Robin Lee said that the restructured advertising system of Wenxin model will bring hundreds of millions of yuan of incremental revenue in the fourth quarter. The ban on chips in the United States has limited impact on Baidu in the short term.
On November 21st, Baidu (Nasdaq: BIDU, 09888. HK) released its third quarter financial report, which showed that Baidu's revenue reached 34.447 billion yuan, a year-on-year increase of 6%; The net profit attributable to Baidu (non GAAP) reached 7.3 billion yuan, a year-on-year increase of 23%, and both revenue and net profit exceeded market expectations.
As of the close of the US stock market, Baidu's stock price rose 1.91% to $113.420 per share. At the financial report conference call, analysts' questions mainly focused on the performance of Wenxin 4.0, Baidu Cloud, and advertising marketing business, and pointed out that Baidu's advertising revenue seemed to be relatively weak in the third quarter, while Baidu's cloud business also showed a slight decline in the third quarter.
In this regard, Robin Lee, the founder, chairman and CEO of Baidu, pointed out that in the third quarter, in addition to the adverse macro situation, the contribution of e-commerce platform to online marketing business was weak, and e-commerce platform was one of the largest sources of online marketing revenue, accounting for about 10%. Baidu Cloud will return to the positive growth range in the fourth quarter.
There is a large reserve of AI chips, and the short-term impact of export restrictions on Baidu is limited
The short-term impact of export restrictions on Baidu is limited. We have a large reserve of AI chips that can help us continuously update the Wenxin big model in the next year or two. In addition, Wenxin does not require strong chips, and our chip reserves and other alternatives will be sufficient to support a large number of AI local applications for end users When Robin Lee mentioned the impact of the US chip export restrictions on Baidu's AI development on the financial report conference, he said that in the long run, the difficulty in obtaining the most advanced chips will inevitably affect the pace of China's AI development. Baidu is actively looking for alternatives, although these options are not as advanced as the US chips.
According to the Global Times, the US Department of Commerce announced a series of new chip export restrictions on October 17th, expanding the definition of advanced artificial intelligence chips and imposing additional licensing requirements on chip products shipped to over 40 countries to avoid resale to China. The new restrictions are scheduled to take effect on November 16th.
Shen Shuan, president of Baidu AI Cloud Business Group, mentioned that some Baidu customers are more willing to train their own models, but the export restrictions on chips will reduce activities in this regard.
Baidu launched Wenxin 4.0 in October this year. Users can experience Wenxin 4.0 through ERNIE Bot, and enterprises can call the API of Wenxin 4.0 through Baidu AI Cloud Qianfan big model platform. The financial report shows that at present, the number of ERNIE Bot users has reached 70 million, covering 4300 scenarios.
Robin Lee pointed out in the financial report conference that since November 1, Baidu has officially launched ERNIE Bot Professional Edition and started charging. Version 4.0 has widened the gap between Baidu and other models and become the first model to charge, Regarding the opportunities for commercial monetization, we have seen many opportunities related to the native application of artificial intelligence technology, some developed by Baidu itself, and some developed by customers using Baidu technology. In our own part, there are many opportunities for new search and adjusted advertising business. With our search service being able to achieve natural language dialogue and multiple rounds of dialogue, the potential for commercial monetization also increases It will be even larger. In the long run, inference services will become an important contribution to the company's revenue
In addition, Robin Lee said that Baidu is reconstructing its advertising system with Wenxin model, including generative creativity, generative orientation and other services. These measures are expected to bring hundreds of millions of yuan of incremental revenue in the fourth quarter, Advertisers adopting AI new features achieved an average of high single digit conversion rate growth in the third quarter. Taking IT professional education company Dane Education as an example, after using the new features, the conversion rate increased by 23.3% and the ROI (return on investment) increased by 22.7%
Cloud business slightly declined, expected to resume positive growth in the fourth quarter
At the financial report meeting, the performance of Baidu's cloud business also received attention. Robin Lee mentioned that cloud business declined slightly in the third quarter and will return to the positive growth range in the fourth quarter.
Shen Dou pointed out that Baidu Cloud has achieved operating profits in the past few quarters that do not comply with US GAAP. Due to the weak demand for intelligent transportation services in the market, the supply of cloud business also decreased in the third quarter. If the intelligent transportation part is not included, the growth of cloud business is good.
According to the financial report, the revenue of Baidu Core (a combination of search and transaction services) in this quarter was 26.6 billion yuan, and the net profit attributable to Baidu Core (non GAAP) reached 7 billion yuan, a year-on-year increase of 21%; Baidu's core online marketing revenue increased by 5% year-on-year to 19.7 billion yuan, which is basically in line with JPMorgan Chase's expectations. Previously, JPMorgan Chase lowered its revenue forecast for this performance to 19.7 billion yuan. The revenue from non online marketing business was 6.9 billion yuan, a year-on-year increase of 6%. This part of the business includes revenue from innovative businesses such as Baidu Cloud, Xiaodu, and autonomous driving.
Baidu's executives stated during a conference call that traditional cloud business is slowing down, generating AI and large-scale language models are intervening and reshaping the competitive landscape of the past cloud business industry. Some of the products among the customers are still in the experimental stage and have successful experience overseas, so it can be seen that new technologies are increasing Baidu's competitive advantage.
Baidu expects that traditional cloud businesses will remain profitable, and the new opportunities brought by generative AI and large models are expected to achieve significant profit margins in the long term.
Baidu Chief Financial Officer Luo Rong stated that in the future, Baidu will continue to prioritize investment in artificial intelligence, especially generative AI and basic models, firmly focusing on efficiency and strategic resource allocation.
It is worth noting that in the financial report, Baidu disclosed that it has appointed Xu Ran as an independent director of the company, effective from January 1, 2024. According to the announcement, Xu Ran has been serving as the CEO and Executive Director of JD Group since May 2023. Xu Ran is currently also a director of Yonghui Supermarket Co., Ltd.
As of September 30, 2023, Baidu Company's cash, cash equivalents, restricted funds, and short-term investments amounted to 202.7 billion yuan, and cash, cash equivalents, restricted funds, and short-term investments (excluding iQiyi) amounted to 1974 billion yuan. Free cash flow is 6 billion yuan, and free cash flow (excluding iQiyi) is 5.2 billion yuan.