Baidu, Inc. Q3 FY2022 Earnings Call

Thank you for standing by, and welcome to the Baidu Incorporated Third Quarter 2022 Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. 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.

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 US 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 Stock 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 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 site 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 over to our CEO, Robin.

Hello, everyone. Recapping the third quarter in broad terms, we delivered improved bottom line results despite a challenging macro environment, especially for the mobile ecosystem. Operating profit resumed positive year-over-year growth. For AI Cloud, operating loss and margin improved meaningfully, both on a year-over-year and 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 environments. Periods of challenges have enabled us to emerge stronger, given our relentless effort on building long-term growth. We're using this period to ready ourselves for current business conditions to improve. Our key short-term tasks remain unchanged, which are efficiency, optimization and continuous investments in the new AI businesses. Our new AI businesses such as 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 the 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 conditions have improved gradually since June. Encouragingly, revenues from healthcare and retail recorded positive year-over-year growth in the quarter. Going forward, when the COVID situation alleviates in major cities, ad revenues across different verticals such as travel, franchising, and local services should rebound. For our new AI businesses, I am proud to report some highlights. Revenues from AI Cloud increased by 24% year-on-year to RMB 4.5 billion in the quarter. AI Cloud has been a major growth driver for Baidu Core non-advertising revenue. In Q3, non-advertising revenue accounted for 26% of Baidu Core total revenue, up from 21% a year ago. Baidu Apollo 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 roads. We believe we remain the largest autonomous ride-hailing service provider globally. Now let's review the third quarter operational highlights. Revenues from 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 quarters, we have made shifts away from some lower-margin businesses to build sustainable growth for AI Cloud. Meanwhile, we continue to take measures to standardize our solutions 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 quarter, we continued 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 divested the solutions for typical use cases, such as traffic management and V2X for urban road and highway. Previously, we talked about how our projects help improve traffic efficiency on city roads in Beijing, Guangzhou, Changsha, Chongqing and other cities. Recently, Tuju, an important transportation hub in Hunan province, adopted our smart traffic management solutions. Our solutions covered more than 70% of the major intersections in the business district of Tuju. After adopting our solutions, delays have been reduced by 22% during rush hour in the current region. By the end of the quarter, Baidu ACE Smart Transportation solutions had been adopted by 63 cities, up from 24 cities a year ago, and 51 cities a quarter ago based on contracts amounting to over RMB 10 million per city. As we demonstrated, our capability to use AI to improve transportation efficiency in more cities, ACE Smart Transportation will further expand its market share. We're trying to replicate 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 intelligent transformation. We believe we remain well positioned in the early-stage, fast-growing market due to our capabilities to establish end-to-end solutions based on our full-stack AI capabilities, ranging from chip design to deep learning frameworks, large language models, and application-level software; along with our insight about customers' pain points and our growing know-how and capabilities to solve their problems. While COVID caused 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 investing in intelligent driving have begun bearing fruit. Baidu Apollo auto solutions had total projected cumulative sales exceeding RMB 11.4 billion recently. Based on our current pipeline, some major car models equipped with ANP and AVP are expected to be launched in the second half of next year. We expect meaningful revenue contributions from this business to begin in 2024, and profit to expand once meaningful 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 for ANP, AVP, and HD maps for one of their popular models. To date, we have announced collaboration 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 solutions get into consumer hands, we will continue to refine and update our solutions. Considering the sizable development cost for high-level autonomous driving technology, many automakers are seeking partnerships with reliable suppliers that have strong brand and technology capabilities. We have differentiated ourselves with world-leading Level 4 autonomous driving, established through years of investment. 