百度 (BIDU) 2007 Q4 法說會逐字稿

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  • Operator

  • Hello everyone, and welcome to Baidu's fourth quarter and full year 2007 earnings conference call.

  • We have distributed Baidu's fourth quarter and fiscal year 2007 earnings earlier today.

  • You may find a copy of the 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 Haoyu Shen, Vice President of Business Operations.

  • After their prepared remarks, Robin and Haoyu 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 U.S.

  • Private Securities Litigation Reform Act of 1995.

  • Baidu does not undertake any obligation to update any forward-looking statement 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 and thank you for joining us.

  • I'm pleased to report strong fourth quarter and full year 2007 results.

  • Total revenues for the fourth quarter grew 110% year over year.

  • This was driven by healthy increases in both of our key growth drivers, the number of active online marketing customers and revenue per customer.

  • Our active online marketing customers grow to 155,000, approximately 44% increase year over year.

  • And revenue per online marketing customer grows to CNY3,700, up 48% year over year.

  • Our leading market share in Chinese search also grows as users continued to choose Baidu's suite of search and community-based offerings, such as Baidu Knows and Baidu post bar, and new products like [Simon's] Channel, Statistical Search and Pattern Search.

  • According to iResearch, Baidu's Web Search traffic share grows to nearly 72% in the fourth quarter, up from nearly 69% in the third quarter of 2007.

  • And a study recently released by comScore found that Baidu is the world's third most popular search engine.

  • Spending by large advertisers started to outpace our traditional SME customer base as they realized the importance of integrating search with other online and offline campaigns.

  • In particular, we have seen increases in large advertisers from the financial services, IT, electronics and automobile industries.

  • Compared with other online media platforms, Baidu has the advantage of offering a variety of advertising products in bundles.

  • This can combine traditional search, banner ads, behaviorally targeted ads or Targetizement and ad space on our union sites.

  • They can also incorporate our newly launched branding service.

  • We expect our bundled advertising offerings to continue to gain traction as we generate increased traffic and enhanced brand recognition for our customers.

  • Also of note from the fourth quarter is that Shenzhen we -- in Shenzhen we have transitioned away from third-party distributors and are now using a direct sales model.

  • We now have direct sales teams in Beijing, Shanghai, Guangzhou, Shenzhen, [Tonghai], [Zhongshan] and Foshan.

  • Looking at our new initiatives, we're very excited to officially launch Baidu Japan this past January.

  • As you know, we've had a well-received beta site live since last March.

  • And the day after the official launch, user traffic quadrupled.

  • We are already offering Web Search, Video Search, Image Search and Block Search on Baidu.jp.

  • This year will be the year of products and our on-the-ground team is dedicated to creating more search services that suit Japanese users' needs.

  • With Baidu's search technology and focus on local users with content that we can create by dynamic competitor in Japan's search market.

  • In 2008, we are expecting to invest about U.S.$20m to U.S.$25m in this.

  • Another initiative that we announced last quarter is our C2C auction platform.

  • Plans for launching in 2008 are on track.

  • We have established a unit of professionals currently working on the details of this model, including placement, layout and payment mechanism.

  • We will be keeping you informed as we move ahead on this.

  • One thing we are really excited about is Japan's -- is Baidu's growing importance in China's top culture [vein].

  • Since lots of people already come to Baidu to search for entertainment or/and information, we've become a leading destination for entertainment-based online communities.

  • And so we are actively working to position Baidu as a hub of China's fast-growing digital entertainment ecosystem.

  • Part of this effort is online.

  • Our new Entertainment Channel, for example serves as a community for all kinds of discussions.

  • And we will continue leveraging our brand recognition through increased collaboration with entertainment industry players to bring user advertising supported online music, video and more.

  • We believe that our efforts have paid off so far.

  • In 2007, Baidu became the first Chinese company to join the NASDAQ 100 index.

  • With 2,010m users today, China's Internet population continues to grow fast from a relatively small base.

  • Baidu's dominant market share, well-received products and strategic initiatives, such as C2C, position us perfectly to benefit from this growth.

  • Today, web-based search is our main source of revenue, but only accounts for 40% of our total traffic.

  • That means in non-web search, including users accessing our community and entertainment platforms accounts for 60% of traffic, but much less a proportion of revenue.

  • We see many opportunities to monetize this non-web search traffic, creating new revenue streams to support our long-term growth.

  • On a separate note, as you know, in late December, our CFO, Shawn Wang, passed away while on vacation with his family.

  • This has been a very difficult and sad time for us, as Shawn was an important and much-loved presence in Baidu.

  • While we conduct our search for a permanent CFO, our Vice President of Business Operations, Haoyu Shen, will be responsible for our financials.

  • By way of instruction, Haoyu joined Baidu in June of 2007, coming to us from American Express where he served as the Vice President in charge of U.S.

  • Consumer Card Acquisition.

  • Haoyu has an MBA and holds a CFA charter and previously worked for McKinsey & Company in Greater China and New York.

