Hello, and thank you for standing by for Baidu's First Quarter 2019 Earnings Conference Call. (Operator Instructions) Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Sharon Ng, Baidu's Director of Investor Relations..
Hello, everyone, and welcome to Baidu's First Quarter 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, Baidu's Chief Executive Officer; and Herman Yu, Baidu's Chief Financial Officer.
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've 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..
Hello, everybody, and thank you for joining our call today. Our first quarter revenue, for the most part, were solid, reaching RMB 24.1 billion, up 21% year-over-year, excluding revenue from divested business.
Our Q1 revenue were impacted by industry-specific government policies and our self-directed health care initiative, which required health care marketing customers to move their ad landing pages onto Baidu's platform.
Towards the end of Q1, we began to see the impact of macro environment, compounded by a significant release of ad inventory into the market, causing CPM post Chinese New Year, to not rebound as pronounced as we had historically experienced.
Although the Chinese government has announced many economic policies to bolster the economy, given the current macro conditions, tighter government scrutiny on content, cut backs from the VC community and so forth, we are taking a cautious view that online marketing in the near term will face a more challenging environment.
We are reviewing our resource requirement and improving our execution capabilities, which Herman will discuss in more detail later. While greater operational efficiency will be a focus for us, our priority will be to strengthen our mobile business and make the necessary investments to position Baidu for higher, long-term growth.
We are working on a CRM offering for our marketing customers, which we plan to release later this year that will feature better user targeting, customer engagement and sales force management.
Coupled with our performance-based marketing services, our Platform-as-a-Service, will allow our marketing customers to move from user interest and intent targeting to live messaging or call to order taking in a seamless process.
Our CRM app will consolidate Baidu's marketing services placement systems, including search, feed and Baidu Union, for easier campaign targeting and management. Baidu CRM will leverage Baidu's massive user insight, our sales force management experience and technologies and our AI capabilities.
For example, our smart invitation feature provides personalized prompts to invite users to chat online with sales reps when Baidu AI matches the user interest with relevant customer offering.
To better manage its sales force and better understand their customer calls, our customers can run a report to identify sales agents who were rude on a customer call and summarize comments made by customers during sales calls, leveraging Baidu's advanced Natural Language Processing capabilities.
In March, Baidu's mobile reach expanded to 1.1 billion monthly active devices, providing rich intent and interest-based user insights.
Our focus on in-app services, expanding our ecosystem of content and services and optimizing user relationship management offer an exciting future for us to grow, to continuously improve our user experience, stickiness and mind share.
Strengthening our in-app services and user relationship management are the foundation that allows us to go deeper into the marketing funnel to offer our customers CRM capabilities beyond our leading performance-based ad.
Beyond the 1.1 billion mobile devices, we hope to expand Baidu's platform reach to DuerOS smart devices in homes and in autos and out-of-home digital screens which will enhance Baidu's omni-marketing capabilities.
Our vision for AI-first Internet is to provide the best user experience to our users as they move across Baidu's family of 20-plus apps as well as prepare our users to move from mobile-only to a cross-platform experience, seamlessly crisscrossing back and forth on mobile, in homes and in autos.
We are quite excited about the opportunities ahead, for example, to offer cross-platform distribution capabilities to Baidu's content providers and service app developers.
To keep pace with the fast-changing technology environment, Baidu has adopted a young leadership development program to incubate talent for middle management and above, to align with the market that we serve and provide an option for leaders to retire, pursue their personal interests and release their responsibilities.
Over the past year, excluding iQIYI, Baidu added 7 Vice Presidents, both newly promoted and new hires, to our strong executive team of over 20 members. Hailong Xiang, our Senior Vice President of Search business, has tendered his resignation which I have accepted. I'd like to thank Hailong for his 14 years of service at Baidu.
I'd also like to congratulate Dou Shen for his promotion to Senior Vice President, overseeing Baidu's mobile business, which we have renamed from our search business.
Dou previously served as Vice President of Baidu's mobile products and has served in various other roles at Baidu since joining in 2012, including web search, display advertising and financial services group. Prior to Baidu, Dou worked at Microsoft and cofounded Buzzlabs.
Dou holds a PhD in computer science from the Hong Kong University of Science and Technology. Let's begin our Q1 review with search plus feed. We continue to increase the scale and bolster the content and service offering in Baidu App to give our users unmatched native app-like experience for search and feed.
Combining feed with search increases user stickiness. We are employing this strategy with Haokan and investing in Video Search. DAU for Baidu App and Haokan are growing robustly. In March, Baidu App DAUs reached 174 million, up 28% year-over-year, and Haokan short video DAUs reached 22 million, up 768% year-over-year.
