Baidu, Inc. Q2 FY2022 Earnings Call

Thank you for joining us, and welcome to the Baidu Second Quarter 2022 Earnings Conference Call. All participants are currently in listen-only mode. We will begin with a presentation, followed by a question-and-answer session. I will now turn the call over to Juan Lin, Head of Investor Relations for Baidu. Please proceed.

Hello, everyone, and welcome to Baidu's second 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 provision 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 detailed discussions of these risks and uncertainties, please refer to our latest annual report and other documents filed with the SEC and Hong Kong Exchange. 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 non-GAAP financial measures. Our press release includes a reconciliation of the non-GAAP measures to the 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.

Hello, everyone. Baidu Core earned RMB23.2 billion in revenues and 5.1 billion in non-GAAP operating profit in the second quarter. The resurgence of COVID-19 led to an unfavorable macro environment in the quarter. However, Baidu AI Cloud and Intelligent Driving business maintained their rapid growth momentum as we aligned well with the government's repeated calls for technological innovation. Especially Q2 revenues from Baidu AI Cloud increased by 31% year-over-year, outgrowing many of our peers, contributing 18% of Baidu Core's revenues in the quarter, which is up from 14% in the same period last year. Further, the operating margin for Baidu AI Cloud improved on both a year-over-year and quarter-over-quarter basis. Apollo Go completed 287,000 rides in Q2, increasing by almost 500% year-over-year. On July 20, Apollo Go's cumulative ridership reached 1 million. In July, we unveiled Apollo RT6, the sixth generation Apollo robotaxi vehicle, bringing the cost of robotaxi down to the price range of mass-market electric vehicles for the first time in China and globally. We aim to put a sizable number of RT6 vehicles into operation in the year 2024. While Baidu Core ad revenue decreased by 10% over the year in the second quarter due to a challenging macro environment, our mobile ecosystem continued to generate strong cash flow as we focused on operational excellence and efficiency. Since early June, we have seen signs of recovery as the control measures were gradually lifted. For example, the year-over-year decline of our ad revenues narrowed in June and July. In particular, ad revenues from retail customers resumed year-over-year growth during the 618 Shopping Festival. Project implementation for Baidu AI Cloud has also been improving, thanks to the gradual removal of some major travel restrictions. While the recovery is likely to be gradual, and there are still uncertainties about the development of COVID-19, our long-term goals, strategies, and capabilities for shareholder value creation remain intact. As a group, we have built a discipline of long-term thinking, which we believe is a strong asset in this fast-evolving, innovative, and highly competitive environment. Cost optimization and operational efficiencies are always top of mind for us. Our mobile ecosystem business should continue to generate strong cash flow to fuel and fund our investments in Baidu AI Cloud and Intelligent Driving over the long term. Now let's review the second quarter operational highlights. Revenues from Baidu AI Cloud grew by 31% year-over-year in the quarter, once again, offsetting our peers despite the macro challenges brought by the resurgence of COVID-19. Our growth was driven by strong performance in the cloud business within enterprise and the public sector. We managed to improve our operating margin both on a year-over-year and quarter-over-quarter basis in Q2, as we focused on healthier and more sustainable cloud revenue growth. We aim to achieve profitability as we scale up further. Baidu AI Cloud continues to benefit from the growth opportunity in China’s digital and intelligent transformation. We believe this transformation is still in its early stage, and organizations are eager to leverage technologies to improve efficiency and productivity. Over the past years, we have made tremendous advances in AI technologies, made our AI capabilities widely available to enterprises and developers through our open platform, gained valuable industry expertise, and seen significant improvements in productivity in areas like manufacturing, transportation, energy, utilities, and the public sector. Baidu AI Cloud's differentiating strengths are our AI capabilities and deep understanding of industry-specific pain points to help our customers accelerate their transformation. In short, our competitiveness enables us to take full advantage of the tailwind offered by these new secular trends. Revenues from ACE Smart Transportation increased by about 40% in Q2. During the second quarter, we won several new projects for highways and urban roads, both from our new and existing customers. By the end of the second quarter, Baidu ACE Smart Transportation has been adopted by 51 cities, up from 20 cities a year ago and 41 cities a quarter ago, based on the contract amount over RMB20 million. Going forward, we will continue to focus on key industries and enable cross-industry replications for similar use cases by utilizing AI innovation. By doing so, we believe we will be able to reduce the operating losses and achieve profitability over time. Meanwhile, we will continue to focus on quality and sustainable revenue growth and aim to continue outgrowing our peers. Moving to Intelligent Driving, Apollo Go continues to take a significant step towards building up operations, strengthening its lead position as the world's fifth autonomous ride-hailing service provider. In Q2, Apollo Go provided 287,000 rides to the public, up from almost 500% year-over-year and 50% quarter-over-quarter. On July 20, 2022, Apollo Go accumulated rides reached 1 million. In the Yizhuang region of Beijing, according to our estimates, Apollo Go has obtained a 10% market share for ride-hailing services with pickup and drop-off both in Yizhuang. Apollo Go has already become an important supplement for daily commuting as we launched the service less than two years ago. Now, more than 100 Apollo Go vehicles are serving the Yizhuang residents daily, and each vehicle, on average, completes more than 20 rides per day. In July, Apollo Go branched out to Hefei and Chengdu and is now operating in more than 10 cities, charging fees in seven cities across China. We believe large-scale operation allows us to improve our level of autonomous driving technologies further. With data generated from everyday operations, we can identify problems that are not visible during the testing phase. The number of incidents incurred during operations has far exceeded those found by vehicles in testing. In