百度 (BIDU) 2007 Q2 法說會逐字稿

Good evening, and thank you for standing by for Baidu's second quarter 2007 earnings conference call.

At this time all participants are in a listen-only mode.

After management's prepared remarks, there will be a question and answer session.

Today's conference is being recorded.

If you have any objections, you may disconnect at this time.

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

Please proceed.

Hello everyone, and welcome to Baidu's second quarter 2007 earnings conference call.

We distributed Baidu's second quarter 2007 earnings earlier today.

You may find a copy of the press release on the company's website as well as our 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 able 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 Legislation Reform Act of 1995.

Baidu does not undertake any obligation to change 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 company 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 another strong quarter.

We grew our revenue by 109% year over year, and 46% quarter over quarter.

Our net income grew even faster despite our investment in Japan.

Our growth was primarily driven by strong traffic growth and the increase in our customer base.

In the second quarter, we continued to enhance our portfolio of community-based products.

These continue to be very popular and are important contributors to Baidu's rapid traffic growth.

In fact, Baidu is now the largest online Q&A service in the world, regardless of language and country.

It currently has over 17 million answered questions.

We are also expanding our online independent platforms through collaborations with international record companies.

We are pleased to pioneer online advertising supported by digital music in China, and we have confidence in the long-term potential of this model, which benefits both Baidu and our partners.

This initiative improves the overall online user experience, increases our brand recognition, and helps drive user traffic.

During the second quarter, we continued to see the benefits of our focus on customer service.

We added 16,000 active online marketing customers to reach a total of 128,000 in the quarter.

And these customers increased their average spending from last quarter's RMB 2500 to RMB 3100 this quarter.

We believe that customers are happy with the effectiveness of our online marketing platform, and we are confident that more and more Chinese businesses will chose Baidu in the future.

We continued to develop our sales and distribution network in the second quarter.

Our transition to a direct sales force in Beijing has been a success.

We are now expanding our direct sales and customer service in Shenzhen, another high-growth region.

We are committed to investing for long-term growth; making sure we have the best people is an important part of this, and we are recruiting the most talented and innovative minds.

During the quarter, we were pleased to welcome Mr.

Haoyu Shen as Vice President of Business Operations.

We also added approximately 100 people to our R&D team and 400 to the sales team, and we continue to develop our talent base through internal and external training programs.

Of course, we also continue to invest in building our network capacity and infrastructure.

Turning to our Japan initiative, we are pleased with our progress, and on schedule to officially launch later this year.

The Japanese market is promising, and we are looking forward to providing a quality search alternative there.

As we announced recently, we have invited Mr.

Nobuyuki Idei, former Chairman and CEO of Sony Corporation, to join Baidu's board as an independent director, and we have no doubt that he will be a source of valuable insight.

In China, about 162 million people currently use the internet.

While this is a large number, it represents only a small percentage of China's overall population.

More importantly, our search volume grows much faster than the general internet user base here.

So we are very excited about the tremendous opportunities ahead, and we are confident that we have the right strategy to drive our growth.

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

Thank you, Robin.

Hello, everyone.

As Robin mentioned, we just had another strong quarter, as more and more of China's businesses are seeing the benefits of online marketing with Baidu.

Total revenues for the quarter were approximately RMB 401 million.

That exceeds the top end of our guidance, and is up 109% over a year ago period.

Online marketing revenue was slightly over RMB 400 million, and that is 112% growth year over year.

A number of factors contributed to our growth, including a year on year growth in the number of active customers of 42%, as well as a year over year increase in per customer spending of 48%.

Traffic acquisition costs, as a component of costs of revenues, was RMB 45 million.

That is 11% of total revenues, compared with a 9% a year ago, and this increase reflects continued growth of revenue contribution from Baidu union members.

Bandwidth costs were RMB 28 million, or 7% of total revenues.

That compares with 5% a year ago.

Depreciation costs were RMB 34 million, or 8% of total revenues, compared to 6% in the year ago period.

The increase in both bandwidth and depreciation costs was mainly due to the network expansion to support our long-term growth.

