Baidu (BIDU) Q3 2018 Results - Earnings Call Transcript

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About: Baidu, Inc. (BIDU)
by: SA Transcripts

Baidu, Inc. (NASDAQ:BIDU) Q3 2018 Earnings Call October 30, 2018 9:15 PM ET

Executives

Sharon Ng - Baidu, Inc.

Robin Yanhong Li - Baidu, Inc.

Cheng-Chun Yu - Baidu, Inc.

Analysts

Alicia Yap - Citigroup Global Markets Asia Ltd.

Eddie Leung - Bank of America Merrill Lynch

Gregory Zhao - Barclays Capital, Inc.

Grace Chen - Morgan Stanley Taiwan Ltd.

Juan Lin - 86Research Ltd.

Piyush Mubayi - Goldman Sachs (Asia) LLC

Natalie Wu - CICC

Jerry Liu - UBS Securities (Asia) Ltd.

Karen Chan - Jefferies Hong Kong Ltd.

Operator

Hello and thank you for standing by for Baidu's Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference is being recorded and 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. Sharon Ng, Baidu's Director of Investor Relations. Thank you.

Sharon Ng - Baidu, Inc.

Hello, everyone, and welcome to Baidu's third quarter 2018 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 statement, 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 will also be available on the Baidu's IR website.

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

Robin Yanhong Li - Baidu, Inc.

Hello, everybody, and thank you for joining our call today. We delivered solid revenue growth in the third quarter driven by AI-powered search, continued robust growth from Baidu feed, as well as strong and increasingly significant growth from new AI businesses such as ABC Cloud.

Baidu has made incredible progress on strengthening our mobile foundation over the past two years, with our efforts to improve the user experience for Baidu's family of apps with AI, such as Search, Maps, Mobile Keyboard and launching feed with AI-powered algorithms. QuestMobile, a third-party research firm recently cited Baidu's family of apps together generates 980 million monthly active users, putting Baidu in the top three of MAUs in China in its autumn report on mobile internet.

Our own internal data actually indicates that the MAUs of the Baidu family apps reached 990 million in September, and growing 28% year over year, excluding overlaps as many users have multiple touchpoints with us. This massive reach on mobile in hand, we are well positioned for the shift in Internet usage in China. As developers are placing greater reliance on super apps to direct user traffic and provide native app integration, bypassing the need for new users to download their apps. Internet connectivity on home devices is seeing accelerated growth this year and the auto industry is beginning to experiment with connective Internet via voice assistance. These trends play to Baidu's transit and put us in a sweet spot for new Internet gateways.

Our use of AI to strengthen Baidu's core business is also generating new use cases and opening Baidu up to exciting new markets, such as AI as a Service. We are seeing AI extend beyond the Internet into everyday life and this presents Baidu with large new market opportunities in the 2C, 2B, and 2G markets.

Let's begin Q3 with search and feed. In core search, top 1 now compresses of over 40% of our search queries. And video search is becoming ever more popular with daily queries in the tens of millions, doubling from last year.

This AI-powered feature not only differentiates Baidu's search experience, but also enable us to introduce features like Smart Answer or Smart Screen. For example, a user of Huawei, OPPO, or Vivo smartphones with Baidu AI may take a photo of a plant or a pet. And the phone screen will return the card with information about the images in the photo. Smart Answer can also identify and provide information about celebrities, points of interest, and so forth.

IDC recently reported that smartphones' shipments in China declined 11% year over year in the first half of this year, making it more difficult for less frequented apps to continue traffic acquisition from app pre-installations.

Mini Programs have become a new source of traffic without requiring merchants to have native apps. We launched the invite-only phase of our Smart Mini Program in July and monthly active users ramped up quickly, surpassing 100 million in September. We have received favorable feedback from users, developers, and our network partners. And program registration was open to the public at the end of September.

We are on track to open source our Smart Mini Programs, which enable apps to join our Host, Union, and our Smart Mini Programs. Our Smart Mini Program open approach, by design, makes the information in Baidu's Smart Mini Program network searchable.

Moving on to Baidu Apps. In September, average daily active users of Baidu App reached 151 million, up 19% year over year, and time spent on Feed grow 68% year over year. In the two short years that we launched the Baidu Feed, we have added 276 MCNs and over 1.5 million content publishers, up from 1 million two quarters ago.

Twin-engine search plus feed offerings, coupled with unmatched AI-powered recommendation technology deep inside of our massive user base, makes Baidu Apps a compelling offering. A twin-engine apps not only provides better user experience but also generates better unit economics.

Excluding iQIYI, Baidu distributes over 2 billion video views per day. The strong demand for video content on Baidu's platform places us in a good position to offer more variety of video feed. We are replicating the Baidu Apps formula to develop video-only feed apps. For example, we began experimenting with Haokan this year, and in September, Haokan reached a DAU of 12 million.