Total feed time spent on Baidu App and short video apps grow robustly, up 83% year-over-year in March. We continue to expand Baidu's ecosystem of third-party content and services, which enable news feed and short videos as well as services and related information traditionally found only in apps, searchable on Baidu.
Baijiahao, our feed content network, now hosts 2.1 million publisher accounts, up 89% year-over-year as more and more top publishers, creators and media companies are taking advantage of Baidu's large search plus feed distribution scale. Our Smart Mini Program, including its user base and developer network, continue to scale.
MAUs of Baidu's Smart Mini Program in March reached 181 million, up 23% sequentially. Service providers, large and small, are adopting Baidu's Smart Mini Programs as we leverage our search capabilities. For example, Baidu's Smart Mini Program has become the largest traffic channel for a leading social commerce company in China behind its mobile app.
Notably, our AI-powered algorithms help male users on the Baidu platform find interesting content in the social commerce company's Smart Mini Program, increasing a user group that has been historically underrepresented. Baidu's Smart Mini Program allows users to search by the content within the Mini Program, employing our strong search capabilities.
Baidu's Smart Mini Program is also helping users to find less frequented apps with long-tail content. For example, an online urban dictionary adopted Baidu's Smart Mini Program and saw its user experience dramatically improve, with daily search traffic increasing by 27x and Baidu's Smart Mini Program becoming its most significant source of traffic.
In addition, we are strengthening our vertical offerings, such as health care and online literature, filtering out poor and questionable content with Baidu AI. We are adding mini games in the Baidu App with more vertical offerings to come.
Through the Chinese New Year Gala campaign, we educated users that Baidu App is an all-in-one app, allowing users to search, watch short videos and read headline news, quickly find long-tail information, make direct purchases from Smart Mini Program, play mini games and read online literature, just to name a few.
Baidu App also offers voice search, augmented reality search and visual search as well as OCR translation. Our focus on growing in-app search traffic and expanding our content and services ecosystem is proving to be the right strategy. In addition to growing feed time spend, Baidu App saw search traffic growing in the mid-teens over last year.
Turning to monetization. Our focus to grow in-app traffic build an ecosystem for content, services and vertical offerings, and improve user relationship management will provide tremendous potential to improving recommendation relevancy and native app-like experience for our users as well as continuously improving marketing ROI for our customers.
For example, Jia.com, a home interior-design e-commerce platform, saw leads conversion to in-person consultation from Baidu's Smart Mini Program increases nearly 30% compared to its HTML5 site.
Our focus on in-app traffic and user relationship management will also allow us to provide CRM offering to our customers which will strengthen our relationships with our customers and open a large opportunity for future growth.
We are also expanding Baidu's online -- Baidu's advertising partner network to over 1.5 million out-of-home digital screens, covering 362 cities across 31 provinces. Turning to DuerOS.
Our DuerOS voice assistant continues to lead in China with installed base reaching 275 million, increasing 279% year-over-year and monthly voice queries reaching 2.37 billion, increasing 817% year-over-year in March.
We are expanding the service offering in the DuerOS skills store with wide-ranging genre from watching short videos and long videos to playing online games, from listening to children's stories to setting up tools to help users find their phone.
App developers are finding that DuerOS skills, or voice-enabled apps, can translate into great user experience and user retention. For example, almost 40% of live video Douyu skill's monthly active users on DuerOS continue to use the skill 4 months after initial sign on, which shows incredible user stickiness.
DuerOS first-party device and the breakout quarter, with first quarter Xiaodu series smart devices surpassing the unit sales of all 2018. OEM manufacturers are adopting DuerOS voice assistant as well.
For example Skyworth, a leading smart TV manufacturer in China, recently switched the wake word on its TVs to Xiaodu Xiaodu, and Huawei tablets come with tablet mounts that convert the tablet into speech-recognition-enabled DuerOS smart devices. On the auto front, Chery Automobile EXEED sedans are selling with DuerOS infotainment system preinstalled.
DuerOS for Apollo has received a very positive initial customer feedback, particularly for facial recognition capabilities, to activate personalized settings, online payment and AR navigation.
On the service front, over 190 Smart Mini Programs from Baidu App and skills from DuerOS home devices are now available in the skills store of DuerOS for Apollo, including iQIYI, E Designated Driving and GeekPark. Turning to Apollo.
The Beijing Transportation Commission recognized Apollo as the leader in autonomous driving, amassing over 10x the test miles of the next industry player, according to the commission's 2018 Beijing Autonomous Driving Vehicles Road Test Report issued in March.
