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Operator
Good evening and welcome to the Baidu second quarter 2006 earnings conference call. At this time, all participants are in listen-only mode. After management prepare remarks, there will be a question and answer session towards the end of this conference. Today’s conference is being recorded. If you have any objection you may disconnect at this time.
I would now like to turn the meeting over to your host for today’s conference, Miss Cynthia He, Baidu’s Investor Relations Manager, please proceed.
Cynthia He - IR Manager
Hello everyone and welcome to Baidu’s second quarter 2006 earnings conference call. We distributed our second quarter earnings earlier today. You may find a copy of the press release on the Company’s website as well as on [utilize] services.
Today we will hear from Robin Li, our Chief Executive Officer, and Shawn Wang, our Chief Financial Officer. After their prepared remarks, Robin and Shawn will be available to answer your questions.
Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor Provisions of the US Private Securities Litigation Reform Act of 1995. Baidu does not undertake any obligation to update any forward-looking statements except as required under applicable law.
As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on Baidu’s corporate website at ir.baidu.com.
I will now turn the call over to Baidu’s CEO, Robin Li.
Robin Li - CEO
Hello everyone. Thank you for joining us. We had another good quarter by many measures. Our results show user traffic growth, revenue increase, customer base expansion and intense profitability. And, more importantly, many events that took place from the beginning of the second quarter to date well position us even better for continuing growth in the future. I’m very excited to talk to you about this update.
On the user front, we enjoyed strong traffic growth even though the week-long national holiday in May and the World Cup soccer games kept people away from their computers. It is encouraging to see that our focus on improving social experience continues to be important to our users.
We previously launched a series of products that address users’ needs to feel connected when they search and this product, including Baidu Post Bar, Baidu Knows and Baidupedia are becoming increasingly popular. To create a stronger sense of community for our users we launched Baidu Space on July 13. This is a product which allows users to create personalized home pages, consisting of blogs, photo albums and social networking function. The product also integrated use of other Baidu products in one place. Baidu Space is another product created to meet our users’ demands. Within the first day of the launch more than 100,000 users registered on Baidu Space. We will gather feedback from these early users and continue to improve Baidu Space. We expect this product to take off quickly.
On the customer front, we provided online marketing services to more than 90,000 customers, compared to 74,000 in the first quarter. I believe 12 months ago, for Q2 of ’05, we only had 41,000 active customers, so during the past 12 months, we added more customers than we did for the previous four years.
The expansion of our active customer base was mainly due to a strengthened stealth network and is increasing -- and the increasing appreciation of Baidu’s pay-for-performance services amongst small to medium size businesses. Our p-for-p model works on a real time, keyword, auction system. On June 1 we removed the original RMB0.30 minimum bid price and adopted a dynamic bidding mechanism for the starting price. We believe by letting the hours and determining the starting bid we'd better rationalize the auction system and ensure that pricing better reflects the true value of different keywords. As a result, the starting bid for some keywords became higher than RMB0.30 and some lower.
We have already seen positive impact on the average clicking price and online marketing revenues as a result of this change. Overall, we believe that there is significant room for growth in the average price of keywords which is still low in China compared to other markets. While the market gradually matures we will continue to refine our p-for-p system in order to best capture additional revenue potential.
In [inaudible] front, we continue to be the partner of choice for companies looking to participate in the growth of Chinese economy. Building on our strategic alliances, such as Nokia and Intel, we recently signed agreements with IBM and Hewlett Packard which we expect will create new opportunities for Baidu search products.
While improving and expanding our search business, we need to focus our resources on business lines essential to our core. In line with this strategy, we recently discontinued our enterprise search software business which worked on a separate business model and made only a nominal contribution to our revenue stream.
Before I turn the call over to Shawn Wang, I would like to emphasize that our second quarter results are evidence of Baidu’s availability to better connect with search users and better serve the needs of online marketing customers in China.
We are continuing to offer superior search experience and cost-effective way of online marketing. We look forward to leading the way in Chinese Internet search for many years to come.
I will now turn the call over to our CFO, Shawn Wang, to discuss our financials.
Shawn Wang - CFO
Thank you Robin. Hello everyone. As Robin mentioned earlier, we delivered great revenue and earnings results in Q2. I will walk you through the contributors to these great results and other financial highlights. The numbers I refer to will be in RMB unless otherwise indicated.
Our second quarter total revenues were approximately RMB192 million , a 41% increase from the previous quarter and 175% increase from a year ago. This was towards the top end of our earlier guidance of RMB193 million. Online marketing revenues were RMB189 million or a 99% of total revenues, representing a 43% sequential growth and 183% year-on-year growth. This growth was driven by a number of factors including traffic growth, a sequential increase in the number of active customers of 22% as well as a sequential growth in per customer spending which is 19%. Traffic acquisition costs, as a component of cost of revenues, was RMB80 million or approximately 9% of total revenues. Our tax remains flat at the percentage revenues compared with the previous quarter.
