百度 (BIDU) 2021 Q2 法說會逐字稿

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  • Operator

  • Hello, and thank you for standing by for Baidu's Second Quarter 2021 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, Ms. Juan Lin, Baidu's Director of Investor Relations.

  • Juan Lin - Director of IR

  • Hello, everyone, and welcome to Baidu's Second Quarter 2021 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; Herman Yu, our CFO; and Dou Shen, our EVP in charge of search and feed. After our prepared remarks, we will host 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 Report 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 Exchange. Baidu does not undertake any obligation to update any forward-looking statements except as required under applicable law.

  • Our earnings press release and this call includes 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 also be available on Baidu's IR website.

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

  • Robin Li - Co-Founder, Chairman & CEO

  • Hello, everyone. We delivered another solid quarter with Baidu Core revenue growing 27% year-over-year, accelerated by non-advertising revenues with AI cloud growing 71% year-over-year in the second quarter.

  • We are entering a new era where technology is becoming more powerful, and we are benefiting from the deployment of technology to upgrade China's industrial competitiveness, digitize urban cities and improve mobility. As China plans for the next stage of growth, it rests upon us to recognize the need to align our business strategy with the environment that we operate in and the future that we want to build with our stakeholders.

  • ESG highlights a shared future for humanity. To support China's pledge to achieve carbon neutrality by the year 2060, Baidu aims to reach carbon neutrality by 2030 through the use of green data centers, smart office buildings and other means. In addition, we hope to improve urban traffic flow and lower carbon emissions for 100 metropolitan areas across China with our build-out of smart transportation and accelerate the switch to EVs for the masses through our investment in robotaxi and smart TV.

  • Leveraging technology to serve a larger population to achieve inclusiveness is part of China's growth plan. In June, we introduced Apollo Moon, fifth generation of Apollo robotaxi vehicles that once again saw a 60% drop in cost per mile. With the rapid pace of autonomous driving technology advancement and cost efficiency improvement, Apollo robotaxi stands to become much cheaper than driver for hire or ride hailing in the coming years, which will make robotaxi ride hailing much more accessible.

  • Baidu Health is another example of expanding resources to a broader population for improved living. We are enabling closed-loop telehealth, online prescription and home delivery to free up hospital resources for critical treatments. Concurrently, we are helping hospitals find patients with specific illness that match their treatment specialties by leveraging our AI-powered search and Smart Mini Program.

  • We see great opportunities to use technology to advance sustainability and inclusiveness. As we go through our quarterly highlights, you will see other examples of how our AI-powered business is naturally aligned with these goals. This is due in part to our belief in using technology to build a better world.

  • Turning to Q2 operational highlights. Our AI cloud continued to see strong growth. IDC once again ranked the Baidu AI cloud the #1 AI cloud provider in China in their 2020 report on public cloud. Over the past decade, ads has been the growth driver for China's cloud market, which set up a strong foundation to implement AI solutions that solve industry-specific problems and provide urban living upgrades. By differentiating with AI solutions, we have the opportunity to provide repeat business with expanded applications and become a one-stop shop, cross-selling ads and other services.

  • In the past, we discussed empowering financial services, utilities and Internet media sectors with AI. Let me give you an example of how our AI cloud empowers the auto sector. We are helping Geely, a leading automotive manufacturer, to develop a multiyear digitization plan which entails: one, setting up their private cloud infrastructure; two, moving Geely's business onto cloud; three, leveraging Baidu AI solution to advance Geely's high-tech manufacturing capabilities such as IoV, security and risk management; and four, enabling Geely to provide cloud services to their automotive suppliers and customers.

  • Baidu AI is deployed into multifaceted environments. For example, Quanzhou, Fujian, a city of population of 8 million, implemented Baidu AI solution at its water treatment plant. Our smart monitoring capability was used to provide early detection of malfunctioning equipment, replacing labor-intensive patrolling. And a customized machine learning model was developed to predict water usage and dynamically adjust the water pressure of different water pipelines, cutting electricity needs by 8%. Our employees feel a sense of pride when natural resource is optimally managed and sustainability is indirectly advanced.

  • In health care cloud, we have expanded into over 400 hospitals in 29 provinces and over 1,500 primary care clinics in 11 provinces with leading solutions like [our CBSS], resulting in rapid revenue growth at 245% year-over-year for the first half. According to IDC's June report, Baidu deep learning platform became the most widely used in China, surpassing Google. Our Paddle Paddle developer community reached 3.6 million, up 62% year-on-year, and is adopted by 130,000 businesses. Baidu's large development community helps improve our machine learning models and individualize our AI tools and technologies.