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 Map into our intelligent driving group to create synergies between the Baidu Map mobile app and our mass solutions for auto and transportation industries. Since our map is already widely adopted, we gain more insights into the transportation industry, allowing us to strengthen our solutions for the mobility sector. With Apollo Go, we continue to scale our operations, and we believe we remain the largest autonomous ride-hailing service provider worldwide. In the third quarter, rides provided by Apollo Go reached 474,000, increasing 311% year-over-year and 65% quarter-over-quarter. A vast majority of the rides served passengers during rush hours, covering places like subway stations, office buildings, and shopping malls. As our operation continues to expand, Apollo Go keeps learning and improving from scenarios that do not occur during the testing phase. Leveraging large-scale operations, we're making Apollo Go a professional AI driver while offering a safe and comfortable autonomous ride-hailing service. Today, when an Apollo Go vehicle enters a dense intersection, it is able to navigate between pedestrians, bicycles, and other moving objects, ensuring safe driving while providing a comfortable experience to passengers. Apollo Go continues to improve autonomous ride-hailing services under extreme weather conditions. Scalable operations have indeed reinforced our Level 4 autonomous driving capabilities, setting a strong foundation for further operational expansion. We believe this virtuous cycle will make Apollo Go the most experienced AI driver to handle various situations on the road on a large scale. We're planning the expansion of Apollo Go based on a comprehensive financial model. In previous earnings calls, we talked about Apollo Go's achievement in the Yizhuang region of Beijing. In fact, Apollo Go has achieved significant progress in other Tier 1 cities as well. In Q3, on average, each vehicle in Beijing, Shanghai, and Guangzhou completed more than 15 rides per day. According to our knowledge, this number is quite close to the average daily rides for traditional ride-hailing services. We believe our strong and improving safety track record on public roads provides a strong endorsement for more cities to issue permits for fully driverless ride-hailing. We believe fully driverless ride-hailing will create more affordable urban transport and attract more consumers to the ride-hailing market. Baidu will continue to invest to capture this massive market opportunity. Moving to the mobile ecosystem. Our operating profit improved on a year-over-year basis, and we continue to generate strong cash flow in the quarter. Our mobile ecosystem continued to expand. In September, Baidu App's MAUs increased by 5% year-over-year to 634 million. In Q3, total mobile search queries increased by double-digits year-over-year, and feeds distributed through Baidu App increased by 23% year-over-year. We continue to introduce short videos in feeds and search results. In September, short video distribution and time spent within Baidu Feed grew double-digits year-over-year. For Baidu Search, in September, 23% of the clicks on search result pages were short videos, and we expect the prevalence of video in search results to continue progressing rapidly. We're using AI to produce more short videos for our mobile ecosystem. While it is still in very early stages, we believe AI will allow us to generate short videos much faster and more cost-effectively than human-generated content. In e-commerce, users are coming to Baidu App for product searches, which resulted in a continuous increase in product-related sector. Quarterly GMV facilitated by Baidu Search grew by about 52% year-over-year in Q3. Today, users come to Baidu App not only to search for information and knowledge but increasingly to look for services and merchandise. As we are able to make purchases and book services without leaving Baidu App, we have been deepening our understanding of user needs. Meanwhile, more customers are leveraging our ecosystem infrastructure to build their marketing campaigns and even operate their businesses in our mobile ecosystem. This has allowed us to accumulate more customer insights and better serve our customers. The improving insights into our users and customers have, in turn, allowed us to enhance user experience and app conversion. In the future, we believe our mobile ecosystem will continue to generate strong profit and cash flow. To close, during this uncertain time, we focused on making the long-term investments that will position us to be stronger coming out of this challenging period, including Baidu AI Cloud and intelligent driving. While the advertising industry has been impacted by COVID-19, some of our verticals could recover faster when there is an upturn in the economy, which will drive our ad revenue to resume growth. Before I turn the call to Rong, I want to thank Baidu's employees for their diligent work in a challenging environment and the time and effort they put into making our company a success in the long term. With that, let me turn the call over to Rong to go through the financial highlights.

