百度 (BIDU) 2008 Q2 法說會逐字稿

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  • Operator

  • Good evening and thank you for standing by for Baidu's second quarter 2008 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 meeting over to your host for today's conference, Helen Zhang, Senior Manager of Investor Relations at Baidu.

  • Please proceed.

  • Helen Zhang - Senior Manager, IR

  • Hello everyone.

  • And welcome to Baidu's second quarter 2008 earnings conference call.

  • We distributed Baidu's second quarter 2008 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'll hear from Robin Li, Baidu's Chief Executive Officer and Jennifer Lee, Baidu's Chief Financial Officer.

  • After their prepared remarks Robin and Jennifer will be joined by Peng Ye, Baidu's Chief Operating Officer and 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 made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995.

  • Baidu does not undertake any obligations to update any forward-looking statements except as required under applicable law.

  • As a reminder, this conference is being recorded.

  • In addition, a webcast of this conference call will be available on Baidu's corporate website at ir.baidu.com.

  • I will now turn the call over to Baidu's CEO, Robin Li.

  • Robin Li - CEO and Chairman

  • Hello everyone and thank you for joining us today.

  • We are pleased to report that in the second quarter of 2008, we exceeded the top end of our revenue guidance with 100% year-over-year growth.

  • Operating profit showed even better progress, growing faster than revenue and reflecting the scalability of our business model.

  • We increased both the number of active online customers and spending per customer.

  • Despite the devastating earthquake in mid-May we were able to enjoy yet another extremely strong quarter.

  • Since Baidu's inception, small and medium-sized enterprises have been our most loyal customers.

  • Across China, those businesses were the first to understand and appreciate the value of paid search.

  • Over the past few quarters we have seen more large enterprises beginning to realize the value of paid search marketing.

  • The entry of large enterprises into our customer mix has created a considerable core of customers who can enjoy Baidu's bundled product.

  • An expanding reliable customer base contributes to the strength and stability of our business.

  • Our business has been resilient in the face of market turbulences such as the snowstorms of Q1 and the earthquake this past May.

  • A new development this quarter has been the launch of My Marketing Center.

  • Over the past few years we have had requests from our customers for tools that will help them make better marketing decisions.

  • My Marketing Center is a customized online platform that integrates industry information, market trends and business and industry news.

  • Every online marketing customer, regardless of size and spending, is given access to this platform.

  • My Marketing Center combines Baidu's vast resources in online information to enable customers to improve their marketing strategies.

  • So far our customers have been quite pleased with the service.

  • We're also always looking for ways to improve our sales and marketing strategies.

  • One change we made in the second quarter was to consolidate three sales offices in Southern China.

  • The setup of our Shenzhen office is progressing well and we are able to close nearby offices in Zhongshan and Foshan, bringing the accounts served by those offices under the direction of Shenzhen office.

  • We expect this will bring greater productivity to the region and better service to our customers in that area.

  • We see this as a clear move towards greater operational efficiency.

  • As always, at Baidu we listen to our users and provide the products and services they demand.

  • We recently created direct links from our homepage to two of our increasingly popular services, Video Search and Hao123.

  • Video Search directs users to video content through a keyword search.

  • Traffic to our Video Search portal has been growing rapidly.

  • Hao123 is an index of the most popular Chinese websites and categories that allow users to click through navigation to find desired information.

  • To many local Internet users it is easier to find a desired website by click through than typing a URL address or keyword.

  • Hao123 is one of the most commonly used [depart] home pages in China and it's gaining traffic quickly.

  • This site is an important supplement to our keyword search business and has contributed to improved user experience and increased traffic.

  • Turning now to some of our other important initiatives.

  • Our C2C platform is moving along as planned and we expect a formal launch before the end of the year.

  • We have hosted some promotional activities in various test regions of China and we expect a successful launch.

  • For Baidu's Japan operations we continue to concentrate on product development.

  • We anticipate this will be our focus for the remainder of 2008.

  • Aside from the four products we have already launched in Japan, we are localizing additional products.

  • We are happy with the progress of our Japan operations to date and look forward to further developments ahead.

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

  • Jennifer, please go ahead.

  • Jennifer Li - CFO

  • Good morning and good evening.

  • As you have heard from Robin, it has been an outstanding quarter for Baidu.

  • I will now lead you through our second quarter results, highlighting a few areas with more detailed explanation.

  • This quarter, despite some negative effect from the earthquake, we were able to generate total revenues of CNY803m, exceeding our top-end guidance and up 100% year over year.

  • We increased our number of active online customers by approximately 41% year over year and increased the revenue per active online marketing customer by 42% year over year.

