Baidu, Inc. (NASDAQ:BIDU) Q4 2019 Earnings Conference Call February 27, 2020 8:15 PM ET
Juan Lin – IR Director
Robin Li – Chief Executive Officer
Herman Yu – Chief Financial Officer
Dou Shen – Senior Vice President
Conference Call Participants
Piyush Mubayi – Goldman Sachs
Eddie Leung – Bank of America
Alicia Yap – Citigroup
Thomas Chong – Jefferies
Binnie Wong – HSBC
Tina Long – Credit Suisse
Tian Hou – T.H. Capital
Hello, and thank you for standing by for Baidu’s Fourth Quarter and Full Year 2019 Earnings Conference Call. [Operator Instructions] Today’s conference is being recorded. And 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, Baidu’s Director of Investor Relations. Please go ahead.
Hello, everyone, and welcome to Baidu’s fourth quarter and full year 2019 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 Senior Vice President and 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 U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC, including our annual report on Form 20-F. Baidu does not undertake any obligation to update any forward-looking statements, except as required under applicable law.
Our earnings press release and this call include discussions of certain unaudited non-GAAP financial measures. 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.
I’d like to start the call by sending prayers to Wuhan and all the people who have worked so diligently and unselfishly to contain the novel coronavirus. We have strong faith in the concerted and courageous efforts that have been made to combat the epidemic outbreak.
At Baidu, many of our employees have chipped in, forgoing the extended Chinese New Year holiday and working overtime, to help contain the epidemic outbreak. For example, we leveraged our facial recognition and other AI technology to deploy fever screening systems to railway stations, hospitals and municipal buildings across China.
Our systems remotely measure the temperatures of up to 200 people per minute, detect body temperature even for people wearing face masks and hats, and identify those who are not wearing masks or wearing them improperly. Baidu’s AI model has been open sourced to further help reduce the spread of the coronavirus.
On Baidu App, we launched a free health care consultation platform to allow people to access doctors online, ask pneumonia-related questions and save hospital resources. Our operational team is partnering with medical experts to provide authoritative information on the coronavirus and leveraging our large platform reach to make timely and reliable information available to the public.
Baidu Maps is providing timely information, such as the location of traffic control areas, designated hospitals and infected cases to help people better manage the situation. By leveraging big data, Baidu Maps helps track population migration and predict the spread of the epidemic in China.
As part of our corporate social responsibility, we have pledged RMB 300 million toward to support – to support these efforts, provide awareness, education and improve public health in China. The coronavirus outbreak has undoubtedly impacted our economy.
While the near-term impact on the business has been negative, as many of our top industries, such as travel, real estate, auto, health care and franchising, suffer from reduced off-line activities.
The side effect is that people are staying home more, and they have the opportunity to get to know Baidu’s products and services better. For example, we are seeing new highs in Baidu App DAUs and time spent on Xiaodu [ph] smart speakers. Search queries on coronavirus exceeded 1 billion during the Chinese New Year, as users came to Baidu for fact checking and finding more reliable information.
Turning to Baidu’s fourth quarter results. 2019 had been a year of significant changes and progress, as we focused on strengthening Baidu’s mobile ecosystem and AI monetization, such as smart speakers, smart transportation and cloud enterprise solutions, while improving operational efficiency.
Our mobile business, we have built a comprehensive and diversified ecosystem, centered around knowledge and information with Baijiahao, Baidu Smart Mini Program and Managed Page as our mobile building blocks. These pillars provide a unified infrastructure to allow more video sharing and user engagements and provide users with greater trust on content shared on Baidu’s platform.
Through Baidu’s mobile building blocks and hosted marketing platform, we enable content providers, customers and other partners to leverage Baidu AI, to create, share and engage its user and access services from our platform to improve conversion, which have led to unprecedented expansion of Baidu’s mobile ecosystem and robust organic traffic growth.
Our new AI businesses, DuerOS has further strengthened its leadership as the most popular voice assistant in China, we believe, and our Xiaodu smart devices saw exceptional growth last year.
On Apollo, we made exciting progress in early stage commercialization, forming partnerships with municipalities across China to install V2X infrastructure backbone for smart transportation.
On Baidu Cloud, our cloud solutions have helped enterprises improve their service offerings, productivity and operational efficiency, as well as supported their digital transformation.
Looking ahead, we celebrate our 20th anniversary this year, and we look forward to enabling our partners and customers to do more with Baidu AI. We are excited about the opportunities ahead, to apply our AI technologies to growing use cases and take steps closer to realizing our mission to make the complicated world simpler through technology.
Let’s begin our Q4 review with MEG, our Mobile Ecosystem Group. In December, Baidu App daily active users saw continued robust growth reaching 195 million, that’s up 21% year-over-year. Momentum for in-app traffic remains strong, with in-app search queries growing almost 30% year-over-year.
We have been relentless in improving the user experience for search. The building blocks for Baidu’s mobile ecosystem are expanding the scope of Baidu’s search from knowledge and information to services and transactions, empowering Baidu App to become a super app.