Share-based compensation expenses decreased to RMB 9 million from RMB 12 million in the year ago period.

SG&A expenses were RMB 94 million, and that is 60% increase from the year ago period.

Research and development expenses were RMB 32 million, and that is a 74% increase from the year ago period.

In the second quarter, Baidu Japan incurred operating costs and expenses of RMB 17 million in aggregate.

The income tax expense for the last quarter was approximately RMB 1.8 million.

Net income was approximately RMB 142 million, representing a 143% increase year over year.

Net income excluding share-based compensation expenses, a non-GAAP measure, was RMB 151 million, and that is a 115% increase from the year ago period.

Basic and diluted EPS were RMB 4.19 and RMB 4.09, translating roughly US$0.55 and US$0.54 respectively.

Basic and diluted EPS, excluding share-based compensation expenses - again, that's a non-GAAP measure - that number was RMB 4.45 and RMB 4.34, translating roughly to US$0.58 and US$0.57, respectively.

The cost of the expenses related to the Japan operations impacted our EPS by about US$0.07.

Net margin, excluding share-based compensation expenses, again a non-GAAP measure, was at 38%, slightly higher than the year ago period.

Now moving on to balance sheets.

We ended the second quarter of 2007 with a cash, cash equivalents, and short-term investments of RMB 1.3 billion, or US$176 million.

Operating cash inflow was RMB 277 million, representing a year over year increase of 114%.

Capex expenditure for the second quarter was at RMB 99 million, primarily focused on capital capacity expansion.

We expect the construction of Baidu campus to commence in the coming quarter.

We have a budget of close to RMB 600 million for the project, and the estimate is that it will take up to two years to complete.

Adjusted EBITDA, again a non-GAAP measure, was RMB 179 million for the second quarter, representing 111% increase from the year ago period.

Now let me provide you with our top-line, our guidance for the third quarter of 2007.

We currently expect total revenues to between RMB 492 million and RMB 506 million, which will represent a year over year growth of 106% to 111%, and quarter over quarter growth of 23% to 26% respectively.

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.

Thank you again for joining us today.

I will now open the call to questions.

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 of Citigroup.

Please proceed.

Thank you, and good morning, Robin and Shawn.

And congratulations on a very good quarter and a very good outlook.

I will ask my first question about Google.

They appear to be making some progress in China as of late, including signing a deal with Sina, and they seem to be out there pursuing some additional deals of that nature.

By our estimates, however the progress that Google seems to be making is coming not out of Baidu, but from some of the weaker players in the market.

Could you tell us whether you think that is consistent with what you guys are seeing internally?

And could you also comment on whether you're seeing -- whether Google is making inroads into any of your key Baidu union members?

Thanks.

If you look at the third-party research report, you will see that Baidu continues to gain traffic share during the past few quarters.

We roughly have two-thirds of the search traffic for Chinese search.

The rest of the players combined have about a third of that.

We do monitor closely on how those players play in this space, but we believe that we are in a very good position to continue to grow our service, and continue to benefit from the growth of the Chinese search market.

Okay, thanks, I'll get back in the queue.

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

Please proceed.

Thank you.

Robin and Shawn, we saw an acceleration in the number of your new advertisers in the quarter on par with the year ago period, and I was just wondering -- do you think that this was due to the benefits from your direct sales force?

Was it from a new distribution partner?

And do you think this type of incremental new partner adds on a quarter over quarter basis on par with a year ago before you saw the slowdown can be maintained?

Thanks.

I think China is country with a lot of businesses which are SMEs, small to medium enterprises.

We saw reports like the number of those being around 20 million.

So at 120,000, it's still a very small percentage of the total business number, because we believe paid search is ideal for almost everything.

We see a lot of potential there.

So how fast we grow our number of active online customers really depends on how good we execute.

During the past quarter, we were able to hire more salespeople and suit up our customer service, and our numbers show the results of those executions.

Thank you.

Your next question comes from the line of Robert Peck from Bear Stearns.

Please proceed.

Hey, Shawn, I wanted to ask a quick question on tax.

We saw it rise to about 11.3%.

