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Baidu, Inc. (NASDAQ:BIDU)
Q2 2020 Earnings Call
Aug 14, 2020, 9:15 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and thank you for standing by for Baidu’s Second Quarter 2020 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 Juan Lin, Baidu’s Director of Investor Relations.

Juan LinDirector of Investor Relations

Hello, everyone, and welcome to Baidu’s second quarter 2020 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 Chief Executive Officer; Herman Yu, our Chief Financial Officer; and Dou Shen, our Executive Vice President in charge of Baidu’s Mobile Ecosystem Group, our Search and Feed business. After our prepared remarks, we will hold a Q&A session.

Please note that discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC, including our Annual Report on Form 20-F. Baidu does not undertake any obligation to update any forward-looking statements except as required under applicable law.

Our earnings press release and this call include discussions of certain unaudited non-GAAP financial measures. We have made minor adjustments to our non-GAAP measures and retroactively applied these changes for comparison purposes. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures and is available on our IR website at ir.baidu.com.

As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on Baidu’s IR website.

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

Robin LiCo-Founder, Chairman and Chief Executive Officer

Hello, everyone. Baidu’s total revenue in the second quarter reached RMB26.0 billion, declining 1% year-over-year versus a 7% decline [Technical Issues]

Operator

Excuse me, presenter, we do not have audio from your side. Can you unmute locally, please?

Robin LiCo-Founder, Chairman and Chief Executive Officer

All right, let me repeat what I just said. Baidu’s total revenues in the second quarter reached RMB26.0 billion, declining 1% year-over-year [Phonetic] versus the 7% decline in the first quarter. Baidu Core contributed to the rebound with the second quarter revenue growing 24% sequentially. Baidu Core’s online marketing services has demonstrated steady improvement, since the drop in February, with encouraging recovery across many industries.

The second quarter, however, was also met with temporary setbacks such as new waves of COVID-19 cases appearing in Beijing and other areas of China, where Level 2 pandemic precautionary measures were again put in place. Fast forward to latter half of July, the situation has been improving since then, as COVID-19 cases subsided.

This positive moves forward coupled with some temporary setbacks, leave us cautiously optimistic about the business climate into the second half. While COVID-19, geopolitical tension, and other phenomenon plaguing the economy may continue to bring about hiccups, the opportunities that AI has presented us are getting more exciting.

Our foray into in-app search three years ago is proving to redefine how content and services are consumed, and allow Baidu to be a competitive force to enable long-tail SMEs to do business online. More than two-thirds of Baidu App users are logging in daily, which not only demonstrate user stickiness, but also indicates greater sense of identity and belonging on Baidu of users. The CPM gap between Baidu Apps and union traffic continues to widen in-app revenue mix up the majority of search and feed revenue, and daily in-app search queries outgrowing the total search market in China.

Traditional search through a browser direct users away from Baidu, whereas in-app search aggregates third-party content and services onto our platform for a unique closed loop experience. Users come to Baidu to form relationships with merchants, through follow, messaging, live video, shop and so on.

With users remaining on Baidu after the landing page, we are in a better position to improve user insight and provide superior user experience such as verifying the merchants, monitoring the content and services on Baidu for better quality, strengthening Baidu’s vertical and community offerings, and enabling users to follow, interact and transact as merchants.

From the merchant’s perspective, our customers no longer rely on Baidu only for traffic. They are able to build a fan base through our building blocks of BJH accounts; Smart Mini Program and Managed Page; and increase interaction with their fan base through live videos, coupon giveaways and closed-loop transactions; and leverage our marketing services platform for conversion improvement, lookalike targeting, and repeat purchases.

Baidu’s value proposition extending from selling traffic to also provide marketing cloud services to empower merchants, consumer relationship management capabilities makes us more competitive by leveraging Baidu’s AI and cloud capabilities. The increasing liveliness of our users, their participation in live broadcasting, e-commerce and other activities provides Baidu an opportunity to leverage our existing traffic to move beyond marketing services into memberships, online games, and other revenue streams.

Our new AI businesses; Xiaodu smart devices continues to sell well, despite the current economic situation causing headwind to smartphones and other consumer electronics. Baidu Cloud is leveraging Baidu’s leading AI to provide intelligent cloud solutions to enterprises to help them digitize and do more with AI computing.

Apollo continues to make advances in autonomous driving and commercialization, particularly in the area of smart transportation, which stands to benefit from the new infrastructure initiative that China is pushing to reignite the economy. iQIYI weathered another COVID-19 impacted quarter with positive growth year-over-year, reinforcing the belief that online entertainment can fare well in difficult economic times.