addition, Apollo Go has made some exciting progress since our last earnings call, marked by receiving the green light to provide fully driverless ride-hailing service systems and the launch of the sixth-generation robotaxi vehicle, RT6. Earlier this month, we obtained the regulatory permits in Chongqing and Wuhan to provide fully driverless ride-hailing services on open roads. We were also authorized to collect fees for those services. We are proud to be the first and only company in China now to offer fully driverless ride-hailing services to the public on open roads, entirely without human drivers in the car. Such achievements validate our superior Level 4 autonomous driving technology and endorse our strategy of utilizing large-scale operations to stimulate further technological advancements. On July 21 at Baidu World, we unveiled Apollo RT6, the sixth-generation Apollo robotaxi vehicle with a targeted mass production cost of RMB250,000. This is significantly lower than the mass production cost of the fifth-generation vehicle and is now in the price range of mass-market electric vehicles. RT6 is designed to offer large-scale fully driverless ride-hailing services and launched at a time when both our technological and operational capabilities are ready. We believe that China's smart EV value chain is already well established. Some of the auto parts and components for Level 4 autonomous driving solutions are now being produced in China at a much lower price than a few years ago. Moreover, RT6 is a passenger-centric vehicle, so we have removed certain components, specifically designed for drivers. For example, RT6 has a detachable steering wheel, which could unlock space for extra seating, luggage, desks, and even entertainment equipment, enhancing the in-car experience for passengers. Such achievements have set a strong foundation for Apollo Go to significantly reduce the two largest cost items for its operations, labor cost and robotaxi vehicle cost. This is a critical step for Apollo Go to establish a revolutionary business model and accelerate its expansion. Over the long term, we aim to make Apollo Go an alternative mobility option for millions of people, creating tremendous economic and social value. Baidu's Apollo auto solutions, including ASD and DuerOS for auto, continues to gain popularity among automakers. As an increasing number of auto OEMs have publicly committed their brands to autonomous and connected vehicles, we are pleased to say that many have chosen to partner with Baidu to expedite their timelines and plans. Recently, the total projected accumulated sales of our auto solutions have grown to RMB10.3 billion, according to our internal estimates. Moving to the mobile ecosystem, the user base of our mobile ecosystem continued to grow steadily. We once again delivered strong margins in the second quarter despite the negative impact caused by macro weakness. On the user side, Baidu app's MAU increased by 8% year-over-year to 628 million in June. Data search queries and the content distributed through Baidu app grew double digits year-over-year in Q2. Our innovations and efforts to deliver a closed-loop experience have made Baidu app increasingly valuable to users. In addition to searching for information and knowledge, people come to Baidu app to look for ways to fulfill their needs. We have enabled them to order services, purchase products, and interact with industry experts and others without leaving Baidu app. Here are some metrics to share. 84% of our DAU in June were lock-in users, up from 76% a year ago. People have discovered that their user experience within Baidu app continues to improve once they are engaged. Quarterly GMV facilitated by Baidu search and LotSmart grew by about 127% year-over-year. In particular, during the 618 Shopping Festival, GMV increased by about 260% year-over-year. In June, 130,000 industry experts actively signed up for our instant replies feature, up from about 100,000 in March. Total daily instant replies increased by about 190% year-over-year, up about 30% from March. Another highlight is our progress in short videos. Currently, about 85% of the content distributed within the Baidu app feed are short videos. During the quarter, we expanded the fully immersive video experience in the service homepage to all users. This feature is now available on both search and feed, aiding short video consumption on Baidu app. In Q2, short videos distributed through the search feed increased by double digits year-over-year. In addition, we are also using AI to expand our content portfolio. We provide content creators with AI tools, which they can use to produce video content more efficiently. AI-generated content works particularly well for both long and short content. While using our closed-loop experience, more and more users lead their footprint within our mobile ecosystem, increasing our capability to understand user needs and enabling strong conversion optimization at each step of their journey. Together with our continuous efforts to optimize advertising technologies, this has helped us to significantly improve the app conversion rate for our customers. Looking ahead, here are some key takeaways I'd like to give you. First, operationally, we have built strong new growth engines for Baidu Core, which we believe will boost Baidu Core's revenue growth in the coming years. Baidu AI Cloud's uniqueness in AI capabilities continues to outgrow most of our peers. Apollo Go continues to solidify its position as the largest autonomous ride-hailing service provider in the world. Apollo Go has entered a new chapter with fully driverless ride-hailing on open roads. With the launch of our purpose-built RT6 robotaxi vehicles at a significantly low cost, Apollo Go is set to accelerate its operation, further differentiating itself from peers in both technology and operations. The second takeaway financially is that the mobile ecosystem will continue to generate strong cash flow to fund our investments in cloud and intelligent driving. On a separate note, we are also excited about iQIYI's continuous efforts in improving operational efficiency. iQIYI once again generated operating profit in Q2, the second consecutive quarter to report positive operating profit on both GAAP and non-GAAP financial measures. Furthermore, iQIYI generated positive net operating cash flow in the quarter for the first time. Before I turn the call to Rong, I'd like to highlight that we will be added to the Hang Seng Index from September 5. We believe with the inclusion in the Hang Seng Index, one of the best-known indices in Asia, the Hong Kong shares of Baidu will receive more front flow. Overall, I'm very proud of the team's strong execution in the quarter and remain excited about our future. With that, let me turn the call over to Rong to go through our financial highlights.

