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Baidu, Inc. (NASDAQ:BIDU)
Q1 2019 Earnings Call
May 17, 2019, 9:15 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and thank you for standing by for Baidu's First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference is being recorded. 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 of Investor Relations.

Sharon Ng -- Director, Investor Relations

Hello, everyone, and welcome to Baidu's first quarter 2019 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 US 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-cash financial measures. We have made minor adjustments to our non-GAAP measures and retroactively applied these changes for comparison purposes. Our press release contains the reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures and is available on our IR website at ir.baidu.com.

As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on Baidu's IR website. I will now turn the call over to our CEO, Robin.

Robin Li -- Chairman and Chief Executive Officer

Hello, everybody, and thank you for joining our call today. Our first quarter revenue for the most part were solid, reaching RMB24.1 billion, up 21% year-over-year, excluding revenue from divested businesses. Our Q1 revenue were impacted by industry specific government policies and our self-directed healthcare initiative, which required healthcare marketing customers to move their ad landing pages on to Baidu's platform.

Towards the end of Q1, we began to see the impact of macro environment compounded by a significant release of our inventory into the market causing CPM, post the Chinese New Year, to not rebound as pronounced as we had historically experienced. Although, the Chinese Government has announced many economic policies to bolster the economy, given the current macro conditions, tighter government scrutiny on content, cutbacks from the VC community and so forth, we are taking a cautious view that online marketing in the near term will face a more challenging environment.

We are reviewing our resource requirement and improving our execution capabilities, which Herman will discuss in more detail later. While greater operational efficiency will be a focus for us, our priority will be to strengthen our mobile business and make the necessary investments to position Baidu for higher long-term growth.

We are working on a CRM offering for our marketing customers, which we plan to release later this year, that will feature better user targeting, customer engagement and salesforce management. Coupled with our performance-based marketing services, our Platform-as-a-Service will allow our marketing customers to move from user interest and intend targeting to live messaging or call-to-order taking in a seamless process.

Our CRM app will consolidate Baidu's marketing services placement systems, including search, feed and Baidu Union for easier campaign targeting and management. Baidu CRM will leverage Baidu's massive user insight, our salesforce management experience and technologies, and our AI capabilities. For example, our smart invitation feature provides personalized prompts to invite users to chat online with sales reps when Baidu AI matches the user interest with relevant customer only.

To better manage its salesforce and better understand the customer calls, our customer can run a report to identify sales agents who were rude on a customer call or -- and summarize comments made by customers during sales calls, leveraging Baidu's advanced Natural Language Processing capabilities.

In March, Baidu's mobile reach expanded to 1.1 billion monthly active devices, providing reach, intent and interest-based user insight. Our focus on in-apps services, expanding our ecosystem of content and services, and optimizing user relationship management offer an exciting future for us to grow, to continuously improve our user experience, stickiness and mindshare. Strengthening our in-app services and user relationship management are the foundations that allows us to go deeper into the marketing funnel to offer our customers' CRM capabilities beyond our leading performance-based ad.

Beyond the 1.1 billion mobile devices, we hope to expand Baidu's platform reach to DuerOS smart devices in home and in autos, and on our home digital screens which will enhance Baidu's omni marketing capabilities. Our vision for AI-first Internet is to provide the best user experience to our users as they move across Baidu's family of 20-plus apps as well as prepare our users to move from mobile-only to a cross-platform experience, seamlessly criss-crossing back and forth on mobile, in homes and in autos.

We are quite excited about the opportunities ahead, for example, to offer cross-platform distribution capabilities to Baidu's content providers and service app developers. To keep pace with the fast-changing technology involvement, Baidu has adopted a young leadership development program to incubate talent for middle management and above, to align with the market that we serve and provide an option for leaders to retire, pursue their personal interest and release their responsibilities.

Over the past year, excluding ITE, Baidu added 7 Vice Presidents, both newly promoted, and new hires to our strong executive team of over 20 members. Hailong Xiang, our Senior Vice President of Search business has tendered his resignation, which I have accepted. I'd like to thank Hailong for his 14 years of service at Baidu.

I also would like to congratulate Dou Shen for his promotion to Senior Vice President, overseeing Baidu's mobile businesses, which we have renamed from our search business. Dou previously served as Vice President of Baidu's mobile products, and has served in whereas other roles at Baidu since joining in 2012, including web search, display, advertising and Financial Services Group. Prior to Baidu, Dou worked at Microsoft and Co-founded the Buzzlabs. Dou holds a Ph.D. in computer science from the Hong Kong University of Science and Technology.

Let's begin our Q1 review with search plus feed. We continued to increase the scale and bolster the content and service offering in Baidu App to give our users unmatched native app life experience for search and feed. Combining feed with research increases user stickiness. We are employing this strategy (inaudible) and investing in video search.

DAU for Baidu App and Haokan are growing robustly. In March, Baidu App, DAU reached 174 million, up 28% year-over-year. And Haokan Short video DAUs reached 22 million, up 768% year-over-year. Total feed time spent on Baidu App and short video apps grew robustly, up 83% year-over-year in March.