E-commerce touches the lives of majority of the 850 million Internet users in China. In the past, users came to Baidu to search for information about delivery companies. Through Baidu’s building blocks, all six major express delivery companies in China have adopted Baidu Smart Mini Program.
When a user searches express delivery, this express delivery Smart Mini Programs appear on 1 card. A logged in user on Baidu App can seamlessly obtain the shipping status of his or her e-commerce order, or request for an express delivery, simply by selecting the Smart Mini Program on the search results card. Search queries for express delivery spiked fivefold in December from the previous year.
Baidu Smart Mini Program is also extending into government services. For example, employees in China contribute to a housing fund each payroll period, similar to social security in the U.S.
Through Baidu Smart Mini Program, logged in users can access their housing fund information by simply scanning their face with Baidu App. Daily average search queries on the housing fund in December spiked 40%, a month after the introduction of the housing fund Smart Mini Program.
We believe expanding Baidu’s service offerings with native-app-like user experience will further differentiate Baidu’s Search and pave the way for more online service provider to obtain a new source of traffic. Baidu Smart Mini Programs save users the hassle of having to maintain so many apps on their phone or re-login a website for every transaction.
Moving onto feed. We’ve revamped hot topics, powered by Baidu’s unique user insight, continuously updated with the latest search and feed trends. Peak DAUs for hot topics grew threefold, and time spent on Baidu feed was up 18% year-over-year in December.
As more content providers with original content join Baidu’s Baijiahao publisher platform, user engagement on Baidu feed is growing and a network effect is taking shape.
On short videos. With 5G around the corner, we believe the opportunities in short video lie beyond entertainment-oriented content. To seize these opportunities, we are enabling content providers across all verticals to share video.
We have built a large repository of short videos from our video apps, Haokan and Quanmin, as well as the main Baidu App, of which over 70% of the content distributed are short videos.
Through Baidu’s building blocks, we are enabling content providers to share short video across search, feed, Haokan and Quanmin as well as Baidu’s other properties, such as Baidu Wiki and Baidu Post Bar.
Baidu serves over 1.1 billion users or devices each month, and our users demand rich knowledge, information and services, which can be best satisfied when the short videos are distributed across numerous consumer-facing products that we offer each year towards a different targeted audience.
Nevertheless, we remain focused on improving Baidu’s short video apps to differentiate from other market players. Time spent on our feed plus short video apps was up 20% year-over-year.
For example, we have partnered with major TV stations and provincial satellite stations to provide live TV streaming and VOD experience via Baidu Smart Mini Program.
Through Baidu’s mobile building blocks, TV stations can leverage Baidu’s powerful content distribution channel to extend their reach, allowing online users to engage with their shows and stay relevant as Internet technologies advance with AI and 5G.
Turning to content verticals. Baidu is known for exploring knowledge and information. Strengthening content verticals to improve user experience has been a priority for us. For example, in June 2019, we set out to develop a health care wiki to aggregate medical knowledge and information from authoritative and professional sources.
In a little more than half a year, Baidu’s health care wiki covers over half of the top medical efforts in China, including hospital directors, presidents and academicians. Health care – health care search DAUs in Baidu App grew 35% year-over-year in December, outpacing Baidu App DAU growth. We are seeing consumers become increasingly reliant on Baidu for health care information and services.
Online literature is another area where we are aggregating content to improve user experience. With top online literature content providers joining Baidu, DAUs of our online literature channel in Baidu App was up 40% year-over-year in December.
Let me quickly cover the building blocks of Baidu’s mobile ecosystem. Baijiahao now hosts 2.6 million publisher accounts, that’s up 38% year-over-year. The increasing scale and media influence of Baidu App is drawing more original content creator to Baidu’s content ecosystem. In December, the number of publishers providing original content grew 116%, while original content pieces grew more than threefold year-over-year.
Baidu Smart Mini Program continues to gain momentum in the market, with MAUs reaching 316 million in December, up 114% year-over-year. The number of Smart Mini Program is up 35 fold from last year and up 40% from last quarter.
Baidu Smart Mini Program is becoming an important source of traffic for app developers. Hao Hao Zhu [ph] an online network of interior design and decoration, saw the MAUs on its Baidu Smart Mini Program grow to about quarter of the MAUs on its own app one month after going live. Zhihu, a leading online question-and-answering community, grew DAUs on its Baidu Smart Mini Program to over 2 million in just two weeks after release.
Baidu Smart Mini Program lends Baidu’s AI capabilities to app developers through our hosted marketing platform, offering intelligent data analysis, better targeting and improved conversion.
A leading Internet portal in China adopted Baidu Smart Mini Program and saw its ad monetization soon exceeded that on its HTML5 site, giving the portal more reasons to shift its content to Baidu Smart Mini Program.
Turning to Managed Page. Revenue from Managed Page grow to about quarter of Baidu’s Core marketing revenue in the fourth quarter. Advertisers are proactively adopting Baidu Managed Page as we roll out industry-specific solutions, for example, for home services, legal and B2B sectors.
