BIDU earnings call for the period ending March 31, 2024.

Baidu (BIDU -1.78%)

Q1 2024 Earnings Call
May 16, 2024, 8:00 a.m. ET

Contents:
Prepared Remarks
Questions and Answers
Call Participants

Prepared Remarks:
Operator

Hello, and thank you for standing by for Baidu's first-quarter 2024
earnings conference call. At this time, all participants are in listen-only
mode. After management's prepared remarks, there will be a question-
and-answer session. Today's conference is being recorded.

If you have any objection, 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 Lin -- Director of Investor Relations

Hello, everyone, and welcome to Baidu's first-quarter 2024 earnings

conference call. Baidu's earnings release was distributed earlier today,
and you can find a copy on our IR website as well as on newswire
services. On the call today, we have Robin Li, our co-founder and CEO;
Rong Luo, our CFO; and Dou Shen, our EVP in charge of Baidu AI
Cloud Group ACG. 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. For detailed discussions
of these risks and uncertainties, please refer to our latest annual report
and other documents filed with the SEC and Hong Kong Stock
Exchange.

Baidu does not undertake any obligation to update any forward-looking

statements except as required under applicable law. Our earnings press
release and this call include discussions of certain unaudited non-GAAP
financial measures. Our press release contains a reconciliation of the
unaudited non-GAAP measures to the unaudited most directly
comparable GAAP measures and is available on our IR side at
ir.baidu.com. As a reminder, this conference is being recorded.
In addition, a webcast of this conference call will be available on Baidu's
IR website. I will now turn the call over to our CEO, Robin.

Robin Li -- Co-Founder and Chief Executive Officer

Hello, everyone. Our business continued to grow in the first quarter.

Baidu Core's total revenue increased by 4% year over year to RMB 23.8
billion, and the non-GAAP operating margin reached 23.5% an
improvement from a year ago. In particular, revenue growth from Baidu
AI cloud accelerated to 12% year over year in the quarter while
continuing to deliver operating profit on a non-GAAP basis.

2024 is the second year of our march on the GenAI path. As we solidify
our leadership position in foundation models, we are transforming the
company from an Internet-centric business to an AI-first business. Given
that ERNIE is the most powerful LLM in China, we are aggressively
pushing the envelope for both our 2C business and 2B business to adopt
ERNIE, to provide better user experience, to increase advertiser ROI, to
enable developers to write agents and applications to let customers enjoy
more effective and more efficient models. While we operate our legacy
business in a challenging environment and experience lower revenue
growth in the near term, we remain confident that AI will bring us
sustained growth in revenue and profit in the long run.

We expect our cloud business to accelerate and the loss of our Robotaxi
business to narrow for the rest of the year. We expect mobile business to
be soft in the near term and start to recover when GenAI becomes the
new core of our existing products next year. Looking beyond the near
term, GenAI and foundation models will bring us tremendous
opportunities, offering a new innovation cycle. Enterprise and individual
developers have swiftly transitioned from the fear of missing out on this
opportunity to leveraging foundation models like ERNIE to build AI
applications.

Baidu is well prepared to benefit greatly from this technology

transformation. We believe one of the most important long-term
opportunities is model inferencing which will be a key growth driver for
our AI cloud revenue in the future. In April, ERNIE handled about 200
million API costs daily, a significant jump from around 50 million in
December last year. This considerable growth indicates the increasing
adoption of ERNIE and points to strong future revenue potential from
model inferencing.

To accelerate the adoption of ERNIE, we are building a vibrant and

healthy ecosystem around it. We believe ERNIE ecosystem will over
time, contain millions of applications, especially agents developed by a
diverse community of enterprise and individual developers across
various industries meeting a wide range of needs in people's everyday
life and work. Our large user base in mobile and desktop will enable us
to distribute these agents and apps to whoever needs it, whenever
appropriate. The anchor of this ecosystem is the ERNIE family of
models, including our flagship models, ERNIE 3.5 and ERNIE 4.0., as
well as the lightweight models we introduced in Q1.

Throughout the quarter, we continued improving ERNIE's efficiency,

leveraging our unique proprietary four-layer AI architecture and our
strong ability in end-to-end optimization. For example, ERNIE has
increased its training efficiency to 5.1 times, and its inference cost is
only about 1% compared to the March 2023 version. To make ERNIE
increasingly accessible and affordable, we now offer three sets of tools
on our MaaS platform. Last quarter, we introduced AppBuilder and
ModelBuilder for enterprise and individual developers to develop apps
and build models.

In April, we took a step further by introducing AgentBuilder, a platform

encompassing tools for easily creating AI agents. This is because we
envision AI agent will become one of the most important forms of
applications powered by GenAI and foundation models. With the ability
to use natural language as the programming language, developers will be
able to build AI agents without the need to write a single line of code.
Currently, new ERNIE agents are created on our platform every day, and
together, they are distributed millions of times per day, serving a wide
range of verticals including education, legal, B2B, travel, and more.