We continue to expand Baidu's ecosystem of third-party content and services, which enable news feeds and short videos as well as services and related information, traditionally found only in apps searchable on Baidu. Baijiahao, our feed content network, now hosts 2.1 million publisher accounts, up 89% year-over-year as more and more top publishers, creators and media companies are taking advantage of Baidu's large search plus feed distribution scale.

Our Smart Mini Program, including its user base and developer network, continued to scale. MAUs of Baidu's Smart Mini Program in March reached 181 million, up 23% sequentially. Service providers, large and small, are adopting Baidu's Smart Mini Programs, as we leverage our search capabilities. For example, Baidu's Smart Mini program has become the largest traffic channel for a leading social commerce company in China, behind its mobile app. Notably, our AI power algorithms help male users on the Baidu platform find interesting content in the social commerce company's Smart Mini Program, increasing a user group that has been historically underrepresented.

Baidu's Smart Mini program allows users to search by the content within the Mini program, employing our strong search capabilities. Baidu's Smart Mini programs also help users to find less frequented apps with long-tail content. For example, an online urban dictionary adopted Baidu's Smart Mini Program and saw its user experience dramatically improved, with daily search traffic increasing by 27 times and Baidu's Smart Mini Program becoming its most significant source of traffic. In addition, we are strengthening our vertical offerings such as healthcare and online literature, figuring out poor and questionable content with Baidu AI. We are adding Mini games in the Baidu App, with more vertical offerings to come.

Through the Chinese New Year Gala Campaign, we educated users that Baidu App is an all-in-one app allowing users to search, watch, short videos and read Headline News, quickly find long-tail information, make direct purchases from Smart Mini Program, play mini games and read online literature just to name a few.

Baidu App also offers voice search, augmented reality search and visual search, SOS, OCR translation. Our focus on growing in-app search traffic and expanding our content and services ecosystem is proving to be the right strategy. In addition to growing feed time spent, Baidu App saw search traffic growing in the mid-teens over last year.

Turning to monetization, our focus to grow app traffic -- in-app traffic, build an ecosystem for content, services and vertical offerings, and improve user relationship management will provide tremendous potential to improving recommendation, relevancy and native app like experience for our users, as well as continuously improving marketing ROI for our customers.

For example, Kia.com (ph), a home interior design e-commerce platform that leads conversion to in-person consultation from Baidu Smart Mini Program increases nearly 30% compared to its HTML5 site. Our focus on in-app traffic and user relationship management will also allow us to provide CRM offering to our customers, which will strengthen our relationships with our customers and open a large opportunity for future growth. We are also expanding Baidu's online -- Baidu's advertising partner network to over 1.5 million out-of-home digital screens covering 362 cities across 31 provinces.

Turning to DuerOS, our DuerOS voice assistant continues to lead in China with installed base reaching 275 million, increasing 279% year-over-year and monthly voice queries reaching 2.37 billion, increasing 817% year-over-year in March. We are expanding the service offering in the DuerOS skills store with wide-ranging -- generally from watching short videos and long videos to playing online games, from listening to children's stories to setting up tools to help users find their phone. App developers are finding that DuerOS skills for voice enabled apps can translate into great user experience and user retention.

For example, almost 40% of live video though use skills, monthly active users on DuerOS continue to use the skill 4 months after the initial signing on, which shows incredible user stickiness. DuerOS first party device had a breakout order with first quarter Xiaodu series smart devices surpassing the unit sales of all of 2018. OEM manufacturers are adopting DuerOS Voice Assistant as well. For example, Skyworth, a leading Smart TV manufacturer in China recently switched the week work (ph) on its TVs to Xiaodu Xiaodu. And Huawei tablet comes with tablet mounts that convert that tablet into speech recognition enabled DuerOS smart devices, on the auto front Chery Automobile EXEED sedans are selling with DuerOS infotainment system pre-installed.

DuerOS for Apollo has received very positive initial customer feedback, particularly for facial recognition capabilities, to activate personal life setting, online payment and VR navigation. On the service front, over 190 Smart Mini Programs from Baidu App and skills from DuerOS home devices are now available in the skills door of DuerOS for Apollo, including iQIYI, e-designated driving and GeekPark.

Turning to Apollo, the Beijing Transportation Commission recognized Apollo as the leader in autonomous driving, amassing over 10 times that test a miles off the next industry player according to the Commission's 2018 Beijing autonomous driving vehicles load test report issued in March. The report measures safety and quality controls of autonomous driving and bases its assessment on test miles monitored by the commission as compared to self-reported miles used by other autonomous driving reports.

The Apollo developer community has now expanded to 15,000 strong. We are pleased to see that Apollo autopilot technologies have been adopted in many innovative scenarios, including street cleaning, goods delivery and shuttle services. Transportation related to vehicle and road infrastructure represent approximately 11% of China's GDP according to the National Bureau of Statistics.

