百度 (BIDU) 2008 Q1 法說會逐字稿

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  • Operator

  • Good evening.

  • And thank you for standing by for Baidu's first quarter 2008 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.

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

  • I would now like to turn the call over to your host for today's conference, Helen Zhang, the Senior Manager of Investor Relations at Baidu.

  • Helen Zhang - Senior Manager IR

  • Hello everyone and welcome to Baidu's first quarter 2008 earnings conference call which was preceded by the first quarter 2008 earnings earlier today.

  • And you'll find a copy of the press release on our website as well as newswire services.

  • Today you'll hear from Robin Li, Baidu's Chief Executive Officer, and Jennifer Li, Baidu's Chief Financial Officer.

  • After their prepared remarks, Robin and Jennifer will be joined by Haoyu Shen, Baidu's Vice President of Business Operations to answer your questions

  • Before we continue, please note that the discussion today will contain forward looking statements under the Safe Harbor provisions of the U.

  • S.

  • Private Securities Litigation Reform Act of 1995.

  • Baidu does not entertain 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 Company 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 today.

  • We are pleased to report that in the first quarter of 2008 we exceeded the top end of our revenue guidance with 108% year over year growth.

  • This result is in large part due to the continuous effort of our sales force and our strong customer service team.

  • It also reflects an increased understanding of, and appreciation for, the benefit of paid search by both our existing online advertisers and more traditional advertisers turning to this platform.

  • Despite a long Chinese New Year holiday and severe snowstorms at the start of the quarter, we exceeded our goals.

  • Revenue growth was driven both organically and through our continued expansion of Baidu Union.

  • Our revenue growth is a clear indication of our continued ability to maintain and attract new users and customers to the premier Chinese online search platform.

  • Our focus on knowing our customers' needs, as well as our transition to a direct sales model, have paid off.

  • Active online marketing customers have reached 161,000, up from 155,000 last quarter.

  • Revenue per online marketing customer for the first quarter remained stable at approximately CNY3,300 [sic see press release] an increase of 44% from the corresponding period in 2007.

  • Our Web search services are well complemented by a full suite of other popular products.

  • In particular image search has done very well and has become the largest non-Web search service in terms of page view.

  • Community based products are growing fast.

  • Internet users usually find the most relevant results from their websites -- from their web search queries comes from Baidu Knows, no matter which search engine they use.

  • This last quarter we also began the public testing phase of Baidu Hi, our instant messenger platform.

  • The IM market in China is different from that of other countries.

  • In China it is common practice to use instant messenger as the primary means of communication in professional as well as social networks.

  • We believe Baidu Hi will bring more convenience to Baidu users and attract new Internet users to our site.

  • We have also made progress this quarter in our ongoing strategy to become an entertainment hotspot on the Internet.

  • In addition to our ongoing [WAP] agreement with the leading record companies, we have also recently signed agreements with 15 radio stations.

  • And we are at the forefront of music and information streaming from radio stations online.

  • We are continuing to explore new and innovative partnerships with record labels and content providers, paving the way for Baidu to function as an online media platform for music and information.

  • We also continue to expand Baidu Union.

  • Our recently announced partnership with China Netcom is an exciting development.

  • China Netcom is an Olympic sponsor and has an extensive user base.

  • According to the agreement, China Netcom subscribers will automatically be redirected to a Baidu search base if they attempt to visit an incorrect on non-existent URL, a practice enabling more user friendly and efficient online information searches.

  • This agreement is an excellent method to increase traffic to Baidu.

  • Another development I'd like to mention is a recently initiated revenue sharing partnership with four online gaming operators including Shanda, the NASDAQ listed Internet gaming company.

  • According to the agreement, online gamers will be able to access their game from Baidu's online game platform youxi.baidu.com which will then redirect the traffic to the gaming operator.

  • This allows game operators -- game users convenient access and drives gaming traffic to Baidu's gaming partners.

  • We are pleased to have formed this partnership.

  • Our Japanese initiatives are also progressing very well.

  • In 2008 we will maintain our focus on product development.

  • In that regard we recently announced a partnership with Waseda University in Tokyo, a pioneer local Internet search engine developer, to jointly conduct Web search related research.

  • Our goal in Japan is to develop a product that fuels the needs of Japanese users and establishes the Baidu brand as the high quality alternative and meaningful player in the dynamic Japanese market in the coming years.

  • I would also like to update everyone on our C2C platform.

  • In the past quarter we continued to develop and design the platform and hire staff who will manage this operation.

  • We remain on track with this project and plan to launch in 2008.

  • We will keep you updated on our progress in the coming quarters.

  • While we continue to grow the business and invest in long term opportunities, we are constantly focused on improving operating efficiency and leveraging our online platform to extend scalability.

  • Now turning to our management team, we have two very important, new members of the Baidu staff.

  • First it is my great pleasure to introduce you all to Jennifer Li, our new Chief Financial Officer who is here with me today.

  • Jennifer joined Baidu as our Chief Financial Officer in March.

  • She is an experienced finance leader who brings over 13 years of experience in financial management, treasury, corporate finance and financial analysis.

  • Jennifer joined Baidu from GMAC where she served as Controller of GMAC's North American operations.

  • Prior to that, Jennifer was Chief Financial Officer of General Motors China where she was responsible for GM's wholly owned and joint venture businesses.

  • We are excited by Jennifer's vast financial and international experience and are confident that she will bring a new perspective to our finance function and continue to strengthen Baidu's international standard of competence.