Thank you, Robin. Now, let me walk through the details of our third quarter financial results. Total revenue was RMB 32.5 billion, increasing 2% year-over-year. Revenue from Baidu Core was RMB 25.2 billion, increasing 2% year-over-year. Baidu Core online marketing revenue was RMB 18.7 billion, decreasing 4% year-over-year but improved 10% from the second quarter as macro conditions have improved gradually since June. Baidu Core non-online marketing revenue was RMB 6.5 billion, up 25% year-over-year, driven by cloud and other AI-powered businesses. In Q3, Baidu AI Cloud increased by 24% year-over-year to RMB 4.5 billion. Revenue from ACE was RMB 7.5 billion, decreasing 2% year-over-year. Cost of the revenues was RMB 16.3 billion, increasing 1% year-over-year. Baidu Core's cost of revenue was RMB 10.7 billion, increasing 15% year-over-year, which was in line with the growth in sales of AI Cloud and other AI-powered businesses. Operating expenses were RMB 11 billion, decreasing 19% year-over-year, primarily due to a decrease in channel spending, promotional marketing expenses, and staff-related expenses. Baidu Core selling, general, and administrative expenses were RMB 4.2 billion, decreasing 31% year-over-year. SG&A accounted for 17% of Baidu Core revenue in the quarter and decreased from 25% in the same period last year. Baidu Core research and development expenses were RMB 5.3 billion, decreasing 4% year-over-year. R&D accounted for 21% of Baidu Core revenues in the quarter and decreased from 22% in the same period last year. Operating income was RMB 5.3 billion. Baidu Core's operating income was RMB 5 billion, and Baidu Core's operating margin was 20%. Non-GAAP operating income was RMB 7.2 billion. Non-GAAP Baidu Core operating income was RMB 6.7 billion, and non-GAAP Baidu Core operating margin was 26%. Q3 presented the first year-over-year growth in non-GAAP operating profit and margin since Q2 2021. Total other loss net was RMB 4.8 billion, decreasing 78% year-over-year, which mainly includes a fair value loss of RMB 3.1 billion and impairment of long-term investments of RMB 1.4 billion. In the third quarter last year, we recognized a fair value loss of RMB 18.9 billion. A significant portion of long-term investments includes, but is not limited to, investments in equity securities of public and private companies, private equity funds, and digital assets. This is subject to quarterly fair value adjustments, which may contribute to net income volatility in future periods. Income tax expenses were RMB 908 million compared to an income tax benefit of RMB 1.8 billion in Q3 2021, primarily due to an increase in deferred tax benefit recognized on fair value loss of long-term investments and deduction of certain expenses that were previously considered non-deductible in the third quarter of 2021. Net loss attributable to Baidu was RMB 146 million, and diluted loss per ADS was RMB 0.87. Net income attributable to Baidu Core was RMB 25 million. Non-GAAP net income attributable to Baidu was RMB 5.9 billion. Non-GAAP diluted earnings per ADS were RMB 16.87, non-GAAP net income attributable to Baidu Core was RMB 5.8 billion, and non-GAAP net margin for Baidu Core was 23%. Adjusted EBITDA was RMB 8.9 billion, and adjusted EBITDA margin was 27%. Adjusted EBITDA for Baidu Core was RMB 8.2 billion and adjusted EBITDA margin for Baidu Core was 33%. As of September 30, 2022, cash, cash equivalents, restricted cash, and short-term investments were RMB 184.5 billion and cash, cash equivalents, restricted cash, and short-term investments excluding iQIYI were RMB 179.5 billion. Free cash flow was RMB 6.6 billion and free cash flow excluding iQIYI was RMB 6.4 billion. Baidu Core had approximately 36,500 employees as of September 30, 2022. On a separate note, ACE generated positive operating profits on both GAAP and non-GAAP bases in this quarter. The acquisition of ACE also generated positive free cash flow in this quarter. With that, Operator, let's now open the call to questions.

