Baidu (BIDU) Q2 2023 Earnings Call Transcript

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Baidu (BIDU 0.62%)
Q2 2023 Earnings Call
Aug 22, 2023, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, and thank you for standing by for Baidu's second quarter 2023 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, Juan Lin, Baidu's director of investor relations.

Juan Lin -- Director, Investor Relations

Hello, everyone, and welcome to Baidu's second quarter 2023 earnings conference call. Baidu's earnings release was distributed earlier today, and you can find a copy on our website, as well as on newswire services. On the call today, we have Robin Li, our co-founder and CEO; Rong Luo, our CFO; Dou Shen, our EVP in charge of Baidu AI cloud group, ACG; and Zhenyu Li, our SVP in charge of Baidu intelligent driving. After our prepared remarks, we will hold a Q&A session.

Please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. For detailed discussions of these risks and uncertainties, please refer to our latest annual report and other documents filed with the SEC and Hong Kong Stock Exchange.

Baidu does not undertake any obligation to update any forward-looking statements, except as required under applicable law. Our earnings press release and this call includes discussions of certain unaudited non-GAAP financial measures. Our press release contains a reconsideration 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 be available on Baidu's IR website. I will now turn the call over to our CEO, Robin.

Robin Li -- Co-Founder and Chief Executive Officer

Hello, everyone. I'm pleased with our financial performance in the second quarter. Revenue from online marketing increased by 15% year over year, reflecting improvement in advertiser sentiment. In Q2, non-GAAP operating profit for mobile ecosystem continued to strengthen, and AI Cloud once again delivered positive operating profit.

At the same time, we are facing tremendous opportunities in foundation models or, more broadly, AGI. Today, I would like to share an update on our ongoing business transformation by utilizing ERNIE and ERNIE Bot, as well as our achievements in this field. After that, I'll briefly go over the operational highlights for each of our business. Over the past few months, foundation models have captured the imagination of people and businesses around the world.

It is becoming increasingly clear that foundation models will fundamentally transform work across industries, boosting overall productivity and accelerate the wider democratization of AI innovation. Right now, we are in the midst of a scrolling period. This is due to the fact that the hard work we've poured into generative AI over the years is now beginning to bear fruit. This pivotal and transformative opportunity is setting the stage for Baidu's future success, and we couldn't be more excited about it.

On product and service front, we're using ERNIE and ERNIE Bot to improve, rebuild, and create new offerings. On the product side, we are reinventing our products, building AI-native apps. For vital search, AI has played an important role for many years in driving innovation and improving user experience, resulting in a consistent increase in the percentage of search queries by one-shot search results. It means the first search result displayed on the result page that can provide a satisfactory response to a search query.

We're using ERNIE Bot to enhance search experience, making Baidu Search capable of answering complex questions that were previously unanswerable. For example, please craft a marketing campaign proposal for a smartphone launch event, or what kind of new energy vehicles would be suitable for a family of six with a budget of RMB 300,000. ERNIE Bot also enables Baidu Search to assist users with more personalized and in-depth research on a topic or project. The feedback from users who have tested these new features has been positive.

Another example of product innovation is Baidu Wenku, where many users search for articles, papers, books, or templates to create documents on a wide range of topics and in many formats. We are currently beta testing an AI assistance feature that can generate customized content for users based on their request. User engagement and retention among Baidu Wenku testing users for such feature saw significant improvement. For example, users have doubled their time spent on Wenku after trying out the AI assistant feature, and they are more likely to become paying users.

Currently, Wenku has over 100 million monthly active users, and we believe such an intelligent feature will help Wenku attract even more users and convert nonpaying users to paying users once it is rolled out on a large scale. Generative AI offers bright horizons for our online marketing business, and we are actively using the technology to build and rebuild our marketing products. Actually, our online marketing business has relied on AI for years to provide more value to advertisers. Last quarter, we shared our progress on using AIGC to automate app creation in text format, which leads to an increase in conversion rate.

This quarter, we further enable advertisers to use AIGC to generate image and video ads with natural language. In Q2, we further improved our monetization system by using generative AI to broaden ad campaign keyword to user search queries, driving better manipulation for advertisers. For example, an online professional education company and conversion increased by about 16% in August after using this new feature. We are consistently enhancing our system, are using generative AI, and we expect to introduce more and more new features in the coming months.

Additionally, we have been leveraging generative AI to enhance our auction system so that it can better match app to search queries and search intent. Such improvement helped increase Baidu Search eCPM in Q2 and contributed to the year-over-year growth in online marketing revenue in the quarter. We're also in active conversations with advertisers to get their input on how to further make our marketing products work best for them. Meanwhile, we will continue to leverage ERNIE and ERNIE Bot to help advertisers create sophisticated end campaigns and improve ROI on Baidu.