  • We are extremely pleased to have Jennifer with us at Baidu.

  • Also today is actually the first day on the job for our new Chief Operating Officer, Peng Ye.

  • Peng brings with him a wide range of experience in sales, marketing and business operations management as well as software development in the IT and telecom industry.

  • Most recently, Peng served as Country General Manager for Apple China.

  • In that role he oversaw all business operations for Apple China.

  • Prior to that, he worked for SatCom AG as Managing Director and for Motorola mobile business North Asia as Vice President of Asia Pacific and General Manager of new wireless carrier operations.

  • Peng also served with Nortel China and Nortel Europe for seven years in several senior management and product development positions.

  • Peng is a strategic addition to the management team and we are confident that he will make significant contributions to Baidu's future.

  • So I am very pleased that after a year of vacancy we were able to fill the Chief Operating Officer position with such a high quality member.

  • With that, I'll now turn the call over to Jennifer to go through the quarter's financial highlights with you.

  • Jennifer, go ahead.

  • Jennifer Li - CFO

  • Good morning and good evening everyone.

  • I want to thank Robin for the kind introduction and I would like to add a few words.

  • First of all, I'm thrilled to be here today.

  • People ask me why I joined Baidu.

  • Returning to my home country and working for such a vanguard company is a great opportunity and a challenge I welcome.

  • Having come from the relatively mature automotive industry I'm keen to be part of the promising Chinese Internet industry as it emerges from its infancy.

  • Baidu is one of the strongest brand names in China and a source of national pride.

  • With a start as a Chinese Internet company, Baidu is now recognized globally and is a true international player.

  • The Company's impressive growth today reflects the promise of the industry and the entrepreneurial spirit of Baidu.

  • Robin is a great leader, with an excellent reputation.

  • Working with Robin and the Baidu team is a pleasure.

  • And I'm excited that my position will allow me to apply my experiences in international finance to a newly international company, operating in an exciting market.

  • I'm very happy to be home, proud to be at Baidu and excited to contribute to the Company's future.

  • I will now turn to our first quarter results and provide you with financial highlights.

  • As many of you know, our first quarter results tend to reflect the seasonal impact of a long Chinese New Year holiday break.

  • This year, severe snowstorms furthered the negative impact.

  • Despite this, we posted healthy growth in the quarter, generating total revenues of CNY574m, nearly 5% above our guidance and up 108% year over year.

  • Both the number of active online customers as well as per customer spending increased by approximately 44% year over year.

  • Solid revenue growth was achieved through the continued effort of our sales force, strong customer service and an increased awareness and use of [C2C] online marketing in China.

  • Online marketing revenue grew to CNY572m, a 109% increase year over year.

  • Traffic acquisition costs, as a component of cost of revenue was CNY77m, or 13% of total revenue compared to 10% a year ago.

  • The users reflect continued growth of revenue contribution from Baidu Union.

  • Share based compensation expenses increased to CNY16m from CNY12m in the year ago period.

  • SG&A expenses were CNY147m, a 96% increase from a year ago.

  • This was due to the expansion of our direct sales force.

  • Excluding share based compensation expenses, SG&A rose 109% year over year.

  • Research and development expenses were CNY51m, a 106% increase from a year ago mainly due to the expansion of [Hertan].

  • Excluding share based compensation expenses, R&D expenses rose 107% year over year.

  • As Robin mentioned earlier, our Japan initiative is progressing well.

  • Baidu Japan incurred operating costs and expenses in the first quarter of CNY30m in aggregate.

  • Adjusted EBITDA, a non-GAAP measure, was CNY228m for the first quarter, representing a 93% increase from the year ago period.

  • Operating profit was CNY147m, double the level of the corresponding period in 2007.

  • In the first quarter of 2008 our income tax expenses was approximately CNY11m.

  • The increase in tax over previous quarters reflects expected increase in tax rates applied to two of our PRC based subsidiaries as their tax holidays either expired or partially elapsed.

  • Regarding taxes, as some of you may know, a new enterprise income tax law with some detailed guidelines came into effect on January 1, 2008.

  • This new law continues to offer preferential tax rates to qualified entities.

  • At this stage, we're still awaiting final detailed guidelines to confirm our current preferential tax rate treatment for some of our entities.

  • We'll keep you updated as we have information.

  • Net income for the quarter was CNY147m, a 71% increase year over year.

  • You will notice the year over year net income grew less than the year over year operating profit this quarter.

  • This is mainly due to the flat year over year other income levels, particularly interest income.

  • Net income, excluding share based compensation expenses, a non-GAAP measure, was CNY163m, a 67% increase from a year ago.

  • Basic and diluted EPS, excluding share based compensation expenses, were CNY4.77 and CNY4.68, translating roughly to $0.68 and $0.67 respectively.

  • Now moving on to the balance sheet, we ended the first quarter of 2008 with cash, cash equivalents and short term investments of CNY1.7b, or $238m.

  • Operating cash flow for the quarter was CNY248m, representing a year over year increase of 120%.

  • Capital expenditure for the first quarter was around CNY158m, up from CNY154m a year ago.

  • A portion of capital expenditure were allocated to the construction of Baidu new campus facility.

  • Now let me provide you our top line guidelines for the second quarter of 2008.

  • We currently expect total revenues to be between CNY780m and CNY800m which would represent year over year growth of 94% to 99% and a quarter over quarter growth of 36% to 39%.