We will now begin the question-and-answer session. The first question today comes from Alicia Yap with Citigroup. Please go ahead.

Thank you. Good evening, management. Thanks for taking my questions. I have two questions. First, can management comment on how we should look at the advertising demand recovery in the near-term and also in the next quarters? Secondly, can management comment on how you think about the competitive landscape in the China advertising market going forward? What would Baidu's long-term market share be? Thank you.

Hi Alicia, this is Robin. Let me answer your questions. Yes, our revenues are very sensitive to COVID control measures. Baidu Core's ad revenues returned to positive year-over-year growth in August, but in September, it decreased again because of another round of COVID resurgence. Overall, Q3 was much better than Q2, due to a recovery from the disruptions caused by COVID in the second quarter. When we entered the fourth quarter, the situation improved in October, but since early November, it got a bit cloudy because another round of COVID impacted some regions, like Guangzhou and Beijing. We're closely watching how the situation will develop. I think the short-term will probably still be quite volatile, but the economy should improve in the mid-term and beyond. China has been fighting against COVID for almost three years, and the country has been gaining experience. While we're certainly going to see some ongoing disruptions and uncertainties, the overall situation should move in a positive direction over the next few quarters. As you know, many of our ad verticals were affected by COVID and macro factors. Once COVID and macro situations improve, ad revenues from different verticals such as travel, franchising, or local services should rebound. Again, we will closely monitor how the COVID situation develops, and we will work very hard to bring our ad revenue back to a positive year-over-year growth as soon as possible. In addition, AI Cloud and intelligent driving—our new businesses—were also negatively impacted by the COVID disruptions. So if COVID does impact the supply chain, these non-advertising businesses should also see improvement. Regarding your question on competition in the online advertising market, first of all, I think Baidu App is one of the very few super apps in China's mobile internet industry—well-recognized and well-established. Search ads enjoy the best ROI among various types of performance ads because users explicitly express their intent in our search box. Search ads connect users' intentions with the most relevant products and service offerings. This is why many advertisers consider Baidu Search as the most important and most efficient channel to reach their targeted audience. Secondly, China's mobile internet is maturing. User growth is gradually slowing down, and the competitive landscape is much less volatile than before. With this backdrop, Baidu App has still managed to grow its user base nicely over the past several quarters. On top of that, due to the unique positioning of search, we believe we will be able to sustain our market share in the online advertising market over the long run. Thirdly, unlike our peers, most of our advertisers are SMEs involved in the real economy. Many of them run businesses in the service sector, such as local services, business services, and travel. This business has been hit the hardest by the pandemic. When the impact of COVID subsides, their revenue should rebound quickly, and Baidu stands to gain share in the overall advertising industry.

Thanks, Robin.

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

Hi, good evening, guys. Pretty solid quarter despite all the macro headwinds. I have a couple of questions on cloud services. So we have seen what seems like a slowdown in the industry. Could you talk a little bit about the reasons behind the slowdown and how you guys are thinking about the growth rates in the upcoming quarters on the medium term? Secondly, could you also talk a little bit about the competitive landscape? We have seen media reports of market share gains by cloud companies, all tied to the Internet sector in the past one or two years. Any color on the competitive landscape would be useful. Finally, I remember you, Robin, mentioned the margin improvement of cloud. Could you also talk about your thoughts on the road to profitability? Any timeline would be helpful. Thank you.

Hello, Eddie. Thanks a lot for your questions. This is Dou. I'll try to answer your questions. For the revenue growth part, I think it's slowing down mainly due to the COVID-19 impact. For example, because of the travel restrictions, we could not even implement our projects on time, and the bidding for new contracts was also affected. Apart from that, I also want to highlight that we are focused on healthier and more sustainable growth by cutting some low-margin businesses. This approach is crucial for long-term development. Looking beyond the current quarter, as Robin just mentioned, the trend for China's traditional industries and the public sector to use AI and migrate their businesses onto the cloud remains unchanged. Post-pandemic, companies should gain more confidence in their future growth, making them more willing to invest in digital and intelligent upgrades. Baidu has already demonstrated our capability to use AI to improve efficiency in transportation. As you can see, our ACE Smart Transportation revenues have been growing rapidly, allowing us to continue to gain market share. Meanwhile, we are reducing the operating loss for smart transportation as we expand scale and continue to increase operating leverage. As for next steps, we are excited about replicating our success in transportation in other traditional industries like manufacturing and utilities. Just in the past quarter, our cloud revenues from the manufacturing and utilities sectors have both shown solid growth, largely because of our continuous efforts in enhancing our end-to-end AI capabilities and understanding fundamental needs in these industries. To answer your question, we believe these are our sustainable competitive advantages against other players. Additionally, the market is expanding with alternative opportunities for us and our peers to grow long term. Regarding profitability, Baidu AI Cloud reduced operating loss and continued to improve operating loss margin this quarter. Our personal cloud continues to generate decent operating profit and margin, while our enterprise segment is growing faster than our personal cloud. We are pleased to see the trend of loss reduction thanks to the strategies I just outlined. Our approach to standardizing solutions across key industries is beginning to yield results. We have worked diligently to replicate more solutions from one use case to another to grow business scale and improve margins. This has been evident in our Smart Transportation results. We remain committed to growing this business and improving margins going forward.