All these initiatives derive from our extensive experience and insights in
building and running ERNIE, as well as developing AI native
applications. We believe that ERNIE's true value will only be realized
when numerous applications built on top of it are widely used by users
and customers. I'm pleased to note that ERNIE is extending its influence
across smart devices through API. Last quarter, we proudly announced
the partnerships with renowned smartphone brands such as Samsung
China and Honor, assisting them in enhancing their native app
experiences using ERNIE.

This quarter, we are excited to extend our collaboration with more

leading smartphone makers such as Oppo, Vivo, and Xiaomi, who
leveraged ERNIE APIs to elevate user experiences. Moreover, our reach
now extends beyond smartphones to include PCs and electric vehicles.
ERNIE APIs are now utilized by Lenovo, a top PC brand, to empower
its AI assistant in the default browser of its PCs. Nio, China's leading
smart EV manufacturer began using the ERNIE API to enhance the
encamping experiences for its vehicles.

This broadening of our partnerships into various smart devices opens up

ample opportunities for large-scale user adoption, paving the way for
ERNIE-enabled applications to become the entry point into the world of
generative AI. In addition to the brands I just mentioned, we have also
acquired many notable new customers such as Trip.com, [Inaudible] and
Singapore Tourism Board. Another long-term opportunity is in our
consumer-facing business. We have been reconstructing all of our
consumer-facing products.

Our goal is to build our proprietary AI-native applications, potentially

killer apps for the ERNIE ecosystem. By doing so, we should be able to
generate new growth opportunities. For example, after rebuilding with
GenAI and LLMs, Baidu Wenku, our one-stop shop for document
creation, experienced double-digit year-over-year increase in paying
users in the first quarter. Penetration of ERNIE for Baidu search and feed
took longer than expected because the user base is in the order of
hundreds of millions, and use cases are generally very sensitive to cost
and response time.

We need a wide range of ERNIE models in different sizes, optimized for

different scenarios for best price performance ratio. After trial and error
for a few quarters, we are firming up our strategy. Going forward, we
plan to accelerate the launch and adoption of new product features such
as multimodal generative search results, multi-round interaction in
search, and more recently, distribution of ERNIE agents. We are at the
forefront globally of this unique technological change, and we are
confident in our abilities to innovate.
By definition, we are operating in uncharted territory. As always, we
want to be flexible to make timely adjustments with evolving consumer
needs and how users incorporate new product features in their day-to-
day life. Now, let me review the key highlights for each business for the
first quarter. In the first quarter, AI cloud revenue reached RMB 4.7
billion, up 12% year over year, and continued to generate operating
profit on a non-GAAP basis.

The revenue growth was mainly driven by GenAI and foundation

models. In the first quarter, such revenue accounted for 6.9% of total AI
cloud revenue. Currently, the majority of this revenue is from model
training, but revenue from model inferencing has been growing quickly.
We believe revenue from GenAI and foundation models will continue to
rise as customer adoption improves.

For instance, within our internal cloud revenue Baidu Core, other
business groups, such as mobile ecosystem groups and intelligent
driving group are increasingly leveraging the power of ERNIE. As a
result, 15% of their payments to the AI cloud group are allocated to
GenAI and foundation model. Enterprises choose Baidu AI cloud to train
and host their models because they believe we have the most powerful
and efficient AI infrastructure for model training and inferencing in
China. Compared to our peers, we help enterprises to train model at all
sizes on our AI cloud while also reducing model inferencing cost.

This is primarily attributable to two reasons. Number one, our self-

developed four-layer AI architecture has allowed us to innovate and
optimize at each layer, enabling continuous efficiency gain. And number
two, we have superior capabilities and insights in GPU cluster
management. Leveraging our technical expertise, we can now integrate
GPUs from various vendors into a unified computing cluster to train an
LLM.

Our platform has demonstrated very high efficiency with this setup on a
GPU cluster that is composed of hundreds, even thousands of GPUs.
This is an important breakthrough because of the limited availability of
imported GPUs. Another growth driver for AI cloud is cross-selling of
our CPU cloud services to our GPU cloud customers. With the high
recognition of our GPU cloud among existing and new customers, we
have seen customers increasingly switch more and more of their CPU
cloud usage to Baidu.

As I mentioned earlier on the MaaS side, we took many initiatives to

make the ERNIE family of models increasingly affordable and efficient
than open-sourced models. Here are some highlights for this quarter. We
have expanded and enhanced our ERNIE model portfolio, offering a
total of three lightweight LLMs and two test-specific LLMs,
ModelBuilder. This model helps enterprises and professional developers
balance model performance with cost in ERNIE to reach a broader
audience for model development.