  • Traffic acquisition costs as a component of cost of revenue in the second quarter were CNY102m or 13% of total revenue, a small decrease from Q1 '08 and up from 11% a year ago.

  • The increase over a year-ago level reflects continued growth of our revenue contribution from Baidu Union while the sequential minor decrease reflects normal fluctuation.

  • The cost of revenue excluding tax was CNY179m, representing 22% of total revenue, comparing to 25% in the corresponding period in '07.

  • The decrease is mainly due to decrease of bandwidth costs, depreciation and operation costs as a percent of revenue reflecting improved usage of infrastructure and operational efficiency.

  • Cost of revenue excluding tax before share-based compensation was CNY178m.

  • Total operating expenses were CNY245m, a 95% increase from a year ago.

  • Specifically, SG&A expenses increased 86% over a year ago due to the expansion of our direct sales force and increase in customer service staff to serve our growing customer pool.

  • R&D expenses increased 124% mainly due to an expansion in headcount.

  • Excluding share-based compensation expenses SG&A rose 75% year over year and R&D expenses increased 123% year over year.

  • As Robin mentioned, our Japan operation is progressing well.

  • Baidu Japan incurred operating costs and expenses in the second quarter close to CNY30m.

  • Overall, we have seen improved profitability this quarter.

  • Specifically, adjusted EBITDA, a non-GAAP measure, was CNY377m for the second quarter, a 110% increase from a year-ago period.

  • And operating profit was CNY276m, a 114% increase over the corresponding period in 2007.

  • Both measures rose at a faster rate than revenue.

  • In the second quarter of '08, our income tax expense was approximately CNY29m.

  • The effective tax rate for the quarter was 9.7%.

  • Year to date we have had an effective tax rate of 8.7%.

  • The increase in tax expense over last year is mainly due to higher taxes applied to some PRC-based subsidiaries as their tax holidays either expired or partially elapsed.

  • We estimate that for the remaining quarters of the year, the effective tax rate will likely be in the neighborhood of what we have seen year to date.

  • Net income for the quarter was CNY265m, an 87% increase year over year.

  • Net income excluding share-based compensation expenses, a non-GAAP measure, was CNY294m, a 95% increase from a year ago.

  • Basic and diluted EPS, excluding share-based compensation expense, were CNY8.60 and CNY8.46, translating roughly to $1.25 and $1.23 respectively.

  • Now moving on to the balance sheet.

  • We ended the second quarter of '08 with cash, cash equivalents and short-term investments of CNY1.9b, or $280m.

  • Operating cash flow for the quarter was CNY403m, 46% increase year over year.

  • Capital expenditure for the second quarter was around CNY113m.

  • A portion of the capital expenditure was associated with the construction of Baidu's new campus facility.

  • We ended the second quarter with approximately [6,800] employees.

  • This reflects a 2% increase over last quarter.

  • Most of the headcount increase during the quarter was in R&D, while sales, marketing and customer service staff headcount remained relatively flat compared to the prior quarter.

  • As Robin mentioned we have consolidated two South China offices into Shenzhen office to increase efficiency.

  • The transition to a direct sales model in Shenzhen is progressing well and we expect the productivity of local direct sales force to gradually improve in the coming quarters.

  • Now let me provide you the top-line guidance for the third quarter of '08.

  • We currently expect total revenues to be between CNY905m and CNY935m which would represent year-over-year growth of 82% to 88% and quarter-over-quarter growth of 13% to 16%.

  • During the third quarter, Beijing will host the 2008 Summer Olympic Games.

  • It is a big and exciting event for the country.

  • We believe the Olympics will be beneficial in the long run to our business and the Internet industry as a whole.

  • More people will turn to Internet to find information and more business in particular will come to appreciate the power of search in promoting their business.

  • However, during the Games period we expect that our users may spend comparatively more time watching the Games and less time online to search for business-related topics.

  • In addition, we expect that some business near Beijing will be affected and, in some cases, temporarily shut down.

  • Many new regulations have been imposed to lessen traffic congestion, control pollution and maintain tight security during the Olympics.

  • To the extent business cannot be carried out as usual, we expect some customers will scale back their paid search marketing during the Games.

  • Due to potential altered user behavior and the possibility of scaled back business operations, we expect modest growth in total revenues in the third quarter.

  • We are confident though that our strong growth trajectory will quickly resume after the Olympics.

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

  • I will now turn back to the operator to open the call to questions.

  • Operator

  • (OPERATOR INSTRUCTIONS).

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

  • Please proceed.

  • Gene Munster - Analyst

  • Good morning and congratulations.

  • Obviously you gave upbeat guidance, basically maintaining your estimates, despite the fact -- or the Street estimates, despite the fact that -- the headwind of the Olympics.