One other initiative I'd like to mention here is that, internally, we introduced an AI assistant within InfoFlow, Baidu's self-developed enterprise communication and collaboration platform. The AI assistant automates various workflows such as summarizing meeting notes, chat histories and workplace content, drafting documents, generating charts, facilitating knowledge Q&A, and completing tasks, such as creating meeting invites, applying for vacation days, and conducting data analysis using natural language. This assistance helps our employees work more productively. We plan to open up the intelligent features of InfoFlow to our customers in the future.

Alongside our own products, we are empowering cloud customers to build their transformative products and services using ERNIE Bot. In Q2, the number of corporates connecting to ERNIE Bot continue to grow. Foundation models, large language models, and generative AI are expanding our total addressable market, attracting new customers while also increasing sales to our existing customers. We are also using ERNIE and ERNIE Bot to help customers in various industries address real-world challenges with unprecedented effectiveness and competence.

This further strengthens the capabilities of ERNIE and ERNIE Bot, empowering them to take on more significant roles in solving industry-specific issues. For example, in the software development industry, we launched Baidu Comate, an AI coding assistant to the public in June. Baidu Comate aids people in coding and can be used in multiple programming languages. It has now been widely adopted by Baidu's own R&D team, who have reported a meaningful improvement in their productivity after using Comate.

As of today, more than 100 organizations have tested Baidu Comate, and some of them have already decided to purchase Baidu Comate to boost productivity in coding. In the healthcare industry, we are solidifying our presence by utilizing industry expertise and sales network developed through our collaboration with leading hospitals in China. Gushengtang Limited, a traditional Chinese medicine clinic chain, is using our ERNIE-based model developed for the healthcare industry to support doctors and their patient care. Our AI assistant helps doctors write notes for patients, analyze medical images, and make informed clinical decisions, among other tasks.

It also helps patients find the most suitable doctors and departments and provide pre-consultation service online. Furthermore, we've developed tools for model training and fine-tuning, data processing, labeling, and more. These tools help to lower the threshold and cost for enterprises to use foundation models on Baidu and support them to train and operate their purpose-built models efficiently. Additionally, Baidu AI Cloud stands out as our AI-optimized cloud infrastructure, makes us a top-performing platform for training and serving foundation models, including large language models.

This is why more and more enterprises are upping their digital spend on our cloud infrastructure to capture the new AI opportunities. This is particularly obvious among internet and tech companies as they are early adopters of gen AI and foundation models. Shifting our focus to technology, at Baidu, we maintain an unwavering commitment to improve ERNIE. During Q2, we unveiled ERNIE 3.5, our latest state-of-the-art foundation model powered by PaddlePaddle.

Notably, PaddlePaddle enhancements enabled our self-developed four-layer AI architecture to operate more seamlessly than ever before, significantly improved the framework's compatibility with ERNIE and demonstrating engineering excellence. As a result, compared to ERNIE 3.0 version in March, Ernie 3.5 has tripled its training throughput. And its queries per second, or QPS, for inference have increased by more than 30 times. Additionally, I'm proud to note, that IDC recently reported that ERNIE 3.5 surpassed peers in many areas such as algorithms, industry coverage, developer tools, and ecosystems.

As compared to ERNIE 3.0, 3.5 is capable of producing safer, more responsible, and more creative responses, making significant improvements in question answering, reasoning, and coding. ERNIE 3.5 is now powering ERNIE Bot with plugins to expand its functionality to cover real-time and precise information, long text summary, data analysis and visualization, text-to-video conversion, and facilitate dialogues that include images. We are committed to enriching our ecosystem by adding more high-quality plugins, in particular from third parties, to contribute to the advancement of China's foundation model. On the ecosystem front, we are determined to make ERNIE the most popular foundation model in China.

Importantly, we believe foundation models should be able to well support problem-solving capabilities for various industries. As a result, we need to work collaboratively with our partners, such as enterprises and AI developers, to continually build industry models and solutions. Our 8 million developers on PaddlePaddle are the anchor that we can leverage to build a community for ERNIE. To foster a vibrant ecosystem, we hosted Baidu ERNIE Cup Innovation Challenge.

It attracted almost 1,000 start-ups to submit their ideas and prototypes, covering various fields, encompassing productivity toward developers, sales and marketing companies, entertainment companies, social platforms, middleware developers, as well as applications across different industries, including education, healthcare, finance, etc. We have also launched a venture fund of RMB 1 billion to support start-ups in developing all kinds of AI-native applications, which will complement our organic growth. On regulation, Baidu has recently -- Baidu was recently appointed as a leader of China's LLM standardization task force at the World AI Conference. This position signifies national-level recognition and endorsement of our foundation models and AI capabilities.

While we are still waiting for the green light for large-scale rollout of ERNIE Bot, we have observed that Chinese government has been increasingly supportive of the development of gen AI and LLM. As a market leader, we believe Baidu is well capable of benefiting from the opportunity and contributing to this mega trend in China. Now, let's have a quick look of the second quarter operating highlights for each business. Revenue from AI Cloud increased by 5% year over year to RMB 4.5 billion in the quarter, and AI Cloud maintained positive non-GAAP operating profit.

