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Hello, and thank you for standing by for Baidu's First Quarter 2020 Earnings Conference Call. [Operator Instructions].
I would now like to turn the meeting over to your host for today's conference, Juan Lin, Baidu's Director of Investor Relations. Over to you.
Hello, everyone, and welcome to Baidu's First Quarter 2020 Earnings Conference Call. Baidu's earnings release was distributed earlier today. You can find a copy on our website as well as on newswire services. On the call today, we have Robin Li, our Chief Executive Officer; Herman Yu, our Chief Financial Officer; and Dou Shen, our Executive Vice President and in charge of Baidu's mobile ecosystem group, our search and feed business. 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 provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC, including our annual report on Form 20-F. Baidu does not undertake any obligation to update any forward-looking statements, except as required under applicable law.
Our earnings press release and this call include discussions of certain unaudited non-GAAP financial measures. We have made minor adjustments to our non-GAAP measures and retroactively applied these changes for comparison purposes. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures and is available on our IR website at ir.baidu.com.
As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on Baidu's IR website.
I will now turn the call over to our CEO, Robin.
The outbreak of COVID-19 resulted in China's economy shrinking 6.8% in the first quarter, compared to a growth of 6.0% in the previous quarter. This was China's first economic contraction since quarterly GDP reporting began 28 years ago. Shelter-in-place was put in place, malls and movie theaters were shut down, and much of the offline activities came to a halt in the first quarter.
The good news is that the pandemic outbreak seems to be under control, and people are gradually allowed to travel freely around the country as we witnessed during the May 1 Labor Day Golden Week. Restaurants and shops are re-opening across the country, the Chinese economy is rebounding, and Baidu's marketing services is growing each week after hitting a trough in February.
Baidu's total revenues in the first quarter reached RMB 22.5 billion, declining 7% year-over-year. iQIYI weathered the macro headwinds by growing 9% year-over-year. iQIYI's revenue diversification, from advertising to membership to online games, made it a beneficiary of the stay-at-home environment.
Baidu Core revenue declined 13% year-over-year in the first quarter, which is stronger than many advertising verticals. Our wide-spanning sales channel allowed Baidu's marketing services to diversify and benefit from the pockets of growth in the first quarter, such as online businesses and key account customers. Our new AI businesses also fared well during the first quarter. Cloud, DuerOS and Apollo all saw healthy business growth in Q1.
During the first quarter, we quickly retooled Baidu's AI capabilities to help users, municipalities and organizations better cope with the pandemic crisis, as part of Baidu's social responsibility.
For example, through Baidu Health, one of the largest and most comprehensive health and wellness platform in China, we provided tens of millions of free online doctor consultation and powered many third-party medical apps with Baidu's online health care services, such as online pneumonia screening, to free up hospitals for critical emergencies.
More than 100 Apollo-powered autonomous vehicles have been deployed across 17 cities in China, including Wuhan, Beijing, Shanghai, Shenzhen and Xiamen, to provide medication, face masks and food deliveries and unmanned fever-screening and sterilization services.
COVID-19 was a black swan event, and we turned the crisis into opportunities for Baidu. Let me share with you a few observations that, we believe, will support Baidu's near-term recovery and fuel the long-term growth of our search and feed business.
First, according to QuestMobile, Baidu App was one of the fastest growing in DAUs among the Top 10 apps in China in February. This trend continued into March, even as the pandemic outbreak leveled off from the peak. As a leader in information and knowledge-centric Internet, Baidu is well positioned to allow users to easily fact-check information, which is a long-term demand on the backdrop of rampant misinformation on the Internet. Our expanding mobile-ecosystem further solidifies Baidu's capability, affording users native app-like experience of third-party content and services, without leaving Baidu App. BJH accounts plus Smart Mini Program and Managed Page together provide Baidu's in-app search an unmatched experience.
Second, user behavior in China is shifting from browser search to in-app search, with the latter now accounting for the majority of Baidu's mobile search traffic. Baidu App has an advantage in in-app search because most users visit with an intent to search. Such user intent is difficult to build especially in apps that are developed for non-search purposes. In-app search creates a positive, re-inforcing cycle among users, customers and partners. In the age of AI, Baidu can deliver better user experience when users log in, better conversions when our marketing customers log in and better content distribution when content providers log in.