Unlike Smart Mini Program owners, Managed Page owners tend to be smaller merchants without development capabilities. By lending Baidu’s AI capabilities to SMEs through Baidu’s hosted marketing platform, SMEs can maintain their web presence, keep up with the advances of Internet technologies and continuously improve on conversion over time, simply by opening an account with Baidu and foregoing the hassle of servers and software purchases. Managed Page is built with data structure, which ensures content quality and improves consumer trust.
On the monetization front, we continued to deepen our service offerings through Baidu’s hosted marketing platform to enhance the value of our marketing customers. As our customers increasingly use video ads for their marketing campaigns, we are providing new video ad templates and content creation tools to build more impactful creative ads. These initiatives are leading to improved monetization and ROI for our customers.
Longer term out, we see Baidu’s hosted marketing platform becoming a sales and marketing SaaS, evolving from marketing tools and audience building into equipping SMEs with AI-powered capabilities to perform marketing automation, sales-lead generation and marketing to sales funnel analytics.
This innovative goal is quite meaningful when you consider how Baidu’s mobile ecosystem is bringing users, content and service providers and merchants together to create a win-win experience for everyone.
Moving on to DuerOS. In the fourth quarter, DuerOS voice assistant continues to grow rapidly with monthly voice queries surpassing 5 billion in December, up over threefold year-over-year.
Monthly voice queries from Xiaodu first party devices grew even faster, up over sevenfold from last year, reaching 2.3 billion in December. Search queries on our own devices are more valuable, and we plan to provide this figure to you going forward.
DuerOS-powered smart speakers continue to generate strong sales momentum. According to market analytics firms, Strategy Analytics and Canalys, Xiaodu smart speakers ranked the first in smart speaker shipments in China, and Xiaodu Smart Display ranked the first in smart display shipments globally for the full year of 2019.
With Xiaodu smart devices growing about sevenfold in 2019, DuerOS skills store is capturing the attention of mobile app developers. For example, in video category, iQIYI, Tencent Video, Mango TV and Migu Video, all offer their own DuerOS skill. We look forward to more exciting upgrades from DuerOS after the launch of Xiaodu X8, our 8-inch smart display in December.
Xiaodu X8 is equipped with AI-powered understanding, interaction and self-learning capabilities, enabling users to wake up the device with eye gestures, pause streaming content with hand gestures and send notification of moving objects at home when the owner leaves the house.
Turning to Apollo. We are partnering with municipal government in China to enable smart transportation by installing Baidu V2X infrastructure solutions. In Cangzhou, Hebei province, the installation of Baidu V2X solutions further extended into the launch of the city’s robotaxi pilot program with an initial fleet of 30 Apollo-powered autonomous driving vehicles last November. Baidu also partnered with Yinchuan, the capital of Ningxia province, to install V2X solution which support autonomous drive – trucking.
As we continue to advance in autonomous driving technologies, it is important for us to gain operational experience as well as derive commercial value from areas such as smart transportation to ensure that we are meeting market needs with our technology.
Turning to Baidu Cloud and AI Services. Last month, Tesla announced the switch to Baidu Maps for its vehicles in China. We are excited to provide Tesla vehicles with mapping services, such as base map display, POI search and real-time traffic conditions through Baidu’s leading PaaS solutions.
And in November 2019, we released an end-to-end far-field Automatic Speech Recognition solution based on our in-house designed Baidu Honghu AI chip, customized for Baidu’s AI. Baidu Brain’s leading speech recognition capabilities are used across Baidu products, including Xiaodu smart speakers, DuerOS in-vehicle infotainment, Baidu Maps and Baidu call center cloud solutions. Developers have tapped the Baidu Brain’s speech recognition engine more than 10 billion times.
In December 2019, Baidu’s pretraining framework for language understanding, ERNIE, became the first to score above 90 on the General Language Understanding Evaluation benchmark, or GLUE, which is likely considered as the benchmark for testing AI language understanding and otherwise dominated by U.S. technology firms and universities. ERNIE powers Baidu Search and Xiaodu smart devices to provide the best user experience.
We have also begun to install Baidu Kunlun, our in-house designed, high-performance AI chip to power new cloud servers. Baidu Kunlun is customized to optimize visual, speech, natural language processing and other AI capabilities.
Turning to iQIYI. In December, iQIYI subscribers reached 106.9 million, a net add of 19.5 million from a year ago. iQIYI’s large subscriber base strengthens its foundation as a leading video platform and producer of long-form video. iQIYI’s leading position in China’s video marketplace is a valuable component to Baidu’s large content ecosystem, both on mobile and at home.
With that, let me turn the call over to Herman to go through our financial highlights.
Thanks, Robin. Hello, everyone. Welcome to Baidu’s fourth quarter call. All monetary amounts used in my discussion are in renminbi, unless stated otherwise.