With the Chinese Government open to experimenting with smart transportation to improve urban living, we see an opportunity to partner with local government to implement autonomous driving and smart transportation solutions across China. We are working with municipalities to pilot robotaxi by second half of this year. We are also working with Haitian district operating to develop an AI-powered city brain to improve municipal services. Our entrance into smart transportation is opening doors to the government market and potentially expanding into broader smart city solutions to help Chinese cities modernize.

Turning to Baidu Cloud, our cloud business is continuing to exhibit strong revenue momentum, growing triple digit year-over-year. Last October, we discussed implementing Baidu AI call center solution at one of the top telecom operators in China. Baidu Brain is now handling approximately 5.6 million calls per month. Our telecom operator customer was pleased with Baidu's AI enterprise solution and has signed up to expand Baidu AI call center solutions for half of their call centers nationwide. In addition, we are receiving orders from enterprise customers in other industries such as financial services, airline and energy.

At the Baidu Cloud Internet Summit in April, we released a stack of enterprise solutions for companies working with video. We also released a library of new toolkit that can help developers create, edit, analyze and manage video content using Baidu AI, including content adaptive encoding, truly interactive augmented reality and a comprehensive video AI model training platform. The solution stacks and toolkits will benefit customers in the video, education, gaming and healthcare industries. Baidu Cloud is focused on using Baidu AI to solve our customer problems and increase corporate productivity. We differentiate through heavy investment in AI and our support for open source deep learning platform.

According to the World Intellectual Property Organization 2019 Artificial Intelligence Report, Baidu is the leading company globally in patent application for deep learning. Baidu is also the only Chinese Internet company listed among the top 30 AI patent advocates worldwide. In March, developer downloads of PaddlePaddle, our leading Chinese open source deep learning platform, was up 40% sequentially. PaddlePaddle helps developers to enhance and streamline their deep learning development modules and drive greater adoption of deep learning in real world applications on Baidu cloud.

Turning to iQIYI, iQIYI continue to see strong subscriber growth with membership reaching 96.8 million, increasing 58% year-over-year, and further strengthen iQIYI's foundation to offer blockbuster, original entertainment content.

A quick word on Baidu's corporate social responsibility. Baidu data centers have obtained more than 400 technology and innovation patents in China and abroad. For example, our Yangquan Cloud Computing Center, the first double five a energy saving data center in China, is widely regarded as an industry role model with an annual POE of 1.09, reaching to a top tier level at global standards, much higher than the average level in China. In 2018, through technology innovation and clean energy adoption, Yangquan Cloud Computing Center reduced carbon dioxide emissions by 177,000 tonnes. For more information on Baidu's corporate social responsibility effort, please refer to our newly published CSR report, the website link to which can be found in our earnings release.

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

Herman Yu -- Chief Financial Officer

Thanks, Robin. Hello, everyone. Welcome to Baidu's first quarter 2019 call. Before I begin financial review, let me make a few comments. All monetary amounts used in my discussion are in renminbi and all growth rates assume year-over-year growth unless stated otherwise. For the first quarter 2019, total revenues reached RMB24.1 billion, up 15%, or 21% excluding spin-off revenue of RMB1.1 billion. At the same time, we incurred a net loss of RMB327 million, due to our investment in CCTV's Chinese New Year Eve Gala marketing campaign, as well as increased loss from iQIYI.

Our net margin also decreased with our focus on in-app growth over TAC revenue growth. In-app growth changes our business model requiring us to spend more heavily upfront on marketing for app installs and user education, while monetization occurs over the lifetime of the users. TAC revenue on the other hand is earned in the quarter TAC is incurred. Investing in AI and leveraging user insight to improve user relationship management can offer us greater growth potential than Union traffic.

Revenue from TAC declined in the first quarter as bidding for Union traffic, especially on mobile, continues to be competitive. Our goal for Union traffic is to maximize profit unlike some of our peers who is bidding on negative margins. The fierce market competition for TAC is also weighing down on our Q1 margin. The bright side TAC is that Baidu's ad network is expanding into out-of-home digital screens which complement Baidu's omni-marketing strategy to reach our users in multiple ways and is becoming a source of future revenue growth.

As Robin mentioned, we are reviewing our business for opportunities to increase operational efficiency. This process will occur over the next few months and we will look for opportunity to lessen the currently planned increase of approximately RMB1 billion in cost structure each quarter for the remaining quarters this year. Nevertheless, our priority remains to strengthen our mobile foundation, including growing our search feed apps and to lead in new AI businesses. Our Board recently approved $1 billion for a stock repurchase the plan for which is effected until July 1st next year. This is in addition to the current $1 billion stock buyback plan in place, approximately $500 million of which is available for repurchase until the end of next month.

