百度 (BIDU) 2007 Q1 法說會逐字稿

Good evening, And thank you for standing by for Baidu's first-quarter 2007 earnings conference call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question and answer session. Today's conference is being recorded, and if you have any objections, you may disconnect at this time.

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

Hello, everyone. Welcome to Baidu's first-quarter 2007 earnings conference call (inaudible) Baidu's first-quarter 2007 earnings earlier today. You may find a copy of this press release on the Company's website as well as on newswire services.

Today, you will hear from Robin Li, Baidu's Chief Executive Officer, and Shawn Wang, Baidu's 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 (technical difficulty)

Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provision 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.

Hello, everyone, and thank you for joining us today. We are pleased to report that in the first quarter of 2007, we exceeded the top end of our revenue guidance, with revenues growing 103% year over year. After two quarters of transitioning, we believe we have set a solid foundation for future growth.

We continue to build our market share by expanding Baidu's position as the premier platform for Chinese-language information online. Our traditional search service and other search-related products continue to be the key drivers for growth.

In particular, our community-based products including Baidu Knows, Baidu Space and Baidu Encyclopedia are among our fastest-growing and most exciting products. Currently, Baidu Knows has about 15 million answers for the questions, and during the first quarter the number of Baidu Space users almost doubled.

We are also seeing good user response to our new product and content initiatives. In the first quarter, we introduced Baidu Video Search, and we expanded our digital entertainment offering through further collaborations with the leading record companies.

We believe in the long-term market potential for advertising-supported digital music, and content providers continue to show great interest in working with us. We remain on the lookout for strategic partnerships that help to enhance user experience and revenue.

Developing the best sales team in China is an important part of our strategy, and that is why we promoted Mr. Xiang Hailong to be our Vice President of Sales. Mr. Xiang has successfully headed our direct sales team in both Shanghai and Beijing, and we are confident that he will be instrumental in the ongoing development of our sales network.

Despite the late Chinese New Year, our active online marketing customers grew by over 4,000 as we continue to build our direct sales team in major cities and strengthen our distributor network. We believe that our commitment to customer service will continue to translate into a growing customer base and higher average spending per customer. This should also help existing customers transition to our improved P4P online marketing platform.

As we announced earlier today, we have accepted David Zhu's resignation as COO. David has made a valuable contribution to Baidu's growth, and has helped us build a strong team. We wish him all the best, and we are considering options to fill the COO role.

In the meantime, we continue to develop home-grown talent; in fact, two of the newest members of our senior management team have both been with us for over five years. Mr. Yu Jun has been promoted to Vice President of Products, to lead the design and promotion of new and existing Baidu products and services. Mr. Xuyang Ren has been promoted to Vice President of Marketing and Business Development in our overseas area marketing, strategic partnerships, and international business development. We pride ourselves on creating a good place to work and grow, and we will continue to hire and develop the best talent.

Today, the Internet market in China is still in its infancy, with only around 10% Internet penetration. With this enormous market potential before us, we are strongly committed to investing in long-term growth. This is reflected in our aggressive investment during the quarter in technology, bandwidth and network capacity.

Lastly, I am pleased to report that we are profiting very well with our Japan initiative. Many of you will have noticed that we began operating a limited beta site this quarter, baidu.jp, and the initial indications have been very positive. We are on track to officially launch Baidu Japan later this year, and we will keep you updated.

I will now turn the call over to our CFO, Shawn Wang, to discuss our financials.

Thank you, Robin.

Good morning, good evening, everyone.

As many of you know, our first-quarter results tend to be affected by the seasonality from the long Chinese New Year holiday. Regardless of this, we exceeded our guidance and posted healthy revenue growth in the first quarter of 2007.

This was achieved by the strength of our customer service and the increased awareness of P4P online marketing in China. I will take a few minutes to walk you through some of the important factors contributing to these results and a few other financial highlights.

Our first-quarter total revenues were approximately RMB276 million, slightly exceeding the top end of our guidance and up 103% for the year-ago period. Online marketing revenues were RMB275 million; that is 108% growth year over year. A number of factors constituted to our growth, including a year-over-year increase in the number of active customers of 51%, as well as a year-over-year increase in per-customer spending of 41% approximately.