Let’s begin Baidu’s second quarter review with MEG. Baidu App DAUs reached 204 million in June. MAUs were over 0.5 billion, which puts Baidu App in an elite class of Top six apps in China ahead of Douyin, Kuaishou, Weibo and other feed apps; according to QuestMobile. In-app user engagement on Baidu App remained strong with in-app search queries growing 28% year-over-year in the second quarter, thanks to improving user experience and the expansion of third-party content and services on our platform.

Let me talk about video social services and monetization for MEG. First on video, Baidu App is becoming a powerful distributor of video content. Video consumption from search increased 81% year-over-year and video make up about 70% of the feed consumed. For Baidu’s set of knowledge — set of six knowledge products, such as Baidu WIKI, Baidu Knows, video contributed to almost a third of the page views, up from less than 20% at the beginning of the year.

Our efforts in fortifying the content on Baidu with video is showing incredible results. For example, in the area of healthcare, PGC videos expanded rapidly, resulting in total video views surging over five-folds from the prior quarter.

Live streaming is becoming a popular way for professionals to share their content on Baidu. We are making live streaming easy to conduct to our building blocks, especially for non-entertainment oriented content creators. For example, daily non-entertainment live video sessions on Baidu App surged by more than four-folds and monthly viewership grew by 80% in the last three months.

Topical live sessions such as Baidu Wiki Virtual Zoo, Summer Art Festival and Wandering through Civilization Season 2, attracted over 40 million viewership in the second quarter. Industry experts are also live streaming on Baidu. For example, live video sessions by healthcare experts nearly tripled in the last three months even as COVID-19 subsides in China.

Second, on social, we’re making it easier for users to interact with content creators and service providers on Baidu through our building blocks. The versatility of Baidu building blocks allows our users, for example, to leave comments on their search results to interact with content creators or with others who are interested in the same content, in essence, building topical communities.

Users can follow the content creators for future informational update. We recently integrated BJH accounts with Baidu knowledge products and interactions between users and content creators within Baidu knowledge products increased 78% in the last three months.

Third, on services. In the second quarter, we added service centers in Baidu App, which allows users to access services from a wide range of merchants and government organizations through a single sign-up and keep track of their transactions with various service providers through our My Wallet and My Message Center. Through My Service Center, users can perform a host of third-party services such as buying tickets for tourist destinations and train rides, making reservations for restaurants and car repairs, checking express delivery status, and paying utility bills, all in Baidu Add, without leaving — without having to download the host apps. Baidu’s service offerings will continue to expand as new players join our Smart Mini Program network.

Fourth, on monetization. Despite tough macro environment in the first half of this year, Baidu App revenue grew both in Q1 and in Q2. Baidu App search traffic continues to see healthy growth and the CPM gap between in-app search and browser search continues widening, validating that Baidu’s in-app strategy is coming to fruition.

On the CRM side, when customers buy traffic from Baidu, they can login to our marketing cloud platform which is upgraded regularly with new features, tools and technology advances, to help them improve ad conversion. By enabling our marketing service customers to perform consumer relationship management, we are transforming search from directing traffic to enabling customers to engage and improve the lifetime value of the consumers they acquire on Baidu.

Let me talk about how our building blocks is making verticals and communities more compelling. The healthcare and wellness industry makes up almost a tenth of China’s GDP. Baidu Health is fortunate to be a top healthcare and wellness platform in China, and our strong brand has gained further recognition amid the spread of COVID-19 into a pandemic. Year-to-date, top-tier doctors joining Baidu Health has increased 87% and our partnership covers the majority of the top hospitals in China.

The aggregation of quality healthcare content on Baidu from healthcare expert newsfeed, to short video, to live broadcasting has increased our healthcare traffic and resulted in online doctor consultation more than doubling from last year. We see such progress to naturally lead to offerings of online prescription, dietary supplements, and other related products and services over time to enable more people in China to access quality healthcare and wellness services.

Baidu building blocks are also helping to form topical communities. For example, we hosted approximately 100 live broadcasting sessions conducted by experts on national cultural heritage in the second quarter, which created a community following for Jade antique jewelries and collectables.

Various stakeholders in the community sprouted up on Baidu such as collectable valuation specialists, merchants using live broadcasting e-commerce and other feature sets to enable long-tail merchants to better monetize on Baidu.

The versatility of Baidu’s building blocks is also allowing a strong community of students and parents to form on Baidu. For example, students can watch the 400-plus live broadcasting sessions offered by over 100 universities and educational experts from our feed and Smart Mini Programs as well as check their entrance exam scores, research suitable universities and learn about popular majors, based on Baidu’s big data.

While at an early stage, we see community formation from the interplay of Baidu building blocks as a way to further enrich Baidu’s position as a leading knowledge and information-centric internet platform. Empowering content and service providers to monetize on Baidu will ensure a robust and growing content and services ecosystem, paving the way for additional monetization opportunities in the future.

