Baidu Inc (BIDU) Q1 2023 Earnings Call Transcript

Baidu Inc (NASDAQ: BIDU) Q1 2023 earnings call dated May. 16, 2023

Corporate Participants:

Juan Lin — Director, Investor Relations

Robin Li — Co -Founder and Chief Executive Officer

Rong Luo — Chief Financial Officer

Dou Shen — Executive Vice President

Analysts:

Alex Yao — JPMorgan — Analyst

Alicia Yap — Citigroup — Analyst

Gary Yu — Morgan Stanley — Analyst

Lincoln Kong — Goldman Sachs — Analyst

Miranda Zhuang — Bank of America Securities — Analyst

Kenneth Fong — Credit Suisse — Analyst

Wei Xiong — UBS — Analyst

Presentation:

Operator

Hello and thank you for standing-by for Baidu’s First Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the management’s prepared remarks, there will be a question-and-answer session. 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, Juan Lin Baidu’s, Director of Investor Relations. Please go ahead.

Juan Lin — Director, Investor Relations

Hello, everyone, and welcome to Baidu’s third quarter 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 newswire services. On the call today, we have Robin Li, our Co-Founder and CEO; Rong Luo, our CFO; Dou Shen, our EVP, in-charge of Baidu AI Cloud Group, ACG; Zhenyu Li, our SVP, in charge of Baidu Intelligent Driving. 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 US 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. 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 include discussions of certain unaudited non-GAAP financial measures. 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 be available on Baidu’s IR website.

I will now turn the call over to our CEO, Robin.

Robin Li — Co -Founder & Chief Executive Officer

Hello, everyone. 2023 is off to a good start with [indecipherable] performing well across the board and driving strong growth. In Q1, Baidu Core revenue growth re-accelerated year-on-year and supported an improvement in our operating margin. Our online marketing business has seen a positive impact from China’s overall economic improvement after the Chinese New Year, there was a quick recovery which was especially beneficial for many of our advertisers in offline sectors, such as travel, health-care in services and local services. Moreover, we’ve been working hard to intense user experience for Baidu App and this has led to good use metrics and increased online marketing revenue for the first quarter compared to the previous year. Our AI Cloud achieved profitability on a non-GAAP operating level this quarter. Starting in Q2 last year, we have focused on building sustainable growth for our cloud business by phasing out, no quality projects and wins. At the same time, we have been building standardized AI solutions for key use cases and replicating them from one project to another. This approach has led to an increase in AI Cloud margins over the past few quarters and we have seen profitability on that non-GAAP offing level this quarter.

Today, all eyes are keenly focused on the transformative impact of January AI. For today’s call, I will first provide an update on the topic and then walk you through our operational highlights in AI Cloud, Intelligent driving and mobile ecosystem. Generative AI represents a tremendous opportunity for us. It can be compared to the introduction of the Internet and smartphones to capture this opportunity we leveraged our technology capabilities and our extensive experience in search, knowledge graph, and dialog. We were able to quickly deploy Ernie Bot in March, which became the first TBT model owned and operated by a public company. This launch demonstrated our significant investments and achievement in AI, over the past 10 years, and it also highlights our position as the operator of China’s largest search engine. With our search engine we have gathered a vast amount of data, facts and knowledge for natural language understanding, which has been critical in training our models. Baidu established a robust range of the AI capabilities powered by its four layered AI architecture, which encompasses Cloud infrastructure. The PaddlePaddle deep learning framework large language models Ernie and AI applications. We have this distinctive advantage that helps us optimize entire process and reduce costs for model training and inference. One of our significant advantages owning PaddlePaddle, which is the leading deep learning framework in China. We have the best that PaddlePaddle in a way that aligns with Ernie Bot and this creates a strong synergy between the systems.

Let me give you an example, training and running large language models require a lot of data, which can be complex an overwhelming and demand is significant computing resources. To tackle this challenge, we use our proprietary full stack AI architecture. We are continuously looking for new techniques to make our four layers work seamlessly, which helps us achieve better performance and quicker throughput. Specifically, we have improved compatibility between PaddlePaddle the large language model and the cloud infrastructure.

