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Baidu, Inc (NASDAQ:BIDU)
Q4 2018 Earnings Conference Call
Feb. 21, 2018, 8:15 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and thank you for standing by for Baidu's Fourth Quarter and Full Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question and answer question. 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, Sharon Ng, Baidu's Director in Investor Relations.

Sharon Ng -- Director, Investor Relations

Hello, everyone, and welcome to Baidu's Fourth Quarter and Full Year 2018 Earnings Conference Call. Baidu's earnings release was distributed earlier today, and you can find a copy on our website, as well as on newswire services.

On the call today, we have Robin Li, Baidu's Chief Executive Officer; and Herman Yu, Baidu's Chief Financial Officer. After our prepared remarks, we will hold a Q&A session.

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

Our earnings press release and this call include discussions of certain unaudited non-GAAP financial measures. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures and is available on our IR website at ir.baidu.com. As a reminder, this conference is being recorded.

In addition, a webcast of this conference call will also be available on the Baidu's IR website, along with our earnings press release, which is intended to supplement our prepared remarks today during today's call and provide a reconciliation of the differences between GAAP and non-GAAP financial measures. Unless otherwise specified, we refer to non-GAAP measures on the call, which should not be considered as a substitute for the financial information prepared in accordance with GAAP. These GAAP measures are included as additional clarifying items to aid investors in further understanding the company's performance. Please refer to the Non-GAAP Financial Measures section of Baidu's press release for further information about our use of non-GAAP measures.

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

Robin Li -- Chief Executive Officer

Hello, everybody, and thank you for joining our call today. In 2018, we expanded Baidu's Beyond Search with AI by strengthening our mobile foundation and leading in new AI business, which puts us on strong footing as we enter 2019.

On mobile, the gross rate of Baidu APP DAUs accelerated over the past year, growing 24% year-over-year to RMB 161 million in December 2018, compared to a range of 17% to 19% in the past four quarters. Haokan, our short video app, duplicated by Dual Apps surge plus team strategy and saw its DAUs grow to 19 million in December from one million a year ago. Quanmin, our flash video app with short video usually under one minute long, saw its DAUs grow to four million within one quarter of official launch. Aggregated a C timespan on Baidu, Haokan, and Quanmin apps grew 112% year-over-year.

The robust growth of Baidu's organic traffic is strengthening our search foundation, as well as enabling us to leverage Baidu's AI to become an important player in feed and short video offerings, which are experiencing strong momentum in China.

Our new AI business, DuerOS, we believe has become the most popular voice assistant in China, with the largest installed base, reaching 204 million in December. On product innovation, we launched the first smart display in China, Xiaodu at Home, and were the first to introduce a commercial Level 4 vehicle in China, Apolong, with King Long Automotive.

On cloud, we've helped enterprise customers build a competitive edge through Baidu's AI solutions. Enterprise AI has tremendous potential in China. By leveraging powerful AI computing, it gives China's traditional industries a technological advantage over its regional peers. In 2018, Baidu reached a historical milestone, its revenue surpassing RMB 100 billion. We are excited to pursue the next 100 billion of growth by leveraging Baidu's AI to expand beyond search into fast-growing consumer markets, as well as new AI opportunities in enterprise and government sectors.

Let's begin our Q4 review with search and feed. Our focus in 2018 has been investing in organic traffic to accelerate our growth, and strengthening Baidu's content ecosystem to give users a better experience with search and feed. Daily active users on Baidu App, our flagship app, has been accelerating over the past year, due in part to the improved search experience and the strength of our feed. During the recent Chinese New Year Gala, the most popular TV show in China, Baidu participated in the Red Envelope Giveaway, which turned out to be a success. More users now realize that Baidu App is better, safer, and more powerful, as it integrates search and feed seamlessly, and provides a native app-like experience. In the future, we do expect search traffic in the Baidu App to grow much faster than the overall search market.

Over the past year, we have made significant progress in expanding our content network on Baijiahao, which now hosts 1.9 million Baijiahao accounts. With significant coverage of popular publishers on Baijiahao accounts, we believe Baidu's AI -- we leverage Baidu's AI to push the most relevant content to new Baidu App users and make their onboarding experience smoother. We deployed the same methodology to Haokan earlier this year by attracting a large base of high quality video content publishers, and used the Baidu AI to enable smoother onboarding for new Haokan users. And the result? Haokan was the second-fastest growing app among the Top 10 Short Video Apps in China in terms of DAUs, MAUs, and total daily time spent during the three months ending December, according to QuestMobile.

And the fastest-growing app over the same period was Quanmin, a short video app that we are incubating. Quanmin's DAU grew to four million in one quarter. Short video is a growing market in China, and we expect this demand to grow even faster with the arrival of 5G. Our foray into short video is seeing strong results. For example, excluding ITE, Baidu distributed over three-and-a-half billion video views daily in December. That's up 56% from last quarter.

With users showing insatiable appetite for short videos, we are leveraging Baidu AI to better tag the video content and personalize each distribution based on user preferences. Whereas Baijiahao accounts for FIO, our users' demand for feed content, Baidu's Smart Mini Program allows them to enjoy native app experience from our partner network of service apps. Through the pull-down of the home screen search results and feed viewing, Baidu App users can access the functionalities of our partner apps directly from the Baidu App. We believe the future of mobile search will shift toward close-looped, native-app experience from the current search experience that directs users to HTML sites.