Capital expenditures for the second quarter was RMB41 million, up from RMB12 million in the first quarter. CapEx was mostly spent on additional network capacities to support traffic expansion and new product development [and roll out].
Our effective income tax rate for the quarter was 15% versus 16% for the first quarter.
Our share-based compensation expenses equally is in aggregate to RMB12 million from RMB13 million in the first quarter.
R&D expenses for the second quarter were RMB80 million. that represents a 18% increase from the previous quarter and 111% increase from the second quarter of 2005. This increase was primarily due to the expansion of R&D headcount.
Now our earnings. Net income for the quarter was RMB58 million representing a 66% sequential increase and a 385% increase year-over-year. This growth reflects the inherent scalability of our business.
Net income, excluding share-based compensation expenses, a non-GAAP measure, was RMB17 million, representing a 62% increase sequentially and a 285% increase from the second quarter of 2005. Basic and diluted EPS, excluding share-based compensation expenses, was 2.11 and RMB2.03, translating roughly to US$0.26 and US$0.25 respectively.
Net margin was, excluding share-based compensation expenses for the second quarter, was 37% up from 32% in the previous quarter.
Now a few highlights on the balance sheet. We ended the second quarter with a cash and cash equivalent of slightly over RMB1 billion. Operating cash flow, for the quarter, was RMB130 million representing a 37% sequential increase.
Adjusted EBITDA, again, a non-GAAP measure, was RMB85 million for the second quarter, representing a 63% increase from the previous quarter and 243% increase from the corresponding period in 2005.
Now let me provide you with our top line guidance for the third quarter of 2006.
We currently expect the total revenues to be between 238 and RMB246 million which would represent an annual growth of 168 to 177% and a sequential growth of 24 to 28%. I do wish to emphasize that this forecast reflects Baidu’s current and preliminary view which is subject to change.
I will now turn the call back to Robin for his closing remarks.
Robin Li - CEO
Thank you Shawn. It has been almost a year since we became a public company in August 2005. We delivered several quarters of solid results and we are glad to see that more and more people are beginning to appreciate Baidu’s ability to serve the search market in China and to capitalize on its vast potential.
It is our dedication to understanding the needs and desires of Chinese search users and our proven ability to develop the right product mix. We are confident that we will continue to lead the way and enjoy growth well into the future.
Thank you, again, for joining us today. I will now open the call to questions.
Operator
Thank you. The question and answer session of this conference call will start in a moment. [OPERATOR INSTRUCTIONS].
Your first question comes from the line of Jason Brueschke. Please proceed.
Jason Brueschke - Analyst
Thank you. Good morning, Robin and Shawn. Congratulations on a very solid quarter.
My question concerns the seasonality and the sequential growth of your revenues. It looks like you grew revenues 18% sequentially in Q1, you delivered a monster Q2 at 41% or so sequential growth and now the guidance for Q3 of a range of 24 to around 29% suggests a sizeable deceleration. Could you maybe address the affects of, first of all, the timing of the Chinese New Year and how that could have influenced the strength in Q2, as well as the fact that golden weeks in the World Cup probably hurt you in Q2 and they don’t reappear in the third quarter, and maybe help us to understand exactly what’s going on in the sequential growth guidance that you gave? Thanks.
Robin Li - CEO
Hi Jason, this is Robin. I think the business, by nature, is seasonal. First, as you mentioned, first quarter we had Chinese New Year. Second quarter is basically a catch-up quarter because we had slower growth in Q1 so comparing to Q1, Q2 sequential growth is much higher. I would guide you to look more closely at the annual growth rate in the current quarter comparing to four quarters ago, as far as growth rate is -- a 170% [blanch] for just the past quarter or for the current quarter guidance. So it’s very natural to us to look at the business this way.
Jason Brueschke - Analyst
Great, thanks. I’ll get back in the queue.
Operator
Your next question comes from the line of Anthony Noto. Please proceed.
Anthony Noto - Analyst
Thank you very much. Hi Robin and Shawn. I was wondering if you could comment a little bit on the sort of trends in CapEx and the impact of Hewlett Packard deals that relates to margins going forward? Thank you.
Shawn Wang - CFO
Anthony, Shawn here. As you can see, we actually significantly increased our CapEx from 12 million over Q1 into about 41 million in Q2; that has reflected our investment in those two to support our significant traffic growth and also our new products -- development and new product roll out. We would expect that our investment in this area will continue.
In terms of the impact of the Hewlett Packard deal, actually, that deal represents one of the strategic corporations we are working with a lot of our partners. Financially, we don’t believe that it has any mature impact at this current stage.
Anthony Noto - Analyst
Okay. Thank you.