Our twin-engine search plus feed allows users to consume feeds when they are visiting without an intent in mind, increasing overall user stickiness. In-app search also monetizes better than browser search. The shift in user behavior from browser search to AI-powered in-app search is a positive to Baidu's long-term growth.
Third, with the Chinese economy recovering, SMEs are starting to rebound at an encouraging pace, especially with the support of government policies towards SMEs. Our survey of marketing services customers and distributors show that heavy-hit verticals such as health-care, franchising and auto/logistics may recover faster in the months ahead.
Baidu's new AI businesses have weathered COVID-19 headwinds well, and the future looks even more promising. IDC's data indicates that smart speakers are becoming one of the major Internet gateways in China. In 2019, smart speaker shipments doubled from the prior year, while smartphone shipments dropped 8%, resulting in smart speaker shipments surpassing 10% of smartphone shipments in China. One interesting trend to note is that: mobile users are adding smart devices in their homes, so that they have a hands-free, voice-enabled, connected device nearby, while keeping their phones free for texting and other mobile-centric activities.
The Chinese government recently touted new infrastructure investments amounting to trillions of U.S. dollars to speed up economic recovery and boost sustainable growth. Baidu's smart transportation and cloud service stand to benefit from these government projects.
Let's begin our operational review with MEG, our mobile ecosystem group. In March, with the nation shifting from shelter in place to back-to-office, Baidu App DAUs experienced strong growth, reaching 222 million, up 28% year-over-year. In-app search queries grew 45% year-over-year, and feed time spent was up 51% , from a year ago. These impressive stats show that Baidu is widely recognized as the place to find more comprehensive, timely and reliable information. Our efforts to strengthen Baidu's mobile ecosystem through our mobile building blocks is making a huge difference. Third-party content and services through BJH accounts, Smart Mini Programs and Managed Pages now make up the majority of our mobile search results. This interplay enables search users to engage with search results by liking or posting comments, which dramatically improves the quality of and livens up search results.
In-app search provides a better user experience, and logged-in users on Baidu App have increased to almost 60% by the end of March.
Baidu's content verticals add in-depth and authoritative content to Baidu's content ecosystem. For example, our health and wellness vertical includes a health care Wiki, BJH accounts of doctors and other well respected professionals in the medical field, health care smart mini programs to provide online doctor consultation, and Managed Pages from a large network of health-care providers.
In the first quarter, Baidu Health held more than 100 live broadcasting events on COVID-19 and other health-care-related topics, hosted by industry experts. Baidu Health allows users to register for doctor appointments, buy health insurance, research information on hospitals and certified doctors, and connect users to hundreds of thousands of doctors for online consultation.
Baidu's building blocks are dynamic, because content by topical interest are scattered in news-feed, in apps and on mobile websites on the Internet. Through Baidu's building block, we can pull all of the content by topical interest together, deliver the content to users through search and feed, and allow users to transact without leaving Baidu's platform. Just as how we have developed the Baidu Health, we are using the same dynamic building-block architecture to develop B2B and beauty verticals, just to name a few.
Baidu's knowledge products complement third-party content provided through Baidu's building blocks, providing users an oasis from the rampant misinformation on the Internet. For example, users have come to know Baidu Wiki as the authoritative source for fact checking in China. Baidu Knows is another important knowledge product, which we have upgraded with innovative Q&A features and more video content, resulting in daily questions posed increasing 150% over the past year. Baidu's comprehensive set of knowledge products, including Baby Knows and Baidu Experience, make it easier for users to fact check and seek critical and reliable information.
Baidu's mobile ecosystem is making great progress with video. In March, total daily video views within Baidu's knowledge products grew 100% year-over-year, and short videos viewed within Baidu's family of apps was up 68% year-over-year. We have been expanding Baidu's library of short videos and live streaming, particularly around information and knowledge. For example, in the first quarter, we hosted 10 sessions of hour-long live streaming Wandering through Civilization, which is added to our library for VOD playback.
Let me quickly cover the progress of Baidu's mobile building blocks.
BJH content network now hosts 3 million publisher accounts, up 44% year-over-year. In March, the number of publishers providing original content grew 178% year-over-year, due to the large user scale of the Baidu platform, including Baidu App, Haokan, Quanmin and Baidu Wiki.