As a result, since launching Ernie Bot in March, we normalize –our normalized queries per second have increased almost to 10 times indicating significant efficiency gains. Baidu is rapidly integrating Ernie Bot into all of our businesses for testing. The goal is to leverage its capabilities to enhance, rebute and create both our enterprise and consumer facing products and services. Thereby revolutionizing our bin. We are also working on building an ecosystem around Ernie bot to promote the adoption of generative AI in a wider range of use cases. This strategy should enable us to gain market share across all sectors and achieve sustainable long-term growth. As more people use Ernie bot more products integrated Ernie bot in seamless ways we will be able together large scale human feedback and iterate the model rapidly and tailor to real life market need. The enterprise facing been side, generative AI expanding the total addressable market of the cloud in this industry. This is because cloud service provider can use generative AI to add or enhance capabilities to their current offerings. Develop new solutions and applications to advice unfulfilled market demand and drive productivity and efficiency.

As a result, since we introduced Ernie Bot, we have observed more-and-more enterprises from various industries started their model training on our cloud. Our powerful foundation models and our unique full stack AI capabilities differentiate us from our competitors, which gives us an edge in the market. In March, sales lead increased by more than 400% year-over-year, which is a significant achievement for us. We believe that our AI Cloud while continue to gain market share over time. I’ll provide some examples of how Ernie Bot is helping our customers to gain efficiency. In the financial services industry, we have partnered with a prominent domestic insurance company to help them enhance their digital experiences for employees and clients. To achieve this, we will utilize our AI capabilities including PaddlePaddle and Ernie and their private cloud.

Additionally, we will create customized tools and technologies to assist them in training and refining models Ernie Bot with their unique data. And we will continuously improve the system over time. This model well, power risks applications, including helping financial advisors analyze large amount of research report and public information. We believe that this project has the potential to establish a new industry standard for innovation and efficiency in China, financial services sector.

In the software industry, we are collaborating with some productivity software developers to test the integration of Ernie Bot into their application. With the goal of automating certain workloads and expanding the capabilities of their end users. Additionally, we are partnering with some ERP companies who are exploring the use of Ernie Bot to assist their programmers in writing code.

In the education industry, we opened Ernie Bot to a leading online education company via model as a service. Helping them fine tune their own model on Baidu AI Cloud. One of the features, we’re working on together is an enhanced sophisticated AI tutor enabling them to better serve their student. We’ve observed that industry is experiencing a surge in demand after the pandemic interested in using Ernie Bot to improve the [indecipherable] operations more efficiently. Online travel companies are a good example of this trend as some of the biggest players, testing the use of Ernie Bot to assist customer service team in managing customer queries, suggesting trips and directing customers to relevant information. The feedback so far has been positive and customers are also beginning to switch their IT expenditures to our cloud. Consumer facing businesses, we are utilizing Ernie Bot to enhance our product for the users. We’re currently beta testing an upgraded version of Baidu search, which is powered by Ernie Bot. This version provide natural conversational interactions or more seamless search experience. We also testing the integration of Ernie Bot to Baidu Wenku our online documents sharing platform to enable Ernie Bot to work alongside users and assist this 13 summarizing and generating content using natural language.

Additionally, we are cooperating Ernie Bot into other consumer facing products such as Baidu map, Baidu keyboard, Baidu Post and Xiaodu. Furthermore, we are testing a standalone application for Ernie Bot. So far we have been encouraged by the positive user feedback as the current testing stage and look-forward to bringing this experiences to more users in the coming months. In the new era AI chatbot will become a traffic way for people to seek information and contact. Therefore, we should continue to gain user traffic and my share, which will drive monetization overtime. We are also working to build an ecosystem around Ernie Bot with our partners to fuel innovation and drive growth. On the regulatory front as the leader in AI and an advocate for AI Ethics Baidu continues to promote the responsible use of AI. To comply with regulatory requirements any new technology, product or service must undergo government review and approval before large scale deployment. We have applied for review and approval of Ernie Bot and while rolling out at a large scale to our customers and users once we get the green light. Baidu has been operating search in China for more than 20 year and has extensive experience with Chinese culture and regulatory environment, which we believe will help us navigate the regulatory landscape.

In early April, the cyberspace administration of China, released a new draft regulation for comments on generative AI, which explicitly endorse the development of tough designed AI algorithm and deep learning frameworks. We believe that regulators active engagement in generative AI in the early stage while raise the bar to entry and we are well positioned for that. Overall, we are thrilled about the prospects that lie ahead with Ernie Bot and we will continue to invest in it to unlock the tremendous potential that we innovation.