MAUs of our Mini Program have grown to 147 million in December, up 30% sequentially. In December, we open-sourced Baidu's Smart Mini Program to allow our top partners to build their own Mini Program network.

On monetization, the integration of search and feed in Baidu App brings together significant synergies. During the quarter, we expanded our optimized cost per click for OCPC offerings to OCPX. For example, we're now offering OCPM for impressions and OCPV for video views, which enables feed ads to use the same optimization algorithm. With feed and search under one roof, we are seeing customers opting for omni-marketing, which is a powerful marketing campaign, leveraging the reach of search, feed, and app opening interstitial ads. Over time, we believe the adoption of Baidu's Smart Mini Program will also be a revenue driver for us. Early AB testing indicates that advertisers using Baidu's Smart Mini Program are getting better ROI than using HFI sites as the landing pages for their advertisements.

Turning to DuerOS Voice Assistant, DuerOS is gaining strong market adoption, with an installed base arching 204 million in December, up from 141 million in September. Voice queries on DuerOS continue to grow robustly, reaching 1.6 billion in December, representing a sequential CAGR of over 100% for the last seven quarters. Our customers will have smart devices that understand them better, that provide better search results, and that offer more and better services. As a result, we will continue to make heavy investments in AI to provide best-in-class speech recognition and natural language processing technology.

We have also begun testing the DuerOS Skills Store, where customers can subscribe to both free and fee-based skills. The DuerOS Skills Store currently offers over 1,000 skills, such as DouYu (live video), Dragonfly FM (online radio), and CITIC Academy (online literature), and has a developer community of 27,000 engineers.

In the fourth quarter, our first party smart device sold exceptionally well. Xiaodu Smart Speaker was the best-selling smart speaker on JD.com, Pinduoduo, and GOME.com during the Double 11 event. And Xiaodu at Home, our smart display, saw unit sales accelerate from previous quarters. To expand the use of DuerOS voice assistant in November, we added to our line of Xiaodu smart devices Xiaodu Smartphone Car Mount, a smartphone charger under $15.00 equipped with far-field microphones that enable users to operate DuerOS skills, such as Baidu Maps and CITIX New Media, through conversational AI, freeing their hands to allow safer driving. Stay tuned for new Xiaodu smart devices, as we will be launching soon.

DuerOS for Apollo, a version of DuerOS adopted for in-vehicle usage, has already been preinstalled in charis high-end six-speed cars, and will be preinstalled in selected models of Ford, Lincoln, Great Wall Motors, and Beitan cars later this year. Our goal for DuerOS is not only to make interactions with smart devices simpler -- we also see a need from users to be able to switch their skills interchangeably across mobile, home, and car. Building to DuerOS for Apollo is a Skills Store that operates Mini Programs from the Baidu apps, which will convenience to both our users and the developer community.

In the hospitality sector, DuerOS now powers Baidu's smart display to provide a personal concierge in over 2,000 rooms across a score of hotels in China, particularly five-star hotels, including the newly opened Intercontinental Shanghai Wonderland.

Turning to Apollo, at CES in Las Vegas last month, we received Apollo 3.5, which supports autonomous driving on complex urban roads. We also introduced Apollo Open Road for the developer community, and Apollo Enterprise, offering solutions to support commercial production, including DuerOS for Apollo, valet parking, assisted highway driving, minibus, and intelligence maps. In the fourth quarter, we added First Automotive Work and Mobile as Apollo partners for commercial production of Level 4 passenger cars. Apollo has garnered over 135 OEMs, Tier 1 parts suppliers, and other strategic partners to date, including recent additions of Volkswagen Automotive, China Unicom, Kalray, Quanta Computer, and StarNeto technology.

Beyond autonomous driving, we are receiving interesting from Chinese municipalities to partner with them and provide smart transportation solutions. With the support of local governments, we see commercial opportunities to minimize traffic congestion, reduce air pollution, and improve load shifting by leveraging Apollo V2X for vehicle to infrastructure solutions. And for Baidu Cloud, in December, we open sourced OpenEdge, an edge computing platform that extends Baidu Cloud's data processing and machine learning to edge devices. Baidu's OpenEdge has received positive feedback from the developer community, reaching number one on its GitHub in the Open Source Edge Platform category shortly after launch, and continues to hold the top spot in current rankings as of February.

Baidu Cloud is seeing strong growth in both revenue and customer base, and is expanding AI solutions across different industry verticals, such as telecomm, manufacturing, and financial services, and transportation. For example, last quarter, we showcased a top telecomm operator in China that used a Baidu AI solution to power one of their call centers. After initial implementation, Baidu's AI solution was handling millions of calls per month and reducing the average customer call time by over 70%. We recently signed with the telecomm customer to expand Baidu's AI-powered automated call center solution to power several more call centers. At the same time, we are receiving interest from financial institutions, as well as airlines, to power their customer call centers.