You had made some comments in your introductory remarks, but I was curious if you would give us an idea of what's particularly happening with tax rate, and where you see that trending going forward, and then I'll get back in the queue.

Thanks.

Yes, Bob.

Bob, we talked about it at the end of last year, that we actually signed off a deal with Microsoft in China, where some of the Microsoft properties in China are being powered by Baidu, are being magnetized by Baidu, and that relationship also goes with some of the local telecom (inaudible) as well.

So in the course of the last two quarters, we've been in the process of gradually incorporating those traffic, and I think that the tax is largely a result of those initiatives.

Thanks, Shawn.

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

Please proceed.

Hi.

Congratulations on a good result.

Can you tell me a bit more on the operating leverage, as we're seeing that SG&A and R&D expenses are gradually on a downward trend, likely because of the strong growth of revenue.

Are we going to see much further rising in the operating margin?

Thank you.

Wallace, I think, there has been a consistent way for us to look at our business, and look at the potential of the market and how we manage our investment decisions.

And I think we've been seeing this from the very beginning that strong leverage in our business.

And the further we've seen that leverage and the potential of the market, it will give us renewed confidence to make additional investment.

And that has been the trend over the past few quarters.

Now, if you look at the pace of investment that we've been making, we've been adding significant amount of headcount, and on top of that we're making very large capex investments.

And I mentioned about our depreciation expenses and our bandwidth expenses, and that's largely the result of our capex expansion.

In Q1, I mentioned about 150, we made over RMB 150 million capex investment in our network capacity, and that is more than the amount we made for the entire year of 2006.

And although in the second quarter we didn't make as much, but certainly it's close to RMB 100 million, so it's still a very large number.

That reflects our confidence of our business model and also how long a term we wanted to look into.

So, the near-term margin or the short-term margin is not something that is the key driver for how we do it.

So I don't want to let you, to let people focus too much on those at this time.

Okay, thanks.

I'll come back, Shawn.

[OPERATOR INSTRUCTIONS]

Your next question comes from the line of Vivian Li with Piper Jaffray.

Please proceed.

Hey, it's Gene here and Vivian.

In terms of the Sina/Google deal, you guys seem to be backing off of those transactions where you're trying to buy traffic.

Do you think that is basically going to be the game going forward?

We shouldn't expect you to do a deal similar to what Google and Sina did?

Is that correct?

I think that because we are the market leader, we have lots of users, our marketing can be done by primarily word of mouth.

We do not need to spend advertising dollars.

When we talk to the larger potential partners, they usually ask a lot higher guarantees for their search traffic, and that's what we don't want to get into.

So during the past few years, we never tried to compete on that kind of basics, and our results so that we believe that we have the right strategy, and our organic traffic grows very, very fast; probably faster than any other competitors in this space.

And, I guess, with the Sina and Google relationship, I know you talked about it a little bit earlier, but have you seen that having an impact on your business in the one and a half months that it's been active?

Again, I believe we have two-thirds of the traffic share for Chinese search, and you can go back to the third-party reports to dig out the traffic share for each of the players.

I believe, statistically, those kind of deals are insignificant to our business.

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

Please proceed.

Sure.

Robin and Shawn, can you help us understand a little better about your Japan initiative?

What is the current status?

And what is your commercial plan going forward; I'm particularly interested in your capex plan, because for the quarter you are probably underspending your budget.

Thank you.

We are happy about the progress we have made in Japan so far.

Japan is a more mature search market, so it's probably going to take a little longer than the China market, really for us to take off there.

The first step is to hire the right people, assemble the right team.

The second way is to give out the right product for that market, and the third is to grow traffic, and then we will follow with revenue.

I think that currently we are on track that kind of strategy.

Richard, you talked about the capex plan.

If you look at the historical pattern, we've been expending our capex, our networking for such every few quarters -- it goes in somewhat of a cycle.

So I think we made a very significant investment in Q1; in Q2, it was also relatively large, but it certainly wasn't close to the Q1 level.

So, if history were to repeat itself, we would expect to see somewhat a moderate increase, a moderate capex compared to Q1 level, but still, we are at a different operational scale now.