Thank you, Robin. Now let me walk you through the details of our second quarter financial results. Total revenue was RMB29.6 billion, decreasing 5% year-over-year. Revenue from Baidu Core was RMB23.2 billion, decreasing 4% year-over-year. Baidu Core's online marketing revenue was RMB17.1 billion, decreasing 10% year-over-year. Baidu Core's non-online marketing revenue was RMB6.1 billion, up 22% year-over-year, driven by cloud and other AI-powered businesses. In Q2, Baidu AI Cloud increased by 31% year-over-year to RMB4.3 billion. Revenue from iQIYI was RMB6.7 billion, decreasing 13% year-over-year. Cost of revenues was RMB15.2 billion, decreasing 5% year-over-year, primarily due to a decrease in content costs, partially offset by an increase in personnel-related expenses and other costs related to new AI businesses. Operating expenses were RMB11.1 billion, decreasing 8% year-over-year, primarily due to a decrease in channel spending and promotional marketing expenses. Operating income was RMB3.4 billion. Baidu Core operating income was RMB3.2 billion, and Baidu Core operating margin was 14%. Non-GAAP operating income was RMB5.5 billion. Non-GAAP Baidu Core operating income was RMB5.1 billion, and non-GAAP Baidu Core operating margin was 22%. Total other income net was RMB151 million compared to a total other loss of RMB2.4 billion last year, which included a fair value loss of RMB3.1 billion from long-term investments. In the second quarter of 2022, we recognized a favorable gain of RMB536 million, a substantial portion of long-term investments including, but not limited to, investments in equity securities of public and private companies, private equity funds, and digital assets is subject to quarterly fair value adjustments which may contribute to net income volatility in future periods. Income tax expenses was RMB125 million, decreasing 99% year-over-year, primarily due to the reversal of certain tax expenses accrued for 2021 based on the 2021 tax return filed in the second quarter of 2022 and an increase in deductions on certain expenses that were considered not deductible in the second quarter of 2021. Net income attributable to Baidu was RMB3.6 billion, and diluted earnings per ADS was RMB9.97. Net income attributable to Baidu Core was RMB3.7 billion. Non-GAAP net income attributable to Baidu was RMB5.5 billion. Non-GAAP diluted earnings per ADS were RMB15.79. Non-GAAP net income attributable to Baidu Core was RMB5.4 billion, and non-GAAP net margin for Baidu Core was 24%. Adjusted EBITDA was RMB7.1 billion, and adjusted EBITDA margin was 24%. Adjusted EBITDA for Baidu Core was RMB6.6 billion, and adjusted EBITDA margin for Baidu Core was 28%. As of June 30, 2022, cash, cash equivalents, restricted cash, and short-term investments were RMB189.4 billion, and cash, cash equivalents, restricted cash, and short-term investments, excluding iQIYI, were RMB184.5 billion. Free cash flow was RMB5.5 billion and free cash flow, excluding iQIYI, was RMB5.5 billion. Baidu Core had approximately 36,000 employees as of June 30, 2022. With that, operator, let's now open the call to questions.