Now let’s have a look on the first quarter operational highlights. In Q1, revenues from AI Cloud increased 8% year-on-year, which is an improvement from the 4% year-over-year growth in the fourth quarter last year. We’re pleased to report that AI Cloud achieved profitability on the non-GAAP operating profit level during the quarter. The margin improvement on the growth 2 point of progress. One is, our ability to optimize operations and drive sustainable and healthy revenue growth. Two is, our efforts to standardize our AI solutions and applications and efficiently replicate them across different customers and sectors. In Q2 of last year, we have phased out low margin businesses and projects for AI Cloud, leading to a healthier bin portfolio and cost structure. At the same time, we continue to standardizing AI solutions for key use cases for replication. In the water industry. For example, last year we replicated AI solutions, we developed for predicting water usage and controlling water pressure from Chenzhou water company to Guangzhou water company. And in Q1 we deployed the majority of our earlier standardized solution to the Lintao County Water Company in [indecipherable]. This example demonstrated the scalability and margin expansion of our standardized approach, including AI solutions for traditional industries. As I mentioned earlier generative AI, it’s creating a host of opportunities for the cloud industry and expanding the cloud market significantly. Therefore, we will continue to invest and actively explore ways to grow our cloud services.

Moving into intelligent driving, we continue to make solid progress in Q1, the number of rides provided to the public [indecipherable] increased over threefold compared to the same period last year and reaching nearly 660,000. Thanks to the remarkable growth in rides and our strong track record of safe operations. We have received more permits from government to offer fully driverless ride-hailing services in China. On March 17th, Apollo Go was allowed to provide 40 traveler’s wide hailing service in [indecipherable] region of Beijing. As of today, we are providing the services in three cities. Beijing, Wuhan and Chongqing. We are prioritizing fleet expansion and passenger adoption in regions where we can provide driverless commercial operation, meaning it’s fully driverless and we can charge. Our efforts yielding good results.

In Wuhan, where we first received the permits to provide such services on public road last August, we now have more than 135 driverless vehicles and more than one third of the paid right Apollo Go provided we’re in fully driverless vehicles. We are confident that the number of rides provided by 40 driverless vehicles, while continue to increase leading to cost optimization and creating a profitable business model. We firmly believe the demand for autonomous driving services while continue to grow at a rapid pace and we will further dedicate our technology and operational capabilities to better provide safe and reliable services to the public.

Moving to mobile ecosystem. I’m pleased to report that online marketing revenue returned to positive year-over-year growth in Q1, resulting in an increase in operating margin. One contributing factor to this growth was the overall improvement in China’s economic recovery and commercial environment as a result of China’s reopening. As I mentioned earlier, many offline related verticals, travel, health care in services and local services have substantially increased as we are ad spending on our platform. Some of this verticals have already rebounded to above pre-pandemic levels indicating solid signs of recovery. Our own initiatives aimed at improving the product experience such as incorporating short videos and product listing information within the Baidu App. Also played a significant role in the revenue increase.

Additionally, revenues from retail and e-commerce continued to grow mainly driven by merchants direct spending on our platform. The quarterly GMV facilitated by Baidu search grow by 55% year-over-year in Q1, demonstrating our continued traction in the e-commerce sector. Our users and traffic continue to grow in the quarter. Baidu app’s MAU increased by 4% year-over-year in March and feed distributed through Baidu App and mobile search queries maintaining steady growth. This reflects the high value that users plays on Baidu search as their primary source of information.

During the quarter, we continue to focus on enhancing user experience and customer satisfaction. On the user side Baidu App has a wonderful flow feature on the explore page, which is particularly attractive to young female enabling an infinite browsing experience and catering to the diverse needs. We expanded our immersive video feature to more-and-more use cases on Baidu App including incorporating it into search results. Additionally, we continuously improve our one shot search result through AI to provide a better search experience. This efforts have helped to increase user engagement and expand our user base. On the advertiser side, since launching our AIGC capabilities late last year, we’ve been working with advertisers to create more effective at by allowing advertisers to specify their requirements our platform generates customized options for them to choose from. For instance, our local tower agency turn to our AIGC capabilities to create App. Our AI generated app outperformed those created by the advertisers, delivering an average of about 20% higher sales lead over that.