  • I do wish to emphasize that this forecast reflects Baidu's current and preliminary view.

  • This 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.

  • As always, we believe that the best is ahead of us.

  • We look forward to continuing to provide the best online search experience for our users and continuing to execute our strong growth strategy in the coming quarters and years.

  • We'll now open the call to questions.

  • Operator

  • The question and answer session of this conference will start in a moment.

  • (OPERATOR INSTRUCTIONS).

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

  • Please proceed.

  • Dick Wei - Analyst

  • Hi.

  • Good morning Robin, Jennifer and Haoyu.

  • Congrats on a very good quarter.

  • My question is that I'm very excited about the new initiatives for online games and (inaudible) etc.

  • But for your core search business what are some of the key plans to try to drive monetization for 2008?

  • For example, if you can comment on the trend for revenue per search, any rooms for improvement on that front?

  • Any potential changes could there be in your sponsored search algorithm?

  • And actually, if you have any trends of revenue per search compared to your competitors, that would be great.

  • Thanks.

  • Robin Li - CEO

  • Okay.

  • As many of you know, we started to improve the monetization algorithm since 2006.

  • We implemented our dynamic bidding and dynamic starting bid price and incorporated quality factors in ordering the sponsored links.

  • Those have set a very good foundation for further improvement in the revenue per search opportunities for us.

  • So this year we continue to fine tune those offerings and have been making constant progress in improving the relevancy of the sponsored links.

  • And revenue per search has been growing steadily.

  • Having said that, I have to point out that the best is yet ahead of us.

  • We have identified lots of areas in the monetization algorithm that we can do a better job, not only this year but next year.

  • We still have a lot to do.

  • We don't have the numbers for -- up yet for our competitors, but our internal assessment is that we are not doing a better job in this area.

  • Haoyu, do you have anything to add?

  • Haoyu Shen - VP of Business Operations

  • No I think I agree with what Robin just said.

  • I think we -- New algorithms go into production everyday, into paid search.

  • And definitely there's a lot of things out there ahead of us for the rest of the year and going into next year as well.

  • Dick Wei - Analyst

  • Great.

  • Thanks a lot.

  • And congrats again.

  • Operator

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

  • Please proceed.

  • Eddie Leung - Analyst

  • Hi.

  • Good morning Helen, Robin, Jennifer and Haoyu.

  • I have one question.

  • About the Olympics, could you guys help us to understand what could be the impact on your advertiser budget and the search traffic in the third quarter?

  • Thank you.

  • Robin Li - CEO

  • Ad budget for the third quarter.

  • I think at this time there are still some uncertainties.

  • Larger companies generally have actual budgets for the Olympics starting from the first quarter of this year and gradually ramping up to the second quarter and third quarter.

  • I think we will be a beneficiary of that.

  • But a large portion of our revenue comes from small and medium enterprises.

  • And they are generally not that sensitive to the Games.

  • Also, during the Games, the traffic pattern may change significantly.

  • So we are not sure what kind of impact we will have during the Games time.

  • But longer term we think the Olympics will be driving force for better, improved Internet usage in China.

  • People will have a better sense of how to leverage the Internet to do marketing.

  • We think, longer term, it's going to be a positive impact for Baidu.

  • But during the third quarter, if traffic pattern changes significantly, our revenue, which is based on cost per click, could be impacted negatively.

  • Eddie Leung - Analyst

  • Robin, a follow up on that front.

  • Regarding the traffic, could you also share with us some of the experiences during the World Cup soccer in 2006?

  • Robin Li - CEO

  • Well the traffic did not change that much during the World Cup, I think, in 2006.

  • We were not a beneficiary of that because, at that time, not many sports related advertisers came to Baidu.

  • So, I would say, the impact was minimal at that time.

  • Eddie Leung - Analyst

  • Understood.

  • Thank you.

  • Operator

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

  • Please proceed.

  • Ming Zhao - Analyst

  • Thank you.

  • Good morning everyone.

  • Just a question on the Baidu Union.

  • It seems like the TAC ratio is going up gradually every quarter.

  • So my question is how do we look at Baidu Union's contribution to your top line.

  • If you can tell us a rough idea how much revenue is from the Baidu Union?

  • And also, just the behavior on this Baidu Union's website.

  • Is the revenue mainly coming from the search or the new contextual ad product?

  • Thank you.

  • Robin Li - CEO

  • Okay.

  • Let me start with a few words and I'll have Haoyu elaborate.

  • When we look at the revenue from the Baidu Union, we usually look at the net revenue, meaning revenue net of traffic acquisition cost.

  • If the net revenue is a positive to us, we will do a deal.

  • Based on that philosophy, for the past few quarters we have been able to sign up more revenue [booked] or content partners.

  • And revenue for the Baidu Union has been growing very well.

  • And I think, even if you back out the traffic acquisition cost, our Q1 revenue, year on year, grew more than 100%.

  • That's the big picture.

  • Haoyu, would you want to add?

  • Haoyu Shen - VP of Business Operations

  • Yes.

  • As far as the TAC going up, as we always said the TAC percentage to the revenue going up.

  • The main reason is revenue from Union members have been growing faster.

  • Although we don't breakout numbers, but it's safe to say that Baidu Union does contribute a big portion of our revenue.

  • As far as the revenue based on search versus revenue based on contextual search -- contextual ads, what we can say is the majority of revenue -- or the revenue from search is larger than the revenue from contextual ads.