In addition, our mixture of experts, or MOE approach, can position a

user query into distinct tasks, assigning the most suitable models to
handle each task and use ERNIE 3.5 or 4.0 only for the most complex
tasks. This approach allows for faster responses and lower inferencing
cost, while maintaining similar performance level to using more
advanced models. Last quarter, we introduced AppBuilder to developers.
Throughout the quarter, we continued in reaching and refining the tools
for AppBuilder, enabling developers to easily create AI-native apps in
just three steps on our platform.

With the launch of AgentBuilder in April, anyone can create an AI agent

with just a few sentences on Baidu. Overall, we remain confident in the
strong for our AI cloud revenue, and we aim to continue generating
operating profit on a non-GAAP basis. Mobile ecosystem has continued
to deliver healthy margins and strong free cash flow. In the first quarter,
our online marketing revenue grew by 3% year over year.

Revenue growth was impacted by a challenging macro environment. At

the same time, we have been pushing hard to transform the user
experience from a traditional mobile product to a generative AI
experience. This transition is ongoing and monetization has not yet
started. We also continued to leverage ERNIE to reconstruct our
monetization system for better conversion and efficiency gain.

During the quarter, we further enhanced our ad-targeting capabilities and

scaled up real-time ad generation. These efforts resulted in an
improvement in conversion and generated incremental revenue. ERNIE
agents stand for a long-term opportunity for monetization upgrade, too.
Recently, we have seen, not only brand advertisers, but also SMEs
gradually adopting ERNIE agents.

We have designed this agents for SMEs as virtual storefront and service
desk, serving consumers around the clock. We believe that the use of
agents can improve SME's sell-through rate, enhance their productivity,
and expand their reach among users. This will be an important step for
us to transform our traditional CPC model to a significantly more
efficient CPS model and, meanwhile, enhancing user experience on
Baidu. Going forward, I believe greater opportunities will arise from AI-
native apps, particularly for GenAI-enabled Baidu Search.

GenAI complements traditional search, expanding the total addressable

market. Since Q2 last year, we have been reconstructing Baidu Search
with ERNIE. Now, more and more search results are generated by
ERNIE in a growing variety of formats like text, image, third-party
links, point of interest, and citation. These results are usually produced
in real time to directly address users' questions and problems.

By doing so, we have improved and will continue to enhance the search
experience which is crucial for increasing the usage of Baidu Search.
While user feedback on this product and feature renovations has been
encouraging, it is important to note that we are still in the early stages of
reconstructing Baidu Search with ERNIE. This process will likely take
time given that Baidu Search has a history spanning over 20 years, and
user behavior will evolve gradually. Overall, I believe that search will be
one most likely killer app in the GenAI era, and we are on the right
trajectory to capitalize on this potential.

I mentioned ERNIE agents as an important opportunity for monetization.

With newly introduced AgentBuilder, creators, publishers, and service
providers will find it increasingly easy to build agents on Baidu. This
initiative is key to enhancing Baidu's content offerings and ultimately
provide an AI-native user experience on our platform. Moving on to
intelligent driving.

We believe Apollo Go stands as the largest autonomous ride-hailing

service provider globally, measured by the ride provided to the public. In
the first quarter, Apollo Go offered about 826,000 rides to the public,
marking a 25% year-over-year increase. In April, the total number of
rides surpassed 6 million. We are continuing to move forward -- move
toward achieving unit economics breakeven for Apollo Go.

To make this happen, our strategy is to reach UE breakeven in key

regions and then replicate the success in other regions. To reach the
regional breakeven point, we are focusing on scaling up the operations
of fully driverless ride-hailing service and enhance the utilization of each
vehicle. Wuhan, Apollo Go's largest regional operations, is progressing
toward this goal. In Wuhan, Apollo Go is gradually becoming an integral
part of the city's transportation network.

Apollo Go more than doubled its operational area from a quarter ago,
serving a population of over 7 million and achieving the remarkable
milestone of crossing Yangtze River with fully driverless vehicles as part
of its expansion. Moreover, our vehicles started to operate 24/7 in
Wuhan in early March, further expanding Apollo Go's reach and
improving the vehicle utilization. All these progresses have led to the
rapid growth of fully driverless rides. In Q1, the rides provided by fully
driverless vehicles accounted for over 55% of total rides in Wuhan,
which is up from 45% in the fourth quarter last year.

This figure continues to rise, exceeding 70% in April, with expectations

of sustained rapid growth ahead and reaching 100% in the coming
quarters. Looking ahead, we plan to deploy RT6, our sixth generation
Robotaxi in our Wuhan Apollo Go operation this year which will
significantly reduce hardware depreciation costs. With the scaling of
driverless operations and continuous improvement of cost structure, we
believe Apollo Go will achieve operational UE breakeven in Wuhan in
the near future. As Apollo Go continues to progress, we will closely
monitor efficiency and persist in optimizing the operation of our overall
intelligent driving business.