  • Can you walk us through a little bit more in detail of how you calculate or anticipate that headwind, how you factored that in and maybe some more specifics into how that's actually calculated?

  • Thanks.

  • Robin Li - CEO and Chairman

  • Hi Gene, this is Robin.

  • As we mentioned in the prepared remarks, we have never experienced an Olympics hosted in China.

  • So there are some uncertainties.

  • But in the long run I think it's going to be a huge plus to Baidu because, as a major event, lots of people talk about information they get from online or specifically from Baidu.

  • So that drives more people to come to Baidu in the future.

  • During the Game time, it probably affects about two months' period of time, starting from July 20 to September 20, where Beijing has traffic control.

  • And even before that time, some of the factories in Beijing and the surrounding provinces and cities were shut down.

  • And some customers do not feel the need to do online marketing during that time.

  • Also I think during the Game period, the two, three weeks of Game period, lots of people -- consumers will spend more time watching TV and search for Game-related information.

  • And we expect work-related search volume will drop.

  • By factoring all of this kind of factors we believe that Q3 guidance would be the numbers we just talked about.

  • Operator

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

  • Please proceed.

  • Dick Wei - Analyst

  • Hi, morning and congrats on a good quarter.

  • Just questions on the 3Q guidance as well.

  • I wonder if you have seen any of the macro slowdown in China in some of the -- because we have been hearing news about credit tightening and the shutting downs, particularly in the Southern China region.

  • And I don't know if you have factored in any of those impacts on your guidance and probably just your views longer term in that respect, and in particular any industries that you see being impacted more.

  • Thanks.

  • Robin Li - CEO and Chairman

  • Yes, there are some difficulties in the Southern region for certain export- and import-related businesses.

  • But the Baidu paid search platform is suitable for all kinds of industries.

  • We have a very diversified portfolio of customers.

  • Plus the paid search market is still in its infancy.

  • As more and more companies realize that Baidu is the best way for them to promote their products and services, they come to us.

  • So our Q3 guidance did not factor in any macroeconomic condition for China.

  • We believe that the strong growth of paid search in China will outweigh anything related to the macro economy.

  • Operator

  • Your next question comes from the line of Catherine Leung with Citigroup.

  • Please proceed.

  • Catherine Leung - Analyst

  • Hi, good morning.

  • Can you please discuss the progress of the developments in both Japan and C2C?

  • I know that you discussed this briefly in your prepared remarks.

  • Can you maybe discuss and elaborate a little bit more what kind of products and what types of products you plan to introduce to Japan and what, if any, initial feedback there has been?

  • And could you also update us on the planned spend for the second half of '08?

  • Thank you.

  • Robin Li - CEO and Chairman

  • Yes, for Japan I think our top priority is to really improve the quality of the existing four products.

  • We have already gained good traction for our image search and video search for Baidu.jp.

  • And we are diligently working on improving the quality of our web search and blog search.

  • I think it's going to take some time for us to really come out with a very competitive product in the mainstream Japanese search.

  • We have shifted some of the product marketing functions from Tokyo to Beijing so that more people could work on those kind of products and services.

  • We are going to open a research center in -- research and development center in Shanghai later this year.

  • And initially we will -- the main purpose of that center will be to serve our Japan-related search applications.

  • Our C2C development is on track.

  • As I mentioned we are going to launch -- do a formal launch before the end of the year.

  • Jennifer Li - CFO

  • And Catherine, just to your question on the spend.

  • The expectation for the rest of the year for Japan, year to date we have incurred 8.6m in total expenses.

  • As Robin mentioned we anticipate increased activities related to our Japan initiative.

  • And our estimate -- original estimate of $20m to $25m expenditure for the year, we continue to expect the expenses will fall within that range.

  • Operator

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

  • Please proceed.

  • Eddie Leung - Analyst

  • Hi, good morning guys.

  • Can you help us to understand more about your customer mix, in particular the proportions of advertisers that are e-commerce related?

  • Thanks.

  • Robin Li - CEO and Chairman

  • Haoyu?

  • Haoyu Shen - VP of Business Operations

  • Hi Eddie, it's Haoyu.

  • Your question is the percentage of our customers related to e-commerce, right?

  • I think it's -- in general, Internet-related industry is a big element of our customer mix, not necessarily e-commerce-related, be it C2C or B2C.

  • If they are -- some of those customers are [pretty] big for us, but in general as a percentage of the total revenue, they don't account for a big number.

  • Eddie Leung - Analyst

  • Okay, thanks.

  • Operator

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

  • Please proceed.

  • Ming Zhao - Analyst

  • Thanks for taking my question, good morning.

  • Can you guys update us on how many large advertisers now are in your customer pool?