The large increase of internet users in some of the products are currently under development, we think these investments are necessary.

Thank you.

Your next question comes from the line of Ming Zhao from SIG.

Please proceed.

Thanks.

Good morning.

Shawn, just a follow-up question to that investment in Japan -- because I think a half year ago when we talked about this, you said the P&L impact would be about $15 million.

Now, in the first half, you spent roughly $3.8 million, so there's still a lot left.

Are you still budgeting $15 million for the whole year?

We talked about in the past that the investment in Japan, the expenses to be incurred in Japan will somewhat accelerate throughout the year.

In the first quarter, we spent a bit over $1 million, and in the second quarter, we spent over $2 million, and I think that as we continue to make strong inroads and progress in our Japan initiatives, we are looking to spend more.

There is no reason for us to change that estimate, but I have to remind you that that is an estimate.

Okay, thanks.

Your next question comes from the line of Paul Keung with CIBC World Markets.

Hey, Shawn and Robin.

Good morning.

If you look at your advertisers that have been customers of you guys for more than a year, I was curious how their spending has grown, and also give us an update of the turn rate, now that you're almost a year beyond where you made those algorithmic changes.

Many of our customers are loyal to us; as our traffic grows, they continue to spend more on our platform, even if we hike the price to a certain extent.

During year's algorithm change, we still have a large number of very loyal users or customers.

Those customers tend to have a better understanding of the internet marketing space.

There was some churn during the past few quarters, again due to the change of our algorithm for paid search, but I guess that's largely over; we have signed up some new customers, they are happy with the service right now.

And just to add to that -- some of the customers whose spending, that reduced spending, many of them have come back after the transition.

Let me know if I got this right -- so churn rate is back to normal, and the spend for customers who have been around for a while is still growing faster than the economy, say 20%.

I think it's -- our business, if you talk about the growth of the economy, which is roughly 10% or so, and look at our business, there's still, there's no real comparison.

I think we're at such an early stage.

Like Robin mentioned earlier, we're serving about 1% of the potentially accessible market.

So I think what's driving the gross is still what's inherent in this big discrepancy.

And by definition, "paid search" is pay for performance.

I guess as long as we can deliver the performance, or we can deliver better performance than any other alternative, we will be able to have a very loyal customer base.

Okay.

Thanks.

Your next question comes from the line of Steve Weinstein with Pacific Crest.

Please proceed.

Actually, my question's been asked.

Thank you.

Your next question comes from the line of George Chu.

Please proceed.

Good morning.

There has been some media report regarding the restructuring of the Baidu union into different tiers.

I would just like to know if that's going to have any impact on the percentage revenue sharing going forward.

Thank you.

No, I don't think that will change the revenue sharing percentage or the percentage of revenue contributed by the union.

We are still the largest union system among Chinese search players, and we believe we have a very solid position that that part of the (inaudible) will continue to roll, along with the (inaudible) operated property.

Thank you.

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

Please proceed.

Hi, Robin.

Can you help us understand the activities in the quarter a little bit?

Can you maybe talk about what verticals do you think that's driving expenditures in 3Q, and is there any other seasonal factors that's driving this spending for the quarter?

I guess lastly, how does the pre-October holiday advertising activity impact the spending in 3Q as well?

Thanks.

We have more than 120,000 active customers, so that represents a very diversified industry.

We have many verticals that are seasonal; overall, during Q1, we have the Chinese New Year, we have the weakest quarter, and Q2 because of the relatively base of Q1, you already have big jumps quarter on quarter.

A number of, actually, much of the businesses that advertise with us are seasonal; for example, during summer, travel-related business would spend more, and right before the summer holidays, the training and educational business would spend more.

Because we have hundreds or maybe thousands of different verticals, I think we are very healthy, we have a very healthy mix, and this business will continue to grow like we did for the past few years.

Thank you.

Your next question comes from the line of James Mitchell.

Please proceed.

Thank you for taking the question.

If I look back at the past couple of years, it seems like your average revenue per online customer has climbed about 20% quarter on quarter in the second quarter because of the positive seasonality you've just identified.