On auto solutions, our Apollo self-driving for ASD technology continue

to evolve. I mentioned in our last earnings call that Apollo is a global
pioneer in the use of visual foundation models in autonomous driving.
Now, our state-of-the-art autonomous driving solution, solely reliant on
vision, is made available to OEMs. ASD can effectively navigate
complex, urban environments across over 100 cities in China with plans
to expand in to hundreds of cities in the coming months.
This allows us to make advanced autonomous driving attainable across a
broad spectrum of passenger vehicles from high-end to economy models
priced as low as 150,000 RMB, and it serves as another proof of our
technology leadership. With that, let me turn the call over to Rong to go
through the financial results.

Rong Luo -- Co-Founder and Chief Executive Officer

Thank you, Robin. Now, let me walk through the details of our first-
quarter financial results. Total revenues were RMB 31.5 billion,
increasing 1% year over year. Revenue from Baidu Core was RMB 23.8
billion, increasing 4% year over year.

Baidu Core's online marketing revenue was RMB 17 billion, 1-7,

increasing 3% year over year. Baidu Core's non-online marketing
revenue was RMB 6.8 billion, up 6% year over year, mainly driven by
the AI cloud business. Revenue for iQIYI was RMB 7.9 billion,
decreasing 5% year over year. Cost of revenue was RMB 15.3 billion,
increasing 1% year over year, primarily due to an increase in traffic
acquisition costs and costs related to AI cloud business partially offset
by the decrease in content costs.

Operating expenses were RMB 10.7 billion, decreasing 2% year over

year, primarily due to a decrease in personnel-related expenses and other
R&D expenditures, partially offset by the increase in server depreciation
expenses and server custody fees, which support GenAI research and
development inputs. Baidu Core's operating expenses were RMB 9.4
billion, decreasing 1% year over year. Baidu Core SG&A expenses were
RMB 4.5 billion, decreasing 1% year over year. SG&A accounting for
19%, 1-9, of Baidu Core's revenue in this quarter compared to 20% in
the same period last year.

Baidu Core R&D expenses were RMB 4.9 billion, decreasing 1% year
over year. R&D accounting for 21% of Baidu Core's revenue in this
quarter compared to 22% in the same period last year. Operating income
was RMB 5.5 billion. Baidu Core's operating income was RMB 4.5
billion, and Baidu Core's operating margin was 19%, 1-9, and non-
GAAP operating income was RMB 6.7 billion.
Non-GAAP Baidu Core operating income was RMB 5.6 billion, and
non-GAAP Baidu Core operating margin was 23.5%. Total other income
net was RMB 2 billion, decreasing 52% year over year, primarily due to
a decrease in favorable gain from long-term investments, partially offset
by the increase in net foreign exchange gain. Income tax expenses was
RMB 883 million, compared to RMB 1.2 billion in the same period last
year. Net income attributable to Baidu was RMB 5.4 billion, and diluted
earnings per ADS were RMB 14.91.

Net income attributable to Baidu Core RMB 5.2 billion, and net margin
for Baidu Core was 22%. Non-GAAP net income attributable to Baidu
was RMB 7 billion. Non-GAAP diluted earnings per ADS was RMB
19.91. Non-GAAP net income attributable to Baidu Core was RMB 6.6
billion, and non-GAAP net margin for Baidu Core was 28%.

As of March 31st, 2024, cash, cash equivalents, restricted cash, and

short-term investments was RMB 191.8 billion. And cash, cash
equivalents, restricted cash, and short-term investments excluding iQIYI
were RMB 185.8 billion. Free cash flow was RMB 4.2 billion. And free
cash flow excluding iQIYI was RMB 3.3 billion.

Finally, Baidu Core had approximately 36,000 employees as of March

31st, 2024. With that, operator, let's now open the call to questions.

Questions & Answers:

Operator

Ladies and gentlemen, we will now begin the question-and-answer

session. [Operator instructions] Your first question comes from Alicia
Yap with Citigroup.

Alicia Yap -- Citi -- Analyst

Hi, thank you. Good evening Robin, Rong, and also -- sorry. So, thank
you for taking my questions. I wanted to ask, were you able to quantify
how has AI technology been helping Baidu to improve app monetization
rate? Can management share some feedback on those advertisers who
have adopted this system? In what kind of areas do they see the largest
improvements, and are there any areas that can be further enhanced?
Thank you.

Robin Li -- Co-Founder and Chief Executive Officer

Hi, Alicia. This is Robin. As you know, our monetization system was the
first to benefit from GenAI, generating several hundred million RMB per
quarter in incremental revenue. Since the second half of last year, we
have been utilizing ERNIE to upgrade our monetization system,
enhancing various aspects of ad technology.