Overall, we remain optimistic about Baidu's future. In the past 19 years, we have weathered macro conditions, government policy changes and technological changes each time, returning to growth several quarters later. We are excited about our current strategy to make the fastest growing areas of content searchable while adding newsfeed to our distribution channel, to grow our ecosystem with content services and vertical offerings enabling us to perform user relationship management and to take advantage of our AI capabilities to capture market opportunities with voice assistant, cloud and autonomous driving, which may cause us to sacrifice short-term profit to optimize sustainable long-term growth.

Let me now turn to Q1 financial review. Revenue from Baidu Core grew to RMB17.5 billion or $2.6 billion, up 16%, excluding spinoff revenues, which is RMB0.1 billion lower than the midpoint assumption we had used for our Q1 guidance. During Q1, we saw revenue stream coming from education, retail e-commerce and services sector, which was of -- partially offset by weakness in healthcare, online gaming, financial services, primarily due to industry specific government regulations in our self directed healthcare initiative.

At the end of March, the majority of our healthcare customers have been switch -- have switched their ad landing pages onto our platform. Though our structured data initiative will dampen near-term revenue growth, Q2 -- and Q2 will have a full quarter impact, we believe better service quality and user experience will strengthened Baidu's foundation for sustainable long-term growth. Our structured data initiative is generating healthy traffic growth and we plan to roll out this initiative to other service sectors, such as moving companies, home services and express delivery, to improve the user experience in these areas.

Our new (technical difficulty) businesses are growing fast, particularly our cloud business which generated RMB1.3 billion in revenues in the first quarter, up 133%. Revenue for IT reached RMB7 billion, growing at a robust rate of 43%. Membership revenue continues to be strong with 9.1 million subscribers added in Q1, driven by premium content and hot originals.

Turning to cost of sales, excluding stock compensation and intangible asset amortization, cost of sales was RMB14.6 billion, up 49%. Content cost was up 47% to RMB6.2 billion, mainly due to iQIYI's increased investment in content and to a much lesser extent investment in fee content.

SGA expenses -- excluding stock compensation, SG&A expenses were RMB5.5 billion, up 94%, primarily due to the increase in China promotional market, mainly for Baidu family of apps including marketing campaigns around the Chinese New Year as well as increasing personnel related expenses. R&D expenses excluding stock compensation were RMB2.5 billion, up 25%, primary due to an increase in personnel related expenses. Non-GAAP operating income was RMB0.4 billion, non-GAAP operating income for Baidu Core was RMB2.1 billion and non-GAAP operating margin for Baidu Core was 12%.

Income tax was RMB294 million compared to RMB1.1 billion last year. Lower income tax is mainly due to lower pre-tax income from Baidu Core. Non-GAAP net income to Baidu was RMB967 million and non-GAAP net margin was 4%. Non-GAAP net income attributed to Baidu Core was RMB1.8 billion and non-GAAP net margin for Baidu Core provided was 10%.

Adjusted EBITDA was RMB1.8 billion and adjusted EBITDA margin with 7%. Adjusted EBITDA for Baidu Core was RMB3.4 billion and adjust EBITDA margin for Baidu Core reached 19% in Q1. As of March 31st, 2019, cash and short term investments were RMB143.6 billion or $21.4 billion. Excluding (inaudible), cash and short term investments for Baidu Core was RMB125.7 billion were $18.7 billion. Operating cash flow was RMB1.7 billion up. Operating cash flow for Baidu Core was RMB1.3 billion or $191 million. Total headcount of Baidu Core was approximately 32,600, down 1% year-over-over.

Turning to second quarter guidance, we expect total revenues to be between RMB25.1 billion and RMB26.6 billion, representing negative 3% to 2% increase year-over-year, or 1% to 6% increase year-over-year excluding spin-off revenues of RMB1 billion for Q2. Excluding spin-off revenues, our guidance assumes Baidu Core will grow between negative 2% and 4% increase year-over-year. These forecasts are current and preliminary view, and are subject to change.

I will now open the call to questions. Thank you.

Sharon Ng -- Director, Investor Relations

Operator, first question please.

Questions and Answers:

Operator

The question-and-answer session of this conference call will start in a moment. (Operator Instructions). Your first question comes from the line of Alicia Yap of Citigroup. Please ask your question.

Alicia Yap -- Citigroup -- Analyst

Hi, good morning Robin, Herman and Sharon. Thanks for taking my questions. I have a question regarding the app outlook and also the second quarter guidance. Could you share with us firstly, the reasons why Mr. Hailong Xiang decided to leave? Is it related to your young manager promotion program? Will this be any potential short-term impact to the search team morale or any impact to sentiment among your key search advertiser?

Based on your second quarter guidance, Herman, just wanted to clarify, you mentioned earlier, so Core Baidu revenues is implying about negative 2 plus 4% year-over-year, right? So does this have anything to do with the departure of Mr. Xiang or is it mainly the macro softness impact on the apps demands? And how long do you expect this challenging outlook to last?