  • Ming Zhao - Analyst

  • Okay, great.

  • Thank you.

  • Operator

  • Your next question comes from the line of Jason Brueschke with Citigroup.

  • Please proceed sir.

  • Jason Brueschke - Analyst

  • I want to extend my welcome to Jennifer to the firm, and my best wishes.

  • And second, a quick congratulations on the quarter.

  • I have two questions.

  • First is more of a housekeeping question.

  • Could you update us on what the P&L impact in the quarter was for both the Japan initiative and the C2C initiative?

  • Could you give us an update as to what you think the P&L impact will be for the balance of the year?

  • And can you tell us whether the spending in Japan has peaked and when you will start to get revenues from Japan.

  • So that's kind of the first step.

  • And secondly, I have a question about mobile search.

  • There have been some comments from, I think, a competitor of yours that mobile search in China will be larger than PC based search within three years.

  • I was wondering if we could get your views on that?

  • And also Google, your competitor, has partnered with China Mobile who is a dominant wireless carrier, and I just wondered if you could give your comments on whether that gives them some particular competitive advantage if, in fact, you believe mobile search becomes important to this market effect?

  • Robin Li - CEO

  • Okay.

  • I'll ask Jennifer to answer the P&L question first then I'll cover the mobile search part.

  • Jennifer Li - CFO

  • Hi Jason.

  • On the first quarter Japan P&L impacted -- Japan operational P&L impact was CNY30m.

  • We have mentioned in the past that we expect our 2008 total operating expenses related to our Japan operation will be between CNY20m to CNY25m -- $20m to $25m.

  • So when you think about Q1, that's a little over $4m.

  • So we expect our expenses to continue to occur in Japan and slightly ramp up.

  • Robin Li - CEO

  • And for the revenue opportunities in Japan, we have stated that we do not expect any revenue for this year.

  • And we will update you our outlook for next year as time passes by, when we will have a better idea.

  • As I mentioned before, C2C is a relatively lower cost initiative.

  • And we currently do not break that down in our P&L.

  • For mobile search, we have been constantly monitoring the mobile Internet market in China.

  • There has been a lot of talk about mobile search, a lot of talk about 3G networks.

  • But so far I think everything is pretty much talk, not reality.

  • We are anxiously waiting for the 3G network system to become widely available and affordable to the average Chinese consumers.

  • And when that happens, I think we will be able to have a better idea of how important mobile search is and how should we play in that better world.

  • Having said that, I have to say that I'm optimistic about mobile search going forward.

  • But the form of mobile search may not be the same as you see today.

  • And today a lot of users add that mobile search to the form of WAP.

  • And just to clarify that, wap.baidu.com is the most popular wireless search in China as of today.

  • Jason Brueschke - Analyst

  • Robin, maybe a comment on the relative importance of the carriers in this market going forward, China Mobile, China Unicom?

  • Robin Li - CEO

  • Yes, the carriers are very, very important in this market.

  • But going forward, we do expect more competition among the carriers which should be good impact for players like us who offer application services on top of that.

  • Jason Brueschke - Analyst

  • Okay, great.

  • Thanks again and congratulations.

  • Robin Li - CEO

  • Thank you.

  • Operator

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

  • Please proceed.

  • James Mitchell - Analyst

  • Hi.

  • Thanks for taking the question.

  • When I look at your operating expenses increasing quarter on quarter on the SG&A and on the R&D, is that increase mostly due to new headcount additions, a bigger headcount?

  • Or is it mostly due to salary increases for existing headcount?

  • What kind of wage inflation are you experiencing?

  • Robin Li - CEO

  • Jennifer?

  • Jennifer Li - CFO

  • Yes.

  • Hi.

  • Our SG&A and R&D expense increases are predominantly driven by headcount increases.

  • For the quarter, we ended the quarter with a total headcount of about 6,700 and that's up from about 5,200 at the end of Q4.

  • We do, as you know, continue to ramp up our direct sales force through the transition of the Shenzhen distribution channel.

  • And at the same time, primarily] our headcount increases are in the R&D function as we build up the capabilities of the function and try to expand the product offerings.

  • We do also see salary increases over time.

  • Generally Q1 time frame is typically when we give merit increases and year end bonuses.

  • So Q1 you do continue to see operating expenses, SG&A go up a little bit.

  • James Mitchell - Analyst

  • What sort of wage inflation are you experiencing?

  • Jennifer Li - CFO

  • Our compensation is a total package.

  • It's a combination of a cash bonus and stock based compensation.

  • So we look at everything as a total package.

  • James Mitchell - Analyst

  • And what kind of a total package inflation are you experiencing?

  • Robin Li - CEO

  • It's slightly better than the CPI increase.

  • James Mitchell - Analyst

  • Thank you.

  • Robin Li - CEO

  • Yes.

  • Operator

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

  • Please proceed.

  • Richard Ji - Analyst

  • Hi Robin, Jennifer.

  • How are you?

  • Good quarter.

  • And I have one question -- two questions actually.

  • One starting with the average spending per customer which seemed rather flattish quarter on quarter.

  • Is that mainly due to seasonality issue or some other factors?

  • And should we expect acceleration in the ARPU figure for your customers?

  • And a related question is again with Beijing, small, medium enterprises in China are facing a lot of challenges this year due to tight credit environment and Renminbi appreciation, as well as a rising labor cost.