This includes -- including adding capabilities, refining the options

system, automating creative generation, and add strategy formation for
our advertisers. Advertisers have been seeing better conversion and more
sales leads. This improvement has motivated advertisers to increase their
spending with Baidu. So, in the first quarter, AI-related incremental
advertising revenue grew on a quarter-over-quarter basis, and we expect
this trend to continue.

The incremental revenue has helped us mitigate the broader macro

weakness and also bought us some time to reconstruct our user product
with ERNIE. As I emphasized in my opening remarks, we believe
ERNIE agent offers a significant long-term opportunity for our online
marketing business. Agents function as virtual stores or domains.
Advertisers can establish their online presence and interact with potential
customers using natural language through multi-round conversations.

With the introduction of AgentBuilder, advertisers can easily create

customized ERNIE agents. When advertisers express their intentions to
these agents, they can more effectively achieve their goals, whether it's
helping potential customers understand their products or improving
customer service quality. Agents can also help enrich our content
offering and improve user experience on Baidu. While still in early
stage, ERNIE agents have helped some advertisers achieve better ROIs.

For example, we have a customer in online education. They used

AgentBuilder to create its AI agent, injecting it with key insights like
product introduction and subject matter expertise, while continually
providing feedback for refinement. This agent has significantly enhanced
the company's online customer service by offering round the clock high-
quality consultations. The adoption of ERNIE agent led to a 20%
increase in ad conversion rate for this online education company.

I think this is just the beginning. We believe agent will be a major form
of content and services in the new AI era. We will continue to improve
the capabilities of ERNIE Agent. Agents will not only elevate user
experience, both conversion and ROI for advertisers, but also, over time,
foster increase in transactions directly generated on our platform.

This shift should help us to transform our tradition CPC model into a
more efficient CPS model. Thank you.

Operator

Your next question comes from Gary Yu with Morgan Stanley.

Gary Yu -- Morgan Stanley -- Analyst

Hi. Thank you, management, for the opportunity to ask questions. I have
a question regarding AI cloud business. How has the price cut initiative
by some of your peer companies affected Baidu AI cloud business, and
how should we think about the cloud revenue profitability as
competition heats up, and also how should we -- what should be the
sustainable level of cloud growth outlook going forward? Thank you.

Dou Shen -- Executive Vice President, AI Cloud Group ACG

Yeah, Gary. This is Dou. As we have already mentioned, GenAI and

foundation models are transforming the cloud industry from general
purpose computing to AI computing. So, this shift is reshaping the
competitive landscape within the cloud industry, presenting us with the
valuable opportunity to establish ourselves as a leader in AI cloud.

We believe we offer China's most efficient AI infrastructure and most

advanced MaaS platform for model training and inference. As a result,
more and more enterprises are choosing us for model training, fine-
tuning, and AI-native app development on our public cloud. This
increasing demand has significantly boosted our AI cloud revenue.
Actually, since the second quarter, the second half of last year, our AI
cloud revenue growth has started to accelerate from a year-over-year
decline in the third quarter to an 11% increase in the fourth quarter last
year, and then further accelerated to 12% in the first quarter this year.

The revenue acceleration was supported by two main factors: the

incremental revenue directly generated by GenAI and foundation
models, and also the new opportunities they provide to our legacy cloud
business. As Robin just mentioned, in the first quarter of this year,
revenue from GenAI and foundation models accounts for 6.9 of our AI
cloud revenue. And then our traditional CPU cloud businesses were
capitalizing on the opportunities presented by GenAI and foundation
models. Both factors were important growth drivers of our AI cloud.

On a separate note, while the smart transportation business remained

subdued, its impact on overall AI cloud business in Q1 was substantially
smaller than the previous quarters. So, overall, we expect our AI cloud to
continue benefiting from the trend to maintain strong revenue growth
momentum in the upcoming quarters. On the profit side, Baidu AI cloud
continued to generate non-GAAP operating profit as we have seen in
previous quarters. We are committed to sustainable and healthy revenue
growth.

During the quarter, we maintained our focus on achieving high-quality

revenue growth by scaling down low-margin business. Regarding the
business of GenAI and foundation models, the market is still at a very
early stage, so our focus remains on educating the market and
broadening our footprint across more enterprises. Looking to the long
run, we expect the normalized margin for GenAI and foundational
models related business to improve further and to be higher than our
traditional cloud business. Regarding the change of pricing policies of
some competitors that you just mentioned, it is actually pretty common
for cloud vendors to adjust their pricing for certain products.