Robin Li -- Chairman and Chief Executive Officer

Alicia, let me answer the first part of the -- of your question. Mr. Xiang resigned for personal reasons and Shen Dou is promoted to Senior Vice President who's in charge of our mobile ecosystem, which was formerly named search company. I think Dou is very strong. He has proven track record in managing a lot of businesses, most recently our feed business has been growing very fast. And if you look at the user front, we have already built a relatively strong mobile ecosystem with a large app -- a super app with very high DAU, the times then is growing, search traffic in the app is growing and our organic content and services from Baijiahao as well as Smart Mini Programs are all growing. So going forward, we are confident that when we view the stronger sales team and stronger monetization capability, we should be right on track for higher growth.

Herman Yu -- Chief Financial Officer

Alicia, this is Herman. Yes, I wanted to just confirm what you noticed. With regards to our guidance for Q2, we are assuming that Baidu Core will be growing approximately negative 2% to positive 4% year-over-year for Q2. And you asked us what were the considerations that we have for Q2. I think several aspects, as Robin mentioned in his prepared remarks, let me kind of summarize the key factors. I think one is macro factors that we talked about. Number two is, we started seeing, after Chinese New Year, that there's been an increase in inventory -- ad inventory release in the market. And as a result, that has been impacting our CPM. So obviously, we're going to be focusing on improving our monetization capabilities going forward.

I think earlier we talked about our healthcare initiative. I recall in November last year, we said that we're going to be doing this healthcare initiative for structured data. We are still on track. We're moving everyone -- hopefully trying to move everyone onto Baidu's landing page. So, that was done in March. So we're going to absorb a full quarter of that impact in Q2. We think over the long run, since we now understand the users better, we will understand their behavior as we are navigating on the structure side. We think that over the long term, we can continue to improve the experience. We're seeing traffic from that initiative actually increasing growth. So I think over time, we're going to be able to improve conversion. And lastly the -- well, we're assuming for the policy to have impacted us, whether it's on gaming, whether it's on financial services, on real estate, on auto and so forth, will continue to be this way. So if these industry-specific policies improve, that will be upside for us, OK.

Alicia Yap -- Citigroup -- Analyst

Thank you.

Operator

Your next question comes from the line of Eddie Leung of Thomson Asia (ph). Please ask your question.

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

Gentlemen, wondering if you could share more color with us on the growth rate you have seen of some of your key verticals, client or advertiser verticals, regarding the softness in the first quarter and second quarter? Specifically, are we seeing an across-the-board regulars (ph) with a similar magnitude, or are we seeing a couple of verticals dragging down the overall growth rate? And if so, could you talk a little bit about that field verticals, I suppose maybe medical and financial services? Anything along that line would be very helpful. Thank you.

Herman Yu -- Chief Financial Officer

Hi, Eddie, this is Herman. Let me answer that. As we -- as I mentioned in the prepared remarks, several industries probably have the slowest growth rate, healthcare, online gaming and financial services. I think these three will probably be the hardest hit on a year-over-year basis. Beyond that, as we mentioned, this is a macro impact. It's impacting our CPM, so as a result, you're seeing a slowdown of growth rate in many industries beyond those three that I mentioned.

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

That's absolutely helpful. Thank you.

Operator

Your next question comes from the line of Gregory Zhao from Barclays. Please ask your question.

Gregory Zhao -- Barclays -- Analyst

One follow up of your guidance please. So we're looking to the business segment of Baidu Core, we're now here on search, feed and cloud, I just want to understand the growth trend of each individual segment and what's the driver for each segment of your Q2 guidance? And also a quick follow-up. In your prepared remarks, you mentioned the efficiency improvement plan and you also mentioned the RMB1 billion. So is that for -- is that our saving quarter-by-quarter or more investment quarter-by-quarter? Thank you.

Herman Yu -- Chief Financial Officer

Greg, this is Herman. So two questions, one on drivers of search, feed and cloud. So I'll go first and Robin can add. So I think as we mentioned earlier, the -- so for our Q2 guidance, the four factors that we're looking at right now that's impacting our growth rate, the macro -- our initiative for structured data and the fact that the market is seeing significant increase in supply of inventory in some industry-specific policies, I think those would give you a good indication of the drivers.

Obviously, we're going to be focusing monetization. We talked about how we're going to focus on CRM, we're going to focus on other initiatives to increase our eCPM so that we can become more competitive. I think those are the drivers for advertising. And then we break out specifically for cloud that it's RMB1.3 billion, growing at 133% year-over-year. I think the driver for us is to continue to expand into different industries and to replicate a lot of the solutions -- enterprise solutions that we have, so that it's much faster to grow with the existing solutions rather than having to customize new solutions. So, that's kind of our strategy to accelerate the growth of our cloud business.

And then with regards to cost structures, we originally had planned at the beginning of the year to increase our cost of sales and operating expenses by RMB1 million per quarter. So it's increasing incrementally RMB1 (ph) billion quarter-over-quarter for the remaining quarters of this year. We have started looking at each of these areas. Our goal is to decrease the increase sequentially through our business reviews.