The report measures safety and quality control of autonomous driving and bases its assessment on test miles monitored by the commission as compared to self-reported miles used by other autonomous driving reports. The Apollo developer community has now expanded to 15,000 strong.
We are pleased to see that Apollo autopilot technologies have been adopted in many innovative scenarios, including street cleaning, goods delivery and shuttle services. Transportation related to vehicles and road infrastructure represent approximately 11% of China's GDP, according to the National Bureau of Statistics.
With the Chinese government open to experimenting the smart transportation to improve urban living, we see an opportunity to partner with local governments to implement autonomous driving and smart transportation solution across China. We are working with municipalities to pilot robotaxi by the second half of this year.
We are also working with Haidian District of Beijing to develop an AI-powered city brain to improve municipal services. Our entrance into smart transportation is opening doors to the government market and potentially expanding into broader smart city solutions to help Chinese cities modernize. Turning to Baidu Cloud.
Our cloud business continued to exhibit strong revenue momentum, growing triple digits year-over-year. Last October, we discussed implementing Baidu AI call center solution at one of top telecom operators in China. Baidu Brain is now handling approximately 5.6 million calls per month.
Our telecom operator customer was pleased with Baidu's AI enterprise solution and has signed up to expand Baidu AI call center solutions for half of their call center nationwide. In addition, we are receiving orders from enterprise customers in other industries, such as financial services, airline and energy.
At the Baidu Cloud Internet Summit in April, we released a stack of enterprise solutions for companies working with videos.
We also released a library of new toolkit that can help developers create, edit, analyze and manage video content using Baidu AI, including content-adaptive encoding, fully interactive augmented reality and a comprehensive video AI model training platform.
These solution stacks and toolkit will benefit customers in the video, education, gaming and health care industries. Baidu Cloud is focused on using Baidu AI to solve our customer problems and increase corporate productivity. We differentiate through heavy investment in AI and our support for open source deep learning platform.
According to the World Intellectual Property Organization 2019 Artificial Intelligence Report, Baidu is the leading company globally in patent application for deep learning. Baidu is also the only Chinese Internet company listed among the top 30 AI patent applicants worldwide.
In March, developer downloads of PaddlePaddle, our leading Chinese open source deep learning platform, was up 40% sequentially. PaddlePaddle helps developers to enhance and streamline their deep learning development modules and drive greater adoption of deep learning in real-world applications on Baidu Cloud. Turning to iQIYI.
IQIYI continues to see strong subscriber growth with membership reaching 96.8 million, increasing 58% year-over-year and further strengthening iQIYI's foundation to offer blockbuster original entertainment content. A quick word on Baidu's corporate social responsibility.
Baidu data centers have obtained more than 400 technology and innovation patents in China and abroad.
For example, our Yangquan Cloud Computing center, the first double 5A energy-saving data center in China, is widely regarded as an industry role model with an annual PUE of 1.09, reaching to a top-tier level at global standard, much higher than the average level in China.
In 2018, through technology innovation and clean energy adoption, Yangquan Cloud Computing center reduced carbon dioxide emission by 177,000 tons. For more information on Baidu's corporate social responsibility effort, please refer to our newly published CSR report, the website link to which can be found in our earnings release.
With that, let me turn the call over to Herman to go through the financial highlights..
Thanks Robin. Hello, everyone. Welcome to Baidu's first quarter 2019 call. Before I begin the financial review, let me make a few comments. All monetary amounts used in my discussion are in renminbi, and all growth rates assume year-over-year growth, unless stated otherwise.
For the first quarter 2019, total revenues reached CNY 24.1 billion, up 15%, or 21%, excluding spinoff revenue of CNY 1.1 billion. At the same time, we incurred net loss of CNY 327 million due to our investment in CCTV's Chinese New Year Eve Gala marketing campaign as well as increased loss from iQIYI.
Our net margin also decreased with our focus on in-app growth over TAC revenue growth.
In-app growth changes our business model requiring us to spend more heavily upfront on marketing, for app installs and user education, while monetization occurs over the lifetime of the users, TAC revenue, on the other hand, is earned in the quarter TAC is incurred.
Investing in AI and leveraging user insight to improve user relationship management, can offer us greater growth potential than Union traffic. Revenue from TAC declined in the first quarter, as bidding for Union traffic, especially on mobile, continues to be competitive.
Our goal for Union traffic is to maximize profit, unlike some of our peers who's bidding on negative margins. The fierce market competition for TAC is also weighing down our Q1 margin.
