Baidu, Inc. (NASDAQ:BIDU) Q4 2023 Earnings Call Transcript

Baidu, Inc. (NASDAQ:BIDU) Q4 2023 Earnings Call Transcript February 28, 2024

Baidu, Inc. beats earnings expectations. Reported EPS is $21.92, expectations were $2.75. Baidu, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello and thank you for standing by, for Baidu’s Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. At this time, all participants are in listen-only-mode. After management’s prepared remarks there will be a question-and-answer session. Today’s conference is being recorded. [Operator Instructions] I would now like to turn the meeting over to your host for today’s conference, Juan Lin, Baidu’s Director of Investor Relations.

Juan Lin : Hello everyone and welcome to Baidu’s fourth quarter and fiscal year 2023 earnings conference call. Baidu’s earnings release was distributed earlier today and you can find a copy on our website as well as on our newswire services. On the call today, we have Robin Li, our Co-Founder and our CEO; Rong Luo our CFO, and Dou Shen our EVP in charge of Baidu AI Cloud Group ACG. After our prepared remarks, we will hold a Q&A session. Please note that the discussion today will contain forward-looking statements made under the Safe Harbor Provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ maturity 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 includes discussion of certain unaudited non-GAAP financial measures. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most comparable with GAAP measures and it’s available on our IR website at ir.baidu.com. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on Baidu’s IR website. I will now turn the call over to our CEO, Robin.

Robin Li: Hi. And when we concluded 2023 with the solid note. Baidu’s total revenue for the fiscal year increased about 8% year-over-year, and the non-GAAP operating margin expanded from 22% to 24%. This improvement highlighted the resilience of our core business, which serve as a strong foundation for our ventures in ERNIE and ERNIE Bot. 2023 marked a year of Gen AI and foundation models. A massive technology shifts that will re-engineer this process and bring about a real renaissance in every sector of the economy. Baidu is well prepared to benefit greatly from this groundbreaking economic revolution. We progressed from talking about the opportunities of Gen AI and foundation models to activity of high ERNIE and ERNIE Bot at scale.

As the front runner in AI, Baidu probably became the first public company globally to launch a GPT model with our EP 4.0 standing high as the most powerful foundation model in China. ERNIE continues to gain market recognition, as evidenced by ERNIE API calls from multiple well known companies. Notably, Samsung uses ERNIE API on its Galaxy S24 5G sales. Honor uses ERNIE API in its Magic 8.0 and Autohome using ERNIE API to power multiple AITC apps. The partnerships further solidify our leadership in Gen AI. Furthermore, we continued improving the efficiency of ERNIE. For example, the inference cost of EB 3.5 is only about 1% of the March 2023 version. With lower infant costs, ERNIE will become increasingly accessible to users and enterprises.

We are able to do that primarily because of our unique four-layer AI architecture and our strong ability in end-to-end optimization. Additionally, we are offering our RMs in smaller sizes. This small models can balance between performance and efficiency, better serving wherever customer needs things. Since Q2 2023, we have actively utilized ERNIE to revolutionize our products and services, creating AI native experiences. We believe real applications are essential to unleashing the full business potential of ERNIE and ERNIE Bot. Recently, we began to generate incremental revenues from ERNIE and ERNIE Bot. In the fourth quarter, we earned several hundred million RMB primarily from ad technology improvement, and helping enterprises build their own models.

I’ll provide a more detailed explanation in the business review section. Looking into 2024, we believe this incremental revenue will multiply to several billion RMB primarily from advertising and AI cloud building. While we are beginning to commercialize Gen AI and foundation models, we see enormous monetization potential in this ground breaking technology. We invasion ERNIE as the future foundation system, serving as the foundation for millions of AI native applications developed by third-party and Baidu. This paradigm will enable us to create an ecosystem around ERNIE which opens up whereas revenue sources. Now the key highlights in Baidu’s native AI application. Equipped within AI copilot, Baidu Wenku has become a platform for users to create content in a wide range of formats, helping them express their ideas.