This is a trend we have observed multiple times in the past. Given that
our cloud offering has expanded beyond traditional CPU cloud to a high-
value AI product and services, the industry changes on CPU cloud
pricing has a minimum impact of the development of our AI cloud.
Actually for cloud platform services, by leveraging our unique
proprietary four-layer AI architecture and our strong ability in end-to-
end automation, we have lowered ERNIE's inference cost to only 1%
over the variant in March last year. This May, ERNIE handles about 200
million API calls or approximately 250 billion tokens daily.

We are confident that ERNIE's expanding adoption will continue to

enhance its performance, boosting efficiency, and then further reduce
costs. It's also important to evaluate price and performance ratio for
different models at different workloads, rather than just focusing solely
on some superficial prices. We believe our state-of-the-art AI
infrastructure and advanced MaaS platform delivers the best value to our
customers. Looking forward, leveraging our strong AI capabilities, we
aim to continuously attract new customers and encourage existing ones
to increase their spending on Baidu AI cloud.

At the same time, we aim to consistently generate positive non-GAAP

operating profit. Thank you, Gary.

Operator

Your next question comes from Alex Yao with JPMorgan.

Alex Yao -- JPMorgan Chase and Company -- Analyst

Hi, good evening, management, and thank you for taking our question.
Given the chip shortage in China, how does Baidu maintain its
commitment to deliver differentiated value while enhancing its leading
advantage in LLM technology in China? Thank you.

Robin Li -- Co-Founder and Chief Executive Officer

Hi, Alex. We do think very differently in this aspect. We are taking an

application-driven approach for our AI push. For example, solving all
the high school math problems using the most advanced LLM may not
be the highest priority at this time, while generating convincing reasons
for users to buy the right products is more important in a lot of
applications.

With that in mind, we are taking advantage of our unique four-layer AI

tech stack to optimize the cost and performance of ERNIE models, and
we make sure customers and developers can easily build applications
using tools like AgentBuilder, AppBuilder, and ModelBuilder. For the
AI infrastructure layer, a key factor contributing to our high efficiency in
model training and inference is our superior capability in GPU cluster
management. We have recently made a breakthrough by integrating
GPUs from different vendors into one large scale, unified computing
cluster, allowing us to use less-advanced chips for highly effective model
training and inference. Our deep learning framework, PaddlePaddle, has
been through continuous innovation and enhancement, helped reduce the
cost of model training and inferencing on a constant basis.

PaddlePaddle is compatible with over 50 different chips, many

domestically designed, and the developer community has grown to 13
million. With ERNIE 3.5 and ERNIE 4.0 remain to be the flagship
models for sophisticated tasks, we're making ERNIE more accessible
and affordable by launching lightweight LLMs, introducing a toolkits for
model development and app development, applying MOE approach for
model inference for better performance and lower cost. With our
application-driven mindset, we have used ERNIE extensively to
renovate our own products, and we have gained experience and insights
in training and using ERNIE, as well as developing AI-native
applications on it. We're making all these capabilities available to our
customers and developers.

With all these efforts, we are fostering a vibrant and healthy ecosystem
around ERNIE. We can see that we are actually taking a holistic
approach to developing GenAI and LLM, which is very different from
some of our competitors. Our reserve and access to the chips on the
market should be sufficient for us to support millions of AI applications
in the future. And in the long run, I think China will form an ecosystem
of its own, probably with less powerful chips but most efficient
homegrown software stack.

There is ample room for innovation in the application layer, model layer,
and framework layer. With ourselves developing a four-layer AI
infrastructure, as well as our strong R&D team, our dedication to AI and
our application-driven approach in building an ecosystem around
ERNIE, I'm quite confident that Baidu will stand as a leader in China's
AI ecosystem in the long term. Thank you.

Operator
Your next question comes from Lincoln Kong with Goldman Sachs.

Lincoln Kong -- Goldman Sachs -- Analyst

Thank you, management, for taking my question. My question is about

the advertising business. So, what's the major drag for the advertising
growth if we compare it with our peers? So, what are the trends we have
seen for advertising budgets and advertiser sentiment, especially into
second quarter April and May? How should we think about normalized
advertising growth for 2024? Thank you.

Robin Li -- Co-Founder and Chief Executive Officer

Yeah. You know, our online marketing revenue grew by 3% year over
year in the first quarter. While traditional search is maturing, we are
working hard to renovate the user experience with GenAI. Right now,
about 11% of our search result pages are filled with generated results.

These results provide more accurate, better organized, and direct

answers to users' questions and, in some cases, enable users to do things
they could not do before. We have not started the monetization of those
GenAI results, so it will take some time for revenue to catch up. And the
weak macro also contributed to the softness of our ad business. Our
advertisers come from a wide range of industries with the majority being
SMEs.

This makes our advertising revenue highly sensitive to the macro

environment, particularly to the offline economy. In the first quarter,
advertiser sentiment in some verticals, such as real estate and
franchising, remained weak. Specifically in the real estate industry, not
only was ad spending from developers and agencies muted, but the
impact also extended to both upstream and downstream sectors. For
example, energy, chemicals, machinery, building materials for upstream
and home renovation, furniture, which is kind of downstream, all saw
constrained ad spending on our platform.

