMB2.6 billion, a 4.6% increase over the corresponding period in 2016. Income tax expenses was CNY405 1,000,000 for the Q1. The effective tax rate for the Q1 was 18.6% compared to 25.4% in Q1 2016. The decrease in the effective tax rate reflected our operating loss narrowed for some loss generating entities in the group. Net income attributable to Baidu for Q1 was CNY1.8 billion, a 10.6% decrease from the corresponding period in 2016. Basic and diluted earnings per ADS for the Q1 amounted to RMB4.65 and RMB4.63, respectively. Non GAAP net income attributable to Baidu for Q1 was CNY2.4 billion, a 1.3% increase year on year. Non GAAP diluted earnings per ADS for Q1 was RMB6.85. As of Q1, the company had cash, cash equivalents and short term investments of CNY90.7 billion. Net operating cash flow and capital expenditure for the Q1 was RMB4,700,000,000 RMB1,200,000,000, respectively. Total headcount on a consolidated basis, including invested entities, was about 43,400 as of the end of Q1 of 2017. This represents a decrease of 5.5% as compared to the end of last year. Now let me provide you with our top line guidance for the Q2 of 2017. We currently expect total revenue for the Q2 to be between RMB20.47 billion and RMB20.98 billion, representing an annual increase of 12.1% to 14.9% and a sequential increase of 21.2% to 24.2%. 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. Thank you. The question and answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, Your first question comes from the line of Eddie Leung from Merrill Lynch. Please go ahead. Hi, good morning. First of all, my best wishes to Jennifer for your next role. And then for my questions, I'm wondering if you could share more color with us on the different components of your revenue guidance for the Q2, especially any color on the contribution of our subscription and the newer business mobile news feed will be helpful. Thank you. Hi, Eddie. Thank you for your kind words. With regards to Q2 revenue, as you look at our business, essentially, it's the core business as well as iQIYI that are the main revenue contributor. Within the core business, there is search. We're also putting a lot of effort in the feed. The feed product, as Qi mentioned earlier, from a user adoption perspective, it's progressing very well. We're in the early stage of monetizing the product. So it has not been very much focused on we're driving aggressively on the monetization front. So for our core business, it continues to be very search centric and we are very excited to expand the service we can offer to our users and advertisers, and we expect solid progress in that regard, and we should expect the search business to expand over the next few quarters. For the IT business, as you would have seen from our 20 F, last year, iQIYI had a very solid growth and contribution to our overall business. IQIYI is an integral part of the overall Baidu subscription user base. So if you look at the Q2, sequentially, you continue to Q1, sequentially, you continue to observe other revenue line continues to grow quarter on quarter and a big part of that is iQIYI's subscription user business. So for iQIYI's revenue growth, it's on a solid ground. The 2 engine advertising as well as subscription fees continue to grow very well. So we're still on the path of recovery from our last year's incident and research is ramping up very nicely. Your next question comes from the line of Chi Sang from HSBC. Please go ahead. Good morning, everybody, and again, congratulations, Jennifer, on this next opportunity. I wanted to ask you about core search. In particular, I was wondering if you can comment on traffic as well as demand. On the traffic front, what are you guys seeing in terms of growth in traffic and maybe growth in paid clicks year to date? And I'm wondering if you expect paid clicks to grow faster this year than last year. And then in terms of demand, given the rebasing of your customer base as well as with higher standards, what type of customer growth do you expect this year? Thanks so much. I'm going to take the first cut on T's question and Qi and Robin can feel free to add. The traffic as overall continues to be very solid. Mobile continues to be growing nicely and a bigger proportion of the overall traffic. As you know, we I mentioned earlier, the feed product is also we're busy developing that and seeing good progress on that. So from our product service perspective, we have the nicer search traffic as well as user engagement that user have more time and interesting topics that they can view on the Baidu platform. For us to build in more of these inventories, it creates more of the user product. It provides a bigger advertiser advertising pool and inventory for our advertisers. So I think going into 2017, later in the quarter, we should continue to expect that the paid clicks will power the growth of monetization. From a Customer wise also, I think seasonally Q1 was a low quarter. And I think for the remainder of the year, as we have richer products for our advertisers and our sales force, we focus their efforts to develop the market. We should expect the customer base to grow as well. Yes. Let me just add to what Jennifer described. With regard to search traffic, as we mentioned earlier, we view search as a fundamental human need, user need. And as we digitize more and more information, digitize more and more daily activities, the search overall demand will increase. That's number 1. Number 2, in its