  • And what kind of changes have you observed after launching that My Marketing Center?

  • Is there any other plan for implementing more products like My Marketing Center in the future?

  • Thanks.

  • Robin Li - CEO and Chairman

  • Haoyu?

  • Haoyu Shen - VP of Business Operations

  • Yes, the number of large advertisers, or what we call brand advertisers, is in the hundreds every quarter.

  • And we are seeing stable growth of that number over time.

  • As far as the My Marketing Center, that product we launched back in June, it does not specifically target large advertisers.

  • We see a lot of value in that product for SMEs.

  • And as far as going forward, we're definitely looking at more new products serving the needs of different kinds of customers.

  • Robin Li - CEO and Chairman

  • And more importantly, for any new product launch we will spend a lot more effort to improve the quality of that service.

  • So every time we launch something we will take some time to listen to the market and make necessary improvements going forward.

  • Operator

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

  • Please proceed.

  • Richard Ji - Analyst

  • Hi, Robin and Jennifer.

  • Good morning.

  • I have a question regarding some of your new initiatives, especially -- and your new service My Marketing Center sounds quite encouraging.

  • And can you elaborate a little more on the type of value-added service that would be included in the My Marketing Center service?

  • And what percentage of your customers are currently using that service?

  • And when do we expect that service will contribute material revenue?

  • Thanks.

  • Haoyu Shen - VP of Business Operations

  • Hi Richard, this is Haoyu.

  • Yes, we launched this product for only a month and -- a little over a month.

  • It targets the current SME customers.

  • It's sort of a gateway for the customers.

  • When they sign in they come to this page.

  • They see information related to their account.

  • They also see information related to their own business, information related to their industry, news, news alerts or what have you.

  • It's very sort of self designed.

  • It can be designed by the customers themselves.

  • So -- but as I said, the product is very new.

  • We don't want to get into the details of how many have adopted these products.

  • But, as Robin mentioned, we are continuing -- we're going to continue to monitor the progress of the product and keep improving it.

  • Robin Li - CEO and Chairman

  • Hi Richard, this is Robin.

  • We do not expect any revenue for the My Marketing Center.

  • It's more like a value-added service to our existing customers.

  • And it's going to serve as a marketing tool for our paid search services.

  • As you know, Baidu has a dominant market share in Chinese search.

  • We can actually have a very good sense of the industry trend based on the queries our users type in, related to certain industries that our advertisers or customers are interested.

  • So My Marketing -- one of the most important features for My Marketing Center is that they can have a grasp of the search volume based on the keywords they are interested in and the time elapsed.

  • So our customers will have a very good sense of the consumer appetite trend for their targeted customers.

  • That's one of the very unique things we can offer to our advertisers and customers.

  • Operator

  • Your next question comes from the line of Jason Helfstein with Oppenheimer.

  • Please proceed.

  • Jason, your line is open.

  • You may ask your question.

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

  • Please proceed.

  • James Lee - Analyst

  • Hi.

  • Can you just talk about -- a little bit more color about how you guys plan to manage headwind uncertainty going into 3Q?

  • Are you guys doing anything different in terms of launching new products, possibly taking advantage of possible increase in Olympic-related keywords?

  • Anything like that, along that line would be very helpful.

  • Thank you.

  • Robin Li - CEO and Chairman

  • Hi, this is Robin.

  • Yes, we have made necessary preparation for the Olympic Games.

  • As I mentioned before, every big event, nationwide event, is a propeller for usage of Baidu because more people will find information on Baidu and they will talk about it among their friends and families.

  • So through word of mouth we get more users.

  • This time is no exception.

  • Probably the only difference is that we can -- we have enough time to prepare for what's going to happen during the next couple of months.

  • We have lots of products and services that are particularly suitable to users who are looking for this kind of information, specifically Baidu Post Bar, our query-based community.

  • Anything that arises all of a sudden, people cannot find enough information on the static web.

  • So whenever they type in the same keyword they are directed to a community or to a message board that they can exchange ideas and communicate with each other.

  • Every time something happens we saw traffic surge from those related Post Bars.

  • And this time I think, during the Game time, there will be lots of surprises in who's going to win what medal.

  • And those related people's bars will become very, very popular.

  • We also have an Olympic channel, 2008.baidu.com.

  • And we will report news and the related results from that channel.

  • Operator

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

  • Please proceed.

  • Kar Kwong - Analyst

  • Hi guys.

  • Thanks for taking my question.

  • It looks like your gross margin has improved a lot this quarter, 500 points -- basis points sequentially.

  • And that seemed to come mainly from bandwidth costs and depreciation.

  • I was wondering just how we should think about these costs going forward, whether this kind of margin is sustainable for the rest of the year, or will we see some softness due to the headwinds in 3Q?