Traffic acquisition costs as a component of cost of revenues was RMB28 million, or 10% of total revenues, compared to 9% a year ago. The slight increase reflects continued growth of revenue contribution from Baidu Union.

Bandwidth costs as a component of cost of revenues was RMB22 million or 8% of total revenues compared to 6% a year ago. Depreciation costs as a component of the cost of revenues was RMB26 million, or 9% of total revenues compared to 8% a year ago. The increase in bandwidth and depreciation costs were mainly due to new data centers established in southern China and in Japan.

Share-based compensation expenses decreased marginally to RMB12 million from RMB13 million in the year-ago period. SG&A expenses were RMB75 million. That is a 49% increase from a year ago. Research and development expenses were RMB25 million for the quarter; that is a 61% increase from the year-ago period.

As Robin mentioned, our Japan initiative is progressing well; our Baidu Japan incurred opening costs and expenses in the first quarter of RMB11 million in aggregate.

In the first quarter of 2007, income tax expenses was RMB1 million approximately.

Net income for the quarter was RMB86 million, representing a 143% increase year over year. Net income excluding share-based compensation expenses, a non-GAAP measure, was RMB98 million; that is a 125% increase from a year ago.

Basic and diluted EPS excluding share-based compensation expenses were RMB2.9 and RMB2.82, translating roughly to $0.38 and $0.37 US, respectively.

The above costs and expenses related to Japan operations impacted our EPS by $0.04 in US dollars.

Net margin, excluding share-based compensation expenses, for the first quarter was 35%, up from 32% in the year-ago period. The year--over year increase primarily reflected the [capability] of our business.

Now moving on to our balance sheets. We ended the first quarter of 2007 with cash, cash equivalents and short-term investments of RMB1.2 billion, or in US dollars, $151 million. Operating cash flow for the quarter was RMB113 million, representing a year-over-year increase of 20%.

Capital expenditure for the first quarter was around RMB154 million, up from RMB12 million a year ago. The significant increase in capital expenditures was primarily due to the establishment of data centers in South China and Japan.

Adjusted EBITDA, again, a non-GAAP measure, was RMB118 million for the first quarter, representing a 126% increase from the year-ago period.

Now please allow me to provide you our top-line guidance for the second quarter of 2007.

We currently expect total revenues to be between RMB378 million to RMB388 million, which would represent a year-over-year growth of 97% to 103%, and a quarter-over-quarter sequential growth of 37% to 41%. And I do wish to emphasize that this forecast reflects Baidu's current and preliminary view. That is subject to change.

I will now turn the call back to Robin for some closing remarks.

Thank you again for joining us today. While we are pleased with the results we have achieved to date, we believe that the best is ahead of us. We look forward to continuing to provide the best search experiences for our users and continuing our strong growth path in the coming quarter and years.

I will now open the call to questions.

(OPERATOR INSTRUCTIONS)

The first question comes from the line of Jason Brueschke. Please proceed, sir.

Thank you. First of all, good morning, Robin and Shawn, and congratulations on your quarter, and especially on the outlook. It looks very, very strong.

My first question, and I'll get back at the end of the queue, is -- the transition period seems to have come to an end, and that is something that you guys have said would happen going into Q2. Could you maybe just give us some color on really what has changed?

I guess what I'm interested in -- have we seen a decrease in customer churn in Q1, and I guess your expectations for Q2 as well? Have we seen customers that maybe have stopped coming and advertising on Baidu because of the changes in the algorithm, the relevancy of dynamic bidding? Have they been coming back?

And could you maybe comment on why the ARPU seems to be growing very, very well? Is that now the latent effect of these changes to the algorithm, or is there something else going on in the market? Thanks.

Jason, as we mentioned earlier, we went through about two quarters of transition and that was actually initiated by some of the algorithmic changes we made in our paid search platform. That change caused some customer confusion, and we tried to solve that problem by improving our customer service team, our sales team.

Now what we are seeing is that more and more customers, including the new customers we signed up during the past couple quarters, and many of the existing customers can appreciate our effort. When they look around and try to compare the performance of Baidu platform and other alternatives, they found that Baidu is still the most effective way for them to promote their products and services. That's why we're seeing the result is getting better and better.