According to QuestMobile, Haokan was the fastest-growing apps from June to September among all mobile apps in China, with a DAU of more than 5 million.

On monetization, the strong traffic growth of our feed, as well as video traffic are contributing to Baidu's revenue growth. In addition, our industry-leading use of AI to power ad monetization as dynamic ads, mobile action ads, and optimized cost per click, continues to position Baidu as a compelling source of performance-based traffic.

Baidu is pushing the boundary of innovation with cutting-edge technologies to better meet our customers' needs. For example, using blockchain and visual search to combat fake goods and generate more revenue for our customers.

Hairy crabs from the Yangcheng Lake in Jiangsu Province apprised four-season delicacy in China. This year, we worked to build hairy crabs fisheries from the Yangcheng Lake to set up a Smart Mini Program to enable consumers to verify product authenticity via the Baidu App.

Blockchain ensures a tag or a cart's uniqueness, while visual search provides a matching reading to ensure that the product was not switched. The combination of the two technologies have significant commercial value for merchants of big ticket items sold online.

Baidu has made significant strides to proactively improve the quality of healthcare information, and consumers are increasingly dependent on Baidu for healthcare-related services. We are developing a search solution to organize healthcare information into a structured format, so that users can more easily compare services across healthcare providers.

Our solution will verify the identity of licensed medical institutions and use AI to monitor the information quality on the landing pages, as well linked to such structured data instead of third-party websites. Although these efforts to improve user experience may impact our revenue in the near-term as users get used to the new information structure, we believe they will ultimately lead to better traffic conversion for healthcare providers.

Turning to DuerOS, Baidu's voice assistant. DuerOS continues to gain traction as we focus on user experience, such as improving natural language processing, which enables endless conversation, and building out DuerOS scale ecosystem. We have seen people across China, from Tier-1 to lower-tier cities, from toddlers to senior citizens, use DuerOS-powered devices to perform or search, watch videos, listen to music, make video calls, and control IoT devices in their homes.

In September, DuerOS installed base reached 141 million, up from 100 million in July, and voice queries on DuerOS continued its rapid rise, surpassing 800 million times, which roughly doubled every quarter for the past seven quarters.

DuerOS skills store now has a community of over 24,000 developers and over 800 skills available, such as education, cooking, and game genres such as VIPKID, Cooking Recipes and Digital Pets, respectively.

DuerOS partners continue to expand from TVs to smart meters to smart watches. In addition to homes, DuerOS also expanding its partnership in the IoV environment. For example, UCAR, better known as Shenzhou Zuche, a car rental and ride-hailing service provider, will be installing DuerOS on its fleet of new vehicles.

Turning to Apollo. We are gaining valuable experience in commercial operations with Level 4 vehicles. The Xiamen King Long produced Apolong, Apollo-based fully autonomous minibus, is currently running in over 10 locations throughout China. We are learning that end customers are requesting to purchase wholesale annual maintenance plans, and that the passengers are willing to pay for a ride on the Apolong minibuses. For example, Guangzhou's sunflower garden charges RMB 20 a ride for adults and RMB 10 for children.

Smart city utilizing AI to improve urban living presents Baidu with a great opportunity to serve the 2G market and bring Baidu AI to everyday lives.

The municipality of Changsha have just signed with us to be the first municipality in China to test robot taxi and our connected road solution, powered by Apollo. We are also in discussions with Beijing and Shanghai, whose population is almost equivalent of three New York cities to provide AI-powered city management solutions to help with urban safety, traffic congestion, and public parking, leveraging Baidu Brain, Baidu Cloud, and autonomous driving technologies to improve urban living.

Turning to ABC Cloud. Baidu Cloud continue to grow robustly, and recently recognized by third-party market research firm, Analysys, as the fastest-growing and among the top three most technologically advanced cloud service providers in China. At the Baidu ABC Cloud Summit in Shanghai last month, we announced new enterprise solutions with advanced AI capabilities to serve the transportation, education, and financial services industries.

Our AI as a Service approach aims to help customers increase productivity and improve operational efficiency. For example, a top Chinese telco choose Baidu's ABC Cloud with AI as a Service to power their call center. Baidu Cloud was chosen for our differentiated AI technology in speech recognition, natural language processing, and knowledge graph, enabling endless conversation and sparing customers the tedious experience of IVR menus.

Using Baidu's enterprise AI solution, the call center saw dramatic improvement in customer service quality, with average call time falling 70%, and Baidu's AI solution handling millions of calls per month. At Baidu World in Beijing tomorrow, we will share many more case studies illustrating Baidu's enterprise AI solutions now serving over one dozen industries.