  • Haoyu will now take you through fourth quarter and full fiscal year 2007 financial results.

  • Haoyu Shen - VP of Business Operations

  • Thank you, Robin.

  • Hello everyone.

  • As Robin mentioned earlier, we delivered healthy revenue and earnings results in the fourth quarter.

  • I will walk you through some important factors contributing to these results and other financial highlights before taking you through highlights and financials for the full fiscal year 2007.

  • Our fourth quarter total revenues were approximately CNY571m, within our guidance range and up 110% over the year-ago period.

  • Online marketing revenues were CNY570m, representing 111% growth year over year.

  • The growth was driven by a number of factors, including traffic growth and increase in the number of active online marketing customers of over 8% over the third quarter of 2007, as well as a nearly 6% sequential increase in per-customer spending.

  • Traffic acquisition costs as a component of the cost of revenues was CNY72m, or almost 13% of total revenues, compared to nearly 9% in the year-ago period.

  • The increase in TAC as a percentage of total revenues, primarily reflects the continued growth of value contribution from Baidu Union members.

  • Share-based compensation expenses increased to CNY13m in fourth quarter of 2007 from CNY7m in the year-ago period.

  • SG&A expenses were CNY132m, an 86% increase from the fourth quarter in 2006.

  • Excluding share-based compensation expenses, SG&A rose 95% year over year.

  • Research and development expenses were CNY47m, a 123% increase from the corresponding period in 2006.

  • Excluding share-based compensation expenses, R&D expenses rose 99% year over year, mainly due to the expansion of headcount.

  • Costs and expenses related to Japan operations in the fourth quarter of 2007 were CNY25m in aggregate.

  • Net income for the quarter was CNY220m, up 79% year over year.

  • Net income, excluding share-based compensation expenses, a non-GAAP measure, was CNY233m, a 79% increase from the fourth quarter of 2006.

  • Basic and diluted EPS, excluding share-based compensation expenses, were CNY6.84 and CNY6.7, translating roughly to U.S.$0.94 and U.S.$0.92, respectively.

  • Net margin, excluding share-based compensation expenses for the fourth quarter of 2007 was 41%, down from 48% in the year-ago period.

  • Now moving on to the balance sheet, we ended the fourth quarter of 2007 with cash, cash equivalents and short-term investments of CNY1.6b, or U.S.$218m.

  • Operating cash inflow for the quarter was CNY335m or U.S.$46m, a year-over-year increase of 96%.

  • Capital expenditure for the fourth quarter of 2007 was CNY166m, up from CNY23m in the year-ago period.

  • Adjusted EBITDA, again a non-GAAP measure, was CNY247m for the fourth quarter and an increase of 87% from the corresponding period in 2006.

  • Now turning to fiscal year 2007 results, total revenues were CNY1.7b, representing a 108% increase on the previous year.

  • Online marketing revenues were CNY1.7b, a 110% increase from the previous year.

  • The growth was driven by a number of factors, including traffic growth, an increase in the number of active online marketing customers of nearly 50% over 2006, as well as a year-over-year increase in per-customer spending of nearly 40%.

  • Traffic acquisition costs were CNY205m, representing 12% of total revenues, compared with 9% in 2006.

  • SG&A expenses were CNY411m, up 64% from 2006, mainly due to expansion of the direct sales force and strengthening of the distributor network.

  • R&D expenses totaled CNY141m, a 78% increase on 2006, largely due to expansion of R&D headcount.

  • Costs and expenses related to Japan operations were CNY73m in aggregate.

  • Net income was CNY629m, an increase of 108% from 2006.

  • Net income, excluding share-based compensation expenses, a non-GAAP measure, was CNY669m, representing a 94% increase from 2006.

  • Basic and diluted EPS, excluding share-based compensation expenses, were [CNY19.79] and CNY19.26, translating roughly to [$2.79] and $2.64, respectively.

  • Net margin, excluding share-based compensation expenses for fiscal year 2007 was 38%, down from 41% from 2006.

  • Full year net operating cash inflow and capital expenditure in 2007 were CNY979m and CNY569m, respectively.

  • Adjusted EBITDA was CNY768m in 2007, a 101% increase from 2006.

  • Now let me provide you with our top-line guidance for the first quarter of 2008.

  • As many of you know, our first quarter results tend to be affected by the seasonality from the long Chinese New Year holiday.

  • This year, the seasonality was amplified by the severe snowstorms across large portions of the country.

  • In the first quarter of 2008, we currently expect total revenues to be between CNY533m and CNY548m, which would represent an annual growth of 93% to 99%.

  • 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 again for joining us today.

  • With our focus on tailoring online products to meet user and customer needs and our commitment to making strategic investments for the long term, we are confident that we will continue to lead the Chinese Internet search market and enjoy growth well into the future.

  • I will now open the call to questions.

  • Operator

  • (OPERATOR INSTRUCTIONS).