  • So far have you seen any material impact on your customer base and especially for their advertising budget?

  • Thanks.

  • Robin Li - CEO

  • For the ARPU I think it's a function of seasonality because of the Chinese New Year as well as the severe snowstorm in many of the areas in China.

  • Traffic actually dropped significantly during that period.

  • And our sales force were not able to go out and approach potential customers during that period.

  • So average spending actually was flattish quarter on quarter.

  • But if you look at the year over year number it's still looking very good.

  • So don't worry about this ARPU.

  • I think, for Q2, we will have a significant increase on that front.

  • Regarding to the SME customers, we so far we haven't seen any slowdown, either in their spending or in their interest to use our platforms.

  • We continue to believe that paid search is the best promotional platform for any company of any size to promote their products and services.

  • If there is any challenge in their operations, the first cut of their promotional budget should not come from the Baidu budget.

  • It should come from other areas.

  • And if they are going to their cost, they can just move all the other budget to the Baidu platform.

  • I haven't seen any negative impact from the tight credit or Renminbi appreciation to our customer spending.

  • Richard Ji - Analyst

  • Thank you Robin.

  • Operator

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

  • Please proceed.

  • Gene Munster - Analyst

  • My congratulations.

  • If you look at the revenue growth and the guidance, it looks more like a breakout period versus -- a breakout quarter versus kind of a longer inflection time.

  • It seems like something's actually going on.

  • I know you mentioned earlier in the call a number of different factors.

  • Is there one factor that -- one or two factors that have really caused this revenue acceleration?

  • My first question.

  • Second is, can you repeat what the paid click growth was year over year please?

  • Thanks.

  • Robin Li - CEO

  • Well when you look at the revenue guidance, you really need to look at the year over year number.

  • I think to us it just looked normal.

  • We have been growing like this year after year.

  • So this year is no exception.

  • Well, I know that's kind of impressive because the number gets larger and larger, but also the paid search market scene in China has become more mature.

  • And quarter after quarter we're seeing more companies come to us because they realize the power of our platform, they realize the benefit of paid search.

  • But so far, all over the world, I just haven't seen any other promotional platform better than paid search.

  • And of course Baidu dominates the paid search market in China.

  • So I think that's the main reason.

  • In addition to that, I think the execution is very important.

  • We have been very careful.

  • We have been doing a good job in executing our strategies and our vision.

  • In terms of number of paid clicks, we never disclosed this kind of metric because the paid search algorithm is still being revamped constantly.

  • And sometimes we may tune down the number of clicks but that sometimes we need to make up.

  • And it's a tricky balance between the average clicking price and number of hits.

  • The relevancy of that is the user experience, the bidding structure, there are lots of factors we are playing with.

  • So before the monetization algorithm is stable, I don't think we want to discuss the trends in the number of paid clicks.

  • Gene Munster - Analyst

  • Okay.

  • How about revenue per click?

  • 40% growth.

  • Robin Li - CEO

  • That's something --

  • Gene Munster - Analyst

  • Or is that something you can --

  • Robin Li - CEO

  • In a broader sense, I have to tell you that the number of clicks and the revenue per click have been going up.

  • Gene Munster - Analyst

  • Okay, great.

  • Thank you.

  • Robin Li - CEO

  • Thank you.

  • To maybe just add more color to your first question about Q1 versus -- Q2 versus Q1, if you look at historic growth, Q2 versus Q1 we always have the best sequential growth.

  • So we really don't look at it quarter -- this coming Q2 as a breakout.

  • It's really normal.

  • And if you look year-over-year, we're still targeting over 90% growth.

  • That really demonstrates our confidence in this model and our execution.

  • Gene Munster - Analyst

  • Great.

  • Thank you.

  • Operator

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

  • Please proceed.

  • James Lee - Analyst

  • Hi Robin.

  • Can you talk about -- elaborate about the banner program a little bit.

  • Can we get a sense of the scale of the business like how many advertisers you currently have?

  • And if you could talk about pricing a little bit, maybe compared to last year, how much of a pricing leverage you were able to get and maybe compare that versus major portals.

  • That would be very helpful.

  • Maybe you could help us on the top verticals in there as well.

  • Thank you.

  • Robin Li - CEO

  • Haoyu you want to take on the --

  • Haoyu Shen - VP of Business Operations

  • So we have -- as you know we have banner ads on our web search [properties] such as Baidu Knows and Baidu Post Bar.

  • And we -- the number of advertisers we -- it's in the hundreds, probably less than 1,000, but definitely in the hundreds.

  • And these advertisers, they typically buy those banner ads and pay for it either in the same campaign or in a different campaign.

  • And (inaudible) the -- sometimes it's similar to [technical difficulty] And we do have rate increases there.

  • So as far as (part three) ads for the advertisers we (inaudible).

  • James Lee - Analyst

  • Okay.

  • Haoyu you were going in and out, sorry if I missed it.

  • When was the last time you increased the price and how much, to get a sense?

  • Haoyu Shen - VP of Business Operations

  • Well we typically increase it by -- in January and in third quarter.

  • So we did it again this January, but I don't want to get into details of exact numbers.

  • James Lee - Analyst

  • Okay.

  • Lastly, can you talk about the ASP of the major advertisers on your banner program versus -- maybe compare the ASP versus small, medium size, like how much more are they spending versus the SMEs?

  • Haoyu Shen - VP of Business Operations

  • We don't dictate how much they pay us when someone puts their ad.