This quarter looks like the growth is a little stronger.

I was wondering if that's just due to general business trends, or whether the Shenzhen integration benefited you, or whether more branded advertising benefited you.

Thank you.

If you look at our guidance for Q3, I think the quarter on quarter growth is similar to that quarter on quarter growth last year; we believe that's natural.

We did not factor in anything like the Shenzhen integration.

Actually, really during the integration process, revenue and profit growth went down for that particular region.

Actually, I was talking more about 2Q than about 3Q.

It looked like you had a very strong improvement in average revenue per customer in 2Q, even relative to prior years.

James, Shawn here.

Let me try to address your question.

I think, if you look at our Q2, we had a fairly strong revenue per customer increase, And I think it was a combination of a number of factors in play here.

First of all, we had a Q1 which is seasonally very slow, and that coupled with the fact that we were going through the transition, reaching out to our customers through better customer services, and helping them to understand better the algorithm on the search.

And that all played out, and the impact was felt in Q2 results.

So I think I agree with what Robin just described.

Our Shenzhen effort is just underway and hasn't really affected the ARPU in any significant manner.

You mentioned, you asked about whether our branded advertising, how has that affecting us?

Our branded advertising has been very strong, has been going strong, but at the same time, it is on the back of the strong [key business growth].

So any, in the large impact, it will somewhat be shared by our increase in the number of advertisers.

Another point you may want to take note is that we have been saying that for this year, the Chinese New Year was very late, so that it affected the Q1 numbers negatively.

If you compare to that, you will see a higher growth rate for Q2.

Okay, great.

So it's really a bounce back from the late lunar new year and the effects of the algorithm transition.

Yes.

Thank you.

Your next question comes from the line of [Yu-san Deng] with Citi Capital.

Please proceed.

I wanted to ask a question about your recent cooperation with [Li Ning] and your future plans for the sport-related business.

We had been doing all kinds of experiments with our non-websearch properties.

In fact, we have over 50% of our traffic on non-websearch traffic, we generally use that to do two things: one, it's to proceed in textual ads, and other is display-oriented, and two in some special cases we would do some kind of customized event for our partners or advertisers.

Right now, all of this area is growing quite (inaudible), but percentage-wise it's still a small number.

With regard to sport, we do not view it as anything special.

We treat it like any other vertical.

We are studying how we can benefit from the Olympics next year, but there's no concrete strategy yet.

Okay.

Thank you.

Your next questions comes from the line of Steven Ju of RBC Capital Markets.

Please proceed.

Steven Ju, if your line is muted, please un-mute it.

Can you hear me now?

Yes.

Okay.

I apologize for that.

Good morning, gentlemen.

Does your third quarter guidance contemplate growth more from ARPU as a spend per customer, or does it contemplate growth more from the volume side?

Thank you.

Of course it's a combination of -- we have to be able to grow our traffic in order to generate the inventory for the customers to use, and we also need to develop more new customers and to have the existing customers spend more on our platform.

In theory, if the customer does not have a budget limit, they would spend the growth -- the customer spend would be at the same ratio as the traffic growth.

So for the third quarter, it's like any other quarter, it will be concluded by a number of factors.

Thank you.

Your next question comes from the line of Robert Peck.

Please proceed.

Yes, I was wondering if you could give us a little more color on the tax rate?

It seems like it came in a little bit low at around 1.3%, you've given guidance historically for the mid-single digits.

How should we think about that going forward?

I think - we have been receiving some additional tax breaks from the government with respect to our product technology development.

The Chinese government has been, has had a national planning and promoting the technology and innovation, and they appreciate what we're doing in our end of the business.

It's hard to know for certain when some of the tax breaks can be [blunted], but it looks like we are looking at the mid-single digit is a probably a fair point.

It could even be lower, potentially, but there is an uncertainty in that regard.

Thanks, Shawn.

You have a follow-up question from the line of Jason Brueschke.

Please proceed.

I have two additional questions.

First, a quick housekeeping question.

Could you tell us how many people you have total now in sales, and how many you had last quarter, just to remind us?