Some investors may wonder how the economics will work for Baidu as we enter enterprise AI. Investing in feed and voice assistant are natural extensions of Baidu's search business. As we venture into enterprise AI, we have the potential to leverage the same AI to significantly expand Baidu's total addressable market into the massive enterprise and government centers. In the case mentioned above, just like the economics of ERT projects, the economics of cloud-enabled AI solutions may have low margins in the beginning, but with each replication, the project margin improves. And our AI solutions become better with machine-learning models and experience accumulated.

Turning to iQIYI, as an entertainment IT powerhouse in China, iQIYI continues to see strong subscriber growth, adding 36.6 million subscribers in 2018 to 87.4 million members in fourth quarter. Baidu and iQIYI co-launched a hybrid OTT TV box with Sichuan Cable TV, enhancing the home entertainment experience through AI. And this is the OTT TV following the release of Gehua Little Fruit earlier this year.

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

Herman Yu -- Chief Financial Officer

Thank you, Robin. Hello, everyone. Welcome to Baidu's Fourth Quarter and Full Year 2018 Call. Before I begin with a financial review, let me make a few announcements. All monetary amounts used in my discussion are in Renminbi, unless stated otherwise. Starting on January 1, 2018, we adopted ASC 606, a new revenue accounting standard that nets value-added tax from the revenue and cost of revenue line. To increase comparability with 2018 numbers, 2017 revenue numbers and related metrics, such as margin, have been adjusted assuming net of VAT.

We had a terrific year in 2018. Total revenues grew to RMB 102.3 billion, up 28% year-over-year, 31% year-over-year excluding revenue from spinoff businesses, which were approximately RMB 4.1 billion and RMB 3.1 billion since 2017 and 2018, respectively. Revenues for Baidu Core reached RMB 78.3 billion, up 22% year-over-year, or up 26% year-over-year, excluding spinoff revenues. Non-GAAP net income to Baidu was RMB 23.3 billion, up 35% year-over-year, and non-GAAP net margin reached 23%. Non-GAAP net income attributed to Baidu Core was RMB 28.5 billion, up 37% year-over-year, and net margins was 36% versus 33% last year.

Adjusted EBITDA is RMB 24.3 billion, up 4% year-over-year, and EBITDA margin was 24%. Adjusted EBITDA for Baidu Core grew to RMB 31.5 billion, up 18% year-over-year, and adjusted EBITDA margin reached 40% compared to 42% the prior year. Free cash flow was RMB 27.2 billion. Free cash flow generated by Baidu Core was strong, at RMB 24.9 billion, or $3.6 billion.

Turning to fourth quarter 2018, total revenues reached RMB 27.2 billion, up 22% year-over-year, or 28% year-over-year, excluding spinoff revenues, which was RMB 1 billion in Q4 2017. Revenue from Baidu Core grew to RMB 20.5 billion, or $3 billion, up 20% year-over-year, excluding spinoff revenues. Marketing customers grew over 10% year-over-year, which can be largely attributed to our industry-leading performance state app products, like dynamic ads and OCPS, as Robin mentioned.

We saw strong streaming coming from education, e-commerce/retail, and service sector, which were partially offset by the weakness in healthcare, gaining real estate, and to a lesser extent, financial services. The customer sector weakness was mostly impacted by industry-specific policies. On healthcare ads, we successfully brought up Baidu's new policy to require healthcare customers in the sphere of andrology and gynecology to shift the landing pages of their ads to Baidu's content platform. By requiring healthcare marketing customers to place their content in structured data format on Baidu's platform, which allows for comparison across service providers, site commentary and ratings, and other important features, we are in a better position to monitor the sites of our healthcare customers and weed out those that offer questionable services. With Phase One of the healthcare provider network transition, we are on track to shift the ad landing pages of other healthcare customers this year.

The new business model not only will include the quality of marketing customers and their information about healthcare sites, but would also give us a better understanding of user interests, which over time would allow us to further improve the navigation and relevancy of online healthcare information in China.

Using similar technology, we see an opportunity to build a content vertical for online literature, and make it easier for authors to distribute their literary works online and receive revenue share. The online literature market in China is shifting to an ad-supported model versus paid content, which presents Baidu with a huge market opportunity to cling to our strength as a leading marketing platform.

Another bright spot in Baidu's quarter revenue is our cloud business, which reached RMB 1.1 billion revenue in the fourth quarter, more than doubling from last year. Revenue from iQIYI reached 7 billion RMB, growing at a robust rate of 55% year-over-year. Membership revenue continued to be strong, with 37 million subscribers added in 2018, bringing the total subscribers to 87 million in the fourth quarter, driven by premium content and hot originals, like Tang Dynasty Tour, The City of Chaos, and Original Sin. iQIYI is becoming a strong entertainment IT powerhouse through its relentless efforts and focus on originals, on premium content, and multiple monetization models with the same IP, such as membership subscriptions, online games, e-commerce, and cross-licensing.