  • I think it's -- we don't look at whether it's SME or large advertisers.

  • They do it in the same system.

  • When you think about ASP, you probably have to think about different sectors.

  • Different sectors.

  • Key words of different sectors typically have different -- or it's just that the levels of profitability vary a lot in different sectors.

  • James Lee - Analyst

  • I was referring to your banner program, how much was it per -- ARPU per advertiser, I just wanted to get a sense, compared to your SMEs?

  • Haoyu Shen - VP of Business Operations

  • ARPU for -- we only have 100 big advertisers.

  • Their ARPU therefore is higher, much higher than small advertisers -- than SMEs, although, within the SME universe, there are more and more advertisers who are spending a lot with us every quarter.

  • James Lee - Analyst

  • Okay.

  • Thank you.

  • Operator

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

  • Please proceed.

  • Steve Weinstein - Analyst

  • Thank you.

  • Just a follow-up question on the operating expenses, in particular the sales and marketing expenses, as a percent of revenue it hit a level that we haven't seen in quite a while.

  • Can you go over what were some of the investments that came in the quarter particularly on that line?

  • And how should we think about that in terms of ability you've got to leverage, to work through the year and the sequential growth of the business?

  • So are there going to be some ongoing investments that we should think about that's a higher base, or are they front end loaded people costs that we'll see leverage on going forward?

  • Jennifer Li - CFO

  • If you look at the Q1 '08 versus Q1 '07, you will notice our revenue went up by 108%.

  • Our SG&A expenses went up basically at the same percentage.

  • Bear in mind that over the year what we have done, basically we invested in the direct sales force, and so hired the sales force and, as well, hired customer support function.

  • So the SG&A in general, if you think about the population of customers out there that we support, that's constantly going up.

  • So we will have to hire customer support teams to support, provide the best service to the customer.

  • At the same time, I think the major investment is maybe in the direct sales force.

  • Transitioning the channels to the sales -- direct sales force in the main market areas will help us focus on developing the vast customer base and get more operational efficiency over time.

  • We have mentioned in the past the transition to direct sales force.

  • We do not see the impact immediately.

  • It takes a few quarters for us to actually see this, the operating efficiency.

  • So this particular timeframe, over the past year, as you see the SG&A expenses go up, it's primarily a reflection of the investment in the reorganizing the distribution channel so that we have the sales force that we can sustain and utilize them and build greater revenue generation going forward.

  • Steve Weinstein - Analyst

  • Okay.

  • Thank you.

  • Robin Li - CEO

  • We did have -- we had a Baidu entertainment ceremony, awards ceremony in this past quarter.

  • So I think that added CNY3m to the SG&A in the first quarter.

  • Steve Weinstein - Analyst

  • Did you say CNY3m?

  • Jennifer Li - CFO

  • Actually yes.

  • It's a bit higher than CNY3m.

  • But we did have -- it's quarter over quarter trends.

  • There are a couple of things that happened in Q1.

  • We did have a local entertainment, kind of a promotional event.

  • That event itself had some expenses.

  • In addition, we had our official launch in Japan.

  • So that event itself also boosted up promotional expense.

  • Steve Weinstein - Analyst

  • Okay.

  • That explains a lot.

  • Thank you.

  • Operator

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

  • Please proceed.

  • Stephen Ju - Analyst

  • Good morning everybody.

  • So sorry to keep harping on regarding the TAC rate again, but just to clarify, the Union-based revenue versus your owned and operated revenue, is it fair to assume that revenue from Baidu Union is growing faster than your owned and operated?

  • And is your Union based revenue growing faster than your owned and operated on an organic basis?

  • And also how should we think about the TAC rate going forward?

  • Will it stabilize, because this seems to be the primary source of your gross margin compression year over year?

  • Thank you.

  • Robin Li - CEO

  • Yes, revenue from Union members has been growing faster than Baidu's own property.

  • Organically I don't have the detailed numbers in front of me, but I would say a lot of Union's revenue growth is due to the addition of new Union members.

  • Stephen Ju - Analyst

  • Right.

  • But if you strip out the new Union members and just look at it on kind of a same store basis if you will, and compare that versus your owned and operated?

  • Robin Li - CEO

  • As I said I don't have exact numbers in front of me, but I would think that the growth definitely should be by those few factors.

  • I don't have the exact numbers in front of me.

  • Stephen Ju - Analyst

  • Okay, got it.

  • Robin Li - CEO

  • Also I would add that we have the flexibility to turn around, to shift the revenue from organic to Union and vice versa.

  • We can choose to show more ads on the Union site and we can choose to show less ads on the Union site.

  • It really depends on our assessment of the ROI for our customers, for advertisers and our assessment of the return for our profitability and revenue growth.

  • Jennifer Li - CFO

  • And I just wanted to add a few comments there.

  • You do look at TAC as an important component of our cost.

  • It does demonstrate that you know Union traffic and Union revenue is an important contributor to our total revenue.

  • Our organic source of revenue as well as Union revenues are both going up.

  • But, to Robin's point, we can definitely leverage the partnership and we can turn on or off of the Union traffic and partnerships that we build to the extent we believe the Union partnership brings positive contribution to Baidu.

  • If you think about the way we support our customers, we have a growing population of customers.

  • And these customers will either use Baidu's own platform to promote themselves, or reach out through the Union platform to reach out to a broader base of customers.