And then I have a follow-up.

The sales people, we have, I would think it's over 3,000 now, and I think, we added about somewhere around 500 sales people in the past quarter.

And, I guess, a follow-up to this.

Shawn, generally how long does it take when you add a new sales person for them to really be 80% effective at contributing revenues?

Is that a one-quarter process, does it take six months for people to get up to speed?

Could you maybe give us a little color on that?

It's a gradual process; it's not like it's a black line that you can just switch it.

We start to see some productivities maybe a month or two afterward, and then I think for the full potential to be reached, it does take at least a few months for them to be up to speed.

I think the full-impact, it does take over, probably two quarters would be a good number.

Okay, great.

And then, the second question I had really addresses the state of e-commerce in China.

Clearly, it's very, very early, but there seems to be some beginning of some e-commerce starting.

You've had tremendous growth in your ARPU since you guys have gone public, and I guess this last quarter, you actually outgrew on a year over year basis, your growth and your number of customers.

Could you maybe give us some feel as to when you think e-commerce probably takes off, not fully, but starts to be more meaningful?

Is that a year out?

Is it two years out?

And just maybe qualitatively, in China, based upon the customers that you have, should we expect really a quantum increase in your ARPU once that happens or will it probably be more of a smooth linear type curve?

Thanks.

Well, I agree that the commerce infrastructure in China is getting better and better.

We did see some of the companies start to think about taking advantage of the e-commerce infrastructure here.

But Baidu's customer base, we are still largely offline for transactions.

What happens is that the more and more customers start to realize that the performance cannot only be measured by how many transactions can be done on their website, but more likely how can get sales from their website, how can they get user registration, and some other metrics.

And again, when we sign up new customers, they don't have the psychological effect that we were very cheap before, so if they compare with any other alternative, they will see that our service is probably the best for the money they spend.

You have a follow-up question from the line of Ming Zhao from SIG.

Please proceed.

Thank you.

Also a question on e-commerce as well.

So, I guess in Q3 or Q4, we're going to see Alibaba going public.

So I wanted to understand a bit your strategy in terms of how you are going to deal with the competitive landscape?

Are you going to initiate some products or do you just focus on the domestic search versus Alibaba probably 70% on the international business search?

That's my question.

I think the domestic market is much larger market, and we as a search platform, do not distinguish between the internal business or the more domestic-oriented.

We can provide a more general-term performance for all kinds of businesses, and we continue to see that customers who spend money on us get much better without any other platform.

But we're not short of money; I think we have all the right things to make the company grow at a very healthy beat.

Maybe another follow-up question to Shawn -- of the almost RMB 100 million capex for the quarter, I guess US$2.3 million is for Japan, what's the remainder of that in nature?

Is that office duty or data center?

These are two different things -- our capex was spent, the close to RMB 100 million.

That's capex investment for all the servers, network equipment, foreign operations, which includes China and Japan.

Now the two point something, the cost of expenses that we input in Japan was P&L charges, which included the depreciation of the balance and also the operational costs [all at once], so these two are different things.

Okay, got it.

Thank you.

You have a follow-up question from the line of Wallace Cheung.

Please proceed.

Hi.

Recently there's a media report talking about Baidu is going to launch some new media strategies.

Can you elaborate a little bit more on this, and will there be any impact on your top line and your bottom line?

Thank you.

I think it's more off the market education events; It's really referring to the events that we're going to have August 9.

As I mentioned before, we see huge potential for the Chinese search market and including display ads for our non-websearch properties.

We deliver better performance than anyone else.

We'd like to host an event so we can have a chance to communicate with potential customers how we can deliver better performance using advertising technologies -- how our platform is different from the traditional media or any other online media in this country.

Okay.

Thank you.

You have a follow-up question from the line of Paul Keung.

Shawn, how do you think of a tax rate for third and fourth quarter as well as calendar 08?

And then, I was looking at the SG&A line and I was curious, outside of this hiring more salespeople, what is the major investment that you have on the G&A line for the rest of this year?

Paul, I missed the last bit of your question -- what of G&A?