In addition to summarizing, creating and expanding content users particularly appreciate Baidu Wenku’s features for assisting them in automatically turning their inspiration into PowerPoint. We have been consistently improving and enriching its AI features. For example, we recently introduced a new one, such as Mind-Maps for organizing information. We are reconstructing Baidu search using ERNIE. Last quarter, we talked about how we used ERNIE to generate search results, improving the on shop experience. In Q4, Baidu search introduced a news feed like information alongside the generated a search results at scale to offer users useful and relevant content to explore. In Q4, we also began facilitating certain search queries with multi-round conversations to delve deeper into understanding users’ intention.

Overall, Gen AI enabled search complements traditional search expanding the TAM of Baidu search by serving a wider range of information meaning and answering content creation related questions. We are actively encouraging SMEs in service industries to build AI chatbot as new landing pages for Baidu search. AI chatbots enable them to better serve potential buyers directed to them by us driving transactions on our platform. At the same time, our AI chatbot can help merchants increase productivity. Currently, about 4,000 merchants are using our AI chatbots, particularly in healthcare, education, travel, legal, B2B and auto, where users often interact with merchants to learn about their offerings before making purchasing decisions. We believe that Gen AI enabled search will help increase user intention on Baidu, reinforcing our position as the primary entry point for users seeking information and services.

We are also expanding the range of ERNIE by enabling enterprises to easily develop AI native application of ERNIE. In December, we introduced app builder, and comprehensive set of tools on our public cloud to support enterprises to swiftly view AI and easy applications from the ground up. This tool enable enterprises to incorporate capabilities, such as organizing unread messages for prioritization, creating draft, summarizing meeting notes, and facilitating Gen AI enabled data analysis. Additionally, we have included several readymade templates, such as AI agent to enable enterprises to promptly create Application for validating their ideas. Such progress is in large part based on our own pioneering experience in developing AI native applications.

In addition to the tools for app development, enterprises partner with us, because we have the most powerful and most efficient foundation models. And the most cost effective cloud platform for running app. In December about 26,000 enterprises are activity using ERNIE through API on a monthly basis, increasing 150% quarter-over-quarter. And ERNIE is now handling more than 50 million queries every day. That’s up 190% quarter-over-quarter is a significant rise in third party quality. As the number of AI native applications hosted our public clouds continue to rise, we are poised to accelerate the enhancement of our model performance by incorporating feedback from our users and customers. This will further widen the gap between ERNIE and our domestic peers.

Moreover, as more and more AI native applications on ERNIE become popular, ERNIE will likewise be successful, and to support a robust ecosystem around it, steering our multi-year growth forward. In conclusion, we find ourselves amidst tremendous opportunity in Gen AI and information model. With the ERNIE and ERNIE Bot, we have started generating incremental revenue. In 2024, we expect AI revenues contribution to become more meaningful, while our core business will remain resilient. Moreover, we are preparing to serve the next wave in the development of ERNIE. In the future, we believe that there will be millions of AI native applications of ERNIE and the majority of them divided by our cloud customers. The expanding ERNIE ecosystem will then unlock numerous monetization potentials for Baidu.

Now let me recap the key highlights for each business for the fourth quarter of 2023. Mobile ecosystem exhibited solid performance across revenue margin and cash flow. In the fourth quarter Baidu’s core online marketing revenue increased by 6% year-over-year, driven by verticals in travel, healthcare, business services, and others. In Q4, we generated several hundred million RMB incremental ad revenue due to improvements in ad tech. We continue to use ERNIE to enhance our monetization system, including targeting capability and bidding system in the quarter. Starting from January, our money violations system has been able to generate real time text-based ads for search queries. Demonstrating significant technology improvements in both targeting and ad creation.

As of today, our new marketing platform has attracted about 10,000 advertisers. An advertiser in the medical aesthetics industry began to adopt our new marketing platform in Q4. With the AI copilot, if the advertiser can articulate its requirements comprehensively through native language, and multiband conversations for further clarify — clarification, and explanation. The conversational experience has assisted in building optimized search and feed campaigns by generating relevant ad content. Our platform has also helped them reach highly targeted audiences, while dynamically allocating budget to drive conversions. The advertiser achieved increase of 22% in conversion rate, and that reduction of 5% in cost for sales lead acquisition after using this enhanced platform, and capabilities.

