Baidu Inc

NASDAQ:BIDU

Earnings Call Analysis

Earnings Call Transcript 2024-Q3

[Operator]

Hello, and thank you for standing by for Baidu's Third Quarter 2024 Earnings Conference Call.

[Operator Instructions]

Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the meeting over to your host for today's conference, Juan Lin, Baidu's Director of Investor Relations.

[Juan Lin, executive]

Hello, everyone, and welcome to Baidu's Third Quarter 2024 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, [indiscernible], our EVP in charge of Baidu Mobile Ecosystem Group, MEG; Dou Shen, our EVP in charge of Baidu AI Cloud Group ACG; and Junjie He, our interim CFO. 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. Credit 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 reports and other documents filed with the SEC and [indiscernible].

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 reconciliation of the unaudited non-GAAP measures to the unaudited [indiscernible] comparable GAAP measures and is available on our IR website at ir.baidu.com.

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

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

[Yanhong Li, executive]

Hello, everyone. Viral core total revenue was RMB 26.5 billion. That's roughly flat for the third quarter on a year-over-year basis. Revenue growth from AI cloud was 11%, continuing its double-digit growth trajectory, thanks to the sustained momentum in Gen AI-related revenue. Our non-GAAP operating profit and non-GAAP operating margin remained stable, which demonstrates the resilience of urban.

While navigating the ongoing macroeconomic weakness we remain patient on our strategic focus of AI-driven innovation with a particular emphasis on transforming our existing products and businesses as well as fostering a new ecosystem for ERNIE. Despite near-term headwinds, we are deeply convinced that this AI focused strategy will position us well to capture significant growth opportunities in the long run.

Underpinning our long-term strategic focus is the advancement of our AI capabilities, which serves as the cornerstone of our AI-driven transformation.

In the third quarter, we continued to improve ERNIE through pre and post training, optimizing model efficiency while tailoring to the needs of our diverse application scenarios. Our flagship model, ERNIE 4.0 Turbo has achieved notable improvements in inference efficiency with throughput increasing by compared to its debut in June. The efficiency gains were driven by the optimization of our self-developed 4-layer AI infrastructure and we expect such improvements to further reduce model inference costs going forward.

We have also expanded our light weight model offerings with the introduction of Speed Pro and LifePro in the third quarter as enhanced versions of their predecessors Speed Pro and Light Pro feature lower latency, higher throughput, improved stability and superior accuracy.

Over the past 24 months, we have forecast on resolving our LLM hallucinations through RAG, retrieval augmented generation. However, we observed that image generation still faces widespread hallucination issues leading to inaccurate and logically inconsistent output. Particularly in e-commerce and marketing scenarios where sellers need to generate images that precisely match their text description.

Aiming at hallucinations at intact to image generation, we launched early ERNIE IRAG at Baidu World 2024 to revolutionize image generation, delivering more precise and demand-driven results with substantially enhanced accurately. These additions have made our offerings more compressive extending the reach and effectiveness of earnings across diverse scenarios.

Thanks to ERNIE's enhanced capabilities, wide-ranging applications and improved cost efficiencies, we've seen a substantial increase in API costs. In November, ERNIE handled approximately 1.5 billion API costs daily, a significant jump from 600 million in August. Meanwhile, over 1.7 trillion tokens were generated on a daily basis. The 13 API call volume and token generation demonstrates strong market adoption of earnings, validating its value in real-world applications.

Powered by the enhanced ERNIE models, we are achieving comprehensive penetration of AI capabilities across our entire product line, from consumer-facing products to enterprise solutions.

Our continuous efforts to transform search have yielded promising progress with encouraging user-centric outcomes emerging this quarter. Currently, over 20% of all search without pages contain AI-generated content increasing from 18% in August.

On Baidu app, where the majority of our search queries were conducted an increasing number of users are engaging with generated content, reaching nearly 70% of its monthly active users. Users exposed to AI-generated search results spend longer time on Baidu used more complicated queries and were more likely to return the next day. These positive changes become increasingly pronounced from quarter-to-quarter, indicating that our Gen AI-enabled search is better serving users' needs and enhancing user satisfaction.

We have also observed changes in user behavior patents, suggesting Baidu is evolving beyond their traditional search in users' mind. Serving as a more complete destination for ERNIE. Users are staying longer to interact with our AI features after initial queries. They are proactively engaging in more complex multiround conversation with the growing interaction frequency, reaching tens of millions of daily interactions.