current forms of user express their intent through keywords, query input, landing on a set of information. That will see its natural pace of growth. As you have seen, our industry has in China has been exhibiting so far. However, what I will emphasize is through AI technology innovations, we believe we can, over time, expand our search traffic by additional user experiences. For example, you can search based on voice. You can search based on image and more and more content will be available for search. So our focus is tapping to the current trend of user traffic growth for sure. At the same time, focusing on building better experience, more search capabilities, expanding into more search scenarios over time to expand search traffic. On the click pay to click side, again, the pattern will be similar. The focus will be using AI technologies to understand the user intent better and enable that to expose to advertisers to our business customers so that advertisers will have, over time, richer opportunities to place their campaigns as part of product so that we have more opportunities to tap into the ongoing growing demand of advertising needs. So nether out, there's existing forms that's growing at its current pace, and we're also focusing on tapping into future user traffic and the future pay to click growth opportunities through AI, through technology technological based enablement. Your next question comes from the line of Alicia Yap from Citigroup. Please go ahead. Hi, thank you. Good morning, Robin, Jennifer and Doctor. Lu. Thanks for taking my questions. My question is related to margins. So your comments of the operating margin, including Baidu Core versus the transaction service, where transaction service 16.8 percent point reductions. Is that mean in Q1 the margin on the transaction service only And then how should we be thinking about the overall core? And then how should we be thinking about the overall core margins in the future with newsfeed becoming a more meaningful part of the contributions? And then related to that, I wanted to ask about the content cost on the iQIYI front. Is all the RMB2.6 billion in Q1 is all related to iQIYI. Is there anything on that is related to the news feed content? And then with iQIYI recent licensing deal with Netflix, does the content cost guidance of doubling year over year this year still hold true or should we expect even more than double in the content cost? Thank you. Thank you, Alicia. So a few questions. First of all, the margin drag that we reported on transaction services was reported on the same concept and definition consistent with the prior quarters. This is to give you an idea and you can clearly see that we're reducing the investments on this front and we're shifting from mobile to AI. And so for your specific comment, normi was included in this number and included in the transaction services, as a reminder, also has financial services, Baidu Delivery, MAP and Nomi. And so these are the main components. As I mentioned earlier, we'll continue to reduce spend on Nomi. And the other element within the old transaction services sector has to do with core search or AI related initiatives. So it doesn't really make sense for transaction service to stand as a separate sector, but for your information, it's more to giving you an indication for this quarter that we are reducing spend on this front. For newsfeed, as mentioned before, News Feed carries a different margin profile and we're in the early stage of developing its business model from an advertising perspective. Currently, we're focusing on driving the user experience, user adoption, so investment related to feed has to do with the ecosystem build up, content acquisition, R and D efforts and some, you can say, infrastructure related bandwidth and depreciation related to servers because we're building the user traffic on the front. We haven't really focused on the advertising effort, but as Qi mentioned earlier, the business model is pretty apparent and the customers are quite open and receptive to this advertising model. So over time, we will ramp up the advertising and monetization capability, But at this point, it's a very early stage. With regards to the content cost for Q1, yes, predominantly a biggest majority of the Q1 content expense was iQIYI related. And as we mentioned earlier, our expectation is this year, there will be a very important content investment, mainly for iQiyi and also partly related to our feed product. The overall guidance we provided earlier that the content cost will likely go up the same percentage as before, that estimate is still hold. Your next question comes from the line of Alan Hellywell from Deutsche Bank. Please go ahead. Great. I just wanted to join the chorus in thanking Jennifer for setting a high watermark in the industry as the CFO and also wish her the very best in her new role. A question around the interplay between demand for our search and newsfeed products. I can see key accounts scratching up new incremental budget to buy newsfeed ads, but I wonder if it is more cannibalistic to our budget limited SMEs that generally prefer the more focused sales generation aspects of buying a keyword to the more impression based aspect of News Feed Ads? And then just a quickie, a disclosure related question. By folding in transaction services to Core Search, are we no longer going to segregate out margin drag from Transaction Services and maybe even iQIYI? Thank you. Let me first answer