Turning to iQIYI. In the third quarter, iQIYI added a record 13.5 million subscribers, reaching a total of 80.7 million subscribers, driven by top-quality content and blockbuster originals like Story of Yanxi Palace. iQIYI continues to rank number one across reach and in engagement metrics in the third quarter, according to third-party market research firms.

Also during the quarter, iQIYI co-launched a hybrid OTT box, with Beijing Gehua CATV network, featuring DuerOS voice assistant video search and children's mode. The hybrid OTT box enables users to access both iQIYI videos and cable TV from one box, an industry first.

Partnerships such as this help DuerOS and iQIYI extend presence into the fast-growing OTT market and exemplify the unique value proposition that Baidu and iQIYI can offer, working in tandem.

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

Cheng-Chun Yu - Baidu, Inc.

Thank you, Robin. Hello, everyone. Welcome to Baidu's third quarter 2018 call. Before I begin the third quarter review, let me make a few notes.

All monetary amounts used in my discussion are in Renminbi unless stated otherwise.

Starting on January 1, we adopted ASC 606, a new revenue accounting standard that nets value-added tax from revenue and cost of revenue line items. To increase comparability with 2018 numbers, 2017 numbers have been adjusted, net of VAT.

We completed the spinoff of Du Xiaoman, Baidu's financial services, during the third quarter, which was the last of the announced spinoffs. For today's discussion on Baidu Core, we are providing revenue and operating income numbers excluding the spinoff businesses, to give more visibility on the performance of Baidu Core without the spinoffs and allow for easier comparison for future quarters. Please refer to our press release for full information on Baidu Core financials.

With that, let's turn to Q3. We had a solid quarter (19:18). Total revenues reached RMB 28.2 billion, up 27% year over year. Non-GAAP operating income was RMB 5.7 billion, up 2% year over year. Non-GAAP net income to Baidu was RMB 6.7 billion, up 47% year over year, and non-GAAP net margin was 24%.

Revenue from Baidu Core, excluding spinoff revenues, were RMB 20.6 billion, up 27% year over year. Non-GAAP operating profit of Baidu Core, excluding spin-offs, was RMB 7.7 billion, up 12% year over year, and non-GAAP operating margin was 37%, compared to 42% from the previous year.

As we previously highlighted, our plan this year is to increase investment in content purchase for BJH accounts and increase marketing expenditures for the Baidu App. This helps Baidu achieve several benefits. Number one, shifting Baidu's search to our own properties, improve the user experience with search and saves on TAC. Two, feed is a complementary business for search. The two together drives better unit economics for marketing purposes. And three, with more and more apps relying on super apps to generate traffic, strengthening the Baidu App as we develop Baidu Smart Mini Program will increase our ad monetization potential.

Although, content and marketing costs are expensed as incurred, we believe we will be able to recover more dollars from these investments to further increase the scale of Baidu App. We are already seeing time spent on the feed in the Baidu App growing 68% year over year in September. But to ensure good budget management, we have placed a sophisticated tracking system in place to keep a close watch on our marketing investments.

As Robin elaborated, we are making strong progress in our strategy to solidify our mobile foundation and lead in AI, and we stay committed to Baidu's future.

As of September 30, 2018 Baidu has returned $487 million to our shareholders under the 2018 share repurchase program announced in June.

Let me now go to the rest of the quarter financial highlights. Online marketing revenues were RMB 22.5 billion, up 18% year over year. We had approximately 522,000 online marketing customers, up 7% year over year, and revenue per customer was approximately RMB 43,100, up 12% year over year.

Other revenues were RMB 5.7 billion, up 80% year over year, mainly resulting from the robust growth in iQIYI membership and other businesses. Excluding spinoff revenue of RMB 1 billion in the third quarter, revenue from Baidu Core was RMB 20.6 billion, up 27% year over year. Revenue from iQIYI reached RMB 6.9 billion, up 48% year over year.

Cost of sales, excluding stock compensation, was RMB 14.2 billion, up 36% year over year. Content cost was up 73% year over year to RMB 6.7 billion, mainly due to increased content purchases by iQIYI and, to a much lesser extent, from Baijiahao, or BJH accounts, Baidu's feed content network.

Other operating expenses, excluding stock compensation was RMB 8.4 billion, up 35% year over year, mainly due to the increase in channel and promotional marketing of Baidu Apps and other apps and the increase in R&D personnel-related cost.

Other income (sic) [Operating income] (23:14) in the third quarter was RMB 4.4 billion, down 6% year over year. Non-GAAP operating income was RMB 5.7 billion, up 2% year over year.