Thank you.

The next question comes from Alex Yao with JPMorgan. Please go ahead.

Thank you, management, for taking my question. I have a couple of questions about Baidu Core margins. In the past several quarters, you guys did a great job in terms of cost control and margin improvement. As large-scale BU and headcount streamlining has been done, how much more room should we expect for further cost cutting in Baidu Core in the coming quarters and 2023? The related question is how should we consider Baidu Core operating margin going forward? Lastly, will Baidu slow down its cloud and autonomous driving investments if the macro situation deteriorates further? Thank you.

Thank you, Alex, for your questions. Let me address your queries. This is Rong. As Robin mentioned at the beginning of the prepared remarks, we continue to optimize cost expenses in Baidu Core, improving our operational efficiency, which is one of our key short-term objectives. At the same time, we continue investing in our new AI businesses for future growth. This strategy has remained unchanged over the past few quarters. It has allowed us to withstand the challenging market environment, preparing us for accelerated growth once the macro downturn subsides. In Q3, let me recast some of the numbers. Baidu's non-GAAP operating profit margin expanded to 26% from 24% in the same period last year. This represents the first year-over-year growth in non-GAAP operating profit and margin since Q2 2021. You probably noticed from our earlier release that our SG&A expenses have decreased again in Q3 compared to the same quarter last year. We have been very disciplined with channel spending and promotional activities. This marks another consecutive quarter of year-over-year decline for SG&A expenses. Going forward, we will continue to control variable costs and expenses, just as we have in the past. Looking at each part of our business, for the mobile ecosystem, our operating profit is actually rising year-over-year, even though we know that revenue was negatively impacted by COVID-19. As previously mentioned, we have made substantial efforts toward the healthy growth of AI Cloud. This quarter, the operating loss margins for AI Cloud improved significantly, both year-over-year and quarter-over-quarter. To break it down, for enterprise and public sectors, we are reallocating resources to high-margin businesses and reducing low-margin operations. Additionally, we continue standardizing our end-to-end solutions, including IaaS, PaaS, and SaaS for key user cases, like the expectations embedded within our smart transportation strategy. We continue to see fast growth coupled with notable margin improvement. For our personal cloud, we similarly continue generating decent profit this quarter. As for our robotaxi business, Apollo Go, we are also choosing to grow it at a measured pace. We have comprehensive financial models to optimize and forecast costs and expenses for this business, particularly concerning labor and hardware. We're cautious in estimating cash flows for this sector. Our strategy is to strengthen our leading position in robotaxis globally, capturing significant market shares within the ride-hailing sector, especially in key cities in China, and ultimately trying to generate more profits in these areas. We won't expand our operations without a mindful focus on establishing a sustainable and profitable business model for Apollo Go. On the auto solutions front, Zhenyu mentioned that we recently projected cumulative sales of around RMB 11.4 billion. While revenue contributions from this stage of development are currently small, we expect to see more revenue from this business starting in the second half of next year or possibly early in 2024, as cars equipped with our solutions become available in the market. To clarify, the RMB 11.4 billion figure includes our estimated contracts and nomination letters we've received from OEMs. In the auto industry, a nomination letter indicates a supplier's eligibility for certain projects, and the OEMs sign contracts with us thereafter. Our estimates are based on assumptions about timing, pricing, and future volumes. Moving forward, we'll maintain a disciplined approach to costs and expenses while continuing to invest in AI Cloud and intelligent driving for growth in the long term. We remain confident that our mobile ecosystem will continue generating profits and cash flows to support our new AI business investments. Meanwhile, we will also work diligently to minimize our losses in AI Cloud. Thank you for your questions.