Baidu Smart Mini Program continues to see strong user growth, with MAUs on Baidu App reaching 354 million, up 96% year-over-year, and total MAUs, including users from Baidu's open network, reached over half a billion in March. The number of Baidu smart mini programs grew over 26 fold year-over-year and is up 35% sequentially, as developers are drawn by the rapid user growth.
Continuing the tradition of Baidu serving SMEs, Baidu smart mini program enables long-tail apps with high-quality content to operate an effective business. For example, Yizhikan Comic grew the DAUs on its Baidu smart mini program 4.6 fold sequentially in March, exceeding the traffic on its own app. Leveraging Baidu's user insight and AI technology, Yizhikan more effectively attracted and retained users. For example, repeat users accounted for over 1/4 of its smart mini program DAUs and contributed to over half of its subscription revenue.
Turning to Managed Page. More and more advertisers are choosing Baidu Managed Page as the landing page for their ads over their HTML sites, as we expanded Managed Page's industry-specific offerings. The structured-data setup of Managed Page, capturing pre-designed fields customized for each industry, allows Baidu to better monitor the information from third-parties and provides users with more reliable information.
Revenue from Managed Page was above 20% of Baidu Core marketing revenue, slightly down from last quarter, as marketing services customers from sectors like health-care and franchising pulled back in the quarter. Nevertheless, we are excited about the potential of Managed Page. Marketing services customers can leverage the resources of Baidu's hosted marketing platform, such as ad creation tools, Baidu user insight, and CRM features, to improve sales lead generation and conversion. SMEs would not otherwise have the wherewithal to employ AI capabilities if the search traffic were diverted to their own mobile sites.
On the monetization front, Baidu's hosted marketing platform has been instrumental in pushing out effective ad tools by having our marketing services customers log in. For example, after releasing a set of video-ad creation tools, video ads grew to 38% of feed revenue in March, up from 29% in December.
Moving to DuerOS. In the first quarter, DuerOS voice assistant's strong momentum continued, with monthly voice queries from first-party devices reaching 3.3 billion in March, up almost 5 fold from last year. Total monthly voice queries reached 6.5 billion, up almost 3 fold from last year.
Time spent on Xiaodu devices is also growing rapidly, especially on smart displays, whose average daily time spent per device reached over 3 hours in March, up over 20% quarter-over-quarter. The popularity of DuerOS in China is drawing top apps, like Douyin, Kuaishou, Bilibili and WeSing, to join the DuerOS skills store. DuerOS now offers over 3,800 skills, spanning a wide range of genres, including education, video, online games and live streaming.
DuerOS popularity is also driving strong sales for Xiaodu smart devices. For 2019, IDC ranks Xiaodu 1st in global smart display shipments, which was reinforced by Strategy Analytics and Canalys. We are seeing encouraging early signs of monetization with DuerOS smart devices. Similar to an app store, DuerOS skills store is distributing thousands of skills and has the potential to enjoy app store economics. Baidu's strong mobile content ecosystem also lends DuerOS an advantage in generating membership revenue for licensed content.
With home devices becoming ever more popular, DuerOS is an important asset for Baidu, to enable developers of smart mini programs to also distribute their content and services through home devices. Turning to Baidu Cloud and AI Services. We are leveraging Baidu AI to help enterprises build a competitive edge and support their digital transformation. In March, we signed a strategic partnership with a major public utilities company to provide AI enterprise solutions to improve customer service and office productivity.
The public utilities company leveraged Baidu's newly launched AI PaaS, to enable its customers to purchase electricity through facial recognition at the kiosks of their customer service centers, which significantly shortens queue time. The customer also upgraded its internal system with Baidu AI PaaS, to enable its employees to more efficiently draft daily and weekly management reports by recommending report highlights derived from relevant internal documents, using Baidu's leading AI-powered recommendation engine.
And on Apollo, we are seeing an increasing interest in Baidu's smart-transportation solution. In the first quarter, Baidu won projects from municipalities, including Hefei, Yangquan and Chongqing.
Navigant Research, a well-known research firm, recognized Baidu Apollo as 1 of the 4 global leaders in autonomous driving based on strategy, branding, functionality and reliability. Baidu was the exclusive autonomous driving leader from China named the report. Apollo also received top ranking in the 2019 Beijing Autonomous Driving Vehicles Road Test Report, which is well recognized, as the numbers used for the report are monitored by the Beijing Municipal Commission.