Our business has become healthier than ever, laying a solid foundation for future growth. On intelligent driving, in Q2, the rides provided by Apollo Go increased by about 150% year over year to around 714,000, resulting in accumulative ride exceeding 3.3 million, which is greater than our closest competitors by orders of magnitude. This leadership in operations implies competitive advantages in data quantity and quality, better model, and greater safety rate. In addition, Apollo Go has widened its footprint in fully driverless ride-hailing services in more cities.

In mid-June, Apollo Go received a permit from Shenzhen Pingshan government to offer fully driverless ride-hailing services to the public. And in early July, in Shanghai, we were allowed to conduct fully driverless testing on open roads as well. With the expansion of the area and fleet size for fully driverless operation, along with the improvement of operational efficiency, we witnessed growth not only in the total average daily orders but also in the portion of fully driverless orders within the overall order portfolio. This highlights a promising pathway for improving the unit economics of autonomous driving business.

In particular, in Wuhan, where we initiated fully driverless ride-hailing services one year ago, the UE continued to improve in the past few quarters. On the revenue side, the average daily order volume and revenue per order have surged, propelling total revenue to grow. Meanwhile, the cost per kilometer per car is decreasing as well, thanks to improved operational efficiency. Finally, on mobile ecosystem, our users continue to grow with Baidu App's MAUs increasing by 8% year over year to 677 million in June.

Also, in June, videos distributed by Baidu App achieved double-digit growth year over year. Baidu remains a significant platform for users who are seeking a wide range of content such as information, products, and services. The revenue growth rate for online marketing accelerated in Q2, aided by strengths in various verticals with offline exposure, including healthcare, business services, local services, and travel. At the same time, revenue from e-commerce demonstrated strength and outperformed in the quarter.

Non-GAAP operating profit for mobile ecosystem grew steadily year over year in the quarter. Mobile ecosystem continue to generate robust cashflow to fund our investment in AI, particularly in foundation models and generative AI. We are confident that revenue, profits, and cashflow generated from our mobile ecosystem will remain strong in the future. With that, let me turn the call over to Rong to go through our financial results.

Rong Luo -- Chief Financial Officer

Thank you, Robin. Now, let me walk you through the details of our second quarter financial results. Total revenue was RMB 34.1 billion, increasing 15%, one-five, year over year. Revenue from Baidu Core was RMB 26.4 billion, increasing 14%, one-four, year over year.

Baidu Core's online marketing revenue was RMB 19.6 billion, increasing 15%, one-five, year over year. Baidu Core's non online marketing revenue was RMB 6.8 billion, up 12% year over year. And in Q2, AI Cloud revenue increased by 5% year over year to RMB 4.5 billion. Revenue from IT was RMB 7.8 billion, increasing 17%, one-seven, year over year.

Cost of revenue was RMB 16.2 billion, increasing 7% year over year. Baidu Core's cost of revenue was RMB 10.6 billion, increasing 4% year over year. Operating expenses were RMB 12.7 billion, increasing 14% year over year, primarily due to an increase in channel spending, promotional marketing expenses, server depreciation expenses, and cloud-related expenses, which supports the earning board research inputs and partially offset by the decrease in personnel-related expenses. Baidu Core's operating expenses for RMB 11.3 billion, increasing 15%, one-five, year over year.

Baidu Core SG&A expenses for RMB 5.3 billion, increasing 34% year over year. SG&A accounted for 20% of Baidu Core revenue in the quarter compared to 17%, one-seven, in the same period last year. Baidu Core R&D expenses was RMB 5.9 billion, increasing 2% year over year. R&D accounted for 23% of Baidu Core revenue in the quarter and decreased from 25% in the period last year.

Operating income was RMB 5.2 billion. Baidu Core's operating income was RMB 4.6 billion, and Baidu Core's operating margin was 17%, one-seven. Non-GAAP operating income was RMB 7.3 billion. Non-GAAP Baidu Core's operating income was RMB 6.5 billion.

And Non-GAAP Baidu Core operating margin was 25%. Total other income net was RMB 1.4 billion, compared to RMB 151 million in the same period last year, primary due to the increase in net foreign exchange gain and net interest income, partially offset by the increase of federal loss from long-term investments. Income tax expenses was RMB 1.3 billion compared to RMB 25 million in the same period last year. The lower level of income tax expenses in the second quarter of 2022 is primarily due to the reversal of certain tax expenses based on the 2021 tax return.

Apart from the reversals, the main reason for the increase of income tax expenses is the increase in profit before tax year over year. Net income attributable to Baidu was RMB 5.2 billion, and diluted earnings per ADS was RMB 14.17. Net income attributable to Baidu Core was RMB 5 billion, and net margin for Baidu Core was 19%, one-nine. Non-GAAP net income attributable to Baidu was RMB 8 billion.