Regarding to the increase in ARPU, I would say it's driven by a number of factors, including the traffic growth we experienced during the quarter. We expect the traffic growth will continue for the rest of the year, and also better customer service, better sales team and better execution in all the operational metrics.

Great. Thank you.

Thank you. Your next call comes from the line of Robert Peck with Bear Stearns. Please proceed, sir.

Yes. Hi, Shawn and Robin. I just wanted to touch really quickly on the sequential increase in the top line. It looks like it's mostly coming from new customers as opposed to increased customer spend. Could you talk about, when you look at the guidance, the sequential growth for 2Q of being about 40%, how should we think about that mix for the quarter? Thanks.

Hi. This is Robin. I think, as I mentioned earlier, it's a combination of new customers coming to us, and the increase in ARPU. The sequential growth really reflects the preparation we did during the past few quarters. As we also mentioned in the last conference call, seasonally Q1 is slow, and last quarter was especially slow because of the late Chinese New Year. So we are actually starting from a relatively low base when you are comparing the sequential growth from Q1 to Q2.

But overall, I think we are very happy about the execution we did during the last quarter. We are quite confident things are back on track.

Your next question comes from the line of Ming Zhao of Susquehanna International. Please proceed.

Thank you. Good morning everyone, congratulations. Just a stupid question on your Japanese investment. I know you have spent RMB11 million on the P&Ls, so what's the amount you booked on your balance sheet? And can you explain -- is that the part of the fixed asset increase?

Ming, I'm not sure if I heard your question completely. But let me try to give a highlight. If I don't answer your question, you can ask again.

In terms of the big P&L charges that is appearing on our quarter, as you can see it's really -- the biggest increases are coming from the bandwidth and depreciation. And to tie that, you can see a very significant CapEx investment that was made during the first quarter associated with our building up of data centers in South China and Japan.

Our building of network capacity is always in a step function. This is the -- as you can tell, the [amount of] investment is more than the CapEx investment we made -- it was almost about the same, or slightly more than what we did for the whole year of '06.

So that reflects a very -- it reflects the optimism, the confidence we have in our business. We have been saying that it's time we make the investment. That's what we did in this quarter.

The RMB11 million number is on a GAAP basis; it includes the depreciation cost.

Okay, yes. (technical difficulty) Yes, that's absolutely right.

So, does that mean for the remaining three quarters you are still expecting to spend RMB14.5 million on the P&L?

In the future quarters, assuming you are still talking about Japan, the expense level we've seen for this Q1 will continue to increase, because the Q1 expenses related to Japan in most part are still the network and fixed-asset related.

In future quarters, as we continue to expand our operations in Japan and incur additional R&D expenses, we would expect that will continue to increase. The Q1 number is not to be repeated.

I understand that, but I just wanted -- from (inaudible) do you still expect full-year expense would be in the range of $15 million?

We talked about $15 million; that was an estimate that we gave out for the whole year of 2007.

Okay. Thank you very much.

Your next question comes from the line of Gene Munster with Piper Jaffray. Please proceed.

Hi. This is Nat Schindler calling in for Gene Munster. I wanted to -- in the past, except for the last two quarters where some of your issues with churn increased related to the number of changes you made, you had a relatively stable net new customer add per quarter. It seemed to be, it looked like it related to the number of salespeople you had.

Assuming Q2 has a nice growth in ARPU, it would -- still, to make your guidance, you're going to have to have a very large growth in net new customers, much bigger in aggregate numbers than you've had in the past. Is this due to more the feet on the ground approaching -- sales people going out and getting new customers? Or is it more just simply search getting bigger in China?

Well, we cannot exactly break down the contribution on new customer and the addition and the increasing ARPU. What I can tell you is that the ARPU is primarily driven by the traffic increase after the Chinese New Year. Typically, the traffic will increase quite dramatically.

If you estimate the overall page view we get during Q2, it should be significantly higher than Q1. Of course this is obviously a function that customers are willing to spend as much as we can provide in terms of traffic inventory.

Also, after the Chinese New Year, the sales team can go out full force to talk to potential customers. So we also expect the number of new customers to be better, much better than Q1.

Thank you.

Your next question comes from the line of Anthony Noto with Goldman Sachs. Please proceed.