  • I think the infrastructure for us to support the -- the core customer base is the same.

  • But the Union platform offers us an extended kind of reach to the end users.

  • So this not only benefits Baidu, it benefits our Union customers.

  • And it actually benefits the end users who get to see more products, more services.

  • So it's a win-win situation for all.

  • And I think my point is I think you mentioned about gross margin compression.

  • Our Union -- through the Union network, it's definitely a faster way to grow the business.

  • But if you have -- if we have the infrastructure already, this offers an additional platform, bring in additional revenue, actually it's a better way to produce a better operating profit margin.

  • Robin Li - CEO

  • Yes, I think if you're really interested in the TAC issue you can just back out the TAC and look at the net revenue growth.

  • Stephen Ju - Analyst

  • Yes, thank you.

  • Operator

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

  • Please proceed.

  • Wallace Cheung - Analyst

  • Hi, morning.

  • Two questions.

  • First of all can you just give us a bit more highlight on the strategy on Hi?

  • So is this close to (inaudible) and can add more business model to your Company?

  • Or is it more like to the say Alibaba is more likely to support these kind of platforms for your C2C going forward?

  • And the second question will be regarding to the interest income, surprisingly the cash going up but the interest income going down on a sequential basis.

  • Is it because you're keeping more cash on U.S.

  • dollars?

  • Thank you.

  • Robin Li - CEO

  • Okay.

  • For our IM, Baidu Hi, the strategy is to really provide a better user experience for our existing users.

  • As you know, we have a number of community oriented products like Post Bar, Baidu Knows, Baidu Encyclopedia.

  • And our users do have the need to communicate instantly and this also relates to the culture for Chinese Internet users.

  • We believe that Baidu Hi fulfills this kind of demand from our users.

  • Currently we do not expect any revenue from Baidu Hi.

  • And it is just a tool for existing Baidu users, for other kind of applications, be it C2C or Post Bar or Baidu Space.

  • It's really the integrated user experience.

  • Jennifer you want to take on the interest question?

  • Jennifer Li - CFO

  • Sorry Wallace, can you repeat your question?

  • Wallace Cheung - Analyst

  • Yes.

  • Hi Jennifer.

  • So the interest income on a sequential basis, based on my records, is actually coming down a little bit.

  • But the cash level is going up.

  • So I was just figuring out what the reason behind, because maybe you're holding more U.S.

  • dollar cash, then the interest rate coming down and the U.S.

  • dollar depreciating against Renminbi?

  • Jennifer Li - CFO

  • Right.

  • It's predominantly it's marginally driven.

  • You know our cash and cash equivalents from earnings aren't marking the money market ways.

  • As the overall rate environment comes down, that's basically the interest income comes down.

  • The cash level, as you noticed, is actually going up.

  • Of course, it's due to positive cash flow generated by operations less the primary spenders which is primarily on the capital expenditure side.

  • So our cash levels are going up, but the lower interest income is predominantly due to the lower market rates.

  • Wallace Cheung - Analyst

  • You mean -- when you talk about market rates you mean the U.S.

  • market rate or the Renminbi market rate.

  • Jennifer Li - CFO

  • Both.

  • Wallace Cheung - Analyst

  • Both?

  • Okay.

  • Thank you.

  • Operator

  • Your next question comes from the line of Kar Kwong with Needham and Company.

  • Please proceed.

  • Kar Kwong - Analyst

  • Hi guys.

  • Good morning.

  • Thanks for taking my question.

  • I was just wondering how many of the customers that you guys had this year were -- had never previously marketed with Baidu before?

  • Robin Li - CEO

  • We don't provide that statistics.

  • But if you look at the quarter over quarter type of customer growth, I think a meaningful number is from customers who haven't spent with us before.

  • Kar Kwong - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Your next question comes from the line of Colin Gillis with Canaccord.

  • Please proceed.

  • Colin Gillis - Analyst

  • Good morning.

  • Robin Li - CEO

  • Good morning.

  • Colin Gillis - Analyst

  • So, on the Union can you discuss how many of the different brackets there are right now?

  • And maybe how many members there are in the top bracket?

  • Robin Li - CEO

  • Generally we have five categories of Union members.

  • We have [proprietary] websites, we have softwares, we have Internet cafs and we have carriers.

  • The last category I think is those other ad networks.

  • We have -- in total we have over -- I believe we have over 160,000 or 170,000 Union members.

  • And I can't provide a breakdown of members in each category.

  • Colin Gillis - Analyst

  • Could we get a sense maybe in a rough term what percent strive to make that top category?

  • Robin Li - CEO

  • Okay.

  • By and large all the Union members can be categorized into the five types.

  • Colin Gillis - Analyst

  • Okay.

  • Fine.

  • And then turning to Japan, what was the headcount at the end of the quarter?

  • Robin Li - CEO

  • We do not provide the exact number of headcount in Japan, but it has been growing steadily.

  • Colin Gillis - Analyst

  • So could we just get a sense in terms of that $20m to $25m expense any color to the ramp, of when that comes?

  • Should we see it growing linearly or is there a spike in any particular quarter?

  • Robin Li - CEO

  • Pretty much going to be by linear growth.

  • Colin Gillis - Analyst

  • Okay.

  • Just finally, if you're looking at five years, do you see any major shifts in Baidu's market share?

  • Robin Li - CEO

  • We are confident that we will continue to be the dominant player for the foreseeable future.