Moving to DuerOS, Xiaodu series of smart displays and smart speakers was the best-selling in speaker category on JD.com during June 18 Shopping Festival. Xiaodu series of smart devices is building a strong brand in the marketplace with Baidu’s leading AI capabilities such as voice search and multi-input modality. DuerOS skills store now offers over 4,000 skills in wide breadth of content, including children, learning, online games, videos.

Turning to Baidu Cloud and AI Services; we are at an early stage of intelligent transformation, empowering traditional industries through the use of AI in their operational data to increase productivity and improve their service offerings. Businesses are coming to the realization that they have to innovate through AI or be left behind.

While many cloud enterprises chasing after scale in areas such as CDN and IaaS, Baidu Cloud is positioned as a one-stop shop for our customers’ cloud needs. And more importantly, differentiating through intelligent solutions by leveraging Baidu’s leading AI, paving the way for long-term growth.

For example, Baidu formed a strategic partnership with China National Building Materials Group, the parent of 13 listed companies, with the aim to leverage Baidu AI PaaS, equipped with big data and IoT edge computing capabilities, to provide intelligent logistics, intelligent factory and industrial autonomous driving. CNBM Group plans to use Baidu AI PaaS paired with Baidu intelligent map to improve the routing efficiency of its logistics vehicles and track vehicles whereabouts to improve operational efficiency and reduce production costs.

Baidu’s AI open platform is built on Baidu Cloud, offering over 260 AI capabilities, which is tapped at peak a trillion times a day by over 2.1 million developers. This gives Baidu incredible insight on how AI is best used.

And at the World Artificial Intelligence Conference recently, Baidu ERNIE, our natural language processing framework, earned highest honorary recognition, the SAIL award. IDC recently published a report ranking Baidu Cloud, number one in China’s AI public cloud market in 2019 based on revenue, AI cloud product portfolio, APIs used by developers.

Turning to Apollo, we are making strides in autonomous driving, smart transportation, as well as connected vehicles. China’s new infrastructure initiative is promoting municipalities to adopt smart transportation and Apollo stands to benefit by providing local governments with V2X infrastructure, which supports the add-on features including, smart signaling, smart parking and smart buses.

To-date, we have seen multiple RMB100 million-plus contracts which reflects how municipal governments are intelligently using technology to improve the living standard of citizens in their community. DuerOS for auto is also a promising market with electrical vehicles becoming over — becoming ever more popular.

Apollo robotaxi operations in Beijing, Changsha and Cangzhou are expanding into larger networks and more complex road conditions such as downtown streets. In working with Apollo customers, we are gaining valuable experience in the operation of autonomous driving, leading us to believe that the arrival of 5G will bring new opportunities for Apollo. For example, enabling the monitoring of driverless fleets from remote which will increase the efficiency of auto operation to one person per multiple vehicles.

In Q2, we completed the 145,000 square feet Apollo Park in Beijing, probably the world’s largest autonomous driving and V2X test facilities which supports associated functions including, testing, operational command center, big data cloud control, vehicle warehousing, maintenance and collaboration.

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

Herman YuChief Financial Officer

Thanks Robin. Hello, everyone. Welcome to Baidu’s second quarter 2020 call. All monetary amounts used in my discussion are in renminbi unless stated otherwise. Baidu’s total revenues reached RMB26 billion or $3.7 billion, decreasing 1% year-over-year, which is an improvement from last quarter’s 7% decline.

Our business improvement mainly came from Baidu Core whose revenue reached RMB18.9 billion or $2.7 billion in the second quarter, decreasing 3% year-over-year, which is a significant improvement from the 13% decline last quarter.

Travel, financial services, franchising, healthcare and auto underperformed in the second quarter though we are seeing a meaningful recovery in healthcare and franchising, along with real estate and machinery. In-app revenue grew double digits year-over-year in the second quarter and made up more than half of our search and feed revenues. The robustness of in-app revenue and its increasing revenue proportion will be an important revenue driver going forward.

Our new AI businesses also saw strong growth, up double digits year-over-year, with strength coming from Baidu Cloud and smart transportation. Cloud revenue reached RMB2 billion in the second quarter and we expect cloud and smart transportation to be important revenue drivers for us going forward. iQIYI revenue reached RMB7.8 billion, up 4% year-over-year. iQIYI subscribers reached 104.9 million and its membership revenue was up 19% year-over-year. iQIYI’s app business was down 28% year-over-year, impacted by the challenging macro environment and the delayed releases of top hits.

Non-GAAP cost of revenues was RMB12.9 billion, down 19% year-over-year, primarily due to a decrease in traffic acquisition costs, sales tax and surcharges and cost of goods sold. Traffic Acquisition Costs decreased primarily due to a double-digit decline in TAC revenue. Our strategy on TAC continues to be optimizing profit rather than growing TAC revenue at a loss.

