Baidu, Inc.
Q2 2020 Earnings Call Transcript

Published: 14 Aug 2020

[Operator:]

Hello, and thank you for standing by for Baidu's Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference Juan Lin (00

[Unverified Participant:]

Hello, everyone, and welcome to Baidu's second quarter 2020 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 Chief Executive Officer; Herman Yu, our Chief Financial Officer; and Dou Shen, our Executive Vice President in charge of Baidu's Mobile Ecosystem Group, our Search and Feed business. 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. Potential risks and uncertainties, include but are not limited to those outlined in our public filings with the SEC, including our Annual Report on Form 20-F. Baidu does not undertake any obligation to update any forward-looking statements except as required under applicable law. Our earnings press release and this call include discussions of certain unaudited non-GAAP financial measures. We have made minor adjustments to our non-GAAP measures and retroactively applied these changes for comparison purposes. 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 also be available on Baidu's IR website. I will now turn the call over to our CEO, Robin.

[Robin Li:]

Hello, everyone. Baidu's total revenues in the second quarter reached RMB 26.0 billion, declining 1% year-over-year versus 7%... [Technical Difficulty] (00

[Operator:]

Excuse me, presenter, we do not have audio from your side. Can you unmute locally, please?

[Robin Li:]

All right. Let me repeat what I just said, Baidu's total revenues in the second quarter reached RMB 26.0 billion, declining 1% over year versus the 7% decline in the first quarter. Baidu Core contributed to the rebound with the second quarter revenue growing 24% sequentially, Baidu Core's online marketing services has demonstrated steady improvement, since the drop in February, with encouraging recovery across many industries. The second quarter, however, was also met with temporary setbacks such as new waves of COVID-19 cases appearing in Beijing and other areas of China, where Level 2 pandemic precautionary measures were again put in place. Fast forward to latter half of July, the situation has been improving since then, as COVID-19 cases subsided. This positive moves forward, coupled with some temporary setbacks, leave us cautiously optimistic about the business climate into the second half. While COVID-19, geopolitical tension and other phenomena plaguing the economy may continue to bring about hiccups. The opportunities that AI has presented us are getting more exciting. Our foray into in-app search three years ago is proving to redefine how content and services are consumed, and allow Baidu to be competitive force to enable long-tail SMEs to do business online. More than two-thirds of Baidu App users are logging in daily, which not only demonstrate user stickiness, but also indicates a greater sense of identity and belonging on Baidu of users. The CPM gap between Baidu App and unit traffic continues to widen in-app revenue mix up the majority of search and feed revenue, and daily in-app search queries outgrowing the total search market in China. Traditional search through a browser direct users away from Baidu, whereas in-app search aggregate third-party content and services onto our platform for a unique closed loop experience. Users come to Baidu to form relationships with merchants, through follow, messaging, live video, shop and so on. With users remaining on Baidu after the landing page, we are in a better position to improve user insight and provide a superior user experience such as verifying the merchants, monitoring the content and services on Baidu for better quality, strengthening Baidu's vertical and community offerings, and enabling users to follow, interact and transact as merchants. From the merchants' perspective, our customers no longer rely on Baidu only for traffic. They are able to build a fan base through our building blocks of BJH accounts, Smart Mini Program and Managed Page and increase interaction with their fan base through live videos, coupon giveaways and closed-loop transactions; and leverage our marketing services platform for conversion improvement, lookalike targeting and repeat purchases. Baidu's value proposition extending from selling traffic to also provide marketing cloud services to empower merchants, consumer relationship management capabilities makes us more competitive by leveraging Baidu's AI and cloud capabilities. The increasing liveliness of our users, their participation in live broadcasting, e-commerce and other activities provides Baidu an opportunity to leverage our existing traffic to move beyond marketing services into memberships, online games and other revenue streams. Our new AI businesses, Xiaodu smart devices continues to sell well, despite the current economic situation causing headwind to smartphones and other consumer electronics. Baidu Cloud is leveraging Baidu's leading AI to provide intelligent cloud solutions to enterprises to help them digitize and do more with AI computing. Apollo continues to make advances in autonomous driving and commercialization, particularly in the area of smart transportation, which stands to benefit from the new infrastructure initiative that China is pushing to reignite the economy. iQIYI weathered another COVID-19 impacted quarter with positive growth year-over-year reinforcing the belief that online entertainment can fare well in difficult economic times. Let's begin Baidu's second quarter review with MEG. Baidu App DAUs reached 204 million in June. MAUs were over 0.5 billion, which puts Baidu App in an elite class of Top 6 apps in China ahead of Douyin, Kuaishou, Weibo and other feed apps according to QuestMobile. In-app user engagement on Baidu App remains strong with in-app search queries growing 28% year-over-year in the second quarter, thanks to improving user experience and the expansion of third-party content and services on our platform. Let me talk about video social services and monetization for MEG. First on video, Baidu App is becoming a powerful distributor of video content. Video consumption from search increased 81% year-over-year and video make up about 70% of the feed consumed. For Baidu's set of six knowledge products, such as Baidu WIKI, Baidu Knows, video contributed to almost a third of the page views, up from less than 20% at the beginning of the year. Our efforts in fortifying the content on Baidu with video is showing incredible results. For example, in the area of healthcare, PGC videos expanded rapidly, resulting in total video views surging over fivefold from the prior quarter. Live streaming is becoming a popular way for professionals to share their content on Baidu. We are making live streaming easy to conduct to our building blocks especially for non-entertainment oriented content creators. For example, daily non-entertainment (00