Turning to iQIYI. In March, iQIYI subscribers reached 118.9 million, up 23% year-over-year. iQIYI's large subscriber base strengthens its foundation, as a leading video platform and producer of long-form videos. iQIYI's leading position in China's video marketplace is a valuable component to Baidu's large content ecosystem, both on mobile and at home.
With that, let me turn the call over to Herman to go through the financial highlights.
Thanks, Robin. Hello, everyone. Welcome to Baidu's First Quarter 2020 Call. All monetary amounts used in my discussion are in renminbi, unless stated otherwise. Despite the huge uncertainties and adverse impact caused by the COVID-19 outbreak in the first quarter, Baidu's total revenues reached CNY22.5 billion or USD 3.2 billion, decreasing only 7% year-over-year.
Revenue from Baidu Core was CNY15.3 billion or USD 2.2 billion, decreasing 13% year-over-year. Marketing services from health-care, travel, franchising and financial services, among other sectors, were significantly impacted by the halting of off-line activities during shelter-in-place. We offset some of this weakness by leveraging Baidu's spanning sales channel to capture growth from performing areas, such as e-commerce, online game, online education and software. In general, SMEs held back more during the quarter, while key accounts took advantage of the situation to build their brands.
Our new AI businesses saw strong growth across the board, from smart devices to cloud to smart transportation. iQIYI revenue reached CNY7.6 billion, up 9% year-over-year, and their ad business was impacted by the challenging macro, down 27% year-over-year.
Non-GAAP cost of revenues was CNY14.2 billion, down 3% year-over-year, primarily due to a decrease in traffic acquisition costs, offset by an increase in content cost. TAC decreased primarily due to a double-digit decrease in TAC revenue. Our strategy on TAC continues to be optimizing profit, rather than growing TAC revenue at a loss.
Non-GAAP SG&A expenses were CNY3.4 billion, down 39% year-over-year, primarily due to less channel spending and promotional marketing and decrease in personnel-related expenses. Non-GAAP R&D expenses were CNY3.5 billion, down 1% year-over-year.
Non-GAAP operating income was CNY1.4 billion. Non-GAAP operating income to Baidu Core was CNY3.3 billion or USD 473 million. And non-GAAP operating margin to Baidu Core was 22%. Adjusted EBITDA was CNY2.9 billion, up 61% year-over-year, and adjusted EBITDA for Baidu Core was CNY4.6 billion or USD 656 million, up 38% year-over-year. And adjusted EBITDA margin for Baidu Core was 30%, up 11 points from last year.
With our solid execution in expanding Baidu's mobile ecosystem, we are able to leverage R&D to strengthen Baidu's mobile building blocks and increase user retention. Despite total marketing spending decreasing year-over-year, Baidu App DAUs saw a respectable year-over-year increase of 48 million users in March. The strong operating leverage in the first quarter also reflects our focus on quality revenue growth for our new AI businesses. In smart devices, we try to lead by launching innovative products to increase ASP, while growing sales volume to drive down BOM costs.
In cloud, we focused on developing solutions for enterprise customers and growing gross margin in tandem with revenue growth. Smart transportation is the fastest growing among our new AI businesses, and it is also experiencing improving margin trends.
As of March 31, 2020, cash and short-term investments was CNY146.7 billion. Excluding iQIYI, cash and short-term investments for Baidu Core was CNY136.7 billion or USD 19.3 billion.
Free cash flow was CNY1.7 billion, and free cash flow for Baidu Core was CNY2.3 billion or USD 327 million.
As a side note, in accordance with the new accounting policy ASU 2019-02, we reclassified licensed content purchase from investing activities to operating activities, starting from January 1 this year. Prior to the new accounting standard adoption, we reflected licensed content purchase in cash flow from investing activities, which was consistent with our peers in China.
Baidu Core had approximately 28,800 full-time employees, as of March, down 7% from last year.
During the first quarter, we returned USD 185 million to shareholders, and cumulatively over the last 2 buyback programs, we repurchased approximately USD 1.4 billion. Our Board recently approved a new USD 1 billion buyback program, which will be effective through July 1 next year. In early April, we completed a bond offering of USD 1 billion at a blended annual percentage rate of 3.26%, proceeds from which will be used to pay off maturing bonds and for general purposes.