Users are also moving beyond pure search to content creation on Baidu. For example, during this year's mid-autumn festival we saw a surge in both image creation and text generation, indicating changes in how users interact with our platform and their growing exploration of ERNIE-powered functions. These changes inspired us with new ideas for future enhancements. Going forward, we will enrich our content diversity, explore more current intensive and unified way of content presentation and promote chat-based interactions. We envisioned Agent as the most prominent form of AI native application and a transformative force in driving meaningful innovation. This quarter, we continued to enhance ERNIE Agents capabilities and expand their applications across various scenarios.

We have witnessed significant growth in the conversation rounds with ERNIE Agents, reaching an average volume of 15 million daily. The recently released top 100 agent list at Baidu World covers a wide array of scenarios and industries, showcasing the breadth and variety of our agents.

The ERNIE agent we created for BYD demonstrates how agents can enhance brand engagement and create significant value. Rather than navigating through traditional websites, users can now discover BYD through dynamic conversations with its agent on Baidu. This innovative approach has naturally inspired users to explore the brand more proactively, leading to a higher engagement and stronger purchase intent. The effectiveness of the agent is further validated by the fact that around 70% of users who engaged with the BYD agent returned to Baidu within 7 days for BYD related searches, highlighting how the agents compelling content sparked genuine interest and motivated further brand exploration.

Beyond BYD, we also partnered with leading enterprises such as Samsung and Yanghe to build their own agents on Baidu.

While these examples demonstrate the versatility of ERNIE agents, we believe their transformative potential is just beginning to unfold. We envision agents, redefining information in the AI era, much like our website shifted the Internet age or apps and social media accounts transformed the mobile Internet era. We believe agents are emerging as the fundamental carrier of content, information and services. What sets agents apart is they are human-like capabilities. They can serve as your sales representative customer service agent or personal assistant, delivering content and services in a more intelligent and interactive way.

As we continue to advance our AI technology, we expect agents to unlock unprecedented value for our users.

Another standout in our product transformation journey is Baidu Wenku, our one-stop shop for document creation. Since the official ramp-up of Wenku's AI renovation late last year, the yield of AI-enabled features has grown rapidly, exceeding 50 million in September, representing a year-over-year increase of over 300%. Users of AI-enabled features demonstrated a stronger willingness to pay, contributing to accelerated growth in our paying user base. In the third quarter, Wenku's subscription revenue continued its robust growth trajectory, reaching a year-over-year growth of 23%. We continue to roll out new AI-powered features to facilitate users in their thinking, learning and creative process.

After enabling natural language instructions for PowerPoint slide building and editing last quarter, we introduced a new feature to transform even the most basic text slides into visually stunning, sophisticated and professional presentations, making presentation creation easier than ever and significantly boosting productivity. With a 14-year long history at massive user base, Wenku is now experiencing a remarkable transformation as AI technology rejuvenizes this product and it presented capabilities.

Building on this momentum, we expect such revolution to ripple through our entire product ecosystem unleashing extraordinary potential and creating breakthrough innovations.

Our vision extends beyond our consumer-facing products by collaborating with our clients across businesses and public sectors, we can unlock greater potential of our advanced AI technologies. This quarter, we partnered with Yum China, a leading Chinese restaurant company to deploy clear are ready-to-use customer service product powered by ERNIE. [indiscernible] key advantage lies in its superior intelligence and ability to significantly reduce the need for human intervention in customer service as its AI capabilities can resolve most user inquiries independently. This implied solution has enhanced customer service efficiency and reduced operational costs, driving substantial growth in [indiscernible] volume with peak API costs reaching several millions a day. The partnership serves as a strong testament to the reliability and excellence of our product.

Another example that highlights the expanding use scenarios of ERNIE is called [indiscernible], an online exam preparation platform that leverages ERNIE 4.0 Turbo and ERNIE Speed Pro through public cloud API cost. Initially, [indiscernible] question bank was limited by missing answers and explanations, ERNIE tackled despite automatically generating answers and explanations for existing questions while also creating new answer explanation pairs making the question bank far more effective. This resulted in a 150% increase in effective questions in [indiscernible] question bank. Besides by replacing manual explanation in writing, the cost of creating explanations dropped by 99.8%. And Additionally, ERNIE powers real-time tutoring services where users receive instant explanations from AI tutors by simply uploading their questions. With this improvement, users showed stronger willingness to pay as the paying user ratio increased dramatically by over 100%, leading to a 246% increase in revenue. Our strategic focus on AI innovation continues to drive transformation in consumer-facing applications as well as industry-wide solutions. And we are seeing great results.