  • Moving on to ACE smart transportation. As of June, Apollo has signed with 20 cities to try ACE smart transportation, up from 5 cities a year ago, based on a contract amount of RMB 10 million and above. Apollo also renewed agreements with 9 cities to roll out their next phase of ACE smart transportation. Beyond urban roads, Apollo signed with Xiongan, Hebei to deploy V2X smart highway, enabling the city to remotely identify the need for highway maintenance, assess road closure for poor weather conditions and identify travelers who dodge toll terminals.

  • Turning to autonomous driving. Apollo continues to see strong momentum. Level 4 testing on public roads has reached 12 million kilometers or 7.5 million miles. Apollo has received 278 AD permits, reflecting AD piloting in dispersed geographic regions and under wide-ranging test scenarios.

  • Apollo monetization. In Q2, Apollo Go ride hailing expanded into Guangzhou, our fourth city of operations; and provided 47,000 rides to the public, up 200% sequentially. Customer satisfaction for Apollo Go has been high with user rating of 4.9 out of 5.0. As pointed out earlier, our fifth-generation robotaxi vehicles saw another 60% drop in cost per mile compared to an average decrease of 62% in the first 4 generations of AD vehicles. We plan to roll out Apollo Go ride hailing across 30 cities over the next 2 to 3 years.

  • On ASD, Great Wall Motors become the latest automaker to announce plans for ASD. Apollo automated valet parking will be installed in their WEY Mocha SUV flagship build-out later this year. On infotainment, DuerOS for auto has been installed in 1.8 million vehicles, up 265% year-on-year. Twelve auto OEMs, the likes of Ford, GM, Toyota and Hyundai, have signed with DuerOS for auto for installation in 17 makes.

  • On DuerOS, Xiaodu continues to innovate the smart home device market. For example, the always-on DuerOS smart assistant allows one to conveniently order fresh home-delivery flowers and other commonly used goods in a matter of seconds through conversational AI. China's elderly population is slated to exceed 300 million. Xiaodu Smart Displays connect elders with immediate senior community assistance and serve as a virtual companionship around the cloud through conversational AI, improving their quality of life while allowing family members to monitor their loved ones' health and safety from remote.

  • During the June 18 e-commerce festival, Xiaodu Smart Display and Xiaodu smart pad for education market topped the sales volume in their respective category on leading e-commerce platforms like JD.com. Xiaodu is receiving high customer satisfaction, selling well on higher-price-point product lines and topping the list on units sold, demonstrating how hardware can be differentiated with innovative AI such as new input modalities and services.

  • Turning to Mobile Ecosystem. In June, Baidu App MAU reached 580 million, up 9% year-on-year and daily log-in users reached 77%. As an open in-app search app, Baidu app offers users instant replies on various topics. For example, daily telehealth consultation on Baidu Health surpassed 2 million in the second quarter, up 47% year-on-year. In addition, more than 8,000 industry experts spanning 14 other verticals such as legal, finance and fashion are able to instantaneously reply to user search inquiries through our AI building blocks. When users seek specific information or service, Baidu Search has a decent advantage.

  • Managed Page now accounts for 40% of Baidu Core advertising, reflecting merchants opening storefronts on Baidu as opposed to operating their on-site. For example, a local moving company, [Chenxi Moving] changed their search landing page to a Managed Page, and the site's daily orders doubled 5 weeks after adoption. Through Managed Page, users are able to browse services, interact with the merchant, schedule a move and pay deposits all seamlessly on Baidu. Managed Page also monitors merchant activities on Baidu with AI for added personal safety; for example, a moving service entails strangers coming to your house.

  • Before I turn the call to Herman, I'd like to congratulate him for his new role as Chief Strategy Officer of Baidu. Herman will continue to act as CFO until we find a qualified replacement. He will spend more time on corporate strategy and investments afterwards. Over the past 4 years, Herman has helped Baidu transform from a mostly search company to a leading diversified AI company. With demonstrated business leadership, a holistic view of our business and a keen sense of the capital markets, I'm confident in Herman's ability to help chart a course for our long-term growth and success in the age of AI.

  • With that, let me turn the call over to Herman to go through our financial highlights.