the first part of the question about the on the demand side. The evidence so far has been showing an overall healthy growth and a specific evidence I'll call out is that we have enabled have enabled our customers to place their campaign budget in 2 ways. 1 is through their search campaign, they can indicate how much to go to the feeds. And there's also a separate interface that they can explicitly say these budget will be on the feed side. There's a clear upward trend, a very rapid growth for customers explicitly placing more campaign budget on the feed side while maintaining their search campaign search budget. And that's a clear signs of healthy growth, overall growth for our advertising needs for combined search and the feed products, number 1. Number 2, over time, will become more apparent, but feed, in many ways, enable brand advertising to have a meaningful play in our ad platforms. This is, again, very, very early. We are more focused on getting user experience to be truly, truly compelling and to grow our user base and time spent. But from campaign demand perspective, our combined search and feed will enable more overall growth, not just from the traditional performance based advertising into brand awareness based advertising as well. And Alan, to your second question, yes, we're folding transaction services into core. However, we will continue to separately identify iQIYI as a separate segment and report separately its margin impact on a quarterly basis. Your next question comes from the line of Alex Yao from JPMorgan. Please go ahead. Hi, good morning, everyone. Thank you for taking my question. I have a question on the Apollo project you guys announced recently. Does that make your autonomous car research project open source type of the project, which will potentially impact your monetization capability? If it's not, can you help us understand your future project for monetizing the autonomous car driving initiative? Thank you. Thank you for the question. It's actually a terrific question. As a matter of fact, I can tell you, my goal for Project Toro is to expand our monetization opportunities and a real plausible path towards future economic value creation for Baidu. Specifically, let me give you the thumbnail of what Apollo is and the comment on about business opportunities. First of all, as I described, it's open and complete and reliable platforms. We're open code. We're open software. And then we're also open capabilities. That's through APIs. And we are also providing core services as that overall part of the platforms. The overarching design is any players in the auto industry. With Apollo, you can put together a complete vehicle using off the shelf hardware components and be able to run with different intelligent driving scenarios and all the way up until 2020 towards for the autonomous driving. So that's the overarching vision by design. It's open innovation ecosystem. The key here is the down point of that ecosystem because the EPIC Innovation Center for the auto industry will be in data, in algorithms, in rapid pace of innovations towards intelligent driving. And Apollo is designing that way, and I can tell you my personal experience, the Hadoop ecosystem, the code base comes from Yahoo! Teams. And personally, if you picked the right design point for the industry, you can tap into the vast growth. And I emphasize vast growth are win win with all partners and yet at the same time enable Baidu to tap into the economic opportunities. Now without going into the specifics, what I can point to is there is no ways of monetizing an open ecosystem, whether it's services, packaged softwares, components, solutions. All these options are available to Baidu to tap into. That's number 1. Number 2, the response from auto partners, from industries has been, I can say, overwhelmingly positive. And our confidence of our ability to tap into that new rapid growth through the Apollo ecosystem and our ability to monetize is increased substantially going forward. So it's a terrific question. Maa Design, we want to enable a healthy ecosystem, but let's all make money in our way and grow the whole pie together. Your next question comes from the line of Huan Lin from 86 Research. Please go ahead. Hi, good morning, Roland, Jennifer, Doctor. Lu and congratulations Jennifer on the new role. I have a question on mobile gaming business. You mentioned that revenue contribution of mobile gaming business is around 3% of total revenue. I'm wondering what is the contribution to our profit? And after disconnecting this business, are you going to monetize the mobile game related traffic, which was previously directed to the mobile gaming business? Do you think that disconnecting businesses will eventually lead to a more efficient usage of your traffic in terms of monetization? Thank you. Hi. Mobile game, yes, as I said earlier, it contributed close to 3% of revenue last year. The game business, as you can see, is relatively small in our overall picture and it doesn't generate the kind of margin as we do for our main business. So this transaction is actually a very good transaction for both us and the parties involved. And also, it brings some good level of games for us. For us, the mobile game sector is always a very attractive sector for advertising business. And we do expect that even in the past with mobile game operations, we have game advertising income. And going forward, we will continue to develop this market and grow the mobile