  • The first question comes from the line of Gene Munster with Piper Jaffrey.

  • Please proceed.

  • Gene Munster - Analyst

  • Good morning, everyone and congratulations.

  • I guess, Robin, if you could [talk] a little bit about the first quarter in terms of the outlook.

  • You guys obviously had a strong December quarter but how should we think about guidance being down a couple percent relative to last year, it was up 3%.

  • Maybe get us some framework in terms of maybe timing of the New Year, maybe the best way to think about that.

  • Thank you.

  • Robin Li - CEO

  • Yes, I think as Haoyu mentioned in his prepared remarks, this year for Q1, the revenue was not only affected by Chinese New Year, but also by the severe snowstorm across a large portion of the country.

  • At this time, we just passed the Chinese New Year holiday.

  • It's difficult for us to give an accurate projection of our Q1 revenue at this point, based on what already happened in January and in the first part of February.

  • Our current projection is that revenue will be in that kind of range.

  • Gene Munster - Analyst

  • Okay.

  • And just one quick follow-up question on -- revenues per user was up nicely in the quarter.

  • What was driving that sequential increase?

  • Robin Li - CEO

  • I think that revenue per customer is basically decided by the traffic we have or inventory we have.

  • As more and more users come to Baidu to do their search, we will have more opportunities to magnify those traffic.

  • And we also continue to improve the monetization algorithm so that advertisers have more flexibility in spending.

  • We do believe that there are still lots of potential in the monetization algorithm and we can have more ways to deliver more relevant [tasks] in front of the targeted consumers.

  • So as long as our traffic continues to grow and we continue to optimize our monetization algorithm, I think the revenue per customer will continue to grow.

  • Gene Munster - Analyst

  • Okay.

  • So we should think of that as -- and it should be increasing in the March quarter?

  • Robin Li - CEO

  • If you look at the March quarter during the previous year, because of the Chinese New Year, traffic usually goes down quite dramatically during the holiday season, so we cannot really say revenue per customer will grow sequentially, but year over year that's certainly true.

  • Gene Munster - Analyst

  • Excellent.

  • That's helpful.

  • Thank you.

  • Robin Li - CEO

  • Thanks.

  • Operator

  • Your next question comes from the line of Jason Brueschke with Citi Investment Research.

  • Please proceed.

  • Jason Brueschke - Analyst

  • Thank you.

  • First of all, Robin, allow us here at Citigroup to convey our heartfelt condolences to you and Baidu on the passing of Shawn Wang.

  • He was a great person that we enjoyed working with and a great CFO.

  • And he will be sorely missed.

  • Turning to a couple of business items, I have two questions.

  • First of all, can you tell us how much revenues you're going to expect to generate from Japan in 2008 please?

  • Robin Li - CEO

  • We currently do not have plans to monetize our Japanese traffic, so for year 2008, we would expect zero revenue from Baidu.jp.

  • Jason Brueschke - Analyst

  • And maybe a housekeeping question.

  • Could you tell us how much CapEx you ended up spending in 2007 on Japan?

  • I know at the beginning of the year you indicated 15m.

  • I'm not sure if you ended up spending that amount by the time we got to the end of the year.

  • Haoyu Shen - VP of Business Operations

  • Hi Jason.

  • Haoyu here.

  • The 15m guidance we gave at the beginning of 2007 was impact on P&L.

  • So I think at the end of the year, as I mentioned in the prepared remarks, we spent CNY73m in aggregate.

  • So that's just slightly over U.S.$10m.

  • As far as CapEx for Japan, we don't give detailed numbers, but it's probably over U.S.$10m CapEx spent for Japan.

  • Jason Brueschke - Analyst

  • Great.

  • And then a final question.

  • Regarding the C2C initiative, can you maybe give us a little bit more of an update on your strategy, having had another quarter to look at it?

  • And the two things I'm most interested in are, first of all, are you still planning on building your own platform or have you considered possibly going to try to buy or license somebody else's platform.

  • And then second, related, could you give us an indication of how much spend and the impact on the P&L that you expect from this initiative in 2008?

  • Thanks.

  • Robin Li - CEO

  • What platform were you talking --?

  • Jason Brueschke - Analyst

  • The C2C.

  • Robin Li - CEO

  • C2C, yes.

  • We are going to build our own C2C platform.

  • The product or the service will launch some time this year.

  • We do not expect any revenue for the current year.

  • Jason Brueschke - Analyst

  • And how much is the spend -- should we be modeling for this?

  • Robin Li - CEO

  • The spending will be significantly lower than what we spent in Japan.

  • So at the time, we do not plan to announce a number on the spending.

  • Jason Brueschke - Analyst

  • All right, great.

  • Thanks guys.

  • And congratulations on the quarter.

  • Robin Li - CEO

  • Thank you.

  • Operator

  • (OPERATOR INSTRUCTIONS).

  • Your next question comes from the line of Dick Wei with JP Morgan.

  • Please proceed.