Non-GAAP SG&A expenses were RMB3.9 billion, down 18% year-over-year, primarily due to less channel spending on promotional marketing and to a lesser extent, a decrease in personnel related expenses. Non-GAAP R&D expenses were RMB3.7 billion, down 2% year-over-year.

Non-GAAP operating income for Baidu was RMB5.6 billion, up 187% year-over-year. Non-GAAP operating income for Baidu Core was RMB6.5 billion, or $917 million, up 86% year-over-year. Non-GAAP operating margin for Baidu Core was 34%, up 16 points from last year.

Adjusted EBITDA was RMB7.0 billion or RMB7 billion, up 109% year-over-year and adjusted EBITDA for Baidu Core was RMB7.8 billion or $1.1 billion, up 63% year-over-year. And adjusted EBITDA margin for Baidu Core was 41%, up 17 points from last year.

As of June 30th, 2020, cash and short-term investments were RMB154.1 billion and cash and short-term investments for Baidu Core were RMB144.6 billion or $20.5 billion. Free cash flow was RMB7.3 billion and free cash flow for Baidu Core was RMB8.8 billion or $1.2 billion. Baidu Core had approximately 29,300 full-time equivalents as of June, down 2% from last year.

During the second quarter, we returned $540 million to shareholders under the 2020 stock repurchase programs. And cumulatively, over the last two years, we repurchased approximately $1.9 billion. Our Board recently approved a change to our 2020 share repurchase plans, increasing the buyback of $1 billion to $3 billion which is effective through the end of 2020.

Turning to third quarter guidance, we expect total revenue to be between RMB26.3 billion and RMB28.7 billion, representing a growth rate of negative 6% to 2% year-over-year. Our guidance assumes Baidu Core will grow between negative 7% and positive 3% year-over-year. These forecasts are our current and preliminary view, which is subject to substantial uncertainty.

Before I turn the call to the operator, let me summarize our second quarter achievements. Our strategy to strengthen Baidu’s mobile ecosystem through our building blocks and marketing cloud platform is bearing fruit. More than two-thirds of Baidu app users are logging in daily. In-app search queries continue to grow above 20% year-over-year and CPM in in-app search continues to widen against traditional browser search.

Content and services are expanding at an incredible rate on Baidu. Baijiahao content network now holds 3.4 million publisher accounts, up 52% year-over-year and the number of Smart Mini Programs joining Baidu network grew over five-folds from last year.

The increase in services along with improved social, video and monetization feature sets, including [Phonetic] live streaming, shopping is making Baidu platform more lively and interactive and more conducive to doing business for long-tail SMEs.

Verticals and communities are forming which further enhances closed-loop transactions and down the marketing funnel opportunities in the future. In-app revenue is growing double digits, making up a majority of search and feed revenues. In-app revenue together with new AI businesses will be respectable growth engines for Baidu in the years to come.

Our strong execution is also reflected by our results of increasing non-GAAP operating margin for Baidu Core by 16 points year-over-year and adjusted EBITDA margin for Baidu Core by 17 points. Such strong operating results from Baidu Core is an indication of Baidu’s prudent approach to investments and growing quality revenues. Over time, we believe the true measure of value creation is the ability to increase cash flow for our shareholders.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] First question comes from the line of Piyush from Goldman. Please go ahead.

Piyush MubayiGoldman Sachs — Analyst

Thank you, Robin and Herman, for taking my question. I really have one question centered around how your business has been recovering into the third quarter. You mentioned, Herman, that medical has started to come into its own which is very encouraging. Could you give us a sense of what percentage or some scale of how much it’s come back and how much further we can expand it to — expect it to come back in the coming quarters based on the guidance you’ve set for 3Q?

And related to the guidance and the medical is, you’ve talked about some of the other verticals where you are in the earlier stage of recovery, can you give us a feel for how long that might take to come back, and essentially, give us a feel for how the broader economy has been performing?

And I know you said one question only but there is a pronounced improvement in your gross margin in 2Q over the first quarter and versus the past, is that and the gains you’re seeing at the operating profit level sustainable? Thank you.

Herman YuChief Financial Officer

Hi, Piyush. Well, that’s a mouthful of questions here. Let me see what I can do. With regards to healthcare, as I mentioned, when you look at it on a year-over-year basis, we’re still down significantly double-digits. But when you look at how we’re recovering on a sequential basis, we come back pretty significantly. And we expect, at this current rate, healthcare should probably be as good as last year, probably sometime in Q3, given the current trajectory.

We’re also seeing some other verticals at the same trend and that’s why when you look at our guidance in Q3, you are seeing us doing better on a year-over-year basis than Q2 and Q2 is — assuming we hit midpoint and then Q2 is much better than Q1.

So I think on a whole the trend is right. And as I mentioned in the prepared remarks, given that — this COVID-19 pandemic, we have seen a second wave coming back to Beijing. So the assumption here is that we will continue to have smooth sailing and that we don’t have further waves to disrupt the economy, because part of our business relies on the fact that stores needs to be open so they’ll come to Baidu to buy traffic to their stores.