Turning to cost of sales, excluding stock compensation, cost of sales was RMB 15.5 billion, up 54% year-over-year. Content cost was up 96% year-over-year to RMB 7.5 billion, mainly due to iQIYI's increased investment in content, and to a much lesser extent, investment in Baijiahao content. SG&A expenses, excluding stock compensation, were RMB 5.4 billion, up 61% year-over-year, primarily due to the increase in channel and promotional marketing to acquire new users for the Baidu family of apps. As Robin mentioned, time spent with Baidu apps Haokan and Quanmin together grew 112% year-over-year in Q4, which illustrates our ability to convert marketing dollars into repeat mobile traffic.

Our focus to place greater [audio distorts] shifting our financial model to sustain [audio distorts] marketing dollars with [audio distorts] spread out over the life of the user. In other words, revenue from China spend has a delayed effect, whereas revenue from tax is reported in the quarter of the expense. In the first half 2018, a big part of our marketing expenses were spent on promoting the Baidu App. In the second half, Baidu App seeing strong growth, our app promotion expanded to other products, such as Haokan short video and Quanmin flash video. Our traffic acquisition mix shifted from tagged traffic to organic traffic will dampen our profit margin in the near future. But with extensive internal ROI analysis, we believe over the long-term, this will strengthen Baidu's foundation in search and feed, especially with users, super apps, and the increase in popularity of Mini Program in China.

Turning to R&D expenses, excluding stock compensation, expenses were up RMB 3.6 billion, up 19% year-over-year, mainly due to the increase in personnel use. Non-GAAP operating income in the fourth quarter was RMB 2.7 billion. Non-GAAP operating income for Baidu Core was RMB 5.8 billion, down 17% year-over-year. And non-GAAP operating margin of Baidu Core was 28%.

Income tax expense was RMB 484 million. Effective tax rate was 26%, compared to 16% last year, primarily due to iQIYI not being able to recognize tax benefit from its losses in the current quarter. Non-GAAP net income to Baidu was RMB 4.6 billion, down 15% year-over-year. Non-GAAP net income attributed to Baidu Core was RMB 6.5 billion, down 1% year-over-year. And net margin reached 31% compared to 36% last year. Adjusted EBITDA was RMB 4 billion, and adjusted EBITDA margin was 15%. The adjusted EBITDA for Baidu Core was RMB 6.9 billion, down 12% year-over-year. An adjusted EBITDA margin reached 34%.

As of December 31, 2018, cash and short-term investments [audio distorts], or $20.6 billion, excluding iQIYI cash and short-term investments, were RMB 128.7 billion, or $18.7 billion. Free cash flow was RMB 5.9. Free cash flow to Baidu Core was strong at RMB 5.5 billion, or $801 million. The total headcount of Baidu core was approximately 33,700, up 1% year-over-year.

Turning to first quarter guidance, we expect total revenues to be between RMB 23.5 billion and RMB 24.7 billion, representing a 12% to 18% increase year-over-year, or an 18% to 24% increase year-over-year, excluding spinoff revenues [audio distorts] for the first quarter of 2018.

For 2019 margins, please consider the large marketing campaign that we did around the Chinese New Year timeframe, including branding, Red Envelope Giveaway, and so forth. These forecasts or current and preliminary views, are subject to change.

I will now open the call to questions.

Questions and Answers:

Operator

Thank you so much. The question and answer session of this earnings call will start now. In order to be fair to all callers who wish to ask questions, we will take one question at a time for each caller. If you have more than one question, please request to join the questions queue again after your first question has been addressed. To ask a question, you may just press *1 on your telephone.

All right. And our first question comes from the line of Dani Wong. Dani, your line is now open.

Dani Wong -- [Unstated] -- Analyst

Hi. Thank you, management, for taking my questions. My first question is basically on our investment side. So, in terms of a lot of investments you have made in 2018, when we look forward in terms of 2019, how would she expect in terms of our investment priorities into 2019? And if we look at the growth coming from actually our new business initiatives, how do you rank in terms of the growth drivers? Any comment on how should we expect on the investment cycle and also the margin trend would be very helpful. Thank you.

Herman Yu -- Chief Financial Officer

Hi, Dani. Good morning. As I mentioned on our call, there will be a few businesses that we'll be focused on going forward that we also have been focused on in the last few quarters. I think the way to look at our margins and our investments are like this. We finished our three-year plan just in January, and our plan was to figure out a way to accelerate our revenue growth based on the new markets that we're going after. And the cost driver, I think, for 2019 will be a function of a few factors. I think number one is when you look at, for example, search and feed, our priority would be to grow our organic traffic. Although, as I mentioned before, for our tags, as long as there's profit to be made, we'll continue going down that path. But the priority, I think, will be with organic traffic. And that will be a function of investing in marketing and content costs, and also, it's a function of the number of apps that we decide to promote.

As I mentioned earlier, in 2018, at the beginning of the year, we focused on Baidu App. As we got into the second half, we used at Haokan, and in the fourth quarter, we also ordered Quanmin. So, that caused our marketing dollars toward the end of 2018 to accelerate. I think going into 2019, you should see us focusing on investing at least in three apps, and potentially more.