[Herman Yu:]

Thanks Robin. Hello, everyone. Welcome to Baidu's second quarter 2020 call. All monetary amounts used in my discussion are in renminbi unless stated otherwise. Baidu's total revenues reached RMB 26 billion or $2.7 billion decreasing 1% year-over-year which is an improvement from last quarter's 7% decline. Our business improvement mainly came from Baidu core whose revenue reached RMB 18.9 billion or $2.7 billion in the second quarter decreasing 3% year-over-year which is a significant improvement from the 13% decline last quarter. Travel, financial services, franchising, healthcare and auto underperformed in the second quarter though we are seeing a meaningful recovery in healthcare and franchising along with real estate and machinery. In-app revenue grew double digits year-over-year in the second quarter and made up more than half of our search and feed revenues. The robustness of in-app revenue and its increasing revenue proportion will be an important driver going forward. Our new AI businesses also saw strong growth, up double digits year-over-year with (00

[Operator:]

Thank you. Frist question comes from the line of Piyush from Goldman. Please go ahead.

[Piyush Mubayi:]

Thank you, Robin and Herman for taking my question. I really have one question centered around how your business has been recovering into the third quarter. You mentioned Herman that medical has started to come into its own which is very encouraging. Could you give us a sense of what percentage or some scale of how much it's come back and how much further we can expand it to – expect it to come back in the coming quarters based on the guidance you've set for 3Q? And related to the guidance and the medical, you talked about some of the other verticals where you are in the earlier stage of recovery. Could you give us a feel for how long that might take to come back and essentially give us a feel for how the broader economy has been performing? And I know you said one question only but there is a pronounced improvement in your gross margin in 2Q over the first quarter and versus the past, is that and the gains you're seeing at the operating profit level sustainable? Thank you.

[Herman Yu:]