Your first question will come from Alex Yao of JPMorgan. Please go ahead.

Hi, management, good evening. Thank you for taking my question. I note you mentioned that you are seeing signs of recovery in your advertising business since June. Could you management just share more details on the recovery in terms of advertising categories? Looking into the second half of 2022, how do you expect the advertising to develop? And in the medium to longer term, if we look beyond the near-term impact on COVID, how do you foresee the advertising business to develop in the medium to long term?

Alex, this is Robin. As you know, Baidu Core ad revenues decreased by about 10% year-over-year last quarter because of the challenging macro environment. In April and May, our ad revenues experienced a significant year-over-year decrease because COVID-19 impacted some of China's major cities, especially Shanghai and, to a lesser extent, Beijing. In June, our ad revenue started to recover when the situation gradually improved, and July was better than June. Regarding ad categories, some of the ad verticals were hit particularly hard in April and May, including retail, travel, local services, and healthcare. Ad spending from these verticals has picked up quickly since June. Looking into the second half of the year, we are still facing macro uncertainties. It is hard for us to predict the impact of COVID at this stage. For example, the resurgence in some hot travel destinations like Sanya has caused an early end to the summer travel season. Our search app is highly correlated with China's GDP growth and the performance of SMEs. Therefore, we believe our ad revenue should recover as the macro environment improves. We have also seen some opportunities for our mobile ecosystem around e-commerce and short videos. For instance, integrating e-commerce and short videos within our search and feed; in fact, more and more short videos are appearing in our search results. I think in the mid to long term, our content in key verticals and our capabilities in facilitating transactions within the Baidu App, as well as our closed-loop experience for users, will help us create more user insights for our customers. These insights will drive ad conversion and generate value for advertisers, supporting the long-term growth of our online advertising business.