Now let me review the key highlights for each business for the third quarter. AI cloud revenue reached RMB 4.9 billion in the third quarter, maintaining double-digit year-over-year increase at 11% while sustaining non-GAAP operating profitability. GI-related revenue maintained strong growth momentum and remained a key growth driver, accounting for about 11% of our total AI cloud revenue in the third quarter, up from 9% in the previous quarter. This trend reflected increasing recognition of earnings value among enterprise customers. Our strong technological advantages in AI infrastructure served as a key enabler for this momentum.

During the quarter, we advanced our infrastructure management across our GP cluster that is composed of tens of thousands of GPUs, achieving 99.5% value LLM training time. Also, we further improved our capabilities in combining GPUs from different vendors for training and hosting models by minimizing throughput loss to within 5%.

With this advancement, we further reinforced our position as a leading provider of the most powerful and cost-effective AI infrastructure. Our mass platform continued to evolve with a strong focus on developing comprehensive toolkits that enhance the model and app development experience for our customers and partners.

In Q3, we improved the model builder to make lightweight model fine-tuning easier. With model builder, lightweight models can be fine-tuned into specific models, achieving performance comparable to ERNIE 4.0 while offering faster inference speed at lower cost.

We are leveraging our AI capabilities to improve internal R&D efficiency and facilitate enterprise application divestment. Internally, we've widely adopted AI coating through [indiscernible] our coding assistant for developers. AI now contributes to generating over 1/3 of our new code with our developers providing oversight and approval. We are also lowering the barrier for enterprise in AI native application development. Enterprises can build sophisticated applications through simpler approaches on our mass platform. For example, using natural language instructions with minimum coating efforts to develop the most part of a business application. We introduced [indiscernible] at Baidu World 2024, marking our first step in delivering no-code capabilities. We are excited about its potential to democratize AI as we believe expanding AI accessibility beyond departments will drive innovation at the speed we never seen before.

Meanwhile, the growing recognition of ERNIE's capabilities continues to attract new clients, with notable partnerships established this quarter with Flash X, [indiscernible]. This partnership with leading enterprises reflects the strength and credibility of Baidu AI Cloud.

We have also seen significant growth in adoption from mid-tier enterprise customers as reflected in their increasing investments in GPU public cloud service. In Q3, the incremental revenue from the mid-tier enterprise customers on our public cloud increased by 170% year quarter-over-quarter. With these positive trends and divestments, we reinforce our long-term optimism about the growth trajectory of our AI cloud revenue stream.

For our mobile ecosystem, Baidu Core's online marketing revenue declined by 4% year-over-year in the third quarter due to challenging macroeconomic conditions our ongoing AI-driven search renovation and an evolving Internet content ecosystem. In the third quarter, we saw continued growth in incremental ad revenue from Gen AI and LLM to our advertising system. This replan our ongoing efforts to refine our monetization system and marketing platform, particularly in improving ad targeting capabilities and scaling up real-time ad generation. We believe agents open up a lot of new possibilities for our advertising business. This quarter has seen significant improvements in earning agents for advertisers in terms of response accuracy and intent cognition capabilities. This agents become increasingly sophisticated and effective. We've observed a growing recognition of their value among advertisers. As of September, approximately 20,000 advertisers have been generating ad spending through our earning agents on a daily basis.

A case in point is 1 of our health care lines. After building its own agent, the client was impressed with its performance, they then proactively contributed to their proprietary medical insights to further enhance the agent's capabilities. Through continuous fine-tuning the agent demonstrated good intelligence and service quality, particularly in terms of dialogue accuracy and the context comprehension. This enables the agent to deliver more professional and accurate responses to customer inquiries around the clock. Through extended conversations, the agent can better identify customers' underlying needs and provide tailored service recommendations, significantly enhancing the customer experience. As a result, the client has seen a normal increase in customer engagement as customers' willingness to initiate conversations rising by 13.6% and lead conversion rate increasing by 50% from July to September.