Currently, only a small portion of our entire advertiser base has adopted this new marketing platform, which means there is a significant opportunity for future growth. All these initiatives have helped advertisers improve their conversion, leading to an increase in their ad budget, our platform in the quarter. We expect to continued growth in ad revenue from Gen AI and foundation models in 2024 and beyond. While we enhanced our ad technologies, we also introduced AI chatbot for brands, an innovative ad product building on top of ERNIE Bot in Q4. AI chatbots has further enriched our app product portfolio. It can enhance user engagement and customer surveys, while also capturing customer attention and driving customer demand. Since last October, China Feihe [ph], a local infant formula company has adopted AI chatbot to promote its brand.

The AI chatbot has been enabled for Facebook to have multi-round interactions with our customers, increased brand recognition and gain valuable insights into its potential consumers. These profound insights have also helped the player Facebook understand customers views of the brand and products leading to an enhanced marketing strategy AI chatbot for brand has garnered significant interest from brand advertisers and we expect more interest to embrace the AI chatbot in the future. As I previously mentioned, we’re using ERNIE to build our apps. With continuous enhancement of our AI native product offerings, we believe more and more users will come to Baidu platform. This, in turn, will assist us in gaining more market share in both user engagement and online advertising revenues.

Looking into 2024, mobile ecosystem should continue to generate steady profits and cash flow. AI Cloud revenue grew by 11% year-over-year to RMB5.7 billion and continue to improve profitability in the fourth quarter. Revenue from Gen AI and foundation model represents 4.8% of our AI Cloud revenue in Q4. The increasing demand for model building played a significant role in this accelerated revenue growth, along with increasing distributions from inference. We have seen a growing number of enterprises, in particular, tech companies turning to our public cloud to build their models. Additionally, the AI cloud revenue generated by Baidu Core, other business groups, such as the Mobile Ecosystem Group and the Intelligent Driving Group was about RMB2.7 billion in Q4.

Within the Q4 internal cloud revenue, Gen AI and foundation model accounted for about 14%. On a combined basis, the total internal and external AI Cloud revenue was RMB8.4 billion in Q4, with Gen AI and foundation model contributing around RMB656 million. Gen AI and LLM have become pivotal considerations for many enterprises driving a shift in the cloud industry from general purpose computing to AI computing. This evolution is reshaping the competitive dynamics within the cloud industry strengthening our lead in AI and expanding our total addressable market. Enterprises choose us, thanks to our position of the most powerful and cost-effective AI infrastructure for both model training and inference in China. Thanks to our unique four-layer AI infrastructure to drive consistent efficiency gains and years of experience in ERNIE.

Last quarter, we explained that 98% of LLM training time on our AI infrastructure was valid. Moreover, our GPU networking is running at a 95% utilization for training LLMs. Both of these metrics have set industry benchmarks. Within our Maps, we offer model builder and app builder, which are two set of tools that help enterprises effortlessly build models and develop apps. As of now, enterprises have built about 10,000 models on our Maps. Since its inception, App Builder has facilitated the creation of thousands of AI native apps. As more and more applications are being built on our Maps, we will have greater revenue potential going forward. Looking into 2024, AI Cloud should maintain strong growth in revenue and generate profit as a non-GAAP operating level.

Our intelligent driving business continued to focus on achieving new breakeven for Apollo Go. In Wuhan, Apollo Go’s largest operation, about 45% of our orders were provided by fully driverless vehicles in Q4. This metric surpassed 50% in January. The increase is because we intensified operations during peak hours in areas with complex traffic conditions and further expanding our operating area in the past few months. This development resulted from our ongoing efforts to improve technology through safety — through safely operating Apollo Go on public doles. In China, Apollo Go provided about 839,000 ride in the public in Q4, marking up 49% year-over-year increase. In early January, the cumulative rides offered by Apollo Go exceeded 5 million.