  • Herman Yu - CFO & Chief Strategy Officer

  • Thank you, Robin. Hello, everyone. Welcome to Baidu's Second Quarter 2021 Call. All monetary amounts used in my discussion are in renminbi unless stated otherwise.

  • Baidu's second quarter was -- Baidu's second quarter revenue was CNY 31.4 billion or USD 4.9 billion, up 20% year-over-year, driven by the growth of Baidu Core revenue which reached CNY 24 billion or USD 3.7 billion, up 27% year-over-year. Non-advertising for Baidu Core reached CNY 5 billion or 21% of Baidu Core's revenue. AI cloud revenue was CNY 3.3 billion, up 71% year-over-year, which is an acceleration from the 55% growth last quarter.

  • Our cloud growth is benefiting from the demand of enterprise customers looking to use AI to transform the industry and strengthen their leadership position, for example, customers from the Internet media, from financial services, from energy and from manufacturing sectors. We are also benefiting from the urban cities seeking to adopt Apollo ACE smart transportation to modernize and digitize their transportation network. AI solutions and smart transportation are showing fast growth, serving as catalyst for our cloud to grow faster than the overall cloud market with ads being a smaller part of our cloud business. On intelligent driving and other growth initiatives, we continue to make advances in product development by leveraging Baidu AI capabilities such as speech recognition, NLP and computer vision and our strong Internet foundation.

  • Xiaodu has become the leader in smart display globally based on shipments. Xiaodu speakers entered the smart home device market in 2018, competing on sub-100 product lines. Home devices equipped with AI features can be sold at much higher price points. For example, in May, we introduced Xiaodu Tiantian T10, a 10-inch smart display with karaoke features, at an MSRP of CNY 1,699. Through our innovation, Xiaodu services revenue such as advertising and membership has grown fivefold from last year, now accounting for over 1/10 of Xiaodu's revenues. Xiaodu powered by DuerOS is transforming the smart speaker market from selling hardware to selling AI-powered features and services.

  • Operating systems for the automotive industry is a much larger market. Apollo has an opportunity to leverage its leadership in autonomous driving and infotainment operating system to enable every passenger vehicle to be a smart vehicle. Just as Xiaodu transformed the home device market, Apollo hopes to leverage Baidu's capabilities, ASD and existing OEM channels to boost computing intelligence and transform the automotive industry.

  • Moving to online marketing. Q2 online marketing revenue was CNY 19 billion, up 18% year-over-year. In-app advertising was solid, growing 26% year-over-year, partially offset by the slow growth of union and PC ad revenues. Most of our top ad verticals continue to perform well. CPM saw double-digit growth, especially for in-app online marketing.

  • iQIYI revenue was CNY 7.6 billion, up 3% year-over-year. iQIYI subscribers reached 106 million in June, which supports a large in-house production of entertainment blockbusters.

  • Cost of revenue was CNY 15.9 billion, up 21% year-over-year, primarily resulting from an increase in tax and cost of sales associated with new AI business. Operating expenses were CNY 12 billion, up 30% year-over-year. SG&A for Baidu Core was up 40%, primarily due to an increase in channel spending and promotional activities as well as increase in sales hiring particularly as we look out to the next 6 to 12 months to grow our cloud and also our intelligent driving business.

  • Non-GAAP operating income for Baidu Core was CNY 6.5 billion or USD 1 billion, and non-GAAP operating margin for Baidu Core was 27%. Adjusted EBITDA for Baidu Core was CNY 8 billion or USD 1.2 billion and adjusted EBITDA margin for Baidu Core was 33%.

  • Cash and short-term investments for Baidu Core as of June 30, 2021, was CNY 167.7 billion or USD 26 billion. Free cash flow for Baidu excluding iQIYI was CNY 6.9 billion or USD 1.1 billion. Baidu Core had approximately 36,000 full-time employees as of June 30, up 24% from last year.

  • Turning to Q3 guidance. For the third quarter, Baidu expects revenues to be between CNY 30.6 billion and CNY 33.5 billion, representing a growth rate of 8% to 19% year-over-year, which assumes that Baidu Core revenue will grow between 9% year-over-year and 20% year-over-year. The above forecast takes into consideration the current COVID-19 situation in China, which is evolving, and business visibility is limited. The above forecast reflects our current and preliminary view, which is subject to substantial uncertainty.