Thank you very much. Robin, I was wondering, a year ago the seasonality in the June quarter versus the March quarter -- your sequential growth in new online customers was 45%, but at that time you had a very different model than you do today.

Given the number of internal salespeople you have and incentives, do you think you could accelerate that sequential growth compared to the seasonality a year ago? Thank you.

I really cannot provide guidance on the number of new customers for the coming quarter, especially in the percentage terms. But I would say that Q2 is typically a strong quarter in terms of new customer additions. Our revenue guidance for Q2 does reflect a combination of number of customers and the ARPU.

Thank you.

Your next question comes from the line of James Mitchell. Please proceed, sir.

A kind of narrow focus, a balance sheet question. If I look at your customer deposits, they were up about 4% quarter on quarter. I think this time last year, they were up about 25% quarter on quarter. But your Q--on Q revenue growth for the second quarter is the same as it was this time last year, so you're obviously enjoying very strong secular growth.

Has there been a change in the nature of how customers prepay for your services? Are there more customers paying by credit card rather than through the deposit mechanism? I'm just curious why the revenue is growing faster than the deposits. Thank you.

Jim, this is Shawn here.

First of all, I think the credit card is not becoming any material way of repayment for our business customers. We have been seeing more use of online payments through other [methods], but it's still not the mainstream at this moment.

But when you try to compare to the last year number, I think there are some changes in how we collect a deposit from a customer in the course of the past few quarters. I think in the original way we used to collect a standard minimum payment basically nationwide. In the course of last year, we modified that practice, so we do recognize different markets, different customers, so may have a different payment habit or pattern.

So we actually did abolish the one standard payment metric for the whole market. Instead, we did allow different markets would set a different minimum deposit limit. So that, I think the historical record may not be a good indication.

As the market gets more mature, customers typically pay on a more frequent basis, rather than pay a lump sum and wait for a long time. I (multiple speakers) market maturity or customer maturity.

So, just so I am clear, in the smaller cities, previously, the minimum deposit was a barrier to entry. So you have reduced or removed that barrier to entry to accelerate growth in your lower-income customers. And then some of your bigger customers simultaneously are paying on a more regular basis, rather than making big lump payments once every few months?

That's about right.

Okay. Thank you.

Your next question comes from the line of Steven Weinstein with Pacific Crest. Please proceed.

Thank you. I just want to make sure I understand Shawn's commentary on the CapEx and the bandwidth spending. You indicated, and it's consistent with your comments in the past, that this would be sort of a step function with the growth, understanding that you had some additional headwind there as you're moving into a new geography.

So how should we think about CapEx and bandwidth costs growing for the rest of the year? Have you completed this step up, and we should see a more normalized spending over the next three quarters? Or are you still somewhere in that process of taking that next step higher (inaudible)?

The largest scale, Steve, the largest scale setup is mostly complete. We will be returning to a normal -- we will continue to spend on CapEx, but it will be a normal pattern. It is not going to have the same type of jump that you saw in Q1.

Great. Thank you.

Your next question comes from the line of James Lee with WR Hambrecht. Please proceed.

Good morning, Robin and Shawn.

Good morning.

Good morning.

Can you just help me clarify the seasonality in 1Q? Maybe you can break down the revenues by quarter, and give a sense of what percent of your revenue you book in January, February, and March? And maybe talk about the run rate in April a little bit versus March. That would be very helpful. Thank you.

Let me talk about it in general. I think the holiday, Chinese holiday, tends to affect -- the biggest impact is in Chinese New Year, which could be in the month of January, it could be in the month of February. In this particular quarter, it happened in the second half of February, which means that generally in the Chinese holiday, there is a longer period than last year. Last year, I think it was the end of January.

What we have experienced is the longer the time span between the New Year's, January 1, and the Chinese holiday, the bigger impact of the holiday. People are in the festival atmosphere for a little longer, and that affects our business.

What would normally happen, I think, is after the Chinese holiday -- and I think the Chinese holiday will last roughly about a week to ten days or so, depending on different cities in parts of China. So in this particular case, when we entered into March we start to see the recovery from the Chinese holiday. What we have seen in this March is a very strong recovery in both traffic and business.

Shawn, maybe can you quantify that a little more. Is it fair to say a majority of the revenue during the quarter was booked in March? Over 50%?