Non-GAAP diluted earnings per ADS was RMB 22.55. Non-GAAP net income attributable to Baidu Core was RMB 7.7 billion. Non-GAAP net margin for Baidu Core was 29%. As of June 30, 2023, cash, cash equivalents, restricted cash, and short-term investments were RMB 201.5 billion.

And cash, cash equivalents, restricted cash. And short-term investments, excluding iQIYI, were RMB 196.9 billion. Free cash flow was RMB 7.9 billion. And free cash flow, excluding iQIYI, was RMB 7.1 billion.

Baidu Core had approximately 35,000 employees as of June 30, 2023. With that, operator, let's now open the call to questions.

Questions & Answers:

Operator

[Operator instructions] Our first question today comes from the line of Alicia Yap with Citigroup. Please go ahead.

Alicia Yap -- Citi -- Analyst

Hi, thank you. Good evening, management. Thanks for taking my questions. Congrats on the solid results.

So, can management provide update on the current state of the advertising industry, including how online and offline platforms are recovering? Can management also share about the pace of recovery for key industry and which one has stronger seasonality? And then, in addition, can management also discuss the main drivers for the growth in this industry. And finally, what are the medium-term growth targets for ads as we are now already behind the pandemic and with the current latest macro situation? Thank you.

Robin Li -- Co-Founder and Chief Executive Officer

Hi Alicia, this is Robin. Let me answer your question. Our online marketing revenue increased by 15% year over year last quarter. I think a number of drivers contributed to this growth.

On the vertical side, as we are coming out of the pandemic, many offline verticals, like healthcare, fin services, local services, and travel, continue to outperform. For example, healthcare, we saw solid year-over-year growth in both search queries and eCPM, which leads to revenue strength. We're seeing this momentum continues. Offline sector contributed to a sizable amount of total online marketing revenue to Baidu.

And in the meantime, e-commerce continued to grow in Q2 and Q3 and remain top revenue contributor. For a market like e-commerce, it's highly competitive. So, more and more merchants, they come to realize the value of Baidu, and they come to us to acquire new users and buyers and also invite their existing buyers to come back and buy more. For the second half of the year, we should continue to see a pretty clear recovery trend for our online marketing business.

Also remember, search remains the most effective form of performance-based ads. This is because users approach search with a clear intent, and search ads allow us to connect this intention directly with the most relevant product service offering. In fact, the eCPM for search outgrow other app formats in the quarter, reflecting this effect. Due to the relatively high comp base in Q3, the growth rate might not be as high as Q2, but it should well outperform China's GDP growth.

Additionally, as we have more immersive video features, more and more users are watching the short videos on Baidu. Short videos distributed through the Baidu App again grow by double digits in Q2. As a result, revenue from short videos continue to grow as well, contributing meaningfully to the overall online marketing revenue growth. Looking into the mid to long term, I believe both user traffic growth and monetization upgrade are important growth drivers for our online marketing business.

And on the user side, I talked about our MAU. It grows by 8% year over year. I mean, Baidu App's growth rate in June -- in the month of June. If we look at search, we are renovating the Baidu Search step by step using ERNIE Bot.

We believe it will provide users with innovative and intuitive experience, which will help our mobile ecosystem gain traffic and increase user time spent. And on the monetization side, we've been leveraging AI to improve ad-targeting capabilities in our bidding system for a number of years. And now with ERNIE and ERNIE Bot, we're further upgrading the game. I mentioned earlier that we have made some major improvements in advertising technology by using our LLM and the generative AI for more innovative and personal life.

I believe there are lots of room for growth in this aspect, and I look forward to further break it. Such improvements in monetization technology have started to contribute to revenue and ECPM growth starting from this quarter, Q3. Thank you.

Operator

The next question comes from Gary Yu with Morgan Stanley. Please go ahead.

Gary Yu -- Morgan Stanley -- Analyst

Hi, thank you for the opportunity to ask questions, and congrats on the solid results. I have a couple of questions related to AI product and monetization. First is, can management share some insight on how users have responded to the integration of ERNIE Bot in multiple products? Any new development or features that have come up with the ERNIE Bot offerings? [Technical Difficulty] with market growth in China internet and specifically in the mobile internet sector. And also, lastly, I would like to know more about the monetization and will that play a role in your advertising business.

And also, [Technical Difficulty] update in key industries and use cases related to [Inaudible]? Can you provide additional information on the business model and also potential revenue? Specifically, we'd like to gain a better understanding on financial impact on cloud performance. Thank you.

Robin Li -- Co-Founder and Chief Executive Officer

Hi, Gary. Let me answer the consumer-facing products part of your question, and I'll have Dou talk about the enterprise side, especially cloud business. I think it's clear we are in a paradigm shift in our business. With our early commitment to AI, we saw this time coming.