As mentioned, excluding spinoffs, non-GAAP operating income from Baidu Core was RMB 7.7 billion, up 12% year over year, and non-GAAP operating margin for Baidu Core was 37%.

Net income attributed to Baidu in the third quarter was RMB 12.4 billion. Diluted earnings per ADS was RMB 35. Non-GAAP net income attributed to Baidu was RMB 6.7 billion, up 47% year over year, and non-GAAP diluted earnings per ADS was RMB 19. The year-over-year increase was partially due to the change in noncontrolling interest, as losses from iQIYI were not allocable to preferred shares prior to the IPO.

Non-GAAP net income attributed to Baidu Core was RMB 8.4 billion, up 57% year over year.

Adjusted EBITDA in the third quarter reached RMB 6.8 billion, and EBITDA margin reached 24%. Adjusted EBITDA for Baidu Core reached RMB 9 billion, and adjusted EBITDA margin reached 42%.

As of September 30, 2018 cash and short-term investments was RMB 104.5 billion. Free cash flow was RMB 9.1 billion. Total head count, as of September 30, 2018 was approximately 40,700, up 2% year over year.

Excluding iQIYI, cash and short-term investments was RMB 94.8 billion, free cash flow to Baidu Core was RMB 8.3 billion, and total head count for Baidu Core was approximately 32,300, down 3% year over year.

Turning to fourth quarter guidance. Toward the latter half of Q3, iQIYI's brand advertising, and Baidu's brand advertising to a lesser extent, began to feel the impact of recent policy changes related to certain verticals, such as gaming, financial services, and so forth, as well as general uncertainties from a potential trade war. We expect this trend to continue into the fourth quarter. In addition, our proactive effort to improve the structure of healthcare information may impact our ad revenues in the near future.

Based on the above, we expect total revenues to be between RMB 25.48 billion and RMB 26.72 billion, representing a 15% to 20% increase year over year. Excluding spinoff revenue of RMB 1 billion for the fourth quarter of last year, this guidance assumes Baidu's fourth quarter revenues will grow between 20% to 26% year over year. These forecasts are our current preliminary view and are subject to change.

I will now turn the call over to the operator. Thank you.

Sharon Ng - Baidu, Inc.

Operator, we are ready for our first question.

Question-and-Answer Session

Operator

The question-and-answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed.

And the first question is from the line of Alicia Yap. Your line is now open. From Citigroup.

Alicia Yap - Citigroup Global Markets Asia Ltd.

Hi. Good morning, Robin, Herman and Sharon. Thanks for taking my questions. I wanted to ask if management could share with us your view when comparing the new feed ads versus the search advertising, in light of this softening advertising environment, or potentially more effort to cut. Which one is actually likely to be more resilient and which one is more vulnerable to the budget cut?

In addition to iQIYI, which on previous call, noted it was impacted by the online game sector, wonder how big the exposure of Baidu mobile news feed app is related to the online games? And if management is obviously expecting the economic conditions in this softening, any measure that Baidu plans to do to mitigate the downturn? Or do you think Baidu will be more immune to any slowdown? Thank you.

Robin Yanhong Li - Baidu, Inc.

Hi, Alicia. This is Robin. Your question regarding to the resilience on feed ad and search ad, I would say first that both search and feed ads are primarily performance ads, which means that advertisers always find that the performance on our platform is better and is the worthwhile for them to spend money on. I think brand ads, display ads, impacted us more due to macro condition. And having said that, I would say that the feed is probably less resilient than search because presenting of the feed ad could be brand related. But on the other hand, as you know that the feed is growing faster than search.

And the new regulations on games did have an impact on our revenue. We have a number of advertisers from the game industry. They are affected significantly, but gaming is not a very large industry for Baidu's advertising base. So to certain extent affected, but it's not a top five industry for us.

Cheng-Chun Yu - Baidu, Inc.

Yeah. To give more color, Alicia. I think going into Q4, there's been various policies in China. So game would probably be one of the industries that would be impacted, but there's several other ones we could be impacted. For example, from real estate and interior design, some from lifestyles, online commerce, and so forth. Some on financial service.

So it's not any particular industry that's impacting us heavily for the Baidu Core business, it is just each of these industries, while spread around several industries, a little bit here, a little bit there added together did cause us to probably grow not as fast as we would like in Q4.

But we also need to remember that when we're comparing for Q4 last year, over RMB 1 billion was related to the spinoff. So we got to have a lower base to recognize that.

Alicia Yap - Citigroup Global Markets Asia Ltd.

Sure. Can I just follow up on next year? Are we expecting further slowdown that we should probably take more into consideration for now, expecting next year would be slower?

Robin Yanhong Li - Baidu, Inc.