Robin Li -- Chairman and Chief Executive Officer

Yes, let me give you a little more color on the growth drivers for search, feed and cloud. Cloud, like I mentioned, it's growing by triple digit, it's been very fast growth rate. For search and feed, like I mentioned before, the DAU, the time spent and (inaudible) are all growing in the Baidu App. So, we have a relatively solid foundation on the user front. But on the customer front, we need to get more sophisticated, especially when we have all the user information in our native app. We can actually -- shifting our focus for managing traffic to managing users and customers. For example, when customers switch their landing page from HTML5.1 to Smart Mini Program, we typically see the conversion improve by 30% to 50%.

And the traditional Baidu online marketing business is, you'll recall, a painful (ph) performance. And when the performance improves, let's say, 30% to 50%, we certainly should be able to take a cut from that. And that's just -- the initial result, we believe that there is still lot of room to improve. And the reason for that is that in the same app, we have the user information, their mailing address, their demographic information and their telephone number, they don't need to fill out a lot of new forms before they place an order from the Baidu App. This will significantly improve the conversion rate and provide a more native app-like experience for both the users and online customers. And this kind of trend I think will be able to last for quite a few years and will drive our growth for the Core business.

Gregory Zhao -- Barclays -- Analyst

Thank you.

Operator

Your next question comes from the line of Juan Lin of 86Research. Please ask your question.

Juan Lin -- 86Research -- Analyst

Hi, good morning Robin, Herman and Sharon. Thank you for taking my question. So my question is also on Core business. As you mentioned, the DAU of Baidu App was up by 28% year-over-year and now that we're already in the middle of the second quarter, I wonder if you have seen a similar DAU improvement on a year-over-year basis for the second quarter? Also, there's the disparity between user growth and the revenue growth for the core business obviously. So I wonder when should we see user growth start to contribute to core revenue growth?

Second question is OT -- out-of-home screen and OTE. I wonder how big is the online TV and off-line screen advertising business? What is the margin profile of these two business lines and what is the growth trend for these two business lines? Thank you.

Robin Li -- Chairman and Chief Executive Officer

It's going to be a gradual process to see user growth turning into revenue growth. Like I mentioned, there are a lot of work we can do and we already started to do this kind of work. We will focus more on managing our users and managing our customers, so that the conversion will continue to improve and so that customers are willing to pay more going forward. And on the outdoor digital screens, those are not really off-line screen, those are all online screens. We can leverage this FYSR (ph) mobile, in-home devices, auto, in-auto services to do online marketing. And when we are able to connect the users and customers across all different platforms, I believe that the customers will be better served.

Juan Lin -- 86Research -- Analyst

(multiple speakers). Sorry, please go ahead.

Robin Li -- Chairman and Chief Executive Officer

Go ahead, Juan.

Juan Lin -- 86Research -- Analyst

So just a quick follow up on the user growth for the second quarter. So far -- have you seen a similar year-over-year growth in terms of core mobile Baidu App in terms of user growth so far in the second quarter?

Robin Li -- Chairman and Chief Executive Officer

I would say that our user growth continued to be healthy, but we typically do not give up -- a daily basis update of the DAU growth.

Herman Yu -- Chief Financial Officer

Yeah, just to address an add to that Jen that the 22% year over year is World report for March. So if you're implying that it was this you know impacted by the Chinese New Year, the Chinese year as you know happened in the first half of February. So whatever the impact it does have a branding effect that allows users to continue to come back even after Chinese New Year. So I think March is a good indication of the fact that at that they're making campaign work and that people remember and that people are willing to come back to Baidu App.

Juan Lin -- 86Research -- Analyst

Thank you very much.

Operator

Your next question comes from the line of Piyush Mubayi by Goldman Sachs. Please ask your question.

Piyush Mubayi -- Goldman Sachs -- Analyst

Thank you, Robin, Herman and Sharon. I wonder whether you could split your guidance and the slowdown that you're seeing into 2019 second quarter between macro, the release of new inventory that you talked about, Herman, and the issues that you're facing with the healthcare initiative for structured data, if you could split it? And then if you could talk through if at all possible into when we could see the recovery for the -- for us, in particular the healthcare factor into the second half of 2019.

And my second question is concerning your gross margins which, for the Core for the first time, appear to be in the 50s. It looks like based on our numbers, about 55%, a number we haven't seen in a long time. Should we expect that to be the run rate into the second quarter and the rest of the year? Thank you.

Robin Li -- Chairman and Chief Executive Officer

Hey, Piyush, can you repeat that again? I think what you're implying for 50-some percent?

Piyush Mubayi -- Goldman Sachs -- Analyst

The growth (technical difficulty) margin -- the gross profit margin for the second -- for the first quarter looks like it's 55%, which is lower than the 64%, 68% and 70% we've seen in 4Q, 3Q and second quarter for the Core business. So is that the run rate we should be factoring in as we think through the rest of 2019?