  • Before I turn the call back to the operator, let me summarize our second quarter results. Baidu Mobile Ecosystem continues to be strong. Baidu Core online marketing, revenue was up 18% year-over-year in the second quarter, with in-app marketing revenue growing 26% year-over-year. Baidu App MAUs reached 580 million, up 9% year-over-year and daily user log-in was 77%.

  • Four years ago, we committed to strengthening our mobile ecosystem and do it with AI. Our search and feed is stronger now with AI building blocks and marketing cloud. And non-marketing has become sizable and growing quite fast. We have delivered on our goals, and we are very proud of our team for their strong execution.

  • Many investors have inquired about the recent regulatory landscape. Governments generally favor fair competition and maybe even so when mobile Internet is well penetrated. We see this being played across Europe and in the U.S. Search fundamentally is open. As exclusivity is forbidden for the largest players, this will allow more players in each Internet sector to exist, which gives consumers more choices and makes search more useful.

  • Some investors have asked about government incentives and special tax treatment. It's important that we [elevate] this to see the overall direction of China's development plan. Consumer Internet has been in China for 2 decades. And the country is promoting new growth sectors such as industrial Internet, V2X autonomous driving and monetization of city governments. Thus, it will not be surprising if certain incentives for the older industries will gradually decrease while the new economy benefits from government incentives. We believe government policy will also be adjusted to support these new growth areas. Our new AI business is well positioned in sectors of the new economy such as AI cloud, smart transportation, autonomous driving, smart devices and AI chips.

  • In the second quarter -- I'm sorry, Baidu returned $566 million to our shareholders under the 2020 share repurchase program this year, bringing the cumulative repurchase from last year to USD 2.5 billion. We are excited about Baidu's future, excited about Baidu's durable search and feed business and our new AI business to support China's growth while advancing sustainability and exclusiveness (sic) [inclusiveness].

  • On August 18, starting at 9:30 a.m. Beijing time, we will be hosting Baidu World on CCTV. Please join us to follow the latest on our product development.

  • And lastly, it's truly been a privilege to serve as Baidu's CFO and witness our growth initiatives like AI, cloud solutions, smart transportation, self-driving solutions and smart devices develop into 1/5 of Baidu Core business, using the steady profitability of our search and feed to fund and accelerate Baidu's growth. I'm excited about my new role as CSO, which will allow me to spend more time thinking about technology opportunities.

  • Operator, with that, let's now open the call to questions.

  • Operator

  • (Operator Instructions) Our first question comes from the line of Alicia Yap from Citigroup.

  • Alicia Yap - MD & Head of Pan-Asia Internet Research

  • Congratulations, Herman, for your new role as the CSO. To follow up your kind of like brief remarks about the regulation, I actually have questions on this data security. What could be the impact on Baidu? Anything that we need to do or the changes that we need to do to ensure compliance by September 1 for this data security law?

  • And then very quickly, as we just finished the Summer Olympics and with the Winter Olympics coming up, can you provide some update in terms of the latest robotaxi or even the Robobus commercialization service? Any expectations on this ride-hailing demand in this upcoming winter games? Do you think Baidu's driverless car service could leverage this big event to draw more commercial usage and enhance the branding?

  • Robin Li - Co-Founder, Chairman & CEO

  • Alicia, data security is very important to us. And we have consistently improved on the management of our internal data security system over the past few years. We have a data privacy committee among our management team that oversees the practices of the whole company.

  • We are also active in assisting with the setting of industry standard, and we share our experiences in dialogue with others to ensure that we are on top of industry best practices. If you look at MSCI, Baidu's rating on data privacy and data protection is among the highest compared to our peers. So I'm quite confident we will be able to cope with the new regulatory environment well in terms of data security and user privacy.

  • On Olympics side, yes, we do plan to do something with our robotaxi during the Winter Olympics. But what's important is that we just launched the fourth city of robotaxi operation, which is Guangzhou. I think we will continue to roll out our robotaxi services in many different cities, different regions, and the number of rides that we are providing have been growing very quickly. As I mentioned during the prepared remarks, we delivered 47,000 rides for our customers. That's 200% growth over the first quarter of this year. So we believe that the scale will grow very quickly, and we will be able to learn from all kinds of cases and quickly improve our technology. I'm quite optimistic that robotaxi will commercially be available in more than 30 cities in 2 to 3 years.