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

Hi. Thank you for the opportunity, and congratulations on the expanded partner network and growing backlogs for your auto solutions business. I have a question regarding your auto solutions. When should we expect meaningful revenue growth to begin? How do you differentiate Apollo's auto solution from your peers? Could you help us understand the underlying market space for Baidu Apollo's auto solutions? Additionally, have you noticed a significant change in the attitude of OEMs toward self-developing intelligent driving solutions? Thank you.

Hi Gary, this is Robin. We've seen significant opportunities in the auto solutions market. In the first 10 months of this year, EV sales increased by more than 100% in China. We're now the largest EV market in the world, accounting for more than half of global EV sales. A clear trend in the auto industry is vehicle intelligence, and Baidu is benefiting from this trend. Our years of investment in autonomous driving have begun to yield results. Baidu Apollo's auto solutions are derived from our core technologies. Many AI models developed for our robotaxi services can be applied to autonomous driving solutions. As market leaders, we've been investing in autonomous driving for about a decade. Thanks to these investments, we have completed tens of millions of testing miles on public roads and accumulated invaluable experience running the largest robotaxi fleet on urban roads daily. This gives us great insights, which we apply to develop auto solutions that meet our customers' needs best. For instance, ANP 3.0, which we believe is the most advanced intelligent driving solution for city roads on the market, has been derived from our advanced autonomous driving technology. Our ability to bring this sophisticated solution to market quickly has been facilitated by utilizing a limited number of R&D personnel. Jidu's first car, Robo 01, will be the first to use ANP 3.0. We believe that as more automakers adopt our auto solutions, we will become more experienced in ensuring our solutions remain compatible with popular car models. Furthermore, as more vehicles equipped with our solutions hit the road, we will continue to refine and improve our auto solutions based on daily usage experiences. As I previously mentioned, our total projected cumulative sales for Apollo's auto solutions reached RMB 11.4 billion, a more than 50% increase from last year. Based on our current pipeline, some major car models equipped with ANP and AVP should launch starting in the second half of next year. Therefore, meaningful revenue contributions from this business will begin in 2024, with profits to follow. In terms of differentiation, developing advanced intelligent solutions requires massive investments in technology and talent. Many companies cannot afford this level of investment. Automakers trust our brand and technology, leading many to select Baidu as their trusted and reliable supplier. We have made years of investments in intelligent driving technology and maintain a strong cash position, complemented by our advertising business that continues to generate robust cash flow to support our investments. Going forward, this will continue to bolster our operations with numerous automakers at large scale. For example, in the quarter, we expanded our partnership with one of China's largest auto companies, utilizing our ASD solutions for one of their popular car models. We anticipate extensive partnerships with OEMs, both in China and internationally.

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

Hi, good evening management. Congratulations on the solid quarter, and thank you for taking my question. I have a follow-up question about Apollo Go. Regarding fully autonomous driving, what progress is expected in the near-term? Could management also talk about key milestones Apollo Go is expected to achieve in 2023 and even longer term? To achieve these milestones, how should we consider the impact on your P&L and cash flow? When should we expect the Apollo Go business to reach breakeven? Thank you.