The bright side on TAC is that Baidu's ad network is expanding into out-of-home digital screens, which complement Baidu's omni-marketing strategy to reach our users in multiple ways and is becoming a source of future revenue growth. As Robin mentioned, we are reviewing our business for opportunities to increase operational efficiency.
This process will occur over the next few months, and we will look for opportunity to lessen the currently planned increase of approximately CNY 1 billion in cost structure each quarter for the remaining quarters this year.
Nevertheless, our priority remains to strengthen our mobile foundation, including growing our search plus feed apps, and to lead in new AI businesses. Our Board recently approved USD 1 billion for a stock repurchase. The plan for which is effective until July 1st next year.
This is in addition to the current USD 1 billion stock buyback plan in place, approximately USD 500 million of which is available for repurchase until the end of next month. Overall, we remain optimistic about Baidu's future.
In the past 19 years, we have weathered macro conditions, government policy changes and technological changes, each time returning to growth several quarters later.
We're excited about our current strategy to make the fastest growing areas of content searchable while adding news feed to our distribution channel; to grow our ecosystem and content services and vertical offerings, enabling us to perform user relationship management and to take advantage of our AI capabilities to capture market opportunities, with voice assistant, cloud and autonomous driving, which may cause us to sacrifice short-term profit but optimize sustainable, long-term growth.
Let me now turn to Q1 financial review. Revenue from Baidu Core grew to CNY 17.5 billion or USD 2.6 billion, up 16%, excluding spinoff revenues, which is CNY 0.1 billion lower than the midpoint assumption we had used for our Q1 guidance.
During Q1, we saw revenue stream coming from education, retail/e-commerce and services sector, which was partially offset by weakness in health care, online gaming, financial services, primarily due to industry-specific government regulations and our self-directed health care initiative.
At the end of March, the majority of our health care customers have been switched -- have switched their ad landing pages onto our platform. Though our structured data initiatives will dampen near-term revenue growth Q2 -- in Q2, we'll have a full quarter impact.
We believe better service quality and user experience will strengthen Baidu's foundation for sustainable long-term growth.
Our structured data initiative is generating healthy traffic growth, and we plan to roll out this initiative to other service sectors, such as moving companies, home services and express delivery, to improve the user experience in these areas.
Our new AI services are growing fast, particularly our cloud business, which generated CNY 1.3 billion in revenues in the first quarter, up 133%. Revenue from iQIYI reached CNY 7 billion, growing at a robust rate of 43%. Membership revenue continues to be strong with 9.4 million subscribers added in Q1, driven by premium content and hot originals.
Turning to cost of sales. Excluding stock compensation and intangible asset amortization, cost of sales was CNY 14.6 billion, up 49%. Content cost was up 47% to CNY 6.2 billion, mainly due to iQIYI's increased investment in content, and to a much lesser extent, investment in feed content. SG&A expenses.
Excluding stock compensation, SG&A expenses were CNY 5.5 billion, up 94%, primarily due to the increase in channel and promotional marketing, mainly for Baidu family of apps, including marketing campaigns around the Chinese New Year Eve as well as increasing personnel-related expenses.
R&D expenses, excluding stock compensation, were CNY 3.5 billion, up 25%, primarily due to an increase in personnel-related expenses. Non-GAAP operating income was CNY 0.4 billion. Non-GAAP operating income for Baidu Core was CNY 2.1 billion, and non-GAAP operating margin for Baidu Core was 12%.
Income tax was CNY 294 million compared to CNY 1.1 billion last year. Lower income taxes mainly due to lower pretax income from Baidu Core. Non-GAAP net income to Baidu was CNY 967 million, and non-GAAP net margin was 4%. Non-GAAP net income attributable to Baidu Core was CNY 1.8 billion, and non-GAAP net margin for Baidu Core was 10%.
Adjusted EBITDA was CNY 1.8 billion, and adjusted EBITDA margin was 7%. Adjusted EBITDA for Baidu Core was CNY 3.4 billion, and adjusted EBITDA margin for Baidu Core reached 19% in Q1. As of March 31, 2019, cash and short-term investments were CNY 143.6 billion or USD 21.4 billion.
Excluding iQiyi, cash and short-term investments for Baidu Core was CNY 125.7 billion or USD 18.7 billion. Operating cash flow was CNY 1.7 billion. Operating cash flow for Baidu Core was CNY 1.3 billion or USD 191 million. Total headcount of Baidu Core was approximately 32,600, down 1% year-over-year. Turning to second quarter guidance.