Also, many SMEs in offline sectors need more time to recover as they
have been hit hard in the past few years. As we enter the second quarter,
we have not seen improvement in advertiser sentiment. Given the limited
visibility for sentiment improvement and paired with tough comps in Q2,
our online marketing revenue should remain fundamentally solid, but
from a growth perspective, soft over the next few quarters. Beyond the
near-term challenges, we expect online marketing to remain a bread-and-
butter business for Baidu for the foreseeable future.

Search is one of the most popular apps in the internet age, and Baidu
remains the largest search engine in China with close to 700 million
MAUs. Search will likely be one of the killer apps in the age of GenAI.
Technology innovation will enable us to better engage users with
developers and merchants, directly connect users' intentions with the
most relevant product and service offering in more natural ways. Yeah.

Thank you.

Operator

Your next question comes from Thomas Chong with Jefferies.

Thomas Chong -- Jefferies -- Analyst

Hi, good evening. Thanks management for taking my questions. My

question is about how much more room do we see in cost cutting?
Previously, you mentioned there will be a lag between the investment
and AI revenue contribution. How should we look at margin trends in
2024 if you intend to expand your AI offering? Thank you.

Rong Luo -- Co-Founder and Chief Executive Officer

Hi, Thomas. Thanks so much for your question. I think our macro
challenges are still weighing on our marketing businesses, but we are
confident that there still will be some ways for us to continue optimizing
the operational efficiency. We will stringently manage our cost expenses
for each businesses, and we will take some further steps as necessary,
including we'll try to streamline the organization structures to enhance
the agility and support strategy flexibility.

And we also will reallocate resources to prioritize the key structure

areas. If I take a look into our businesses, for mobile ecosystem, I think
we can still manage the costs and expenses. So, mobile ecosystem group
continues to remain strongly profitable and cash-flow positive. For AI
cloud, as Dou just mentioned, we will continue to phase out low-margin
businesses and products, so we can continue generating the operating
profits and margins on a non-GAAP basis.

If we're looking to longer term, the normalized margin for the GenAI
related cloud businesses should be higher than the legacy cloud
businesses. For other businesses, we aim to reduce our loss, as we talked
about in the past few quarters, particularly our intelligent driving
business with more operational efficiency gains and UI improvements
for Robotaxi. Many investors ask me how our investments in ERNIE
will impact net margins. In fact, our reinvestments are mainly related to
capex for model training and inference.

In 2023, we made a large purchase which has arrived at different times

and the different depreciation start dates. While the annualized
depreciation expenses will be available in the whole year 2024, the
impact on our overall cost expenses and quarterly earnings is quite
predictable and manageable. The depreciation expenses book under
R&D expenses for computing power use and training, and the cost of
revenue for computing power reduced for model inference and business
expenses. In the first quarter, we can see that Baidu Core's non-GAAP
R&D and the cost of revenue both increased very slightly, while non-
GAAP operating margin actually we have expanded to 23.5% due to
disciplined spending on other items such as SG&A.

We believe that the chips we have in hand are sufficient to support

training of ERNIE for the next one or two years. And because of the
limited availability of high-performance chips in China in this year,
2024, we expect our capex to be smaller versus last year. In conclusion,
the investments in GenAI and large language models will have a
manageable impact on the near-term margins, and with our monetization
of earnings already taking off, we expect that more and more revenue
and profit will be generated from that kind of business, for both mobile
ecosystem and AI cloud. Overall, we believe that high-quality growth
and investment should be very balanced.

For many years now, we have delivered a solid track record of top-line
growth with very resolute cost discipline, and we intend to continue
building our future on this kind of business. Thank you so much.
Operator

Your next question comes from [Inaudible] with UBS.

Unknown speaker

Good evening. Thanks, management, for taking our question. My

question is about shareholder return. So, how about should we think
about the execution pace of the current 5 billion buyback program in
addition to your current buyback program? Should we expect other
diversified approach to improve shareholder return? Thank you.

Robin Li -- Co-Founder and Chief Executive Officer

Yeah. Thanks so much for your questions. I think we highly value our
shareholders, and we have been making efforts to increase the
shareholder returns. We have consistently repurchased our shares from
the market over the past four years, averaging around $1 billion
annually.

In total, we have allocated around 37% of our free cash flow toward the
share buyback progress. I think during these period and going forward,
we will continue to buy back more shares from the market as we believe
in our long-term growth opportunities, and we are very committed to the
shareholder returns. And in addition, we have utilized our current share
repurchase program to prevent any significant increase in the total
outstanding share count, aiming to reduce the potential dilution of our
shareholders' economic stake in Baidu. In the year 2023, you can see that
our total number of shares outstanding was flat year over year compared
to a 1.2% increase in the year 2022 and a 3.2% increase in the year 2021.