Overall, while our online marketing business is going through a transitional period, we remain steadfast to aggressively drive forward our AI transformation. We are confident this will deliver long-term value for our users, customers and shareholders.

Turning now to intelligent driving. We've reached another significant milestone, the sixth generation of our autonomous vehicle, RT6, is now operating on public roads in multiple cities in China. This not only expands our vehicle lineup, but also reaffirms our commitment to scaling operations and providing users with safer, more affordable and comfortable mobility experiences.

Following our achievement of 100% fully driverless operations in Wuhan last quarter, the proportion of fully driverless operations nationwide surpassed 70% in the third quarter and 80% in October. Recently, we have taken a better step forward in expanding fully driverless operations. We are delighted to share that in October, we achieved 100% fully driverless operations in Chongqing, where we currently operate a growing fleet of autonomous vehicles. We continue to scale up our services in third quarter with Apollo Go providing about 988,000 rights to the public nationwide, representing year-over-year increase of 20%. The cumulative rights provided to the public surpassed 8 million in October, further solidifying our leadership in smart mobility. We're fully confident that our autonomous driving technology has achieved technical maturity with proven safety and reliability through extensive testing and well wire operations.

While our technology is ready for wider deployment safe and responsible autonomous driving requires a solid foundation of a harmonized regulatory framework, we remain patient as we continue to work alongside the evolving regulatory framework, standing ready to rapidly scale up our operations on the timing's right.

Meanwhile, we are also actively exploring expansion into additional cities and new operational models, such as asset-light strategies to enhance operational resilience and unlock new growth potential.

In summary, while our overall revenue growth remains measured in the near term, we have strong conviction in our strategic direction, supported by encouraging progress across multiple fronts from increased user metrics in search to the growing adoption of our large language models and cloud solutions. Looking ahead, we're confident that our strategic focus and execution will out meaningful returns.

Before I hand over the call, I'm pleased to welcome our interim CFO, Junjie He or Jackson. With that, let me turn the call over to Jackson to go through the financial results.

[Junjie He, executive]

Thank you, Robin. Hi, everyone. I'm honored to step into the role of interim CFO. Following my initial conference call, I look forward to engaging with analysts and shareholders in the coming period. Now let me walk through the details of our third quarter financial results. Total revenues were RMB 33.6 billion, decreasing 3% year-over-year. Revenue from Baidu Core was RMB 26.5 billion, which was basically flat from last year. Baidu Core's online marketing revenue was RMB 18.8 billion, decreasing 4% year-over-year. Baidu Core's non-online marketing revenue was RMB 7.7 billion, up 12% year-over-year, mainly driven by AI cloud business. Revenue from IT was RMB 7.2 billion, decreasing 10% year-over-year. Cost of revenues were RMB 16.4 billion, increasing 1% year-over-year, primarily due to an increase in traffic acquisition costs and costs related to AI car business, partially offset by a decrease in personnel-related expenses and the cost of goods sold. Our operating expenses were RMB 11.2 billion, decreasing 5% year-over-year primarily due to a decrease in personnel-related expenses and partially offset by an increase in channel spending and promotional marketing expenses. Baidu Core's operating expenses were RMB 9.9 billion, decreasing 5% year-over-year. Baidu Core SG&A expenses were RMB 5 billion, increasing 4% year-over-year. SG&A accounted for 19% of Baidu Core revenue in the quarter compared to 18% in the same period last year. Baidu Core R&D expenses were RMB 4.9 billion, decreasing 13% year-over-year. R&D accounted for 19% of Baidu Core revenue in the quarter compared to 21% in the same period last year.

Operating income was RMB 5.9 billion. Baidu Core's operating income was RMB 5.7 billion, and the Baidu Core's operating margin was 21%. Non-GAAP operating income was RMB 7 billion. Non-GAAP Baidu Core operating income was RMB 6.7 billion and non-GAAP Baidu Core operating margin was 25%. Total other income net was RMB 2.7 billion, increasing 14% year-over-year, primarily due to an increase in fair value gains from long-term investments and disposal gain, partially offset by an increase in net foreign exchange loss arising from exchange rate fluctuation between Renminbi and U.S. dollar.