In Q1, advertisers adopting the AIGC increased their ad spending year-over-year and quarter-over-quarter on our platform, demonstrating the effectiveness of our technology in driving wins results. Earlier this year, we began using our AIGC capabilities to help advertisers respond to customer inquiries on our platform. By harnessing the power of AI our advertisers can provide professional and timely answers to their customer inquiries, which in-turn drives an increase in self Li. For instance, a B2B advertiser witnessed a monthly increase of over 100% in sales leads in March, after using our AIGC technology. We are expanding the service to increasing number of advertisers helping them better serve their customers and drive improved wins results. This effort have resulted in improved ROI for advertisers on our platform.

Looking ahead, we remain committed to assisting our advertisers in reaching and converting their target audience by leveraging our cutting edge generative AI technology.

With that let me turn the call over to Ron, to go through the financial results.

Rong Luo — Chief Financial Officer

Thank you, Robin. Now let me walk you through the details of our first quarter financial results. Total revenue was RMB 51.1 billion, increasing 10% year-over-year revenue from Baidu Core was RMB23 billion, increasing 8% year-over-year Baidu Core’s online marketing revenue was RMB 16.6 billion increasing 6% year-over-year. Baidu Core’s non online marketing revenue was RMB 6.4 billion, up 11% year-over-year in Q1 AI Cloud increased by 8% year-over-year to RMB 4.2 billion, revenue for [indecipherable]increasing 15%, year-over-year. Cost of revenue was RMB for 15.2 billion, decreasing 3% year-over-year. Revenue cost, cost of revenue was RMB 9.4 billion, decreasing 4% year-over-year. Operating expenses were RMB 11 billion, increasing 7% year-over-year, primarily due to an increase in channel spending and promotional market expenses. Baidu Core’s operating expenses were RMB 9.5 billion, increasing 5% year-over-year Baidu Core SG&A expenses were RMB 4.5 billion increasing 16% year-over-yea, SG&A, accounting for 20% of Baidu Core revenue, even the quarter compared to 18% same period last year. Baidu Core R&D expenses were RMB 5 billion, decreasing 3% year-over-year, R&D, accounting for 22% of Baidu Core revenues in the quarter and decreased from 24% in the same period last year.

Operating income was RMB 5 billion, Baidu Core operating income was RMB 4.1 billion and Baidu Core’s operating margin was 18% and non-GAAP operating income was RMB 6.4 billion long-term Baidu’s operating income was RMB 5.4 billion and non-GAAP Baidu Core operating margin was 23%. Total other income net was RMB 2.6 billion, which mainly including a fair value gain of RMB 1.5 billion from long-term investments. in the first quarter last year, we recognized fair value loss of RMB3 billion. A significant portion of long-term investments in crores, but not limited to investments in equity securities of public and private companies and private equity funds. This is subject to quarterly fair value adjustments, which may contribute to net income volatility in future periods. Income tax expenses was RMB 1.2 billion, increasing 205% year-over-year, primarily due to an increase in profit before tax. Net income attributable to Baidu was RMB 5.8 billion and diluted earnings per ADS were RMB 15.92. Net income attributable to Baidu Core was RMB 5.5 billion. Non-GAAP net income attributable to Baidu was RMB 0.7 billion. Non-GAAP diluted earnings per ADS was RMB 16.1, and non-GAAP net income attributable to Baidu Core was RMB 5.3 billion and non-GAAP net margin for Baidu Core was 23%.

As of March 31, 2023,. Cash, cash equivalents, restricted cash and short-term investments were RMB 194 billion and cash, cash equivalents, restricted cash and short-term investments excluding IC were RMB 188.8 billion. Free cash flow was RMB flat 4.5 billion and free cash flow excluding IC was RMB 3.5 billion. Baidu Core had approximately 36,000 volumes as of March 31, 2023, on a separate note in the quarter IC generated about RMB1 billion in non-GAAP operating income and about RMB 1 billion in free cash flow.

With that operator let’s now open the call to questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen we will now begin the question-and-answer session.[ Operator Instructions ] Your first question comes from Alex Yao with JPMorgan. Please go ahead.

Alex Yao — JPMorgan — Analyst

Good morning, good evening management team. Congrats on the strong quarter and thank you for taking my question. I have a few on the advertising side of the business. What is the month-on-month trend for as recovery since March and how big is a vertical exposures to offline related verticals. How is the advertiser demand changing on your platform. And then lastly, partially about the full-year at growth rates. So what is the mid to longer-term growth potential for ADS business beyond the COVID for normalization. Thank you.