With regards to our gross margin and our operating margin, I think that you can probably expect that the savings that we had in the last few quarters, as we talked about this last year in May we promised you that we will go through our operations and actually go through and look at where should we put our investments and place our investments that would have higher ROIs.

We followed through six month after that and you saw, starting from Q4 last year that we had a pretty lean P&L. We’ve been going through with this strategy in Q1 and again in Q2, so you should expect us to continue into Q3 and Q4.

I would say that part of Q2 cost structure though is the fact that — several things to look at, for example, sales and marketing, that’s a function of whether we can actually spend light. If our revenue is coming hard, it probably would be hard for us to spend on our marketing whether it’s promotions or whether it’s trying to buy more app installation, because less smartphones are being sold.

So as the economy gets back, there’s more app installation that we could buy with higher — good ROIs we’re going to continue to buy. And then similarly, going into Q3, Q4, it was harder to do interviews especially when people can’t come into the office. But as China opens up, we’re going to be able to do that and we’re going to able to hire and go according to our budget.

So I would say that going from Q2 to Q3, you should expect our cost of sales and operating expenses, on a non-GAAP basis, for Baidu Core to increase probably 10 to — in the teens, I would say, that’s probably a good way to gauge this.

Piyush MubayiGoldman Sachs — Analyst

Thank you.

Herman YuChief Financial Officer

Thank you.

Operator

Thank you for the questions. Next questions comes from the line of Eddie Leung of Bank of America. Please go ahead.

Eddie LeungBofA Merrill Lynch — Analyst

Good morning guys. Just two questions. Number one, could you comment on your thought about the potential combination of Tencent and one of your competitors? Would that change the competitive landscape and how Baidu can address the potential changes?

And then number two, probably more a housekeeping question. You mentioned that the COVID situation in Beijing affected the second quarter core business. So just wondering, could help us to kind of like get a sense of the potential impact and how much exposure of the Core business to the advertisers in Beijing, for example? Thank you.

Dou ShenExecutive Vice President

Thank you for the question, Eddie. I’ll take the first one. So it is actually not new between Sogou and Tencent, right. So, they have been working together for a long while. I think it is not new in terms of the collaboration. So actually in the mobile era, so users usually remember each app by its key feature and Baidu app clearly has established the brand as the number one general search engine. So I think such brand awareness is very hard to duplicate.

And what’s more for Baidu, we have moved to the Baidu app strategy to build our ecosystem within the app. So with that actually, we already improved the user experience from the traditional general search engine. It’s not just for user to get information, but also help the users to experience the closed-loop experience to complete the tasks in their mind. They are not only for service but also even for shop online.

So the more we build our ecosystem and the more good features we can present to the users. So with that I think Baidu will keep leading the innovation in the search market and keep doing well.

Herman YuChief Financial Officer

Let me add to what Dou just said, Eddie. So, it’s important to understand the different product positioning, right? When you have — for example, WeChat is a social network. So the purpose of social network is to get people together, where you try to connect people with other people that are known. The purpose of search is not trying to connect people to people, it’s trying to connect people to a certain content, whether it’s text, whether it’s a photo, whether it’s a video.

So when you go, for example, into a social network, you have their newsfeed and what you want to do is, it’s usually trying to very short and you wanted to just kind of get a very quick update and you want to go a lot of various feeds. Whereas when you’re going to search, sometimes you’re interested in a topic as we mentioned in prepared remarks by Robin, you have people listening to live broadcasting for maybe an hour on a certain topic.

You’d want just very rich content. Usually it’s from whether it’s a social account, whether it’s from certain apps. And we have a Managed Page whether it’s on website. So, the more information you have on that specific content, the more deeper you could dive in, that person who is doing the search will feel more comfortable that they have well informed information.

So when you start building a lot of search functions in a social app, you might be damn good at search, but you will lose that social function. So, the question of whether Tencent wants to make their social product more search-oriented and search-centric and less social, because if they start doing that, then they leave the door open for someone to build a better search product. I mean for a better — someone to build better social product.

Eddie LeungBofA Merrill Lynch — Analyst

And then, on exposure to Beijing, perhaps?

Herman YuChief Financial Officer

Yeah. The exposure from Beijing, it’s not very significant to our overall revenue but it will have some because some of our advertisers are in the north part of China. So I would say probably it’s in the single digit rather than you know more significant amount.

Eddie LeungBofA Merrill Lynch — Analyst

Thank you, Herman and Dou.

Operator

Thank you for the questions. Next questions comes from the line of Alicia Yap of Citi. Please go ahead.