The substantial data collected from operations will further help us enhance the efficiency of safe operations. Looking into 2024, we will remain focused on getting closer to Apollo Go’s UE breakeven target and managing our costs and expenses to reduce losses in intelligent driving. Upon reaching UE breakeven, we plan to swiftly replicate our successful operations in Wuhan to other regions. In summary, we are facing tremendous opportunities in Gen AI and foundation models. We will continue to invest in these opportunities. And at the same time, we will strive to optimize our cost and expense structure for each business line to improve operational efficiency. With that, let me turn the call over to Rong to go through the financial results.

Rong Luo : Thank you, Robin. Now let me walk through the details of our fourth quarter and full year 2023 financial results. We closed 2023 with solid financial results. Total revenues in the fourth quarter was RMB35 billion, increasing 6% year-over-year. Total revenues for the full year 2023 were RMB134.6 billion, increasing 9% year-over-year. Baidu Core’s Q4 revenue was RMB27.5 billion, increasing 7% year-over-year. In 2023, Baidu Core generated RMB103.5 billion in revenue, increasing 8% year-over-year. Baidu Core’s online marketing revenue increased 6% year-over-year to RMB19.2 billion in Q4, accounting for 7% of Baidu Core’s total loan. Baidu Core online marketing revenue was up 8% year-over-year in 2023. Baidu Core’s non-online marketing revenue was RMB8.3 billion, up 9% year-over-year.

For the full year 2023, our online marketing business increased 9% year-over-year. The increase in our online marketing business was mainly driven by the AI Cloud business. Revenue from IT was RMB7.7 billion in Q4, increasing 2% year-over-year. Revenue from IT was RMB31.9 billion in 2023, increasing 10% year-over-year. Cost of revenue was RMB17.4 billion in Q4, increasing 3% year-over-year, primarily due to an increase in causes related to AI cloud business, partially offset by a decrease in quantum costs. Cost of revenue was RMB65 billion in 2023, increasing 2% year-over-year primarily due to an increase in track acquisition costs, partially offset by a decrease in the content costs and the costs related to AI Cloud business. Operating expenses were RMB12.1 billion in Q4, increasing 5% year-over-year, primarily due to an increase in server depreciation expenses and the server custody fees which support Gen AI research and development improves and channel spending and promotional marketing expenses.

Operating expenses were RMB47.7 billion in 2023, increasing 9% year-over-year, primarily due to an increase in channel spending and promotional marketing expenses and server depreciation expenses and sever custody fees, which support Gen AI research and development improves. Operating income was RMB5.4 billion in Q4. Baidu Core’s operating income was RMB4.7 billion, and Baidu Core’s operating margin was 17%, 1-7, in Q4. Operating income was RMB21.9 billion in 2023. Baidu Core’s operating income was RMB18.8 billion, and Baidu Core’s operating margin was 18%, 1-8, in 2023. Non-GAAP operating income was RMB7.1 billion in Q4. Non-GAAP Baidu Core operating income was RMB6.2 billion, and non-GAAP Baidu Core operating margin was 23% in Q4. Non-GAAP operating income was RMB28.4 billion in 2023.

Non-GAAP Baidu Core operating income was RMB24.7 billion and non-GAAP Baidu Core operating margin was 24% in 2023. In Q4, total other loss net was RMB2.5 billion compared to total other income net of RMB1.8 billion for the same period last year mainly due to a peak of losses from equity method investments as a result of a modification of certain terms of underlying preferred shares. Income tax benefit is RMB96 million. In 2023, total other income net was RMB3.3 billion compared to total other loss net of RMB5.8 billion last year mainly due to a fair value gain of RMB198 million from our long-term investments this year compared to a fair value loss of RMB3.9 billion last year and a decrease of RMB2.2 billion in impairment of long-term investments.