Alicia, we don't really give forward-looking guidance for next year. It's very hard for us to predict the macro economy over the next year. What we have seeing is that, for the next couple of quarters, the current macro environment is like this.

Alicia Yap - Citigroup Global Markets Asia Ltd.

Okay. Thank you, Robin. Thank you, Herman.

Robin Yanhong Li - Baidu, Inc.

Thank you.

Operator

Thank you, and the next question that we have is from the line of Eddie Leung from Merrill Lynch. Your line is now open.

Eddie Leung - Bank of America Merrill Lynch

Good morning. Just a question on traffic and competition. I think, Robin, you mentioned that it's getting less efficient to acquire traffic to fire the mobile channel, given you're slowing down in handset growth. But it seems, recently, we have seen a couple of your competitors probably since early of this year pretty aggressively buying traffic, I mean competitors, direct competitors on the search side. So just wondering how you see the competitive landscape going, considering a couple of third-party sources showing, it seems like there's quite a bit of MAU, although you're still much smaller than you guys. Just wondering how you think about this phenomenon. Thanks.

Robin Yanhong Li - Baidu, Inc.

Yeah. Sure, Eddie. I think there are two types of companies. One is platform companies like us. We own super apps. We will continue to aggressively invest in channel to do all kinds of pre-installation or marketing to further solidify our position as the super app or as the platform. But for most other companies who had a native app or had a website but hoping to establish their native app as the gateway to their services, it's getting tougher, because consumers just don't want to install that many apps on their phones, and the number of mobile Internet users is not growing that fast.

So we expect most of the companies will increasingly rely on large platforms like us to get traffic through either Baijiahao or Smart Mini Programs. I think they will shift their developing resources from native apps to Smart Mini Programs and Baijiahao infrastructure. The advantage Baidu has is that we are very strong in AI technology. We have a DNA of using technology to distribute content and services. So our core competence is really to find the most efficient way to distribute content and services and to deliver the best conversion for our advertisers and merchants.

As you mentioned, we do have competition in this area. There are other Internet platforms; they're trying to attract more users, more traffic, more advertisers. And again, our strength is technology. We have unmatched capability to distribute the content and services more efficiently and drive conversions better than anyone else.

Eddie Leung - Bank of America Merrill Lynch

Got it. Thank you.

Operator

Thank you. The next question is from the line of Gregory Zhao from Barclays. Your line is now open.

Gregory Zhao - Barclays Capital, Inc.

Hi, Robin, Herman, and Sharon. Thanks for taking my question. So my first question is still about advertising. And so can you share with us the top-ranking, like the top five or top three advertising categories in this quarter and how that compared to the last quarter and last year? And based on your key account and SME advertising account so which account has seen more impacts from the direct relation on the policy impact?

And a quick follow-up is, in the e-commerce category, your advertising saw very strong growth last year. So we still have less than two weeks before this year's Singles' Day promotions. So can you share us some early colors or metrics for this year's Singles' Day? Thank you.

Robin Yanhong Li - Baidu, Inc.

Yeah. So Greg, I'll take the first one. We actually are – because of the size of our advertising, we actually spend widely among all the industries. Our top industry in advertising would include things like medical; would include retail as a general term, both e-commerce and in other type of retail businesses; would include education, especially those post-college. These are just some of the top advertising industries we have.

Cheng-Chun Yu - Baidu, Inc.

Yeah. I think that the regulatory environment change affects both the key accounts and SME. It's more industry-specific than size-specific.

And regarding to the e-commerce market or the upcoming Double 11 Shopping Festival, we do expect a solid growth again. And I think both the e-commerce platforms, as well as merchants and retailers, are really active in promoting their products during this period. And we stand to benefit from the advertising dollars they spend on our platform.

Gregory Zhao - Barclays Capital, Inc.

Thank you very much.

Operator

Thank you. Your next question is from the line of Grace Chen from Morgan Stanley. Your line is now open.

Grace Chen - Morgan Stanley Taiwan Ltd.

Hi. Thank you. Thank you for taking my question. Could you share with us your strategy for 2019? For this year, we made it clear that we focus more on top-line growth and share gains, so we invest more aggressively in content and marketing expenses. In the results we're seeing very good revenue growth and margin are trending down in the recent quarters. How about your strategy for the next year, specifically your plan for account spending, marketing expenses? And what's the implication on margin for the next year? Thank you.

Robin Yanhong Li - Baidu, Inc.

I think our strategy for next year will pretty much stay the same. We will continue to invest for growth, and we will continue to solidify our mobile foundation and lead in the AI. New business systems, such as DuerOS, Apollo, all requires continued investment. And the fast growth of video and other apps will also require marketing dollars to continue – to fulfill their momentum. Herman?