Turning to second quarter guidance. We expect total revenues to be between CNY25 billion and CNY27.3 billion, representing a growth rate of negative 5% to 4% year-over-year. Our guidance assumes Baidu Core will grow between negative 8% to 2% year-over-year. These forecasts are our current and preliminary view, which is subject to substantial uncertainty.
Before I turn the call back to the operator, let me summarize our first quarter achievements.
Our strategy to strengthen Baidu's mobile ecosystem is working, with third-party content and services, from news-feed platforms, apps and mobile sites, migrating onto Baidu's platform to give users native-app like experience, without having to download third-party apps or be redirected to mobile sites.
Baidu's mobile building blocks are enabling our users, customers and content partners to log in, which is creating a positive virtuous cycle, resulting in strong user growth, more in-app searches and longer feed time spend.
Many investors ask us how to see the terminal value of Baidu Core business. Despite a challenging situation with COVID-19 outbreak in the first quarter, revenue from Baidu App, which makes up the majority of Baidu Core's mobile revenue, was up year-over-year during the quarter. Baidu App's contribution margin is also increasing, due to the strengthening of Baidu's mobile ecosystem.
And Baidu's new AI businesses saw strong performance in the first quarter, while operating losses are decreasing, reflecting our prudent strategy to focus on quality revenue growth.
To appreciate Baidu's business, it is important to recognize the tremendous franchise value that we are creating with Baidu's mobile ecosystem and Baidu App, as well as our new AI businesses, where we are focusing on revenue growth with improving margins.
Operator, with that, let's open the call to questions.
[Operator Instructions]. Our first question comes from the line of Alicia Yap from Citigroup.
Could management share with us your view and the strategies on how you plan to further capitalize the continued strength of your Baidu mobile app traffic to drive broader and more diversified monetization efforts in the coming future? And also on investment priority, what are the budget spend you're committed in the AI, DuerOS, Apollo versus the core search technology this year?
Okay. Dou will answer the first one and then Herman.
Okay. Thank you for question. In terms of the monetization for Baidu App, actually, we are seeing a pretty good trend. So in the last few quarters, last year, we see CPM improved sequentially and consistently from Q2 to Q4 last year. So the trend is temporarily disrupted by the black swan event, COVID-19, in the first quarter of this year, but we already see the trend is coming back. So the CPM is continuing to improve.
So how we make this happen in Baidu App, it's because Baidu App itself is growing quickly, as Robin mentioned in the prepared remarks. We can see the DAUs, we can see the search volumes and feed time spent, they're all growing significantly. And with that, so we had better chance to provide better experience to the users, not only through search but also through feed, our twin-engine strategy. So all the experience are counting on our building blocks like Baijiahao, Smart Mini Programs and Managed Page. So with these building blocks, actually, we can provide not only content but service to the users. And with that, we can get more knowledge about the user, so that's why we can continuously improve the CPM.
So on top of that, right, so as Robin also mentioned the health-care platform, so which another example where we can serve the user better so that we can get more information and the user intent from users. So with that, we can better improve the monetization capabilities. I will just stop here and then let Herman to answer the second part.
Yes. Alicia, yes, Dou talked about how our Baidu App can provide a better experience by having users, advertisers and also our content providers logging in. By having more data, by having to know what users do on our landing page, obviously, we can make the user experience better, and we can continue to help improve CPM. But fundamentally, I think if you step back, what we're doing over the last few years is that we used to rely heavily on browser search. And when you think about browser search, it's more of a mobile area. And now as we're going into AI, we can shift that traffic into Baidu App. That in itself, because margin is higher within Baidu App as our traffic is growing faster in Baidu App versus the overall search traffic and browser and so forth, that proportion of traffic going into Baidu App, that would help with CPM, that would help with revenue growth. As we mentioned in our prepared remarks, even in a difficult quarter like this, Baidu App had revenue growth on a year-over-year basis.