Income tax expenses was RMB3.6 billion. In Q4, net income attributable to Baidu was RMB2.6 billion, and diluted earnings per ADS was RMB6.77. Net income attributable to Baidu Core was RMB2.4 billion, and net margin for Baidu Core was 9%. Non-GAAP net income attributable to Baidu was RMB7.8 billion, non-GAAP diluted earnings per ADS was RMB21.86. Non-GAAP net income attributable to Baidu Core was RMB7.5 billion, and non-GAAP net margin for Baidu Core was 27%. In 2023, net income attributable to Baidu was RMB20.3 billion and diluted earnings per ADS were RMB55.08. Net income attributable to Baidu Core was RMB19.4 billion, and net margin for Baidu Core was 19%, 1-9. Non-GAAP net income attributable to Baidu was RMB28.7 billion, non-GAAP diluted earnings per ADS was RMB80.85.

Non-GAAP net income attributable to Baidu Core was RMB27.4 billion, and non-GAAP net margin for Baidu Core was 26%. As of December 31, 2023, cash, cash equivalents, restricted cash and short-term investments were RMB205.4 billion and cash, cash equivalents, restricted cash and short-term investments, excluding IT, were RMB200 billion. Free cash flow was RMB25.4 billion, and free cash flow, excluding IT, was RMB22.1 billion in 2023. Baidu Core had approximately 35,000 employees as of December 31, 2023. With that, operator, let’s now open the call to questions.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Alicia Yap of Citi. Please go ahead.

See also 20 Countries That Read the Most in the World and 21 Countries that Have the Highest Rates of Cancer Deaths.

Q&A Session

Alicia Yap : Hi, thank you. Good evening, management. Thanks for taking my questions. My question is on the outlook. How does management think about the macroeconomic landscape in China for 2024? What’s management view on 2024 growth outlook for Baidu as a whole? And also, what is the percentage of total revenues of Baidu will be contributed from the AI-related revenue in 2024? Thank you.

Robin Li: Hi, Alicia, this is Robin. Before we dive into the outlook, let’s take a quick look back last year. We had a very challenging macroeconomic environment, but our business demonstrated very solid performance. We invested very aggressive in Gen AI, but our non-GAAP operating margin expanded year-over-year and revenue experienced solid growth. More importantly, we began to generate incremental revenue from Gen AI and foundation models. And for this year, we have noticed that both the central and local governments are putting efforts to grow the economy. And during the eight-day Chinese New Year holiday, we saw a growth in consumption, particularly in the travel sector. But we’re still operating in a macro environment with a lot of uncertainty.

We are closely monitoring significant economic stimulus plan, which we think is essential for achieving this year’s goals. But that being said, by defacing a lot of opportunities. Our core business remains solid, and the incremental revenue from Gen AI and foundation models will increase to several billion RMB in 2024. This will contributing to the growth of our total revenue. And more specifically, thanks to our leading position in LLM and Gen AI, enterprises are increasingly building models and developing apps, the Baidu Cloud. And for our mobile ecosystem, we have already accumulated a huge user base and we keep renovating our products and enhancing our monetization situation capabilities through AI innovation. So when we combine Cloud and Mobile, I think we will be able to sustain our long-term growth which we think will be faster than China’s GDP growth.

Thank you.

Alicia Yap : Thanks.

Operator: Okay. And our next question today will come from Alex Yao of JPMorgan. Hi, Alex, your line is open. Are you muted?

Alex Yao : Yeah. Sorry, I was muted. Good evening, management. And thank you for taking my questions. I have a couple of questions on cost structure and the margin trends. First of all, how much more room do we see in the cost cutting and optimization, how should we look at AI-related investments. In the past, you guys discussed that there will be a lag between chip investments and AI revenue contribution? How should we look at the margin trend into 2024, if you intend to expand?

Rong Luo : Alex, thank you so much for your questions. This is Julius. I think alongside the investments in our Gen AI businesses, it’s pretty sure that there is still room. We can manage the cost and the expenses in our legacy businesses. As we look into the 2024, we will continue to focus on our core businesses, and we also will be ready to reduce our resource allocations to the non-strategic businesses. Additionally, we are continuously enhancing our overall organization efficiencies by removing the layers, simplifying the executions and flattening the organization structures. So heading into this year, we are very committed to the ongoing optimization of our operations, ensuring we have a more productive HR team. And with all these measures in plan, and we aim to keep Baidu Core’s earnings solid with our mobile ecosystem continue to deliver the very strong margins and generate very strong cash flows while the AI Cloud business continues its profitability.