Robin Li — Co -Founder & Chief Executive Officer

Hi, Alex, this is Robin. Thank you for your question. We’re happy to see significant progress in our online marketing since for Q1, revenue made remarkable comeback and return to high single digit growths. Recall that last year, online marketing revenue declined year-over-year for all four quarters. I think it was 4% decline in Q1, 10% in Q2. 4% in Q3 and 4%,6% in Q4. Now we are in a positive territory and the momentum got further strengthened in the current quarter in Q2. The Q1 growth was primarily driven by a number of verticals in the offline sector that I just mentioned during my prepared remarks. Offline sector contribute to a sizable amount of our online marketing revenue. Particularly our largest revenue contributor health care has been improving and it’s back to the pre-pandemic level. So travel is also improving apparently and we saw that the Labor Day holiday really, really hard. The growth in our online marketing revenue has also had a positive impact on the margins of our mobile ecosystem. So the overall margin for Baidu Core got better. This success is our focus user and customer experience our platform. And furthermore, we have observed a strong growth in user engagement and traffic despite of the reopening of China and people are spending more time offline. Our MAU for Baidu App grow 4% year-on-year in March and our feed content [indecipherable]us to Baidu App also demonstrated robust growth. And looking ahead, we anticipate advertisers well. Continued to allocate more ad dollars to performance based platforms and we believe Baidu’s search is well positioned to benefit from this trend.

In addition, we see generative AI, I think significant opportunity that complements our search capabilities and provide new avenues for users to access and create contact. Absolutely, integrate Ernie Bot into our apps, particularly in the search we expect user traffic and engagement will go up. Thereby, further supporting the growth of our online marketing revenue. Ernie bot can also enhance our commercial products presenting an exciting opportunity for us to strengthen our offerings. With Ernie Bot empowered commercial product, we can capture a larger market share and deliver even greater value to our advertisers. This additional dimension gives us further confidence in our online marketing business and its ability to drive sustained growth in revenue. So based on this development and our strong fundamentals. We expect our online marketing revenue to outperform the growth of China’s GDP. Thank you.

Operator

Thank you. Our next question comes from Alicia Yap with Citigroup. Please go ahead.

Alicia Yap — Citigroup — Analyst

Hi, thank you. Good evening, Robin, Rong Luo and management team. Thanks for taking my questions. My question is related to margins [Technical Issues]. What will be the major margin driver this year after large scale of the cost cutting effort last year. How should we think about core operating margin trend for the rest of. Especially given there will be a few moving factors that will impact margins such as, for example, the potential investment related to the large language model the autonomous in August Thank you.

Robin Li — Co -Founder & Chief Executive Officer

Hello, Alicia, let me to your questions. I think we have implemented a number of initiatives last year to improve our operational efficiency, which you can see that in the past this four or five quarters. And all which, all of them has led to a notable improvements in our margins. These measures are not only made their mark to profit numbers to stats, but also transformed our organizations making leaner and more agile, which are definitely will drive for a sustainable long-term growth. Purely numbers spread as a result consider and our non-GAAP operating margin expanding from 17% in Q1 last year to 23%, Q1 this year and the free-cash flow also grew by over 200% from a year-ago. Notably, all of this growth was also accompanied by a [indecipherable]revenue in Q1. More specifically, as John has just mentioned and number-one, our mobile ecosystem profit margins improved, which is also together with the revenue outlook on marketing businesses. Number two is we can see that Baidu AI Cloud by focusing on cutting low-margin projects and businesses as well as our developing more standard AI solutions for few other cases that our Baidu AI Cloud has reached profitability on non-GAAP operating level. This is a positive and significant milestone for us.

And looking for, we aim to continue to enhancing the margins across all of our major operations and at the same time we also will continue to invest in the promising new areas in particularly the unimportant intelligent driving. This strategy investments actually are quite aligned with our long-term growth objectives. Which also reflects two areas where we have identified significant potential opportunities. By focusing on this area was, we aim to capture the larger market shares and we’re trying to drive sustainable growth while we deliver and invest more values to our shareholders. And as in the near term, I think incremental investment in the new opportunities is also quite [indecipherable]. Overall, our focus on disciplined execution and operational efficiency we try to assist long-term growth opportunities all of these efforts have resulted in the improvement of overall Baidu Core margins in Q1 and this will continue in the future quarters. We pull, we will prudently managing our P&L, leveraging our core improvements and further drive sustainable growths. Thank you so much, Alicia.