With regards to our investment priorities, we look at our businesses in 2 separate parts. One is the mobile ecosystem. So we're very focused on ROI-driven parameters here. So when we look at, for example, our in-app installations, marketing promotions, we measure based on ROIs what we think we can deliver to the new users that we acquired based on lifetime value. More importantly, over the last year, as mobile ecosystem started to become stronger and stronger, we started comparing, for example, how much we can spend in R&D versus marketing spend. And as you can see, by toning down our marketing expenses, we continuously see a user increase. So it's very ROI-driven. It's a pretty complex formula. But so far, you can see it. It's working for us. Even in the quarter where revenue is declining on a year-over-year basis, you're seeing profitability increase.
And then on our AI businesses, I think the plan here is to try to get to higher gross margins, right, while the second step might be trying to get the whole business to be profitable at a contribution margin. Right here, we're focusing on how do you grow revenues, at the same time, trying to get to a gross margin that's positive or growing. Thank you.
The next question comes from the line of Piyush Mubayi from Goldman Sachs.
When I look at your guidance, which looks at a recovery from the past quarter, can you give us a sense of where we are as of the month of April to give you the confidence that recovery is taking place or we should look for a number that's better than that? And the second thing is when you look at all of the verticals which have taken off during the course of the last couple of weeks/last couple of months, how many do you think will come back with gusto to now? And an extension of that very question is, how should we think of the medical vertical, particularly where there was so much traffic that came back during the first quarter? And how should we think of the monetization in that specific vertical going forward?
Piyush, I'll take that. When you're looking at the verticals that have come back, our current guidance factored in how each of our advertising vertical sectors has performed in April as well as recently in May. I mean we see this mainly as a trajectory in which the off-line businesses are opening up. If you think about Baidu's business, we're best at interest generation, driving leads for our businesses. And what has happened over the last few months is as the stores were closed down, no one's buying leads because the leads go to nowhere. So as these businesses are opening up across the country, then the advertisers would come back to our platform and start bidding for the traffic to help them generate sales. So it's built into our model, and what we are anticipating is that May should be better, and then June should be better than May, okay?
And with regards to health care, you're seeing tremendous traffic come back. You're seeing the strategy we adopted with mobile ecosystem, being able to not only offer our own content such as Baidu Health Wiki but also third-party content through BJH account, through Mini Programs, through Managed Page. So we have a wealth of information. And then on top of that, being able to insert, for example, short videos of doctor talking about procedure, inserting this live broadcasting where people are talking for over an hour, industry experts and so forth. So that wealth of knowledge really helps generate a lot of traffic. But again, with regards to monetization, the assumption here is that these clinics and these hospitals have to be open. So we believe as COVID-19 gets contained, as there's no more rush to go to hospital to treat this particular pandemic, hospitals will be opened up for regular procedures, checkups and so forth. And when those things happen, we should see better monetization with health-care. So we're pretty bullish going into Q2. We think that the recovery should continue even after Q2.
Next questions comes from the line of Eddie Leung, Bank of America.
My question is about the Baidu mobile ecosystem. It's pretty obvious that we have seen improvement in the things that you can control. For example, we have heard a lot of nice things in traffic, user experience, content, technologies and even monetization. I'm just curious if you could share with us your thought on the external environment, especially about competition. For example, we have heard some of your competitors thinking about getting into search. We have also heard that some short video sites would increase monetization in advertising this year. So for your ecosystem, could you talk about the potential impact and how you guys can deal with it?
Thank you for the question. This is Dou. Let me take this. So let's first talk about the search part. Actually, as we mentioned, search has been evolving from traditional browser search to in-app search, so with Baidu App growing dramatically in terms of the user end traffic and contributing to the vast majority of mobile search queries. So the trend is driving less and less dependency on traffic acquisition, actually, which is in contrast to the competitors who are still highly reliant on the acquired traffic. So the reason why we can achieve this progress is because of the 3 pillars we are building for the mobile ecosystem. As we mentioned, for the user experience and the facilities, the in-depth engagement for users, content providers and customers. As you may know or may not, we have 60% of the daily active users logged in, Baidu App, which is amazing for a search business because we can know the users much better. So a search experience is not just about search. It's actually about the whole ecosystem. That's why with Baidu App, with more traffic coming to Baidu App, with the building blocks for the ecosystem, so we are pretty confident in this area.