The next question comes from Kenneth Fong of Credit Suisse. Please go ahead.

Hi, good evening. Thank you for taking my questions. Congratulations on another quarter with strong cloud revenue growth. Can you help us understand the underlying drivers that helped Baidu AI Cloud to outperform your peers? What's your outlook for the cloud business for the second half of the year? And I'm wondering if you can also help us understand your strategy as well as the timeline for the cloud business to reach breakeven?

Thank you, Ken, for your question. This is Dou. I will address the revenue part and leave the second part to Rong. As Robin just mentioned, Baidu AI Cloud continues to grow well in Q2 despite the challenging macro environment, with revenue up 31% year-over-year, and AI Cloud now contributes almost 20% of total Baidu revenue. We believe what differentiates Baidu Cloud from our peers is our dedication to integrate cloud computing with AI, allowing our AI capabilities to help customers improve efficiency. More specifically, as a cloud vendor, we have strong AI capabilities. On the other hand, as an AI solution provider, we possess strong cloud computing capabilities. Also, as we mentioned, the enterprises in the public sector were the main growth drivers for cloud computing. We believe in China, the traditional enterprises in the public sector are still in the early stages of digital and intelligent transformation. Clearly, this transformation means organizations, whether large or small, want to utilize AI to boost their efficiency and competitiveness, which will further drive the demand for high-performance computing. As a result, the combined revenues from manufacturing, energy, utilities, and the public sector almost doubled in Q2. In smart transportation, we continue to leverage our leading AI technologies and deep understanding of autonomous driving to grow our business. We see smart transportation has become one of the largest verticals for Baidu AI Cloud. With that, we are confident that revenues from enterprises in the public sector will continue to drive the growth of Baidu AI Cloud in the future. Also, since early June, we have seen gradual improvement in project implementation. But there are still uncertainties surrounding COVID-19 in the near term. However, we believe the strong demand and the trend in China remain unchanged. With that, we aim to continue growing faster than our peers.

Yes. Hi Kenneth. I will answer the question about margins. As the AI Cloud continues to generate positive gross margins in the second quarter, just as we did in the first quarter. On top of that, we managed to improve our operating margin, thanks to our strategy of focusing on quality and sustainable revenue growth. We have two parts in our AI Cloud. The first part is the personal cloud. The personal cloud contributes a small portion to the overall cloud revenue. It should continue to generate significant operating profit, and its revenue is growing a bit slower than overall cloud. The second part, which is the majority, is enterprise and public service cloud, which continues to generate positive gross profit in the second quarter. We improved our operating margin year-over-year and quarter-over-quarter because we have been focused on high-quality revenue growth and have gradually reduced the unhealthy projects. I believe in the future, we will work very hard to narrow the losses. Within enterprise and public sector cloud, the ACE Smart Transportation, as mentioned by Dou, already enjoys a very healthy gross margin because of the higher software and AI component. We think ACE's Smart Transportation may achieve breakeven earlier than other verticals in the coming quarters, and we have focused on providing modularized solutions and products for key use cases, such as urban roads, highways, and power. Secondly, we are also working hard to replicate similar scenarios across different industries. Cross-industry replication requires AI technologies to uncover connections across many different scenarios. We believe our AI technologies, such as large models, will help us achieve that goal. Overall, we will continue to focus on quality and sustainable revenue growth to improve margins and reach profitability in the next few years.

The next question comes from Lincoln Kong of Goldman Sachs. Please go ahead.

My question is about robotaxi. We're quite impressed that RT6 is targeting a cost of RMB250,000 per car, which is significantly lower than the previous taxi models. Can management help us understand what's the main driver for this cost reduction? And what's our outlook for future cost trends? How should we think about the robotaxi's economic mechanism concerning this cost? And is there any timeline for when we can expect major commercial contributions from the robotaxi business?