  • Dick Wei - Analyst

  • Hi, and morning Robin, Haoyu and Linda.

  • My question is on first quarter guidance.

  • Is it possible for you to give more color on the guidance?

  • I guess your guidance for '08 is actually worse than '07.

  • Do you expect it to be similar trend for March -- the month of March as well, compared with last quarter?

  • I remember last year it was -- March revenue was about 50% of your total quarter revenue.

  • Do you expect to see a similar trend as well for this quarter?

  • And is it going to more coming out from the customer ads or is it going to come from the average spend per customer?

  • Robin Li - CEO

  • Yes, Dick.

  • I think every year it is a little bit different, even if that Chinese New Year hasn't been Q1 for every year.

  • The timing of Chinese New Year is a little bit different year-from-year.

  • Last year, the Chinese New Year was quite late in February.

  • So the revenue for February was quite low.

  • That affected the Q1 revenue for last year and also resulted in March representing like 50% of Q1's revenue.

  • This year, although the Chinese -- the timing of Chinese New Year is kind of normal, it's in early February, the snowstorm, which is kind of unexpected to us, happened a couple weeks before the Chinese New Year, so our revenue was affected even in January.

  • But the dip in February we did not see as large as it was last year.

  • So the bump back in March, according to our current projection, was not as large as last year, too.

  • So combining with all these kinds of factors as well as a larger revenue base, we are comfortable to give a guidance like, well, Haoyu just talked about in his prepared remarks.

  • Dick Wei - Analyst

  • Great.

  • Maybe if you can comment a bit on -- I guess the snowstorm, is it more impacting your traffic or impacting your customer spend?

  • Or I guess the new customers that you are able to sign up or more customers just stop their search campaign during the period?

  • That would be helpful.

  • Robin Li - CEO

  • All right.

  • I think it impacted our first off -- many of the people were stuck on the road when they tried to go back home for the Chinese New Year holiday, so traffic was negatively affected.

  • Customer spend was also slightly affected because if they run out of money, they don't have the chance to renew before the Chinese New Year holiday.

  • And the new customer was certainly affected because salespeople were not able to contact the potential customers during that period.

  • Dick Wei - Analyst

  • All right, great.

  • Thanks a lot for the help.

  • Robin Li - CEO

  • Thanks.

  • Operator

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

  • Please proceed.

  • Robert Peck - Analyst

  • I was wondering if you could comment a little bit about Google's plans in the market and the idea of them offering free search and free download of all MP3s and how you think that could impact Baidu going forward.

  • Robin Li - CEO

  • Okay.

  • I think -- we have been in this market for MP3 search or music-related file search for a long time.

  • I think we have a very good understanding of the customer needs or user need for additional music.

  • We firmly believe in advertising supported digital music.

  • We think that Internet is a new form of media that can help record companies to promote their artists and songs.

  • We have been working with many record companies and they are happy about the result we are offering.

  • As a search engine, we try to provide as much information as possible that's publicly online.

  • So we do believe in an open system that allows all the record companies, all of the artists, all kinds of files to be found on our search platform.

  • Operator

  • Your next question comes from the line of Eric Wen.

  • Please proceed.

  • Eric Wen - Analyst

  • Hi.

  • Good morning.

  • I have two questions.

  • Hi Robin.

  • Can you outline, how does Baidu plan to increase the traffic of Baidu Japan?

  • And I have a follow-up question.

  • Robin Li - CEO

  • Well, frankly, I think that question is still an open question for us.

  • We employed a number of local people -- local Japanese people who help us to study the market and come up ways to attract Japanese consumers.

  • We are happy -- we are very happy about the progress so far.

  • As I mentioned, our traffic for Baidu.jp quadrupled the day after our public launch, even though the service was publicly available for the past 10, 11 months.

  • So the public announcement really helped Baidu to become known to more and more Japanese users.

  • But, at the end of the day, I think in the search business products and services speak for themselves.

  • As long as we can provide high-quality search services that satisfy Japanese users' needs, I would not worry about the traffic growth.

  • So our main focus will be delivering the best search quality and search services to the Japanese consumers.

  • Eric Wen - Analyst

  • Okay, since -- if I may have a very short question to follow-up.

  • Robin, you talk about your bundling strategy for your branded ads.

  • And could you give us some examples of how you bundle your branded ads with your search ads and particularly what is the pricing for your display ad at this point if you can disclose?

  • Haoyu Shen - VP of Business Operations

  • Hi Eric.

  • It's Haoyu here.

  • Let me take on this question.

  • What we're seeing in our recent quarter is our -- the branded advertisers spending on Baidu has been increasing because we have the advantage of being able to offer bundled products, including search, display ads and behavior targeted ads as well, either in text format or in display format.

  • So I think the reason they enjoy the bundled products is so they can really integrate all these different forms and different advertisements for their different campaigns.

  • And also it's a great way for them, especially search is a great way for them to integrate with their -- even their offline campaigns.