Cheng-Chun Yu - Baidu, Inc.

Yeah. Just as Robin said, I think – with regards to our margins, I think we explained it pretty well in the prepared remarks. There's really two issues here. Number one is the revenue – the guidance that we have in Q4 is growing less than the Q3 rates. So that's going to impact our margin a little bit. For example, in Q4, you see our Baidu Core business; it's probably down around RMB 800 million on a quarter-over-quarter basis, if you assumed midpoint of Q4. And then on top of that, you should expect that our cost of sales plus our operating OpEx, we've been growing at over RMB 1 billion per quarter. So that's going to dampen our margin.

So that's one reason for dampening our margin. The other to consider is the fact that we are heavily investing in the app world, to create super apps. So in the past couple of quarters, we've been focusing on Baidu App. Now that we have seen a pattern of success, we are also going into different video apps; Haokan being the one that we tried in Q3. And you can see how our DAU has significantly grown in Q3, and the fact that QuestMobile cite us as to the fastest-growing app with DAU over 5 million. So we're going to continue to invest in that. And because of that particular financial model, you're not going to be able to match expenses with revenue, because expenses occurs during the quarter while the revenue is over several quarters after the investments, as users come back.

So that is changing. So we have to factor in that as we look at 2019 margins. But all in all, we do have a tracking system that tells us over the two years how the users generate revenue, and when we see positive – only when we see a positive ROI do we double down and increase the marketing spend with that particular app. I hope that helps.

Grace Chen - Morgan Stanley Taiwan Ltd.

Yes. Thank you.

Operator

Thank you. The next question we have is from the line of Juan Lin from 86Research. Your line is now open.

Juan Lin - 86Research Ltd.

Hi. Good morning, Robin, Herman, and Sharon. Thanks for taking my questions. My first question is related to our business outlook. On the outlook, you mainly referred to regulations impacting certain industries. I'm wondering, have you seen the early sign of market slowdown impacting advertisers spending sentiments for the next few quarters? Also, if I got it correctly, you also mentioned the restructure and clean-up of medical ads. Could you elaborate the reasons and details for the changes and whether there is risk for further adjustments of your screening process of advertisers in any other industries down the road?

My second question is related to DuerOS. Given that DuerOS has already accumulated very high installed base, queries and partners, could you please remind us on the monetization roadmaps planned for DuerOS? In particular, when shall we expect DuerOS to contribute meaningful revenue? Thank you.

Robin Yanhong Li - Baidu, Inc.

Okay. On the possible massive slowdown, right now what we have seen is that the confidence level from the private sector, in terms of users is not that high. But this actual impact is not obvious yet. If let's say, during the next couple of months, the confidence level changes, things will change to the positive direction. But we don't know exactly what's going to happen.

On the medical ads, the clean-up is an ongoing process. It's like many other industries, and it's like fighting with fake news on the Internet. And it's a battle between the platform and those merchants who want to find newer ways to take advantage of our platform. So this is the ongoing part.

And in particular, for this quarter and the next few quarters, we are basically redesigning the sponsored search system, so that starting from the medical industry, we will not allow advertisers to direct the link to their own websites. We will host all the information on the Baidu servers, in a more structured format, so that we have better control of what they can say and what kind of information they present to the consumers. We believe this will be beneficial to the end users and eventually drive better conversion for the healthcare providers.

DuerOS monetization, as I mentioned, it's been growing very, very rapidly. We expect the growth to continue in 2019, and meaningful monetization should start from 2020.

Juan Lin - 86Research Ltd.

Thank you, Robin. It's very helpful.

Operator

Thank you. Next question is from the line of Piyush Mubayi from Goldman Sachs. Your line is now open.

Piyush Mubayi - Goldman Sachs (Asia) LLC

...Herman, Sharon. Robin, there've been rumors recently of a potential international search engine entering China. I wonder whether you would be able to talk through the advantages that you think you had in the face of a company like that? And in the same vein, we're looking at several Chinese companies exploring opportunities internationally, I know you've done those or looked at those in the past, and I wondered if you could take us through how your experience has been and relate that to the potential entry of a search engine into the China market? That's my third question.

And second – and a very short question. From a macro slowdown perspective, which period in your operating history does this remind you of, at this stage? Thank you.

Robin Yanhong Li - Baidu, Inc.

Okay. Yeah. If you look at the overall Chinese Internet landscape, you probably cannot find any single U.S.-based company that has meaningful market share here. Well, that's for a reason. First, China is a very large market. And secondly, it's a very fast-growing, fast-changing market. Things changes every day, and you need to make new decisions every day. I don't think a non-China-based company has that kind of competency to really compete in this market, be it search or e-commerce or social or whatever you can think of. You just cannot find anything that meaningful in this market.