Income tax expense was RMB 814 million compared to RMB 1.3 billion in the same period last year. Net income attributable to Baidu was RMB 7.6 billion, and diluted earnings per ADS was RMB 21.6%. Net income attributable to Baidu Core was RMB 7.5 billion, and net margin for Baidu Core was 28%. Non-GAAP net income attributable to Baidu was RMB 5.9 billion. Non-GAAP diluted earnings per ADS was RMB 16.6. Non-GAAP net income attributable to Baidu Core was RMB 5.7 billion, and non-GAAP net margin for Baidu Core was 21%.

As of September 30, 2024, cash, cash equivalents, restricted cash and short-term investments were RMB 144.5 billion, and the cash, cash equivalents, short-term cash and short-term investments, excluding ITE, were RMB 140.3 billion. Free cash flow was RMB 2.6 billion, and the free cash flow excluding ICE was only RMB 2.4 billion.

Finally, Baidu Core had approximately 31,000 employees as of September 30, 2024.

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

[Operator]

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

[Alicis a Yap, analyst]

My question is related to AI and search. So how should we think about ramp-up pace for the generative AI results penetration rate? And what does management think of the optimal level and how long do you plan for the search product transformation period to last. And could management also give more color on the recent developments in the monetization of the AI search. So when does management expect to commercialize the AI search result?

[Unknown Executive]

Alicia, this is [indiscernible], allow me to your question. We have been continuously transforming our corporate with a technology and saying as well Robin has said just now today, over 20% of pages and over 60% of the monthly active users, they have engaged with the Gen AI content already. However, I think the number merely represents our initial progress in 1 aspect of our AI-driven transformation of search. It should not be taken as a comprehensive indicator of our AI-generated content, not be used as the only benchmark for our progress. What really matters goes beyond it. In fact, we aim to revolutionize the through ERNIE and transform every aspect of such experiences. Providing the users with unlimited on-demand and personalize the content through the [indiscernible] of various forms whenever they need, leveraging the ERNIES, we gained deeper insights into user intent behind increasingly completed inquiries, which can enable us to customize the content generation to better fulfill the needs, while continuously enhancing the air generating content quality. We also try to diversify our content formats, such as a summary, as you can see in the top page in images and videos, agents, posts and even digital human all of these different formats can be dynamically combined to create some personalized experiences earnings, and we can tailor both the content and its presentation format, which can best match users want and how they prefer to consume this kind of information. This can allow us to optimize the user experience and drive higher engagement. The AI-driven transformation of our search has already shown initial progress across certain user metrics, which gives us some kind of confidence to keep pushing forward with our efforts. Through ongoing exploration, we are charging the new frontiers of possibility unlocking unprecedented potentials with the part of AI. And quarter-by-quarter, we will continue to see an update of achievement across various aspects of AI-driven transformations.

Specific about your question in the monetization side, we are seeing some encouraging early results in certain verticals, including legal, education and B2B services. For example, our earning agents for advertisers today have demonstrated increase in effective sales leads, which can bring the value to advertisers while enhancing the overall use experiences. As our earnings foundation models continue to evolve, we expect agents to unlock greater revenue opportunities in the future. That said, we are still in the early stage of exploring monetization opportunities for AI search, and we are taking a mature approach at our own pace.

In the near term, we will prioritize the use experience enhancement instead of the rushing in [indiscernible]. In fact, our product transformation journey strongly reflects our strategy direction which is we are making a deliberate choices to priority to the long-term value creation over shorting games. It's true that we experienced some short-term pressures. But these near-term trade-offs are something we're willing to accept as we work towards our long-term vision. Beyond search, we also have a cut comprehensive mobile ecosystem with multiple consumer-facing products, that's the massive use basis such as [indiscernible]. We're also leveraging ERNIE to revolutionize the entire product lines across our mobile ecosystem, enhancing the content production try to optimize the distribution mechanism and try to strengthen the monetization capabilities. We remain fully committed to this transformation and focusing primarily on enhancing the user experiences and engagement. This kind of encouraging early results have reinforced our confidence strategy direction. And we believe that following this period of adjustment, we expect to start seeing improvement in our advertising business next year. Thank you for the question.

[Operator]

Your next question comes from Alex Yao with JPMorgan.

[Alex Yao, analyst]

My question is about the ERNIE's API. I think the API costs have been growing fairly rapidly in the recent months. Could you guys assume more details on the key drivers behind this growth. In addition, as any potential killer app emerged in the B2C market. Finally, what is management's outlook of earning adoption over the medium to longer term?