  • So be it multinationals or domestic, branded advertisers have increasingly realized the synergy between search and other forms of online and offline campaigns.

  • As far as pricing for display ads, we do look at what our competitors do and look at the advantages that we have, look at the page view we have and we believe our pricing for display ads are very competitive in terms of ROI that can be achieved by advertisements.

  • Eric Wen - Analyst

  • Okay, thanks.

  • Operator

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

  • Please proceed.

  • Wallace Cheung - Analyst

  • Hi.

  • Morning, Robin, Haoyu.

  • I just wanted to have question on -- again, on branded advertising.

  • What is the percentage revenue in the fourth quarter coming from this business?

  • And also a follow-up question is actually on the first quarter guidance actually, as brand ads is a typical slow season in first quarter.

  • Does it have any implication on the first quarter guidance and we may have a lower revenue guidance than you have given us?

  • Thank you.

  • Robin Li - CEO

  • I think sometimes it's very difficult to separate brand ads from performance-based ads, even for search related traffic.

  • For example, Brand-link, our new product launched last quarter, it's search and it's brand ads.

  • Our customers come to us for a number of needs.

  • We try to come up with proposals that will satisfy all of them.

  • So it's very hard for us to separate brand ads from performance-based ads.

  • At this time the trend we have seen is that more and more larger companies, multinational companies or national companies, domestic companies, they increasingly realize that our platform, especially a search-centric platform can help them to not only deliver performance but also help their brand advertising campaign.

  • Wallace Cheung - Analyst

  • Okay.

  • Thank you.

  • Haoyu Shen - VP of Business Operations

  • If I can just add, because you did ask what the percentage is from revenues from brand advertisers.

  • It's still a -- comparing with our revenue -- Q-for-Q revenue from SME it's still a small portion of our revenue.

  • But we do see a lot of good traction from these advertisers.

  • Operator

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

  • Please proceed.

  • Richard Ji - Analyst

  • Hi, Robin, Haoyu.

  • I have two questions and the first one is targeted on the direct sales force and you have been actively building a direct sales force over the past one year.

  • And can you help us to understand little better about your future expansion plans?

  • And a related question is about the Baidu Union which has been a significant traffic driver for your Company.

  • And can you help us also understand your current thinking, especially given Google, your arch rival Google has been aggressively building AdSense like alliance with some leading websites such as Sina?

  • Thank you.

  • Robin Li - CEO

  • Okay I'll talk about the direct sales force and Haoyu will take on the union question.

  • As we mentioned in the prepared remarks, we already have direct sales forces in the tier 1 cities, in all the tier 1 cities in China, mainly Beijing, Shanghai, Guangzhou, Shenzhen and a couple of other smaller cities.

  • At this time we do not have plans to convert other regions from channel to direct.

  • I think the efficiency for direct sales in all the regions we currently have presence still have lots of room to improve.

  • And we already have a very sizeable direct sales force in these areas and we will continue to work on improving the efficiency of the sales team.

  • And we will also continue to support our channels in other regions as the growth potential for them is still huge.

  • And managing the channel system better is also a priority for our Company.

  • Haoyu Shen - VP of Business Operations

  • As for the question on Baidu Union, Baidu Union is, according to a piece of research put out by iResearch last year, we are the leading Internet network, ad network in China.

  • I think we command about -- over 35% of market share.

  • We're well ahead of our competitor.

  • So, and we've seen a very healthy growth in union traffic in the past few quarters.

  • And we are constantly on the look out of identifying great partners to work with, to give us traffic and to provide great content.

  • And also, as some of you might know, we launched a new product called Baidu TV which is a one ad -- one format of ad that we put on our union site, on our union content sites.

  • And that's just indicative of our continuous efforts in terms of exploring new monetization formats for our union members.

  • So with our continuous efforts we believe -- we are confident that we'll continue to be the leading Internet ad network in China.

  • Robin Li - CEO

  • Richard, if you look at the TAC as a percentage of revenue, it has been increasing which represents the increasing importance of revenue contribution from Baidu Union.

  • That says something about the strength of our union system.

  • We believe we have a very competitive incentive system for the union members.

  • And going forward this should have a lot of potential too.

  • Richard Ji - Analyst

  • Very helpful, thank you.

  • Operator

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

  • Please proceed.

  • Ming Zhao - Analyst

  • Thank you.

  • Good morning Robin and Haoyu.

  • I want to ask you still a question on the Shenzhen distributor.

  • So is this at the end of November that Shenzhen distributor was acquired and consolidated into your numbers?

  • And also the revenue from the Shenzhen distributor, can we think about that as comparable to Guangzhou?

  • Robin Li - CEO

  • We do not disclose the scale -- revenue scale for individual cities or regions.

  • What we can say is that the Shenzhen distributor was a very important distributor in our channel system and converting them into direct has been an important task for us.

  • We have been preparing for this for some time.