And then secondly, our international expansion or international expansion for Chinese Internet companies, both us and many other Chinese companies are expanding overseas and we are learning how to do business outside of China. What we have learned is that it's very difficult to get into a new market where there is a status quo, there is an existing dominant player and you play just the same rule. That's very difficult.

What we have seen is that if we can come up with some kind of new product, we have a chance to win over the users there and make money. Take Japan as an example. We owned the largest input mass input method called Simeji in Japan, and a lot of people, lots of Japanese consumers are familiar with this brand. And Simeji is also profitable and growing, and it's also related to our core technology in terms of search and AI. We involve users to do large, which requires a good speech recognition technology in Japanese. So going forward, we are continuing to find new opportunities, new markets, new products to try to gain traction in international markets.

On the macro, people will probably most likely think of 2008, when the financial crisis happened. But this time, I think it's different. I think right now, it's more about the traditional industry, more about entrepreneur's confidence and that can change very quickly. I don't think the fundamental fabric of the Chinese economy is in question. So I think, longer-term, I am still very optimistic about the future of Baidu and the future of China.

Piyush Mubayi - Goldman Sachs (Asia) LLC

Thank you, Robin.

Operator

Thank you. Next question is from the line of Natalie Wu from CICC. Your line is now open.

Natalie Wu - CICC

Hi. Good morning. Thanks for taking my question Robin, Herman, and Sharon. Just following up with the landing page change related with merchant account for healthcare industry. Robin, you mentioned that it would bring along some short-term pain in your prepared remarks. Just wondering if it's only related with mobile side and core search product, right? And also, how's that going to impact for your fourth quarter guidance?

And you've also mentioned that this kind of the change is chosen for the medical sector. I'm just wondering if there's any follow up for other top verticals for your advertisers. And, if yes, can you give us some color about your plan for that? Thank you.

Robin Yanhong Li - Baidu, Inc.

Okay. Herman will address the Q4 impact. Let me elaborate on the landing page strategy change more.

If you look at other type of services on the Internet, it's actually quite natural for platforms to use structured data instead of directing consumers to a third-party website. It's just the nature of the search, or due to the legacy of the search, people naturally think that they do a search here, they find all kinds of different links, and they pick one of the links, they're brought to a different website where search engines have no control of.

This is not the best user experience in the mobile age. That's why, in the beginning of the prepared remarks, I said 40% of our top 1 results now can satisfy users' needs. And many of the top 1 results are actually structured data. It's not a website linked to a third-party content.

If you look at in the online travel industry, if you try to find information about a particular hotel, you typically do not go to – go from an online agency like a Ctrip and to the website of a hotel's official website. You actually find structured data about the users' comments and their price and all sorts of things that Ctrip has on the Ctrip website. And for restaurant, right, if you go to a Dianping or Meituan, you also find all kinds of related information in the structured matter. You are not directed to the official website of that restaurant.

And healthcare should be similar, I think, in the future. We should provide structured data for healthcare providers, so that consumers have an easier way to navigate around all kinds of information and make their choices. This is a transition. A transition always affects revenue but longer-term, I think this is a win-win-win situation. The platform has better control on the content. Users have a more transparent way to find information and services they're interested in. And healthcare providers get better conversion from it.

Cheng-Chun Yu - Baidu, Inc.

Yes. Natalie, your question is what's the impact for Q4? Let me try to answer it this way. So when you look at our guidance, excluding spinoff, for Q4 right now, it's between 20% to 26%, and the midpoint is 23%, right? When you look at Q3, for example, our actual result was 27%. So assuming we're trying to reach 27%, we're 4% off, 4% slower, using our midpoint, versus Q3. So when you look at last year at Q4, we're talking about RMB 21 billion, so we're talking about, maybe a little bit, RMB 800 million light. Right?

So I can't break out for you, that RMB 800 million, how much is medical, how much is all the other industries. What I can tell you is that, that RMB 800 million lighter than what we would have thought we could do for Q4, assuming it's equivalent to the growth rate of Q3, is that it would be spread out between this healthcare initiative. And we think that it's probably going to be impacted from some other industries that we're already seeing, such as games, such as real estate, interior decoration, such as lifestyle, such as financial services, and maybe a few others.

So you can see RMB 800 million is not significant of our overall revenues when you have so many different industries and so many different policies impacting us. It's a little bit here, a little bit there. Hard to really quantify at this point how much each of these factors will be – we just think that overall, it should be around that range.

Natalie Wu - CICC

Got it. Thank you. And any follow-up plans for copying this kind of a change to other top verticals?

Robin Yanhong Li - Baidu, Inc.

Eventually, yes. Right now, we are focusing on the healthcare industry right now.