Thanks for your question. This is Zhenyu. We are making significant progress in providing fully driverless ride-hailing services to the public. We believe Apollo Go is the largest autonomous ride-hailing service provider in the world, based on our coverage rate. Apollo Go has provided 1.4 million rides for the public. In Beijing, Shanghai, and Guangzhou, each vehicle has completed an average of 15 rides per day. We are also providing fully driverless AI ride-hailing solutions in Wuhan and Chongqing, and the number of rides provided by fully driverless AI is growing rapidly. Apollo Go already operates in over 10 cities in China, including those with populations exceeding 10 million. As we build our operation, our technology and safety protocols improve. We've received lots of feedback from passengers. For instance, passengers have asked for improved customer service and swifter operations, prompting us to refine our offerings. Our efforts have garnered greater recognition from passengers. In cities like Chongqing and Beijing, Apollo Go is becoming increasingly trusted, as users notice that it provides reliable and efficient services. Currently, some may question why Apollo Go still employs 25% human drivers. This operation complies with traffic regulations, ensuring our AI driver never gets tired or distracted—qualities that provide peace of mind to our users. Our strong takeaways quantify the benefits of our service for both auditors and regulators. As we mentioned, we're progressing towards fully driverless service in Wuhan and Chongqing, where the operation is well underway. Looking ahead, we plan to continue expanding our operations, particularly for fully driverless ride-hailing in additional regions while simultaneously reducing hardware and vehicle costs. We believe that while we are testing, we will become not just profitable but also more affordable than traditional ride-hailing services. Our commitment remains to invest in the robotaxi space to capitalize on the significant market opportunity.

Hi, Kenneth, this is Rong. Regarding your question about the impact on our P&L and cash flow, we believe the overall impact is manageable. As Robin said in his remarks, our team has developed a comprehensive financial model for Apollo Go. This model assists us in understanding what actions to take, areas for improvement, and adjustments necessary to generate profitability for this business in the future. Our goals include achieving two primary objectives: first, we aim to remove safety personnel from our vehicles, as reducing labor costs is critical, and second, we are focused on reducing hardware costs. Over the past quarters, we have worked diligently to enhance our AI for autonomous driving technology, using large-scale operations to improve our systems. These efforts help us build trust and establish a track record in the industry. Currently, we are providing fully driverless ride-hailing services in Wuhan and Chongqing, meaning no safety personnel are present in the vehicles. We are making solid progress in Beijing, where safety staff are permitted not just behind the wheel but also in the front seats, paving the way for further reductions in labor costs as we expand. Regarding hardware, most of the vehicles added in the coming 12 months will be the RT5 model of Apollo Go, meaning there will be significant hardware investments next year. However, once we introduce a sizable number of RT6 vehicles, which launched a few months ago, our unit economics will improve significantly, as RT6 has considerably lower production costs than any previous robotaxi generation. Our unit economics in key cities continue to enhance because we are scaling our operations and achieving cost efficiencies. Robin previously mentioned that our rides have been increasing over past quarters, with each car now completing an average of 15 rides daily in some Tier 1 cities. Apollo Go is becoming recognized as a reliable and efficient option for daily commutes. In summary, we believe the impact on our cash flow and P&L is manageable, and we have confidence in our strategic direction.

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

Thank you, gentlemen. I want to ask about your sales of advanced chips to China, given recent press reports regarding U.S. chip restrictions against China. We wonder how these restrictions could impact your ability to grow the AI Cloud business, as well as autonomous driving and your wider AI business. Could you also remind us which areas of your business rely most on advanced AI chips, and whether you have any ways to manage this with internally developed chips? Thank you.