game advertiser base. Your next question comes from the line of Natalie Wu from CICC. Please go ahead. Hi, good morning, management. Thanks for taking my question. Firstly, I want to expand my best regards to Jennifer on the new role. And my question is regarding the margin of the core business, excluding transaction service and iQIYI, which seems to be declined quite a lot in the Q1 despite savings from traffic acquisition cost. So just wondering, is it mainly due to the AI related investment? Or is there any other factors behind that? And how should we look at the trend going forward? And also just a little bit clarification on the mobile game. So the consolidation of mobile game business will be since May, right? So that is to say your current guidance is reflecting half quarter's validation of the game related revenue? Thank you for the question. Yes, for Q1, I think a couple of factors to think about as you look at the margin for core. Mainly for core, a couple of things are going about. One is we're still recovering from for our search service from the last year's incident. It has not been fully recovered. We're on a good path. It's ramping up. It's performing as expected. The other thing is the investment related to feed. As I mentioned earlier, early stage in terms of monetization, but we're very focused on building feed as a very solid and good complementary product to our search group. Related to that, our bandwidth, depreciation, R and D, content cost and also channel distribution investment to have mobile Baidu be more prominent among the user base. So that's the other factor going in Q1. And the 3rd element, as you mentioned, AI investment, you will have seen R and D expense increase year on year. As I mentioned earlier, the incremental spend would all be related to AI initiatives. AI initiatives are an integral part of our core service and build upon the core technology capabilities and infrastructure So that's what's driving the pure white margin performance. For your second question with regards to mobile games, yes, you're correct. So basically, as I mentioned earlier, mobile games contributed to Q1 overall financial performance. It will only have about half of that in the Q2 period. So Jennifer, what I would just add to emphasize the AI investment part, the place I would like to emphasize is we'll be very disciplined and systematically optimize our resource allocations to make sure that our engineering investments and R and D investment is truly tapping into the substantial growth opportunities ahead of us. And we're going through a lot of work across different teams to make sure that our resource allocation utilization is fully optimized towards 2 fundamental focus. 1 is elevating our current core business. We see a lot of growth opportunities ahead and at the same time, accelerating the commercialization of our AI enabled business. So being disciplined and being very systematic in optimization is very important to us. Your next question comes from the line of Piyush Mubayi from Goldman Sachs. Please go ahead. Thank you for taking my question. First, Jennifer, congratulations on your new role. We wish you the best in your future endeavors. My question is directed to Qi at this point. We recognize that Baidu is strongly positioned in AI R and D. And as the business model evolves in the medium term, could you give us a glimpse into the range of operating metrics that become relevant so we can better understand and appreciate the new world we're getting into? And very specifically, as we go into a face, voice and image recognition based world that AI would bring about versus the current search monetization model in place, how do you think that's going to change? Thank you. Well, thank you for the questions. So let me first comment on your first question with regard to operating metrics. First, myself, my teams are very, very focused on accelerating the commercialization of our AI enabled new businesses. And because the core of AI technology is about efficiently extracting knowledge from data and our focus is, 1st of all, establish very, very compelling user scenarios and users and the usage are important part of metrics. And the second is the data and iteration rate, how we can iterate based on the data that we have in our systems. And the third is rapidly explore business models and monetization capabilities. And adding that together, we are developing our overall operating frameworks and operating dashboards. These are the type of things, Jennifer and myself, our teams collectively look at every week, every month. And we're focusing on driving a disciplined and accelerated pace of execution on commercializing the AI enabled new business initiatives. As I mentioned in my prepared speech earlier, as we move forward, we're appropriate. We will share more light with the investor communities about those operating metrics because it will take time to evolve. But what I can assure you is our teams are staying very, very focused to be very disciplined and rigorous in accelerating our pace forward. With regard to your question about modality change, on the consumer side, our current view is that will not fundamentally affect the economic patterns because even if you use voice instead of using keyboard, you still express your intent. And once we understand user intent and we understand the content that users try to seek to access, We will be able to place match that in a good way and existing models of advertising or