Another business that we are very focused on is the DuerOS. And I think for that, you can see it's a function of the number of products that we have, the amount of promotion we have to do for new products, and also the number of units that we sell. And I think the last set up investment is in the cloud space. We're seeing cloud doing very well, as Robin mentioned. The cloud, given it's a function of how we're growing and preparing to scale our business for the next year, and it's also a function of the number of lighthouse projects that we have. So, with every growth plan, our focus is to also grow revenue. So, what we'll be looking at this year is to focus on, as we're spending these things, are we getting very positive operating metrics? And if so, then we should see revenue growth accelerate in future quarters. So, we'll be looking at the operating metrics first, and then we believe that in the following quarters, the revenue growth should come.

At the same time, just wanted to note that we're also very diligent in terms of content costs. So, if you look at, for example, in 2018, our core business grew 28%, excluding divestitures. At the same time, our headcount only grew 1%. In 2019, our cost control policy in the company will be very similar, where there are areas where we're tightening. We're very focused on improving greater efficiency and so forth. Does that help answer your questions?

Dani Wong -- [Unstated] -- Analyst

Yes, yes. That's very helpful. And just one last follow-up on the newsfeed. How do you see the concentration will be trending in 2019 on the competition on newsfeed side? In terms of also any sharing ratio with the content creator, how should we see that? Thank you.

Herman Yu -- Chief Financial Officer

Dani, the question you had was, how do we see the newsfeed revenue trending?

Dani Wong -- [Unstated] -- Analyst

Competition. The competition dynamics on the newsfeed competitions on that front. Yeah. With other platforms. How do you see the 2019 -- in terms of strategy, how are you positioned to -- in terms of -- in view of the competition here, and also, in terms of any revenue-sharing with the content creator, as we talked about earlier in last quarter call? Just a follow-up on that and newsfeed would be really helpful. Thank you.

Robin Li -- Chief Executive Officer

Okay. This is Robin answering your questions. I think it's very obvious that newsfeed is a fast-growing market. Everyone in the Chinese Internet landscape is trying to expand in this direction. And Baidu obviously is the leading -- one of the leaders in this space, and by leveraging our strong technological capabilities, we have been able to grow the newsfeed at a very rapid rate. We expect this trend will continue. In terms of cost structure, it's basically a revenue-sharing structure for the content contributors in our feed system. So, the more we can derive our feed traffic, the better we can monetize, and the better the economics will be for the content contributors. So, at the end of the day, it's how many users you can reach, and how better you can match content with users.

Herman Yu -- Chief Financial Officer

Yeah. Let me just add a little, Dani, on this. As you can see, newsfeed in the beginning was mainly social-based, and it relies on a user coming on and requiring fans and so forth. What you're seeing now is newsfeed is getting to a place where there are many people that create content. Especially, they create in an organization rather than on an individual basis. So, that's why you see Baidu entering at this stage, and we're it with Baidu app, but also using the same methodology going into video, because nowadays, the limitation is not about the availability of content, because the same person will put the content on different sites; where Baidu's strength is using our AI algorithm, the technology we built up, to be able to recommend better than everyone else so that the users are very sticky. That's why we show you on time spent. So, to answer your question, I think our competition, our stream, it's the ability to use our AI to recommend better and to get a user to be more sticky.

And then I think content has become a commodity. So, in terms of that, I think this year, you'll see us probably growing more video content, as we're having a few more apps that we're pushing. But for beyond the video side, I think that you will see probably a slow growth, because we have to build up that library of content upon passing, just adding new content. We probably will not grow as fast for the non-video side.

Dani Wong -- [Unstated] -- Analyst

Okay. Thank you. Very helpful. Thank you.

Operator

Thank you so much. Once again, as a reminder, we will take one question at a time from each caller. If you have one more than question, please request to join the question queue again after your first question has been addressed. And our next question comes from the line of Alicia Yap from Citigroup. Alicia your line is now open.

Alicia Yap -- Citigroup -- Analyst

Thank you. Good morning, Robin, Herman, and Sharon. Thanks for taking my questions. I have a question regarding the achievement for the Chinese New Year Gala promotion. So, any metrics that you could share with us in terms of the total numbers of users that have successfully bound their bank card to Baidu Wallet, what is the increase in, let's say, the total real name registration for the Baidu App after the Gala? And any metrics in terms of increase on the usage for the DuerOS Smart Speaker from prior to the Chinese New Year to now, post the Chinese New Year. So, any metrics you could share would be helpful. Thank you.

Robin Li -- Chief Executive Officer

Yeah. As you know, that we operated a number of marketing campaigns around the Chinese New Year, and the highlight would be the Spring Festival Gala. During the whole Chinese Spring Festival period, tens of millions of users participated in our Red Packet Giveaway activities. And many of them started to realize that the Baidu App is different from the Baidu search, from third party browsers. That is the, I think, biggest achievement for us, because before, people always go to a third party browser and thought they are using Baidu App. And now, we have the chance to show the users that Baidu App offers better, safer, and more powerful search and feed capability on our app. And the retention rate has been very satisfactory. And meanwhile, we also used this opportunity to promote our smart display, Xiaodu, and that has also been very well-received. And a lot of users placed the order because of this marketing campaign. And the device will be shipped to the user in the coming weeks.

Sharon Ng -- Director, Investor Relations

Operator, next question, please.

Operator

Thank you so much. And our next question comes from the line of Eddie Leung from Merrill Lynch. Eddie, your line is now open.