Alicia YapCitigroup Global Markets Asia Ltd. — Analyst

Dou and Juan [Phonetic], thanks for taking my questions. My questions is related to the revenue from the Managed Page which this quarter increased to 30%, right, of the core marketing revenue. Is there a timeframe that you anticipate older app revenues to be fully migrate to the 100% Managed Page if it’s feasible?

So out of the merchants that previously are on H5 website, what is the percentage of the merchants that already switch over to the Managed Page versus those yet to shift over? And then, just quickly follow up, can you describe the advertiser sentiment, do you feel that the attitude of the spending has dramatically changed or affected in the last two month in light of another layer of the U.S. and China tension? Thank you.

Herman YuChief Financial Officer

I will start with the first part. So, actually, in Robin’s opening remarks, he already mentioned about the percentage of the spending on the Managed Pages. So, some of the — in the beginning, for the Managed Pages, right, so our intention is to make the experience for the users safer and to get more true information.

So, earlier on, we were seeing more and more advertisers actually they start to use the Managed Page by themselves without our enforcement. So, this is because we are adding more and more features to the Managed Pages so they can significantly improve their ROI.

So, in terms of the number of advertisers adopting Managed Pages, it is even higher numbers because Managed Pages now can help this niche to easily to do business on our system — on our products. So that’s why we were seeing more and more advertisers. They are adopting Managed Pages by themselves. And I bet — I think with more features and more advertisers realizing the advantage of the Managed Pages, so we are going to — the rate for adaptation will be even higher or faster.

Dou ShenExecutive Vice President

Yeah. And let me add to that, Alicia. Your question was, do we have a set target for Managed Page. We don’t have a set target. I think as we mentioned many times, using our building blocks, the idea is that if we can get content on Baidu’s platform, we’ll have better user insight, we can provide better user experience, right.

So, the idea is not to have a 100% of our revenues from Managed Page, but to have it for Managed Page, to have it from Smart Mini Programs because that’s content and services from other apps, to have it from Baijiahao so that we could promote creators and publishers and so forth.

So obviously, the more of that the better, but because we are a search engine, we’re an open app, we want to also be able to search content that’s not on our platform so you have the World Wide Web. So, I think the goal is trying to have as much of the World Wide Web on our platform so that we can improve user experience, not just on Managed Page, and we’re seeing a lot of content coming over to Baidu platform since we’ve been focusing on this strengthening our mobile ecosystem.

With regards to advertiser sentiment on geopolitical tension, we think that currently our advertisers’ sentiment is more a function of the economy in China. It’s more of a function of the kind of policies we have allowing people to actually go to store, to the shops outside and so forth. So, as China opens up more, as people have more opportunity to run about, I think our business will come back. I don’t think right now geopolitical tension has a meaningful impact on our business so far.

Alicia YapCitigroup Global Markets Asia Ltd. — Analyst

Thank you, Herman. Thank you, Dou.

Dou ShenExecutive Vice President

Thank you.

Operator

Thank you for the questions. Next questions comes from the line of James Lee of Mizuho. Please go ahead.

James LeeMizuho Securities — Analyst

Great. Thanks for taking my questions. And Herman, I was wondering maybe you can comment on the Baidu App DAU decline sequentially. Is it more to — due to suspension of your app or is this more people returning back to work here? And just curious, are you taking any initiatives to drive DAU growth in the second half or do you feel you have the critical mass at this point in time?

And also secondly, regarding to SEC inquiry on iQIYI and its independent review. Just curious how involved is the Baidu management in this process and especially on the internal review side, such as selecting the advisor here to make sure it’s a credible and impartial process for this important matter? Thanks.

Robin LiCo-Founder, Chairman and Chief Executive Officer

Okay. So, James, let me answer the first question. I’ll answer in part and then I’ll turn over to Dou to answer the second part which is how do we improve our DAU growth and so forth. So, as you know, China was hit hard with COVID-19 in first quarter. I think the — we came to probably the trough of our economy and people were very stringent with social distancing in February and even going into March people were social distancing, and you could see that throughout China.

So, a lot of stores did not open up and so forth, so a lot of people were staying home. You didn’t have schools open. So, when you compare that — our DAU is reported in the third month of each quarter. So, when you compare March to June, obviously in June you see a lot of places in China opening up, a lot of store opening up, you see some of the schools opening up.

So, I think the big differentiation between March and June is the fact that people were going about outside of their house and as a result they have probably less time spent on their app. So, when you look at basically the top apps in China, QuestMobile is a good example, you can see that it’s not just Baidu App, it’s a pretty consistent trend with all the top apps that March was very high and going into June, you’re just going to have less traffic.

I think with the companies that just reported over the last few days, you’re seeing the same trend. With that, let me turn it over to Dou and talk about how — what we’re doing trying to improve DAU growth.

Dou ShenExecutive Vice President

Okay. So, we do have many approaches to work on to solve this issue, right. So as we said, we are adding more and more content and services to the app, right, so that we can increase the engagement between the users and our product. So, this will help us to get users staying more — longer and more frequent on this app.