  • Colin Gillis - Analyst

  • Okay.

  • Thank you for taking my questions.

  • Robin Li - CEO

  • Thank you.

  • Operator

  • Your next question comes as a follow up from the line of Dick Wei with JP Morgan.

  • Please proceed.

  • Dick Wei - Analyst

  • Hi folks.

  • Just two quick questions.

  • First is, did you mention anything about the launch date for C2C?

  • You said first half '08 or is that just 2008?

  • And secondly, if you can give some guidance on the tax rate, how should we look at it for the next couple of quarters if you are qualified for special tax treatment and if you do not then that's--.

  • Thanks.

  • Robin Li - CEO

  • Sorry, can you repeat the first question about C2C?

  • Dick Wei - Analyst

  • Just the launch date for the C2C service, is that first half '08?

  • That's what I believe that was mentioned before?

  • Robin Li - CEO

  • We never mentioned the exact date of the C2C launch.

  • We only said it's this year, sometime this year.

  • The exact date has not been decided yet.

  • Dick Wei - Analyst

  • Okay.

  • Robin Li - CEO

  • Yes.

  • Jennifer Li - CFO

  • On the tax rate question, we -- you probably know, I mentioned in my remarks, at the beginning of the year we do have a new law coming in place.

  • We have now more detailed information on the actual guidelines in terms of the preferential treatment for qualified entities for Baidu site.

  • It's still not finalized yet.

  • But what I wanted to point out is, if you look at our Q1 tax expenditure, we have mentioned that certain of our tax -- of our entities are migrating through their tax holidays.

  • And one entity actually had the tax break holiday expired and another one is moving on to the next stage, still enjoying low tax, preferred tax rate, but it's higher than what they have enjoyed in the past two years.

  • But in terms of the new law, whether we qualify or not, it will only impact part of Baidu legal entities.

  • It does not -- even if we don't qualify, it does not have a material impact to our total effective tax rate.

  • If you look at Q1 our tax rate is close to 7%.

  • And we think, for the remainder of the year, it's still in the single digit range, but more reflective of what you have seen in Q1.

  • It will be in the higher end of the single digit range.

  • Dick Wei - Analyst

  • Okay, great.

  • Thanks.

  • Operator

  • Your next question comes as a follow up from the line of James Mitchell with Goldman Sachs.

  • Please proceed.

  • James Mitchell - Analyst

  • Hi.

  • Thanks for taking the follow up.

  • And I apologize if it's slightly detailed.

  • If I just look at the cash flow, your CapEx is CNY158m, your depreciation is CNY65m and your PP&E is flat.

  • What happens to the balance of the CapEx on the balance sheet?

  • Jennifer Li - CFO

  • We capitalize -- I mean what it basically says, what we show in our balance sheet is the net balance.

  • So through the quarter the depreciation, or the -- the depreciation itself was CNY62m.

  • Operator

  • Your next question comes as a follow up from the line of --

  • Jennifer Li - CFO

  • Let me take a note of that and follow up with you off line.

  • James Mitchell - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Your next question does come as a follow up from the line of James Lee with Sterne Agee Capital Markets.

  • Please proceed.

  • James Lee - Analyst

  • Some quick housekeeping questions here.

  • Can you guys just reconfirm what the CapEx spending planning for this year?

  • And also, last quarter you guys disclosed the traffic of non-search on your baidu.com.

  • That was like 60% as of last quarter.

  • I wonder if anything has changed to that traffic pattern.

  • Thank you.

  • Robin Li - CEO

  • Regarding to the non-search traffic, I think the percentage has been quite stable with the non-search traffic growing slightly faster than the Web-search traffic.

  • Of the CapEx spending for the next year -- for the rest of the year, Jennifer do you want to answer that one?

  • Jennifer Li - CFO

  • Yes.

  • For the remainder of the year we mentioned one portion of our capital expenditure is related to the Baidu campus.

  • So we'll continue to incur that expenditure.

  • We'll continue to have CapEx related to equipment and capacity extension.

  • So we continue to invest in future opportunities.

  • I just wanted to get back on the question earlier, related to the reconciliation of the cash flow related to CapEx versus what you're seeing balance sheet.

  • The cash flow related is CNY158m, but what we have capitalized the CNY158m is cash related.

  • Part of this activity is already capitalized for the entire period and so it's not directly -- you don't know that.

  • James Lee - Analyst

  • And Jennifer, can I ask you a quick follow up question.

  • Can you just update on the CapEx for Baidu campus and how much have you spent so far?

  • Jennifer Li - CFO

  • We have mentioned in the past three quarters that a big portion of our capital expenditure was Baidu campus related.

  • James Lee - Analyst

  • Right.

  • Jennifer Li - CFO

  • So cumulatively, if you look at it, if we spend about CNY150m, CNY160m a quarter, it means that cumulatively will be close to CNY150m in terms of construction-related expenses.

  • For the Baidu campus itself, we do anticipate to ramp up construction and everything in '09, between '08 and '09.

  • The campus related expenditure -- campus expenditure totals between $50m to $60m.

  • James Lee - Analyst

  • Okay, great.

  • Thank you.

  • 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

  • So once again thank you for joining us today.

  • And please do not hesitate to contact us if you have any further questions.

  • Thank you.

  • Operator

  • Ladies and gentlemen, thank you for your participation in today's conference.

  • This concludes the presentation.

  • You may now disconnect.

  • Have a good day.