Baidu had a strong finish in 2019. Total revenue reached RMB107.4 billion, or US$ 15.4 billion, up 8% year-over-year, excluding spin-off revenue. Revenue from Baidu Core was RMB79.7 million or US$11.5 billion, up 6% year-over-year, excluding spin-off revenue. Adjusted EBITDA was RMB18.4 billion. Adjusted EBITDA for Baidu Core was RMB25.5 billion or US$3.7 billion for 2019.
Total revenues for the fourth quarter was RMB20.9 billion or US$4.1 billion, up 6% year-over-year, which slightly beats the high end of our guidance. Revenue from Baidu Core was RMB21.7 billion or US$3.1 billion, up 6% year-over-year, accelerating from the last two quarters. On a sequential basis, fourth quarter revenue for Baidu Core was up 3% compared with being slightly down in the same period last year.
Marketing services in the fourth quarter saw strength from retail, e-commerce, gaming, and services sectors, offset by softness from financial services, health care, franchising and auto sectors. We are encouraged to see the health care in the fourth quarter, while continuing double-digit decline year-over-year was flat sequentially. And our overall CPM continued to trend up sequentially.
Our new AI businesses, which include smart devices, smart transportation and Baidu Cloud, doubled year-over-year in the fourth quarter. Xiaodu smart speakers continue to experience robust growth, and unit economics continues to improve with new products released at higher price points and our BOM costs reduced on greater sales volume. Baidu Cloud revenue recorded strong double-digit growth with impressive margin improvements. As we entered 2020, we are excited that our new AI businesses are becoming an important growth driver for Baidu.
iQIYI revenue reached RMB7.5 billion, up 7% year-over-year. iQIYI subscribers grew 22% year-over-year to 106.9 million, while iQIYI ad business was down 15% year-over-year as a result of slowing macro, delay in the release of hot videos and heavy competition from in-feed advertising.
Adjusted EBITDA was RMB8.2 billion, and adjusted EBITDA margin was 28%. Adjusted EBITDA for Baidu Core was RMB9.8 billion or US$1.4 billion in the fourth quarter and adjusted EBITDA margin for Baidu Core reached 45% compared to 33% last year.
Let me quickly go over the rest of Q4 financial highlights. Cost of revenue, excluding non-GAAP items, was RMB14.9 billion, down 4% year-over-year, primarily due to a decrease in content costs and TAC, offset by an increase in hardware and cloud cost of goods sold as well as server depreciation. TAC decreased primarily due to a decrease in TAC revenue.
SG&A expenses, excluding non-GAAP items, were CNY 3.5 billion, down 34% year-over-year, primarily due to a decrease in personnel-related expenses and decreased investments in channel spending and promotional marketing as less marketing programs met our stringent ROI criteria.
For example, we dialed back marketing spending on short video apps, and as Robin pointed out earlier, put our efforts on differentiating short video apps through features like high-quality broadcasting from television stations.
R&D expenses, excluding non-GAAP items, were RMB3.7 billion, increasing 1% year-over-year, primarily due to decreased personnel-related expenses. Non-GAAP operating income was RMB6.8 billion, and non-GAAP operating margin was 23% compared to 10% last year. Non-GAAP operating income for Baidu Core was RMB8.5 billion, and non-GAAP operating margin for Baidu Core was 39% compared to 28% last year.
Under non-operating income, I should note that Q4 – in Q4, we benefited from higher interest income maturity and other items totaling to approximately RMB1.4 billion that we don’t expect to carry over to Q1.
Non-GAAP net income attributed to Baidu was RMB9.2 billion, and non-GAAP net margin was 32%. Non-GAAP net income attributable to Baidu Core was RMB10 billion or 1.3 – I’m sorry, US$1.4 billion. Non-GAAP net margin for Baidu Core was 46% compared to 30% last quarter.
As of December 31, 2019, cash and short-term investments were RMB147.4 billion or US$21.2 billion. Excluding iQIYI, cash and short-term investments for Baidu Core was RMB135.9 billion or US$19.5 billion.
Free cash flow was RMB10.1 billion, and free cash flow for Baidu Core was RMB8 billion or US$1.2 billion. Total full-time equivalent employees at Baidu Core in December was approximately 28,900 employees, a reduction of 2,700 head counts from last year. We managed our head counts in 2019 and plan to add these head counts back in strategic areas in 2020.
I should note that we made minor changes to our condensed financial statement format this quarter to be more aligned with our industry peers to avoid disclosing sensitive information such as our pricing strategy and to provide investors with more information on our cash flow.
Turning to first quarter guidance. We expect total revenues to be between RMB21 billion and RMB22.9 billion, representing a decrease of 5% to 13% year-over-year. Our guidance assumes Baidu Core will decline between 10% to 18% year-over-year.
The novel coronavirus situation in China is evolving, and business visibility is very limited. These forecasts are current and preliminary view, which is subject to substantial uncertainty.
Nevertheless, let me give you some color on what we are seeing in Q1. As a result of the coronavirus outbreak, the Chinese New Year golden week that was originally scheduled to end on January 30, was extended by a week in Beijing. And in some regions in China, the holidays will extend it even longer.