We expect total revenues to be between CNY 25.1 billion and CNY 26.6 billion, representing negative 3% to 2% increase year-over-year, or 1% to 6% increase year-over-year, excluding spinoff revenues of CNY 1 billion for Q2. Excluding spinoff revenues, our guidance assumes Baidu Core will grow between negative 2% and 4% increase year-over-year.
These forecasts are current and preliminary view and are subject to change. I will now open the call to questions. Thank you..
Operator, first question, please..
[Operator Instructions]. Your first question comes from the line of Alicia Yap of Citigroup..
I have a question regarding the ads outlook and also the second quarter guidance. Could you share with us, firstly, the reasons why Mr.
Hailong Xiang decided to leave? Is it related to your young manager promotion program? Will these be any potential short-term impact to the search team morale or any impact to sentiment among your key search advertisers? Based on your second quarter guidance, Herman, I just wanted to clarify, you mentioned earlier.
So Core Baidu revenues is implying about a negative 2% to plus 4% year-over-year, right? So does this has anything to do with the departure of Mr.
Xiang? Or is it mainly the macro softness impact on the apps demands? And how long do you expect this challenging outlook to last?.
Alicia, let me answer the first part of your question. Ms. Xiang resigned for personal reasons, and Shen Dou is promoted to Senior Vice President who's in charge of our mobile ecosystem which was formerly named search company. I think Dou is very strong.
He has proven track record in managing a lot of businesses, most recently our feed business has been growing very fast.
And if you look at the user front, we have already built a relatively strong mobile ecosystem with a large apps of super apps with very high DAU, the time spent is growing, search traffic in the app is growing, and our organic content and services from Baijiahao as well as Smart Mini Programs are all growing.
So going forward, we are confident that, that when we build the stronger sales team and stronger monetization capability, we should be right on track for higher growth..
Alicia, this is Herman. Yes, I wanted to just confirm what you noticed. With regards to our guidance for Q2, we are assuming that Baidu Core will be growing approximately negative 2% to positive 4% year-over-year for Q2. And you asked us what were the considerations that we have for Q2, I think several aspects.
As Robin mentioned in his prepared remarks, let me kind of summarize the key factors. I think one is macro factors that we talked about. Number two is we started seeing, after Chinese New Year, that there's been an increase in inventory, ad inventory release in the market. And as a result, that has been impacting our CPM.
So obviously, we're going to be focusing on improving our monetization capabilities going forward. Thirdly, we talked about our health care initiative. I recall in November last year, we said that we're going to be doing this health care initiative for structured data. We are still on track.
We're moving everyone, health care trying to move everyone onto Baidu's landing page. So that was done in March. So you're going to absorb a full quarter of that impact in Q2. We think over the long run, since we now understand the users better, we will understand their behavior as we're navigating on the structure site.
We think that, albeit in the long term, we can continue to improve the experience we're seeing in traffic from that initiative actually increasing growth. So I think over time, we're going to be able to improve our conversion.
And lastly, what we're assuming for the policies that have impacted us, whether it's on gaming, whether it's on financial services, on real estate, on auto and so forth, will continue to be this way.
So if these industry-specific policies improve, that will be upside for us, okay?.
Your next question comes from the line of Eddie Leung of BofA Merrill Lynch..
Just wondering if you could share more color with us on the growth rate you have seen some of your key verticals, client or advertiser verticals regarding the softness in the first quarter and second quarter.
Specifically, are we seeing an across-the-board weakness with a similar magnitude? Or are we seeing a couple of verticals dragging down the overall growth rate? And if so, could you talk a little bit about that field verticals? I suppose maybe vertical in financial services. Anything along the line would be very helpful..
Eddie, this is Herman. Let me answer that. As we -- as I mentioned in the prepared remarks, several industries probably have the slowest growth rate, health care, online gaming and financial services. I think these 3 will probably be the hardest hit on a year-over-year basis. Beyond that, as we mentioned, this is a macro impact. It's impacting our CPMs.
So as a result, you're seeing a slowdown growth rate in many industries beyond those 3 that I mentioned..
Your next question comes from the line of Gregory Zhao from Barclays..
One follow-up of your guidance please. We're looking to the business segment of Baidu Core, we know they are search, feed and cloud. But I just want to understand the group's trend of each individual segment and what's the driver for each segment in your Q2 guidance? And also a quicker follow-up.
During your prepared remarks, you mentioned that the efficiency improvement plan and you also mentioned the RMB 1 billion.
So is that for -- is that on saving quarter-by-quarter? Or more investment quarter-by-quarter?.
Greg, this is Herman. So 2 questions, one on drivers of search, feed and cloud. So I'll go first and Robin can add.