Operator
Your next question comes from the line of Safa Rashtchy. One moment while we construct the list. Your next question comes from the line of Andrew Collier. Please proceed.
Andrew Collier - Analyst
Yes. Could you give me some sort of guidance on the breakdown of your revenue by sector? In particular, I was looking for information about hospitals and healthcare and education in the -- and what the change might be Q over Q and Q3 over Q2.
Shawn Wang - CFO
Andrew, as you can tell in the past conversation, and I’ve said it many times, that our revenue streams are very diversified and there’s not a sector that represents a significant portion of our revenue. We will not see any changes in that pattern going forward, I would expect the same time of diversified revenue streams that we experienced in the past.
Andrew Collier - Analyst
Thank you.
Operator
Your next question comes from the line of Robert Peck. Please proceed.
Robert Peck - Analyst
Yes, hi. I was curious if you could provide a little more color around competition. Google’s been signing up more and more resellers there, and Yahoo’s been putting in more of an effort, particularly Alibaba partnership, could you just give a little more color on what the [inaudible] has been over the last three months, what changes you’ve seen as far as the competitive environment? Thanks.
Shawn Wang - CFO
As far as we are concerned, we do not see any meaningful change during the past quarter. We believe we continue to be in the leadership position both in terms of user traffic, as well as market customer numbers. We have the strongest distribution network nationwide, in almost all the major markets, the strongest distributor are Baidu and distributor exclusive to us. We also have direct sales team in a number of cities which exploring very rapidly. We believe that we are very well positioned in terms of the [inaudible] efforts in the pay-per-search market. Currently, we do not feel any impact from the competition.
Operator
And your next question comes from the line of Paul Keung. Please proceed.
Paul Keung - Analyst
Yes, hi. I was wondering if you could give me an update in terms of how’s your churn rate look these days as related to your advertising network, and then I guess the [inaudible], so what mix are you seeing right now in terms of your sales your doing either directly or indirectly?
Shawn Wang - CFO
Paul, can you repeat your question one more time, it wasn’t very clear.
Paul Keung - Analyst
I was wondering if you could give me an update on the churn rate of your advertisers currently. Have you seen a trend in that? And also what kind of trend you see in the mix of your sales, are you doing it on an indirect or direct basis?
Shawn Wang - CFO
Okay. Paul, we actually haven’t seen any changes in the pattern. We continue to see very strong customer loyalty repeat to our business. We actually never discuss the churn rate because the measure of that is somewhat difficult for our business. Once the customer stops its relationship they may come back to us again at different time, at different interval so it’s hard to measure but, all we know, the majority of our customers are repeat customers and that trend is continuing.
Paul Keung - Analyst
Very good.
Robin Li - CEO
Let me have a word on that. I think our customers are, in general, very loyal to us. We sign up a lot of new customers each quarter and it usually takes one to two years for our new customer to fully appreciate the return on investment on our pay-per-search services so, actually, it’s the other way around. We would expect to get more from the customers who have signed up in the past.
Paul Keung - Analyst
Okay. Great. Thank you.
Operator
Your next question comes from the line of Jason Brueschke of Citigroup. Please proceed.
Jason Brueschke - Analyst
Hi. Shawn, you didn’t give us specific EPS guidance, could you maybe qualitatively help us think about how we should be considering what you’re going to be doing with operational expenses? The previous talks about the change in the competitive environment, you already did some pretty big CapEx increase probably affecting your gross margins, but should we be thinking in percentage of revenues or is there any specific plans that you may have that you can share with us that will affect the operational expenses in Q3? Thanks.
Shawn Wang - CFO
Robin, I’ll try to answer that question on quantitative rates. There is one thing for certain, that we are guiding the very strong revenue growth going forward. It doesn’t represent, as Robin mentioned previously, not a slowdown from the previous years. On top of that still, in [inaudible] our scalability, [inaudible], we would expect we will unleash our profitability potential in the quarters to come but, in the near quarters, I also wanted to caution you that we are still making aggressive investment particularly in the areas of sales and marketing. We are in the phase of building a large -- rapidly increasing our large direct sales presence in a number of major cities in China, and all these are likely to have a near-term negative impact on our bottom line although economically these are investments for long-term.
In terms of the CapEx, as I mentioned earlier, we will continue to make aggressive investment in our CapEx. I’m not going to talk about the exact number but I think that they will continue at our current pace.
Robin Li - CEO
When we look at our spending and budget we really look at the long-term, two years from now, five years from now, what the Company is going to look like. We make decisions based on that kind of planned mission so we don’t really talk about near-term bottom line guidance. We will spend whatever is needed to ensure the long-term profitability for our business but if you look at the current EBITDA margin, it’s already well ahead of most -- ahead of what most analysts were expecting previously.
