Operator: Thank you. Your next question comes from Gary Yu with Morgan Stanley. Please ask your question.
Gary Yu: Hi. Thank you management and Congratulations on a decent set of results. So I have a couple of questions regarding the AI cloud business. First one is, for the revenue growth. Will the disruption in revenue collection that we saw in fourth quarter push out the benefit first quarter? And have you seen the reopening kicked off in projects of cloud, so far? What are the overall cloud revenue growth for 2023 that management expects to see? And what product offering — what kind of product offering we can see from the cloud service as the major growth driver for 2023. And how do we expect the company growth rate and the cloud market in the coming years to be? And I think a second question, related to that, is can you also comment on overall IT spending budget by enterprises in the public sector versus the — so the private sector versus the public sector.
And also do you expect to win a decent number of new cloud projects this year? And do you think that the uptick will be gradual given the overall macro remains weak? And just lastly, any comment on breakeven time line? And what is the key bottleneck, so far, reaching breakeven? Thank you.
Dou Shen: Hi, Gary, thanks for your questions. This is Dou. I will answer the first two questions and then let Rong take care of the last one. So we do have seen a gradual recovery of cloud revenues as our R&D team has begun to work on the ongoing projects post reopening. However, the cycle for — from sales lead to revenue recognition varies from a few months to a few quarters. Now considering that, our AI cloud revenue growth should be backloaded this year, but in meanwhile, we will keep out low-margin businesses for both ACE and cloud solution projects as we focus on margin improvement for the cloud. This initiative will have an impact on our ad revenue growth going forward, but still we aim to continue outgrowing our Internet peers in 2023.
If we look into the long term, the big trend for traditional industries to move business onto cloud and use AI to improve their efficiency remains unchanged. I believe the digital and the intelligent transformation will be the key driver for the GDP growth in the near future. And for sure, we will benefit the most from this transformation because we think Baidu is uniquely positioned. Actually, compared to our — to others, our AI cloud provides full-stack offerings on four layers, as Robin just mentioned, from cloud infrastructure, to deep learning platform, that’s PaddlePaddle, as you know; to large foundation models; and new applications. And all the four layers can work seamlessly together in each offered end-to-end solutions to achieve optimal outcomes for our, even at lower costs, versus other solutions which is built from different providers for the cloud platform and models.
In addition, end-to-end solutions can actually upgrade in much shorter time once we have improvement on any of these layers, which will further benefited the plans. So if you were in the sectors of transportation, manufacturing, energy and utilities or other industries so I believe Baidu’s cloud service should be the most efficient one because, in addition to the technical advantage I just explained, we already know the industry and we know the pain points. And we have accumulated a solid experience by successfully delivering high-quality products already in the industries. Most importantly, as Robin just mentioned, we plan to integrate Ernie Bot into our cloud and AI products, so this should help many business owners and entrepreneurs build their innovative applications, explore new business or improve their operations.
So we believe this will be a significant step for our AI cloud and potentially reshape the whole China’s cloud industry. So we will help more business owners and entrepreneurs to leap from digital era to AI era, where AI technologies will play a vital role in productivities in all industries. And with that, I will turn to Rong for your last part.
Rong Luo: Thanks, Dou. Yes, I’m going to address your question regarding to our AI cloud margins. We continually to improve margins for cloud by cutting the low-margin businesses and continue to building AI applications which can scale up, which is a consistent strategy for years. I think, as we have mentioned before is our AI cloud actually including two parts. The first one will be the personal cloud which continue to generate a decent operating profit margin, while the enterprise cloud is still loss making, while the margins is improving both in the gross margin and operating margin perspective. In fact, if you look at the new projects we’ve signed, we projected margins continue to improving in the past quarters. Robin has talked a lot about how we can achieve the margin improvement in his prepared remarks.
And this will help us continue improving our margins in future. Note that it takes time to build a sizable AI application portfolio which can be used by mid companies in industries, but I’m confident that Baidu’s full stack of AI capability can help us to . And lastly, we are pretty much on track to make the AI cloud a profitable and healthy business in the coming few years.
Gary Yu: Thank you.
Operator: Thank you. Your next question comes from Eddie Leung with Bank of America. Please ask your question.
Eddie Leung:
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Rong Luo: Yes, Eddie. And thanks so much for your questions, and let me try to address your questions. If we still remember, actually we start to cut costs and expenses since the end of the year 2021, which was ahead of our counterparts in the same industry in China. And we’ve carefully reviewed and restructured our business last few quarters. For mobile ecosystem, we’ve sized down and even phased out some businesses where Baidu has — obviously we have no competitor advantages or we cannot be profitable for long term. By doing so, the mobile — the MEG — mobile ecosystem growth today, is more healthy than one year ago and having much leaner operations than before. And during the past years, the total head count of Baidu Core actually reduced by 8%.
And we are not — we are focusing on areas where we are in best in class or we are first in class. And at the same time, for AI cloud, we start to gradually eliminate the low-margin businesses. We’re also tightening our controls over robot costs. You probably can see that, as a result, in 2022, Baidu Core’s operating expenses decreased by 9% year-over-year. And if we separate them out, SG&A was down by 15%, one-five, year-over-year. And R&D was down by 3% year-over-year. In the second half of the year 2022, Baidu Core’s non-GAAP operating profit margin is increasing year-over-year. And now we have a healthier cost structure, a stronger organization than one year ago. So looking forward to the year 2023, we will remain very disciplined in spending.
And we will continue to balance the revenue growth and margin as we are building a long-term sustainable development for the whole organization. If we look into each line items we will continue to monitor ROI for all promotional activities, particularly Baidu’s acquisition costs. And we will carefully manage all the other variable costs. For R&D, you have asked just now, we are working very hard to improve the efficiency of our team. The R&D team today are required to focus on building the technologies, products or services which can create more values for users and customers. We believe, over the long term, we should be able to see the operating leverage from R&D design. At the same time, we will continue to invest for growth and new opportunities and closely monitor the returns.
For CapEx, we will keep investing in cutting-edge technologies like large language models or generative AI, because we believe, it will transform many businesses and provide huge opportunities for Baidu. While we are able to further improve our efficiencies of reallocate some resources to supporting the new initiatives such as the Ernie Bot. In short, we will not hesitate to invest in our new, promising business. So as a summary: We will look into each business. Mobile ecosystems should continue to generate high profits and cash flow in the future, which is our foundation. And for AI cloud, we aim to continue to expand our margins. Within AI cloud, for enterprise cloud, we will continue to cut down on low-margin businesses and focus on key industry.
And as Robin and Dou has just say, we will continue to standardize our AI solutions and applications. For personal cloud, we will continue to earn decent profits and margins in the future. For Apollo Go, we will continue to invest for the future, but meanwhile, we will carefully monitor its operational and financial metrics to evaluate our performance and investment returns. Over the long run, we believe we still have room to optimize our cost and expenses, but during this process, we will dynamically allocate resources and balance the growth with margins and cash flow. Thank you so much for your questions, Eddie.