Operator

Thank you. Our next question comes from Gary Yu with Morgan Stanley. Please go-ahead.

Gary Yu — Morgan Stanley — Analyst

Hi, thank you and good evening. I have a question related to cloud. So on your AI cloud revenue growth. What’s the expectation for growth in 2Q and rest of 2023 and could you help us quantify any incremental cloud revenue in coming quarters, coming from early adoption. And a related question on cloud is on margin. With your improvement in revenue growth and margin, how should we look at a normalized revenue growth and margin for cloud going forward. Thank you.

Dou Shen — Executive Vice President

Hi Gary, this is Dou. Thanks for your question on the cloud. So since the second-quarter of last year, so we have made significant efforts in three ways. Trying to consistently improve our margins for the AI cloud. Firstly, we are resolute in phasing out the low-quality products and businesses. And secondly, so we are committed to building standardized AI solutions for key use cases and then efficiently in replicate them across different customers. Secondly, we are continuously investing in the technical capabilities of our standard cloud offerings to reinforce their competitiveness. So as a result of the efforts Baidu AI Cloud achieved a profitability on the non-GAAP operating level this quarter. In addition to that, after China’s reopen, now we finally can meet our clients in person to execute products and present our proposals. And we believe in AI cloud’s revenue growth. Since accelerated from quarter of last year, and he will continue in the coming quarters. Moreover, we believe that any part could provide a massive opportunity for us to gain shares in the cloud industry. Since its launch in the middle March, so we have received in the hundreds, thousands that that testing requests for Ernie Bot from enterprises, customers across a range of sectors, such as finance, software, education, online travel. So this overwhelming interest indicates promising start for the Ernie Bot’s debut.

So our customers are so eager to explore and utilize Ernie Bot for their businesses. And in a way all are confident that it will improve their productivity and enhance their competitive edge. Actually as Robin mentioned several customers has opted to develop their own large models on our cloud platform to leverage the advantages of day four layered AI architecture as Robin just mentioned in the prepared remarks. So while looking ahead, our focus will still remain on achieving healthy and sustainable revenue growths for the existing cloud business. While, we are striving to improve the margins. And in the meanwhile so we will capitalize on the long-term, huge market opportunity of large language models. And for sure, so we are committed to the investment and value-creation of our Ernie Bot overall, we believe we will continue our growing our peers in cloud revenue in the long-run. That’s it. Gary. Thank you.

Operator

Thank you. Our next question comes from LinkedIn Gong with Goldman Sachs. Go, please go-ahead.

Lincoln Kong — Goldman Sachs — Analyst

Thank you management for taking my question. So my question is related to Ernie Bot. So basically can managment further elaborate a bit more on the gross and monetization opportunity for Ernie Bot and a large and push model. So how should we think Ernie Bot will reshape our existing business and especially, help us gain share most of business line in the markets. Thank you.\

Robin Li — Co -Founder & Chief Executive Officer

Yes, Ernie Bot has been making quick progress since its launch in mid March. For instance, we have already upgraded Ernie Bot four times and we have managed to reduce the influence cost by nearly 90% I think these will be. While some of our competitors are still focusing on Aldo training we’ve moved ahead with significant reduction of our influence cost. This improvement, a result of our self-developed AI architecture is for the years, which sets us apart and enables us to switch the reduced cost and enhance efficiency from model training and inference. This strong foundation will facilitate the widespread adoption of Ernie Bot. We’re using only about to upgrade, almost all of our products and services enhancing and rebuilding our existing offerings. This enables us to strengthen our position and gain market share in. Our target markets including cloud services, online marketing and smart devices. In AI Cloud, Ernie Boty is being tested more and more enterprise that Dou just mentioned and is proving to be beneficial to customers in all kinds of sectors helping them solve problems and improve their productivity and efficiency.

It truly demonstrates the power of generative AI and large language models. Since launch, we have witnessed increasing adoption of Ernie Bot with hundreds of thousands of enterprises and entities queuing for testing. This has been encouraging recognition of Baidu’s AI capability, particularly our powerful foundation model. To assist customers to better use Ernie Bot, we have developed the tools and technologies that support training and refining models using our customers’ unique data, which also leads to continuous system improvement over time. And customers are becoming more selective than before, when choosing a cloud provider, they take into consideration the capabilities of generative AI and large language models. We see a growing number of new customers waiting to migrate to our AI Cloud. So we expect Ernie Bot to enhance our competitiveness and our pricing power of our AI Cloud. In March, we saw more than 400% year-over-year growth in the sales and the we anticipate more opportunities in the future. Additionally, while the cloud industry presents significant opportunity for Ernie Bot in adoption, there are great opportunities in online marketing market to. As I mentioned earlier, we utilized some learning about to upgrade popular consumer-facing products including Baidu App, Baidu search and other applications within Baidu family.