I will not go into specific breakdowns by months, but I think what I've told you is roughly, it will help you to understand how the number is reported.

Okay. And can you still compare the April run rate so far versus March?

James, I think our practice is giving forward guidance on the quarter like what we did; I will not be going into specifics.

All right, thank you.

Your next question comes from the line of Richard Ji with Morgan Stanley. Please proceed.

Hi, Robin and Shawn. Somehow my line got disconnected, and so I apologize if the question has been asked. Two questions -- number one is regarding your Japanese venture. I'm just curious, how will you differentiate your Japanese search service from the local leaders, such as Google and also Yahoo! Japan?

The second question is that after you changed your monetization scheme, have you seen the churn rate of your customer base stabilize?

Okay, on the Japan venture, I think our current priority, or current goal is to first make the Web Search and Image Search, which are the two search services we beta launched toward the end of last quarter, to be competitive, to be comparable in terms of service quality.

We do believe that there are a lot of things, a lot more things we can do in terms of differentiating or providing a more localized service to the Japanese consumers. At this time, we really cannot get into the details. Our goal is not really to differentiate from the current market leaders, but do a better job than the current market leaders.

On the churn rate, I think I mentioned during the last conference call, the whole transitioning process is more like a wash. Some of the older customers did not accept the new pricing scheme; they left. And more and more new customers sign up, and they are happy about the performance we can deliver to them.

Okay. Thank you.

Your next question comes from the line of Steven Ju with RBC Capital Markets. Please proceed.

Good morning, gentlemen. What tax rate should we be thinking about for the balance of the year and going forward? Thank you.

Again, it's very -- it's difficult to predict that with any degree of accuracy in the [environment]. We do have various different operating entities, and we get different tax breaks from various government agencies from time to time. But I think it is probably okay to assume at this time it will be somewhere in the mid-single digits.

Thank you.

Your next question comes from the line of George Chu with UBS. Please proceed.

Good morning Robin and Shawn. A few quarters ago, I think, if I were correct, I heard a comment from you on the call that you find for the new customers that just were signed on recently, you find that it tends to take them a few quarters to become real contributors in terms of revenues.

Is the same trend still true? Or are you finding the new customers are spending more money faster than the customer you were signing a year or two years ago?

That's still true. It's not really a trend; it's actually a fact that has been true for a long time. Usually, when a customer signs up, it will take them some time, typically a few months, to get familiar with our online marketing platform. And once they get used to the platform, they know how to track their performance, they will be happy, they will spend more. It's been the case for quite a long time.

I see. And I recall, if I may, I think two years was the period you mentioned before -- meaning that it takes a customer two years before they become a real contributor. Is that correct or am I mistaken?

I don't think we give a number like two years. But I think that as a trend, new customers are spending more, not only because they are more mature, but also because we have more inventory, we have more traffic to deliver.

All right. Thank you.

Your next question comes from the line of Eddie Leung with Deutsche Bank. Please proceed, sir.

Hi. Good morning, guys. Can you talk a little bit more about your new products? For example, the road maps for products that are going to be launched in China. And as far as the traction you see in some of the products launched in the past year, which ones match your expectations, which ones not?

We typically do not pre-announce products we are going to launch, with the exception of Japan because that's incurred -- that would incur a significant amount of expense.

So for the Chinese market, as I mentioned earlier, we have launched a Baidu Video Search during Q1. Many of the existing or relatively new services we launched during the second half of last year or even earlier are doing very well.

We -- our approach in the Chinese market is not to launch a lot of new products. But once we decide to bet on a product, we would target the number one or number two position. So, currently, almost all of the products we launched met or exceeded our original expectations in terms of traffic.

Your next question comes from the line of Jason Brueschke with Citigroup. Please proceed sir.

Thank you. Two follow-up questions. First of all, you acquired, I believe, a news license that might enable you to go into brand advertising, and you've announced some new music partnerships. Can you let us know if you're expecting material revenues from these two new initiatives to come in the second quarter of this year?

And the second question I have is -- could you maybe discuss what your sales and your go-to-market strategy for Japan is going to be? Are you going to try to do more of a direct sales effort with advertisers, or will you look to leverage some third parties that may exist already in that market? Thanks.