Natalie Wu - CICC

Got it. Thank you very much.

Robin Yanhong Li - Baidu, Inc.

Yes.

Cheng-Chun Yu - Baidu, Inc.

But do recognize this is an issue Natalie, because as Robin mentioned, structured data has better conversion. The risk of structured data is initially when you change the format of that information, users have to get used to it. So in the front end, you might lose some revenue, or have some revenue impact, because users are looking at this, and they are not familiar with better quality information. But as they get used to it, in the back end, they actually would have a higher conversion rate. So it's a timing issue.

So as we look at this medical, maybe a few other quarters down the line when we see better conversion rates and so forth, we might go into other industry. But net-net, it doesn't mean that whenever we go into an industry, it's going to have a significant impact on our revenues. We'll have to see.

Operator

And presenters, we have the next question from the line of Jerry Liu from UBS. Your line is now open.

Jerry Liu - UBS Securities (Asia) Ltd.

Hi. Thank you. Yeah, I just have two quick questions. The first one is, when we look at the macro impact, the regulatory impact in the fourth quarter, are we assuming on a month-to-month basis some further deterioration from August to September to October? What do we see for the next few months?

And then, the second question is on Smart Mini Programs. When should we expect some ramp in monetization? And when can we see that tailwind for the search and feed business? Thank you.

Cheng-Chun Yu - Baidu, Inc.

Okay. Hi, Jerry. I'll answer the first one. With regards to how we do our forecast for Q4, we try to gather the information from our sales team and also from our channel. So it's not so much of month to month, but overall as Robin mentioned, part of it is policy that we are seeing, so that would be on a historical trend. Another is really general sentiment of our customers, of our channels and so forth. So the totality of that assessment goes into our Q4. So I would say, based on the information that we have right now, this is what we think the impact would be for Q4.

Robin Yanhong Li - Baidu, Inc.

On the Smart Mini Program you can think of it as the mobile version of websites for native apps. Itself, it's not a business model – it's not a new business model. It's an enhancement to the existing Baidu Mobile ecosystem. People get better experiences when they are navigating around a Mini Program.

But having said that, I think that this will help enhance monetization because – and improve conversion, because users have better experiences when they land on a Smart Mini Program. And the user accounts are typically connected through the Baidu account and the Mini Programs' user account. And things like payment are a seamless experience.

And even better that – because our strength in technology, we can find the best match between the user query or the user intent and the Smart Mini Programs' offerings. So we have the best matching, and Smart Mini Programs ensure better user experience and better conversion. So longer-term, this will enhance our monetization capability, but itself is not a new business model.

Cheng-Chun Yu - Baidu, Inc.

Yeah. Just to add a little bit, Jerry. The assumption behind this is that a lot of the search links today, they're HTML 5, right, so someone searching direct the traffic to the other sites. Whereas what Robin just described is, it allows you to have a closer transaction within the app. So if you're in Baidu App, you search for something, you go to a Mini Program. You can actually transact, do all the things you want to do with that particular Mini Program, and you come back to the Baidu App. So it's still within the whole Baidu App ecosystem; you're not really leaving to another site. So that user experience, it's seamless. It allows you to do transaction. It also allows the users to go back and forth in different areas of Baidu App.

Jerry Liu - UBS Securities (Asia) Ltd.

Got it. Thanks.

Operator

Thank you. And the next question is from the line of Ms. Karen Chan from Jefferies. Your line is now open.

Karen Chan - Jefferies Hong Kong Ltd.

Thank you, Robin, Herman, and Sharon. So my first question is whether management can give us an update on the revenue contribution from mobile news feed ad in the third quarter. And given we saw a very strong quarter-over-quarter growth of 20% on average in 2018, wondering how we should think about going into 2019, given the current visibility. And also, just a follow-up question on can management size the approximate revenue contribution from healthcare currently, compared to a year ago? Thank you very much.

Cheng-Chun Yu - Baidu, Inc.

Hi, Karen. Yeah. So the question was on feed revenue. When you look at our feed revenue, what we disclosed last quarter – and this quarter is a little bit more – is that historically, last quarter feed plus all the AI businesses were less than 20%. So this quarter, we see it up a few more percentages, now making up over 20-some-percent, feed plus the AI businesses.

And then, with regards to healthcare revenues and so forth, we have about 30% of our advertising revenue for medical, they are about 30% of search top up basis, or mid-teens of Baidu revenues, on a GAAP basis. And it's been declining steadily over the last few quarters.

Karen Chan - Jefferies Hong Kong Ltd.

Thank you.

Operator

Thank you. Ladies and gentlemen, we are now approaching the end of the conference call. Thank you for your participation in today's conference. You may now disconnect. Good day.