The initial user feedback we have received is very promising. Upon widespread implementation we should quickly gain user traffic and engagement. Therefore, reshape the competitive landscape in China internet and mobile sectors. So in summary, Ernie Bot’s progress has been very encouraging and we’re excited about the future. We’re pushing the boundaries of AI and exploring new avenues of growth. Thank you.

Operator

Thank you. Our next question comes from Miranda Zhuang with Bank of America Securities. Please go ahead.

Miranda Zhuang — Bank of America Securities — Analyst

Thank you management for taking my question. Congratulations on the good results. My question is about competition with many other Internet peers launching or about to launch there last language model. How to think about Baidu’s competitive advantage. And how does management think about the competitive landscape in China in the near term and the long term, especially for the enterprise facing business. Thank you.

Robin Li — Co -Founder & Chief Executive Officer

Yes. That’s a good question. AI and our LLM are still in the early stage of development and we are very happy to see the entry of more players into this field. As if it will help the industry to develop rapidly. Moreover, we are actively constructing an ecosystem around Ernie Bot to attract new participants and drive innovation in the emerging direction. In our view generative AI and large language model prevent a very high barrier to entry. And very few companies, possess the necessary capabilities to establish a significant presence in this market. The requirements include substantial upfront investment. Robust AI capabilities and expertise. And vast amounts of data for model 20. Also extensive experience in delivering appropriate content to Chinese internet and mobile users is crucial. Given such high requirements we anticipate a highly concentrated market this probably two to three major players, winning in the end. As mentioned earlier, as the first mover in China we leverage Ernie Bot to upgrade and revitalized our entire product and services portfolio, because we have a large product portfolio and large user base. We are able to get lots of user feedback about Ernie Bot, which will help our further enhance our leading position in LLM. This approach allows us to convert cutting edge technology into practical features, products and solutions that address challenges in support sustainable growth. Baidu has a distinctive AI architecture consisting of four layers that we have developed ourselves. The architecture gives us comparative advantage in terms of AI capability and play a crucial role in the successful early launch Ernie Bot. With this architecture we are able to quickly decrease costs and improve efficiency in both training and inferencing. For example, we have optimized the performance of PaddlePaddle for influencing. And this optimization enables us to more effectively work between that framework layer and the model layer, which, leading to a substantial efficiency improvements and cost savings. Developing and training our LLM required significant resources, including robust Cloud infrastructure. To this end, we have our own AI Cloud business and have secured assist substantial amount of computing power including the most advanced GPUs to sustain the ongoing training and iteration of Ernie Bot. Another critical point is that our experience in operating China’s largest search engine for over two decades have allowed us to build an extensive database in Chinese language including very valuable data that’s in knowledge. And enhancing our leadership position in NLP in China. We have extensive experience in reviewing vast amount of content on search and within our living our mobile ecosystem. And therefore to deepen we’re able to offer our customers any combination of all different layers of our AI stack. If the customer only need infrastructure we can provide that. If the customer needs both infrastructure and framework layer, we can provide that. If the customer needs framework layer and monolayer we have to offer those to. And if the customer wants end-to-end solution, we have that ready. So, we are uniquely positioned and very flexible in serving our cloud customers. Based on this competitive advantage, I’m confident that we will be a winner in this market. Thank you.

Miranda Zhuang — Bank of America Securities — Analyst

Thank you very much.

Operator

Thank you. Our next question comes from Kenneth Fong with Credit Suisse. Please go ahead.

Kenneth Fong — Credit Suisse — Analyst

Hi, good evening management. Thank you for taking my question. He says, he looked at that cyberspace administration of China recently released a draft regulation on the generative AI. So what sort of additional investments are needed to be requirement. Thank you.