[Yanhong Li, executive]

Alex, this is Robin. Yes, we've seen remarkable growth in API costs. I think a number of factors are driving this growth. First, ERNIE gets smarter every day and to sanctions have been reduced significantly. So more and more applications can use to add value to the users. And second is the inference cost. It gets lower and lower, so more customers can afford it. And third, it's a tool chain we provide to our customers they can tailor the model to address their own specific needs easily in each application scenario. The substantial volume of ERNIE API costs is driven by both internal and external demand. We began our product transformation in Q2 of last year. We first upgraded our monetization system, delivering higher advertiser ROI and generating hundreds of million incremental revenue each quarter. Then we extended the AI transformation across our major consumer-facing products that includes those products over 100 million MAUs to search on cool, Baidu Dry, by Baidu Keyboard and Baidu Map. We are encouraged by how AI could thoroughly revolutionized and rejuvenate with long-standing products with massive user bases. And this year, we accelerated the renovation of search showing more and more generated content or search with our page. We believe the new Baidu search has the potential and is well positioned to become a killer app in the age of Gen AI. This is because search is by nature deeply rooted in language and text understanding, which aligns perfectly with LLM capabilities. We're fortunate to have 100 million of search users every day and the most advanced foundation models. And along this line, millions of agents are being built to answer user and customers' questions. This also contributed to the growth of earning API costs. While most API costs currently come from the renovation of our 2C products, ERNIE has gained a strong recognition in helping businesses tackle challenges effectively, external API costs have grown quite quickly, roughly like 20% quarter-over-quarter in the last week of Q3. We see strong adoption across sectors, including online education, social media restaurant and food services, health care, legal consultation and recruiting. The West brand adoption shows that enterprises recognize the value of our powerful model and are willing to invest in them. We grow with our progress and committed to accelerating earnings adoption across all our product lines as we transform from an Internet-centric business to an AI-first business. With Gen AI becoming central to our entire product line up, we are confident it will unlock new revenue streams and strengthen our market leadership. Thank you.

[Operator]

Your next question comes from Gary Yu with Morgan Stanley.

[Gary Yu, analyst]

I have a macro-related question. Can management comment on the underlying ad demand trend. And also, have you seen any spend sentiment improvement, especially after the latest seamless policy? And what's management view on the macro outlook heading into 2025?

[Unknown Executive]

Gary, let me take your question. I think our advertising business is highly correlated to the macro environment, especially with the off-line small and media enterprises across wide range of industries, which may cause the majority of our net advertisers basis. As these small and medium enterprises are both deeply connected to the domestic consumption and highly sensitive to macro acquisitions. The vitality and recovery pace suffers more relevant indicators for our business. In Q3, we have seen the continued weakness across the verticals, such as the real asset franchising and health care. And so far we have not observed the notable improvement in advertiser spending patterns and consumer spending remains subdued. And having said that, we are particularly encouraged by the strength and the timeliness of the recent similar policies, which continue to be low out as well as the constructive initiatives we are seeing across the market. And while we think it will still take some time for these measures to reach off-line small and media enterprises and boost their confidence in advertising spending, so we remain conservatively optimistic about the recovery in ahead. We believe that once the macro environment improves and the domestic consumption in [indiscernible] small and medium enterprises confidence will quickly rebound. And Baidu has long been the primary platform of choices for these advertisers with proven effectiveness in driving the customer acquisition and growth, we expect them to return for advertisement spending, which can help us to drive a meaningful recovery in advertising business with our intensive reach and unique value propositions to off-line small and medium enterprises. We believe that our advertising business will rebound with strong recovery momentum once the market confidence hands back. Thank you, Gary.

[Operator]

Your next question comes from Lincoln Kong with Goldman Sachs.

[Lincoln Kong, analyst]

Given the ongoing enterprising pressure and our plan to accelerate and broaden our AI transformation. So could management share more color around our business focus at the moment. our priority in terms of our investment, resources spending and the capital allocation? And how should we think about the margin trend in 4Q as well?