  • And even though the transaction has closed, I would say it's going to take a couple more quarters for the direct sales team in Shenzhen to be really up to speed and release the power of customer acquisition and customer services.

  • Ming Zhao - Analyst

  • Okay, just a follow-up question on the branded advertising.

  • When we look at the balance sheet, especially the accounts receivable line, is this mainly the big advertisers, assuming that the small and medium-sized companies, when they do the search marketing, they will pay upfront?

  • Haoyu Shen - VP of Business Operations

  • Yes, that's right.

  • The accounts receivable on balance sheet is mostly for these branded advertisers.

  • Ming Zhao - Analyst

  • Okay, thank you very much.

  • Operator

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

  • Please proceed.

  • Steve Weinstein - Analyst

  • Thank you.

  • Just looking at the growth in TAC, it does continue at a rate very much faster than revenue and it's certainly becoming a meaningful part of your cost structure.

  • I was hoping you could give us a little more insight into what's happening there.

  • You've already called out growth in terms of Baidu Union.

  • But I'm wondering is there any TAC expenses associated with revenue, not from the union but the Baidu proprietary traffic such as the toolbar distribution or being loaded on a PC, etc.

  • And I think the last time you disclosed the percentage you were paying to the Union members, it was around the time of the IPO.

  • I wonder if you could tell us has there been any movement.

  • Or how much movement has there been since that time in the percentage that you're sharing with the members?

  • Haoyu Shen - VP of Business Operations

  • The question on TAC, as you can see on the P&L, is as a component -- TAC as a component to total revenue has been on an upward trend in the past few quarters.

  • It is really largely a reflection of the fast growth of our union and revenue from the union members.

  • On the other hand, we do, when we look at -- especially when we look at strategic deals, when we look at strategic partners that we want to work with, to recruit them to become our union members, we don't have a strict payout rate that we have to stick to.

  • So we did all individual deals.

  • We do look at revenue net of TAC from that perspective.

  • So I think a slow upward trend for TAC is really a combination of two factors.

  • I didn't quite get the second question.

  • Steve Weinstein - Analyst

  • I was just wondering if there was any TAC associated to driving any of the Baidu direct traffic like toolbar distribution or anything like that.

  • Robin Li - CEO

  • I guess there are.

  • If we struck a deal with some of the distributors to distribute the toolbar or otherwise search boxes for Baidu, that is considered as union traffic not organic traffic.

  • Even though it shows the Baidu URL and the Baidu [UI], that's union revenue and union traffic.

  • Steve Weinstein - Analyst

  • Thank you.

  • Operator

  • Your next question comes from the line of James Mitchell with Goldman Sachs.

  • Please proceed.

  • James Mitchell - Analyst

  • Thank you for taking one question.

  • I guess you had a big reinvestment tax rebate in the quarter.

  • Looking forward, as long as your CapEx remains at high levels, should we expect you to continue getting reinvestment tax rebates and continuing enjoying a very low or negative effective tax rate?

  • Thank you.

  • Haoyu Shen - VP of Business Operations

  • The CNY21m tax refund we got in Q4 is really a one-time event.

  • So, going forward, if you exclude that one time refund, I think when we look at effective tax rate for 2007 it's about 1.3%.

  • And as we mentioned in previous conference calls, our different entities -- we have different entities in China and some of the tax holidays they have been enjoying is going to expire.

  • So going forward for 2008 I think we're probably looking at single-digit tax rate.

  • And because China's tax system is undergoing reform in 2008 and the detailed implementation guideline has not been published yet so there's some uncertainty to it.

  • But I think it's safe to assume that the tax rate in 2008 will be in single digits.

  • James Mitchell - Analyst

  • Thank you.

  • Operator

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

  • Please proceed.

  • George Chu - Analyst

  • Hi, good morning.

  • Just a short question, I'm not sure if this has been answered before.

  • But could you help us to think about how much you will be spending in your Japan operation for 2008?

  • Thank you.

  • Haoyu Shen - VP of Business Operations

  • Yes, for 2008 we expect to spend anywhere between U.S.$20m to U.S.$25m, that's P&L.

  • George Chu - Analyst

  • Thank you.

  • Operator

  • Your next question comes from the line of Eddie Leung with Merrill Lynch.

  • Please proceed.

  • Eddie Leung - Analyst

  • Hi.

  • Good morning Robin, Haoyu and Linda.

  • Could you guys comment on the litigation risk about your MP3 search?

  • And how would that affect your plans to become a hub for entertainment relayed services?

  • For example, will you change your promotions and marketing messages, etc.?

  • Haoyu Shen - VP of Business Operations

  • I think you are referring to a law suit that was filed by [IPI].

  • Again -- so we read about it from the press as well.

  • Up to yesterday we didn't get any notification from any authorities.

  • So we really can't comment on that.

  • But as Robin mentioned earlier we believe an advertising supported digital music business model.

  • And we've already been working with EMI and some other music labels and those are just examples of this.

  • And we believe that we'll continue to play an important role in digital music industry in China.