Robin Li — Co -Founder & Chief Executive Officer

Okay. During our testing of Ernie Bot, we have engaged in close discussions with regulators. Through effective communication, we have found that the principles of content review or generative AI are quite similar to those applied to search. Finally, we have been operating in China largest search engine for over 20 years and we have extensive experience in providing appropriate online content. We also put a lot of effort into both technology and the compliance department to ensure our products and services meet applicable regulatory requirements. For important and sensitive topics, we have to make sure, AI, will not hallucinate. Given that LLM more or less probabilistic model this task is not travel at all. The requirements are not final yet. So we have to continue to update our strategy as it evolved.

Furthermore, we maintain an ongoing dialog with the relevant authorities and keep them informed about the latest technology trends. We actively share our insights supporting the responsible and beneficial growth of technology. Particularly for generative AI. Is this proactive efforts position us well to meet that requirement and offer industry leading generative AI solution in China. Conversely company, which do not have extensive experience in providing appropriate online content or lacking a track record of working closely with the regulator while faced significant challenges in offering scalable generative AI solutions in China.

[Indecipherable] I would like to emphasize that Baidu has been leader in AI for social good for a long-time. We are one of the early adopters of AI for responsive used in China. We believe our new initiative Ernie Bot is best in it’s kind in China and it has the potential to increase productivity and efficiency across whereas industries, which can contribute to China’s economic growth and social investment. We expect Ernie Bot to power agriculture enterprises to promote innovation and to optimize energy use, resource allocation and with reduction. And to improve disease diagnosis in healthcare industry. Therefore enhancing people’s well-being and quality offline. Also we always attach great importance to AI Ethics back in 2018, I came up with the four principles of AI Ethics. That’s like one, AI should be safe and tolerable. Two, AI should promote equal access to technologies for humanity. Three, AI should empower humanity to learn and grow instead of replacing them and then four AI should bring more freedom and possibilities to humanity. I want to make sure that within Baidu everyone understand this principle ones it come to you, AI technology and product. So as to enable that coexistence between AI and the mankind.

In addition, we also prioritized the data privacy and data security in Vince operation and business strategy. We have dedicated the committee to oversee data management and we are currently establishing another committee for AI Ethics and all of this efforts aimed at promoting AI for social good. Thank you.

Operator

Thank you. Our next question is from Wei Xiong with UBS. Please go ahead.

Wei Xiong — UBS — Analyst

Thank you management for taking my questions and congrats on a good quarter. My question is about Apollo Go, so could management provide some updates on your robotaxi business in terms of where strategy and business plan for the year, especially for the fully driverless ride hailing operation. Is there any timeline you can share regarding the scale up or the breakeven of the business and what are some catalyst or milestone event that we could expect for Apollo Go this year. Thank you.

Robin Li — Co -Founder & Chief Executive Officer

Thanks, Wei Xiong. This is a changing. All applicable remains the largest autonomous [indecipherable] service provider in the world [indecipherable] mentioned in the first of quarter [indecipherable] and this number keeps growing. We [indecipherable] technology by providing more rides to the public. In addition, we will always keep in mind the goal of achieving breakeven, training skill and building sustainable business model [indecipherable] when we make our operations. Total Richard, this objective, it’s important to reduce operational cost and improve operational efficiency. On cost, we’re focusing on lowering labor and hardware costs. Those are the major cost for robotaxi operation. So, we are working hard to find ways to cut down on those expensive. To reduce the labor cost, we continued to grow development of freight reality operation. As Robin mentioned in his preparatory remarks we’re doing really well in getting closer [indecipherable] and adding more wheels while we can provide fully driverless ride. In the Yizhuang region of Beijing [indecipherable] remarks after getting free [indecipherable] the testing committees. We’ve got the green lights to offer free driverless ride-hailing services towards public on the open roads in [indecipherable] match. This progress is because of authorities are accountable providing mainly safe and reliable ride to public in the past. Through that we create trust and gain the trust from both users and the government [indecipherable]. And in Wuhan, we start the call for offering free driverless ride-hailing service last August. Now, we are still [indecipherable] wheels and expanding operation tariffs. As Robin mentioned earlier more than one third or ride provided by a Apollo Go offer a more free gravity wheels. We’re seeing this number going up into the future. We will prioritize 50 for the future for each driverless operation. While hardware cost, we’ve been able to set after the reduced [indecipherable] offer new models, Robert helps the in the future. It will continue to decrease. Operational efficiency, warehousing, increase in our interest daily nationwide. In the future, we will continue to automate our operational strategy long-term success in robtaxi. Thank you.

Operator

[Operator Closing Remarks]