Jason Brueschke - Analyst
Great. Thank you. That’s extremely helpful.
Operator
Your next question comes from Steve Weinstein of Pacific Crest. Please proceed.
Steve Weinstein - Analyst
Great. Thank you. My question is, if I look at the growth in your spend for advertising in the first half of ’06 over what we’re doing throughout ’05 and it seems as though there was almost some acceleration in that increase. I’m wondering, is that just a function of the new advertisers being smaller relative to the overall pie so therefore being less dilutive, or are new advertisers, at this point given that there’s just more research on search, coming in and spending more up front?
Shawn Wang - CFO
Steve, Shawn here, let me try to address that first. I think the increase in per-customer spending is not necessarily an indication that the new customers added are spending more. I think it’s a combination of the traffic growth which is generating more clicks and the gradual appreciation for our cost per click. The old customers, a lot of old customers, they are spending also on the rise as well as the new customers, and if you look at each quarter the contribution, [inaudible] for per-customer function by the new customers actually, because of the new customer added throughout the quarters, so there actually tends to be a dragging effect on the average per-customer spending.
Robin, do you have anything to add?
Robin Li - CEO
I think the ROI, or return on investment, for all of the existing customers are still very, very attractive. We just need to make our system ready to release the buying power from the customers, both old customers and newly added customers. As I mentioned before, it really takes a year or two for a customer to fully appreciate our system, fully appreciate the value of the service and customers yearly spend more and more after the [inaudible].
Steve Weinstein - Analyst
Okay. Thank you.
Operator
Your next question comes from the line of Richard Ji of Morgan Stanley. Please proceed.
Richard Ji - Analyst
Hi Robin and Shawn and we’re just noticing in the share-based compensation actually decline roughly 80% quarter-over-quarter, should we expect a fundamental change in the incentive mechanism within your organization?
Shawn Wang - CFO
The answer is yes, Richard. I think we -- after we became a public company we’ve been increasing our workforce and we’re behaving more and more like an established business. In terms of it being supervising our people, we are moving more towards a cash-based compensation and less relying on the share-based compensation. That’s the reason and I do expect the share-based compensation as a proportion of our entire compensation scheme will continue to decline.
Operator
And your next question comes from the line of Leah Hao of Thomas Weisel Partners. Please proceed.
Leah Hao - Analyst
Hi. Good morning, Robin and Shawn. I have a question regarding your new customer adds. In terms of the number of new accounts is seems like, during the past four quarters, you’re adding about 10,000 accounts per quarter and this quarter it jumped to 16,000, so I was wondering f you can give a little bit of color behind that acceleration and whether you think that’s sustainable going forward as well? Thank you.
Shawn Wang - CFO
The increase -- Leah, Shawn here, the increase in the number of customers I think is a combination of two factors. One is our increased efforts in our distribution both through our distributors and also more so our direct sales force. We are -- we have been increasing our direct sales presence in a number of important markets specifically. That’s -- I think the number reflects that. And, fundamentally, I think there’s been increased recognition of [inaudible] as a viable promotion tools for business by Chinese companies. That makes our efforts more effective as well.
Going forward, given our accumulated experience and our more established network and distribution capability, we would expect our business to continue to grow and we expect to increase our number of customers to be signed up.
Leah Hao - Analyst
Thank you. Can I ask a follow-up regarding your sales strategy as well?
Shawn Wang - CFO
I’m sorry, which strategy?
Leah Hao - Analyst
The channel strategy, the direct sales force strategy?
Shawn Wang - CFO
Oh, okay. The -- again, we will continue the strategy that we have communicated a number of times to you and to the market. The strategy that we have, the depreciated strategy for deeper markets throughout China, we don’t have a one nationwide strategy. In some of the markets we work closely with our distributors to give them the best support to help them to sign up new customers and to provide quality services, in other markets that we may chose to opt to a direct sales effort -- presence. In the later case it tends to be in larger and more developed markets. In the past year we have executed that strategy in Guangzhou and Shanghai and we will continue to do that in those two cities and, in the past quarter, we started -- commenced our effort in Beijing as well. We actually just entered into an agreement with one of our distributors in Beijing in the past few days whereby we will be taking over the distribution from one of our distributors in Beijing; we will start putting direct sales to continue to provide customer support in sales effort in Beijing. And Beijing is the only city where we had an overlap between direct sales and distributor.
Leah Hao - Analyst
Right, thank you. I was going to ask that as well. Thank you very much and just very much -- just very lastly, since you, for now you have like more than six months of sales data from the Guangzhou direct sales force, could you give us a little bit of color regarding the matrix in terms of new account adds or spending more customer or churn rate before and after your switching to the direct sales force, please?