Jason, on the brand advertising issue, it's still a very small percentage of our revenue. We've been trying to offer a little bit of brand advertising [to] channels other than Web Search. So far, the effectiveness or the performance has been very good. I think advertisers typically find the brand advertising on Baidu will have better performance than the traditional portal companies.

We also mentioned during the previous conference call, we launched an advertising form called Targetisement. It's really a behavioral targeting based on user behavior. We deliver graphical ads to them based on what the user did on our platform and on the websites we have control of.

So we think, going forward, brand advertising will have very nice growth, but for the next few quarters it's not going to be a very significant contributor to the overall revenue.

Regarding to Japan, I think for the first year our goal is to devise an effective product and service for the Japanese consumers. We have not thought about how we are going to do sales there. But because the Japanese search market is a relatively mature market, I think it's going to be relatively easy for us to get revenue once we get traffic.

Thank you.

Your next question comes from the line of Robert Peck, with a follow-up from Bear Stearns. Please proceed.

Two quick questions here. One is, if I add back the RMB11 million invested in Japan, the margin still seems to drop a little bit here. Could you tell us what's causing that, and how we should think about it going forward?

And secondly, could you also comment a little bit about the delta, or the change, in the market share of Baidu versus Google? Thank you.

Bob, Shawn again. On the margin number, there is a significant investment that was incurred in Q1. We would expect the impact of that, namely depreciation and bandwidth, will last at least -- it will continue to impact our earnings for the next few quarters. So the -- (inaudible) to caution you, I think the margin for the next immediate quarters will continue to reflect this investment.

But the current scalability of our business is not to be affected by this. I think the investment was really on the heel of our strength and confidence in the business. So I do expect, beyond the immediate quarters, we will see improved margin.

About the market share question, again, there is no authoritative number on that. We don't have the exact traffic or user-based number for our competitors. What we have seen is that after the Chinese New Year, our own traffic increased quite quickly. It's doing a job better than we had expected.

Thank you, Shawn. Thank you, Robin.

Your next question comes from the line of Wallace Cheung with Credit Suisse. Please proceed.

Hi, good morning, Robin and Shawn. Just a quick question on the traffic acquisition costs. Can you explain a little detail on how these drive the Baidu Union (inaudible) in the first quarter?

And can you comment on the trend of the TAC as a percent of total revenue going forward the next [few] quarters? Thank you.

Wallace, there hasn't been any change in our Union strategy; we already have the largest Union network in China. We will continue to expand that. (inaudible) we could serve other companies with our monetization platform (inaudible) platform we are open for that opportunity. As you recall, we did enter into a cooperative agreement with MSN in China. We started to power some of the monetization, some of the traffic starting in Q1. I think the number, the TAC increase reflected that slightly.

In the future, we will continue to recruit third-party traffic to the extent that it will contribute to our margin, but the TAC number itself, it may fluctuate.

Sorry. Can you repeat that again (inaudible)?

What I was saying is, in the future, we will continue to try to recruit more third-party traffic and to utilize our monetization platform. So the TAC number in actual dollar amount, it won't increase; as a percentage of our total revenue, that could fluctuate.

Okay. Thank you very much.

Your next question comes from the line of Ming Zhao, with a follow-up from Susquehanna International. Please proceed.

Thank you. Several quick housekeeping questions, if you can provide for me. One is, can you tell me roughly how many Baidu Space users are there right now?

We do not disclose that kind of number. It's a tricky metric. It depends on how you calculate number of users. Is that number of registered users or number of active users; and in terms of active users, how active is active? Is active once a week login? Or once a month login?

It's quite difficult to give a clear indication of how the service is doing. But what you can track is -- you can go onto some third-party website to see the traffic percentage of the Baidu Space service, which is hi.baidu.com. I think that will give you a relatively good picture of how our space is doing.

Okay. Also, can you update us with the headcount at the end of the quarter, and also including the sales (inaudible) force at the end of the quarter, please?

Ming, the line isn't very clear, can you repeat your question again?

Headcount.

Oh, the headcount?

Yes, I would like to know the total number of employees by first quarter, and among them how many are salespeople?

Okay. At the end of the quarter, we have close to about 4,000 employees. The majority, super-majority of them, close to 70% of them are in sales and customer service.