other forms will be equally applicable in that scenario. So at this stage, we do not see a fundamental shift. Even though modality may change, the economic opportunity in front of us will be equally compelling as we have seen up to this point. Your next question comes from the line of Karen Chan from Jefferies. Please go ahead. Thank you, management, for taking my question and congratulations to Jennifer on your new role. My first question is related to core margin. So it is negatively impacted partly by the initial ramp up of mobile newsfeed app. So how should we think about normalized margin level once the mobile newsfeed reaches certain scalability? And my second question is regarding our monetization timeline of DuerOS with the AI enabled home device partnership we secured. Wondering if management can share any color on that. Thanks. Thanks, Karen. I'll take the first part and he can help address the second. As I mentioned earlier, currently, the margin doesn't reflect a true picture. I think we mentioned earlier, feed is a product that's going to carry a different margin profile. But overall, I think just purely focusing on margin is just one angle. It's more important to think about the overall service and the revenue opportunities that we can generate because of the product of search. The core search continues to be a very fundamental need, and that business model is beautiful and scalable and high margin. For speed to complement the search service, we give our advertisers a much bigger advertising inventory and the advertisers, and big or small can have more budget allocated with us. So for us to think about feed, because it is a push kind of product, it's different from search. The overall is the mix, it's more beautiful and more integrated and richer service that we provide. And I think it's important to look at the bigger market that we can potentially tap. Yes. Let me comment on the second part of the question with regard to DuerOS monetization and its time line. And here's how we think about DuerOS, positioning the industry, and that will shed light on how we think about monetization. First of all, DuerOS is the AI generation user experience platform, very similar to iOS and Android. IOS and Android is ready for fingers, the device sits in everybody's pocket. Duos, the fundamental interaction is natural language and the voice based. And it's everywhere. It's on every device in every scenario. So it's a platform in that regard. The second, Duerio is also a new entry point because as you use DuerOS more and more in your home, in your car, say, play the next song for me, order pizza, that becomes a new entry. So it plays dual role as an experienced platforms and new form of entry. On the entry side, the monetization is very natural. This is very similar to today's information gateway, like search. And the time line will be the amount of scale that we can grow into and there will be natural opportunities we can tap into. The second is about the platforms. Traditionally, there are several dimensions of platform economics. If you look at the iOS and Android, there's ways to run an app store type of models. You can get economic value. There's a VIC for the applications that builds on top of our platforms. And at the same time, StoraOS also strategically bring additional demand to our ABC Cloud. So we can also indirectly monetize through that vehicles. So having said all that, our focus right now is really grow the ecosystem. We're doing a good job. Our teams are really racing ahead. Every day, every week, we're signing up new partners. So focusing on skills. But as I said, we see ourselves as a clear leader in China and opportunities over time will be tremendous. Your next question comes from the line of Grace Chen from Morgan Stanley. Please go ahead. Hello. Hi. Thank you for taking my question. My question is about the search business. From the Q2 sales guidance, we can see that the search sales should be recovering on both a Q on Q and A year over year basis. Can you help us understand what are the key drivers for the sales recovery in terms of market segments? And also can you comment on the competitive landscape in the advertising business in general, for example, from like social and e commerce peers? And also on the margin for search business, as we've just discussed that we can see that margin have been contracting in the past few quarters for a couple of reasons. Both the sales recovery and margin recovery, so can you give us a guidance about the reasonable margin level of the search business? Thank you. I think for us, as you noted correctly, the business is recovering and rebuilding. The sectors that we look at, many of the sectors have a lot of potential, specifically education, real estate, local services, like even retail continues to be very strong. I mentioned earlier also like the sectors like games could be a lot of possibilities too. So as we look forward, search continues to have a lot of verticals that we can further develop and service our customers better and with complementary feed products to service even bigger customer pools. I think for us to look at the overall business performance, it's our focus to run highly efficient business. We have always steered our resources towards the strategically important areas as we identify AI as our key strategic focus. A lot of the effort is focusing on the R and D side, in particular, relates to talent. So as I mentioned, if you look at the margin