Shawn Wang - CFO
There’s not much change. I think we’ll see additional direct sales overall, there is the enhanced customer service from directly by those customer service functions. So, overall I think it’s a very positive fact for our customers' experience and also for our financial results but, any -- setting up any direct sales force, at the beginning stage, to us it’s still investment. The -- our business model scalability will show only when the customer base reaches a certain level, a certain threshold in the direct sales or the market that we are operating, particularly in the new markets where we are trying to -- we are in the -- still in the investment phase.
Operator
Thank you. And your next question comes from the line of James Mitchell. Please proceed.
James Mitchell - Analyst
My question’s been asked just now. Thank you.
Operator
And your next question comes from the line of William Bean. Please proceed.
William Bean - Analyst
Hi. Could you just give us a sense of any update on your services strategy, entertainment, music, [inaudible] things like that? Thanks.
Robin Li - CEO
At this time our main business model is still pay-for-performance. Most of the revenue comes from our web page search. We do not consider those newly-added functions independent products. We are serving our users’ information needs in whatever way they require or they demand, so when we add new services, we really consider that added function to the overall Baidu search service to our users. The best monetization method to date is still pay-for-performance. mostly for web page searches. We of course will keep an eye on the development of other business models, our newest business models, but, at this time, we do not expect any meaningful revenue from non-web page search services we added during the past half a year or a year timeframe.
William Bean - Analyst
Okay and could you just give us an update on your thoughts on online payments and online commerce and where that stands now?
Robin Li - CEO
It is still in its very early stage. The payment infrastructure in China is not mature enough. Currently, there are not a lot of users are using those kinds of services.
Operator
As a reminder, ladies and gentlemen, please only ask one question. Your next question comes from the line of Frank Shi of CLSA. Please proceed.
Frank Shi - Analyst
Okay, guys, your revenue per customer increased by 19% quarter-on-quarter, how much of that is due to the increasing number of clicks and how much of that is due to the increase in price per click? Thank you.
Shawn Wang - CFO
Frank, actually, we have a practice of not separately looking into what is the number of clicks rate or average [clicking] price. I think we believe any one of these measures, we were just talking about these measures, maybe a misleading picture of how we’ve been growing our business. It’s still at a very early stage whereby we are in the process we find our people [inaudible] or monetization [inaudible]. Some of these terms may be changing but, overall, I think our traffic has been growing fast and our clicking price has been a positive direction.
Frank Shi - Analyst
Okay.
Operator
And your next question comes from the line of Anthony Noto of Goldman Sachs. Please proceed.
Anthony Noto - Analyst
Great, thank you. Shawn and Robin, I’m not sure if you’d answer this question, so I apologize, some people have asked more full questions and I kind of lost track of what they’re asking, but your guidance for the next quarter implies an acceleration year-on-year revenue growth, I’m just wondering if you’d give us a little bit more clarity on that? Is that because you have good visibility into the backlog because a lot of your new advertisers came in right at the end of the quarter and projecting now having them for a full quarter as opposed to just maybe one month of the quarter gives you an [actual] less in the third quarter results or is it some other factor, because it’s on a year-over-year basis so it’s not related to seasonality? Thanks.
Robin Li - CEO
Anthony, let me clarify the year-over-year growth rate again. I think for Q2 the growth rate is 175%. For Q3 guidance, the number is between 168 to 177, so it’s roughly the same growth for both Q2 and Q3. I’m not sure why you’re asking for an explanation for acceleration.
Anthony Noto - Analyst
I guess you caught me, I always assume you just set the high end of the range, so I apologize. If it were to be at the high end of the range, I guess, the middle of your range doesn’t call for an acceleration on a net revenue basis?
Robin Li - CEO
I think actually the net revenue number gets larger and larger. We are pleased that we are exempt from the law of large numbers.
Operator
Your next question comes from the line of Ming Zhao of Susquehanna Financial Group. Please proceed.
Ming Zhao - Analyst
Okay. Thank you very much. Just one question, maybe you have already answered one of them. I’m just curious about how you make your forward-looking guidance because when you make a forward-looking guidance you’re one month into the quarter and you have two months left, whether you can look at the number of customers added and the average revenue per customer to get any predictions; on the other hand, I think it’s also a function of the traffic and the click-through rate and the revenue per click and I’m just curious, do you have a very clear visibility of how things work out in the next two months when you make your guidance at this point?
Shawn Wang - CFO
The short answer is all the things that you mentioned, we actually do look into that and it’s a pretty complicated process of looking at the pile of statistics that we’ve been accumulating. The good news is that we do or we are the leading search engine in China and we serve a commanding market share of the search queries and we have the largest -- and our customer base is also large enough to be statistically meaningful. The challenge is also in that there’s a lot of factors, the traffic or click price, or number of customers that we sign up; all these are factors that we have to take into consideration and exactly how -- it does involve judgment, it does involve estimates so it’s not a -- it is a pretty challenging task for us as well but the good news is that we have some statistics.