Hi, Piyush. Well, that's a mouthful of questions here. Let me see what I can do. With regards to healthcare, as I mentioned, when you look at on a year-over-year basis, we're still down significantly double-digits. But when you look at how we are recovering on a sequential basis we come back pretty significantly. And we expect at this current rate healthcare should probably be as good as last year, probably sometime in Q3 given the current trajectory. We're also seeing some other verticals at the same trend and that's why when you look at our guidance in Q3, you are seeing us doing better on a year-over-year basis than Q2 and Q2 is – assuming we hit midpoint and then Q2 is much better than Q1. So I think on a whole that the trend is right. And as I mentioned in the prepared remarks given that it is a COVID-19 pandemic we have seen second wave are coming back to Beijing. So the assumption here is that we will continue to have smooth sailing and that we don't have further ways to disrupt the economy because part of our business relies on the fact that stores needs to be open so they'll come to Baidu to buy traffic to their stores. With regards to our gross margin and our operating margin. I think that you can probably expect that the savings that we had in the last few quarters, as we talked about this last year in May we promised you that we will go through our operations and actually go through and look at where should we put our investments and place our investment that would have higher ROIs. We followed through six month after that and you saw starting from Q4 last year that we had a pretty lean P&L. We've been going through with this strategy in Q1 and again in Q2, so you should expect those to continue in the Q3 and Q4. I would say that part of Q2 cost structure though is the fact that several things to look at, for example, sales and marketing that's a function of whether we can actually spend light, if our revenue is coming hard, it probably would be hard for us to spend on our marketing whether it's promotions or whether it's trying to buy more app installation, because smartphones are doing so. So as the economy gets back, there's more app installation that we could buy with higher – good ROIs we're going to continue to buy. And then similarly, going into Q3, Q4, it was harder to do interviews especially when people cannot come into the office. But as China opens up, we're going to be able to do that and we're going to able to hire and go (00

[Piyush Mubayi:]

Thank you.

[Herman Yu:]

Thank you.

[Operator:]

Thank you for the questions. Next question comes from the line of Eddie Leung of Bank of America. Please go ahead.

[Eddie Leung:]

Good morning guys. Just two questions. Number one, could you comment on your thought about the potential combination of Tencent and one of your competitors, would that change the competitive landscape and how Baidu can address the potential changes? And then, number two probably a more housekeeping question, you mentioned that the COVID situation in Beijing affected the second quarter core business, so just wondering could help us to kind of like get a sense of the potential impact and how much exposure of the Core business to the advertisers in Beijing for example? Thank you.

[Dou Shen:]

Thank you for the question, Eddie. I'll take the first one. So it is actually not new between Sogou and Tencent. They have been working together for a long while. I think it is not new in terms of the collaboration. So actually in the mobile era, so users usually remember each app by its key feature and Baidu app clearly has established the brand as the number one general search engine. So I think such brand awareness is very hard to duplicate. And what's more for Baidu, we have moved to the Baidu app strategy to build our ecosystem within the app. So with that actually we already improved the user experience from the traditional general search engine. It's not just for user to get information, but also help the users to experience the closed-loop experience to complete the tasks in their mind. They are not only for service but also even for shop online. So the more we build our ecosystem and the more good features we can present to the users. So with that I think Baidu will keep leading the innovation in the search market and keep doing well.

[Herman Yu:]

Let me add to what Dou just said. a) So it's important to the different product positioning, right. When you have – for example, WeChat is a social network. So the purpose of social network is to get people together, where you try to connect people with other people that are known. The purpose of search is not trying to connect people to people, it's trying to connect people to a certain content, whether it's text, whether it's a photo, whether it's a video. So when you go, for example, into a social network you have their new feed (00

[Eddie Leung:]

And there's no exposure to Beijing perhaps?

[Herman Yu:]

Yeah. The exposure from Beijing is not very significant to our overall revenue but it will have some because some of our advertisers are in the north part of China. So I would say probably it's in the single digit rather than a more significant amount.

[Eddie Leung:]

Thank you, Herman and Dou.

[Operator:]

Thank you for the questions. Next question comes from the line of Alicia Yap of Citi. Please go ahead.

[Alicia Yap:]

So (00

[Herman Yu:]

I will start with the first part. So, then actually in Robin's opening remarks, he already mentioned about the percentage of the spending on the Managed Pages. So, some of the – in the beginning for the Managed Pages, I mean, so our intention is to make the experience for the users safer and to get more true information. So, earlier on we were seeing more and more advertisers actually they start to use the Managed Page by themselves without our enforcement. So, this is because we are adding more and more features to the Managed Pages so they can significantly improve their ROI. So, in terms of the number of advertisers adopting Managed Pages, it is even higher numbers because Managed Pages now can help this means to easily to do business on our system – on our products. So that's why we were seeing more and more advertisers. They are adopting Managed Pages by themselves. And I bet you (00

[Dou Shen:]

Yeah. And let me add to that, Alicia. Your question was do we have a set target for Managed Page. We don't have a set target. I think as we mentioned many times, using our building blocks, the idea is that if we can get content on Baidu's platform, we'll have better user insight, we can provide better user experience, right? So, the idea is not to have 100% of our revenues for Managed Page, but to have it for Managed Page to have it from Smart Mini Programs because that content and services from other apps to (00

[Alicia Yap:]

Thank you, Herman. Thank you, Dou.