So as to other competitors in the market, so clearly, the traffic is growing in terms of the short videos and other ways. So we have to admit this is a challenge for us. But what we are working on is actually to not only expand our user base through Baidu App and the video apps we are working on. But we also have a huge potential to improve the monetization capability for our products. So as we already mentioned, we have the Managed Page as it already showed the effectiveness for improving the ROI for the marketing, for our customers. So we just shipped a few features, and we have more on the list. And we can see the contribution already. So that's why I think we have our unique strength, not only in search experience but also in the building blocks for ecosystem. And for other sites, we are well planned for improving the monetization capability to strengthen our ecosystem.
Yes. I want to add to that, Eddie. Dou talked about the strength of our mobile ecosystem and the content that we're able to put on our platform. The other always keeps in mind that search works because our users are intent-based. As we have seen, trying to compete with Baidu, given our scale and so forth in browser search, although people can get market share and revenue, they don't get market share and profitability. And we believe long-term shareholder value creation is on trying to get market share or profitability. So we're seeing that in the browser part. And then in order for people to compete with us in-app, the main assumption is that their app has to be intent-based. If you look at the people coming to Baidu App, our users have that behavior. So it's very hard to build intent-based users when you have other type of apps such as social, such as entertainment-focused.
Take the example of how we're able to distribute 1-hour-long live broadcasting from health-care industry. If you think about it, if you're watching 15-second videos, entertainment videos, laughing and so forth, how likely are you going to be sitting there all of a sudden watching 1-hour-long health-care experts, or if you're trying to follow your friends? So trying to build intent, really changed the dynamic of that app, in particular. So you're trying to make a search, it might not be as good for other type of behaviors. That's something to keep in mind.
And we talked about how to distribute short videos, again, our focus is not on the format of the content but really by topical so if you think about where we're strong, for example, focusing on trying to build a great place vertical for health-care, trying to build a great place for knowledge, for information and so forth. And where it makes sense to insert short videos, just as it makes sense to insert live broadcasting or text or photos or the services to be able to contact doctors and so forth, we want all of that various different media formats surrounded by topicals. So that's how we're focused on. And when you see a lot of people consuming short videos as they're consuming these long-tail topicals and so forth, that's where we can also insert short video advertising.
The next question comes from the line of Gregory Zhao from Barclays.
And great to see the solid recovery from COVID-19. So I have 2 quick follow-ups. The first one, so we see the Baidu App's very strong user growth in Q1. So I just want to know the user retention and the engagement into Q2 and what's the plan to maintain these users into second half. So another one, we see your smart devices reported very strong shipment and very solid kind of usage numbers. So just wanted to understand a bit more about the monetization potential and also if you have any plan to expand the smart speakers into more kind of broader smart home connection.
Okay. I'll take the first one. It is true, the pandemic outbreak attracts more users to Baidu App because they want to proactively seek information to help them understand the situation. So clearly, it helps to grow the DAUs and the time spent. So after the outbreak, we can see some decline in terms of the DAUs. But the good thing side, it is a very good chance to educate the users what they can do on Baidu App. So for example, let's take the health care example again. So when people started to use Baidu App for health care-related questions and consultations, so they are actually getting used to it, and we can see the consultation numbers are pretty stable. So we are using this chance to educate the users with more features, which are not obvious to the users before. So the short answer is that we are using many approaches to make the Baidu App more friendly, provide more service to the users so that they can use it for different purposes.
Yes. This is Robin. Regarding to the smart device monetization potential, I think it's going to be very similar to the mobile ecosystem in the sense that the revenue can come from selling hardware, selling subscription, selling advertising and even e-commerce. The difference is that it's a home-based device, and we maintain a better control on almost everything from software until the back end of monetization. Because it is in the early stage of the development, we are pretty much focusing on improving the experience, user experience. I've talked about the average time spent for our marketplace is over 3 hours per day. So that's a lot longer than an average mobile app. So we are quite optimistic about the potential of monetization for our smart home devices.
And we will continue to explore new form factors for smart home and other AI or voice-enabled devices. And as time passes by, I will give you a timely update on that.
The next question comes from the line of James Lee, Mizuho.
Herman, I was wondering if you can give us a sense of what the total expenses will look like in 2Q. As revenues start to recover in the second quarter, how should we think about the expense growth there? And also, maybe help us understand maybe opportunity to increase your operating margin /operating leverage maybe over longer term, like, for example, any opportunity to rationalize some of the investments you're making here.