We are reinventing our consumer-facing products. It's an AI-native mindset. As I mentioned in my opening remarks, we are rebuilding our search experience. Users who are testing our ERNIE Bot-enabled Baidu Search and Baidu App tend to ask more questions that were not frequently searched in the past.

And they tend to have multi-run conversation and interaction. This is quite different from the user behavior for traditional search. Therefore, you know, it's incremental business for us. We are using generative AI to construct direct answers to user queries.

This typically creates better and easier-to-understand answers than [Inaudible] from existing web pages. We see increases in clickthrough rate and user retention rate for this kind of changes. We also launched the testing version of ERNIE Bot app, a stand-alone app that is built upon our latest generative AI and LLM. And it aims to serve users as a personal assistant.

We see ERNIE Bot as a potential new traffic gateway that can connect users to various applications, including Baidu and other third-party applications, to address user needs. We also launched ERNIE Bot plugins like search, like chat file, e-chart, etc. Developers will soon be able to submit their applications as ERNIE Bot plugins. For Baidu Wenku, with the AI assistant feature, our average user time spent more than doubled.

And the seven-day retention rate has increased by almost 10%. With the AI assistant, I will not be surprised that we can convert more users into paying accounts and charge a premium for the new AI function in the future. Overall, we are highly encouraged by user feedback. This is just the beginning for us to reconstruct all the products and businesses that's LLM and generative AI.

Very importantly, we have also seen promising opportunities to lift the monetization capability by rebuilding our advertising system. As I mentioned in the prepared remark, ERNIE and ERNIE Bot allow us to continue improving our targeting and ad-bidding system. All in all, I believe that generative AI will help us gain market share of many products and ultimately become a new growth driver for our online market.

Dou Shen -- Executive Vice President and Head of AI Cloud Group

Hi Gary, for your second part, right, so for the impact on our cloud business, I would first mention that the beauty of the foundation model and the generative AI is that it can help organizations in many industries to increase productivity and efficiency. We see more and more enterprises willing to adopt such latest AI technologies, and that's why we would say the new technology is increasing our time. Specifically, ERNIE and ERNIE Bot have been helping our customers from different industries to handle their business challenges more effectively, ranging from software, internet, healthcare, education, finance, even to the public sector. So, they use ERNIE and ERNIE Bot to train models, to build applications, and to improve solutions for efficiency gain, such as improving their customer service, producing different kinds of content, writing code, providing knowledge searches within their organizations, as well as increasing their sales and marketing efforts.

Now, as to the business model that you just asked, I think it's still at its very early stage, and it's evolving. Though we have our preference, we are pretty open and would like to take any effort to speed up the growth of generative AI. So, in addition to providing AI computing infrastructure to our customers, we also consider charging customers for the usage of ERNIE and ERNIE Bot or using our AI applications such as Comate Robin just mentioned. And also, we can charge our customers for retraining or operating their own models on our platform.

Or we can deploy the foundation models, you know, to our customers' private cloud on the project basis. So, we expect the revenue generated from the new opportunity to be gradual, but we believe the long-term potential is immensive. So, we'll continue to invest in ERNIE and ERNIE Bot to serve our customers well for the long term. That's it, Gary.

Operator

The next question comes from Lincoln Kong with Goldman Sachs. Please go ahead. 

Lincoln Kong -- Goldman Sachs -- Analyst

Thank you, management, for taking my question, and congrats on the solid quarter. So, my question is about the cloud business. So, could management help us understand the main reason for the revenue slowdown for cloud this quarter? And when do we expect the revenue to pick up or accelerate again? When we're looking ahead into the second half of our entire year of 2023, how is the revenue growth trajectory expected to play out, and what factors will be driving that? And also on the profitability side, I'm also curious whether this profit breakeven on a non-GAAP operating level is sustainable. And what's the current trend for the AI Cloud profitability? Thank you.

Dou Shen -- Executive Vice President and Head of AI Cloud Group

OK, thank you for that question. I'll take it. So, cloud revenue grows 5% year over year in Q2, and we continue to generate profit on the non-GAAP operating level. It means that our business is becoming healthier, laying solid foundation for sustainable growth in the future.

governance to religious products, in which you really take a longer time to recover after the pandemic. But many enterprise religious products in the key verticals like manufacturing, utilities, and internet service have demonstrated quite solid growth in Q2. As I just mentioned before, you know, we see strong interest from existing and new customers in generative AI. So, while some of them, directly leverage ERNIE or ERNIE bot to enhance their products, to improve their operational efficiency, so some of them actually choose our AI infrastructure as a foundation for their models and applications.

Though it may take a little while to see significant revenue contribution, this opens up a very new space for our cloud business where we're already in a leading position. So, on the profit side, you know, we believe we can keep generating operating profits from the cloud as we did in the previous quarters. So, this indicates that actually our business is becoming increasingly healthy. But we are going to keep standardize our AI solutions that can effectively address AI critical pain points and then replicate them from one project to another, which will further grow the margin and profit.