Okay. Also, what was the CapEx exactly in the first quarter?

How much exactly was the CapEx?

Yes, in the Q1.

It was about RMB150 million. I think that to be precise it's RMB154 million.

Okay, great. Thank you.

All right.

Your next question is a follow-up question from the line of Gene Munster of Piper Jaffray. Please proceed, sir.

Yes. One housekeeping question. Did you just say 4,000 employees, or did I mishear that?

Close to 4,000, yes.

Okay, then one follow-up question. As you had the issues switching over customers from the Beijing distributors, you had to build up your sales force in Beijing. Do you feel comfortable now with the level you're at? Or is there still more room to grow the Beijing sales force to just get yourself back to stabilized in Beijing?

Well, there's room to grow not only in Beijing, I think nationwide. As Robin mentioned earlier, we did see that the market still has (inaudible) room to grow. We think with the improved customer service and with the expanded direct sales forces, we will continue to do a better job. Of course, our distributor will also play a very important role in this. So we will grow our, will continue to grow direct sales in Beijing and other parts of China as well.

All right. And just a final question is, what was the headcount number at the end of Q4, again?

It was about 3,200 roughly.

Okay. Thank you very much.

Your next question comes from the line of James Mitchell with Goldman Sachs. Please proceed, sir.

I know you don't give full-year guidance about items like this, but just very broadly speaking, can you help us think about CapEx to revenue ratios over time?

I understand the first quarter was kind of an anomaly on the way up. But I'm wondering if the ongoing CapEx would be somewhere between where it was last year and the first-quarter trend level, or it would revert to the level last year as relative to revenue?

Jim, the CapEx in the first quarter is basically the -- if you look at our history, this is a record level. And as we mentioned earlier, it's basically the size of the last year's combined, so this is a very large-scale capacity build-up.

In the next few quarters we will not have anywhere close to this level of CapEx buildup again. I think the -- I couldn't give you an exact number, but I think it would be somewhat back to the normal pattern.

I'm sorry, so you say that the CapEx won't see this level of buildup, but will the actual dollar or renminbi figure for the next few quarters be similar to this quarter? Or would it revert to somewhere between this quarter and where the previous quarters were?

When you build the new data centers, you don't keep on building it. You build it once and then you just add more servers and just in the normal pattern which we experienced in the past year.

Great. Thank you.

Your next question comes from the line of Steven Weinstein of Pacific Crest. Please proceed, sir.

Just when I look at the sequential growth in TAC, it grew faster than the sequential growth in overall revenue. As I'm working through my model, I'm wondering -- did the revenue on Baidu properties actually grow sequentially? Or was all of the sequential growth really out of the Union numbers?

The significant contribution of revenue growth came from Baidu properties. Baidu Union did grow as well; you can look at the increases probably from 9% to 10%. The Union revenue did grow as well, and certainly it's not anywhere close to tip the balance.

So, I'm sorry, the line was breaking up a little bit. So on a sequential basis, you're saying that both grew, both Baidu property revenue as well as the Union revenue?

Yes. Both grow.

Okay.

Your next question comes from the line of James Lee with WR Hambrecht. Please proceed, sir.

Hey, Robin, can you just elaborate your banner program just a little bit? I've visited your MP3 channel recently. It seems like you've got quite a bit of banners there, the anchor banner plus the banner on the right side.

Can you just give a sense? It seems like there's quite a big demand and that channel is pretty healthy. Can you give a sense of how much inventory do you plan to introduce your advertisers over the next few quarters, especially heading into the peak season, 3Q?

Okay. I think our MP3 channel has done very well on a relative basis, compared to the past. More and more advertisers now realize the MP3 channel has a lot of traffic, and the user base for MP3 channel, or the user quality for MP3 channel is very good.

We have a number of positions for advertisers to place on MP3-related services. Meanwhile, we have signed up a number of record companies and we can show more ads on the MP3 channel, especially the streaming part of the service, where your users stay for much more minutes on one page. So the media time for those traffic or those page views are much longer than the typical Web surfing webpage.

Going forward I think that we will continue to deliver good performance for the advertisers on MP3 properties. But once again, that's not a significant part of our revenue yet.