Ming Zhao - Analyst
So, maybe just to follow on that, so what’s kind of the trend you’re seeing on the average revenue per click and the click through rate?
Robin Li - CEO
I don’t think we are ready to disclose the average click price and click through rate but let me add more color on this question. I think as the number of active customers for the current quarter or the growth rate for that number really represents a combination of our strong position in the market as well as the maturity of the market. I would say probably more towards the maturity of the market. Internally, the revenue really are determined by the traffic -- related traffic which is very much like an inventory we can produce for our customers or advertisers and also based on pricing and how much we can charge our users. So, internally, we plan on the growth of traffic and the capability we can monetize those traffics based on our pay-for-performance rules, but we are changing. Both factors are changing or improving. That’s how we come up with our quarterly top line guidance.
Ming Zhao - Analyst
Okay. Thank you very much.
Robin Li - CEO
And our number of customers really is an indicator of our position and the market maturity.
Ming Zhao - Analyst
Okay. Thanks.
Operator
Your next question comes from Robert Peck of Bear Stearns. Please proceed.
Lillian Jo - Analyst
Hi. This is [Lillian Jo] for Bob. Robin and Shawn, I would like to get some more details on the newly-launched Baidu Space product, what are the speed of that integration given the monetization plan you have in place for this product, and how do you differentiate Baidu Space from other social networking sites with similar service offerings, such as MSN Space? Thanks.
Robin Li - CEO
Yes, we did this because of popular user demand. Lots of Baidu users asked for it, they really need it, so we came up with a product to satisfy their needs. The functions including, like I said, blog function and photo album function and some social and network functionality. It’s being integrated with other Baidu products including the Post Bar, the Baidupedia and Baidu Knows product so, going forward, we will have more and more information about our users. I think that may help us to better monetize the non-web search traffic in the longer term but, right now, there is no immediate plan to monetize Baidu Space.
And, in terms of competitive offerings, Baidu Space is the newly product which was launched on July 13. There is still a lot of room to improve but with our brand and with the technological advantage we have, Baidu Space is certainly the fastest and most stable service of its kind. We believe, over time, we will become number one in this category.
Lillian Jo - Analyst
Thank you very much.
Operator
Your next question comes from the line of Lu Sun of Lehman Brothers. Please proceed.
Lu Sun - Analyst
Hi, good morning. I actually just have one question regarding the search experience of your users. We noticed there have been quite a few more ads on the left side, i.e. the main search results of your web page, so how do you balance the monetization and also the user experience because your competitors there only increasing their index pages and also providing a better product? Thank you.
Shawn Wang - CFO
Lu, I think the best measurement for user satisfaction is page [inaudible]. If our page [inaudible] continue to grow at a faster pace than our competitors then we are serving the users better than them, so the criteria is not really how many page search results we display on certain search result page, it’s really how well we can satisfy our users’ information needs. Based on that, we adjust our search result page layout on a very frequent basis, constant basis, because often the early stage nature of the page search business. Having said that, I don’t agree with you that we added a lot more page search links on the left hand side of our search results, we actually reduced the number of our page search links on the left hand side during the past quarter. It’s not -- the number of page search links on the search results page is not an indication of how relevant our results are and it’s not an indication of how strong our monetization capabilities is, so far it’s not really a relevant measure.
Lu Sun - Analyst
Okay. Thank you.
Operator
Your next question comes from Paul Keung of CIBC. Please proceed. Paul Keung, your line is now open.
Paul Keung - Analyst
Hi Robin and Shawn. In the past you guys have made a point about in addition to clicks and query growth, your driving coverage and [inaudible] standpoint of going after monetized clicks but also finding more suitable advertisers, so I guess my question is, where are we in that strategy given that you’ve been doing it for some time now and are we -- is that contribution to your [inaudible] growth [going to start falling out] into next year?
Shawn Wang - CFO
I think our strategy has always been to continue finding the better ways to monetize the traffic. Like I mentioned before, coverage is not a really -- it’s not really a good thing because of our monetization capability. We really look at the quality of the sponsored links and look at the relevancy of the sponsored links. We look at how much value we bring to the advertisers and, based on that, we adjust our bidding process, we adjust the starting bid, we may add more page links, sponsor links, we may reduce the number of sponsor links, we may change the matching [inaudible] between the ads and the user queries. There are a lot of things that we are playing with. I do believe there are still a lot of room for us to improve. If you look at the monetization capabilities or the clicking price amount different search markets, China, Japan, Korea, US or UK, I believe that the price Chinese advertisers pay are still a fraction of what advertisers in other markets pay. So we believe we still have a lot of things to do and we have a lot of room to improve. Does that answer your question?
Paul Keung - Analyst
Close enough, thanks.