So I think as we mentioned earlier, for our Q2 guidance, the 4 factors that we're looking at right now that's impacting our growth rate, the macro, our initiative for structured data and the fact that the market is seeing significant increase in supply of inventory, and some industry-specific policies, I think those would give you a good indication of the drivers.
Obviously, we're going to be focusing monetization. We talked about how we're going to focus on CRM. We're going to focus on other initiatives to increase our CPMs so that we can become more competitive. I think those are the drivers for advertising. And then we break out specifically for cloud that it's CNY 1.3 billion, growing at 133% year-over-year.
I think the driver for us is to continue to expand into different industries and to replicate a lot of the solutions, enterprise solutions that we have so that it's much faster to grow with existing solutions rather than having to customize new solutions. So that's kind of our strategy to accelerate the growth of our cloud business.
And then with regards to cost structures, we originally had planned at the beginning of the year to increase our cost of sales and operating expenses by CNY 1 billion per quarter. So the increase incrementally CNY 1 billion quarter-over-quarter for the remaining quarters of this year. We have started looking at each of these areas.
Our goal is to decrease the increase sequentially through our business reviews..
Yes, let me give you a little more color on the growth drivers for search, feed and cloud. Cloud, like I mentioned, was growing by a triple digit, a fast growth rate. For search and feed, like I mentioned before, the DAU, the time spent and page views are all growing in the Baidu app. So we have a relatively solid foundation on the user front.
But on the customer front, we need to get more sophisticated, especially when we have all the user information in our native app. We can actually shifting our focus from managing traffic to managing users and customers.
For example, when a customer switched their landing page from HTML5 one to Smart Mini Program, we typically see that the conversion improved by 30% to 50%. And the traditional Baidu online marketing business is -- you already call it pay for performance.
And when the performance improved, let's say, the 30% to 50%, we certainly should be able to take a cut from that. And that should just -- the initial result, we believe that there is still a lot of room to improve.
And the reason for that is that in the same app, when we have the user information, their mailing address, their demographic information and their telephone number, they don't need to fill out a lot of new forms before they place an order from the Baidu App.
This will significantly improve the conversion rate and provide a more native app-like experience for both the users and online customers. And this kind of trend, I think we'll be able to last for quite a few years and will drive our growth for the core business..
Your next question comes from the line of Juan Lin of 86Research..
So my question is also on core business. As you mentioned, the DAU of Baidu App was up by 28% year-over-year.
And now that we're already in the middle of the second quarter, I wonder if you have seen a similar DAU improvement on a year-over-year basis for the second quarter? Also, there's the disparity between user growth and the revenue growth for the core business obviously.
So I wonder when should we see user growth start to contribute to the core revenue growth? Second question is out-of-home screen and OTV.
I wonder how big is the online TV and offline screen advertising business? What is the margin profile of these 2 business lines? And what is the growth trend for these 2 business lines?.
It's going to be a gradual process to see user growth turning into revenue growth. Like I mentioned, there are a lot of work we can do and we already started to do this kind of work.
We will focus more on managing our users and managing our customers so that the conversion will continue to improve and so that customers are willing to pay more going forward. And on the outdoor digital screens, those are not really offline screens, those are online screens.
We can leverage that as well as our mobile, in-home devices, auto, in auto services to do omni-marketing. And when we are able to connect that the users and customers across all different platforms, I believe that, that customers will be better served..
So just a quick follow up on the user growth for the second quarter.
So far, have you seen a similar year-over-year growth in terms of core mobile Baidu App in terms of user growth so far in the second quarter?.
I would say that our user growth continued to be healthy, but we typically do not give up on a daily basis update on the DAU growth..
Yes, just to address your plan onto that, [Juan]. The 28% year-over-year is what we reported for March. So if you're implying that was this impacted by the Chinese New Year. Chinese New Year, as you know, happened in the first half of February.
So whatever that impact, it does have a branding effect that allows our users to continue to come back even after Chinese New Year. So I think March is a good indication of the fact that the marketing campaign worked and that people remember and that people are willing to come back to Baidu App..
Your next question comes from the line of Piyush Mubayi of Goldman Sachs..
I wonder whether you could split your guidance and the slowdown that you're seeing into 2019 second quarter between macro, the release of new inventory that you talked about, Herman, and the issues that you're facing with the health care initiated for structured data.
If you could split it? And then if you could talk through if at all possible into when we could see the recovery for the force, in particular the health care factor into the second half of 2019.
And my second question is concerning your gross margins which, for the core for the first time appear to be in the 50s, it looks like based on our numbers, about 35%, a number we haven't seen in a long time.