Eddie Leung -- Bank of America Merrill Lynch -- Analyst

Good morning. Hey, Robin, I think you mentioned about omni-marketing in your opening remarks. As we add more advertising opportunities into our platforms, including Mini Programs and short video on top of search and newsfeed, what's your vision of how your advertisers are using these different solutions going forward? And specifically, how would we prepare our advertising system, as well as the sales team, for the increasingly complex solutions on our platform? Thank you.

Herman Yu -- Chief Financial Officer

Yeah, Eddie, that's a great question. As you mentioned, we now have a lot of marketing channels for our advertisers, including new feed search, app opening ads, the GP, or those offline outdoor screens at public areas. We are promoting OCPS so that advertisers just need to tell us what they are about and how do they measure success, and we are able to use the computer programs to distribute their ad messages. So, this has been a very good trend for us, because it can leverage our technological capabilities and improve conversion for our advertisers. We devote a very meaningful amount of engineering resources to constantly improve the performance of this kind of ad delivery.

Eddie Leung -- Bank of America Merrill Lynch -- Analyst

Thank you.

Operator

Thank you so much. And our next question comes from the line of Juan Lin from 86Research. Juan, you may now ask your question.

Juan Lin -- 86Research -- Analyst

Hi. Good morning, Robin, Herman, and Sharon. Congratulations on a solid set of results, and thanks for taking my questions. So, I would like to ask about the healthcare advertisement. I'm wondering whether the cleanup and process of redesigning medical search has been finalized. And in terms of the adjustment of structured content, has such adjustment already been fully applied to all relevant verticals? If so, does it mean that we should expect revenue to restart -- improving monetization, restart improving from here? Thank you.

Herman Yu -- Chief Financial Officer

Hi, Juan. Good morning. Yeah, we have done -- so far, we have done two fields, basically gynecology and also the male field, and we're in the process of expanding that into other medical fields. I think we've seen the initial phase to be very successful, better than our original [audio distorts]. But I think the initial is better than our expectation, as you guys saw [audio distorts] very well [audio distorts] finance revenue [audio distorts].

Sharon Ng -- Director, Investor Relations

Operator, next question, please.

Operator

Thank you so much. And our next question comes from the line of Gregory Zhao from Barclays. Your line is now open.

Gregory Zhao -- Barclays -- Analyst

Hi, Robin, Herman, Sharon. Thanks for taking my questions. So, my question is about the content cost. So, iQIYI's earnings call, the man can just talk about real expectation about long video content calls to gradually come down in 2019. So, here, I wanted to check the content cost, the trend of your newsfeed and short video content cost, and how should we think about the content cost trend in 2019? Thank you.

Herman Yu -- Chief Financial Officer

Hi, Greg. Yeah, iQIYI, it's -- Going mentioned on the call [audio distorts] environment with content costs was -- toward the end of last year, started to come down. It's gonna take probably for it to actually be less than a keynote, because it takes time for this content to be produced. For ours, in addition to the long form, I think this year, content cost is usually two types. One is on the non-video type, which we've been building CITIC during the last year as a result of building up the content for Baidu App. But you saw the Baijiahao content increase during the last year. And this year, I think with regards to that piece, you'll see some incremental increases, but not too significant. But on the other hand, where this year, our focus is, in addition to a team to grow Baijiahao, we're looking at also different types of video apps. One is Fast Video, which means that the videos are usually less than one minute, and the other is Short Video, which is three minutes, to find that kind of product. So, that one, we're gonna have to continue to ramp up the content for these apps in order for these apps to have more content and to grow more users. So, you should see us ramping that up.

Operator

Thank you so much. And our next question comes from the line of Grace Chen from Morgan Stanley. Grace, your line is now open.

Grace Chen -- Morgan Stanley -- Analyst

Hi. Thank you. Thank you for taking my question. My question is about Baidu short video investments. We can see that Baidu's short video apps have achieved very good growth. So, it'd be great if the management can share with us your view about the short video comparable landscape as we see more and more short video apps entering the market, and how Baidu positions itself in this market to differentiate it from others. And also, can you share the size of investments in the short videos, to understand the impact on your financials? Thank you very much.

Robin Li -- Chief Executive Officer

Grace, let me answer the first part of your question. I think video is a particular trend that basically impacts everyone. The whole world, the whole Internet is moving from text images to video. So, it's a very large sector. There are lots of things can be done. And I think that innovation has just begun. For Baidu, our competitive advantage is that we have the best matching capability between users and the content. So, we can distribute the content more efficiently than everyone else, via search, newsfeed, or short video feeds. I think we will continue to think that in the parsing and distribution of our short video apps, but in the meantime, I think at the end of the day, the user experience we can deliver, or the matching and distribution capability we have is better than everyone else. That's why we should be able to make the money that we deserve.

Herman Yu -- Chief Financial Officer

Yeah, Grace. And with regards to the financial model, you're gonna probably see these video apps following the same trajectory that we saw for Baidu App. So, in the beginning, we're gonna have to acquire content for these apps, and then more importantly, we're gonna have to spend promotions to grow the users. And how much we spend on promotion really depends on the daily allowances that we have on the ROIs, whether each of the inventory spots is giving that good ROI. If we do see it, then we're gonna continue to double down. If the ROIs are not good, users are not staying on the apps after they come in, then with that inventory channel, then we'll cut it off. So, it's really a function if we can grow the users and grow user stickiness.

