Baidu (BIDU 0.55%)
Q3 2022 Earnings Call
Nov 22, 2022, 7:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Thank you for standing by and welcome to the Baidu Inc. third quarter 2022 earnings conference call. [Operator instructions] There will be a presentation, followed by a question-and-answer session. [Operator instructions] I would now like to hand the conference over to your host for today, Juan Lin, Baidu’s director of investor relations.
Please go ahead.
Juan Lin — Director, Investor Relations
Hello, everyone, and welcome to Baidu’s third quarter 2022 earnings conference call. Baidu’s earnings release was distributed earlier today, and you can find a copy on our website, as well as on Newswire services. On the call today, we have Robin Li, our co-founder and CEO; Rong Luo, our CFO; Dou Shen, our EVP in charge of Baidu AI Cloud group; and Zhenyu Li, our SVP in charge of Baidu intelligent driving. After our prepared remarks, we will hold a Q&A session.
Please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. For a detailed discussion of these risks and uncertainties, please refer to our latest annual report and other documents filed with the SEC and Hong Kong Stock Exchange.
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Baidu does not undertake any obligation to update any forward-looking statement, except as required under applicable law. Our earnings press release and this call include discussions of certain unaudited non-GAAP financial measures. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures and is available on our IR website at ir.baidu.com. As a reminder, this conference is being recorded.
In addition, a webcast of this conference call will be available on Baidu’s IR website. I will now turn the call over to our CEO, Robin.
Robin Li — Co-Founder and Chief Executive Officer
Hello, everyone. Recapping the third quarter in broad terms, we delivered improved bottom-line results despite a challenging macroenvironment. Especially for the mobile ecosystem, operating profit resumed a positive year-over-year growth; and for AI Cloud, operating loss and margin improved meaningfully both on a year-over-year and a quarter-over-quarter basis. Businesses across the line from mobile ecosystem to AI Cloud to intelligent driving have been negatively affected by the resurgence of COVID.
Throughout Baidu’s history, however, we have experienced many challenging environment. Periods of challenges have enabled us to emerge stronger given our relentless effort on building long-term growth. We are using this period to ready ourselves for current business conditions to improve. Our key short-term tasks remain unchanged, which are efficiency, optimization, and continued investments in the new AI business.
Our new AI business such AI Cloud and intelligent driving are well aligned with China’s tech innovation and national initiatives. By doing so, we will further strengthen our leadership in new AI business and reaccelerate business growth. In Q3, Baidu Core ad revenue was down 4% year over year but improved from the second quarter’s 10% year-over-year decline as macro had improved gradually since June. Encouragingly, revenues from healthcare and retail recorded positive year-over-year growth in the quarter.
Going forward, when COVID situation alleviates in major cities, ad revenue across different verticals such as travel, franchising, and local services should rebound. For our new AI business, I’m proud to report some highlights. Revenues from AI Cloud increased by 24% year over year to RMB 4.5 billion in the quarter. AI Cloud has been a major growth driver for Baidu Core nonadvertising revenue.
In Q3, nonadvertising accounted for 26% of Baidu Core’s total revenue. That’s up from 21% a year ago. Baidu Apollo’s auto solutions continued to gain traction among leading automakers, and the total projected accumulated sales reached RMB 11.4 billion recently, growing more than 50% year over year. Apollo Go completed 474,000 rides in the quarter, up 311% year over year.
By the end of Q3, Apollo Go had completed 1.4 million rides on public sector. We believe we remain the largest autonomous ride-hailing service provider globally. Now, let’s review the third quarter operational highlight. Revenue from the AI Cloud increased by 24% year over year to RMB 4.5 billion in the quarter.
In Q3, the operating loss margin for AI Cloud improved notably both year over year and quarter over quarter. Over the past two quarters, we have made a shift away from some lower-margin businesses to build sustainable growth for AI Cloud. Meanwhile, we continue to take measures to standardize our solution to cut down deployment costs as we scale up. Our efforts have allowed us to gradually improve operating profit and margin.
I’ll take ACE smart transportation as an example. In the past quarters, we continue to grow revenue and improve operating margin for smart transportation as we gain scale. Leveraging our strong AI capabilities and our insights into the industry, we have developed solutions for typical use cases such as traffic management and V2X for urban roads and highways. Previously, we talked about how our projects helped improve traffic efficiency on city roads in Beijing, Guangzhou, Xiong’an, Chongqing, and other cities.
Recently, Zhuzhou City, an important transportation hub in Hunan Province, adopted our smart traffic management solution. Our solutions cover more than 70% of the major intersections in the busiest district of Zhuzhou. After adopting our solution, delays have been reduced by 22% during rush hour in the covered region. By the end of the quarter, Baidu ACE smart transportation solutions have been adopted by 63 cities, up from 24 cities a year ago and 51 cities a quarter ago, based on a contract amount of over RMB 10 billion — 10 million per city.
As we demonstrated in our capabilities to use AI to improve transportation efficiency in more cities, ACE smart transportation will further expand its market share. We’re trying to repeat our success in smart transportation in other key verticals such as manufacturing, energy and utilities, and the public sector. We will empower our customers with AI capabilities to help them increase productivity and cost control. With AI Cloud, our customers will be better positioned to take advantage of digital and intelligent transformation.
We believe we remain well-positioned in this early stage, fast-growing market due to, number one, our capabilities to establish end-to-end solutions based on our full-stack AI capabilities, ranging from chip design to deep learning frameworks to large language models to application-level software; and number two, our insights about customers’ pain points and our growing know-how and capabilities to solve their problems. While COVID causes delays in project implementation and complicated our sales team’s efforts hampering new contract wins, we believe the long-term trend of digital and intelligent transformation remains unchanged. Looking ahead, we will continue to focus on quality growth and aim to improve margins to achieve profitability for AI Cloud. In intelligent driving, we marked several key highlights in the third quarter, and our years of investments in intelligent driving have begun bearing fruit.
On Baidu Apollo’s auto solution, our total projected cumulative sales exceeded 11.4 billion recently. Based on our current pipeline, some of the major car models equipped with ANP and AVP are expected to be launched in the second half of next year. We expect meaningful revenue contribution from this business to begin in 2024 and profit to expand when material revenue kicks in. Such growth demonstrates the increasing demand for our auto solutions.
In Q3, we extended our partnership with one of China’s largest automotive and technology companies ANP, AVP, and HD Maps for one of their popular models. As of today, we have announced collaborations with many OEM partners. Serving various automakers has helped us standardize our auto solutions, making them compatible with more popular car models. As more cars equipped with our auto solution get into consumers’ hands, we will continue to refine and update our solutions.
Considering the sizable development cost for high-level autonomous driving technology, many automakers seek partnership with reliable suppliers who have strong brand and technology capabilities. We have differentiated ourselves with world-leading Level 4 autonomous driving, which has been established through years of investment. Now, we are proactively building high-quality partnerships with an increasing number of auto OEMs to accelerate our partners’ progress in autonomous driving. A few months ago, we integrated Baidu Maps into our intelligent driving group to create synergies between the Baidu Maps mobile app and the map solutions for auto and transportation industries.
Since our maps have already been widely adopted, we have obtained more insights in the transportation industry, allowing us to strengthen our solutions for the mobility sector. On Apollo Go, we continue to scale up…
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