Operator

The next question comes from Kenneth Fong with Credit Suisse. Please go ahead.

Kenneth Fong -- Credit Suisse -- Analyst

Hi, good evening, management. Thank you for taking my questions, and congrats on the solid quarter results. I have a question regarding generative AI. Regarding the recently introduced interim measures to regulate generative AI service by the government, could you provide insights into whether this suggests an imminent authorization of the large language models? Additionally, do you have a projected timeline for the rollout of the applications utilizing these models? Thank you.

Robin Li -- Co-Founder and Chief Executive Officer

Thank you for your question, Ken. We've seen the government continue to support for tech innovation, including AI and foundation models. I think a good sign of this is that the new guidelines and specifications that came out in mid-July about how to use generative AI technology and related services in China. This is a new version, and this version went effectively, I think, in August 15th.

Compared to the previous version, this version, you can probably tell, it's more pro-innovation than regulation. We are still waiting for the green light for large-scale rollout on ERNIE Bot for its use in the consumer-facing apps. But as I said before, the government has increasingly recognized ERNIE and ERNIE Bot, which we believe provide a good foundation for the eventual release of ERNIE Bot on a large scale. Generative AI is pretty new, and it's understandable that people might have concerns about things like user privacy, you know, IP protection, AI ethics.

So, there should be certain regulatory requirements in place. And Baidu has accumulated extensive experience in providing appropriate information to a vast amount of internet users. And we are a leader in not only AI technology for commercial purposes, but also using AI for good. In fact, we are working closely with the regulators and other organizations to push the development and the proper usage of generative AI.

So, we believe we are well positioned to benefit from this opportunity and contribute to this magnitude of generative AI in China. So, while we don't have an exact date for everything, but the trend is very promising, and we're quite optimistic about the future of a better regulatory environment.

Operator

The next question comes from Wei Xiong with UBS. Please go ahead.

Wei Xiong -- UBS -- Analyst

Hey, good evening, management. Thank you for taking my questions, and congrats on the solid results. My question is also related to the foundation model. How can we assess Baidu's foundation model's performance comparing to other Chinese peers? And also, related to that, when we think about industry-specific models versus foundation models, how will the balance between these two will shape out the broader AI landscape in the future? And now, we have more companies offering or focusing on models tailored to specific industries.

So, how does management perceive the landscape in terms of opportunities and competition? So, what are our competitive edges? Thank you.

Robin Li -- Co-Founder and Chief Executive Officer

These are very good questions. When it comes to foundation model in China, ERNIE 3.5 clearly stands out. People have witnessed the fast iteration and improvement over the past five, six months. Our unique full-stack AI capabilities differentiate us from our competitors and give us an edge in the market.

As mentioned in my prepared remarks, an IDC report recently published named ERNIE 3.5 as a leader across various aspects. Like many other technologies, foundation models speed of innovation depend on the applications that use this model. Baidu is an AI company with a strong portfolio of internet products. These products are all being rebuilt and reconstructed with ERNIE Bot, therefore, drives the innovation of ERNIE into the right direction.

In other words, we know what kind of problem to solve, and I think many of our peers don't really know. They just use open domain testing sets to evaluate the effectiveness of their models. We also have, you know, tens of thousands of cloud customers testing ERNIE Bot. They provide valuable feedbacks that help the implementation.

As for the industry-specific models you mentioned, they should be built upon the most powerful foundation models. I think that with time, foundation models will rapidly evolve, given its strong capabilities to learn new subjects and gain industry insights. And the stand-alone industry-specific models will have a hard time to keep up with the pace of innovation. In fact, since ERNIE 3.5 became available, an increasing number of customers have told us that ERNIE 3.5 is visibly more advanced than ERNIE 3.0, and it has helped them solve a growing number of pain points.

And as you can imagine, we are working toward ERNIE 4.0 and should launch it by the end of the year. I believe that, ultimately, only a selected few companies will reach this level of advancement for foundation models, and Baidu will be one of them. During this transitional period, we are focused on multiple initiative to drive the adoption of foundation model. We're working hard to build ERNIE-powered applications and solutions for different industries and scenarios.

Baidu Comate is such an example. And with the upgrade to ERNIE 3.5, we are swiftly rolling out to empower enterprises create industry-specific models and applications that tackle their own challenges. Also, we offer a mass platform, which includes not only ERNIE, but also a variety of models. This allows businesses to easily view, fine-tune, and cooperate their own models using their own data.

We provide a set of valuable tools on our platform, enabling our customers to easily enhance their model training and application development. Of course, enterprises can directly access ERNIE capabilities through API to enhance their business. Recognizing that in the early stages, enterprises prioritize security, so we do provide the flexibility of using our foundation model services on both public and private clients. Our self-developed four-layer AI architecture is our core competitive advantage because we deliver better model performance when we serve our customers as shown in the testing phase over the past few months.