[Herman Yu:]

Thank you.

[Operator:]

Thank you for the questions. Next question comes from the line of James Lee of Mizuho. Please go ahead.

[James Lee:]

Great. Thanks for taking my questions. And Herman, I was wondering maybe you can comment on the Baidu App DAU decline sequentially. Is it more to – due to suspension of your app, or is this more people returning back to work here? And just curious, are you taking any initiatives to try DAU growth in the second half, or are do you feel you have the critical mass at this point in time? And also secondly, regarding to SEC inquiry on iQIYI in its independents review, and just curious how involved is the Baidu management in this process and especially on the internal review side such as (00

[Robin Li:]

Okay. So, James, let me answer the first question. I'll answer in part and then I'll turn over to Dou to answer the second part which is how do we improve our DAU growth and so forth. So, as you know, China was hit hard with COVID-19 in first quarter. I think the – we came to probably the trough of our economy and people were very stringent with social distancing in February and even going into March people were social distancing, and you could see that throughout China. So, a lot of stores open up and so forth, so a lot of people were staying home. You didn't have schools open. So, when you compare that – our DAU is reported in the third month of each quarter. So, when you compare March to June, obviously in June you see a lot of places in China opening up, a lot of store opening up, you see some of the schools opening up. So, I think the big differentiation between March and June is the fact that people were going about outside of their house and as a result they have probably less time spent on their app. So, when you look at basically top apps in China, QuestMobile is a good example, you can see that it's not just Baidu App, it's a pretty consistent trend with all the top apps that March was very high and going into June, you're just going to have less traffic. I think with the companies that just reported over the last few days, you're seeing the same trend. With that, let me turn it over to Dou and talk about how – what we're doing trying to improve DAU growth.

[Dou Shen:]

Okay. So, we do have many approaches to work on to solve this issue, right? So, as we said, we are adding more and more content and services to the app, right, so that we can increase the engagement between the users and our product. So, this will help us to get users staying more longer – longer and more frequent on this app. And also – so we're adding more features, not only content, but service, but also more new features to this product for a different group of users. So, yeah, now we are developing some specific products for the colleges. When they come back to universities campus, they are going to have a chance to use our newer product. So, with that, I think – we already see the trend coming back, but for now it's – because (00

[Robin Li:]

Yeah. And let me comment on the iQIYI SEC investigation. At Baidu, we have zero tolerance for fraud. When there is a short-seller issue (00

[Operator:]

Thank you for the questions. Next questions comes from the line of Tian Hou of T. H. Capital. Please go ahead. T. H. Capital, your line is now open, please ask your question. I'm sorry. I have to move on to the next question, it's from Gregory Zhao from Barclays. Please go ahead.

[Gregory Zhao:]

Hi. Good morning, management. Thanks for taking my question. My first one is about marketing or non-advertising services. So, as mentioned in the press release, for your AI, your cloud-related business, as well as the smart transportation become important revenue driver in the quarter. So, in the future, (00

[Herman Yu:]

Hi, Greg. Thanks for your questions. With regards to how significant our non-AI business or – our non-ad business can be, I think what it will do is it will become important growth driver for us. As you can see, our Baidu Core as non-advertising piece, it's getting bigger and bigger. It's pretty significant now. And because of that size that we think there is potential to be really helping drive the overall growth of our business. And we talked about in my prepared remarks that just the Cloud business alone, we're talking about RMB 2 billion this quarter. Obviously, when you add on the other businesses such as the Xiaodu speakers, you're talking about smart transportation and so forth. The size is bigger than that. With regard to our share purchase program, where we expand from $1 billion to $3 billion, we have several ways of getting US dollars. Obviously, we just raised upon earlier this year, a $1 billion. We also can do several things as you mentioned; one is to convert Renminbi into USD and, obviously, we will take advantage of that when the opportunity arrives. The second thing we can also do is sell down our investments, and we've been steadily doing that. We look at the current market prices and so forth and then we look at our cash needs – US dollar cash needs, and we'll sell our investment down as appropriate, if we feel like there is no strategic need for previous investments.