We have managed to maintain a solid operation profit margins despite our investments in AI. If you still remember from year 2023 and on, we started to invest in Generative AI and large language models. This investment is primarily reflected in our [Indiscernible] and mainly related to the purchasing chips and servers for the model training and services. As you know, the CapEx will be depreciated over several years, so despite a 58% year-over-year increase in Baidu’s cost CapEx in 2023, our non-GAAP operating profit margins still saw a 2 percentage growth on a year-over-year basis. Looking forward in the process of developing our new AI business, it is inevitable that we will make new investments. However, these investments are not expected to significantly affect our margins or profits.

And during the early stage of the market development, we also will now overly prioritize margins for our AI Cloud business. And as we believe that in the long run, this business is expected to yield much better margins. And additionally, there may be some promotional activities for the AI native 2C products, but we will carefully manage and closely monitor the online to balance the investments and growth. We are happy to see that our efforts in investing in new initiatives have begun to yield the early results. As Robin has mentioned just now, the incremental revenue generated from the ad tech improvement have reached several million hundred RMB in Q4 and the incremental AI Cloud revenue generated from Gen AI and foundation models also contributed to 4.8% of the total AI Cloud revenue.

I think all of these promising and top line achievements have strengthened our confidence in our business strategy. So going forward, we will remain steadfast in our commitment to development – to the development of the Gen AI and large language modal use. Thank you, Alex.

Operator: Our next question today will come from Gary Yu of Morgan Stanley. Please go ahead.

Gary Yu : Hi, good evening. And thank you for taking my question. I have a question regarding AI contribution. So for AI-related revenue contribution, is there a way you can quantify or prove that the ad revenues Baidu will be generating is purely incremental contribution from AIGC and not cannibalizing from your existing search business? And if AI is purely incremental, should we be expecting faster than average growth. And excluding AI, how should we think about the core growth rate for 2024? Thank you.

Robin Li: Hi, Gary, this is Robin. We are the largest search engine in China. We have close to 700 million monthly active users and we have established a very robust brand presence among the Chinese Internet and mobile users. They rely on us for comprehensive and reliable information. So we have a strong and stable base revenue and profits. But we are also very sensitive to macro because our advertising business has very broad coverage of different verticals. I mentioned earlier that there are still uncertainties with the macro environment. But Gen AI and LLM are unlocking new opportunities both at the monetization front and the user engagement front. I think it’s easier to quantify the incremental revenue on the monetization front.

I mentioned earlier that Gen AI has already helped increase advertising ECPM. And our upgraded monetization system has allowed us to improve targeting capabilities, thereby generating and presenting more relevant ads. We earned a several hundred millions in Q4 from this kind of initiative. And the incremental revenue will grow to several billion this year. It’s harder to quantify the user engagement part, Gen AI is helping us improve user experience. We have seen initial outcomes in search and one pool, and we will continue introducing new features going forward. These initiatives will help us improve the user mind share and time spent over time and bring us even larger potential. So I think the purely incremental revenue will come from both side and the user engagement side.

Thank you.

Operator: Our next question today will come from Lincoln Kong of Goldman Sachs. Please go ahead.

Lincoln Kong: Hi, thank you, management for taking my questions. So my question is regarding the Cloud business. How should we look at the incremental revenue growth that’s driven by Generative AI, so what is the product mix for Generative AI Cloud? And what exactly are the offerings that primary growth drivers here. And then when we’re looking at 2024, how should we expect the overall AI Cloud revenue growth this year and that will be the margin trend this year as well. Thank you.