Most shops, restaurants and malls across China were closed down and remain closed down – many remain closed down, as we speak. Consequently, the rebound for online marketing after Chinese New Year has been slow this year.
In the past two weeks, however, business activities have started to pick up as people return to work. At Baidu, our employees are gradually returning to the office, applying strict safety measures. We assume businesses across China will do the same in that our marketing services will pick up at a faster pace into quarter end.
As Robin mentioned, a big portion of our marketing services is dependent on off-line activities, and we expect these sectors to see negative growth this quarter. Some may experience negative growth into next quarter. On the other hand, we are benefiting from online sectors, such as online games, e-commerce, online education and other online services.
We are encouraged by the experience that China has had with SARS and other epidemics. In addition, the Chinese government has implemented policies recently to boost the Chinese economy. Internally, we have set aside up to RMB2 billion in sales incentive to help our marketing services customers buffer the current difficult situation.
We are entering 2020 with a lean P&L, which puts us in a good position to continue our heavy investments in technology and in new businesses to optimize future growth. As we look beyond coronavirus outbreak, we’re excited about the strong foundation that we have built with Baidu mobile ecosystem and the scaling of our new AI businesses, as evidenced by the accelerating growth rate of Baidu Core revenue in Q4 on a year-over-year basis.
And with that, operator, let’s open the call to questions.
Certainly, sir. [Operator Instructions] Your first question comes from the line of Piyush Mubayi from Goldman Sachs. Please go ahead.
Thank you for taking my question. In your guidance, Herman, you talked about how the business has recovered in the last two weeks, to a certain degree. Could you just take us through the distinct periods in the first quarter to give us a better sense of the sort of recovery that we’re at? In the last two weeks, for example, what has been the year-on-year growth that you’re witnessing in your business?
And related to that guidance, also, if you could give us a sense of what the underlying search trends have been, i.e., what sort of traffic growth are you witnessing? How was that disrupted in any way? How is that evolving?
And at this stage, how would you comment on what March and the rest of the year looks like, i.e., this recovery in the last two weeks? Can we extrapolate from that that pace of recovery will continue into the rest of the quarter? And is that in your guidance?
Yes. Piyush, I’ll take the first part on revenue, and I’ll have Dou talk more about the traffic for the first quarter. As I mentioned in the prepared remarks, in the first quarter, the first half of first quarter, we see a rather weakness because of the coronavirus and because of extended holidays and the fact that people were being quarantined so a lot of the shops were not open. So a lot of off-line activities were impacted. And a substantial part of our revenue is related to these off-line activities that the sectors that Robin has mentioned.
On the other hand, we do have also a good portion of our revenue that’s online. And as I have mentioned, things like online games, e-commerce, online education and so forth. So when you look at the pattern of growth, after Chinese New Year, we had anemic growth. And we usually look at how fast we’re growing on a week-over-week basis. And we even compared to last year, last year, Q1 was not very strong for us.
And when you compare to last year, we were still subpar this year. But we started seeing activity pick up a little bit two weeks ago. And then also, this week – this week, we’re also seeing continued pickup.
So the assumption with our guidance is that from now until the end of the quarter that the growth on a week-over-week basis will continue to ramp up even faster than what we have seen in the last two weeks.
And we think that that is potentially possible because we’re seeing that many of the cities around China, people are actually going back to work. We’re seeing some of the shops in Beijing are opening up. When you’re going on the freeway now, you’re actually seeing traffic jams versus, say, two, three weeks ago, where the roads were pretty empty.
So Dou, do you want to answer on how our traffic…
Sure. On the traffic side, actually, as Robin already mentioned, right, even in last December, we already see quick growth for both the DAU and the search volumes. Actually, for the epidemic outbreak, so people, once again, realized that the unique value proposition for Baidu service because they were eager to know more about the coronavirus, and they want to proactively to search, instead of waiting there to be effect [ph]
So that side, we can see the search volume metric growth more than 30% during this time. And because of the two hedging – engine of Baidu App, right, where we have search and the feed. So with the volume growth at search, we also see robust growth for the 10 spend [ph] on feed, which surpassed at 100% year-over-year during this time.
The good thing for us is that by analyzing the queries, we not only see the growth for the queries relative to coronavirus, we also see the growth of other verticals for searches. And it means that, okay, users are getting a ton to know more and more about Baidu service so then they can expand to other sectors.
So in general, I think it’s a good time actually for the customers for the users to know, to learn more about Baidu service, and we’ve added the traffic growth will be a good start for the next quarter, actually.
Thank you. We have the next question from the line of Eddie Leung from Bank of America. Please ask your question.
Good morning. So best wishes and our thoughts with everyone being affected by the outbreak. May I have like two questions perhaps to Herman. Just a follow-up on the CPM trend. I would like to clarify if the CPM started to go up year-on-year or still down year-on-year in December or perhaps at the beginning of this year?
And then secondly, on cost of services, just wondering, how should we think about the trends of TAC and content costs, excluding iQIYI going forward? Thanks.