  • And also whether you guys are planning any promotional activities, or promoting the Baidu brand during the Olympics.

  • Thanks.

  • Jennifer Li - CFO

  • Kar, it's Jennifer.

  • Just to address your question, gross margin has indeed improved this quarter.

  • Two main reasons.

  • One is TAC rate, as obviously you can see, has been slightly decreased versus last quarter.

  • In addition you have seen depreciation costs, operations cost and the bandwidth cost as a percent of revenue coming down.

  • As we continue to increase our own monetization methodology, increasing the revenue base and optimizing our infrastructure usage, I expect there still to be some room, from a bandwidth cost and depreciation cost perspective, to come down slightly from a total revenue perspective.

  • Going forward, from an Olympic Games perspective, I think Robin mentioned, during the Games we have our own product lines and the platforms that we will attract the users to come in and take advantage of the information hub that we, Baidu, currently have.

  • Just exceptional high promotional expenses for the quarter, we currently do not anticipate much.

  • Operator

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

  • Please proceed.

  • Eric Wen - Analyst

  • Hi.

  • Thanks for taking my question.

  • Just to continue on the cost side, your traffic acquisition cost decreased, actually it did break a long-term trend.

  • May I know that if this decrease is due to that lower traffic contribution to your search or you are decreasing the payout ratio to your partners?

  • And further, if I can confirm that you just said that the bandwidth cost and depreciation cost as a percentage of revenue would further go down in the coming quarters.

  • Thanks

  • Robin Li - CEO and Chairman

  • Why don't you take it first, then Haoyu can?

  • Jennifer Li - CFO

  • Okay.

  • I'll address the bandwidth and depreciation costs as a percent.

  • What I said is there is still room, we believe, as we can continue to grow revenue base much faster, we can fully leverage the infrastructure base that we have.

  • And therefore, to the extent our revenue continues to grow much stronger, there should be room for us to continue to decrease the percentage of revenue from a bandwidth cost and depreciation cost perspective.

  • In addition, you know we have incurred 30m also of Japan-related expenditures.

  • And much -- a big portion of that expense is related to bandwidth and depreciation cost, to the extent we continue to hold steady in that part of the expense.

  • And while our main revenue base in the China domain continues to increase much faster, you can see that total percentage, from a bandwidth and depreciation cost perspective as a percent of revenue, should continue to have room to improve.

  • And I'll get Haoyu to answer the TAC question.

  • Haoyu Shen - VP of Business Operations

  • Hi Eric.

  • On TAC, TAC ratio for a few quarters until last quarter -- this quarter is the first time we saw some slight decline -- what I can assure you is it's not due to slower growth of revenue contribution from our Union partners.

  • And it's not due to the decrease -- decline of the payout ratio either.

  • It's a pretty complicated business.

  • In Union we have different kinds of business, we have different kinds of models.

  • Payout ratios are different.

  • So the mix shift will cause the fluctuation of TAC ratio from time to time.

  • As we talk about this, talked to you many times in previous calls, we look at our TAC ratio of our Union business on a revenue net of TAC basis.

  • We control TAC ratio very closely.

  • But when it makes sense we do strike deals with partners when it makes strategic sense.

  • So I think, in long term, there may be some pressure for TAC ratio to go up.

  • But given our leadership position in the market I don't see any dramatic increase in the near future.

  • Having said that, from quarter to quarter I wouldn't be surprised to see fluctuations.

  • Operator

  • Your next question is a follow-up question from the line of Dick Wei with JPMorgan.

  • Please proceed.

  • Dick Wei - Analyst

  • Yes.

  • Let me just follow up on how you -- so I guess in the longer term we still should expect TAC to continue to increase as a percentage of revenue, because I think previously you folks discussed it about driving revenues from more of the Union members, etc.

  • I just wanted to [be sure of that].

  • Haoyu Shen - VP of Business Operations

  • Right.

  • Yes.

  • That's my sense.

  • In long term there will be pressure.

  • But again, because we are the biggest Internet ad network, we have a lot of leverage.

  • I don't expect the ratio to go up very quickly.

  • Operator

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

  • Please proceed.

  • Eddie Leung - Analyst

  • Hi.

  • Just want to ask the questions about the brand advertising, because I remember a couple quarters ago you mentioned that the growth on your brand advertising was slightly faster than your organic web search growth.

  • How has this situation been changed in the past quarter?

  • Thanks.

  • Haoyu Shen - VP of Business Operations

  • No, it hasn't changed in the past quarter.

  • We continue to see faster growth of revenues from brand advertisers, be it in search or display.

  • Robin Li - CEO and Chairman

  • Okay.

  • Yes, let me clarify this.