Rong Luo : Thank you for the question. This is Julius. As Robin just mentioned, the total revenue from our — from the Gen AI and the foundation model related businesses, including both internal and external revenue already reached RMB656 million in Q4, and this number should grow to several billion RMB for the full year 2024. We have seen increasing interest from enterprises in using Gen AI and LLM to develop new applications and features. To achieve this goal, so they are actively building models to power their products and solutions. So this is how we generate the majority of the revenue from external customers. Meanwhile, we were seeing a significant increase in model inferencing revenue from external customers. So the revenue from inferencing is still small.

We believe that over the long term, it will become a significant and sustainable revenue driver. We think revenue generated by internal customers is also quite important because a significant portion of such revenue is for model inferencing. So Baidu is the first company to use Gen AI and LLM to reconstruct all the businesses and products. So with the number of products and features powered by Gen AI and ILM continue to increase ERNIE API costs from internal customers have been increasing rapidly and have reached a significant magnitude. As such development has proven that ERNIE and ERNIE Bot can well enhance the productivity and efficiency in real-world applications. And we also believe a growing number of external customers will use ERNIE to develop their own apps and drive our external revenue in the future.

So regarding your question about our product offerings, we have the most powerful AI infrastructure for model training and inferencing in China. So this infrastructure helps our customers build and run models cost effectively. Additionally, as Robin mentioned earlier, our model offers various models and a full set of tools in terms of model builder and app builder for model building and application development. So in addition to that, we have developed our own AI native solutions, such as GBI, that is a Generative Business Intelligence. So those applications are helping enterprises increased productivity and efficiency. In addition to the incremental opportunity related to AI, Gen AI and foundation models also bring new opportunities to our legacy cloud businesses.

So firstly, we continue to win customers and projects for CPU-centric cloud because we are being highly recognized for our AI infrastructure and the CPU-centric cloud offerings, especially in the Internet and tech and education sectors. Secondly, Gen AI and foundation models have allowed us to build AI solutions for our customers more efficiently than before, facilitating digital and intelligent transformations for traditional industries. So both of these two factors are driving growth for our cloud revenue. And overall, we should see cloud revenue growth accelerate in 2024 over last year. Additionally, we are pretty confident in maintaining profitability for our AI Cloud. For Enterprise Cloud, we should be able to consistently improve gross margins for the legacy cloud businesses.

As for Gen AI and LLM businesses, the market is still at a very early stage of development. So we should hold a pretty dynamic pricing strategy to quickly educate the market and expand our penetration into more enterprise customers. So we believe over the long term, the new business should have a higher normalized margins than the traditional cloud businesses. Thank you.

Operator: Our next question today will come from Thomas Chong of Jefferies. Please go ahead.

Thomas Chong : Hi, good evening. Thanks, management for taking my questions. May I ask about the pace for our AI 2C product development how has the traffic growth been? And any key metrics which can be shared on the new generative search? How AI benefits search traffic time spent? And when should we see the exposure of traffic or super app? Thank you.

Robin Li: Yeah, we are reconstructing all of our 2C products using generative AI. I think Gen AI and foundation models are making all of our products more powerful. Over the past few months, we made significant strides in this kind of efforts and the initial user feedback has been encouraging. For search, the introduction of Gen AI has enabled Baidu to answer a broader range of questions, including more complex, open-ended and comparative queries. With ERNIE Bot, we can provide direct and clear answers in a more interactive way. During the past few months, instead of just lending some content and providing some links, more and more search results were generated by ERNIE bot. As a result, users are engaging with Baidu more frequently and asking new questions.

For example, more and more users are coming to Baidu for content creation, be it text or images. During the Chinese New Year holiday, Baidu helped users create New Year greeting messages and generate personalized e-card for their loved ones. This is not a typical use case for search engine, but we see a large number of users rely on Baidu for this kind of need. Going forward, we will increasingly use ERNIE Bot to generic answers for search queries and then use multi-round conversation to clarify user intent, so that complicated user needs can be addressed through natural language. While these initiatives have resulted in an enhanced search experience, we are still in the early stages of using ERNIE Bot to reconstruct Baidu search. We will continue to test and iterate Gen AI enabled features based on user feedback.