  • Herman Yu - CFO & Chief Strategy Officer

  • Yes. And I just wanted to add a point to what Robin just said. You asked specifically about Winter Olympics. If you look at today Shougang Park in Beijing, we believe we're the only second autonomous driving car company in the world where you actually have a car driving without someone at the driver's seat. So I think that shows the number of years of experience that we've been doing autonomous driving. It also shows the fact that we've been doing operations for autonomous driving for a while. That's why we can get the permit and actually start testing that. So it's open to the public. You guys are free to come and look at how autonomous driving is being done without someone at the drivers seat.

  • Operator

  • Our next question comes from the line of Piyush Mubayi from Goldman Sachs.

  • Piyush Mubayi - MD

  • When I look at the way your ride-hailing business is expanding, I can't help but think that you'll soon be running a business without the cost of a driver to factor in. If you could just take us through the math as you see it evolve to getting to 20 cities. At what point of time does it get to be a revenue line that you'll spell out separately and talk about the profitability, if at all?

  • Robin Li - Co-Founder, Chairman & CEO

  • Yes. We continue to work very hard to drive down the cost of the robotaxi vehicles. It has just come down 60% for our fifth generation vehicle. And in the meantime, we are running more testing miles and taking more orders to learn from all kinds of cases and to improve our technology.

  • Based on our current projection, I think that by the year of 2025, we will cross the line, which means that the total cost of robotaxi ride hailing will be lower than manned vehicle ride hailing. And after that, I think that the scale will be able to grow much larger than it is today. And I think around that time, we should be able to report in a separate line.

  • Herman Yu - CFO & Chief Strategy Officer

  • Yes. And just to add to that, Piyush. If you look at the economics, Robin talked about how from fourth generation to fifth generation, we reduced by 60% cost per mile. If you look at the prior 4 generations, we averaged around 62%. So we've been consistently decreasing costs for the last 5 generations at around 60% each time.

  • And if you look at what Robin just said, after 2025, what you're seeing in the economics is that in a ride hailing with actual drivers, look, the cost of a person -- labor cost only goes up. It doesn't go down over time. But you're competing with technology. You're competing with the fact that the more miles that we have, the more data that we have. Our operational experience is that this thing will continue to go down. So I think that's the sexiness of this business model.

  • If you look beyond 2025, if you look at the next 5 years, we have internally -- we can drive that cost down a lot, lot more based on what we have seen in the first 5 generations. So this thing will be very interesting. Once you pass 2025, you have technology efficiency, technology operational improvement compared to labor cost.

  • Operator

  • And next question comes from Alex Yao from JPMorgan.

  • Alex Yao - Head of Asia Internet and New Media Research

  • I have a follow-up question to Piyush's question. In 2025, the CPM of your Apollo solution could be cheaper than a human driver. My follow-up question is when do you expect the safety ratio for your Apollo solution to be safer than the human driver. And then for these 2 conditions to materialize, what does it take? Is it the cumulative mileage to reach a certain level? Or is it something else?

  • Robin Li - Co-Founder, Chairman & CEO

  • Yes. That's a good question. We take safety very seriously. I think we've been testing for like more than 10 million kilometers. We haven't had a serious injury yet. So that demonstrates that once we decide to operate a certain road for robotaxi ride-hailing services, we have the confidence that the service has a higher safety level than human drivers. That will be a minimum bar for us, to roll out services without human drivers. But my expectation is really that we should be 10x more safer than a human driver. So that kind of benefit is quite clear, and it's absolutely assured.

  • What's the second part of the question?

  • Alex Yao - Head of Asia Internet and New Media Research

  • Second part is what does it take for these 2 conditions to play out.

  • Robin Li - Co-Founder, Chairman & CEO

  • Right. There are 500 million kilometers of roads in China, and road conditions vary greatly. The approach we are taking is a very gradual one. We carefully choose roads that we have a high confidence that can be operated without a human driver. That's why we are saying that we're pacing ourselves. We are carefully picking areas and roads that we have a high confidence that we can operate robotaxi.

  • Operator

  • Our next question comes from Gary Yu from Morgan Stanley.

  • Gary Yu - Executive Director

  • I actually have 2 questions, both of which are follow-ups of the previous questions. First is on regulation. I appreciate the management comment about data privacy. How about on data security issue? Have we heard anything from kind of regulator or government level where the officials are comfortable for a private company -- tech company like us to have kind of full control of these sensitive road data traffic on our system? Or is there any discussion on potential formation of state-owned joint venture company having full access to these data instead of fully in the hands of private company? So that's first question related to data security.