Outside of hiring more salesmen, I was curious, what other major G&A investments do you have planned for the back half of this year?

I see what you're saying.

Okay.

Well, first of all on the tax rate, I think I did talk about that.

That is something that on one side, our technology innovation initiatives have been recognized by the government, so we do get breaks once in a while, from time to time.

And some of the breaks may have a benefit to last for a few years.

But, again, blending as such, it does have a degree of uncertainty inherently.

So what we can see right now, the only thing I can see to adjust is a reasonable estimate, and it does have the potential to go lower.

Now going back to the other question, the outside G&A -- within G&A, what other investment are we thinking?

Frankly, the G&A expense, is for the most part, they are just expenses; the operational expenses and the executive expenses.

However, in the past we did incur a pretty significant expenditure in connection with our Sarbanes-Oxley compliance and 404 exercise, and that is, if I do look at it, I see it as a very good long-term investment to build the discipline and control in place, and to enhance the effectiveness of our operations.

So internally, we actually view that as a part of the investment, the soft-dollar investment.

We were very pleased that we came to a very good conclusion of that exercise.

We filed an item report in late May, and we talk about the auditor actually certified us without any material weakness.

I think what doesn't show on the report is what the auditor has told us that Baidu's full exercise not only did not have any material weakness, but also don't have significant deficiencies.

These are two accounting terms, auditing terms, but I think it does give us the recognition that our corporate governance and internal control initiatives are at the level that is very strong in this market.

So we see that as an investment.

All the others, it's hard for me to classify any of the other G&A as an investment.

So it should go relatively stable at this point.

As a dollar amount, it will go up.

There's no question about that.

But I do believe that is an item that will be leverageable.

Your next question comes as a follow-up from the line of James Lee.

Please proceed.

James Lee. Hi, Robin.

Can you elaborate your banner program a little bit?

It sounds like there's a lot of potential there.

I'm just curious of how you plan to grow that program.

Can you just give a sense on how that program is scaled so far?

What vertical channels you have that you're really pushing banner program -- which vertical are you having the most success?

And I believe last quarter you talked about selling more behavior-based banner as opposed to time-based; I was wondering if that is still the case.

And also, maybe compare your pricing a little bit versus other portals.

And I guess lastly, to try to squeeze in here, what do you need to do to drive adoption and what is the sensitivity from your customer's point of view?

Is it the traffic?

Is it the traffic?

Is it the brand recognition from the agency community, or is it really pricing - if you give them more discount, people will take the banner ads?

Thanks.

Okay.

We started a product or service called [Target] roughly a year ago.

That is a behavioral targeting display ads product.

Since we started, we have seen very good adoption rates as our high-profile advertisers come to us and are, in general, very satisfied with the results.

Because it's more targeted, each [owner] is smaller than the untargeted display ads that we receive.

But we are very optimistic that more and more people and more and more advertisers realize the benefit of this, so we do think that that [Target] will continue to grow quite quickly.

For the untargeted display ads, we did not really push it very hard, because we were very careful about the user appearance, we do not want to slow down the download speed for Baidu services, those non-websearch services.

So we only provide very small disturbing display ads on a number of channels, like Baidu News Channel, Baidu mp3 Channel.

In addition to that, like I mentioned before, we also have the contextual ads for our existing paid search customer base.

That part is also growing as roughly the same rate as the webpage search.

In terms of pricing, I think we are still much, much cheaper than any of the major portals.

That's something we need to work on.

For one thing, we do not aggressively sell ads for another in terms of brand recognition; for display ads, we are not in the top tier yet.

Robin, is it fair to say that most of your banner ads are reselling on your mp3 channel or are they diversified on the various key channels that you have right now?

It's pretty much diversified in different channels.

We also have a streaming page that we have partnerships with companies like RockMusic/EMI that we can show relatively larger display ads.

Okay.

Great.

Thank you.

We share revenue with them.

We are now approaching the end of this conference call.

I would now like to turn the call over to Baidu's Chief Executive Officer, Robin Li, for closing remarks.

Once again, thank you for joining us today, 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 the presentation.

You may now disconnect.

Good day.

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