Is it fair to say going forward, besides the MP3, all the other channels you have -- i.e. Post Bar,, i.e. Knowledge, i.e. the new channel -- will see, will start to see more and more banner ads? At least the inventory would be available to advertisers?

Yes, on a relative basis we will gradually add more graphical ads in the non-Web Search channels, but a significant part of those ads will be behavior-targeted (inaudible). It's not shown on every page for every user. We actually try to differentiate which user should see which ad.

And I understand the behavior target base, that's P4P, right? You only get paid when someone actually clicks on the impression?

Yes, that's true.

Your next question comes from the line of George Chu with UBS. Please proceed, sir.

Thank you. Just a follow-up on new customer adds. Just thinking, given Baidu has such a high profile and search market in China also has been getting a lot of attention -- I'd just like to know, for the new customer adds, do they bring high marginal revenues? Or do you think the best customers have already been captured? Thank you.

Well, as we've said again and again, this market is still in a very nascent stage. We haven't seen any limit. As we add more and more customers they typically can appreciate our platform very much. So in terms of quality, I do not see any decrease in customer quality.

As I said before, there's a wash. Some of the lower-quality customers may decide to leave, but new customers typically spend more. Longer term, again, it may take a few months for them to get up to speed.

Great, thank you.

Your next question comes from the line of John Pitts with Steadfast Financial. Please proceed, sir.

Hi. Thanks for the question. I was wondering if you could give us any information on which third-party websites or companies that track things like your search market share, your market share in Baidu Spaces, Answers, and Video, even though that one's relative new. Which ones do you guys use? Maybe you can give us a little information on maybe where you stand in just ranking, not so much the actual traffic numbers.

On the alexa.com website, you can typically see a breakdown of our traffic. You can also compare our traffic rank, reach, et cetera with other Chinese websites.

It's a relatively accurate measure when you're comparing to other Chinese websites. They do fluctuate from time to time comparing to websites outside of China because of the connectivity issue or adjustments in their algorithms.

Domestically, there's a firm called iResearch. They've been tracking the search market, the Chinese search market for a long time. There are a number of other third-party research firms; each has a different angle. But I think we still primarily rely on internal analysis to make our decisions. We think we have the best understanding of the Chinese search market.

You mentioned that there were some metrics based on registration or users, based on the last month or the last quarter or the last week. Is there any measure you can give us in terms of traffic for Baidu Spaces?

Well, we don't really look at that in that way. What we look at is that we measure the page view for each of our services including Baidu Space. We measure the user session. Each user may generate a number of page views in each session; and we try to deliver ads based on the user's behavior.

So we care more about number of users who visit our website, our Web services like Baidu Knows or Baidu Space, than we care how much time a user spends during a typical session. We look at those metrics to decide or to assess how successful our services are.

Okay, thanks.

Your final question comes from the line of Wallace Cheung with Credit Suisse. Please proceed, sir.

Hi. Two quick follow-ups. I think, first of all on the MP3 lawsuit, is there any further update on a resolution with the other record labels besides EMI?

And the second question will be on the CapEx breakdown in first quarter. I think CapEx spending on both China and Japan, can you roughly telling us how much actually spending in Japan market? Thank you.

Wallace, on the MP front, as you know we actually did spend a good part of last year having legal battles with the record companies. I think that came to a good result when the court issued a positive court order for Baidu. After that, we started working with a number of record companies, both leading international labels as well as local players.

We've been experimenting (inaudible) the entertainment form. We truly believe advertising is the right model. I think that that belief has been shared by some of our record company partners. So we are partnering this field together, and we are encouraged by some of the prospects that we've seen so far.

In terms of -- there is still the MP3 litigation, and none of the other record companies did appeal. I know there were seven record companies involved in last year's litigation. After the verdict, a few chose to work with Baidu, and a few others appealed. That litigation is still ongoing, and I cannot comment on that. And certainly I cannot comment on the other's legal cases either.

In terms of CapEx, the CapEx spending is a combination of both our Southern China operations as well as for Japan. I think Japan CapEx, because it's from scratch, so that the CapEx model for Japan is a little more than what we did for the Southern China. But I will not give you an exact number, but it's just a little more in Japan than in China for the Q1.

Thank you very much.

Thank you very much for joining us today again, and please do not hesitate to contact us if you have any further questions.

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect. Good day.