Hi, Eddie. Okay, let me talk about CPM. Your question was how CPM is trending. When you look at CPM trending, we look at it on a sequential basis, we’ve been nicely trending up the last few quarters into Q4. On a year-over-year basis, we’re still seeing us – that being a negative growth. As we saw last year, we talked about how the market was diluted by a lot of supply of inventory going into the market.
But I think you’re seeing good trending on a sequential basis, it’s coming back. It’s hard for me to comment on Q1 because I think Q1, you have an issue of demand, right? We talked about how a big part of our customer base is based – rely on off-line activities.
So when you have them – the shops closing and so forth, very hard for them to compete for CPM. So I think it’s not indicative to look at the CPM trends, given our current situation.
With regards to our TAC. For Q4, our TAC cost was down, our total TAC revenue is down. This is an area we’re seeing the pattern of a search in China. We talked about a lot of our mobile ecosystem. We talked about in-app search. Because in-app search is so much more convenient, because when you’re logged in, you can do so much more, it’s personalized to the particular user, we’re seeing a shift of people – how people are using search.
We think that the future of search is going to be in-app search. You will see us growing very robustly in Baidu App. As a result, what you’re probably seeing that the searches, the browsing and so forth, as a percentage of overall search in China, are declining.
So we expect that that market to continue to decline. As a result, our revenue from TAC as a proportion of total revenue will also decline. So the way we look at that is we’ll continue to participate in bidding for TAC traffic to the extent that we think it could be profitable, since we’re the largest in China, if we cannot be profitable, probably other companies cannot. So we’ll allow other companies to continue to bid for TAC traffic at a negative margin, while we focus on just profitability from that perspective.
And then on content costs, this is an area that’s good for us in a sense that we’re building up our – a feed system. We’re also trying to strengthen our vertical propositions, certain vertical areas such as online literature, such as health care, wiki and so forth. At the same time, we’re also going into, for example, live streaming, if you’ve seen our apps. So that’s an area that that’s going to help contribute to the content.
So I think as a percentage of growth, you’re going to see content costs, we’re going to continue to invest in that this year. But in terms of absolute dollars, it’s not that big compared to our overall cost structure.
One that I’ll add on the CPM-wise because the first months of the first quarter, actually, we have multi-factors like the Chinese New Year and the epidemic, right? But just before the outbreak of the epidemic, by removing all other factors we can think of, actually, we already see the CPM outpacing the last year, quite significantly, actually. But the epidemic actually just disrupted this pace. But down the road, I think we are confident on this.
Thank you. The next question we have is from the line of Alicia Yap from Citigroup. Please ask your question.
Hi. Good morning, Robin, Herman, Dou Shen, Thanks for taking my questions and also wishing you all healthy. So in light of the coronavirus, it seems like Baidu decision last year to transition to the medical structural platform landing page seems timely. So – and you mentioned earlier the DAU for the health care search query, up 35% in December. Could you share with us the rough sense of the absolute size of this DAU?
And could you also give us some comparison in terms of the DAU increase so far until now in the first quarter? And how will these potential higher queries and traffic search to translate to potential higher demand for the medical keyword advertising in the first quarter and also future quarters? Thank you.
Alicia, right, before I talk about these numbers, I wanted to show you why we are seeing the growth of the health care queries and such volumes. So let’s say about this coronavirus, right? So from right around the outbreak of that epidemic, we put together a channel to cover all the relevant information about of the epidemic. So specifically, we actually launched a free health care consultation that allows people to access doctors online.
And also, our operational team is partnering with medical experts to providing authoritative information on the coronavirus. And also, we invite them to do quite a large broadcast to answer the users’ questions.
So with all that, actually, Baidu’s platform, once again, to show its scalability to answer, address users such concerns. So as Robin mentioned, right, so we see the query volumes about health care grows 35% year-over-year in a normal pace, actually. During this epidemic, actually, we can see even higher growth for the health care queries.
So in terms of the specific DAUs, actually, I do not have that number at hand, but we can calculate based on the query volumes proportionately. Does that address your question?
Yes. It’s helpful, yes. Can we get some sense of how we can get the benefit later in the quarter or like in future quarters in terms of translating to revenue upside?
Yes. I think from my perspective, I think it’s pretty correlated. And so since we have more and more users coming to Baidu for the health care. And actually, as I said, the user comes to here for the health care-related information. Actually, they already show their interest for beyond just health care.
So that’s why we can see the total search volume growth. And that said, we can see all this in a user interest and search volumes are going to be monetized properly.
Yes, I think, Alicia, it’s more important to look at the big picture of what we’re trying to do with the whole mobile ecosystem. I think health care is just one of the factors. What we’re trying to do with the health care with the Managed Page is so that the information is verifiable so that it becomes more reliable. And what Dou has mentioned earlier is that during the coronavirus, you see a lot of people applying feeds and so forth.