[Junjie He, executive]

This is Jackson. I will take your call. Currently, we will remain committed to our AI focused strategy as both our near-term priority and the long-term strategic emphasis. Given our ongoing ad-driven renovation of search and the fact that we will not heavily monetize AI-generated search results soon. We expect the circumstances will remain under pressure for our online marketing business in the near term. However, we remain steadfast in this strategic direction as we see strong long-term value ahead. In line with this strategy, we are going through a period of continued initiatives will further intensify our product renovations with a strong emphasis on search and continue to invest in advancing earnings capabilities while enhancing our AI car offerings to maintain a healthy margin and expanding our autonomous driving initiatives, where we view as a viable path to profitability. We believe these initiatives are essential to sustain our position as a leading technology innovator in China. As a result, the near-term margins will be in a period of adjustment, while looking to 2025, we will focus on optimal resource allocation to high growth opportunities. while staying aligned with our long-term strategy. Thank you.

[Operator]

Your next question comes from James Lee with Mizuho.

[James Lee, analyst]

Great. I have several follow-up questions on Cloud. In terms of revenue growth, it has moderated maybe compared to the last couple of quarters? And maybe can you unpack the performance of both personnel and enterprise cloud? And in addition, can you give an update in terms of competitive landscape in the market? And lastly, can you should outlook the cloud business, particularly contribution from Gen AI? And how should we think about the long-term margin assumptions?

[Dou Shen, executive]

Thank you, James, for your question. This is Dou. Since last year, we have observed an accelerating shift in China's cloud industry towards AI computing, driven by the development of GI and foundation models. We have seen more customers choosing Baidu's AI cloud infrastructure and foundation models, the growing adoption is evidenced by our Gen AI revenue. It started at about 5% of our total AI cloud revenue. When we first reported it in Q4 last year, and has now more than doubled, reaching 11% in the third quarter. So we are in that, this upward trend will continue. And so as you know, our AI cloud business consists of 2 main parts: personal cloud and cloud service for enterprise and public sector. This quarter, total ACA revenue growth slightly moderated, primarily due to a temporary impact on our personal cloud revenue brought by a short-term business adjustment. However, we believe ERNIE is ongoing renovation of the personal cloud will help mitigate this short-term impact and position it well for greater long-term growth opportunities. Meanwhile, our cloud service for enterprise and public sector, which makes up the majority of our AI cloud revenue actually maintained strong momentum this quarter, continuing to outpace our overall cloud business. So the growth in enterprise cloud revenue has been driven by a strong demand for model training and inference across various sectors, including Internet education, finance and so on. This reflects our customers' strong recognition of our AI infrastructure and mass platform capabilities. In particular, the major customers in industries like in-night, tech and automotive increased their spending on our GPU public cloud. So we are also seeing a rise in both the number and spending of mid-tier enterprises, especially in sectors like marketing software and other growing industries. In today's cloud market, foundation model capabilities have become more and more so. Given the significant requirement for powerful infrastructure, specialized AI expertise and substantial capital investments, only a slight few foundation models will survive both in China and overseas. And for sure, we will be the 1 of them standing as the front runner. So we are proud that ERNIE has already demonstrated its market leadership through what spread adoption and advanced technology. So this strong position ERNIE to stay at the forefront, attracting more cloud customers and solidifying our market leadership. So on the profit side, our AI cloud is healthier than ever with non-GAAP operating profit margin expanding year-over-year. So this improvement is driven by continued margin enhancement from our Gen AI revenue and our commitment to achieving high-quality revenue growth. So looking forward, we are confident that our AI cloud business will maintain strong revenue growth momentum over time while continuing to deliver a healthy operating profit. Thank you, James.

[Operator]

Your next question comes from Thomas Chong with Jefferies.

[Thomas Chong, analyst]

My question is related to robotaxi. Given the recent IPO way for autonomous driving related companies that have partnership with pet automakers and my heading platforms. What are your thoughts about how the competitive dynamic going forward. Looking ahead, how do you see the Apollo Go mobile taxi defer and business strategy development? Can management share any details about the future plans for spending and going Apollo Go.