Our strengths in model training efficiency and cost effectiveness in turn attract more enterprises to partner with that. So, we gain more and more industry know-how and insights and building and reinforcing positive cycle to further improve ERNIE. Our ultimate goal is to cultivate an AI-native ecosystem centered around ERNIE. We believe that the true power of the foundation model lies in driving a wide array of high-quality AI-native applications, much like an operating system.

Some of the applications are built by us, while others will be built by -- I would say, most will be built by our ecosystem partners to address industry-specific challenges. To enhance this ecosystem, we're happy to invest in other companies to complement our organic growth. Just as I mentioned in the prepared remarks, we hosted the Baidu ERNIE Cup Innovation Challenge and launched a venture fund to support start-ups in developing all kinds of AI-native applications. To sum up, we will continue to improve ERNIE, make ERNIE easy to use, and help enterprises in any industry to not only retain or fine-tune models on top of ERNIE, but more importantly, leverage ERNIE and ERNIE Bot to devise their own applications.

We aim to make ERNIE the preferred choice among AI developers so that more and more applications will be built upon ERNIE in making our ecosystem vibrant. Thank you.

Operator

The next question comes from Miranda Zhuang with Bank of America. Please go ahead.

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

Thank you. Good evening, management. Thanks for taking my question. So, lately, open-source AI models have attracted significant market attention.

So, can management provide your insights into Baidu's perspective on this front and the strategy regarding the open-source versus the closed AI models? Thanks.

Dou Shen -- Executive Vice President and Head of AI Cloud Group

Thank you, Miranda. This is a very interesting question. And I believe there are quite different views on this. I think both open-source and closed-source foundation models will coexist for a while.

In fact, actually, we have already seen many models trained on top of the open-source foundation models, powering tons of applications even today on our cloud platform. But it's really tough actually for open-source foundation models to keep evolving and getting better due to the lack of effective feedback loops, which play a super important role in improving the foundation models. Additionally, building and upgrading foundation models can be very expensive. So, it is really important to build a durable business model to find the sustainable improvement of the foundation models so that they can finally provide long-term value to the market.

So, first, it's our priority that ERNIE keeps evolving quickly and remains the market leader which can then attract more and more customers to use our platform to create innovative apps and improve their business. With their feedback from the real-world scenarios, we can further improve our foundation models. Looking ahead, you know, I believe that will be a limited supply of advanced foundation models, whether open source or closed source, or even industry-specific, available in the market. So, like we just talked, as the industry progresses, enterprises will need advanced models to develop more sophisticated applications.

I bet ERNIE will be one of the few foundation models that can satisfy those evolving demands in the long haul.

Operator

The next question comes from Alex Yao with JPMorgan. Please go ahead.

Alex Yao -- JPMorgan Chase and Company -- Analyst

Thank you, management, for taking the question, and congrats on the strong quarter. I have a couple of questions on the margin outlook. Considering the opportunity of AIGC and the large language models, how should we think about the investment trajectory for the second half of this year? Additionally, once we start large-scale rollouts, what direct cost will be incurred? How should we compare the margin of ERNIE Bot or large language model related to products -- related products of the existing business, IE search, etc. More broadly, could management also provide directional color on the trends of Baidu's core margins when we look into the second half this year? After the significant cost reduction and efficiency improvements implemented last year, what will be the key drivers of the product moving forward? Thank you.

Rong Luo -- Chief Financial Officer

Thank you, Alex. Let me take your questions. This is Julius. I think previously, Robin has already talked about a lot about opportunities of the ERNIE and ERNIE Bot.

So, first of all -- so in the first place I would like to reiterate that we are highly committed to the long-term investment in this promised arrears. And to support their first upgrade of ERNIE, we have invested in computation infrastructures. If you look into our cash flow statements, you probably can see that the Baidu Core's capex in Q2 have increased over the last year. The increase is mainly due to the hardware purchase to support the training and iterations of all AI campaigns, such as ERNIE and ERNIE Bot.

But the impact on the income statement side, which is quite manageable, that's because all such hardware depreciations in general will spread over the next few years, and the impact on the near-term profitability is not substantial. The investments are expected to continue, and the magnitude of the future investments will be highly correlated to the pace of the actual business expansions rather than only supporting the model training, which means that in the near future, the spending will be sponsored by the incremental revenue, which is generated from the ERNIE bots and formulates our positive virtual circles. And regarding to the margin for the financial model and related products, I believe it's a little bit earlier to discuss at the current stage as this model is still evolving. But as Robin has mentioned earlier, powered by ERNIE, such advertising could become more customized, which would result increased ROI for advertisers.

In addition to cloud services, as Dou has just talked about, the AGI and the foundation models will empower various industries and enhance the efficiencies across different industries. So, from a long-term perspective, we believe that the customers will be increasingly motivated to leverage our services to enhance their efficiencies and increasing our pricing power and resulting in higher margins as compared to the current cloud business. If we're moving to the second half of this year for mobile ecosystem, we will continue to serve as a cash cow for the group. In the long run, our goal for mobile ecosystem is to consistently achieve high margins.