  • My second question is also related to robotaxi. So we talked about the cost opportunity. How about revenue? After 2025 or even longer term, how should we project in terms of penetration, mobility penetration or share of mobility penetration that we think will be kind of served by driverless cars? The reason I am asking this question is it seems like that currently driverless car is still limited to certain usage scenario with specific locations. So how should we look at kind of penetration going forward?

  • Robin Li - Co-Founder, Chairman & CEO

  • Yes. On the regulation with the data security, we maintain a constant dialogue with regulators. And as I mentioned, sometimes we participate in the setting of industry standards. So I would say that we have a very high standard. And we haven't heard anything that's very abrupt or adverse -- that's going to have adverse impact on our business operations yet.

  • On the penetration of robotaxi, like I mentioned, we're taking a gradual approach. There are certain roads that are suitable for robotaxi. There are certain roads that aren't suitable to robotaxi. We are carefully selecting what road to operate on.

  • But if you look at the overall market, I think ride hailing has like probably 50 million orders per day. If the cost can become, I think, 1/5 of the current cost, I think that the number of orders could easily double. So it's a huge market. It just depends on how fast we can improve our technology and scale of those services.

  • Operator

  • Next question comes from Jerry Liu from UBS.

  • Jerry Liu - Co Head of HK and China Internet Research

  • Yes. Maybe let me ask a question on the advertising business. Mainly, if I look at the third quarter guidance, we talked about some of the COVID-19 resurgence potential impact. So I just want to ask, first of all, is this something we're already seeing? Or is it more preemptive?

  • And then secondarily, we're also seeing some potential COVID or regulatory impact across different sectors in the whole industry. So I wanted to get a sense on the strengths and weaknesses of the different verticals at the moment. Are we seeing a further impact, for example, online education, e-commerce or other verticals?

  • Dou Shen - EVP

  • Yes. Okay. Thanks for the question, Jerry. You're right, so we already see the impact of COVID-19 for Q3, especially for travel, right? We've seen very good growth trends in the early few weeks for Q3. But certainly, COVID-19 just stopped that train. Actually, it stopped pretty quickly. On the other hand, we did see pretty good progress on the media and vocational education and other verticals.

  • So talking about regulation. I mean so far we see pretty clear regulations on the K-12 education and on some other verticals. The good thing for us is that the K-12 -- education itself is a pretty big vertical for us, but K-12 is only a [smaller portion] of our revenue.

  • And also, for the K-12 regulation, we were pretty optimistic about it because we see 2 potential good things. Number one is that we are expecting more search queries around K-12 because college students, they just work by themselves. The second one, as far as I know, some of the resources are moving to vocational education, which is a very big vertical we are pretty strong at. That's it, Jerry.

  • Operator

  • Our next question comes from Eddie Leung from Bank of America Merrill Lynch.

  • Eddie Leung - MD in Equity Research and Analyst

  • I would like to have a question on your cloud business. It seems like the strong growth this couple of quarters is potentially driven by new projects. So just wondering, could you give us some rough time line that -- when you could get into the development phase that the growth of your cloud business would be more driven by your existing clients upgrading services and then buying more, kind of like more from the usage of existing clients rather than opening up new projects?

  • Robin Li - Co-Founder, Chairman & CEO

  • Yes. As you know, that our cloud business is still growing at a very high rate, the high double-digit growth rate. So by nature, you expect, you're right, that there are a lot of new projects from new customers. And what I can say is that our customer retention has been very good, and it's also improving. As we expand our customer base, more of them will stay with us and give us new businesses.

  • If we want to maintain a very high growth rate, it's inevitable that we will have a large percentage of so-called new projects. So at this stage, I wouldn't manage the percentage of new customers or existing customers. We will try to grab the opportunities that's presented to us. If it's AI-driven solution or a cloud solution, that is our sense to try to do as much as we can.

  • Herman Yu - CFO & Chief Strategy Officer

  • Yes. And let me add to that, Eddie. I think Robin has summarized it pretty well. When you're growing at 71% year-over-year, clearly, you cannot be relying on one driver. What you're seeing actually is 2 drivers. Number one is you are seeing us getting repeat solutions, right? We talked about, for example, smart transportation. Look, we're in 20 cities with contracts over CNY 10 million, 9 of them have renewed, right?

  • If you look at, for example -- we talked about the Geely. We didn't just -- when -- our first phase was building that private cloud for them. And then we talked about a 3-year plan, and then we talked about the other things that we're going to do. And Robin talked about also four steps. So clearly, that's not one solution, one time. That is a repeat solution, right?