And we will follow our typical playbook for testing and fine-tuning new experiences before upgrades are ready for a larger scale rollout. Overall, we believe Gen AI will complement to traditional search. Ultimately, increasing user retention engagement and time spent on Baidu. And in addition to search, ERNIE bot acting as a copilot Wenku has transformed from an application for users to find tablets and documents to a one-stop shop for users to create content in a wide range of format. And year-to-date, I think about 18% of new paying users were attracted by Gen AI features for Wenku. I want to emphasize that we are in the early stages of using ERNIE Bot to reconstruct our apps and build new ones. And at the same time, we are attracting and helping enterprises build apps on ERNIE.

We believe the success of ERNIE depend on its wide and active adoption, whether through Baidu app or through third-party apps. Thank you.

Operator: Our next question today will come from James Lee of Mizuho. Please go ahead.

James Lee : Great. Thanks for taking my questions. Can you guys maybe talk about ERNIE’s technology road map for 2024? Does it include multimodal feature, maybe similar to Sora or maybe opening up an AI store or potentially launching AI engine. Is there any sort of milestone or key metrics you can speak to? And the second part to that question is on the cost of running Gen AI, how should we think about maybe puts and take on managing inferencing costs going forward? And obviously, you talked about some ways to make it more efficient. Are there any additional levers to optimize this process? Thanks.

Robin Li: Yeah, the chips we have on hand should enable us to advance EB4 to the next level. As I mentioned earlier, we will take an application-driven approach to intense ERNIE and that our users and customers tell us where we should improve and adjust for our models. It could be building multi-modalities, agents increasing reliability and so on. It’s important to note that we are focusing on using ERNIE to bring real value to users and customers rather than simply achieving high ranking downloads and research publication. And you’re right, price is a very important issue, making high-performance foundation model affordable is critical for large-scale operations. I mentioned earlier that we have been continuously reducing model inference cost.

Now the inference cost of EB3.5 is about 1% of March of 2023 version. By doing so, more and more enterprises are increasingly willing to test, develop and iterate their applications on ERNIE. We understand that for many customers, they tend to balance efficiency with cost and speed. So we also offer smaller language model and help our customers leverage MOE that’s a mixture of experts for our best performance. With our end-to-end approach, we believe there is still ample room to reduce the cost of our most powerful models and make them increasingly affordable to our customers. And this will help further drive the adoption of ERNIE. Internally, we are closely monitoring the number of apps developed by — developed on ERNIE. As I mentioned previously, ERNIE now handling over 50 million queries per day.

And right now, ERNIE API costs from internal application as still larger than external app cost. The cost for ERNIE in different sizes from external apps have been increasingly — have been increasing rapidly. We’re just at the beginning of this journey. ERNIE will only become more powerful, smarter and more useful as more and more end users use it be it through Baidu apps or through third-party apps. This will enable us to cultivate an ecosystem around ERNIE. As this app and models are actively used by end users, they will also generate significant inferencing revenue for us. Thank you.

Operator: Our next question today will come from Charlene Liu of HSBC. Please go ahead.

Charlene Liu : Thank you. Good evening, management, and thank you again for the opportunity. I have a question related to ERNIE. How does earnings enterprise adoption compared to its peers? Can you please kindly share with us the latest number of enterprises that are using ERNIE to build models and applications and help us understand how that has gone versus last quarter and what the underlying drivers may be? Lastly, can you help us also understand whether we can assume that enterprises who apply the ERNIE API integration will very unlikely be using other elements. Thank you so much.

Rong Luo : Great question, Charlene. So as Robin just mentioned, right, about 26,000 and prices of different sizes, spreading over different verticals, caused our ERNIE API from our cloud in December marching a 150% increase quarter-over-quarter. The ERNIE API costs have exceeded 50 million on a daily basis, and we believe no one else in China has gained so many customers and received such a high volume of API requests. The enterprises choosers primarily for the following reasons. Firstly, we have the most cost-efficient AI infrastructure for modal cleaning and inferencing in China, primarily because of our strong ability of end-to-end optimization. Just mentioned before, Gen AI and large language models for reshaping the competitive landscape China’s public cloud inventory and enhancing our competitive advantage.