And also — so we’re adding more features, not only content, but service, but also more new features to this product for a different group of users. So, yeah, now we are developing some specific products for the colleges. When they come back to universities, campus, they are going to have a chance to use our newer product. So, with that, I think — we already see the trend coming back, but for now as — because it’s in the summer break. So, we are going to see how our solutions are working or not in the near future.

Robin LiCo-Founder, Chairman and Chief Executive Officer

Yeah. And let me comment on the iQIYI SEC investigation. At Baidu, we have a zero tolerance for fraud. When there is a short-seller report issue against our subsidiary, especially one that’s quite autonomous, it is important to get an independent opinion. The audit committee of iQIYI stepped in and they summoned the internal audit as well as hiring independent external advisors.

This process is part of good corporate governance and we think this validation process is important to earn investors’ trust. Since I’m part of the parent company, I am not directly involved in the independent investigation and thus I am not in a position to comment on iQIYI situation specifically. Perhaps I can talk about my understanding of how the process usually works.

In addition to looking at short-seller report, it is customary for independent external advisors to also perform forensic procedures on the rest of the financial numbers, which means the process will take time. The fact that the SEC is involved, they may ask the independent external advisor questions and the independent external advisor may end up doing additional procedures.

With COVID-19 in the backdrop, one should expect this process to be longer than normal. In past cases without a pandemic, we have seen investigations lasting months and sometimes beyond a year. The positive side is that we have a very qualified independent external advisor looking into this situation.

Typically, if that evidence comes to light that there is reasonable doubt to believe a company is fraudulent and that their numbers are not reliable, then the Company’s auditor will pull their audit opinion and withdraw from the engagement.

Again, having an independent set of eyes reviewing this situation is meant to put the allegations to rest. At Baidu, we take — we will take action to ensure good corporate governance, if necessary, and operate with our interests in mind. Only this way will we be able to tap the capital markets in the future. I hope this answers your question.

Operator

Thank you for the questions. Next questions comes from the line of Tian Hou of T. H. Capital. Please go ahead. T. H. Capital, your line is now open, please ask your question. I’m sorry, I have to move on to the next question, it’s from Gregory Zhao from Barclays. Please go ahead.

Gregory ZhaoBarclays Capital Inc. — Analyst

Hi, good morning, management. Thanks for taking my question. My first one is about marketing or non-advertising services. So, as mentioned in the press release, for your AI, your cloud-related business, as well as the smart transportation become important revenue driver in the quarter. So, in the future, so let’s say a five-year or three-year horizon, do you think this non-advertising business or revenue can be kind of possible to exceed your current advertising revenue someday?

And a quick follow-up on your share repurchasing. So, the amount was raised from $1 billion to $3 billion. I know you have a rich onshore cash position in RMB, and you also recently finished the $1 billion debt offering. So, do you have plan to convert as RMB — more RMB into U.S. dollar for the buyback or issuing more debts [Phonetic] or other measures to raise the money for the buyback? Thank you.

Herman YuChief Financial Officer

Hi, Greg. Thanks for your questions. With regards to how significant our non-AI business or — our non-ad business can be, I think what it will do is it will become important growth driver for us. As you can see, our Baidu Core’s non-advertising piece, it’s getting bigger and bigger. It’s pretty significant now. And because of that size that we think there is potential to be really helping drive the overall growth of our business.

And we talked about, in my prepared remarks, that just the Cloud business alone, we’re talking about RMB2 billion this quarter. Obviously, when you add on the other businesses such as the Xiaodu speakers, you’re talking about smart transportation and so forth, the size is bigger than that.

With regard to our share purchase program, where we expand from $1 billion to $3 billion, we have several ways of getting U.S. dollars. Obviously, we just raised the bond earlier this year, a $1 billion. We also can do several things as you mentioned; one is to convert Renminbi into USD, and obviously, we will take advantage of that when the opportunity arrives.

The second thing we can also do is sell down our investments and we’ve been steadily doing that. We look at the current market prices and so forth and then we look at our cash needs — U.S. dollar cash needs and we’ll sell our investment down as appropriate, if we feel like there is no strategic need for previous investments. Thank you.

Operator

Thank you for the questions. We’ll move on to the next question, once again from Tian Hou of T.H. Capital. Please go ahead.

Tian HouT.H. Capital — Analyst

Good morning, Herman, Juan, Shen Dou and Robin. So, my question is related to your investments. So, if I look at your business, we can literally separate them as one part is the consumer facing, let’s say your three building blocks; and the other part is business-facing, that’s your Cloud, AI, Apollo. So I can imagine each of those area, you can do a great deal. So what’s the plan? What’s your investment plan in the second half or next year? And if you have to rank them, what is your priority to invest? Thank you.