  • Join us for our call, for Baidu World. We're actually going to go through AI solutions for many different industries. And you'll see what I'm talking about. Basically, our model is we serve them with the AI PaaS. That's the AI engine. And if they want to do different things, they would then come back for different phases to add applications.

  • So those, you can see, is because that the original engine is on Baidu Cloud, the applications will come back to us to add on that.

  • Very similar with smart transportation at V2X, and they can expand the different applications of V2X. So you can see our business model enables us to do repeat business. At the same time, if we don't expand to different industries, if we don't add different customers, we cannot keep up with the kind of growth that we have.

  • Look, you look at Q2, our annualized revenue based on Q2 is USD 2 billion and growing at 70%. So you have a very exciting business. And if we want to maintain that robust growth, we really have to accelerate from products, from different industries and adding different customers.

  • Operator

  • Our next question comes from James Lee from Mizuho.

  • James Lee - MD of Americas Research & Senior Internet Sector Analyst

  • Just want to follow up on Eddie's question on cloud. Maybe can you guys talk about the improvement that you guys are making to make your offering more scalable? I think last quarter, you talked about developing a standardized solution layer to enable third-party developers and integrators to customize for their clients. Can you give us an update on that?

  • And also secondly, the adoption for machine learning and AI for cloud in the U.S., much smaller -- much lower in the U.S. Can you help us understand why we're seeing a faster adoption cycle in China?

  • Robin Li - Co-Founder, Chairman & CEO

  • Right. On the cloud solutions, as we do more projects and we serve more customers, we are able to more or less standardize our solutions. So in the beginning, we can only hit those more of system integrator role to get the deals. But at this stage, we are able to provide, in a lot of cases, standard packages or parts to the other people who are system integrators who get a large part of those total solution projects. So that demonstrates that our capability to continue to improve the standardization of our solutions.

  • And on the adoption of machine learning, I think the difference between U.S. and China is that U.S. tends to separate the product from solutions on a more horizontal fashion, mainly PaaS and SaaS. At each layer, you have large players at all kinds of different industries. But in China, we can easily see more of those vertically integrated solution providers.

  • For example, for Baidu, we provide smart transportation solutions for a lot of cities. That sometimes includes hardware, software, cloud and on-premise, all kind of things. But that doesn't mean it's not standardizable. It's actually quite similar from city to city and from customer to customer. And by vertically integrating or by providing a solution -- end-to-end solution, we can actually innovate a lot more to really improve efficiency and serve the customer better. Therefore, the customers are better served. And when you can vertically integrate a lot of things, AI or machine learning naturally play a much more important role.

  • Herman Yu - CFO & Chief Strategy Officer

  • And let me just give more granularity of what Robin just said. When you look at, for example, smart transportation, we started with V2X, right? You're trying to synchronize the traffic light. We first did the project back in Baoding. So obviously, we had the product where you're going into a city, you're trying to understand their systems and so forth. And a lot of times, you've got to then connect to the system to a legacy system in order to make it work.

  • But as you're going through different cities in China, once you have certain tools that are set up to deal with the same legacy system and so forth, you get, number one, that you receive from operational experience; and secondly, a lot of tools that we build out. So when you think about us doing V2X specifically to synchronize the traffic lights because we're doing this for several years, you're actually seeing a very high scalability. You're actually seeing better margins and so forth because we've been doing this. So now if you see us start expanding into different scenarios, right, for example, into highways, into mass and so forth, what I would predict based on our past experience is that these margins will improve as we find more familiar environment.

  • Same thing as we're going into enterprises, right? We talked about automated call centers. The first one we did with Unicom wasn't very profitable. And then we start expanding into different call centers throughout the country. So all of a sudden, we're familiar with the back-end system. You just have to buy another server, put the software in there, all the same. You're up and running because you've already trained the machine learning model for a specific client.

  • And then once you start expanding into different industries, you get 1 or 2 leading customers. Again, you're now repeating a lot of things that you're doing, all the same. You get the inertia. So I think AI solution is very similar to the enterprise solution that you have software and so forth in the U.S.. It takes time whenever you're getting into a new industry, into new customers. But once the environment connecting to legacy system is very familiar, you get that inertia in the phases after that.

  • Operator

  • Our next question comes from Natalie Wu from Haitong International.