  • I think it's not really a distinction between brand advertising and web search advertising.

  • It's more of a distinction between larger advertisers, or larger companies who do business with us.

  • They spend both on display ads and search ads.

  • And we -- during the past few quarters, we have seen a trend that more and more larger companies spend more on Baidu platform, be it paid search or display ads.

  • Eddie Leung - Analyst

  • Thank you.

  • Operator

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

  • Please proceed.

  • Eric Wen - Analyst

  • Hi Robin.

  • How are you and Jennifer?

  • Just want to ask a question regarding regulation.

  • Recently there was a -- Beijing State Administration of Industry and Commerce has said it planned to require registration of small and medium enterprises starting from August 1.

  • And how do you see that impacting your customers or potential customers, especially given that Baidu is actually located in Beijing?

  • Thanks.

  • Robin Li - CEO and Chairman

  • I think at this time, almost all of our customers are registered companies.

  • So we do not see any immediate impact for those kind of things.

  • It probably affects C2C services in a bigger scale, because lots of individual sellers could be asked to register.

  • So in that regard it's too early for us to say what kind of impact we will get later on.

  • Operator

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

  • Please proceed.

  • James Lee - Analyst

  • Just a quick follow-up question regarding uncertainties in 3Q again.

  • Is one possible option for you guys to get incremental revenue for the quarter would be, maybe, tweaking your monetization algorithm a little bit to, maybe, to improve that to maybe drive additional revenue to offset weakness?

  • Is that one option you guys are thinking of, or that's not something you're considering at the meantime?

  • Robin Li - CEO and Chairman

  • Well, we are not building the Company for the next quarter.

  • We are building the Company for the next 10, 15 years.

  • So it doesn't make sense for us to do some short-term tweaking in order to meet certain pre-set goals.

  • I think what's more important for us is that the Olympic Games is a great opportunity for Baidu to attract new users.

  • If we can provide good services to our existing users, they will spread around the word that Baidu has the best service.

  • Baidu can help them to find the information they want.

  • Then after the Games we should see a good surge in traffic in new users, in search volumes, all that kind of thing.

  • That would set a very solid foundation for the future growth of the Company.

  • Having said that, improving the monetization capability and algorithm have been our priority for quite a few quarters.

  • We understand there are still lots of room for us to grow here, because if you look at some of the third party research reports, you would see that our traffic share is much higher than our market share in terms of dollar amount.

  • Operator

  • Your next question comes from the line of Leah Hao with Goldman Sachs.

  • Please proceed.

  • Leah Hao - Analyst

  • Hi.

  • Good morning.

  • A few questions regarding your headcount.

  • So can you update us of your number of sales team?

  • And how is the sales efficiency tracking for the new sales person as well as the old, more experienced ones?

  • And what's your plan for the rest of -- maybe over the next six, 12 months in terms of increasing your sales team headcount?

  • Another, also related to that, besides your Japan and C2C project, what are your top three strategic focuses for the next several years?

  • Robin Li - CEO and Chairman

  • Okay.

  • Peng, why don't you talk about the sales force first?

  • Peng Ye - COO

  • Okay.

  • So there's always the room for us to make improvement.

  • But on the other hand I cannot -- I don't see any big increase in terms of headcount for sales operation in the near future for the following couple of quarters.

  • Robin Li - CEO and Chairman

  • Okay.

  • Regarding to the priorities, I wouldn't say the new initiatives are top priorities.

  • I think for Baidu the number one priority is always web search.

  • We always need to come up with better services for the web search, larger index size, better relevancy, fresher content, that kind of thing.

  • We're also hiring R&D engineers very aggressively.

  • Although we have quite a large team these days, we still feel we are short of engineers.

  • There are lots and lots of things we can improve on the natural search system.

  • And I would say the second highest priority would be our monetization capability or algorithm.

  • As I mentioned before, we still are not satisfied with the monetization capability we have.

  • Our traffic share is still quite higher than our market share.

  • And we see lot of things to do here.

  • And we have a very good team working on this.

  • It has gotten senior management attention for quite a while, although we actually kind of started late, much later than our natural search capabilities.

  • I would say that the third priority would be sales-force-related or customer acquisition.

  • You know we already have a very large customer base, large and loyal customer base.

  • But it's still a very small percentage of the total number of enterprises in China.

  • In our mind, we think that every single business in China should use Baidu to promote their services and products.

  • And we are still quite far away from there.

  • So these are the top three priorities for Baidu.

  • Operator

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

  • Please proceed.

  • Stephen Ju - Analyst

  • Good morning guys.

  • What is CapEx outlook for the balance of the year?

  • And if I look at the stock-based compensation, it's up fairly significantly year over year and sequentially.