Lincoln, this is Robin. I think there are three drivers for the cost reduction. First, it's our deep knowledge of autonomous driving technology and operations. Over the past nine years, Baidu has developed strong Level 4 technology and gained industry know-how in the auto industry and how to operate Level 4 ride-hailing services. We have become the largest autonomous ride-hailing service provider in the world, so we fully understand the autonomous ride-hailing market and passengers' needs. We know where we can simplify our in-car features and where we should allocate more resources. For example, RT6 is a passenger-centric vehicle, not a driver-centric vehicle. On one hand, we have reduced certain in-car features designed for the driver to reduce costs, like I mentioned during the prepared remarks. RT6 can remove the steering wheel and some other accessories such as wide display screens for drivers. On the other hand, we focused more on safety performance and passenger experience to make RT6 passenger-centric. For instance, we have safety redundancy in seven parts of RT6, setting an industry standard. This includes redundancy for computing units, sensors, steering systems, braking systems, communication systems, power supplies, and the auto architecture. Additionally, RT6 is designed for more in-car space and better passenger experience. I also want to highlight that about 60% of our RT6 BOMs are for intelligent features like Level 4 and automation capabilities. The second driver is scale. We plan to leverage third-party automakers to produce RT6 for us. So RT6 will not be retrofitted onto passenger vehicles, which is a key differentiator. We will purchase the BOM of RT6 instead of paying the retail price as we did in the past. Once Baidu transitions from retrofitting vehicles to collaborating with third-party automakers to produce RT6, we will take advantage of our scale backed by leading autonomous driving technology and operational capabilities. The third driver is the development of the value chain for China's intelligent EV industry. RT6 was launched when China's intelligent EV industry had matured, with many new EV companies and auto part producers in the market. Specifically, many autonomous driving-related auto parts are now produced locally, making intelligent EVs more affordable. For example, LiDAR—an essential component for autonomous driving solutions—was priced in the hundreds of thousands of U.S. dollars initially, but now costs around $1,000. Therefore, we believe the BOM for our robotaxi will continue to decrease as China's intelligent EV industry advances and as Apollo Go scales up. Our approach is gradual; we will roll out services in different regions and cities. Thus, as we gain scale and continuously enhance our technology, the operating cost for such services will continue to drop. We certainly have the first-mover advantage, and the barriers to entry will become higher over time.

The next question comes from Alicia Yap of Citigroup. Please go ahead.

Thank you. Good evening, management. Thank you for taking my question. I have a follow-up question on Apollo Go. Congratulations on the solid achievements recently. Can management provide some updates on the regulatory environment for autonomous driving and robotaxi in China? How will Baidu capture this trend? Could management also elaborate on Baidu's goals and strategies for fully driverless operations?

Thank you. This is Zhen. Just as Robin mentioned, Apollo Go is already the largest autonomous ride-hailing service provider in the world. In Q2, Apollo Go completed 287,000 rides, and our cumulative rides surpassed 1 million. This number is much higher than our expectations. Our strategy is to leverage our large-scale operation to enhance our technology and grow bigger and faster. This is critically important in China, where road and traffic conditions are very complex, and the data generated from large-scale operations will help us refine our technology further. Currently, our goal is already available in more than 10 cities, including all Tier 1 cities in China. Our operational areas include residential, office buildings, and hospitals. We're also expanding into the B2B industry. With the launch of RT6, targeting a mass production cost of RMB250,000, we will be able to purchase larger-scale operations faster. In the future, we will continue to improve our Level 4 technology and expand our operations. We will also strive to influence China’s regulatory landscape for autonomous driving. Technologically, we started offering autonomous ride-hailing services on open roads in Wuhan on May 10. In less than three months, we can provide fully driverless ride-hailing services on open roads. This significant progress is attributed to our leading technologies and capabilities.