You also note that when you have a lot of feeds and so forth, you have things, what they call fake news. So what people want to do when these things impacts people’s health, impacts people’s lives, they want a place where they can go and have information that’s more authoritative, that’s more reliable. And that’s why you’re seeing people come to Baidu during this time, to search, to get the information, to make sure that this is correct.
So I think we talked about a lot of things we’re doing with health care. But I think when this is over, it’s not just going to be focused on health care advertisers, but more broadly, the users are going to come here because this is where they can verify more reliable information.
As a result, that overall traffic growth is probably going to scope to other sectors of – for our advertisers. I think that’s probably a better way to look at this versus just focusing on our health care customer sector.
So actually another – Alicia, maybe if you guys maybe already noticed, right, Baidu’s unique position in serving users knowledge and information. With that, we already see many news, including the CCTV has quoted or cited Baidu’s data or information a lot during the past – a few weeks actually.
So this, again, proves the authoritative information that’s Baidu’s service. And once again, to help the users to know Baidu’s service even better actually to improve their confidence in Baidu service. I think these are all good signals going on forward.
Great. Thanks for the great effort.
Thank you. [Operator Instructions] The next question we have is from the line of Thomas Chong from Jefferies. Your line is now open.
Hi, Robin, Herman and Dou. Thanks for taking my question and wish everyone is in good health and safe. My question is about our Mini Program’s potential. Given the good traction that we are seeing, I noticed that we mentioned about Baidu AI will be a key driver or one of the drivers for this year revenue growth. Can management comment about the time line on Mini Programs’ monetization?
And on the other hand, can we also talk about the trend in operating expenses for this year, given the fact that our Q4 margin is so solid with our ROI strategies. Thank you.
Dou will answer the first one and Herman will answer the margin question.
Okay. Actually, for the Smart Mini Programs, we already see quite a lot of examples today and before about its advantages in terms of the user experience and the help to the developers. So besides the examples shown before, so fundamentally, it is because with the AI capability, so the developers, they can simplify their development and provide an even more powerful function. Just as the example given by Robin for the – was that the house? The TAC – housing…
Housing fund, right? So I just scan the piece and we can immediately get all the data about the personal information. So that is a good example, actually. So we have a lot of other examples. So in terms of the monetization, just because we’ve seen that Smart Mini Programs, we can have more data about the user, and we can understand the user better. So then we can match the user with the more relevant ads.
And with all the Smart Mini Program launched and monetized through our ad service, so we can see the CPM lift pretty significantly, which is also mentioned in Robin’s script. And also for the advertisers, where we use the Smart Mini Program as the landing page for their campaign, so we also see that ROI lift, which is proven example by example, right? So one after another.
So that’s why we already see the advantage brought by the Smart Mini Programs so far. And also, we can see, so the adoption reach for Smart Mini Program is growing quickly, actually. So all this actually depends on the user experience, which is a fundamental factor for all the advantages I just mentioned. So we are monitoring closely – monitoring the experience between our Mini Programs and Mini Programs on other platforms. Actually, we can see we are showing advantage little by little.
Yes. So Thomas, the way – just to add what Dou has said, the way I think I would look at Mini Programs in what we’re trying to do with this mobile ecosystem is we’re actually disrupting how search is doing, right? We’re going from browser search to what we call AI search. And AI search is basically you log in to Baidu App and the results you get is personalized. That’s why, when you scan your face, we know exactly what the balance of your housing fund is.
So think of it as, in the past, people search through browser, disrupting the in-app search. Because you can log in, because you can then use your personalized information through your AI. With regards to your margin question, can you ask that again? I didn’t hear all of that.
It’s about the trend in operating expenses in 2020. We see that the Q4 margin is very strong, and our focus – ROI-focused strategy is very successful. So with the coronavirus outbreak, how should we think about the trend in operating expenses or the margin outlook, if there’s any color? Thank you.
Yes. So when you look at the cost structure in Q4, we went through our operations, and we deliver our promise back in May when we said we’re going to do it last year. And then when you add – plus 4, 6, 7 months later, we basically cut down our cost structure and took out areas that we thought there’s operating leverage.
So in Q4, on a non-GAAP basis, the cost of sales plus operating expenses exclude the non-GAAP items. We’re talking about a level of RMB13.2 billion. So going into Q1, we think that we can maintain that range or they’ll be a little bit down.
And even at that range of RMB13.2 billion, when you compare it, for example, Q1 of 2019, we’re talking about being down 14%. So I think we’re in a good position going into 2020, even if we maintain at the Q4 level.
Thank you. The next question we have is from the line of Binnie Wong from HSBC. Please ask your question.
Good morning, management. Wishing everyone’s safe and healthy. So two questions here. One is that, I guess, it’s understandable that the situation is very tough now. If you look beyond this one-off event, right, based on your experience with SARS or other epidemic, do you think it’s more realistic to see a U- or V-shaped recovery? Do you notice any change in user behavior or advertiser approach that might lead to new business opportunities?