  • Eddie Leung - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Your next question is a follow up from the line of Robert Peck with Bear Stearns.

  • Please proceed.

  • Robert Peck - Analyst

  • Yes, Robin, I was wondering if you could give us any sort of feel as there's concern that there's global consumer recession going on or potentially going to occur.

  • Can you give us your thoughts and your feel on the insular capabilities of Baidu and the impact that analysts will be [breaking in] for any potential recession in 2008?

  • Robin Li - CEO

  • Well, I'm not an economist so it's very hard for me to predict if there's going to be any recession.

  • But, having said that, I think the potential for the Internet industry in China and search in particular is so huge that it really largely depends on our execution, our improvements in the search quality, our improvements in the monetization algorithm and our efforts to educate companies, enterprises to better understand the benefits of paid search.

  • So in my mind if a company even has $1 to spend on marketing, they should spend the $1 on the Baidu platform.

  • So, in that sense, I don't think any kind of economic downturn unless that's very, very severe would have material impact on our revenue growth.

  • Robert Peck - Analyst

  • Thanks Robin.

  • Operator

  • Your next question comes from the line of Richard Chow with AllianceBernstein.

  • Please proceed.

  • Richard Chow - Analyst

  • Thank you.

  • Congratulations on the results.

  • I have a question regarding the C2C platform.

  • Can you tell us when you expect a more formal plan being laid out regarding your own [built-up] platform?

  • And also when are we going to see the monetization of the revenue model?

  • Thanks.

  • Robin Li - CEO

  • The reason we decide to launch a C2C product is because we realized that a lot of Baidu users search for products in our main search box.

  • So we are really trying to satisfy our user needs better by providing an online option platform to help develop the e-commerce infrastructure and educate Chinese users to use e-commerce-related service more.

  • We currently do not have any plans to monetize that kind of service.

  • We are just trying to satisfy the information needs or the trading needs for our existing users.

  • Richard Chow - Analyst

  • Okay.

  • Thanks.

  • Operator

  • Your next question comes from the line of Stephen Ju with RBC Capital Markets.

  • Please proceed.

  • Stephen Ju - Analyst

  • Good morning.

  • What is your CapEx outlook for 2008 and what's the head count as at the end of the year?

  • Haoyu Shen - VP of Business Operations

  • The head count at the end of the year is just above 6,000.

  • And as far as CapEx for 2008 we don't give guidance on CapEx on an annual basis.

  • But I think we will, as we continue to invest for the future, I think CapEx still will be significant in 2008.

  • And another thing that shouldn't be missed is CapEx on Baidu Campus.

  • The Campus construction is well in progress.

  • The construction will end early part of 2009.

  • So between now and early part of 2009 I would think that there will be around U.S.$50m to U.S.$60m CapEx spent on Baidu Campus.

  • Operator

  • Your next question comes from the line of [James Lee] with Sterne Agee Capital Markets.

  • Please proceed.

  • James Lee - Analyst

  • Morning Robin.

  • Can you talk about the competitive dynamic in tier 2 markets a little bit, given the fact that you have cemented your market position in tier 1 markets?

  • I'm just curious what kind of competitive activities are you seeing from Google and Yahoo?

  • Thanks.

  • Robin Li - CEO

  • I guess I need to talk about it from two aspects.

  • The first is from the user aspect.

  • I think in the tier 2 cities Baidu enjoys an even higher market share, I mean traffic share for our search services.

  • Because we are local, we do have features and products that are really tailored to the needs of the local users.

  • On the customer or advertiser side, we've been building a channel system or distribution system since the year 2002 and this system has been, I think, the strongest in the Internet space in China.

  • We are so far ahead of any competition in this front.

  • Operator

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

  • Please proceed.

  • Ming Zhao - Analyst

  • Thanks, just two follow-up questions.

  • One is the -- there is a very small CNY1m revenue -- other revenue in your top line.

  • Can we understand what that is?

  • Also there's CNY12m other income below the operating income line.

  • That's up from the CNY4m in the prior quarter and can you talk a little bit about that?

  • Thanks.

  • Haoyu Shen - VP of Business Operations

  • Right.

  • If I understand you correctly, Ming, in other income, under other income there's CNY12m interest income and there's another CNY13m other income.

  • And the bulk of that is some tax-related subsidy from the government and also probably a one-time event.

  • Operator

  • Your next question comes from the line of Dick Wei with JP Morgan.

  • Please proceed.

  • Dick Wei - Analyst

  • Yes.

  • Just a couple of questions.

  • First is if you can give out the head count breakdown, that will be good.

  • And also I'm interested in if you can break out the CapEx for fourth quarter.

  • How much was spent on servers versus on the Campus?

  • Thanks.

  • Haoyu Shen - VP of Business Operations

  • Yes, Dick.

  • We don't give detailed breakdown of headcount but, as I said, at the end of the year the total headcount is slightly over 6,000.

  • And what I can say is over 4,000 is in Sales and Marketing.