Thank you, Lincoln. This is indeed a challenging topic to navigate. The short answer to your question is that we believe the impact is quite limited in the near future, and here are the reasons. First of all, a large portion of our AI Cloud business and even our AI business overall does not depend heavily on high-end advanced chips. Secondly, for business areas that do need advanced chips, we have already secured enough supplies to support our needs in the near term. Thirdly, there are alternatives to the restricted chips, and we possess the technology necessary to utilize these substitutes to achieve similar effectiveness and efficiency in both our AI Cloud and AI-driven businesses. Lastly, automotive chips are not on the prohibited list, meaning that in the near future, in-vehicle computing is not adversely affected. Looking to the mid to long term, we have developed our own AI chip called Kunlun, which we already utilize for some large-scale internal AI computing tasks. We are also employing the Kunlun chip to serve external customers. We have full-stack AI capabilities from the chips we develop to AI frameworks, foundational models, and then to application software, allowing us to achieve much higher efficiency as we optimize AI tasks from end to end. For instance, by leveraging our Kunlun chips for specific tasks, we've enhanced efficiency in text and image recognition by 40%, while lowering overall costs by 20% to 30%. There are more applications like this in our smart manufacturing projects and smart city products. As our business grows, we believe our end-to-end capabilities will present us with even stronger competitive advantages. We're also expecting to see additional auto chips and components manufactured in China in the future; as China's intelligent driving market rapidly develops, the supply chain in the auto industry may become increasingly self-sufficient unless we require imports. In essence, while chip sales restrictions could pose challenges, we see limited short-term impact on our operations. Instead, we believe there are potential opportunities for Chinese chip manufacturers to thrive, and our AI chip business and AI ventures will ultimately benefit from these market shifts.

Great. Thank you.

The last question today comes from James Lee with Mizuho. Please go ahead.

Great. Thanks for taking my questions. I have two: first, can you provide more color on your progress in e-commerce search and short video opportunities? Can you discuss from the perspectives of consumers, merchants, and creators what pinpoints you're trying to address? Secondly, can you elaborate on the traction gained in an open mobile ecosystem and potential monetization opportunities here? Thanks.

Yes, this is Robin. I mentioned earlier that we have been building closed-loop experiences for our users and advertisers in our mobile ecosystem, especially within the Baidu app. For e-commerce, due to efforts we've made in the past, users now visit Baidu not only for information and knowledge but also for services and merchandise. Since the start of this year, merchandise-related search queries on Baidu have grown much faster than last year. You may be asking why? It's because users increasingly realize they can find comprehensive product information, reviews, and purchase options on our platform—without leaving the Baidu app. Currently, we have many SKUs available for search on our platform. We've also deepened our partnerships with leading e-commerce platforms, enabling users to easily buy products as needed through Baidu App. As I mentioned in my prepared remarks, GMV facilitated by Baidu Search continues to grow rapidly. Retail has been an outperforming vertical in our online advertising business for several quarters, and recently, revenues during the Double Eleven e-commerce promotional season grew by double-digits year-over-year, demonstrating that our efforts are gradually bearing fruit. Regarding our short video initiatives, we're making short videos increasingly available in our feed and search services. For our feeds, short video distribution and engagement are steadily increasing. Currently, about 85% of the feed distributed by Baidu App consists of short videos. For search, more than 20% of clicks on search results were short videos, with this number increasing by over 80% year-over-year in September. We believe the popularity and adoption of videos in search results will ramp up quickly. With regards to monetization, short videos, especially those providing fully immersive experiences, can be considerably better monetized than traditional text and images. For example, in feeds, ECPM for fully immersive video ads far exceeds that of text and images. This is a key reason for feed revenue to show positive year-over-year growth in this quarter, despite macro headwinds. Our progress in the feed area boosts our confidence that short videos will also enhance search revenues in the future. We are eager to leverage AI-generated content to enrich our short video offerings. While we're still in the early stages, we believe AI will enable us to produce a higher volume of short videos more quickly and cost-effectively than human-generated content. In summary, e-commerce and short videos represent two critical areas for driving incremental revenue growth, and we will continue to invest effort into these initiatives. Meanwhile, we emphasize that profit growth remains a top priority for our mobile ecosystem. Regarding interoperability, we understand this is a long-term trend. Being a search engine, we benefit greatly from increased content across the internet becoming searchable. In the long term, we believe that the government's commitment to building an open mobile internet industry aligns with user and SME interests. Accordingly, we are positioning ourselves favorably for this trend. Thank you.

This concludes our question-and-answer session and our conference call. Thank you for attending today's presentation. You may now disconnect.