Should we expect that to be the run rate into the second quarter and the rest of the year?.
Piyush, can you repeat that again? What you're implying for 50-some percent?.
The growth and profit margin -- the gross profit margin for the second -- for the first quarter looks like it's 55%, which is lower than the 64%, 68% and 70% we've seen in 4Q, 3Q and second quarter for the core business. So that's a run rate we should be factoring in as we think through the rest of 2019..
Yes. Good question. I think for our gross margin, the 2 factors you want to consider, number one, is the fact that we're selling smart devices into homes DuerOS so hardware sales, as you know, margin is very thin. So as a result, the more hardware sales we're selling.
And as we mentioned on the prepared remarks that Q1 sales was basically equivalent of all of last year. So while on the one hand, the sale is doing really well, it's going to impact on margin. And secondly, as I also mentioned in the prepared remarks of our TAC revenues, so you're seeing TAC revenues on the whole declining.
At the same time, you're seeing the cost of TAC revenue growing closer to 40% year-over-year in Q1. So these are 2 factors. I would expect going into Q2, with similar trend where you have Q1 TAC revenue was declining. Going into Q2, I don't think the TAC revenue is going to grow too strongly at all.
On the other hand, I expect smart devices to continue to do well..
And yes, on the headwinds you mentioned macro, new inventory and structure of the data. It's very hard for us to accurately split the percentage amount of these factors, but I think that the general direction is that for the structured data, we have built a good base to improve from.
There are a lot of levers we can pull to improve the conversion, improve the user experience. When those content are structured and hosted on Baidu, we're essentially using the Baidu name to endorse those institutions. So longer term, the conversion should get better and better.
For the new inventory, new ad inventory on the market, we saw a flash of that over the past -- earlier this year, but my expectation is that it's not going to get worse, but it will probably stay the same for the rest of the year. And for macro, there are still a lot of uncertainties that we really do not have accurate read..
Yes. And I wanted to add a few more points on structured data initiatives. I think this is an area where I think it's good for Baidu. I think this is something that, in the short term, is going to impact on margin, but long term, this builds a solid foundation for us to grow.
For several reasons because what you're doing is you're taking over the landing page, right? So you put on Baidu technologies. So in the past, business model is someone searches, we send them to an H5 site and we no longer know what the user does. And then there could be a lot of false advertising on the landing page.
We're now requiring the contents beyond Baidu, and we're using our technology to screen it. So we gained several things. Number one is we get to understand the users more, and at the same time, we request, for example, for these medical institutions that they have the physicians' bio which will allow us in the future to do verification.
We try to do rating because we now have more relationship with this particular vendor, and we would ask for things like certain business license and so forth. We're able to -- because it's on our technical platform, we can do screening using our AI.
We're adding social elements to this so that people can comment on and these rate these vendors and so forth.
So you can think of how structured it is very similar, for example, the e-commerce where once you have the rating system, you have social and then being able to monitor what's on their site, improve the user experience, you can see that also, for example, with hotels on travel sites and so forth.
So I think over time, you're going to actually see us build a solid foundation for revenue improvement because we think there's going to be better conversion. Already, we're seeing traffic in the medical health care areas improve as a result of doing this..
Your next question comes from the line of Grace Chen from Morgan Stanley..
I have a question about the Ad business. Several Internet companies have mentioned about the challenges in online advertisement business in the first quarter. And I think they all point out to similar reasons, including macro regulations and supply increase.
So I'm wondering, apart from these 3 common factors, are there any other specific -- company-specific factors that would differentiate Baidu to perform better or face more challenges in terms of the online ad revenue in the following quarters versus your peers..
I think when we look at the changes in the marketplace, I think that they're out of control like macro, but they are -- so we pretty much focus more on things that we have control of, which is how do we improve the user experience and customer experience, and therefore, improve conversion.
Like I mentioned before, by replacing HTML5 sites with Smart Mini Program, we can typically improve the conversion by 30% to 50%.
And by hosting the landing page using structured data, we're basically endorsing the customers with the Baidu brand, and we're also providing third party more objective comments about those advertising materials as well in the long run improve the conversion. And when conversion is improved, the revenue should follow.
I think this is more Baidu specific and we have better control of..
Yes, Grace, and I think the other question you were asking or you're implying, from my understanding, is you're comparing us to our peers and you're asking us probably on the growth rate. I think in addition to those 3 areas, number one is our -- we span across many industries.