[Yanhong Li, executive]

Yes, autonomous driving has a high bar. It requires best-in-class technical expertise, top talent as well as strong commitment to long-term investment and significant capital reserve. We have built an unparalleled foundation in all these areas, giving us a strong competitive edge and setting a high bar for others to follow. As 1 of the earliest players in the market, we've consistently demonstrated our unwavering commitment through over a decade of investment. This long-term dedication has builded our technological advancements, positioning us as the global leader in automomous driving technology. As mentioned earlier, Apollo Go hit a significant milestone of 8 million total rights, making us the world's top automating service provider. In addition to our cutting-edge technology and strong operational capabilities, we've achieved significant cost effectiveness in hardware, PV stand out with a competitive price of under USD 30,000 for mass production, making it the most competitive option in the market. All the trends as mentioned above, driving us forward, paving the way to validate our business model. The overall market is still in its infancy. So competition should help accelerate the growth of the market and foster a more friendly pro-innovation regulatory environment. We believe such regulatory environment is essential for the healthy growth of this industry. And we remain prepared for expansion when the time is right. Meanwhile, we are actively seeking new opportunities for international expansion. We see significant potential in cities that enable large-scale fully driverless operations. similar to Wuhan, Chongqing. Additionally, we are open to exploring different business model options, focusing on asset-light strategy, to keep our operations flexible and efficient as we grow. Thank you.

[Operator]

Your next question comes from Xiong Wei with UBS.

[Wei Xiong, analyst]

My question is regarding capital allocation. I was wondering could management provide any updates on capital return plan for shareholders such as share buyback and the dividend?

[Junjie He, executive]

Wei, I will take your questions. So since becoming a public company in 2005, we have made consistent efforts to generate long-term value to our shareholders through our growth as a leading technology company in China complemented by share buyback programs. So over the past few years, we have maintained a steady peso share repurchases, averaging about USD 1 billion annually. So I'm pleased to share that through our consistent share repurchase efforts, we have seen a decline in our total ship number of shares outstanding this year. While the pace of share buybacks may vary from quarter-to-quarter according to our established execution rhythm, we remain firmly committed to our share buyback program as a key component of delivering value to our shareholders. While we are currently focused on executing our sustainable and recurrent share buyback programs, we remain open to evaluating various options for returning value to shareholders. As always, we firmly believe in Baidu's long-term and sustainable growth potential and will ensure that our shareholders will be rewarded for their trusting us. The ultimate way of service shareholders' interest is to have a solid business foundation and capitalize on growth opportunities. We are in the midst of a paradigm shifting technology transformation based on AI and the foundation models. At Baidu, we have the AI infrastructure tech expertise as well as financial and human sources to execute on our plans. So we want to have the flexibility to invest as needed to propel our new business forward and with that, bring long-term value to our shareholders. Thank you.

[Operator]

Your next question comes from Miranda Zhuang with Bank of America Securities.

[Xiaomeng Zhuang, analyst]

Okay, management provides an overview of ERNIE technology road map for the future development. What are the upcoming milestones for the company's AI model? And then when can we expect to achieve them? Thank you for my question about ERNIE.

[Yanhong Li, executive]

Well, we launched ERNIE bot in March of last year. Since then, we've been continuously enhancing our foundation model capabilities, particularly our flagship models. In October last year, we introduced earnings China's first TPD 4 type model with world-leading capabilities. And then we launched ERNIE 4.0 Turbo in June of this year and delivering even greater performance. Building on these milestones, we are committed to continuously advancing our flagship models to deliver better performance, accuracy and broader support for diverse user needs. We expect to launch a new version of earning early next year to further strengthen our leadership position in foundation models. Compare to overseas companies, we distinctly take an application-driven approach. We believe foundation models hold real value only when they power widely used practical applications that meet user needs. Over the past 18 months, our model development has centered on addressing real-world problems according to market demand. With this approach, we've made significant progress in resolving hallucinations and improving accuracy, while also introducing a series of models tailored to diversity to make earning models more accessible and affordable. We boosted the performance, lowered [indiscernible] costs and enhanced response speed. What sets us apart is that we really have a clear sense of our strengths and where we are heading. We aren't tied those technologies that allowing most closely with our business and create the most value. Earlier this year, I mentioned that we have expanded our virtual foundation model capabilities to our autos driving business, aiming to further enhance our leading position in this space. Now we are also proactively exploring multi-model capabilities and applications based on our strengths in language model, seeking to create more synergistic value and unlock new possibilities. Throughout all areas, we are very thoughtful about how we allocate our resources optimizing our foundation models in directions that maximize impact across our business and help maintain our market leadership. Thank you.

[Operator]

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now disconnect.