And second is that we noticed there’s an uptick, right, in the Baidu App traffic during the Chinese New Year, and it surpassed the 200 million DAU milestone. So I think that’s very encouraging. Despite we have scaled [our web page] promotion this year compared to last year. How do you think we can sustain this traffic and monetization as well?
And just very lastly, on housekeeping, in 4Q, what are the outperforming, underperforming advertising verticals you see? Thank you.
This is Robin. I think that this basically described our expectation for the rest of the quarter, you can call it V-shaped or U-shaped, probably different people have different interpretation, but what we can tell is that the majority or probably almost all the industries to advertise on us, those kind of demand, they don’t disappear. They are just to postpone.
If you plan to get married, you’ll still get married. If you plan to buy a car, you will still buy a car. If you plan to become prettier, you still go for a cosmetic surgery. So this kind of demand will come back after the epidemic ends.
And in terms of traffic, Dou mentioned that the traffic has gone up very dramatically during this epidemic outbreak. Because we have better technology, better user experience, there’s more accurate information, people get a better sense that the Baidu services are superior. So we think they will stay with us even after the epidemic outbreak. Herman, do you want to cover the Q4 industry?
Yes. I think in the Q4 industry, we talked about it in the prepared remarks. Basically, the ones that are strong are our e-commerce retail, online gaming and services. And then the ones that are weak are our financial services, health care, franchising and auto.
And sorry, can I just follow-up here in the 1Q. So far, how you see this has been trending?
You’re talking about by customer segments?
Yes, by customer segment in 1Q?
Yes, I think it’s obvious that these customers that are doing from online are going to do well, such as online gaming, online education, e-commerce and our other online services. And those are going to be negative, probably obvious, are going to be things like travel industry, which is a big sector for us, auto, real estate, health care and franchisees.
Okay. Thank you. Those were helpful.
Thank you. The next question we have is from the line of Tina Long from Credit Suisse. Please ask your question.
Hi, good morning. Management, thank you for taking my question. Just one quick question on the sales team structure. So it sort of has been almost a year since the senior management change on the sales team.
So I would like to know what has we – what has been done over the past 8 months or so on the sale team, including like team structure, staff incentives and KPI setting, all that kind of thing. And what the change will actually lead to a stronger year for the following quarters in 2020? Thank you.
Yes. About the sales management, I think we – I’ll ask Dou to answer it.
Okay. Sure. We have seen a lot of change over the sales team, both in terms of the member end of the quarter and its collaboration with the products team. So as you guys already know, we have hired or replaced quite a few positions with high-quality people and with a pretty solid experience in sales.
And I think the most important thing is that we have strengthened the connection between the sales team and the commercial product team and even the user side of products team.
So we are exchanging the ideas quickly so that we can fully exploit the power or the service provided through the commercial end users have products to help the advertisers to acquire their target customers, and therefore, improve their ROIs.
Actually, we already see the synergy is happening, and that gave us the confidence or encourage us to see better results in the coming quarters. Does that work? Does that answer your question? Tina?
Sure. Sure. Thank you.
Thank you, Tina.
Thank you. The next question we have is from the line of Tian Hou from T.H. Capital. Please ask your question.
Good morning, management. Thanks for taking the question. The question is related to the new focus of 2020. 2019, I understand, for Baidu is a transitional year. So we have a lot of things for new and the management changes and sales team changes and health care sector removal and the market change, a lot of changes.
So in terms of our packaging, I think was really smart. So we spent money – we use our return on investment as a principle to direct how we spend. So we didn’t grow that much, and we didn’t spend that much either, so we have a good margin improvement. So as we enter into 2020, I wonder what is the new focus for development. And how are we going to direct, deploy our capital in a different area in order to generate more growth? That’s the question. Thank you.
Tian, I think you’re asking maybe M&A question. So when we’re looking at deploying…
Yes. What is the business focus? And how you’re going to spend the money to support your focus? Which area?
Yes. I think when you look at our spending focus in 2020, it’s – a big part of it is going to be similar to how we have focused in Q4. And I think what you’re going to see us, in Q4, we took a look at our operations, and we rightsized it, we made the fine-tune and so forth. I think going into 2020, first, we’ve got to deal with the coronavirus and then try to get our business to go back to growth again. And then once we’re beyond that, I think there are certain areas that we want to focus on. I think we want to continue to invest in our technology in the research that we have.
This is an important area, as we’re moving into AI search with in-app search, and at the same time with our AI businesses and so forth. Another area we talked about earlier that going into more with content as we’re focusing on verticals, trying to strengthen our video areas and also live broadcasting and so forth. This is just another medium in which advertisers can communicate with users and so forth.
And then just beyond this, I think it’s just the things that we’ve been talking about, how do we further continue to invest in our mobile ecosystem, the foundation of building blocks that we talked about and also building our AI businesses, the three areas that we talked about, the smart transportation, the smart devices and also our cloud business. So those are the areas that we’re going to continue to focus on as we move into 2020.
Okay. Thank you, Herman. Thank you, everyone.
Thank you. Ladies and gentlemen, this does conclude our conference for today. Thank you for participating. You may all disconnect.