For the AI cloud side, we aim to achieve the profitability on a non-GAAP OP level and improve margins over time. For intelligent driving, while we firmly believe that it's a huge long-term opportunity, we will continue to make sure we invest at a measured pace. As a whole, our main focus is on developing sustainable growth strategies for each business, which prioritize the long-term thinking. In addition, we plan to invest in ERNIE and ERNIE Bot to take advantage of the huge opportunities presented by the foundation models and apps.

Thank you, Alex.

Operator

The next question comes from Thomas Chong with Jefferies. Please go ahead.

Thomas Chong -- Jefferies -- Analyst

Good evening. Thanks, management, for taking my questions and congratulations on a strong set of results. I have two questions. The first is about our robotaxi business.

Management mentioned that the e-commerce in some cities are improving. Could management share the logic and the efforts taken behind it? What's your plan in terms of the city expansion and the volume target for fully driverless operations in the upcoming quarters? In addition, when can we expect the LT6 vehicle to be launched? What's the projected size of the vehicle fit for this year and how could it potentially impact the cost? My second question is on auto solution. Which vehicle models will hit the road in the latter half of this year and next year? And how should we size up the financial impact on the books? Thank you.

Zhenyu Li -- Senior Vice President and General Manager of Intelligent Driving Group

Thanks for the question. This is Zhenyu. I will start from the robotaxi question. Our autonomous driving services is rapidly gaining traction in major cities, providing valuable data that fills the development of all driverless technologies.

This data is instrumental in enhancing the safety, efficiency, and overall experience for all operations. As a result, we have garnered the driving part from both customers and regulators, enabling us to expand into new locations and significantly increase our operations. This positive feedback loop of our large operations also drives the improvement of our model. And the improved model drives the expansion of our operations, propelling us to the best front of global leading in our whole autonomous driving technology.

On the logic behind the UE improvement, here, I would like to take Wuhan's operation as an example. We have continued to scale up our services in Wuhan in the past year. If you compare with the situation one year ago, you may notice that, firstly, our fully driverless fleet size has expanded significantly, growing from [Inaudible] one year ago to almost 200 in August this year. Secondly, the operation area for fleet driverless services has expanded by around 15 foot in Wuhan.

Meanwhile, the operation hours have been further extended, covering both peer hours in the morning and the evening, as well as the late-night operations. Thirdly, Apple Go is now serving more passengers than ever, becoming one of the largest in providing fully driverless ride-hailing service in the world. And, fourthly, in terms of the order, the proportion of fully driverless orders to all our operations has increased from 10% in last August to 55% in July this year. All the progress mentioned above contributes to the improvement of UE.

Looking ahead, we will continue to focus on the operations in key cities and operation regions, like Beijing and Wuhan, to further expand the fleet size and operation areas of our driverless operations and, thus, gradually improve the unit's economy. Next year, we aim to enter into more cities to conduct fully driverless ride-hailing services and expand the scope of fully driverless commercial operations. Regarding RT6, the timeline for mass production is proceeding as planned. It brings a significant cost advantage with mass production cost loaded by 50% compared with the previous generation.

So, it will be guaranteed to come to the majority in our operations we operate, propelling the unit economy closer to profitability point. Last, on auto solution business, currently, prevailing this land-driving product do not fully meet the standards in terms of generalization and safety, failing to satisfy consumer demands for convenience and efficiency. So, that in this area, the intense price competition in China's EV market has led to a general decline in the profitability within the automotive sector. And OEMs have been showing some standard demand for intelligent driving and leaning more toward cost-cutting measures to the cumulative sales, which has affected and is also affecting [Inaudible] auto solution in the short term.

However, we believe there are much opportunities ahead in the long run, driven by the consumer demand for intelligent driving. We plan to launch our safety navigation pilot product, Apollo safety driving map, later this year. As we look ahead, we believe the change in the auto industry is heading toward intelligent driving with exciting opportunities in the future. And we will capitalize on this change with cutting-edge technologies and sensible business model.

Thank you.

Operator

This concludes our question-and-answer session and does conclude our conference for today. [Operator signoff]

Duration: 0 minutes

Call participants:

Juan Lin -- Director, Investor Relations

Robin Li -- Co-Founder and Chief Executive Officer

Rong Luo -- Chief Financial Officer

Alicia Yap -- Citi -- Analyst

Gary Yu -- Morgan Stanley -- Analyst

Dou Shen -- Executive Vice President and Head of AI Cloud Group

Lincoln Kong -- Goldman Sachs -- Analyst

Kenneth Fong -- Credit Suisse -- Analyst

Wei Xiong -- UBS -- Analyst

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

Alex Yao -- JPMorgan Chase and Company -- Analyst

Thomas Chong -- Jefferies -- Analyst

Zhenyu Li -- Senior Vice President and General Manager of Intelligent Driving Group

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