  • As far as CapEx in Q4, the total CapEx Q4 is CNY166m.

  • Over a third of that was for Baidu Campus.

  • Dick Wei - Analyst

  • So about CNY50m, CNY60m is for the Campus?

  • Haoyu Shen - VP of Business Operations

  • Well the total is CNY166m and more than a third of CNY166m is for Baidu Campus.

  • Dick Wei - Analyst

  • Okay.

  • Great.

  • Thanks.

  • Operator

  • Next question comes from the line of Wallace Cheung with Credit Suisse.

  • Please proceed.

  • Wallace Cheung - Analyst

  • Hi.

  • Just a question on the share-based compensation, it tends to go up a lot in the fourth quarter.

  • Is that going to have a much higher growth in the next few quarters?

  • Thank you.

  • Robin Li - CEO

  • Yes the SBC in Q4 is slightly higher and that's really a function of the [grants] we gave in Q4, and that's really a function of our hiring of senior positions.

  • So it does fluctuate from quarter to quarter.

  • But I don't expect it to continue to go up.

  • Wallace Cheung - Analyst

  • Thank you.

  • Operator

  • Your next question comes from the line of Elinor Leung with CLSA.

  • Please proceed.

  • Elinor Leung - Analyst

  • Thank you.

  • My question is you mentioned -- Baidu mentioned about Hong Kong listing earlier before.

  • Do you still considering that option?

  • Robin Li - CEO

  • Yes, we are always open to all kinds of listing options if that can serve our shareholders better.

  • At this time the plan is very preliminary.

  • We need to find a way to prove that this will be beneficial to the existing shareholders and employees and customers.

  • That's all.

  • Elinor Leung - Analyst

  • So does that mean that is unlikely to happen this year?

  • Robin Li - CEO

  • Right, I think it's unlikely for this year.

  • Elinor Leung - Analyst

  • Thank you.

  • Operator

  • Your next question comes from the line of Ke Chen with Shah Capital Markets.

  • Please proceed.

  • Ke Chen - Analyst

  • Yes.

  • Just a quick question regarding Microsoft Yahoo acquisition.

  • I'm wondering have you prepared for this acquisition and how that is going to affect you?

  • Robin Li - CEO

  • As you may know that these two players do not have significant market share in terms of Chinese search.

  • And the deal will probably take quite some time to complete, if it ever completes.

  • So it's very hard for us to speculate the impact on Baidu.

  • Ke Chen - Analyst

  • Thanks.

  • Operator

  • Your final question comes from the line of Kar Kwong with Needham & Company.

  • Please proceed.

  • Kar Kwong - Analyst

  • Hi guys, thanks for taking my questions.

  • I guess during this last quarter you had a pretty nice re-acceleration in the year-over-year change in customers.

  • It went from 40% in Q3 to 44% this quarter.

  • I was wondering to what extent is that being driven by an increased percentage of repeat customers?

  • And also if you could also comment on to what extent the faster pace of growth in the large advertisers compared to the SMEs is driving the ARPU growth that we're seeing?

  • Thanks.

  • Robin Li - CEO

  • Yes.

  • I think the number of active online customers is really a reflection of our execution capability of the sales team.

  • The potential for this market is huge.

  • There are more than 10m or 20m enterprises in China.

  • And clearly every company and every enterprise can take advantage of our paid search platform.

  • It's just a matter of marketing maturity and how we execute in terms of customer acquisition.

  • So I think the number thing in Q4 really is the reflection of our execution in the sales force.

  • ARPU, large customers generally spend more on our systems so that certainly helps increasing ARPU.

  • Kar Kwong - Analyst

  • Do you think you can disclose the number or the percentage of your customers that are repeating, that have spent with you in the past?

  • Robin Li - CEO

  • It's really hard to define what's a repeating customer.

  • We are basically offering this like a service.

  • People in theory should just keep putting money in this system.

  • But sometimes they would decide to stop for a while and come back later.

  • They may stop for a week.

  • They may stop for a month.

  • They may stop for a year.

  • It's really difficult to define what a repeating customer is.

  • Kar Kwong - Analyst

  • For example, a customer that spends --.

  • Robin Li - CEO

  • I think overall the customer loyalty is very high and the performance we are delivering is very good for all of the customers.

  • They are very satisfied.

  • Kar Kwong - Analyst

  • Can I have like a mix between large advertisers and SMEs?

  • Robin Li - CEO

  • As I mentioned before, we see increasingly high interest from -- higher interest from the larger companies.

  • But SMEs is still a major part of our revenue contribution.

  • And, like I mentioned, the potential is still very large and we don't really see any limit in new customers or customer spending.

  • It's really about marketing maturity and our execution.

  • Kar Kwong - Analyst

  • Thank you very much.

  • Operator

  • 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 his 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.

  • Operator

  • Thank you for your participation in today's conference.

  • This concludes the presentation.

  • You may now disconnect.

  • Have a great day.