performance for the year, I have given a pretty clear indication in terms of how you look at our overall business. Basically, this year, I think for us, we talked about content that's related to iQIYI and our overall ecosystem build up. I talked about R and D that's related to talent, specifically for AI. And I think these are the main items and the rest of us is to focus on execution. No specific margin guidance, but I think I hope that the information we provided is helpful for you to construct your margin picture. With regard to competitions, what I will emphasize is, first, we are clear to market leaders, particularly in search market share on mobiles. And that's number 1. Number 2, our focus is on innovations. Our focus on extending the search scenarios, particularly expand search capabilities so that search experience is fundamentally natural to a mobile device and tap into the rich capabilities such as camera and speech so that over time, we will be more compelling. And last, I would say is search, at its core, is a scaling business. There's a fundamental scale impact. As market leaders, we want to fully leverage that so that our technological capabilities with the new AI at the core will understand user better than any other and understand content better than any others. So over time, we are confident that we will be able to maintain a strong market leadership position. So let me just add on the search revenue side. I think the search business has been very traffic bound advertisers or customers. They always want to buy more traffic and the performance is unmatched by any other type of media online or offline. So our focus has been and will continue to be on growing the search traffic. So we would not worry about other type of advertisement from other type of media. Your next question comes from the line of Ming Zhu from UBS. Please go ahead. Good morning. Thank you for taking my question. So I have two questions. The first one is on the newsfeed side. So if you name one key area to improve on the user experience of newsfeed, So I'm wondering whether it's what is that, whether it's recommendation algorithm or targeting or content or something others? Could you help us understand? And secondly, my second question is on CPC. I think the from the 20 F, we know that last year, the number of paid clicks actually more quickly than revenue growth indicating that the CPC is actually down. So you just mentioned that this year the paid clicks will continue to grow. So could you also comment on the CPC trend? Let me first talk about the feed side. Good question. If there's one thing for us to focus is the quality of the matching algorithms because the search product fundamentally is about deeply understand a user, the user's interest, the information needs. On the other hand, understand the content. But at its core, it's about matching them together. So the areas for us to focus on are the top priority areas is the quality of the matching algorithms so that we can sustainably improve the overall user satisfaction and grow the base of that product. And on your second question, yes, last year, if you recall, last year, we took effort to have a higher standard for our customers. And as a result, a lot of the customers are removed or unable to do business with us. For search, it is a bidding business model. When you have a less like a smaller advertiser pool, the bidding will not be as intense. So that in itself can affect the CPC. However, looking at the paid click trend, you will notice that for this kind of phenomenon to occur, our advertisers are actually having better ROIs for the business. It continues to speak to this high performance nature of paid search. And it's just a matter of transition that we're going through that CPC was a result of that. But that's not something that I feel should be worried should be worried from. Your next question comes from the line of Evan Jao from Credit Suisse. Please go ahead. Hi, management. Thank you for taking my questions. Just lastly, I want to ask the update about Baidu Financial Services. Wondering whether this has becoming more sub visible or higher contribution portion within the other revenue we recognized in the Q1? And how's the kind of profitability improvement within this segment for our business because we have also seen some across the industry, the overall growth and profitability has improved a lot in the past few months. So why don't you get an update on that? Thank you. Yes. For our transaction for our financial services business, it does generate financing income and that would flow through other revenue. It's still in its early stage and having us building the fundamental capability like leveraging data and our algorithm to have better modeling for credit risk underwriting would be the focus. So as you would see that we position our financial services business as a Fintech business, and we do originations and wealth management to help our train our models and so that we can really get better handling of the much richer data that we have and the technology capabilities. So financial services itself, as an effort, is progressing very well. And I think it's on the path of getting more stronger fundamental capability in helping using the technology and a different angle to look at the financial services business. Ladies and gentlemen, we are now approaching the end of the conference call. Thank you for your participation in today's conference. You may now disconnect. Goodbye.