  • Natalie Wu - Research Analyst

  • We noticed recently from the press release that you are expanding your campus recruitment this year, going out to nearly 20% of the total head count. Just wondering if management can share with us the rationale behind that aggressive expansion at this point? And how should we see the margin trend of Baidu Core ahead? Also, if we simply look at the marketing-related business in Baidu Core, just wondering what's the margin profile of that segment alone.

  • Robin Li - Co-Founder, Chairman & CEO

  • Yes. On the head count growth, if you look at our growth rate of our cloud, it's very high. And this kind of industry solutions require a lot of head count addition. If you compare this -- compare our cloud team with other industry peers, I think that the head count for Baidu is not that high. It's actually quite reasonable, and we need to have a lot more people to help to deliver our services.

  • Herman Yu - CFO & Chief Strategy Officer

  • Yes. And then on the margins for Baidu Core, we're looking at non-GAAP basis, if you look at Q3, my estimate right now would be we're probably going to increase cost of sales plus OpEx maybe RMB 1 billion to RMB 1.5 billion on a sequential basis. So that's how I would look at this. And you guys have the last few quarters. I would look at the non-GAAP for Baidu Core, and then I think you guys have a very clear trend.

  • Operator

  • Our next question comes from Tian Hou from TH Capital.

  • Tian Hou - Founder, CEO & Senior Analyst

  • The question is related to your AI cloud. So there's normal cloud and there's AI cloud. So I wonder if we measure this 2 type of clouds, from a financial point of view, can I say AI cloud is much more higher margin? So can I treat that as the difference? That's number one. What kind of clients need the AI cloud? What kind of clients need the regular cloud? So that's the first question.

  • The second one is Managed Page has already increased to a bigger portion of online marketing. So what's the outlook for this Managed Page going forward?

  • Robin Li - Co-Founder, Chairman & CEO

  • Yes. The margin for AI cloud is higher, significantly higher than the more general cloud. Especially, I think you all know that IaaS and CDN generally has a lower margin. But I would say clients need AI cloud and general cloud. They need all kinds of technology and solutions. It's just that -- our experience is that we are very advanced in AI. And we find that by integrating our AI technology, AI solution to resolve our customers' problems, we are able to do a much better job. We do provide IaaS. We do product-like channel cloud services. But I think the market is very large. It's large enough and growing very quickly, and we are gaining market share in this very attractive space.

  • Herman Yu - CFO & Chief Strategy Officer

  • And let me just add. You asked about who needs AI. If you look at our customer set, we see several specifics. One is, for example, Internet media, right? When you have a media win -- for example, some of the media companies, those are very data-heavy. When you look at, for example, our industrial sectors, different areas of manufacturing, when you look at utilities, energy and so forth, they all have a lot of data sets. You look at, for example, smart transportation, the government has a lot of data sets. So our AI solution basically says, if you are a customer and you have a lot of data sets, you need to improve operational efficiency. So what -- our machine learning models when we go in there are Baidu Brain. We can help you -- a lot of things that you have to do manually before, we can automate that. We can do it much faster with AI computing.

  • So companies or industries that have a lot of data sets, we can automate. For example, you look at financial services, rather than computing and approving every loan you have, for example, of a few million customers, we can automate that whole computation where we just ask Baidu Brain rather than having someone manually compute all the different ratios and all the numbers of that particular customer. So you can see that usage very helpful, especially in China's economy.

  • Dou Shen - EVP

  • I will take the second one. You're right, so the Managed Page now accounts for like 40% of Baidu Core advertising. So actually Managed Page, it is not alone. We treat it as part of the marketing cloud we have discussed a few times, right, including the Managed Page and also the tools we provide to the merchants to make it easy for them to run campaigns on Baidu.

  • So as we always say, Managed Page together with Baijiahao and Smart Mini Programs, they altogether are the building blocks for the mobile ecosystem. Actually, it's nice because we can provide more closed-loop experience in which we increase the stickiness or the engagement between the user and the Baidu App.

  • So as a result, we can see -- so the conversion rates with those building blocks are much higher than before. That's why we can see since the COVID-19 outbreak in Q1 last year, so we -- our online marketing business actually rebounded consistently in the last 5 quarters, especially for the in-app marketing because of the 3 building blocks. And it grows as much 26% year-over-year. So that said, we will keep working on the Managed Pages because it will improve the user experience and also the monetization capability.

  • Operator

  • Ladies and gentlemen, we have reached the end of the question-and-answer session. So with that, we conclude our conference for today. Thank you very much for participating. You may all disconnect.