Herman Yu -- Chief Financial Officer

Yes, good question. I think for our gross margin, the two factors you want to consider, number one, is the fact that we're selling smart devices into homes, DuerOS. So hardware sales, as you know, margin is very thin. So as a result, the more hardware sell -- we're selling, and as we mentioned on the prepared remarks that Q1 sales was basically equivalent of all of last year. So while on the one hand, this sell is doing really well, it's going to impact our margin.

And secondly, as I also mentioned in the prepared remarks of our TAC revenues, so you're seeing TAC revenues on the whole declining. At the same time, you're seeing the cost of TAC revenue growing close to 40% year-over-year in Q1. So, these are two factors. I would expect going into Q2 similar trend where you have -- Q1 TAC revenue was declining. Going into Q2, I don't think the TAC revenue is going to grow to -- strongly at all. On the other hand, I expect smart devices to continue to do well.

Robin Li -- Chairman and Chief Executive Officer

And yes, on the headwind you mentioned, macro, new inventory and structure of that data, it's very hard for us to accurately split the percentage amount, these factors, but I think that general direction is that for the structure of the data, we have built a good base to improve from. There are a lot of levers we can pull to improve the conversion, improve the user experience. When those content structures and hosted on Baidu, we're essentially using the Baidu name to endorse those institutions. So longer term, the conversion should get better and better. For the new inventory, new app inventory on the market, we saw a flash over the past -- earlier this year, but my expectation is that it's not going to get worse but it will probably stay the same for the rest of the year. And for macro, there are still a lot of uncertainties that we really do not have accurately.

Herman Yu -- Chief Financial Officer

Yes. And I wanted to add a few more points on structured data initiatives. I think this is an area where I think it's good for Baidu. I think this is something that, in the short term, is going to impact on margin, but long term this builds a solid foundation for us to grow for several reasons, because what you're doing is you're taking over the landing page, right? So you put on Baidu technology. So in the past, business model is someone searches, we send it to an H5 site and we no longer know what that user does. And then there could be a lot of false advertising on the landing page. We're now requiring the content to be on Baidu and we're using our technology to screen it. So, we gained several things. Number one is we get to understand the users more, and at the same time we request, for example, for these medical institutions that they have the physicians vial (ph) which will allow us in the future to do verification.

We try to do rating because we now have more relationship with this particular vendor, and we would ask for things like certain business license and so forth. We're able to -- because it's on our technical platform, we can do screening using our AI. We're adding social elements to this so that people can comment on these and rate these vendors and so forth. So, you can think of how structured it is, very similar for example, to e-commerce where once you have the rating system, you have social and then being able to monitor what's on their site, improve the user experience. You can see that also, for example, with hotels on travel sites and so forth. So I think over time, you're going to actually see us build a solid foundation for revenue improvement because we think there's going to be better conversion. Already, we're seeing traffic in the medical healthcare areas improve as a result of doing this.

Piyush Mubayi -- Goldman Sachs -- Analyst

Thank you very much.

Operator

Your next question comes from the line of Grace Chen from Morgan Stanley.

Grace Chen -- Morgan Stanley -- Analyst

(technical difficulty) app business. Several Internet companies have mentioned about the challenges in online advertisement business in the first quarter. And I think they all point out to similar reasons, including macro regulations and supply increase. So I'm wondering, apart from these three common factors, are there any other specific -- company-specific factors that would differentiate Baidu to perform better or face more challenges in terms of the online ad revenue in the following quarters versus your peers. Thank you.

Robin Li -- Chairman and Chief Executive Officer

I think when we look at the changes in the marketplace, they're I think out of control like macro, but they are -- so we pretty much focus more on things that we have control of, which is how do we improve the user experience and customer experience and therefore improve conversion. Like I mentioned before, by replacing HTML5 sites with Smart Mini Program, we can typically improve the conversion by 30% to 50%. And by hosting the landing page using structured data, we're basically endorsing the customers with Baidu brand and we're also providing third party more objective comments about those advertising materials. This well in the long run improve the conversion. And when conversion is improved, the revenue should follow. I think this is more Baidu specific and we have better control of.

Herman Yu -- Chief Financial Officer

Yes, Grace, and I think the other question you were asking -- or you're implying from my understanding is you're comparing us to our peers and you were asking us probably on the growth rate. I think in addition to those three areas, one is our -- we spend across many industry. Secondly, I think is the structured data, we talked about various ads on our platform that we want to -- we've been doing this starting late last year, that we want to actually ensure that we have a better user experience. So as a result, it's a matter of derisking the properties in Baidu so that in the future we have a more solid foundation to grow.

So I think structured data initiative fits into that, and that's probably something that we're doing that a lot of peers are not doing. And as a matter of fact, by doing this, some of our peers probably would benefit from some of the advertisers that we select -- that we reject. But what that means is that you have short-term growth and then you also have a higher risk in the future. So we think that again, our focus right now is how do we maximize our long-term growth, how do we improve the healthiness of our advertising and so forth.

Grace Chen -- Morgan Stanley -- Analyst

Got it. Thank you.

Operator

Your next question comes from the line of Jerry Liu of UBS. Please ask your question.