For operations in the Yizhuang region, as I mentioned, we have already captured about a 10% market share for ride-hailing services in the area. Each of our active vehicles completes more than 25 rides on average per day. As a pioneer in the industry, Baidu works closely with regulators to establish regulations and industry standards. Recently, the Chinese Ministry of Transport issued a draft that outlines guidelines for autonomous ride-hailing services. The guidelines promote commercial operations for autonomous ride-hailing services in China. This is the first regulation on autonomous ride-hailing services at a central government level globally and matches efforts to promote high-level autonomous driving. We are proud to be the first and only company in China to offer fully driverless ride-hailing services to the public on open roads without human drivers present in the car. In early August, Baidu was given the approval to provide fully driverless ride-hailing services in Hefei, Chongqing, and Wuhan, which are major cities. Going forward, we will continue our expansion and strive for broader adoption of fully driverless ride-hailing.

The next question comes from Eddie Leung of Bank of America Merrill Lynch. Please go ahead.

Thank you for taking my question. I have a question regarding your autonomous driving solutions for OEMs. You mentioned that the contract value after the last quarter was just over $10 billion. It doesn't seem to be increasing much from the last quarterly result. Could you provide a bit of insight into the reason for that? Can you also remind us of some of the automakers that have been working with you on using your autonomous driving solutions?

Ed, let me answer your questions. As Robin mentioned in his remarks, the total projected cumulative sales of our auto solutions has reached RMB10.3 billion, according to our estimates. I think that when we talk about these numbers, we need to bear in mind that the trend towards smart EVs is irreversible. For cars, we believe that long-term electrification is just part of the equation, while intelligence is the game changer. In the future, EVs lacking intelligent driving capabilities will not be competitive. Many automakers, including some leading domestic and international manufacturers, are interested in using our solutions for their car models to capture this emerging market opportunity. Based on our conversations with them, we understand that automakers appreciate our AI capabilities, our insights into autonomous driving, and our strong brand. We are in discussions with many automakers, both locally and globally, including some very large names in the industry. I want to emphasize that each automaker has its own timeline for engaging with suppliers, which can lead to different paces in our backlog. This discrepancy is completely normal in the automotive industry. Currently, we have partnerships with many automakers, including leading manufacturers in their respective segments. In addition to our in-car infotainment solutions, an increasing number of customers are adopting our Apollo self-driving products, including the ANP (Apollo Navigation Pilot) for highways and urban roads, the automatic AVP products, and HD Maps. I believe that soon, as more of our auto solutions become integrated into market-ready vehicles over the next three years, we should see significant revenue contributions.

The next question comes from Gary Yu of Morgan Stanley. Please go ahead.

Thank you for the opportunity to ask a question. Congratulations on the solid results. My question pertains to margin and cost control optimization. We saw that you achieved another strong quarter with margins better than expected. Could you please elaborate on the efforts taken to achieve such encouraging results? What is the margin outlook for the second half of the year?

Yes, thanks so much, Gary. I’ll address this question. Despite the very challenging macro environment in Q2, Baidu's non-GAAP operating margin was 22%, which reflects a 5 percentage point increase quarter-over-quarter. Over the past few months, we have made significant efforts to improve our operational efficiencies. For example, Baidu's SG&A expenses decreased by 12% year-over-year in the second quarter. Our businesses are at different stages of development, so we have varying investment strategies for each. For the mobile ecosystem, which is a relatively mature business, our goal is to maintain solid profits and margins, allowing it to provide strong cash flow to support our investments in new AI initiatives. For our new AI initiatives, we will continue to invest strategically as necessary. Going forward, we will remain focused on quality, sustainable revenue growth, and aim to continue improving our operating margins in the future.

The next question comes from James Lee of Mizuho. Please go ahead.

My question is regarding Jidu. Congratulations, by the way, on your launch in June. At the same time, you also launched RT6. I'm curious about the positioning of Jidu and RT6. Can you discuss the customer segmentation strategy of the two autonomous driving vehicles? I'm interested in how much overlap there is in demand between the two.