Secondly, I think is the structured data we talked about various ads on our platform that we want to -- we've been doing this starting late last year that we want to actually ensure that we have a better user experience. So as a result, it's a matter of derisking the properties on Baidu so that in the future we have a more solid foundation to grow.
So I think structured data initiative fits into that, and that's probably something that we're doing that a lot of peers are not doing. And as a matter of fact, by doing this, some of our peers probably would benefit from some of the advertisers that we selectively reject.
But what that means is that you have short-term growth and then you also have a higher risk in the future. So we think that, again, our focus right now is how do we maximize our long-term growth, how do we improve the healthiness of our advertising and so forth..
Your next question comes from the line of Jerry Liu of UBS..
First, just following on with the advertising discussion, I want to ask about 2 of the verticals we discussed. One's health care and one's online gaming.
Could we see some improvement in ad demand here potentially health care as we move all the landing pages and in online gaming as the regulatory approvals are restarting? And then secondarily, just a clarification on costs.
Do we -- so net of the investments and the cost savings, how do we see OpEx trending for the rest of the year?.
Hi Jerry, so a couple questions in terms of are there upsides to the industries specifically for health care and gaming. I think we talked about the health care. I think the key driver there is we switched the majority of our medical advertisers at the end of Q1.
So in Q2, we're going to have a full quarter hit, because typically when you switch those sites, the users come to our site, they have to get used to it, and it will take a while for them to get used to it to get the conversion to where we are before the switch.
And then I think over time, because traffic in this area searches are increasing, it shows that user experience are getting better, and we are now getting better understanding of what the users do after they go to the landing page. So I think over time, using our technology and our experience, we should be able to improve conversion.
So I think once we can do that, you'll be able to see that growth will come back in health care. With regards to gaming, I think you're right.
I think for all the industry-specific policies, it's going to be in a similar fashion that once, for example, gaming license you're seeing more and more getting approved that's going to cause the game developers to be able to develop new games. So whenever they develop new games, they want to launch new games and so forth.
I think that revenue is going to come back. The other factors that we talked about in our prepared remarks is the fact that there's government economic stimulus right now, including a CNY 2 trillion for tax breaks and for other benefits of related costs.
So those type of things, we didn't factor in how that's going to impact our business because it's hard to quantify, but if those things start to take toll, that is a potential upside. With regards to our cost structure, as I mentioned, we currently plan about increasing CNY 1 billion per quarter for the remainder of the year.
What we're doing is going to our businesses to see how much we can reduce that. So I think ultimately, you're probably going to still see a sequential increase, but we would like to not increase at the rate of CNY 1 billion per quarter. Okay, I hope that helps..
Your last question comes from the line of Wendy Huang from Macquarie..
First is a follow-up on the structured data for the health care. So Herman, you mentioned earlier the full quarter impact will be seen in second quarter.
So does that mean from the Q3 onwards, we should actually see the growth, actually, both sequentially as well as year-over-year? And also, has this change in the structured data for the health care actually affected the number of advertisers in the health care industry? And also regarding the advertiser side.
So are we seeing the lower spending from advertiser each? Or are we seeing actually the less amount of the smaller advertisers because that actually is dying down due to a macro?.
Hi Wendy, that's a mouthful of question there. With regards to health care, it's hard for me to predict going into our Q3.
So my initial reaction would be that if Q2 is going to have a full quarter impact, we'll probably not going to be able to learn enough about the users and change the user behaviors and so forth in just a matter of a couple of months. It probably will take us a little bit longer.
I can't say at this point when that turning point is going to be, but I don't think it's going to be a few years, okay? On the other hand, with regards to a number of customers, yes, as we're being more selective on the quality of our customers, that's going to cause us to actually decrease the number of customers for our product health care but I think it's a good thing.
As I mentioned, it's a matter of do you want to derisk your properties and have a good foundation of the future growth? We've always believed maximizing our future growth is where we want to be. And you're going to some of our peers picking up these probably unhealthy advertisers and probably showing near-term growth.
But at the same time, that comes with the risk and regulations and so forth. With regards to are we seeing ARPU with our industries and so forth, I think in general, as I mentioned, this is a macro impact. So we're seeing ARPU, it depends on which industries, which areas.
So it's not, in the past, on a year-over-year basis, we'll probably see ARPU increase across the board. I think this is a quarter, especially when we go into Q2, where it's going to be mixed. It's hard to have 1 generalization for all the industries.
I think right now, with CPM not growing as fast as we had hoped for after Chinese New Year, then we're going to have mixed results across the board. So I think fundamentally, for us what we can control is improve our monetization capabilities to focus on how do we become better versus our peers. And that's what we've been starting to do..
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