  • Should we assume that the second quarter amount is in your run rate?

  • Thanks.

  • Jennifer Li - CFO

  • It's Jennifer.

  • From a CapEx standpoint, we obviously make investment to infrastructure, to network equipment whenever there is a need and it makes sense for us to do.

  • So we don't particularly set out for a certain target as to what CapEx expenditure we want to incur.

  • On your second question related to SBC, as we mentioned in the earnings release, we did have a higher SBC compared to our prior quarters in this Q2.

  • A big portion of that is an update of forfeiture rate that's assumed in the SBC calculation.

  • So there is a little bit of a catch-up that we were doing in Q2.

  • The lower forfeiture rate that we have updated is reflecting lower turnover rate of our employees.

  • So this is more like a one-quarter event.

  • So going forward, it's not -- you can expect the SBC expenses isn't going to be as high as Q2.

  • Operator

  • Your next question comes from the line of Jason Helfstein with Oppenheimer.

  • Please proceed.

  • Jason Helfstein - Analyst

  • Hi guys.

  • Just two quick questions, one on revenue per customer growth.

  • How much of that do you think was a function of traffic growth or was it -- did you guys do anything to try to increase minimum bids or as far as do you think it was more a function of market-driven demand for keywords?

  • And then were there any R&D projects that were planned for second quarter that were pushed out into the third quarter?

  • Thanks.

  • Robin Li - CEO and Chairman

  • Okay.

  • This is Robin.

  • Let me give you some color on that.

  • The revenue growth is driven by both ARPU and number of customers.

  • I think traffic in general would have a very nice growth from Q1 to Q2 due to the low base of first quarter where Chinese New Year is located.

  • And people would spend more if we can have more to sell, or if we have more inventory.

  • Lots of customers feel that Baidu is the best way -- provides the best ROI for their marketing dollar.

  • So if we can provide more traffic, they will spend more on us.

  • And, as I mentioned before, it also can be -- contribute to the improvement of our monetization algorithm.

  • We are providing some better targeted or more relevant paid search results to the consumers, or to our users.

  • Therefore the monetization capability has been improved, so that customers can spend more and more effectively.

  • And the third factor is that, I also mentioned that before, that we've seen a trend that larger companies come to us to spend both on display and paid search, they will drive up the -- they have driven up the ARPU too.

  • Regarding to the R&D projects, I'm not sure why you asked this question.

  • We -- all of our projects are on schedule, on target.

  • I don't see any changes because of Olympics or anything like that.

  • Operator

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

  • Please proceed.

  • Your line is open.

  • You may proceed.

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

  • Please proceed.

  • Ming Zhao - Analyst

  • Thanks.

  • Robin, I wanted to ask you a big-picture question about the e-commerce in China.

  • As you know, the consensus view is that the use of search in China is still to generate sales leads rather than leading to online transactions.

  • So, in your assessment, when do you think China's e-commerce will develop to a stage where search will lead to significant online transactions?

  • And if that day arrives, do you think the top-line growth of Baidu will accelerate from currently 90% or 100% to even a higher rate?

  • Thank you.

  • Robin Li - CEO and Chairman

  • Okay.

  • I think people use Baidu's paid search for three reasons.

  • The primary reason, as you correctly pointed out, is for sales leads.

  • But there are companies that use Baidu to drive online transactions.

  • And the third category of companies is to do some branding work awareness.

  • We've seen the trend that larger companies do offline advertisement and pointing their audience to search certain keywords online.

  • So larger advertisers, branded advertisers, are doing this to -- have been doing this to drive traffic to search sites so that their targeted audience, or customers, can have a better understanding of their product and services.

  • So going forward, I think branding-oriented customers and the transaction-oriented customers will both represent larger percentage of our product mix.

  • And back to this e-commerce question, we've seen the e-commerce market in China growing quite nicely over the past couple of years.

  • And that's why we're doing a C2C launch this year.

  • But it's a gradual process.

  • We haven't seen any sudden surge on that.

  • And going forward, I think for our main business, the paid search business, these three types of customers will all contribute significant percentage of our revenue.

  • Operator

  • Your next question comes from the line of Catherine Leung with Citigroup.

  • Please proceed.

  • Catherine Leung - Analyst

  • Hi.

  • I have a follow-up question on the ARPU.

  • Once again we saw the revenue per active online marketing customer increase very healthily year on year, largely in line with the increase as well in the active online customers.

  • My question is also related to your previous stated priority of increasing the customers.

  • How should we think about the revenue per active customer, considering that the Company is trying to bring in newer customers who may start out at a lower spend per customer?

  • And also the increase in average revenue, has that been driven more by increased number of clicks driven by traffic, or increased amounts paid for each keyword?