Yes. James, so two questions. Let me answer the first part. So when you look at Baidu Core's operating model in Q1, on a non-GAAP basis, our cost of sales plus OpEx was probably around CNY11.9 billion. And because we typically have our wage adjustments in Q2 because COVID-19 in China seems to be rather under control, so we're going to start hiring more and so forth, so you should expect sequentially that this number will grow 10%, probably even in the teens. It really will depend on several factors. That's uncertain right now, but I expect that kind of range of growth from Q1 into Q2.
On the longer term, in terms of our operating margin potential, I think it really comes in two parts. Number one is MEG. So as you can see, because of the traffic that we're growing within apps, in-app search is growing faster in terms of traffic, and it has higher margins, you can see us having that better terminal value over time because proportionately revenue is growing in apps as we're making our mobile ecosystem stronger. So that's going to make the MEG business healthier.
Secondly, with the AI businesses, as we have mentioned, our focus is on how do we grow revenue, at the same time, how do we grow our margin. So these 2 are important, hand-in-hand, we want to grow quality revenue. So as time passes, we expect to have less expenses or less losses in our AI businesses. In a few years, potentially 1 or 2 of these businesses could even turn profitable. So that's really our target, trying to shoot for that. So I think over time, you should see that there's a potential of a margin improvement, both on MEG and also new AI businesses.
The next question comes from Tian Hou from T.H. Capital.
Congratulations on a good quarter. I have a couple of questions. One is related to the in-app search. So if in-app search is a trend, how can Baidu attract more users to use Baidu's in-app search versus other apps' in-app search? That's the first question. The second one is we're observing a lot of live broadcasting e-commerce, so it's really the way to accomplish CPM. And I wonder if that activities are going to be a negative impact to our e-commerce advertising revenue. That's the two questions.
Okay. I'll take the first one users use search because they have a certain need, and the need is satisfied through search. So just because with the building blocks like Baijiahao, Smart Mini Programs and Managed Page, we can provide better user experience for users to search. We can connect the users not only to the content, to the information, but also to the service they want to achieve. So with that, we can impress the user once they use it. So that's why we can see the average search times per user every day is actually growing. So I think this is key to retain the users for Baidu in-app search because once they use the Baidu in-app search, they compare with other search on browser or in other apps, so they can see the difference. They know which one's better. They know how to get there. So I think this is the major approach for us to do it.
And secondly, it's because of the brand awareness. So as Herman already mentioned, Baidu is the strongest or the well-known brand for search. And it is actually taking more effectiveness to help build the in-app search habit for users. So to sum up, the brand for search of Baidu and also the better user experience, not only for content search but also for service connection, so it's helping us to retain the users for search.
Okay. This is Robin. Let me answer the second question. It's obvious that live broadcasting in e-commerce is growing very quickly and becoming a trend. And it could become a major form of commerce, or more broadly speaking, I think live broadcasting will become another new form of media, comparable to video, image and text. So we are embracing live broadcasting content too throughout the search experience, feed experience and the Baidu mobile ecosystem. So going forward, when the e-commerce advertisers come to Baidu to advertise, they can choose all kinds of media format to integrate their services or ad creatives or content with Baidu products. So we think we stand to actually benefit from this trend, not hurt by this trend.
The next question comes from the line of Natalie Wu from CICC.
So I have a question regarding the health care-related revenue. So I guess the high base effect related with the clear-up efforts in the last two years should be disappearing coming into the second half of this year. So that should create a relatively easy comp accordingly. Is that right? Just curious what's the revenue contribution from medical advertisers lately. I remember that the number is around 1/7, dating back the second quarter of last year. So just wondering what's the level recently. And also, can you give us a sense regarding the multinational advertisers exposure for your Baidu Core business?
Natalie, yes, the revenue proportion really is 2 main factors. One is the traffic that we're seeing. Secondly is also the amount of off-line activities. If hospitals are now opening up, it's very hard for them to actually come on to our platform to try to drive interest and buy leads and so forth. And for that reason, in Q1, health-
3care dropped below 10% of Baidu Core's advertising revenue.
Your second question was on multinational. We don't track our revenue by multinational because when we look at our overall revenues, we just look at our key accounts. We don't see there's a major difference between multinational or a local Fortune 500. So we look at our business either by SMEs or by key accounts. Thank you.
Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now disconnect.