Operator

Thank you. And next question comes from the line of James Lee from Mizuho Securities. James, your line is open.

James Lee -- Mizuho Securities -- Analyst

Yes. Thanks for taking my question. And Herman, maybe you can help us maybe crystallize the operating income for the Core business in 1Q a little bit here. Given the fact that you talked about your priorities are more on organic growth or apps, and also, you're gonna focus on promotional costs, should we think about maybe your total cost base? How should we think about that relative to 4Q versus 1Q? So, for example, in 1Q 2018, your total cost base stepped down about 13% sequentially. Is that the right way to think about it? Thanks.

Herman Yu -- Chief Financial Officer

Hi, James. Yeah, good question on 1Q. So, we gave you revenues. With regards to cost of sales and opex, the way I would look at it is that maybe in the first quarter, there's a lot in that channel. We made a huge promotion around the Chinese New Year. And a couple days ago, the Yinshao, which is the ending of the Chinese New Year, we also did another promotion on television. So, we have to consider that cost. So, the way I would look at it is when you look at cost of sales plus opex, we could be increasing on a sequential basis upwards to maybe a billion RMB. Where we reside from that RMB 0 to RMB 1 billion really depends on several factors, which I think we're gonna have to wait for a few more weeks to be more precise, because there's some activities that we have to see for it to pan out. But I would say on a sequential basis, you'll probably see a growth -- it could be up to RMB 1 billion. It could be less than that.

Operator

Thank you so much. And our next question comes from the line of Karen Chan from Jefferies. Karen, your line is now open.

Karen Chan -- Jefferies -- Analyst

Thank you, Robin, Herman, and Sharon. Thanks for taking my question. So, just wondering, for fourth quarter 2018, what's the revenue contribution from mobile newsfeed? We know the very robust growth and the total online advertising customers, while pricing side is relatively suppressed. Do we see any pricing pressure potentially as a result of the overall industry supply and demand dynamic changes there? Thank you.

Herman Yu -- Chief Financial Officer

Hi, Karen. So, the way we look at our business today, we don't look at newsfeed versus search. We actually look at the ROI of the App in itself. So, Robin talked about how customers are buying online marketing [audio distorts] they're looking at not only on the search results, they're looking at, at the same time, if the advertising can also work so there on the users. Just all the advertising in the feed. And then they did a search, a natural search, and what they actually see is, by being able to see that same ad in different ways, it's actually more effective. So, the customers are looking at it that way, as far as our place to then be able to decouple how to allocate the revenue between search and between feed, because there's value for that synergy. So, the way we actually look at it is how do we grow organic growth versus inorganic growth.

So, with regards to pricing, we're seeing pricing come down, but I don't think it's because of competitive reasons. Our pricing, because we're performance-based, it's really a function of the industry mix that we have. If you look at Baidu's products, whether it's dynamic ads, whether it's CPX, whether it's action-oriented ads and so forth, we're industry-leading. We're really the best-in-class. So, I think it's not a function of whether you're seeing better effectiveness elsewhere. It's a function of, for example, if you have more gaming revenues, for example, you're gonna see higher CPMs. If you have other type -- for example, e-commerce compared to gaming, you're just gonna see less CPMs. So, a lot of it has to do with the industry mix. And that's I mentioned on the call, whether other industries are increasing where the industry sectors are decreasing for two-four, so you guys can get a flavor of how's that impacting our business.

Operator

Thank you so much. And your next question comes from the line of Piyush Mubayi from Goldman Sachs. Piyush, your line is now open.

Piyush Mubayi -- Goldman Sachs -- Analyst

Thank you for taking my question. I have a quick question, Robin. And if you could just take us through what you think the organic growth rates are for the current -- for the overall Core business, excluding the near-term corrections that we're seeing because of either macro factors or the adjustments that you're making in specific verticals. So, I'm referring to the 21% on Core growth rate guidance that you've given for the first quarter, and what you think it would be on a normalized basis. Thank you.

Robin Li -- Chief Executive Officer

Yeah. I think we have entered a new stage for Chinese Internet. The landscape and population or the penetration dividend has gone. The growth, the future growth will be driven by technological innovation, at least for Baidu. For our Core business, both search and feed, we continue to see a lot of room to grow and to improve.

On the search side, I mentioned OCPX, that will automate delivery, and we've -- Herman also mentioned that we moving third party websites to hosted ads, where we have more control on the content and have better visibility on the conversion. We are developing these marketing programs as well, to enable advertisers to deliver user experiences. And we also see strong demand for video content, not only from the search -- from the feed front, but also from the search front. We see video search growing at a very fast pace, and we need to develop the technology that can better understand video content so that users will be able to find relevant video content more easily.

Operator

Thank you so much. And your next question comes the line of Thomas Chong from Credit Suisse. Thomas, your line is now open.