Jerry Liu -- UBS -- Analyst

Hi, thank you very much. First, just following on with the advertising discussion, I want to ask about two of the verticals we discussed, one's healthcare and one's online gaming. Could we see some improvement in ad demand here potentially healthcare as we move on the landing pages and in online gaming as the regulatory approvals are restarting? And then secondarily, just a clarification on costs; do we -- so net of the investments and the cost savings, how do we see OpEx trending for the rest of the year? Thank you.

Herman Yu -- Chief Financial Officer

Hi Jerry, so a couple questions, in terms are there upsides to the industry specifically for healthcare and gaming. I think we talked a lot about healthcare. I think the key driver there is we switch the majority of our medical advertisers at the end of Q1. So in Q2, we're going to have a full quarter hit because typically when you switch those sites, the users come to us and I say, they have to get used to it. And it will take a while for them to get used to it, get the conversion to where we are before the switch. And then I think over time, because traffic in this area, searches are increasing, it shows user experience are getting better and we are now getting better understanding of what the users do after they go to the landing page. So I think over time, using our technology and our experienced, we should be able to improve conversion. So I think once we can do that, you'll be able to see that the growth will come back in healthcare.

With regards to gaming, I think you're right. I think for all the industry-specific policies, it's going to be in a similar fashion that once, for example, gaming license you're seeing more and more getting approved, that's going to cause the game developers to be able to develop new games. So whenever they develop new games, they want to launch new games and so for, I think that revenue is going to come back.

I think the other factors that we talked about in our prepared remark is the fact that there's government economic stimulus right now, including a RMB2 trillion for tax breaks and for other benefits of related costs. So those type of things, we didn't factor in what the hell (ph) that's going to impact our business because it's hard to quantify, but if those things start to take toll that is a potential upside.

With regards to our cost structure, as I mentioned, we currently plan about increasing RMB1 billion per quarter for the remaining of the year. What we're doing is going through our businesses to see how much we can reduce that. So I think ultimately, you're probably going to still see sequential increase, but we would like to not increase at the rate of RMB1 billion per quarter. Okay, I hope that helps.

Jerry Liu -- UBS -- Analyst

Thank you.

Operator

Your last question comes from the line of Wendy Huang from Macquarie. Please ask your question.

Wendy Huang -- Macquarie Research -- Analyst

Thanks for this follow up on that. First is a follow-up on the structured data for the healthcare. So Herman, you mentioned earlier the full quarter impact will be seen second quarter. So does that mean from the Q3 onwards, we should actually see the growth to actually resume both sequentially as well as year-over-year? And also, has this changing the structured data for the healthcare actually affected the number of advertisers in the healthcare industry?

And also regarding the advertiser side, so are we seeing the lower spending from rapid builder advertiser each or are we seeing actually the less amount of smaller advertisers because they're actually dying down due to the macro? Thank you.

Herman Yu -- Chief Financial Officer

Hi Wendy, that's a mouthful of question there. With regards to healthcare, it's hard for me to predict going into Q3. My initial reaction would be that if Q2 is going to have a full quarter impact, we're probably not going to be able to learn enough about the users and change the user behaviors and so forth in just a matter of a couple of months. It will probably take us a bit longer. I can't say at this point when that turning point is going to be, but I don't think it's going to be a few years, OK.

On the other hand, with regards to a number of customers, yes, as we're being more selective on the quality of our customers, that's going to cause us to actually decrease the number of customers for the healthcare but I think it's a good thing. As I mentioned, it's a matter of do you want to derisk your properties and have a good foundation of future growth? We always believe maximizing our future growth is where we want to be. And you're going to some of our peers picking up these probably unhealthy advertisers and probably showing near-term growth. But at the same time, that comes with the risk and regulations and so forth.

With regards to are we seeing ARPU with our industries and so forth, I think in general, as I mentioned, this is a macro impact. So we're seeing ARPU. It depends on which industries, which areas. So it's not -- in the past, on a year-over-year basis we probably see ARPU increase across the board. I think this is a quarter, especially when we go into Q2, where it's going to be mixed. It's hard to have one generalization for all the industries.

I think right now, with eCPM not growing as fast as we had hoped for after Chinese New Year, then we're going to have mixed results across the board. So I think fundamentally, for us what we can control is to improve our monetization capabilities to focus on how do we become better versus our peers. And that's what we've been starting to do.

Wendy Huang -- Macquarie Research -- Analyst

Thank you, Herman.

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: 67 minutes

Call participants:

Sharon Ng -- Director, Investor Relations

Robin Li -- Chairman and Chief Executive Officer

Herman Yu -- Chief Financial Officer

Alicia Yap -- Citigroup -- Analyst

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

Gregory Zhao -- Barclays -- Analyst

Juan Lin -- 86Research -- Analyst

Piyush Mubayi -- Goldman Sachs -- Analyst

Grace Chen -- Morgan Stanley -- Analyst

Jerry Liu -- UBS -- Analyst

Wendy Huang -- Macquarie Research -- Analyst

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