Operator
Your next question comes from Steve Weinstein of Pacific Crest. Please proceed.
Steve Weinstein - Analyst
Thank you. Just a question on the growth in CapEx in the quarter. I think in the script you talked about that really trying to keep up with the demand there was in the quarter, but I’m wondering if there was some additional spending in the quarter to prepare for growth in the second half of the year, or if you really match your spending with the current demand of the business and what you think about CapEx having to grow more in line with just the overall top line growth kind of going forward?
Shawn Wang - CFO
Steve, the CapEx growth has not, in most parts it’s not related to any specific project links. I think it’s more in line with our overall strategy for growing our business. These CapEx, our money spent buying [inaudible] network equipments which have an average life of somewhere between three to seven years that we could use. It just reflects the confidence we have in the future growth of the business and we will continue to make investment in the future quarters to come.
Steve Weinstein - Analyst
Thank you.
Operator
Your next question comes from Andrew Collier of New York Global Securities. Please proceed.
Andrew Collier - Analyst
Thank you. Could you give some indications of what you’re hirings have been thus far in the quarter and what you expect it will be for the remainder of the quarter, given that you are taking over distribution in Beijing from [Chung Wan] and you also -- you mentioned earlier that you are going to be expanding some of your sales and marketing efforts also in the country?
Shawn Wang - CFO
We will continue to grow our direct sales. Our headcount increase I think in the past quarter, in the near quarters to come will continue to be the addition of the direct sales headcount. I think the acquisition of -- I’m sorry, the taking over of the general customers, that would require us to expand our customer service support and also expanding our direct sales presence in Beijing. And, at the same time, we see growth opportunities in Shanghai and Guangzhou are continuing to be unleashed and we will be adding manpower in those markets as well.
Andrew Collier - Analyst
A month ago, when I was in Beijing, the company said that they added, I believe, 600 people since the beginning of the year, is that figure -- where does that figure stand now since January and where do you expect it to be by the end of the quarter?
Shawn Wang - CFO
At the end of the quarter, at the end of the Q2, we have roughly about 2,300 people and that presumably about 5 or 600 headcount increase from the previous quarter, and the amount of the addition came from direct sales and we will continue to be adding more and more direct sales. I can’t give you an exact number how many we’ll be adding.
Andrew Collier - Analyst
Thank you.
Operator
Your next question comes from the line of Safa Rashtchy of Piper Jaffray. Please proceed.
Nat Schindler - Analyst
Yes, hi. This is Nat Schindler calling in for Safa, sorry about the earlier technical difficulties that caused a message not to go through. But here, I just have a question, what percentage of your sales are now coming through distributors and how has that changed over the last quarter? I know you’ve talked about bringing more of your sales in-house and what effect will that expansion of the in-house sales force as opposed to the distributor sales force have on your margins in the long-term.? Thank you.
Shawn Wang - CFO
The majority of our sales, at his stage continue to be -- we’re [not talking about] revenues or still the majority of our revenue came from our project distributors, but over the course of the past few quarters we’ve been making investment in direct sales and that proportion has been gradually declining but is still over 50%. In longer-term, we would see the increase in direct sales contribution will accelerate because the direct sales force that have been put in place will not have immediate incremental sales effects in the near quarter, and that will be our customer base gradually and as a recurring customer base the effect of our direct sales and the contribution in terms of revenue will accelerate. At some point in time we will have the majority of our sales to be generated by direct sales.
Robin Li - CEO
And in terms of margin, I think, direct sales have -- inherently have lower -- slightly lower margin because we have to hire sales force but it will have a better impact on top line. Currently, for the distributors, we only record net revenue and then our distributors' commission.
Shawn Wang - CFO
Right. Now, direct sales will have a better both top line and bottom line, it's just the margin itself, because of repeating [inaudible] expenses that may be affected [inaudible].
Robin Li - CEO
Right.
Nat Schindler - Analyst
Okay. Thank you.
Operator
Your next question comes from the line of Frank Shi of CLSA. Please proceed.
Frank Shi - Analyst
Hi, guys. How much of your traffic growth is coming from the community-based products, because in your growth traffic probably -- won’t generate much revenue for you and do we need to worry about the deterioration after your traffic, not only for new products for the whole industry because everyone else [inaudible] do the same thing? Thank you.
Robin Li - CEO
If you look at the third party data, Baidu is the number one website in all Chinese [world], probably the largest website in Asia, or largest website outside of US in terms of reach and traffic. Not all of them, the traffic, are [inaudible] per traffic. We do have traffic from the community [inaudible] and search services -- our search-related services. I believe those services help increase the traffic of web page search for the traffic that we can better monetize. So developing other functions or products for Baidu users help increase the web page search traffic for us; that’s been our strategy so far.
Frank Shi - Analyst
Okay. Thank you.