Thomas Chong -- Credit Suisse -- Analyst

Hi, good morning. Thanks, management, for taking my questions. I have a quick question about the advertising market. Can management comment about how we see the advertising sentiment changing before and after the Chinese New Year, if any? And how should we think about the trend of our key advertising categories as we head into 2019? And then a quick follow-up on DuerOS and the follow. Should we expect 2020 as the year that we should expect a meaningful ramp-up in terms of monetization of the piece through business? Thank you.

Robin Li -- Chief Executive Officer

Well, I think it's a little bit early to talk about the advertising market after Chinese New Year, because Chinese New Year is not one day. It's like a month-long holiday. Typically after the Lantern Festival, advertisers gradually come back. So, it's only a couple days. It's too early for us to tell whether it's different from 2018. And because there's a heavy message we are making this year, we do expect that monetization in 2020 will pick up.

Operator

Thank you.

Herman Yu -- Chief Financial Officer

Yeah, let me add a little bit on that.

Thomas Chong -- Credit Suisse -- Analyst

Thank you.

Herman Yu -- Chief Financial Officer

First of all, when you mention how our advertising sentiment is before and after Chinese New Year, I think that's probably more relevant in terms of our brand advertising business. As you know, in the brand advertising business, you usually have the master contracts after the Chinese New Year. So, our business for the majority is based on performance-based, as I mentioned earlier. So, that way, it really depends on our technology and our ability to actually get marketing customers' ROI. So, I think one point on that.

Secondly, you mentioned how do you see the marketing customer sectors growing. As I mentioned earlier, in 2018, the fourth quarter, the sectors that were strong for us -- education, e-commerce, and retail in generation, service -- we think that that's gonna continue to be strong sectors for us. With regards to gaming, real estate, financial, and so forth, I think it's a function of policy changes, as I mentioned earlier. So, if the policies are loosening up, if there are more advertisers coming from these sectors and so forth, we believe we're gonna get our share, because our performance base, I think, is best-in-class.

Operator

Thank you. Next is Han Joon Kim from Deutsche Bank. Your line is now open.

Han Joon Kim -- Deutsche Bank -- Analyst

Great. Thank you for the chance to ask a question. I understand your sponsored initiatives and so forth. But one thing that I also noticed was the latest kind of investments into H5 gaming. And when I looked at your Baidu main app, I see kind of Mini Program games being more prominently featured there than before. So, I wanted to understand the stringent points of gaming to you guys, and how you think about positioning the interface to focus a little bit more on gaming recently. So, just some explanations around that would be great. Thank you.

Robin Li -- Chief Executive Officer

Yeah, the Baidu App has a daily active user of well more than 100 million. And that provides users a chance just to spare some time and relax, sometimes just to play a few games based on the Mini Program structure. We started to roll out the Mini games during the Chines New Year Festival, and we obviously saw very good results. Tens of millions of users played this game. And from day one, it has been a profitable thing for us.

Operator

Thank you. Next question comes from the line of Wendy Huang from Macquarie. Wendy, your line is open.

Wendy Huang -- Macquarie -- Analyst

Thank you. Can you clarify which cloud RAM you implied in your first quarter guidance, and what's your differentiation strategy in targeting the new cloud customers? And also, on the literature side in your prepared remarks, you mentioned you see great potential there. But on the other hand, we noticed that iQIYI is also doing quite well with their literature product recently. So, how do you see the synergies as far as the competition actually between you two in the literature space? Thank you.

Herman Yu -- Chief Financial Officer

How do we feel [audio distorts] the full guidance on a particular sector of our business, we give it on the business in whole. So, I'll be able to talk more about the cloud as we exit Q1. With regards to how we differentiate, as Robin mentioned in his prepared remarks, how to think about the AI solution, really our competitive strength [audio distorts] solution [audio distorts] and see where we can provide AI solutions to the enterprise [audio distorts].

As far as for literature, our strength is in search, the search traffic. So, while iQIYI is building their library of content and so forth and growing, they're probably gonna be more related to [audio distorts], whereas for Baidu, we're looking at our total blend of Internet in China. So, there will be a portion of our overall content on strategy, coupling that with the amount of traffic that we have on search, I think we [audio distorts] to build a vertical [audio distorts] iQIYI has confidence in the content that Baidu has access to in implicit search traffic that we have to give an overall industry strategy.

Operator

We are now approaching the end of the conference call. Thank you for your participation in today's conference. You may now disconnect. Good day.

Duration: 66 minutes

Call participants:

Sharon Ng -- Director, Investor Relations

Robin Li -- Chief Executive Officer

Herman Yu -- Chief Financial Officer

Dani Wong -- [Unstated] -- Analyst

Alicia Yap -- Citigroup -- Analyst

Eddie Leung -- Bank of America Merrill Lynch -- Analyst

Juan Lin -- 86Research -- Analyst

Gregory Zhao -- Barclays -- Analyst

Grace Chen -- Morgan Stanley -- Analyst

Karen Chan -- Jefferies -- Analyst

Piyush Mubayi -- Goldman Sachs -- Analyst

Thomas Chong -- Credit Suisse -- Analyst

Han Joon Kim -- Deutsche Bank -- Analyst

Wendy Huang -- Macquarie -- Analyst

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