[Gregory Zhao:]

Thank you.

[Operator:]

Thank you for the questions. We'll move on to the next question, once again from Tian Hou of T.H. Capital. Please go ahead.

[Tian X. Hou:]

Good morning, Herman, (00

[Robin Li:]

Tian, this is Robin. Let me try to answer your question. I think our consumer-facing businesses and business-facing businesses are all (00

[Dou Shen:]

Yeah. And let me just add to that, Tian. You talked about priorities. I think it's been a pretty clear, we've been very consistent with our priorities, when you looking at our 2C business is in-app services, right? And then outside of our AI businesses, we talk about the three businesses that we have in particular Cloud, it's at a bigger scale, and it's a huge market and we do have our advantage of having a leading AI capability. So, three AI businesses in addition to the in-app services are our top priorities. I think among the AI businesses, I think they're all growing nicely. And then I think Cloud is a bigger scale, and that's probably something I'll more emphasize on.

[Operator:]

Thank you. In the interest of time, we have time for one question. The last question comes from Binnie Wong of HSBC. Please go ahead.

[Binnie Wong:]

Hi. Good morning, management. Thank you for the time here. So, congrats on the earnings beat with a meaningful margin improvement. The question here is on the Smart Mini Program, right. Looking at our competitor's strategy that is mini program and social network actually work nicely together to sustain the relationship with the users, and advertiser can actually feel with the private domain. So, how would that define – would change the advertising industry landscape, and then also our positioning in this Smart Mini Program? And then a quick follow-up here is that I recall, Robin, in your opening remarks, you mentioned that video is accounting for 70% of the feeds. So I wonder if we can discuss more about the pricing, because again your competitor mentioning that the shift from banner ads towards feeds has seen like a meaningful interest and in the pricing – so, meaningful increase in the pricing, I meant. So do you see this is also going to be one of our drivers into the second half of this year faster revenue growth from here? Thank you.

[Dou Shen:]

For the Smart Mini Program, so as Robin already mentioned, right, we see the increase in terms of the MAU, monthly active users. Actually, if we talk about the time spent on Smart Mini Programs, and so the growth is even much higher. So, it means that, okay, Smart Mini Programs is leading to heavy engagement between the users and the service providers. So, we already see the numbers of transactions through the mini programs, and also the budget dollars using Smart Mini Program as the landing page for their campaigns. And also, the amount of the transactions, I mean in terms of the GMVs also growing. So, we see pretty good trends for the Smart Mini Programs in our ecosystem. And all this happens because it is providing better user experience to users, and so a good way to connect to the users and the service providers. So later on, we're going to share more information and data about the Smart Mini Programs. And then, with that, I will turn to Robin for (01

[Robin Li:]

Yeah. On the video content for advertisers, it's also very effective for our advertisers as well as users. And it improves the conversion for many of our advertisers. Therefore, as you know, most of our advertisers were budget performance-oriented. So the pricing for ad created with video content is generally higher than the average. Is that what you are asking?

[Operator:]

Thank you, management, for the reply. Binnie, do you have anything to add?

[Binnie Wong:]

Oh yes. I was just asking is that in terms of the pricing because we have seen more video advertising. So thank you for the color on the conversion, but what about on the pricing side? Do you think we can also charge higher pricing with the video ads on the ECPM side from, like, banner ads and then that should help us to be another like the growth driver in the second half?

[Dou Shen:]

Yeah, the simple answer is yes, because the advertisers are mostly performance driven. When we can improve the conversion through video, also other means, the pricing will follow.

[Operator:]

Thank you very much, management, for the answers. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect your lines.