Robin LiCo-Founder, Chairman and Chief Executive Officer

Tian, this is Robin. Let me try to answer your question. I think our consumer-facing businesses and business-facing businesses are all good business. They each have their own potential. On the consumer-facing ones, during the prepared remarks as well as the answers from Dou and Herman, you can see that there are still a lot things we can do, especially using technology to provider — to provide better content and services to our users and provide better conversion for our advertisers.

But for the business-facing opportunities, this sector as well grow apparently faster than the consumer facing ones, and we will continue to aggressively invest in areas we have picked. And these areas will grow year-after-year for many years, and we are leading in almost all the categories we decide to get in for the business-facing opportunities.

Dou ShenExecutive Vice President

Yeah. And let me just add to that, Tian. You talked about priorities. I think it’s been pretty clear, we’ve been very consistent with our priorities, when you look at our 2C business, it is in-app services, right. And then outside of our AI businesses, we talk about the three businesses that we have, and particular Cloud, it’s at a bigger scale, and it’s a huge market and we do have our advantage of having a leading AI capability.

So, three — the AI businesses in addition to the in-app services are our top priorities and I think among the AI businesses, I think they’re all good. They’re all growing nicely. And then I think cloud has a bigger scale, and that’s probably something I’ll put more emphasize on.

Operator

Thank you. In the interest of time, we have time for one questions. The last questions comes from Binnie Wong of HSBC. Please go ahead.

Binnie WongHSBC — Analyst

Hi. Good morning, management. Thank you for the time here. So, congrats on the earnings beat with a meaningful margin improvement. The question here is on the Smart Mini Program, right. Looking at our competitor’s strategy that this mini program and social network actually work nicely together to sustain the relationship with the users, and advertiser can actually feel it’s their private domain. So, how would that define — would change the advertising industry landscape, and then also our positioning in the Smart Mini Program?

And then a quick follow-up here is that, I recall, Robin, in your opening remarks, you mentioned that video is accounting for 70% of the feeds. So I wonder if you can discuss more about the pricing, because again your competitor mentioning that the shift from banner ads toward feeds has seen like a meaningful improvement in the pricing — so, meaningful increase in the pricing, I meant. So do you see this as also going to be one of our driver into the second half to see a faster revenue growth from here? Thank you.

Dou ShenExecutive Vice President

I think for the Smart Mini Program, so as Robin already mentioned, right, so we see the increase in terms of the MAU, monthly active users. Actually, if we talk about the time spent on the Smart Mini Programs, and so the growth is even much higher. So, it means that, OK, Smart Mini Programs is leading to heavy engagement between the users and the service providers.

So, we already see the numbers of transactions through the mini programs, and also the budget dollars using Smart Mini Program as the landing page for their campaigns. And also, the amount of the transactions, I mean in terms of the GMVs is also growing.

So, we see pretty good trends for the Smart Mini Programs in our ecosystem. And all this happens because it is providing better user experience to users, and so a good way to connect to the users and the service providers. So later on, we’re going to share more information and data about the Smart Mini Programs.

And then, with that, I will turn it to Robin for the second one.

Robin LiCo-Founder, Chairman and Chief Executive Officer

Yeah. On the video content for advertisers, it’s also very effective for our advertisers as well as users.

Dou ShenExecutive Vice President

I would add [Indecipherable] to the video app.

Robin LiCo-Founder, Chairman and Chief Executive Officer

And that it improves the conversion for many of our advertisers. Therefore, as you know, most of our advertisers were at budget performance-oriented. So the pricing for ads created with video content is generally higher than the average. Is that what you’re asking?

Operator

Thank you, management, for the reply. Binnie, do you have anything to add?

Binnie WongHSBC — Analyst

Oh yes. I was just asking, is that in terms of the pricing, because we have seen more video advertising. So thank you for the color on the conversion, but what about on the pricing side? Do you think we can also charge higher pricing with the video ads on the ECPM side from like — like say banner ads and then that should help us to be another — like the growth driver into second half?

Dou ShenExecutive Vice President

Yeah, the simple answer is yes, because the advertisers are mostly performance driven. When we can improve the conversion through video and also other means, the pricing will follow.

Operator

[Operator Closing Remarks]

Duration: 65 minutes

Call participants:

Juan LinDirector of Investor Relations

Robin LiCo-Founder, Chairman and Chief Executive Officer

Herman YuChief Financial Officer

Dou ShenExecutive Vice President

Piyush MubayiGoldman Sachs — Analyst

Eddie LeungBofA Merrill Lynch — Analyst

Alicia YapCitigroup Global Markets Asia Ltd. — Analyst

James LeeMizuho Securities — Analyst

Gregory ZhaoBarclays Capital Inc. — Analyst

Tian HouT.H. Capital — Analyst

Binnie WongHSBC — Analyst

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