Yes, this is Robin. The positioning for Jidu and RT6 are very different. Before discussing Jidu, let me first outline our strategy for intelligent driving. Our goal is to provide large-scale, fully driverless ride-hailing services on open roads, powered by our L4 autonomous driving technology. Simultaneously, we employ some of our L4 capabilities into assisting driving features to meet automakers' intelligent driving demands. Jidu is a perfect example of such partnerships. Looking at our business portfolio for intelligent driving, we have RT6. RT6 represents Baidu's premier autonomous driving technology. RT6 is intended for large-scale, fully driverless ride-hailing services on open roads and is not a consumer-facing vehicle; it isn't sold to consumers. Jidu's Robo-01, on the other hand, is a consumer-facing product. It integrates our Level 4 technology into Level 3 or Level 2+ automation. Jidu Robo-01 will be equipped with AMP 3.0, our most advanced autonomous driving solution that can manage end-to-end intelligent driving and parking on urban roads and highways. Our smart cabin will also be installed in the vehicle, facilitating voice interaction, insights, and external interfacing. We believe these new offerings will assist in expanding our business. As for the timeline, everything is progressing well. We expect the first mass-produced Robo-01 to be completed very soon. The timeline reflects Jidu's capabilities from design to mass production. Jidu plans to begin taking orders for Robo-01 later this year and deliver the vehicles starting in 2023, with a second model set to launch at the end of this year and orders taken in 2023, leading to deliveries in 2024.

Our last question will come from Wei Xiong of UBS. Please go ahead.

First, I'm wondering if management can share updates on capital allocation. Could management discuss the implementation of your share buyback program? How do you balance investments in new businesses against doing more buybacks or dividends? Secondly, as we have seen the recent developments between U.S. and Chinese regulators regarding audit inspections of ADRs, could management share thoughts on this progress? Given that some of your peers have initiated the process to convert to dual primary listings, would Baidu also consider a U.S.-Hong Kong dual primary listing status?

Yes. Thank you for your questions. Let me address your inquiries. As of today, we have returned about $2.9 billion to shareholders under the 2020 share repurchase program. The program has a $4.5 billion cap, indicating we still have approximately $1.6 billion remaining. Baidu will continue to repurchase shares in the open market as we strongly believe in our long-term development potential. Reviewing our balance sheet, as of Q2, our cash equivalents, restricted cash, and short-term investments totaled $28.3 billion, and we also have around $11.1 billion in long-term investments. In terms of our current structure, our mobile ecosystem continues to generate substantial profit margins. Baidu AI Cloud's revenue has been growing impressively and faster than our industry peers. Apollo Go is now recognized as the largest autonomous ride-hailing service provider globally. Everything is on the right track, and we intend to continue investing in future growth. Regarding the second question about delisting and the potential for a primary listing in Hong Kong, I believe the recent agreement reached between the PCOB and Chinese authorities marks a significant first step toward allowing the PCOB to effectively investigate the auditing processes for public companies in China. This is a key milestone for both countries and for China-based companies trading under ADRs in the U.S. We perceive that both governments are keen to find solutions. For Baidu, we've already completed our Hong Kong secondary listing, and some of our major shareholders have converted their Baidu ADRs to ordinary shares in Hong Kong. We are also pleased to be included in the Hang Seng Index, which will take effect on September 5. We believe that this inclusion will attract more front flow for our Hong Kong shares. As for primary listing, the transition from secondary to primary listing in Hong Kong is typically straightforward, and we don’t foresee any hurdles to achieving that. However, we believe it’s more crucial to maintain focus on business fundamentals and drive long-term shareholder value. Additionally, Baidu will comply with all applicable laws in both China and the United States, while striving to maintain listings on both NASDAQ and the Hong Kong exchange. Thank you so much.

That will conclude today's question-and-answer session. This does conclude our conference for today. We thank you for participating, and you may now disconnect.