Operator
Your next question comes from the line of James Mitchell of Goldman Sachs. Please proceed.
James Mitchell - Analyst
Thanks very much. You mentioned just now that you enjoy a revenue pick-up when you bring sales force in-house on a per customer basis because you’ve switched from reporting revenue net of the sales force payments gross [inaudible]. Is that revenue pick-up having a material impact on your revenue per customer or is it an immaterial impact at this stage? Thank you.
Shawn Wang - CFO
James, it’s an inventory impact at this stage.
Robin Li - CEO
New customers really need some time to ramp up to release their buying power so we would -- the customers we obtain through direct sales force to have full buying power release of two years from their signing up.
James Mitchell - Analyst
But if there’s a customer who was already working through a third party sales force for two years and then you brought the third party sales force in-house, wouldn’t you get a 50% step-up in the spend from that customer that you report?
Robin Li - CEO
The fact is, many of the customers working through distributors [that] discount from the distributors, it’s not really a 50% ramp-up for revenue.
James Mitchell - Analyst
Okay. I wasn’t referring so much to the discount they enjoy but to the fact that when you report revenue you report net of the distribution as discount if it’s through a third party and you gross it back when you take the sales force in-house.
Robin Li - CEO
Yes, well we -- I’m not sure if you’re asking about the customer we took over from the distributors or the customer we [added] organically through our direct sales force.
James Mitchell - Analyst
I’m sorry, I was referring to the former.
Robin Li - CEO
Ah, for the former.
Shawn Wang - CFO
When we take over from the distributor, those customers are already enjoying a discount, we cannot change that immediately, so there’s no material impact for the top line.
James Mitchell - Analyst
Okay. I wasn’t referring so much to what the customer spends but to what Baidu books, because previously I thought Baidu would book two thirds of what they’re spending as revenue whereas post the acquisition of the sales force Baidu would book the full amount as revenue?
Robin Li - CEO
Yes, but two thirds of the listing price, the end customer may not pay listing price.
Shawn Wang - CFO
I think, to answer your question, yes, there is an incremental as a result of taking over from our distributors, there is an incremental contribution to our top line, to the revenue, however, the incremental is not as high as you imagine as 50% pick-up because some of the customers who are now paying the full listing price, but there is incremental. However, given that the distributors who are taking over, none of them was a -- is representing a material -- a larger share of our overall customer base so the incremental impact while financial in the unit terms are not material.
James Mitchell - Analyst
Okay. That’s great. Excellent. Thank you.
Operator
Your next question comes from the line of Tony Tang of Lucite Research. Please proceed.
Tony Tang - Analyst
Hi. Thank you for taking my questions. Part of my questions have been answered about the [inaudible] acquisition so looking forward, do you have any more acquisition in the pipeline and how to do you see this acquisition will contribute to your future growth? Are you looking for the strategy of growing your revenues through the acquisition in the future?
Shawn Wang - CFO
We have an acquisition strategy of looking at others' products or software or a website that would [be] synergetic to our business, meaning either adding traffic or adding user experiences [inaudible]. In accordance with the past quarters, we have in turn into some small deals but none of them were material enough and didn’t have any material impact financially or business or [inaudible] and we will continue to look for opportunities along those lines and there’s nothing that I could elaborate further.
Tony Tang - Analyst
Okay. So my other question about the taxation, I remember way back two quarters before, you actually mentioned you’re looking for some favorable tax treatment from the government, but in the last few quarters your tax pattern has been around 15%, I’m just wondering, is anything going on on that side? Are you getting back from the government yet?
Shawn Wang - CFO
There’s no any change in the status. The -- we are still paying the statutory tax rate, we also are still in the process of applying for certain tax breaks, the timing of these or whether we could or could not get it is still uncertain. I want to caution you that these are not to be taken for granted.
Tony Tang - Analyst
Okay. Thank you.
Operator
Your next question comes from the line of Ming Zhao of Susquehanna Financial Group. Please proceed.
Ming Zhao - Analyst
Okay, thank you. Just a quick question. Can you comment on the traffic and the monetization because of the World Cup?
Robin Li - CEO
The traffic and monetization both have -- what hurt -- both were hurt by the World Cup games because lots of people left their computer desk and went and watched TV. We are not in -- most of our businesses are not related to brand advertising so we do not get any benefit from those kind of customer spendings.
Ming Zhao - Analyst
Okay, thank you.
Operator
There are no further questions at this time. We are now approaching the end of the conference call. I will now turn the call over to Baidu’s Chief Executive Officer, Robin Li, for the closing remarks.
Robin Li - CEO
Once again, thank you for joining us today and please do not hesitate to contact us if you have any further questions. Thank you.
Operator
Thank you for your participation in today’s conference. This concludes our presentation. You may now disconnect. Good day.