In this quarter, the total shares outstanding began to decrease. We can see
that it has been declining by 0.5% as compared to the prior quarters. We
are adopting a strategy of sustainable and recurring share buyback
programs for the open market and, at the same time, we are taking into
consideration the opportunities ahead of us. Now, we are facing a huge
opportunity in GenAI and foundation models, and we have structured a
concrete plan to capitalize it.
So, we want to have the flexibility to invest as we consider necessary
and in the best interests of long-term value to the shareholders.
Furthermore, we believe that the most effective way to create value for
shareholders is by building strong base fundamentals. Our core
marketing business remains steady, and we believe that AI will help us
to build another growth engine over time. Thank you so much for your
question.

Operator

Your next question comes from Miranda Zhuang with BofA Securities.

Miranda Zhuang -- Bank of America Merrill Lynch -- Analyst

Thank you. Good evening, management. Thanks for taking my question.

My question is about Robotaxi.

So, can management share more updates on the Robotaxi initiatives and
the geographic coverage for this year? I think previously you'd
mentioned that Apollo Go will achieve operating UE breakeven in
Wuhan in the near future. I want to understand what's the logic behind
the efforts to continue to improve the UE. What's the projected size of
the vehicle fleet for this year, and how will it potentially impact the cost?
Thanks.

Robin Li -- Co-Founder and Chief Executive Officer

Sure, Miranda. Let me give you some more color on the Robotaxi
business. In 2023, Apollo Go made significant progress in improving the
regional unit economics in key cities. Let me use Wuhan, Apollo Go's
largest operation, to explain how we achieved that.

We kicked-off Apollo Go's commercial operations in Wuhan back in

2022. Since then, we've witnessed a consistent enhancement in
operational UE, which can be attributed to the expanding scale of
driverless operations and decreasing cost per vehicle. Regarding scale
expansion, our vehicle fleet has been steadily growing. Compared to one
year ago, our fully driverless fleet in Wuhan has grown threefold,
reaching about 300 vehicles today.
Meanwhile, both the operational area and service hours for our fully
driverless operations have been consistently expanding, thanks to the
increasing recognition of our autonomous driving technology by the
local government. The operational coverage area for our fully driverless
ride-hailing service increased by eightfold from a year ago, now
covering over 7 million people in Wuhan. Apollo Go's operational hours
also gradually expanded from only the off-peak hours in the beginning to
adding peak hours to its operations and eventually extending to 24/7 in
March of this year. The scale expansion resulted in a consistent
improvement of UE in terms of revenue.

Both daily rides per vehicle and distance per ride have been growing.
When it comes to cost, the majority is labor cost and hardware
expenditures. We have been demonstrating consistent track record of
safe operations, which helps us to increase deployment of fully
driverless ride-hailing operations. In April, the proportion of fully
driverless orders rose to 70%.

That's up from only 10% in August 2022 and 45% Q4 of last year. We
expect this figure to reach 100% in the coming quarters, thereby
enabling us to minimize the cost related to safety officers. In addition to
lowering the labor cost, we are steadfast in driving down hardware costs.
The mass production and timeline of RT6, our sixth-generation
Robotaxi, remains on track.

Adopting a battery swapping solution, the mass production price for RT6
excluding battery is below $30,000. We will use RT6 as the primary
vehicle in the future fleet expansion, and it should help to significantly
reduce the hardware depreciation cost for each vehicle, and further
improving our UE and bringing us closer to profitability. Looking to this
quarter, we plan to expand the fully driverless fleet of our Wuhan
operation to 1,000 vehicles by the end of the year, more than tripling
from the end of last year. Our focus remains on improving regional UE
and narrowing the losses for Apollo Go business.

With continued improvement in operational efficiency and cost

reduction, we believe Apollo Go will achieve operational UE breakeven
in Wuhan first. And once that's achieved, we can scale up the operation
quickly. Thank you.
Operator

Ladies and gentlemen, that does conclude our conference for today.
[Operator signoff]

Duration: 0 minutes

Call participants:
Juan Lin -- Director of Investor Relations

Robin Li -- Co-Founder and Chief Executive Officer

Rong Luo -- Co-Founder and Chief Executive Officer

Alicia Yap -- Citi -- Analyst

Gary Yu -- Morgan Stanley -- Analyst

Dou Shen -- Executive Vice President, AI Cloud Group ACG

Alex Yao -- JPMorgan Chase and Company -- Analyst

Lincoln Kong -- Goldman Sachs -- Analyst

Thomas Chong -- Jefferies -- Analyst

Unknown speaker

Miranda Zhuang -- Bank of America Merrill Lynch -- Analyst

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