  • Thank you.

  • Robin Li - CEO and Chairman

  • Haoyu, do you want to talk about it?

  • Haoyu Shen - VP of Business Operations

  • I'll give you more color.

  • If you look at existing customers, what's driving the ARPU growth, obviously you have inventory or number of queries and CPC, cost per click.

  • So historically traffic has been the bigger driver of ARPU growth.

  • And on CPC it has been growing very nicely as well over the quarters.

  • And the growth of CPC can be driven by either more bids for the same keywords, because more customers come to appreciate the value of ROI, and also it can be indirectly driven by our -- sometimes we do increase minimum bid.

  • We, from time to time, we do look at different sectors and we adjust minimum bid.

  • So that's what's driving the ARPU growth of existing customers.

  • Operator

  • Your next question comes from the line of Leah Hao with Goldman Sachs.

  • Please proceed.

  • Leah Hao - Analyst

  • Hi.

  • Thank you.

  • A quick follow-up on some short-term stuff.

  • Can you give us a little bit of color about the traffic trends and business trends so far into July?

  • And also the other one, I think you commented quickly about the margin trends.

  • But I was just wondering if the margin, operating margin trend for R&D and SG&A going forward would be sustainable for the rest of the year, I guess.

  • Thank you.

  • Robin Li - CEO and Chairman

  • Okay.

  • I'll talk about the traffic trend.

  • And Jennifer will talk about margin trends.

  • For Baidu's search traffic, as I mentioned before, we're seeing some very nice growth for a certain type of our search-related services, such as video search and Hao123, during the past few quarters.

  • Those two have been growing quite rapidly.

  • In terms of web search, the growth pattern is very predictable in the sense that comparing to the same time last year, we can actually do week-by-week comparison, that it's very consistent with what we have done in the past.

  • Also, going into July, we have not seen anything that's abnormal.

  • Jennifer?

  • Jennifer Li - CFO

  • On the margins side, this quarter we did post a pretty healthy margin.

  • It does demonstrate the stability of our business model.

  • And we believe the model does inherently definitely have this stability.

  • Peng mentioned earlier, from an SG&A perspective, we do not anticipate to add a whole lot of headcount.

  • We're increasing our productivity.

  • And that's our focus.

  • On the R&D side, Robin mentioned people is our top priority.

  • And we continue to attract talent.

  • And in the summertime, over the next couple of quarters is when the school year finishes and we'll see new graduates starting to be recruited.

  • And they join on board to Baidu.

  • Overall, as I mentioned, we believe there is an inherent scalability in our model.

  • Our margins should improve longer term.

  • However we have never, in the past, set a margin target, because we believe in investing in the right opportunities, as we have done in the past.

  • And therefore we believe, as I mentioned, longer-term operating margin should have room to improve.

  • Operator

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

  • Please proceed.

  • Kar Kwong - Analyst

  • Hi.

  • Thanks for taking my follow-up.

  • Just a quick housekeeping question.

  • I was just wondering if CapEx spending on the campus trended similarly to previous quarters.

  • Jennifer Li - CFO

  • Yes.

  • We have set out in the past that we have budgeted expenditures between 50m to 60m for '08 and '09.

  • The construction itself started in [Q3] 2007.

  • Things are going well.

  • And we have steadily incurred capital expenditure.

  • For this past quarter we have a little over one third of our CapEx that's related to Baidu campus.

  • Operator

  • Your final question comes from the line of James Lee with Sterne Agee.

  • Please proceed.

  • James Lee - Analyst

  • Thank you.

  • I was hoping to get some feedback about -- for your larger advertiser relating to API.

  • Can you just comment about maybe different case study or successful examples, how you drive additional adoptions from the larger advertisers?

  • And I'm just curious, is the API offered to larger advertisers on a limited basis?

  • Or is that open to all advertisers wanting to see the product?

  • Thank you.

  • Robin Li - CEO and Chairman

  • Yes, James, we started to offer API at one point, starting from January.

  • And it's really open to any customer or agencies who have a need to -- so that they can better spend with Baidu.

  • So right -- as of right now, I think there are dozens of customers or agencies that are already working off the API that we offered.

  • And I think, in the next quarter or at least by the end of the year, we are going to launch API 2.0 to offer more functionalities and better usability.

  • So I believe that will further drive the growth of spending from big advertisers through that.

  • 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 and Chairman

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

  • China's Internet population continues to grow rapidly.

  • And it has surpassed the US to become the world's largest Internet market as measured by number of users.

  • Internet penetration is still lower than the global average.

  • It's still in teens.

  • This leaves a huge potential for further development.

  • 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.

  • Thank you for joining us today.

  • 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.

  • Good day.